February 8, 2013, 5:39 p.m. ET

Work Disincentives, Still Crazy After All These Years

In the spirit of Jack Kemp, a pro-growth agenda is needed for America's pockets of poverty.


It is tempting to dismiss the role played by incentives in economics, but the persistence of poverty in the inner city and elsewhere is difficult to explain with any other view of human behavior. Poor people, like everyone else, respond to incentives. The dilemma is how to introduce market incentives while still maintaining a generous system of helping those in need.

The first step is to consider the role played by disincentives, whether they are disincentives to work because government benefits fall away as income rises, or disincentives that make employers reluctant to hire entry-level workers likely to come from the ranks of the young unemployed.

More than three decades ago, I began enumerating a myriad of government "needs tested" programs that diminished welfare benefits as their recipients earned more income. The loss of government benefits made earning more income less attractive to many low-income families, an effect similar to that of raising marginal tax rates.

In the intervening years, alas, very little has changed. Gary Alexander, secretary of public welfare for the State of Pennsylvania, made that quite clear in a July presentation to the American Enterprise Institute entitled "Welfare's Failure and the Solution," an analysis of the welfare benefits plus wages of a single mother of two young children living in Pennsylvania.

Mr. Alexander reports that a single mother of two in the Keystone State earning no wages will obtain welfare benefits—such as food stamps, child care and Medicaid servicesworth more than $45,000 annually. If the woman begins earning wages, her total annual income, including the value of her welfare benefits, will rise as well—up to about $9,000 in wages. But the next $5,000 in wages will not increase her total income, because she will lose some Medicaid and other benefits. In short, she faces the equivalent of a 100% marginal tax.

From about $14,000 to $29,000 of gross wages, she will also lose government benefits such that her total annual income will rise only about $5,000—an effective marginal tax rate of 67%. At $29,000 of wages, the woman will realize a little less than $57,000 in net income plus benefits. Once she earns more than $29,000 in wages her housing subsidies and food subsidies drop way down. With wages above $43,000, her child-care subsidies disappear, and once her wages top $57,000 her family will no longer qualify for the Children's Health Insurance Program.

What this means is that her total incomewelfare benefits plus wages, minus taxeswon't reach $57,000 until her gross wage income rises to $69,000. In other words, the money earned by her between $29,000 and $69,000 faces a marginal tax rate, on average, of 100%. She receives no net benefit from her labor. Now if that doesn't motivate you to get up and go to work, I don't know what will.

This example is particular to a single mother in Pennsylvania with two children, but the principles apply generally across the country. People with low incomes who receive various forms of welfare subsidies in any number of stateswith and without children, whether married or notface enormous disincentives in trying to improve their lives by working. And these barriers to self-improvement through work have been rising over time.

According to the most recent Census Bureau data, the percentage of the American population in 2011 living below the poverty line was 15%, tied for a 50-year high and well above the 11.4% in the late 1970s when I began calling attention to "needs tested" disincentives to work.

Using employment as a share of total population for especially vulnerable demographics, the consequences of poorly thought-out policies are stark.

Consider the predicament of teenagers 16 to 19 years old, whose employment-to-population ratio has been 26%—about one in four young people employed—for the past three years. In the period 1975-2002, the ratio was in a healthier 40%-50% range. For African-Americans 16 to 19 years old, the employment-to-population ratio for the past four years has been in the anemic 14.5% to 16.5% range.

Minimum-wage laws ostensibly intended to help the young and poor may have put a bit more money in the pockets of those who found work, but study after study indicates that governmental minimum-wage interventions discourage employers from hiring.

How to counter these disincentives? My preferred solution is to enact a form of enterprise zone where marginal tax rates would be greatly lowered for both employers and employees in areas with high poverty. For starters, employer and employee payroll taxes could be eliminated for people who both live and work in the enterprise zones. There would be scant revenue loss to the U.S. Treasury because few people are working in these areas anyway.

Second, tax rates on corporate profits and personal income could also be reduced in the enterprise zones for businesses and employees whose principal residence is in the enterprise zone. Potential workers need employers after all. Once these residents see that their pay will not be whittled away by payroll and income taxes, they will not be so disinclined to sacrifice the government benefits that would recede as their income increases.

Developing business and life skills through on-the-job training is crucial for populations suffering generational poverty. To help make youth employment in the country's poorest areas more attractive, enterprise zones should eliminate job-killing state and federal minimum wage requirements for workers under 21. (The "youth minimum wage" provision allows payment of $4.25 an hour to workers under age 20 instead of the federal $7.25 minimum wage, but the rate expires after 90 days.)

After being unemployed for a number of years, poor, unskilled youths often become unemployable. And, after being unemployable for a number of years, many of them quite understandably become hostile to the world, and society has to spend fortunes protecting itself from them. It is a dispiriting Catch-22.

In the spirit of the late, great New York Rep. Jack Kemp, the time is right to take up the cause of a bipartisan pro-growth agenda for America's pockets of poverty.

Mr. Laffer, chairman of Laffer Associates and the Laffer Center for Supply-Side Economics, is co-author, with Stephen Moore, of "Return to Prosperity: How America Can Regain Its Economic Superpower Status" (Threshold, 2010).

domingo, febrero 10, 2013



North Korea
The new capitalists
Even as another nuclear provocation looms, hope glimmers for the world’s most oppressed people
Feb 9th 2013

NOT long ago North Korea-watchers were speculating that the new leader, Kim Jong Un, might prove a moderniser. The path-breaking boy-dictator let himself be seen with his fashionable wife. He actually spoke in public, whereas his late father’s speeches were as rare as a well-stocked Pyongyang supermarket. Lately, though, Mr Kim has reverted to type by prophesying war. Experts fear the North’s Punggye-ri underground complex is about to host a nuclear test. If it does, Mr Kim will inherit the family title of Asia’s pariah-in-chief.

The nuclear threat and the vicious eccentricities of its leadership are, for the West, the most compelling of the country’s features. But, as our briefing explains, a revolutionary force is rising from below: a new class of traders and merchants. Capitalism is seeping through the bamboo curtain.

This is not at the behest of the regime, as happened in Deng Xiaoping’s China. North Korea is more repressive and backward than Cuba or the old Soviet Union. The regime will not depart quickly or easily: in the short term, Mr Kim’s growing unease could well make him still more of a threat to his neighbours. But a familiar picture is emerging—and the world should do what it can to encourage it.

Jinxed by juche

Mr Kim’s grandfather, Kim Il Sung, built his post-war paradise in the north on the principle of juche, or “self-reliance” (though, the Soviet Union greatly helped). At first the North and South Korean economies matched each other won for won but, starting in the 1970s, autarky decayed into inefficiency. The North’s huge army hogged resources. Managers and workers stripped state factories bare and flogged anything of value on new black markets. Today perhaps 200,000 North Koreans remain imprisoned in the gulag. Output per head is over 17 times larger in the South than the North. Twenty-year-old South Koreans stand 6cm (2.4 inches) above North Korean contemporaries stunted by famine and malnutrition.

In the 1990s famine provided an opening for a new sort of North Korean trader. Many of them were smallholders, often women, selling vegetables grubbed up from the family plot. The facts are patchy, but it is becoming clear that other merchants operate today on a far more ambitious scale, exporting raw materials to China and bringing back consumer goods.

The merchants use an informal system of money-changing to move funds in and out of the country. In the capital those with cash go to restaurants and play the slot machines. It sounds surreal, but they are the North’s nouveaux riches.

North Korea’s capitalists are here to stay. The regime has repeatedly tried to purge them, by suppressing the farmers’ markets and cracking down on smuggling.

But money talks in today’s North Korea, and the traders often have enough cash to bribe their way out of trouble. Moreover, they have become an indispensable part of the economy. Industry functions so poorly that tower blocks in Pyongyang cannot be built without the imported supplies the merchants provide.

As in China, capitalism is letting in the outside world—a vital change for a people fed only grotesque lies. Corrupt border guards and security operatives can be bribed by people determined, for religious or political reasons, to get information in and out. The mobile phones, computers and radios that the traders sell are eroding the state’s monopoly on truth. Television shows and films smuggled in on memory sticks confront North Koreans with the potentially revolutionary fact that their brethren in the South live in comfort and plenty—and without the fear of a knock on the door at midnight. They discover that the Workers’ Utopia is built on a Great Lie.

And the capitalists count because they stand somewhat apart from the security establishment. The Kims have always surrounded themselves with a caste of revolutionary families present at the North’s creation. For decades power began and ended with them. But some of the merchants come from outside the Kims’ circle—and all have a keen eye on their wealth. Although the traders make money from the status quo, they are likely to value growth more and security less than the ruling clique.

Competition for resources is also emerging in parts of the government-controlled economy. Fissures are thus emerging in what used to be a monolithic state.

For years now the world’s dealings with North Korea have chiefly been about stopping its nuclear programme, which poses a grave threat to peace. But that policy has pretty much failed. Today’s nuclear intimidation is just the latest in a series of provocations from a state that will lie, threaten and blackmail its way to the negotiating table only to storm off again into belligerent isolation. The bet is that Mr Kim will never give up his weapons, because they are his only claim to influence.

The Chosun path
Change will not necessarily make North Korea safer. It may destabilise the regime and thus, in the short term, make it more dangerous. That is what China fears: its strategic nightmares feature migrants pouring across the Yalu river and South Korean or American troops approaching its borders.

But in the long run the best way of making North Korea less dangerous lies in defanging the Kims.

That means taking every opportunity to undermine the regime, as the West did in eastern Europe during the cold war. The Soviet era teaches that nothing is more potent than exposing people to the prosperity and freedoms of the world around them. So outsiders should pay for North Koreans to travel and to acquire skills abroad, support the radio stations that broadcast into the country, back the church networks that supply documentaries and films and turn a blind eye to the smuggling networks and the traders.

China’s policy is contradictory. It props up the Kims, at the same time as its officials encourage North Korea to emulate the economic policies that transformed China 35 years ago. But development and stability—of the suffocating sort that the Kims represent—are incompatible.

Ultimately, the Chinese will have to choose. What the mercurial Mr Kim offers leads nowhere. The capitalists at least promise something better. China should back them.

February 7, 2013

Kick That Can


Actually, Mr. Boehner needs to refresh his memory. During the first decade of his time in Congress, the U.S. government was doing just fine on the fiscal front. In particular, the ratio of federal debt to G.D.P. was a third lower when Bill Clinton left office than it was when he came in. It was only when George W. Bush arrived and squandered the Clinton surplus on tax cuts and unfunded wars that the budget outlook began deteriorating again.
But that’s a secondary issue. The key point is this: While it’s true that we will eventually need some combination of revenue increases and spending cuts to rein in the growth of U.S. government debt, now is very much not the time to act. Given the state we’re in, it would be irresponsible and destructive not to kick that can down the road.
Start with a basic point: Slashing government spending destroys jobs and causes the economy to shrink.
This really isn’t a debatable proposition at this point. The contractionary effects of fiscal austerity have been demonstrated by study after study and overwhelmingly confirmed by recent experience — for example, by the severe and continuing slump in Ireland, which was for a while touted as a shining example of responsible policy, or by the way the Cameron government’s turn to austerity derailed recovery in Britain.
Even Republicans admit, albeit selectively, that spending cuts hurt employment. Thus John McCain warned earlier this week that the defense cuts scheduled to happen under the budget sequester would cause the loss of a million jobs.

It’s true that Republicans often seem to believe in “weaponized Keynesianism,” a doctrine under which military spending, and only military spending, creates jobs. But that is, of course, nonsense. By talking about job losses from defense cuts, the G.O.P. has already conceded the principle of the thing.
Still, won’t spending cuts (or tax increases) cost jobs whenever they take place, so we might as well bite the bullet now? The answer is no given the state of our economy, this is a uniquely bad time for austerity.
One way to see this is to compare today’s economic situation with the environment prevailing during an earlier round of defense cuts: the big winding down of military spending in the late 1980s and early 1990s, following the end of the cold war. Those spending cuts destroyed jobs, too, with especially severe consequences in places like southern California that relied heavily on defense contracts. At the national level, however, the effects were softened by monetary policy: the Federal Reserve cut interest rates more or less in tandem with the spending cuts, helping to boost private spending and minimize the overall adverse effect.
Today, by contrast, we’re still living in the aftermath of the worst financial crisis since the Great Depression, and the Fed, in its effort to fight the slump, has already cut interest rates as far as it can basically to zero. So the Fed can’t blunt the job-destroying effects of spending cuts, which would hit with full force.
The point, again, is that now is very much not the time to act; fiscal austerity should wait until the economy has recovered, and the Fed can once again cushion the impact.
But aren’t we facing a fiscal crisis? No, not at all. The federal government can borrow more cheaply than at almost any point in history, and medium-term forecasts, like the 10-year projections released Tuesday by the Congressional Budget Office, are distinctly not alarming. Yes, there’s a long-term fiscal problem, but it’s not urgent that we resolve that long-term problem right now. The alleged fiscal crisis exists only in the minds of Beltway insiders.
Still, even if we should put off spending cuts for now, wouldn’t it be a good thing if our politicians could simultaneously agree on a long-term fiscal plan? Indeed, it would. It would also be a good thing if we had peace on earth and universal marital fidelity. In the real world, Republican senators are saying that the situation is desperate — but not desperate enough to justify even a penny in additional taxes. Do these sound like men ready and willing to reach a grand fiscal bargain?
Realistically, we’re not going to resolve our long-run fiscal issues any time soon, which is O.K.not ideal, but nothing terrible will happen if we don’t fix everything this year. Meanwhile, we face the imminent threat of severe economic damage from short-term spending cuts.
So we should avoid that damage by kicking the can down the road. It’s the responsible thing to do.

Berlusconi Remains Wild Card in Italy Race

Max Rossi/Reuters


Published: February 8, 2013



The Democratic Party leader, Pierluigi Bersani, preparing for a television appearance last month in Rome. His party leads in the polls two weeks before the Italian national election.
With only two weeks to go before national elections, the Italian campaign has become a surreal spectacle in which a candidate many had given up for dead, former Prime Minister Silvio Berlusconi, has surged. Although he is not expected ever to govern again, with his media savvy and pie-in-the-sky offers of tax refunds, Mr. Berlusconi now trails the front-runner, Pierluigi Bersani, the leader of the Democratic Party, by about five or six points, according to a range of opinion polls published on Friday.
The polls found that the former comedian Beppe Grillo, who made the Qaeda quip as part of his antipolitical campaign, is close behind in third place, while the caretaker prime minister, Mario Monti, who made the “poisoned meatball” remark as he stepped up attacks on Mr. Berlusconi in an awkward transition from technocrat to candidate, is taking up the rear with around 10 percent to 15 percent of the vote.
Most analysts predict that the center-left will win, but with not enough votes to govern without forming an alliance with Mr. Monti’s centrists. Yet in a complex political landscape — and with significant policy differences between Mr. Monti and Mr. Bersani, who have been criticizing each other in their campaignsnothing is a given, and the political uncertainty weighs on financial markets.
Some compare the election to a power struggle on a corporate board. Mr. Berlusconi knows he can’t govern, but wants a strong seat at the table,” said Marco Damilano, a political reporter for L’Espresso, a weekly. The Democratic Party will have the majority of seats but will not be able to govern without making accords, he said, adding that “Monti wants the golden share,” in which his few seats count for a lot.
Many outsiders marvel at the survival skills of Mr. Berlusconi, who dragged down Italy’s finances and international standing to the point that Mr. Monti was brought on in November 2011 to lead an emergency technocratic government that lasted a year. But at least a good part of Mr. Berlusconi’s success has to do with his competition.
Mr. Monti lacks a strong party and has hit Italians with unpopular taxes, and centrists who might lean left are concerned that Mr. Bersani would be weak on the flagging economy. On top of that, Mr. Berlusconi, whose center-right People of Liberty is more a charismatic movement than a party, has true loyalists who do not know where else to turn.
Berlusconi is politically dead, but his electorate is still there and it is looking for a new leader, and there isn’t one,” said Massimo Franco, a political columnist for the daily newspaper Corriere della Sera. “So it’s a sort of a nostalgic operation.”
In an auditorium near the Vatican, Mr. Berlusconi was greeted Thursday by rows of adoring fans, most of them retirees. Ah,” he said. “It reminds me of the good old days.” Joking about his age, the 76-year-old former premier added: “I looked at myself in the mirror and saw someone who didn’t look like me. They don’t make mirrors the way they used to.”
In a two-hour off-the-cuff speech, he returned to familiar themes: depicting the left as unreconstructed, cold-war Communists; magistrates as politically motivated; the euro and Chancellor Angela Merkel of Germany as harming Italy; and Mr. Monti as a leader beholden to foreign interests who did nothing but raise taxes.
His supporters were mostly buying it. “Even if he doesn’t refund us the property tax, at least he’ll take it away,” said Francesca Cipriani, 70, a retiree, as she cheered Mr. Berlusconi.

“My house is worth 20 percent less,” Nicola Manichelli, 75, a retired taxi driver, chimed in.
Marcello Sorgi, a columnist for the Turin daily newspaper La Stampa, said: “Berlusconi voters fear that Monti will raise taxes, and that under Berlusconi that won’t happen. It’s not at all true, but Berlusconi’s propaganda works with his electorate.”
“His electorate still has a messianic, religious rapport with him,” Mr. Sorgi added.“Berlusconi is considered a kind of guru.”
Not so with Mr. Monti, who is beloved in Brussels, Berlin and Washington, but has been less popular with Italian voters. As he learns to campaign, Mr. Monti, an economist with no previous political experience, has sought the services of the political consulting firm AKPD Message and Media, whose co-founder, David Axelrod, President Obama’s key political strategist, visited Mr. Monti in Rome last month.
Mr. Monti, who is trying to capture the civic-minded centrists from both right and left who once voted for the centrist Christian Democrats before the party disbanded in a corruption scandal in the early 1990s, also opened a Facebook page. He uses it to post folksy musings that some critics say are undermining the authority of the slyly ironic but hardly showmanlike candidate instead of humanizing him.
Last week, an interviewer presented Mr. Monti with a puppy on live television, days after Mr. Berlusconi had appeared with one. “This is a mean blackmail,” Mr. Monti said with a smile, before stroking the fluffy pet and saying, “Feel how soft it is.”
Mr. Bersani, a longtime party veteran and former economic growth minister, speaks more to the old guard of the Italian left. He defeated Matteo Renzi, the charismatic 38-year-old mayor of Florence, in a rare party primary and has been running on the sloganA Just Italy,” a message aimed at reassuring voters but which may not inspire them.
In a half-hour speech on Thursday to party loyalists, including municipal workers and frustrated university adjunct teachers, Mr. Bersani called attention to youth unemployment and the disconnect between the real economy and financial markets, and called for economic stimulation to help more people have steady jobs.Europe isn’t just the fiscal compact,” he said.
Both Mr. Berlusconi and Mr. Bersani appear to speak more to their own constituencies than to the nation as a whole, long a characteristic of Italian politics. Faced with a political class that seems stuck in the past, Mr. Grillo and his antipolitical Five Star Movement have been gaining ground in the polls, campaigning in piazzas across Italy.