Over the next week, Advancing a Free Society will publish a series of pieces related to the Supreme Court’s decision in National Federation of Independent Businesses v. Sebelius. The Forum will cover the law, the medicine, the economics, and the politics surrounding this landmark ruling.

Below, renowned legal scholar and Hoover Senior Fellow Richard Epstein reviews the decision on the Medicaid expansion. According to Epstein, this decision is “welcome,” although not perfect, after the “unhappy performance” of Chief Justice Roberts on the individual mandate.

Earlier today, Hoover research fellow Bill Whalen provided his assessment of what this generally unexpected Supreme Court decision means for the presidential campaigns and, perhaps, Election Day.

Follow The Hoover Forum on the Supreme Court’s health care ruling by subscribing to the Advancing a Free Society RSS feed or subscribing to the new Hoover Daily Report.

This week’s installment of Data Matters features data presented by Tammy Frisby, a research fellow at the Hoover Institution who also teaches in the political science department and public policy program at Stanford.

This week on Capitol Hill, there was renewed attention to the looming Taxmaggedon (or Taxmageddon; take your pick), which involves, among other pending tax code changes, the scheduled expiration of lower tax rates on income, dividends, and capital gains, and the end of the extended payroll tax holiday. There is now more public talk from senators and members of Congress about using the threat of Taxmaggedon in January 2013 to build a legislative coalition for a sweeping tax overhaul that would preempt the economic and political damage that Taxmaggedon would wreak.

For all the uncertainty about what will come of this talk, this is a safe bet: the next six-and-a-half months will be filled with comparisons to the last major tax code reforms in 1986.

Tammy Frisby has shared with us a pair of tables, which she used as a starting point for her own ongoing research on the politics of tax reform. These tables present the major changes made to the tax code with the 1986 tax reform law. The tables compare major provisions in the individual and corporate tax codes before the reforms and as passed in the 1986 law. The middle data two columns in each table show the proposed changes by two main administration plans (“Treasury I” and the plan out of the Reagan White House). Compare these plans to the final law to see where administration reformers hit political obstacles.

As we point out in the tables’ titles – the 1986 tax overhaul created a cleaner – but not a clean – tax code. Tax reformers in 2012 face prodigious challenges to reach even the success of the Reagan-era reforms, challenges that are no less daunting than Taxmaggedon.

Click on the images to enlarge.

Tammy Frisby is a regular contributor to Advancing a Free Society. You can read her analysis of policy making and elections here. She also provides analysis of the 2012 election in audio and video podcasts that are part of Hoover’s 2012 In Perspective series.

With Data Matters, we highlight data relevant to public policy that Hoover fellows are using in their research. We feature original data, data from another source that Hoover fellows are presenting in a new way, or data that fellows find helpful in shaping their own thinking. Visit the Data Matters archive here.

Sign up for the Advancing a Free Society RSS feed to follow our data stream.

Today, we add a new weekly feature to Advancing a Free Society. Each week, we will highlight data relevant to public policy that Hoover fellows are using in their research.

Our inaugural data post is a graph generated by John F. Cogan, the Leonard and Shirley Ely Senior Fellow at the Hoover Institution and a professor in the Public Policy Program at Stanford University. The graph shows federal government outlays as a percent of GDP from 1994 to 2022. The graph presents historical outlays and the striking contrast between two different future scenarios: one that follows the Obama administration’s budget and the other that follows the budget path that would be created under Paul Ryan’s plan.

Click on the image below to enlarge.

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I am planning a trip to Spain to archery hunt for Spanish ibex, a magnificent wild goat. The hunt will cost several thousand dollars, not counting the money for airfare, hotels, and food. I’m wondering, however, if I should still go or cancel the trip and follow the lead of Spain’s King Juan Carlos by recanting my sin of hunting.

King Juan Carlos recently went on safari to Botswana where he allegedly hunted elephant. While there he broke his hip and returned home for treatment. Spanish newspapers reported the story including a picture from a previous hunt showing the king standing in front of a dead elephant with a rifle.

The story sparked outrage from citizens who feel the king abdicated his responsibility by enjoying himself on safari while his subjects suffered under the Spain’s worsening financial crisis. Socialist Party leader, Tomas Gomez, said the king should choose between his “public responsibilities or an abdication.”

In response the king appeared on television as he left a Madrid hospital saying, “I’m very sorry, I made a mistake. It won’t happen again.”

The outrage goes beyond the economy to the environment. The king is the honorary president of the Spanish branch of WWF, one of the world’s largest environmental groups. Because of his hunting escapade, members have gathered 65,000 signatures on a petition calling for Juan Carlos to resign his honorary presidency.

Such outrage is not just aimed at royalty. Bob Parsons, founder of GoDaddy, was attacked in 2011 by the animal right group, PETA, when he hunted a rogue elephant in Zimbabwe. PETA worked with Parson’s competitor, NameCheap, to persuade more than 20,000 GoDaddy customers to switch their accounts, pledging to donate a portion of its revenue to the nonprofit, Save the Elephants. Similarly, when Dan Richards, director of the California Fish and Game Commission, legally shot a mountain lion in Idaho, 40 Democratic legislators signed a letter calling for his resignation. They “reasoned” that because it was illegal to hunt mountain lions in California, it was unethical for Richards to do so in Idaho where it is legal and necessary to control lion populations.

While such good-versus-evil narratives are useful for garnering financial for environmental groups and public support for politicians, they ignore the complexity of human-wildlife conflicts in Africa and in the U.S.

WWF understands this complexity and played an important role in linking hunting with community-based conservation in southern Africa when it helped create CAMPFIRE (the Communal Areas Management Program for Indigenous Resources) in 1989. This program empowers rural African communities to manage their wildlife and derive profits from trophy hunting. In Zimbabwe where CAMPFIRE is most active, elephant populations soared from 37,000 to 85,000 between 1989 and 2005. During the same period CAMPFIRE generated more than $20 million in direct income, benefitting an estimated 90,000 households. A paper on the WWF website concludes that “financial and economic benefits from wildlife management provide incentives for community-based organisations to manage wildlife and other natural resources.”

Though Botswana, where King Juan Carlos hunted, does not participate in CAMPFIRE, it does use community-based wildlife management. In addition to paying local people for services, hunting companies pay royalties to local governments. Annual revenue from trophy hunting in Botswana is $20 million, of which half is reinvested in local communities creating thousands of jobs.

Cancelling my hunt won’t show up in Spanish GDP, but it will cause the Spanish citizens who get paid for the services they provide to suffer a bit more. By canceling, I would also abdicate my responsibility as a conservationist. A hunting I will go.

Yesterday’s Wall Street Journal op-ed by Peter Diamond and Emmanuel Saez received quite a reaction. Diamond and Saez advocate raising the top marginal tax rates on the rich to between 50-70%. Their recommendation is based on a 2011 paper they published in the Journal of Economic Perspectives (PDF) where they advocated 1) Raising marginal tax rates on the very rich, 2) Subsidizing earnings (phasing out at a high rate) for low earners, and 3) Taxing capital. Their paper was widely discussed when it was published, and it is serving as a justification for many on the left to raise taxes on high-income earners. It’s their first recommendation that I would like to address.

There are several key limitations with the authors’ methodology used to conclude that raising marginal tax rates is optimal social policy. Two I’ll mention here are the dynamic effects of raising marginal tax rates in the medium and long term, and the volatility that comes with higher rates on a small portion of the population.

First, and this is the most important issue with the paper, Profs. Diamond and Saez are unable to produce estimates of the effect higher marginal tax rates have on economic growth or tax revenues in the medium or long term. (I’d note that Scott Sumner highlighted the following excerpt months ago. Still, it should be front and center of the criticism of their recommendation.) From their paper:

It is conceivable that a more progressive tax system could reduce incentives to accumulate human capital in the first place. The logic of the equity-efficiency trade-off would still carry through, but the elasticity e should reflect not only short-run labor supply responses but also long-run responses through education and career choices. While there is a sizable multiperiod optimal tax literature using life-cycle models and generating insights, we unfortunately have little compelling empirical evidence to assess whether taxes affect earnings through those long-run channels.

Translated: We don’t know what will happen in a few years as a result of this change.

The effects of their optimal tax recommendation after more than a few time periods cannot be predicted with any accuracy. It seems unreasonable to have confidence in such a recommendation. Their suggestion isn’t a small change either; it would completely alter the tax code. When playing with hundreds of billions – or even trillions – of dollars, we should be confident about what the results will be.

Yet the justification the authors cite in the WSJ for ignoring the effects higher rates have on economic growth is historical adjusted US growth in the past half-century, first from 1950-1980 and then from 1980-2010. They note that the top marginal tax rates were 70% in the earlier period, and much lower in the recent period. First one thing to make clear is the enormous difference between marginal tax rate and effective tax rate (a point John Cochrane brilliantly made a few days ago). Second, correlation isn’t causation. I think if I had used their example as justification for such a policy in an introductory econometrics class, I would be given a failing grade.

To be fair, some of the reaction to the authors’ recommendation is that raising marginal tax rates would lower economic revenue in the long-run, since we’d see lower growth. But Diamond and Saez aren’t saying that – what they’re saying is that in the short-run, we could haul in a sizable chunk of tax revenue from the rich before they have a chance to respond. Pity we aren’t playing a single-period game.

The solution is instead to shift focus from identifying the revenue-maximizing tax system to the growth-maximizing tax system, while still raising enough revenue to operate the necessary functions of the federal government.

The second critical flaw in the authors’ optimal tax policy is that it completely ignores the volatility in tax revenues such a system would induce. (This, of course, stems from failing to predict behavior a few time periods out.) Assuming tax avoidance wouldn’t run rampant (ever wonder why we created the AMT?), tax revenues would vary widely from peak to trough. Has anyone ever sought to create a tax system that’s volatile? I’d be willing to wager that a majority of economists prefer a stable system of tax collection through a broader base and lower rates is preferable to a volatile tax system with a narrow base and high rates, even if the stable system collected slightly less revenue.

Meanwhile, I’ll wait for an “optimal tax policy” that includes predictions of its effects on both economic growth and tax revenue.

Tom Church is a research fellow at the Hoover Institution. Click here to subscribe to his RSS feed.

Critics of my blog post How Krugman Would Ru(i)n Steve Jobs’ Apple point out that Paul Krugman has a Nobel prize in economics and I do not. I should shut up in the face of a superior authority. If Krugman were writing about his specialty, international trade theory, I might indeed shut up. When Krugman puts on his political hat, he is fair game.

In his Jobs, Jobs, and Cars, Krugman uses bad economics that would shame an introductory economics lecturer. He criticizes Apple because its labor force is too productive. (His figures show that Apple has about the same sales revenue as GM but has one fifth the work force).  By being so productive, Apple creates too few jobs! Let economists chew that one over. Krugman would be in agreement with Marx’s discredited technological unemployment.  I guess the solution is for Apple employees to become as unproductive as GM workers.

In the same article, Krugman criticizes Apple for outsourcing routine manufacturing operations to Asia. Isn’t this what trade economists call the international division of labor? How can a trade theorist be against this practice? I guess he thinks Apple should keep routine manufacturing jobs at home even if it means higher consumer prices, loss of market share and profits.

Krugman seems to hold the strange opinion that the business of business is to create as many jobs as possible. Last time I looked at a principles of economics text, I learned that business are there to produce products that people want as cost-effectively as possible, in the course of which the business earns profits for its owners. I guess we need to recall all economics texts.

Krugman’s gratuitous characterization of Obama’s Detroit bailout as  “the single most successful policy initiative of recent years”  is designed to provide red meat for the President’s reelection campaign, from an economics Nobel laureate no less. This is not economics but a partisan politics.

The New York Times has gotten considerable mileage out of its Nobel laureate commentator. I suggest they add a warning label stating that their Nobel laureate is writing politics not economics.

Today Avik Roy of Forbes kindly provided me with a forum for responding to some of the questions that have arisen about my study showing that the 2010 health care reform law will add substantially to federal deficits.

The full paper, again, is here.

The Forbes blog is here.

Excerpts from the Forbes blog post:

The paper was subject to a double-blind peer review process, which means I did not know who was reviewing the paper, and the reviewers did not know who had written it.  Prior to this review process, I also independently had the paper reviewed by several fellow federal budget and health care financing experts to confirm that the analysis was correct.  Few of the criticisms of the paper have been substantive. I do not believe the few substantive criticisms hold water for the following reasons:

1. There is no dispute that my study’s reading of the law is correct.

2. There is no dispute that the scoring convention used to find that the ACA reduces federal deficits differs from actual law.

3. The basis of the criticism is the contention that an evaluation based on the scoring convention’s hypothetical baseline is a better indicator of the likely budgetary effects of the ACA than is an analysis that analyzes the literal change in the law.

4. Crucially, for the critics’ contention above to be correct, there must be no increase in future Medicare spending as a result of the ACA’s extension of Medicare HI Trust Fund solvency.

5. The available empirical evidence is decisively against the theory of government behavior outlined in #3 and #4 above.

Supporters of the ACA have elsewhere made clear that they agree the ACA will extend the Medicare Trust Fund’s solvency, protect its spending authority, lessen the risk of near-term benefit reductions, and mitigate the urgency of further Medicare reforms.In sum, the literal change in law effectuated by the ACA clearly increases federal deficits, as even the critics of the study have conceded.  Beyond this, however, the empirical evidence contradicts the theory that the hypothetical scorekeeping convention is a better guide to the practical budgetary impact of the ACA.  Both by statute and as a matter of political economy realities, the ACA clearly worsens the fiscal outlook.

The Washington Times also printed an op-ed I wrote briefly explaining the paper.  It can be found here.

Excerpt: Many are skeptical of claims that the law, known as the Affordable Care Act, or ACA, will simultaneously extend the solvency of Medicare, provide subsidized health coverage to more than 30 million new people and yet somehow reduce federal deficits. They are right to be skeptical.  The legislation greatly exacerbates projected federal deficits and increases an already unsustainable federal commitment to health care spending. Many do not understand these harsh realities because traditional government accounting methods – while useful in many respects – often obscure significant costs. Comparing the health care law to prior law, rather than the “alternate baseline” used by government scorekeepers, gives a complete estimate of the legislation’s fiscal effects.

Posner is clearly correct that the analytical differences between “super Pacs” and direct campaign contributions to candidates are not large enough to justify disparate treatments. Yet, because they should be treated the same way does not necessarily imply that spending by super Pacs should also be sharply controlled. I believe that it is very likely  preferable to apply the reasoning in Citizens United v. Federal Election Commission to direct contributions than to extend the limits on direct contribution to super Pacs.

I agree with Posner that candidates with political positions attractive to rich individuals may obtain considerable funds that give these candidates political advantages in appealing to voters. Such political contributions may well also affect the policies supported by candidates and elected officials. This is the corruption issue raised by Posner and by much of the literature that supports sharply limiting campaign contributions.

Sharp restrictions on campaign contributions would make more sense if monetary contributions were the only major force that shapes who wins elections and the policies goverment officials support.Yet that is very far from the situation that prevails in American politics, and in the politics of most other democratic nations. One reason for this is that interest groups can often avoid the intent of restrictions on campaign contributions through other ways to influence political outcomes. For example, many industries hire lobbyists and spend other monies to try to persuade legislators, regulators, and others in important political positions to subsidize their industries, or to reduce the taxes on their industries, or to gain other advantages.

Continue reading Gary Becker…

A “counterfactual” is an analysis of “what would have happened if.” President Obama’s claim that “the stimulus added as many as 3.3 million jobs” is the most famous example of this genre.

Counterfactual analysis of the effects of the 2010 election on federal spending can be executed, unlike the jobs-saved analysis, on a more solid foundation with nothing more than a pocket calculator. The procedure is simple: First, we find what the Obama administration intended to spend in 2011 and 2012 on the eve of the November 2010 election (and not knowing that an electoral disaster lay in store). Second, we compare these figures with what was actually spent in 2011 and what is likely to be spent in 2012.  For example, if the administration planned to spend $3 trillion in 2011 but actually spent $2.5 trillion after the Republicans gained the House, the “counterfactual saving” for 2011 is $.5 trillion.

According to my arithmetic, the unanticipated Republican November 2010 sweep of the House with victories of fiscally-conservative freshmen saved or will save taxpayers at least $300 billion dollars for the two-year period 2011 and 2012 alone – a figure that may understate the saving by another two hundred billion.

Continue reading Paul Gregory…

President Obama has not taken our country’s precarious debt situation seriously. When forced by Congress to revise his budget earlier this year, Defense was the only department targeted for cuts. Last summer’s Budget Control Act legislated further reductions for this year’s budget and portends even more significant cuts in the out years of the coming decade. Obama and Defense Secretary Leon Panetta recently unveiled a sensible set of choices for the coming year, but unfortunately failed to account for hundreds of billions of dollars that still must be found under the terms of last summer’s legislation. Unless they provide a better blueprint for spending, across-the-board cuts will come into effect in January 2013. And, as Panetta himself has said, not just the budget choices but the entire Pentagon strategy would collapse with any further cuts.

In addition to producing a budget willfully ignorant of further cuts, the White House has avoided any serious discussion of the hazards of cutting spending this deeply. The president is trying to have it both ways, cutting defense while pretending there is no risk associated with the cuts. At his Pentagon press conference in January, Obama said that “yes, our military will be leaner, but the world must know—the United States is going to maintain our military superiority.” But neither he nor Panetta has produced a plan that gives credence to the claim.

Continue reading Kori Schake…

Until recently, the euro seemed destined to encompass all of Europe. No longer. None of the remaining outsider European countries seems likely to embrace the common currency. Seven Eastern European countries that recently joined the European Union (Bulgaria, the Czech Republic, Hungary, Latvia, Lithuania, Poland, and Romania) have announced their intention to revisit their obligations to adopt the euro.

Two non-euro members of the European Union, the United Kingdom and Denmark, have explicit opt-out provisions from the common currency, and popular opinion has recently turned strongly against euro membership. In Sweden, which lacks a formal opt-out provision (but has cleverly refused to fulfill one of the requirements for membership), a November poll on whether to join the euro was overwhelmingly negative: 80 percent no, 11 percent yes.

In light of the political response to the ongoing fiscal and currency crisis—which is leaning strongly toward a centralized political entity that will probably be even more unpopular than the common currency—I suggest that it would be better to reverse course and eliminate the euro.

Continue reading Robert Barro…

A lot of people are wondering what we can do to restore America’s prosperity and create more jobs. Both the president and his Republican rivals have offered their ideas in this election year. I believe the fundamental answer is simple: government policies must adhere more closely to the principles of economic freedom upon which the country was founded.

At their most basic level, these principles are that families, individuals, and entrepreneurs must be free to decide what to produce, what to consume, what to buy and sell, and how to help others. Their decisions are to be made within a predictable government policy framework based on the rule of law, with strong incentives derived from the market system, and with a clearly limited role for government.

The history of American economic policy displays major movements between more and less economic freedom, more and less emphasis on rules-based policy in fiscal and monetary affairs, more and less expansive roles for government, and more and less reliance on markets and incentives. Each of these swings has had enormous consequences. Taken together, they make for a historical proving ground to determine which policy direction is better for restoring prosperity.

Continue reading John Taylor…

The next labor market battle in both the United States and Europe will be over the “living wage.” Long backed by both unions and progressive groups, the living wage looks like an old-fashioned minimum wage, with a critical twist. The national minimum wage, currently $7.25 an hour (up from $5.15 in 2006), applies to a wide range of workers in the public and private sector. In contrast, living-wage laws target only individuals who work in projects that get some sort of government subsidy. As the New York Times put it in an impassioned editorial about the proposed Fair Wages for New Yorkers Act, a city that doles out “hundreds of millions of dollars a year to private developers” should be in a position to ask them to pay decent wages to the workers whose jobs these subsidies created.

The New York proposal was drafted to do just that. It called for imposing one of two living-wage requirements on employers who receive $1 million or more in discretionary financial assistance from New York City: either pay workers $10 per hour in wages plus benefits, or pay them $11.50 per hour without benefits. That works out to a wage boost of 58 percent for workers in that category. Needless to say, that basic requirement was riddled with exceptions for various small businesses and the like, all of which would raise compliance issues. Supporters of new social legislation always underestimate that problem.

Backers defended the proposal by arguing that those who receive government subsidies ought to share them with the workers they hire. They also noted that at least one econometric study by the Center for American Progress concluded that cities that had adopted these proposals had the same level of employment growth as cities without living-wage requirements. The most charitable reading of this finding is that these subsidy programs fail to improve matters, owing to the many unanticipated consequences they introduce into both public finance and the labor market. The reality will prove far worse.

Continue reading Richard Epstein…

Greece, Italy, and many other countries obscured the problem of unsustainable social-welfare benefits for too long. For many of these countries, meaningful reform is now unavoidable.

The social-insurance systems in Europe, as in the United States, Japan, and elsewhere, were designed under certain economic and demographic circumstances—rapid economic growth, rising populations, and lower life expectancy—vastly different from those prevailing today. Governments (the focus is on Greece and Italy at the moment, but they are not alone) promised too much, to too many, for too long. My 1986 book Too Many Promises pointed to the same problem with America’s social-welfare system.

This fundamental problem has now manifested itself in these countries’ unsustainable debt dynamics. Euro membership, which temporarily enabled massive borrowing at low interest rates, merely aggravated it.

Reforming social-welfare benefits is the only permanent solution to Europe’s crisis. One hopes that with the help of national governments, the European Central Bank (ECB), the International Monetary Fund (IMF), and the European Financial Stability Facility (EFSC) the holes in the sovereign-debt-funding dike will be temporarily plugged, and that European banks will be recapitalized. But this will work only if structural reforms make these economies far more competitive. They must both lower the tax burden and reduce bloated transfer payments. Too many people are collecting benefits relative to those working and paying taxes.

Continue reading Michael Boskin…

In the 1985 Reith lectures, broadcast by the BBC, the OECD economist David Henderson coined the phrase “do-it-yourself economics.” These, he argued, were the practical ideas that ordinary people use to understand the economic world around them. In the world of DIY economics, he noted, public spending and exports are good because they create jobs; factories that produce things are more deserving of support than offices that produce intangible services; cheap goods made by foreigners threaten our jobs; and whatever is wrong, it is the government’s duty to do something.

DIY economics is alive and well in many countries. I’ll give three examples: hostility to banking, support for revenge taxation, and demands for more fiscal stimulus. Something of interest in all three cases is the length of causal chains. In the world of DIY economics there is never more than one step from cause to effect. This is one reason for its appeal. DIY economics is concrete and intuitive, and everyone can understand it.

HOSTILITY TO BANKING

The Occupy Wall Street and Occupy London movements have their roots in DIY economics. They contrast bankers’ bonuses with spreading unemployment among the people who make things with their hands. They blame banking for everything that has gone wrong since 2007. This is not an unrepresentative minority; a Pew opinion survey in October 2011 found that 39 percent of Americans supported Occupy Wall Street, more than would have supported the tea party at the time.

Continue reading Mark Harrison…