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Do Voters Reward Pro-Market Politicians?

Tue, 08/14/2018 - 12:45pm

A few days ago, I shared some academic research investigating whether economic crises lead to more liberalization (Naomi Klein’s hypothesis) or more statism (Robert Higgs’ hypothesis).

Given the dismal long-run outlook for the United States and most other developed nations, this is not just a theoretical issue.

Well, the good news is that the evidence shows that economic turmoil appears to be associated with pro-market reforms. At least with regard to regulatory policy.

Today, I’m going to share more good news. We now have some empirical research from two Danish economists showing that voters like good policy.

Here’s what Niclas Berggren and Christian Bjørnskov wanted to ascertain in their research

Since the early 1980s a wave of liberalizing reforms has swept over the world. While the stated motivation for these reforms has usually been to increase economic efficiency, some critics have instead inferred ulterior motives…with the claim that many of the reforms have been undertaken during different crises so as to bypass potential opponents, suggests that people will dislike the reforms and even be less satisfied with democracy as such. We test this hypothesis empirically, using panel data from 30 European countries in the period 1993–2015. The dependent variable is the average satisfaction with democracy, while the reform measures are constructed as distinct changes in four policy areas: government size, the rule of law, openness and regulation. …We moreover include a set of control variables, capturing economic circumstances, political institutions and features of politics.

In other words, we’ve seen considerable liberalization over the past 20-plus years. Were voters happy or unhappy as a result?

Here’s a way of visualizing what they investigated.

For what it’s worth, I’ve argued that Reagan showed good policy is good politics.

And the good news is that this research reaches a similar conclusion. Here are their main results.

Our results indicate that while reforms of government size are not robustly related to satisfaction with democracy, reforms of the other three kinds are – and in a way that runs counter to the anti-liberalization claims. Reforms that reduce economic freedom are generally related to satisfaction with democracy in a negative way, while reforms that increase economic freedom are positively associated with satisfaction with democracy. Voters also react more negatively to left-wing governments introducing reforms that de-liberalize. …the hypothesis of a general negative reaction towards liberalizing reforms taking the form of reduced satisfaction with democracy does not stand up to empirical scrutiny, at least not in our European sample.

Wonky readers may want to spend some time with this table, which shows the results of the statistical analysis

I’ll close with a couple of specific observations from the research, all of which deal with whether some reforms are more popular than others.

The good news is that voters are most satisfied when there’s less protectionism.

It turns out that the most immediately important type of reform here is liberalizations that increase market openness, such as reductions in protectionism and removal of obstacles to capital movements.

(Methinks the folks in the White House may want to reconsider their protectionist policies. It seems people understand that trade wars cause blowback.)

The bad news is that voters don’t seem to get excited about reforms to restrain government spending, whereas other types of pro-market reforms are popular.

Reforms that involve government size are rarely statistically significant; reforms that involve the other three reform areas typically are.

Though voters sometimes aren’t happy when government gets bigger, so I guess that’s partial good news.

Crises only seem to matter when government size increases, and then they make the effect on satisfaction with democracy much more negative.

Perhaps this is evidence that people recognize Keynesian “stimulus” schemes aren’t a good idea? I hope that’s the right interpretation. Heck, maybe this is yet another reason to stop sending tax dollars to subsidize the OECD.

Fiscal Crisis in America, Part 2: Greece – A Harbinger for the United States?

Tue, 08/14/2018 - 1:47am

[PDF Version]

July 2018, Vol. XII, Issue III

Fiscal Crisis in America, Part 2: Greece – A Harbinger for the United States?

By Sven R. Larson*


A fiscal crisis in the United States is no longer unthinkable. It is difficult to assess the probability and the exact timing of a crisis; to do so would require large sets of data from similar events in the past. Since fiscal crises have been unusual historically, traditional economic analysis is of little help here. However, the fiscal crisis in Greece that began ten years ago is a compelling case study for what the United States could be looking forward to. There are compelling similarities between the macroeconomic and fiscal situations in Greece before the crisis and in the United States today.

The Greek crisis became global news in 2010 when the European Union, the European Central Bank and the International Monetary Fund formed what has since become known as the “Austerity Troika” or, for short, the “Troika”. In response to fading debt-market investor confidence in Greek treasury bonds, the Troika intervened to coordinate lending to the Greek government, bring borrowing costs under control and stem the tide of surging interest rates.

In return, the Greeks would have to accept tough fiscal measures designed to quickly bring down the deficit. Initially, in February 2010 when the first austerity package was announced, the implication was that one such package would be enough to bring the Greek fiscal crisis under control. That would have been a tall order to fill: in January that year, Greek treasury bonds had come under “ferocious pressure” in response to a budget deficit of almost 13 percent of GDP.[1]

Since 2010, the Troika has subjected Greece to approximately one dozen austerity packages (depending on how one technically separates the packages) and although the intensity in austerity policies has decreased, to date there is no guarantee that the crisis is over. At no point has either the Troika or the government in Athens explained why previous austerity measures have not been enough to solve the fiscal crisis, or why more of the same fiscal medicine would have a different effect than than previous packages.

As the budget finally balances in 2018, the Greek nation has paid a hefty price for eight years of fiscal crisis measures:

  • Gross Domestic Product fell by one quarter in current prices;
  • Youth unemployment topped out at 60 percent in 2013, subsequently stabilizing around 50 percent;
  • The average Greek family has lost 38 cents of every euro they made before the crisis;
  • One fifth of government spending is gone, yet taxes have increased from 39 percent of GDP to 50 percent.

This tally is not indicative of any specific outcome of a U.S. fiscal crisis. However, it is important to note that when the Greek crisis broke out, there were no forecasts to be found that would come even close to predicting just how serious the situation would become. Therefore, the similarities between pre-crisis Greece and the United States, together with this tally, suggest that the U.S. economy could pay a literally unimaginable price if it fell into a fiscal crisis.

Spending is the problem in Greece – and in the United States

Economists often point to growth as a remedy for structural problems in the economy. There are good reasons for this, as explained by Dan Mitchell in a 2014 article in the Wall Street Journal.[2] Growth allows poor and low-income families to find better-paying jobs; it increases demand for high-paid workers, thus motivating people to improve their labor market skills; it opens new, profitable opportunities for entrepreneurs and rewards risk taking.

All in all, economic growth lifts people out of dependency on government. This should mean that government spending would be less of a problem in economies with strong growth. Specifically, strong growth should allow governments to collect more than enough taxes to pay for whatever spending is essential over the long term.

Since the Greek fiscal crisis erupted after a long streak of budget deficits, it is reasonable to ask whether the country’s economy had suffered from slow growth. As Figure 1 explains, that is not the case – on the contrary, over the past few decades, Greece has been able to match the United States in GDP growth:


Figure 1

Source: United Nations National Accounts Database


It was not for lack of economic growth that the Greek economy fell into a fiscal crisis. Notably, both the Greek and the U.S. economies saw growth rates in the 2-3 percent range as recently as in the 2000s (with the Greek GDP occasionally expanding much faster). By any reasonable account, both countries should have been able to feed their governments with enough tax revenue to maintain balanced budgets.

With relatively strong growth, both the Greek and the U.S. economies could grow tax revenue at more than adequate rates. In Greece, during the ten years immediately before the crisis began in 2008, total tax revenue grew by more than seven percent per year. In current prices, tax revenue more than doubled from 1996 to 2006.

The U.S. government saw its revenue grow almost as fast: from 1988 to 2007, federal tax revenue expanded by 5.8 percent per year on average. In 2005 and 2006, revenue growth reached 14.5 percent and 11.8 percent, respectively.

Despite rapid expansion in tax collections, neither country’s government was able to pay for its spending:


Figure 2

Source: Eurostat


There is no other way to characterize the lead-up to the Greek crisis than as a virtually chronic problem with excess government spending. For this reason, it is worth taking seriously the similarities between Greece and the United States.

To reinforce this parallel, Figure 3 reports growth rates in so-called social expenditures, or what is known in American parlance as “entitlements”. In both countries, this form of government spending has grown as share of current-price GDP:


Figure 3*

Source: Eurostat (Greece); Office of Management and Budget (U.S. federal); Census Bureau (U.S. State and Local)


The steady growth in social expenditures explains why healthy growth rates in GDP cannot yield enough tax revenue to pay for all of government outlays. The purpose of social expenditures is to redistribute income and consumption between citizens, the goal being a gradual diminution of economic differences between citizens.[3] In order to fulfill this goal, governments must gradually, over time, grow social expenditures as share of the economy. Therefore, the ideological foundation of government spending makes it inevitable that it grows over time and as share of GDP.

When government grows as share of GDP, by definition it creates a lasting need for higher taxes. A tax system with constant rates and a constant tax base will only grow tax revenue when GDP grows; tax revenue will remain a constant share of GDP. When spending grows faster than GDP, government will have to expand its taxation either by raising tax rates or by growing its tax base (or both). If tax hikes do not keep up with the expanding welfare state, the inevitable consequence is a growing government debt.

Similarities and differences

There are obvious limitations to a comparison between the Greek and the American economy. Greece has a GDP the size of Alabama, with an industrial structure that is a far cry from as diversified as the U.S. economy. Greece is also much more dependent on foreign trade.

At the same time, there are enough similarities to make a serious comparison worth the while. Both economies are subject to the same universal economic laws, such as the incentives and disincentives created by government participation in the economy. High taxes and generous entitlements have the same discouraging effects everywhere on investments, entrepreneurship and workforce participation.

As the social-expenditure data indicates, there are also important institutional similarities between the two countries. Government provides for retirement and poverty relief, gives cash and in-kind benefits to families with lower incomes, and funds their spending with taxes that disproportionately target higher incomes. Health care is under government hands to a larger extent in Greece than in the United States, but over the years the differences have become smaller.

With regard to government spending, the main difference is in the growth trend. Greek expenditures have grown continuously, while U.S. spending has jumped with recessions. There is a visible jump in federal social expenditures around 1980, in the wake of the second oil-price recession of the 1970s. During the Reagan presidency federal social expenditures dipped below ten percent of current-price GDP.

With the recession in the early 1990s the ratio for federal spending once again climbed above ten percent and has never been below that mark again. Not even the strong growth period in the late 1990s could bring the ratio down to Reagan-era levels.

The Millennium and Great Recessions bumped up the social expenditures ratio in two increments, such that it is now above 14 percent of GDP. There is even a hint of a rise in the past couple of years, right as the economy was recovering from the Obama-era recession and stagnation.

It is important to note that the American welfare state differs from most of its European peers in one important way: it splits its spending between three levels of government. States and local governments are responsible for social expenditures equal to approximately five percent of GDP, money that must be added to the federal outlays in order to give an accurate picture of just how big the American welfare state is.

While there is no one-stop database for welfare-state spending in the United States, the Census Bureau and the Office of Management and Budget produce data of comparable quality. When added together, these two forms of social expenditures are now at 20 percent of GDP; the U.S. levels of spending are not at contemporary Greek levels. However, it is worth noting that when the Great Recession began in 2008, Greek social expenditures were just a smidge above 20 percent of GDP.

The fact that U.S. social expenditures are now at “Greek” levels of ten years ago adds to the long-term growth trend in this spending category. While this does not place the United States at the doorstep of a fiscal crisis, it does suggest a dangerous level of fiscal vulnerability. The level of social expenditures reveals an irresponsible magnitude of entitlement promises. These promises, in turn, structurally exceed the levels that U.S. taxpayers can fund.

In lieu of substantial spending reform, the federal budget is returning to trillion-dollar deficits.[4] These forecasts do not take into account the budgetary effects of the next recession; a decline in tax revenue following a dip in macroeconomic activity could easily generate a deficit shockwave in the federal budget. Since most of the spending driving this deficit is of the entitlement kind, it is likely that any warning signals of a looming deficit shock will go unnoticed. This is yet another “Greek” parallel.

The fiscal crisis comes to Athens

The big, unanswered question is what a fiscal crisis could look like in the United States. Since our country has never experienced anything comparable to such a crisis, it is again relevant to draw on the experience from Greece.

Once government debt and deficits were at a point where global debt-market investors lost confidence in the Greek economy, interest rates began rising. Initially the increase was moderate: the ten-year treasury bond rate rose from 3.4 percent in the third quarter of 2005 to five percent by the end of 2008. Then the increase accelerated:


Table 1

Source: European Central Bank


It is an open question whether or not such interest rates are possible in the United States. On the one hand, the European Central Bank quelled the spike by unleashing a bond-buying program that really was nothing more than a masked, and massive, deficit monetization program. This raises the possibility that the Federal Reserve could keep U.S. rates in check by copying the ECB strategy.

On the other hand, the Federal Reserve has already engaged in various forms of deficit monetization for approximately a decade. Its penchant for printing money gained global notoriety under the Bernanke era as “quantitative easing”. Since Janet Yellen’s chairmanship the Federal Reserve has been trying to distance itself from this era, ostensibly to rebuild some muscle in the event of new runaway budget deficits. However, that does not mean that the central bank would have anywhere near the credibility or even capability needed to neutralize a debt-market loss of confidence in the U.S. Treasury.

In other words: the responsible approach is to consider seriously the possibility that budget deficits at the trillion-dollar level will at some point be associated with a rapid, and rather violent, spike in interest rates.

If that happened, it would have serious effects on the federal budget. At the current (July 2018) approximate interest rate on U.S. debt of 2.75 percent, net interest payments are expected to reach $315 billion:

  • If the rate doubled to 5.5 percent, the debt would cost taxpayers $41 billion more than Medicare;
  • If the rate tripled to 8.25 percent, the debt would cost taxpayers more than Defense, Veterans Benefits and Transportation together;
  • If the rate quadrupled eleven percent, the debt cost would by far be the biggest item in the federal budget, costing $1.25 for every $1 spent on Social Security.

The Greek ten-year bond rate did not peak until it had exceeded 25 percent. That peak, again, was reached only because of unprecedented intervention by the European Central Bank, the European Union and the International Monetary Fund.

There is no way of confidently estimating the risk of a U.S. interest-rate spike, let alone to suggest how Congress would react to it. However, even if the risk of quadrupled or even tripled interest rates is small, it is important to note that even smaller increases can have very serious effects on the federal budget, and force Congress into legislation that, today, would seem unthinkable.

Greece was forced by its unraveling debt situation to subject its government budget to repeated austerity packages. The practical meaning of these packages were a long series of rapid-fire spending cuts and tax hikes.

On the spending side, all categories of social expenditures took a beating:


Figure 4

Source: Eurostat


Some of the hardest-hitting reductions took place in unemployment benefits. From 2009 to 2014, total spending declined from 3.4 billion euros to 1.9 billion euros, in current prices. While not the largest cuts percentage-wise, the impact on an individual level was substantial, with a decline from 7,000 to 1,500 euros per year.

Tax-paid health care, a staple of the European welfare state, also took a hard beating. From 2009-2014, government reduced health care spending by 46 percent. Table 2 explains how government walked away from its promises to provide benefits practically across the entire health-care spectrum:[5]


Table 2

All these spending cuts represent partial or full-scale defaults on promises that the welfare state has made to its citizenry. When people are given a promise from government that they will be taken care of in the event of unemployment and other adverse experiences, they reduce their own contingency-based savings. Likewise, when government promises health care, housing subsidies and other entitlements, people place their standard of living above their means. Therefore, rapidly executed spending cuts have deeply negative effects on people’s personal finances in a way that predictable, gradual, long-term spending reductions do not.

As if to drive home the point about the difference between unpredictable spending cuts and reductions made in a predictable manner, the Greek government was perfectly able to bring its spending under control when they wanted to enter the euro zone (which they did in 2000). As part of its initiation rite, the Greek government had to at least look like they were trying to comply with the EU’s budget rules of a deficit at or below three percent of GDP and a debt no higher than 60 percent of GDP.

From 1996 to 2000, the Greek government managed to cut its deficit in half, from -8.2 percent of GDP to -4.1 percent.[6] Once the euro-zone membership was secured, deficits began increasing again. From 2001 through 2007, the deficit averaged -6.7 percent of GDP.

During the belt tightening leading up to the euro-zone entry, the Greek economy showed no visible signs of macroeconomic distress. The Greek government had time to implement spending restraint that would resonate with private-sector confidence. It is likely that if they had maintained this regime and gradually phased out the deficit, they could have avoided the fiscal crisis entirely.

Destructive tax hikes

Predictable deficit reduction means, in part, taking measures that avoid higher taxes. In fact, when spending cuts are done right they pave the way for future tax reductions. That, however, presupposes that the goal with reducing spending is to reduce the government’s fiscal footprint in the economy.

Policy measures in response to a fiscal crisis do not have the same purpose: they are dictated entirely by the need to mitigate a confidence meltdown among government creditors. Therefore, predictable policy measures are preventative and therefore proactive in helping a government avoid a fiscal crisis; once the crisis breaks out, there is only time for reactive, crisis-mitigating measures.

Due to the need to execute the highest amount of deficit reduction in the shortest time possible, crisis-ridden governments will resort to tax increases when they come with a smaller political price tag than spending cuts. For this reason, the macroeconomic repercussions of austerity in response to fiscal crises are always negative (Larson 2014). Greece is a case in point:

  • in 2004, taxes tallied up to 38.8 percent of GDP
  • in 2008, when the crisis started, they were 40.7 percent of GDP;
  • in 2012, three years after the Troika had begun its reign in Athens, taxes suddenly claimed 46.5 percent of GDP;
  • by 2016 they had gone up even further to 49.7 percent.

By 2012, GDP had declined by more than 19 percent. By 2016 it had fallen by a total of 25 percent, an almost unprecedented loss of economic activity in the modern, industrialized world.

The causal relationship from higher taxes to declining GDP is easy to understand against the backdrop of multiple increases in income taxes. As Table A reports, prior to the first Troika-imposed austerity package in 2010, Greece was on a slow path toward tax relief, at least for low-income families. As mentioned earlier, the GDP growth record was strong before the crisis set in.

Starting in 2010, the Greek parliament raised income tax rates in several steps. One of many effects was the gradual extension of the the highest 45-percent tax bracket, from incomes above 100,000 euros down to 35,000 euros. However, all income layers saw taxes go up, often significantly:


Table 3

Source: OECD


Figure 5 explains how sharp the effect of the income-tax increases actually was. It reports gross personal income for a family in Greece with approximately average incomes and the percentage of that income the family paid in taxes:


Figure 5

Source of raw data: Eurostat


Other taxes also increased, either in isolation or in combination with spending cuts:

  • Another package in October 2011 raised taxes in multiple steps through 2014. Among the tax hikes were a “solidarity levy” on personal income, a cut of the standard income-tax deduction by more than half (from 12,000 euros to 5,000 euros), a substantial increase in the VAT for restaurants, a one-third hike in excise taxes on fuel, cigarettes and alcohol, to mention a few. These tax hikes were combined with reductions in government employee wages, the national defense budget, health care, income security, pensions, local governments and education (which led to the closing or merger of almost 2,000 schools).[7]
  • By March 2012, new cuts in pensions, health care and defense spending were accompanied by large layoffs of government workers.[8] The cuts were accompanied by a slash to the country’s minimum wage, meant to slow the rise in unemployment.[9]
  • In July 2013, BBC reported that corporate income-tax rates were going up, while low-earning farmers would lose their tax-exempt status.[10]
  • In July 2015, CNBC reported on a “big hike” in Greek consumption taxes. The tax, which applied to both goods and services, increased from 13 percent to 23 percent. CNBC also reported that this incease in cost of living would take an extra 1,500 euros ($1,625) per year out of an average family budget.[11]
  • Less than a year later, in May 2016, Reuters reported that the Greek parliament passed yet another increase in consumption taxes from 23 to 24 percent. This was “the sixth VAT hike in as many years” that “would depress sales by 3 percent, increase tax evasion”.[12]
  • Also, in May 2016, The Guardian reported on “array of new levies, from a special import tax on coffee to extra duties on hotel bookings and a consumption tax on beer.”[13]
  • January 2, 2017, Deutsche Welle explained that the Greek government yet again increased the value-added tax, adding “higher duties on tobacco products, coffee, and automotive fuels.”[14]

Multiple tax increases of such tangible proportions do double harm to the economy. The impact in terms of higher cost of living and of doing business is immediate and likely responsible for the brunt of the decline in the Greek economy. However, there is also the longer-term effect of increased uncertainty for both households and businesses. When taxes go up drastically and frequently, and when the tax hikes are announced on short notice as “emergency measures”, uncertainty spreads among economic decision makers. Consumers who can still afford to, will hoard as much cash as possible for future contingencies and refrain from taking on new spending commitments such as a car loan or a second mortgage. Business owners will make short-sighted but critically necessary decisions to maintain or increase their operating margins in an effort to be prepared when the next tax hike comes.

When consumers and businesses become short-sighted in their decision making, it has a negative effect on long-term economic activity. By injecting uncertainty into the private sector, government derelicts on one of its very few duties in the economy, namely to provide a predictable and non-obstructive legal and regulatory framework. In upsetting that stable framework, a government engaged in fiscal-crisis reaction does yet more harm, long term, to an economy that is already hurt by a rapidly rising government burden.

Inevitable crisis, impossible response

When a country reaches a certain point, a fiscal crisis becomes inevitable. While some questions remain unanswered as to exactly when and how that point is reached, there is little question about what a government’s options are once it passes that point. Experience of varying degrees of fiscal crises in Europe suggests that when a country has maxed out its credit with the global debt market, and when the central bank has tapped out its ability to monetize deficits, all that remains is a series of fiscal measures aimed exclusively at crisis mitigation. There is no longer any room for proactive anti-deficit measures.

Once the crisis becomes inevitable, the response that the government can produce becomes impossible. Rapid spending cuts and tax increases may improve the budget upfront, but their macroeconomic consequences can almost as quickly neutralize whatever gains government made in reducing the deficit.

Adding insult to injury, the unpredictability of spending cuts and the unpalatability of tax hikes can put a significant political price tag on austerity.[15] In April 2010, before the Greek government had started on its first Troika-imposed austerity package, some analysts already pointed to the impossibility of the task they were charged with. Explained Kai Lange of the German business newspaper Manager Magazin:[16]

According to an assessment by Deutsche Bank, Greece is in for a “Herculean challenge”. The country will push its deficits down from its current 13.5 percent of GDP to two percent of GDP. It is expected that the strict austerity measures will slow economic activity by almost ten percent through 2012. Growth is a prerequisite for alleviation of the debt burden – economic activity must not be depressed.

Lange succinctly summarizes the situation that the Greek government had put itself in. At the start of the austerity era, in 2010, the budget deficit was 11.2 percent of current-price GDP. If the government had responded to this deficit with an equally balanced combination of higher taxes and spending cuts, the deficit reduction would have required an 8.8-percent cut in total government spending and an increase in tax revenue by 11.1 percent.

In a U.S. context, these tax increases would increase the tax burden on an average family of two adults and two children by $4,800 per year.[17] This burden would be imposed on them directly in the form of higher income taxes, or indirectly through rising corporate taxes (passed on to consumers in the form of higher prices and to employees in the form of layoffs and pay cuts).

Drastic, rapid-fire spending cuts of the aforementioned magnitude would likely cause a political uproar in American politics. This is also what happened in Greece. As a testimony to the virtual impossibility of the legislative situation created by a fiscal crisis, in a January 2010 closed meeting Troika officials discussed “how to press Athens to forge ahead” with highly unpopular anti-deficit policies.[18] Similar discussions took place within the IMF at the time.[19]

Conceivably, the political turmoil would have been worth the while if the economy would have responded positively to the first, or the first couple of austerity packages. However, that did not happen: the Troika itself admitted that the policies it imposed on Greece were ineffective.[20] By October 2011 they warned of consequences from their own austerity policies that they initially had not accounted for. The Greek economy, they said, was in a substantial decline and would “contract by 15% from 2009 to 2012”.[21]

These insights did not lead the Troika to re-evaluate its fiscal policies. On the contrary, it doubled down and demanded more and faster anti-deficit measures.[22]

Herein lies a very important policy lesson for the United States. Once we cross the line between a fiscally troubled situation and an overt fiscal crisis, and the global debt market expects austerity policies similar to those in Greece, Congress will be locked on a policy path that is destructive both politically and economically.

This outlook should serve as a stark warning that our elected officials better take the opportunity to reverse course on big spending, before it is too late.


*  Ph.D., political economist and associate scholar with the Center for Freedom and Prosperity. Dr. Larson has a total of 20 years of experience in politics, political economy and public policy, stretching across three countries. His research is published by referee journals and free-market think tanks, and in books such as The Rise of Big Government: How Egalitarianism Conquered America (Routledge, 2018) and Industrial Poverty (Gower/Routledge 2014).

The Center for Freedom and Prosperity Foundation is a public policy, research, and educational organization operating under Section 501(C)(3). It is privately supported and receives no funds from any government at any level, nor does it perform any government or other contract work. Nothing written here is to be construed as necessarily reflecting the views of the Center for Freedom and Prosperity Foundation or as an attempt to aid or hinder the passage of any bill before Congress.





* Disaggregated data for state and local government spending is only available for a limited period of time.

[3] Larson, Sven: The Rise of Big Government: How Egalitarianism Conquered America; Routledge, 2018.


[5] For a street-level perspective on these cuts, see: accessed 9/24/17





[10] accessed 9/27/17

[11] accessed 9/27/17

[12] accessed 9/27/17

[13] accessed 9/27/17

[14] accessed 9/27/17


[16] Author’s translation; original German text: “Nach Einschätzung der Deutschen Bank steht Griechenland vor einer “Herkulesaufgabe”. Hellas will seine Neuverschuldung von derzeit 13,5 Prozent des BIP binnen vier Jahren auf 2 Prozent des BIP drücken. Der strikte Sparkurs dürfte die Wirtschaftsleistung bis 2012 um knapp 10 Prozent einbrechen lassen. Wachstum ist aber Voraussetzung für eine Entschuldung – die Konjunktur darf nicht vollends abgewürgt werden.”

[17] This number does not take into account the distribution of the federal income-tax burden that places a disproportionate amount of the tax burden on high-income families.







Measuring American Democracy

Mon, 08/13/2018 - 4:11pm

Since the election of Donald Trump there’s been a lot of ink spilled regarding the state of American democracy. An interesting addition to this conversation, I think, comes from my friend Dr. Eduardo Morgan Jr., a former Panamanian ambassador to the United States. What he brings to the table is an outsider’s perspective, and I think it’s worth taking stock of how American institutions have traditionally worked to constrain authoritarianism from someone who has directly witnessed what can happen, as in South America, when such institutions are not nearly so robust.

So here is an excerpt from his article:

I was a witness during the time I attended Yale University, and then as Panama’s ambassador to the United States, of what the checks and balances of this great democracy mean. The Panama Canal’s ports, Cristóbal and Balboa, were obsolete as transshipment ports so the government of President Perez Balladares decided to privatize them. Those who won the concession would make the necessary investments to meet the load and the transshipment needs, which were the most important functions they would have as auxiliaries to the geographic position and the Canal. Major port companies from Japan and Hong Kong came to the bid, including Hutchinson Wampoa, which was perhaps the most important of them all, with ports all over the world.

The United States wanted Bechtel, one of its large companies, to obtain the concession and tried to convince the government to grant it directly, since it would make an offer that could not be rejected because of how advantageous it would be for Panama.  Ultimately they convinced President Pérez Balladares to halt the bidding process to tend to the Bechtel proposal, which in the end the President deemed to be a mockery, thus discarding it immediately. The bidding went ahead and was won by the aforementioned Hong Kong Company. The United States’ reaction and fury (there is no other word to describe it) came swiftly.

Right away the six most important senators sent a note to the director of the Federal Maritime Authority stating that they had to ‘punish’ Panama for discriminating against American interests in the bidding of the ports. They talked about how they would prevent ships bearing the Panamanian flag from reaching American ports. As expected, panic spread in Panama so the government asked me, as the ambassador, to hire a law firm to advise us on the subject. A single preliminary note from lawyers cost more than $ 5,000 and I realized that the meager Embassy budget would not allow for much more. I then sent the legal adviser to the Embassy, ​​Alfredo Suescum, accompanied by Lili Romero, who also acted as a lawyer, to find out with the officials of the Maritime Commission what could happen to us and what remedies we would have available to mitigate the damages. Alfredo and Lili returned smiling and relaxed. I asked them how long it would take the Commission to apply the penalty. Their response: ‘Ambassador, we met with the heads of the different departments and the message is: ‘Nothing will happen to Panama. This is an internal Panamanian matter and has nothing to do with us. Do not worry about the letter from the senators. It is just politics without any significance for us. Our director is also a politician, but these things we handle internally’.

This was a great lesson on the strength that democracy has in protecting officials against impositions from bosses they might have at a given time. In fact, the senators’ overblown threats deflated and besides some extreme groups’ propaganda stating that Panama was handing over the Canal to a Chinese company (they would wave the Chinese flag over the Canal in television ads), no more was spoken about the subject; there was no sanction of any kind and the Embassy saved a fortune in legal fees.

So I realized, because I experienced it, how great democracy is in that country.

You can access the article in full here.

A Court Case That Tells You Everything You Need to Know About Government

Mon, 08/13/2018 - 12:41pm

In June 2017, I shared an image and made the bold claim that it told us everything we needed to know about government.

In July 2017, I shared a story and similarly asserted that it told us everything we needed to know about government.

In that grand tradition of rhetorical exaggeration, here’s a court case that tells us everything we need to know about government.

…a lawsuit arguing that Detroit students were being denied an education had been dismissed. …With the help of a public interest law firm, a handful of Detroit students charged in federal court that educational officials in Michigan — including Gov. Rick Snyder — denied them access to an education of any quality. …Student cannot be expected to learn when they are simply “warehoused for seven hours a day” in “an unsafe, degrading, and chaotic environment” that is a school “in name only.” …almost 99 percent of the students are unable to achieve proficiency in state-mandated subjects. Last year, the state moved for dismissal, arguing that the 14th Amendment contains no reference to literacy. …U.S. District Judge Stephen Murphy III agreed with the state. Literacy is important, the judge noted. But students enjoy no right to access to being taught literacy. All the state has to do is make sure schools run. If they are unable to educate their students, that’s a shame, but court rulings have not established that “access to literacy” is “a fundamental right.”

I’m not a lawyer, so maybe the judge made the right decision. Indeed, I suspect it probably was the right outcome since a decision in favor of the suit may have resulted in some sort of judicial mandate to squander more money on failed government schools. And we have lots of evidence that additional funding would mean throwing good money after bad.

But I still feel great sympathy for the students and their parents. They are stuck with rotten schools that cost a lot of money.

They have been betrayed by government incompetence. Both Thomas Sowell and Walter Williams have explained how the system is rigged to benefit teacher unions rather than kids.

And even though most of the victimized children are minorities, the NAACP sides with the unions. Shame. The failed government school monopoly serves the interests of insiders, not students.

The only solution is school choice, as explained in this video.

P.S. Needless to say, the federal government shouldn’t play a role. Bush’s no-bureaucrat-left-behind plan didn’t work, and neither did Obama’s Common Core boondoggle. The best thing that could happen in Washington would be the abolition of the Department of Education.

P.P.S. There’s a lot we could learn about school choice and private schooling from SwedenChileIndiaCanada, and the Netherlands.

The Most Uplifting Chart of the 21st Century

Sun, 08/12/2018 - 12:17pm

Two months ago, I shared some data on private gun ownership in the United States and declared that those numbers generated “The Most Enjoyable Graph of 2018.”

Now I have something even better because it confirms my hypothesis about tax competition being the most effective way of constraining greedy politicians.

To set the stage, check out these excerpts from a heartwarming story in the Wall Street Journal.

Last year’s corporate tax cut is reducing U.S. tax collections, as expected. But that change is likely to ripple far beyond the country’s borders in the years ahead, shrinking other countries’ tax revenue… The U.S. tax law will reduce what other countries collect from multinational corporations by 1.6% to 13.5%… Companies will be more likely to put profits and real investment in the U.S. than they were before the U.S. lowered its corporate tax rate from 35% to 21%, according to the paper. That will leave fewer corporate profits for other countries to tax. And as that happens, other countries are likely to chase the U.S. by lowering their corporate tax rates, too, creating the potential for what critics have called a race to the bottom. …Mexico, Japan and the U.K. rank near the top of the paper’s list of countries likely to lose revenue… Corporate tax rates steadily declined over the past few decades as countries competed to attract investment.

Amen. This was one of my main arguments last year for the Trump tax plan. Lower tax rates in America will lead to lower taxes elsewhere.

For instance, look at what’s now happening in Germany.

Ever since Donald Trump last year unveiled deep tax cuts for companies in America, German industry has been wracked with fears over the economic fallout. …“In the long term, Germany cannot afford to have a higher tax burden than other countries,” warned Monika Wünnemann, a tax specialist at German business federation BDI. …the BDI urges Berlin to cut the overall tax burden, including corporate and trade levies, to a maximum 25 percent, compared to 26 percent in the US. …tax competition has clearly heated up within the European Union: France plans to reduce its top corporate rate to 25 percent by 2022 from 34 percent. The UK wants to cut its rate to 17 percent by 2021 from 20 percent today. If it fails to take action, Germany will be stuck with the heaviest corporate tax burden among industrialized countries.

Now let’s peruse a recent study from the International Monetary Fund.

Tax competition and declining corporate income tax (CIT) rates are not new phenomena. However, over the past 30 years, the United States has been an outlier in not reducing tax rates. Combined with the worldwide system of taxation, this is widely regarded as having served as an anchor to world CIT rates. Now the United States has cut its rate by 14 percentage points to 26 percent (21 percent excluding state taxes), which is close to the OECD member average of 24 percent (Figure 1). Combined with the (partial) shift toward territoriality, this may intensify tax competition. …Given the combination of highly mobile capital and source-based corporate income taxation, pressures on tax systems are not surprising. …The most clear-cut, and possibly largest, spillovers are still likely to be caused by the cut in the tax rate. …Depending on parameter assumptions, we find that reform will lead to average revenue losses of between 1.5 and 13.5 percent of the MNE tax base. …The paper has also discussed the likely policy reactions of other countries. …tax rates elsewhere also fall (by on average around 4 percentage points based on tentative estimates).

And here’s the chart from the IMF report that sends a thrill up my leg.

As you can see, corporate tax rates have plunged by half since 1980.

And the reason this fills me with joy is two-fold. First, we get more growth, more jobs, and higher wages when corporate rates fall.

Second, I’m delighted because I know politicians hate to lower tax rates. Indeed, they’ve tasked the OECD with trying to block corporate tax competition (fortunately the bureaucrats haven’t been very successful).

And I could add a third reason. The IMF confesses that we have even more evidence of the Laffer Curve.

So far, despite falling tax rates, CIT revenues have held up relatively well.

Game, set, match.

I’m very irked by what Trump is doing on tradegovernment spending, and cronyism, but I give credit where credit is due. I suspect none of the other Republicans who ran in 2016 would have brought the federal corporate tax rate all the way down to 21 percent. And I’m immensely enjoying how politicians in other nations feel pressure to do likewise.

Paul Krugman, Supply-Side Economist

Sat, 08/11/2018 - 12:51pm

I’ve been writing about the Laffer Curve for decades, making the simple point that there’s not a linear relationship between tax rates and tax revenue.

To help people understand, I ask them to imagine that they owned a restaurant and decided to double prices. Would they expect twice as much revenue?

Of course not, because people respond. Customers would go to other restaurants, or decide to eat at home. Depending on how customers reacted, the restaurant might even wind up with less revenue.

Well, that’s how the Laffer Curve works. When tax rates change, that alters incentives to engage in productive behavior (i.e., how much income they earn). In other words, to figure out tax revenue, you have to look at taxable income in addition to tax rates.

For some odd reason, this is a controversial issue.

My wayward buddy Bruce Bartlett posted a video on Facebook from Samantha Bee’s Full Frontal show. The goal was to mock the Laffer Curve, and here’s the part of the video featuring economists dismissing the concept as a “joke.”

Wow, that’s pretty damning. Economists from Stanford, Harvard, MIT, and the University of Chicago are on the other side of the issue.

Should I give up and retract all my writings and analysis?

Fortunately, that won’t be necessary since I have an unexpected ally. As shown in this excerpt from the video, Paul Krugman agrees with me about the Laffer Curve.

And Krugman’s not alone. Many other left-leaning economists also admit there is a Laffer Curve.

To be sure, as Krugman noted, there is considerable disagreement about the revenue-maximizing tax rate. Folks on the left often say tax rates could be 70 percent while folks on the right think the revenue-maximizing rate is much lower.

I have two thoughts about this debate. First, if the revenue-maximizing rate is 70 percent, then why did the IRS collect so much additional revenue from upper-income taxpayers when Reagan lowered the top rate from 70 percent to 28 percent?

Second, I don’t want to maximize revenue for government. That’s why I always make sure my depictions of the Laffer Curve show both the revenue-maximizing point and the growth-maximizing point. At the risk of stating the obvious, I prefer the growth-maximizing point.

The bottom line is that I think the revenue-maximizing point is probably closer to 30 percent, as shown in my chart. Especially in the long run.

But I wouldn’t care if the revenue-maximizing rate was actually 50 percent. Politicians should only collect the relatively small amount of revenue that is needed to finance the growth-maximizing level of government spending.

P.S. As tax rates get closer and closer to the revenue-maximizing point, that means an increasing amount of economic damage per dollar collected.

P.P.S. Paul Krugman is also right that value-added taxes are not good for exports.

Addendum: This post was updated on August 12 to add the clip of selected economists mocking the Laffer Curve.

Do Economic Crises Produce Liberalization or More Statism?

Fri, 08/10/2018 - 12:28pm

When I give speeches about modern welfare states, I’ll often cite grim data from the IMFBIS, and OECD about the very depressing fiscal consequences of ever-expanding government.

And if I really want to worry an audience, I’ll augment those numbers by talking about the erosion of societal capital and explain it’s very hard to adopt necessary reforms once the work ethic and self-reliance have been replaced by a culture of dependency and entitlement.

I basically warn people that many western nations (including the United States) are doomed to suffer Greek-style fiscal collapse. Depending on the type of speech, this is where I sometimes share a slide suggesting that there are two possible outcomes once an economic crisis occurs.

  • Does a crisis caused by bad government lead to even more bad government, which is the pessimistic hypothesis in Robert Higgs’ classic, Crisis and Leviathan?
  • Or does an economic crisis force politicians to actually scale back the size and scope of government, which is the hypothesis in Naomi Klein’s The Rise of Disaster Capitalism.

I’ve generally sided with Higgs, though there obviously are cases – such as Chile – where bad statist policies were followed by sweeping economic liberalization.

But, based on new research from the International Monetary Fund, it may be that Klein has a stronger argument (which would be a depressing outcome for her, since she favors bigger government).

Here are some of the issues that the authors investigated.

Relying on a new database of major past labor and product market reforms in advanced countries, we test a large set of variables for robust correlation with reform in each area. …structural reforms are notoriously difficult to implement…one of the most prominent hypotheses put forward in the literature, namely that crisis induces reform… we attempt to minimize value judgements and measurement error by employing a newly constructed “narrative” dataset of major reforms in four areas namely product market regulation (PMR) in network industries, EPL for regular workers, EPL for temporary workers, and unemployment benefit systems. … The large welfare costs of economic or financial crisis can break the deadlock over welfare-enhancing measures that could not be adopted otherwise due to conflict over their distributional consequences.

In short, they wanted to find out whether bad economic news (as captured by data on “GDP growth, deep recession, unemployment, crisis”) leads to pro-market reforms.

The answer is yes.

Our main result supports some form of the crisis-induces-reform hypothesis across all four reform areas. High unemployment, recession and/or an open economic crisis tend to be associated with a greater likelihood of reform. The effect is economically significant. For example, an increase of 10 percentage points in unemployment (as seen in several European economies in the aftermath of the Great Recession) is associated with an increase in the probability to undertake a major EPL reform for regular contract of about 5 percentage points — that is, about twice the average probability in the sample.

Here’s a chart from the report showing a big spike in deregulation in late 1990s/early 2000s.

And here’s a chart showing nations that took steps to cut back on unemployment subsidies.

Keep in mind, by the way, that some nations (such as Austria) may not have reformed because they never adopted bad policies in the first place.

Kudos to Denmark for implementing so much reform. And Greece wins a Booby Prize for failing to adopt desperately needed reforms.

I was also happy to see some results that bolster my argument in favor of jurisdictional competition as a tool to encourage better policy.

We also find evidence that outside pressure increases the likelihood of reform in certain areas. Reforms are more likely when other countries also undertake them.

Interestingly, it doesn’t appear that ideology plays a major role.

…we do not find any evidence for an ideological bias—there is no robust difference between left- and right-of-center governments’ propensity to undertake reform. …In the context of labor and product market reforms, while a reforming right-of-center government may face the combined resistance of the leftwing electorate, trade unions and other civil society groups, a left-of-center government will be less likely to be accused of pushing through reforms on ideological grounds and may therefore be more likely to succeed.

My two cents is that ideology can play a role (think Reagan and Thatcher, for instance), but that there are plenty of instances of putative right-of-center politicians making government bigger (Nixon and Bush, to cite US examples) and several instances of supposed left-of-center politicians overseeing pro-market reforms (Bill Clinton being the obvious example from America).

I’ll close with a very important caveat. The IMF study looked at regulatory policy. There are no lessons to be learned from this research about whether crises produce better fiscal policy.

For what it’s worth, based on all the post-financial-crisis tax increases that were imposed in Europe, I suspect that the Higgs hypothesis is still very relevant.

Mirror, Mirror, on the Wall, What Nations Protect Property Rights Best of All?

Thu, 08/09/2018 - 12:45pm

My favorite annual publication is the Fraser Institute’s Economic Freedom of the World, which measures the amount of economic liberty that exists in 159 nations. The rankings are based on five equally weighted categories, though I’ve always viewed “Legal System and Property Rights” as being the most important because even low taxes and light regulation won’t produce much growth if investors and entrepreneurs have no faith in the rule of law or the quality of governance.

This is why the annual International Property Rights Index is another one of my favorite publications. It provides a detailed look at why the right to own, utilize, and trade property is essential to a free society.

Property rights are accepted as a linchpin for human beings’ liberty, acting as a catalyst for economic and societal growth , and as a defense against authoritarian temptations. …Property is the basis of the freedom to contract, which is simply liberty in action. Without freedom to exchange, a third party, generally the government, intervenes through the political-bureaucratic ruling class. Freedom is more than the right to own property or the right to make transactions, to exchange, to buy and sell. Once citizens lose the right to own, they lose the ability to control their own lives. …This Index was developed to serve as a barometer of the state of property rights in all countries of the world.

Here’s the methodology of the Index. There are three main categories, each of which is comprised of several indices.

Now let’s get to the rankings.

As you might expect, Nordic nations and Anglosphere jurisdictions dominate, along with a smattering of other European countries.

…the top 15 countries for this year’s IPRI edition. Finland leads the 2018 IPRI (8.6924)… New Zealand ranks second (8.6322)… Next come Switzerland (8.6183), Norway (8.4504), Singapore (8.4049), Sweden (8.3970), Australia (8.3295), Netherlands (8.3252), Luxembourg (8.2978), Canada (8.2947), Japan (8.2315), Denmark (8.1640), United Kingdom (8.1413), United States of America (8.1243), and Austria (8.0050).

Congratulations to Finland, New Zealand, and Switzerland for winning the gold, silver, and bronze medals.

If you peruse the full rankings below, you’ll see that the United States is #14 (the same as last year).

Haiti is in last place, below even Venezuela.

It’s also worth noting that Chile is the highest-ranked Latin American nation.

Now let’s look at the nations with the biggest movement in the right direction and wrong direction. It’s easy to make a big jump for nations that are ranked very low, so Cyprus (which is now near the top of the 3rd quintile) probably deserves the most applause.

This year, five countries show the highest absolute improvement in their IPRI score: Azerbaijan (1.09), Ukraine (0.86), Russia (0.85), Moldova (0.82), and Cyprus (0.79); while the ones with highest decreases in their 2018 IPRI scores were South Africa (-0.65), Ethiopia (-0.3), Liberia (-0.27), Uganda (-0.25), and Uruguay (-0.22).

And South Africa’s decline is very tragic since it historically has been one of the best African nations.

By the way, if you want to know why property rights are so important, this chart is all the evidence you need.

And we’ll close today’s column with a bit of good news.

We don’t have decades of data, but the numbers that do exist show continuous improvement.

And since we also have evidence that overall global economic liberty is increasing, there are reasons for optimism.

What Will Cause the Next Recession?

Wed, 08/08/2018 - 12:14pm

I often discuss the importance of long-run growth and I pontificate endlessly about the policies that will produce better economic performance.

But what about short-term fluctuations? Where are we in the so-called business cycle? I don’t think economists are good at forecasting the ups and downs of the economy, but I did mention the factors that might contribute to a downturn in this interview with Dana Loesch.

Dana isn’t the only one interested in this topic.

The New York Times opined today about the state of the economy.

…the American economy has a lot more power…, and it’s making a lot of noise. …While Mr. Trump praised himself effusively…the stock market seemed unimpressed. …That’s because if you look down the line, there are few clear reasons to be so enthusiastic.

I suspect the editors at the NYT are somewhat motivated by a desire to make Trump look bad, but I don’t necessarily disagree with some of their analysis.

Though I think they are wrong on tax policy, which is the best thing that’s happened since Trump took office.

…the initial jolt of the Republicans’ $1.5 trillion tax cuts, mostly for corporations and the wealthy, is wearing off. Corporations have bought back $437 billion of their own shares, which leaves them that much less to invest in new production, or wages.

By the way, there’s nothing wrong with stock buybacks. It’s a way for companies to return profits to shareholders. And those shareholders generally then reinvest the money, so the NYT screwed up on that bit of analysis.

But they raise a very legitimate issue when looking at the impact of monetary policy.

Then there’s the flattening yield curve, which the St. Louis Federal Reserve’s president, James Bullard, warns could invert late this year if current conditions persist. That means short-term rates, such as those for two-year Treasury bonds, run higher than long-term rates, like the 10-year bond, a sign of pessimism that is a well-known red flag.

Though I would add that we wouldn’t be in the position of having to raise rates if the Fed hadn’t pushed rates artificially low in the first place (the same mistake they made last decade, by the way).

In other words, the best way of avoiding “tight money” is to not engage in periods of “easy money.”

The NYT editorial also looks at consumer spending, which is fine if the goal is to see whether retailers are happy. But if the issue is whether the economy is doing well, it’s much more important to see whether personal income is rising or falling.

Consumers were in a spending mood this spring, an attitude that won’t necessarily continue. …A recent Reuters analysis found that the bottom 60 percent of income-earners have been fueling their spending, and thus the economy’s, by using their savings or credit cards. They almost have to, because wage growth is expanding at a disappointing 2.7 percent annual clip.

I fully agree with this excerpt about trade. Assuming he wants to run for reelection, Trump is being very foolish to push for more protectionism.

…consider the administration’s effort to apply the sledgehammer to the economy’s toes via a trade war and ensuing tariffs on imported steel and aluminum, among other products. …Not only have the tariffs contributed to $1 billion in higher costs for General Motors, they are now contributing to rising prices of everything from Cokes to vacuum cleaners as companies pass along those costs to consumers.

Last but not least, I don’t necessarily agree that expansion have to end. After all, the economy is largely capable of self-correcting.

But a “business cycle” is probably inevitable so long as government has so much power to intervene.

None of these issues by themselves will put the brakes on an economy that is powering along with a 3.9 percent unemployment rate. But the friction is building. …economic expansions — and this one is in its 10th year — eventually run out of gas. …Mr. President, while you like to take credit for positive economic trends that are well beyond your control, you will own the downside, too.

For what it’s worth, I think misguided monetary policy usually deserves blame for short-run economic instability.

I mentioned in the interview that the central bank is trying to “normalize” interest rates. I hope the Fed is successful, though I worry that financial markets (and housing markets) have become dependent on easy money and will take a hit.

I’ll close by pointing out that the pundit class is focusing on whether the economy is growing faster under Trump than it grew under Obama.

I don’t care about that contest. I’m much more interested in whether we can getthe kind of free market-driven prosperity we enjoyed under Ronald Reagan or Bill Clinton.

We didn’t get that growth during the Obama years.

And given Trump’s schizophrenic approach to policy, I don’t have high hopes we’ll average 3 percent-plus growth during his tenure.

Denmark’s Successful Transition from Tax-Financed Old-Age Payments to Private Retirement Accounts

Tue, 08/07/2018 - 12:46pm

The United States has a bankrupt Social Security system.

According to the most recent Trustees Report, the cash-flow deficit is approaching $44 trillion. And that’s after adjusting for inflation.

Even by DC standards of profligacy, that’s a big number.

Yet all that spending (and future red ink) doesn’t even provide a lavish retirement. Workers would enjoy a much more comfortable future if they had the freedom to shift payroll taxes to personal retirement accounts.

This is why I periodically point out that other nations are surpassing America by creating retirement systems based on private savings. Here are some examples of countries with “funded” systems (as compared to the “pay-as-you-go” regime in the United States).

Now it’s time to add Denmark to this list.

Here’s how the OECD describes the Danish system.

There is…a mandatory occupation pension scheme based on lump-sum contributions (ATP). In addition, compulsory occupational pension schemes negotiated as part of collective agreements or similar cover about 90% of the employed work force. …Pension rights with ATP and with occupational pension schemes are accrued on a what-you-pay-iswhat-you-get basis. The longer the working career, the higher the employment rate, the longer contribution record and the higher the contribution level, the greater the pension benefits. …ATP covers all wage earners and almost all recipients of social security benefits. ATP membership is voluntary for the self-employed. ATP covers almost the entire population and comes close to absolute universality. …The occupational pension schemes are fully funded defined-contribution schemes… Some 90% of the employed work force is covered… The coverage ratio has increased from some 35% in the mid-1980s to the current level… Contribution rates range between 12% and 18%.

A Danish academic described the system in a recent report.

As labour market pensions mature, they will challenge the people’s pension as the backbone The fully funded pensions provide the state with large income tax revenues from future pension payments which will also relieve the state quite a bit from future increases in pension expenditures. Alongside positive demographic prospects this makes the Danish system economically sustainable. … a main driver was the state’s interest in higher savings… Initially, savings was also the government motive for announcing in 1984 that it would welcome an extension of occupational pensions to the entire labour market. … Initially, contributions were low, but the social partners set a target of 9 per cent, later 12 per cent, which was reached by 2009. …it is formally a private system. Pensions are fully funded, and savings are secured in pensions funds. …It is also worth noting that the capital accumulated is huge. Adding together pensions in private insurance companies, banks, and labour market pension funds (some of which are organized as private pension insurance companies), the total amount by the end of 2015 was 4.083 bill.DKK, that is, 201 per cent of GDP.

Denmark’s government also is cutting back on the taxpayer-financed system.

… the state has also sought to reduce costs of ageing by raising the pension age. In the 2006 “Welfare Reform”, it was decided to index retirement age with life expectancy… Moreover, the voluntary early retirement scheme was reduced from 5 to 3 years and made so economically unattractive that it is de facto phased out. Pension age is gradually raised from 65 to 67 years in 2019-22, to 68 years in 2030, to 69 in 2035 and to 70 in 2040… These reforms are extremely radical: The earliest possible time of retirement increases from 60 years for those born in 1953 to 70 years for those born in 1970. But the challenge of ageing is basically solved.

Those “socialist” Danes obviously are more to the right than many American politicians.

The Social Security Administration has noticed that Denmark is responding to demographic change.

The Danish government recently implemented two policy changes that will delay the transition from work to retirement for many of its residents. On December 29, 2015, the statutory retirement age increased from age 67 to 68 for younger Danish residents. Three days later, on January 1, 2016, a reform went into effect that prohibits the long-standing practice of including mandatory retirement ages in employment contracts.

And here’s some additional analysis from the OECD.

…pension reforms are expected to compensate the impact of ageing on the labour force… To maintain its sustainability…, major reforms have been legislated, including the indexation of retirement age to life expectancy gains from 2030 onwards. …a person entering the labour market at 20 in 2014 will reach the legal retirement age at 73.5. This would make the Danish pension age the highest among OECD countries. …As private pension schemes introduced in the 1990s mature, public spending on pension is projected to decline from around 10% of GDP in 2013 to 7% towards 2060.

Wow. Government spending on pensions will decline even though the population is getting older. Too bad that’s not what’s happening in America.

Last but not least, here are some excerpts from some Danish research.

Denmark has also developed a funded, private pension system, which is based on mandatory, occupational pension (OP) schemes… The projected development of the occupational schemes will have a substantial effect on the Danish economy’s ability to cope with the demographic changes. …the risks of generational conflicts seem smaller in Denmark than in many other countries. …Overall, the Danish OP schemes are thus widely regarded as highly successful: they have contributed substantially to restoring fiscal sustainability, helped averting chronic imbalances on the current account and reduced poverty among the elderly.

This table is remarkable, showing the very high levels of pension assets in Denmark.

To be sure, the Danish system is not a libertarian fantasy. Government still provides a substantial chunk of retirement income, and that will still be true when the private portion of the system is fully mature. And even if the private system provided 99 percent of retirement income, it’s based on compulsion, so “libertarian” is probably not the right description.

But it is safe to say that Denmark’s system is far more market-oriented (and sustainable) than America’s tax-and-transfer Social Security system.

So the next time I hear Bernie Sanders say that the United States should be more like Denmark. I’ll be (selectively) cheering.

P.S. The good news isn’t limited to pension reform. Having reached (and probably surpassed) the revenue-maximizing point on the Laffer Curve, Denmark is taking some modest steps to restrain the burden of government spending. Combined with very laissez-faire policies on other policies such as trade and regulation, this helps to explain why Denmark is actually one of the 20-most capitalist nations in the world.

August 8 addendum: Here’s a chart from a report by the European Commission showing that private pension income is growing while government-provided retirement benefits are falling (both measured as a share of GDP).

By Design: Poverty Forever

Mon, 08/06/2018 - 1:58pm

In his blog “The non-relationship between welfare spending and poverty reduction in the western world” Dan Mitchell explains how the welfare state is counter-productive in reducing poverty. He makes many strong points, perhaps the best of which is that poverty was declining sharply in the western world before the welfare state kicked into high gear.

The non-relationship between the welfare state and poverty is one of the most damning pieces of evidence against economic redistribution. But it gets better – or worse, if you will. Our government has actually rigged its anti-poverty spending programs in such a way that they cannot eliminate poverty, no matter how much money we spend.

Prior to 1964 the U.S. government used a so-called absolute poverty definition: a person or a family was defined as living in poverty if its standard of living was below an absolute amount. The threshold was not fixed over time – it changed with the general perception of what was considered a life in poverty – but there was no formal tie between the poverty threshold and the standard of living among the rest of the population.

As I explain in my book The Rise of Big Government: How Egalitarianism Conquered America:

Historically, the United States relied on an absolute poverty concept, which defines poverty independently of the general standard of living in a society. Prior to the invention of the relative poverty concept, federal welfare programs had been specifically designed to relieve absolute poverty. While those programs expanded radically in the wake of the Great Depression, the purpose, and the definition of entitlements in the programs, were all intended to make an absolute level of poverty as palatable as possible.

Then the Lyndon Johnson administration introduced the relative poverty concept, which defines a person as poor if his income is of a certain percentage of median income. All of a sudden, the poverty threshold rises automatically when people in general make more money.

There are two absurdities with this definition. The first and most obvious one is that when the economy is doing well and median income rises, the poverty threshold will go up – and more people will be defined as poor. By the same token, in a recession with stagnant or even declining median income, the poverty threshold suddenly declines.

None of this makes sense, of course. In fact, it is counter-intuitive to how common sense says we should define poverty. Nevertheless, this is the definition our government uses, and it guides all the spending programs in our welfare state.

Which brings us to the second absurdity with a relative poverty concept. Since a poor person, by definition, lives on a percentage of median income, government spending cannot eliminate poverty. It is arithmetically impossible, unless government by law eliminates all income differences.

In other words, we have a welfare state that spends hundreds of billions of dollars every year to “fight poverty”, while at the same time we define those who are poor in such a way that the “fight” to end poverty can never be successful.

If this all seems illogical, it is because – yes – it is illogical. However, to ask for logic behind government spending is to ask for the impossible. The only rational explanation for this construct is, as I suggest in my book, that the welfare state born from the War on Poverty is actually designed to gradually reduce, and eventually eliminate income differences. It is, in short, a redistributive behemoth aimed at transforming America into a Scandinavian-style egalitarian welfare state.

Trump Slams the Brakes on Obama’s CAFE Mandate

Sun, 08/05/2018 - 12:36pm

I don’t like the tribal nature of American politics, in part because I get criticized for not playing the game.

I tell both groups that I care about public policy rather than personal or partisan loyalty. Not that this explanation makes either group happy.

Today, I’m going to give a “thumbs up” to the President for what he’s doing about car mileage regulations. Which means the first group will be happy and the second group will be irritated.

To be more specific, the Trump Administration is proposing to ease up on the CAFE (corporate average fuel economy) rules. The Obama Administration, working with California environmentalists, proposed to make these regulations far more costly. Trump’s people basically want to freeze the car mileage mandate at the current 37-miles-per-gallon level.

Here’s a look at the history of the CAFE standards.

Sam Kazman of the Competitive Enterprise Institute explained earlier this year why these regulation impose high costs. And deadly costs.

The federal government’s auto fuel economy standards have for decades posed a simple problem: They kill people. Worse, the National Highway Traffic Safety Administration has covered this up. …To call it a coverup isn’t hyperbole. CAFE kills people by causing cars to be made smaller and lighter. While these downsized cars are more fuel-efficient, they are also less crashworthy. …A 1989 Harvard-Brookings study estimated the death toll at between 2,200 and 3,900 a year. Similarly, a 2002 National Academy of Sciences study estimated that CAFE had contributed to up to 2,600 fatalities in 1993. …The Insurance Institute for Highway Safety, which closely monitors crashworthiness, still provides the same advice it has been giving for years: “Bigger, heavier vehicles are safer.”

The Trump Administration apparently was listening to Sam, and has decided to block future increases in the CAFE mandate.

Environmentalists are predictably upset, but the Wall Street Journal opined on this topic a couple of days ago and explained why it is good news.

The Trump Administration’s deregulation is improving consumer choice and reducing costs… Its proposed revisions Thursday to fuel economy rules continue this trend to the benefit of car buyers… Obama bureaucrats were acutely blind—perhaps willfully so—to economic and technological trends in 2012 when they set a fleetwide average benchmark of 54.5 miles a gallon by 2025. …Americans prefer bigger cars, which makes it harder for automakers to meet the escalating Cafe targets. …As prices rise to meet the new standards, consumers would also wait longer to replace their cars. The average age of a car is approaching 12 years, up from about 8.5 in 1995. Newer cars are more efficient and safer, so longer vehicle turnover could result in more traffic fatalities… Thursday’s Trump Administration proposal to freeze—not roll back—fuel economy standards at the current 2020 target of 37 miles a gallon. …Automakers also want to duck a prolonged legal tussle with California, which received a waiver from the Obama Administration under the Clean Air Act in 2013 to establish its own emissions standards and electric-car mandate. The proposed Trump standards would apply nationally.

Holman Jenkins of the WSJ also weighed in on the issue, pointing out that undoing Obama’s expansion of CAFE mandates will have no impact on the earth’s climate.

…the effect on climate change would be zero. The Obama White House at the time exaggerated by a factor of two the Environmental Protection Agency’s estimate of the effect on total emissions over the lifetime of the cars involved. It doesn’t matter. Two times nothing is still nothing. …Let’s remember the truth of Mr. Obama’s fuel-economy rules. He did not wander the balconies of the White House gazing far into the future when he drafted the 2021-25 fuel economy target of 54.5 miles a gallon. His flunkies, as documented in a House investigation, simply were looking for a impressive-sounding number to serve the administration’s political interests at the time. …in undoing Mr. Obama’s policies, Mr. Trump is doing nothing to hurt the climate.

Myron Ebell of the Competitive Enterprise Institute also wrote on the topic and noted that Trump’s policy will save about 1,000 lives each year.

…the administration has struck a blow for consumer choice that will be good news for drivers planning or hoping to buy a new car in the next decade. That’s because the mileage mandate is one of the main causes of rapidly rising vehicle prices. …Meeting ever more stringent fuel economy standards is driving up new vehicle prices. Sticker shock is thereby causing a lot of people to hang on to their current cars. The average age of all cars on the road is now at an all-time high of over 11-1/2 years. …Freezing CAFE standards will make new cars more affordable for millions of Americans and also allow many of them to buy bigger and hence even safer new models. How much safer will be hotly debated. The Transportation Department concludes that the proposed changes will prevent about 1,000 traffic fatalities a year. …For many people, fuel economy will still be the most important factor in choosing a new car. The good news for them is that the Trump administration’s action will in no way prevent them from buying a model that gets great gas mileage. The good news for everyone else is that the choice of models will be much wider than if the CAFE standard remained 54.5 mpg.

By the way, this isn’t simply a matter of saving lives.

After all, we theoretically could save thousands of lives by simply banning automobiles. In the world of sensible public policy, we make trade-offs, deciding if achieving a certain goal is worthwhile when looking at all the costs and all the benefits.

So it’s theoretically possible that a policy that leads to more premature deaths might be acceptable.

But CAFE fails even on that basis. As Marlo Lewis explained a few years ago, the policy both kills people and imposes net financial costs.

The bottom line is that Donald Trump just improved his grade on regulation.

Back in April, I gave him a B+ on regulation. But then he did something foolish in June that (if I recalculated) would have dropped him to a B. Now he’s probably back at a B+ because of the change to the CAFE rules.

Given what he’s doing on trade, he needs to boost his other grades as much as possible!

Virtue Signaling, Plastic Straws, and Political Humor

Sat, 08/04/2018 - 12:08pm

Since I focus on public finance, I think California is crazy because of punitive taxes and reckless spending policies.

But I can understand why other people think California is crazy, period.

This is a state, after all, where politicians come up with bizarre ideas such as regulating babysitting and banning Happy Meals.

Not to mention banning other things as well.

So you won’t be surprised to learn that the Golden State is leading the way in attacking the horrible scourge of plastic straws.

Plastic straws are quickly becoming a takeout taboo. Starbucks has vowed to get its iconic green sippers completely off store shelves by 2020, while Seattle banned all plastic utensils, including straws, from bars and businesses city-wide earlier this month. San Francisco quickly followed suit this week and passed an ordinance that, once approved, will ban plastic straws beginning in July of 2019… It may seem as though the quarter-of-an-inch diameter drinking straw is the least of our worries. But environmentalists say the fight’s got to start somewhere. “We look at straws as one of the gateway issues to help people start thinking about the global plastic pollution problem,” Plastic Pollution Coalition CEO Dianna Cohen told Business Insider.

If I’m willing to claim earmarks are the gateway drug for big spending, then I can’t complain when other people come up with imaginative claims about other types of “gateways.”

In any event, there is a legitimate reason to be concerned about plastic.

Some straws drift out to sea, becoming just one more piece of the 79 thousand-ton colossal floating iceberg of trash called the Great Pacific Garbage Patch. Scientists who’ve studied the patch, a trash heap wider than two whole Texases that bobs somewhere between Hawaii and California, have discovered it’s essentially a watery pit of litter and illegal dumps that’s trapped in the ocean currents, and it is basically all plastic. …The anti-straw movement may have first picked up steam because…Texas A&M graduate student Christine Figgener…noticed something encrusted in the nose of one of the male turtles. …The team soon figured out it was actually a “plastic straw stuck in his nose,” and removed it, hoping the extraction might help give him some more breathing time on Earth.

But the people on the left side of the country are not actually solving this problem.

Plastic pollution is basically a problem caused by developing countries.

So the politicians in Seattle and San Francisco are making the Nanny State more intrusive without achieving anything.

A classic case of virtue signaling.

But look at the bright side. It’s already generated some great political satire.

Starting with this little girl.

I imagine the plastic straw will be a gateway for operating an unlicensed lemonade stand!

And if SWAT teams run out of harmless pot smokers to harass, they now have new target to justify their budgets.

And the gun grabbers will appreciate the importance of dealing with high-capacitystraw dispensers.

Though it’s unclear how the left will deal with the danger of concealed straws.

Especially since some of those straw nuts will become dealers.

I’ve saved the best for last. For those old enough to remember OJ Simpson and the white Bronco, this image of a renegade toddler will bring back memories.

Remember, if you outlaw straws, only outlaws will have straws.

Next thing you know, they’ll try to outlaw tanks.

It’s a slippery slope!

The Non-Relationship Between Welfare Spending and Poverty Reduction in the Western World

Fri, 08/03/2018 - 12:48pm

Last September, I shared some very encouraging data showing how extreme poverty dramatically has declined in the developing world.

And I noted that this progress happened during a time when the “Washington Consensus” was resulting in “neoliberal” policies (meaning “classical liberal“) in those nations (confirmed by data from Economic Freedom of the World).

In other words, pro-market policies were the recipe for poverty reduction, not foreign aid or big government.

Sadly, the Washington Consensus has been supplanted. Bureaucracies such as the International Monetary Fund, the United Nations, and the Organization for Economic Cooperation and Development are now pushing a statist agenda based on the bizarre theory that higher taxes and more spending somehow produce prosperity.

To add insult to injury, some people now want to rewrite history and argue that free markets don’t deserve credit for the poverty reduction that already has occurred.

Esteban Ortiz-Ospina, writing for Our World in Data, wants readers to conclude that redistribution programs deserve credit.

…the share of people living in extreme poverty around the world has fallen continuously over the last two centuries. …many often say that globalization in the form of ‘free-market capitalism’ is the main force to be thanked for such remarkable historical achievement. …this focus on ‘free-market capitalism’ alone is misguided. …Governments around the world have dramatically increased their potential to collect revenues in order to redistribute resources through social transfers… The reach of governments has grown substantially over the last century: the share of total output that governments control is much larger today than a century ago.

And for evidence, Mr. Ortiz-Ospina included this chart.

shared a version of this data back in June, asserting that the explosion of social welfare spending made this “the western world’s most depressing chart.”

So does Ortiz-Ospina have a compelling argument? Does poverty go down as welfare spending goes up?

Nope. Johan Norberg points out that there is a gaping flaw in this argument. An enormous, gigantic hole.

Wow. This isn’t just a flaw. It’s malpractice. It’s absurd to argue that welfare spending in developed nations somehow led to poverty reduction in developing countries.

I hope Mr. Ortiz-Ospina is just an inexperienced intern, because if he really understands the data, one might be forced to conclude that he’s dishonest.

But let’s set that issue aside. Johan closes his video by explaining that poverty in rich nations declined before modern welfare states. I want to expand on that point.

Johan cited Martin Ravallion, so I tracked down his work. And here’s the chart he put together, which I’ve modified to show (outlined in red) that extreme poverty basically disappeared between 1820 and 1930.

And guess what?

That was the period when there was no welfare state. Not only is that apparent from Our World in Data, it’s also what we see in Vito Tanzi’s numbers.

Here’s Tanzi’s table, which I first shared five years ago. And I’ve circled in red the 1880-1930 data to underscore that there was virtually no redistribution during the years poverty was declining.

The bottom line is that poverty in the western world fell during the period of small government. Yet some people want to put the cart before the horse. They’re making the absurd argument that post-1950s welfare spending somehow reduced poverty before the 1930s.

That’s as absurd as Paul Krugman blaming a 2008 recession in Estonia on spending cuts that took place in 2009.

P.S. For those who want U.S.-specific data, it’s worth noting that dramatic reductions in American poverty all occurred before Washington launched the so-called “War on Poverty.”

Using the Tax Code to Increase Rents and Enrich Landlords

Thu, 08/02/2018 - 12:14pm

There’s a problem in California. No, I’m not referring to the punitive tax laws. Nor am I talking about the massive unfunded liabilities for bureaucrat pension.

Those are big problems, to be sure, but today’s topic is the state’s government-created housing crisis. The population keeps expanding, but local governments use zoning laws to restrict development of new homes and apartments.

And guess what happens when supply is constrained and demand keeps climbing? Even a remedial student in Economics 101 will probably understand that this is a recipe for ever-rising prices.

The solution, of course, is to expand the housing stock. Build more homes, apartments, and condos.

But local governments don’t like that option because existing homeowners (who vote) benefit from scarcity-induced increases in home values. And environmentalists also don’t like any development because of ideology.

Moreover, why fix the problem when politicians in Washington are willing to promote crackpot ideas. And that’s a very apt description of Senator Kamala Harris’ scheme to subsidize rental payments.

Under the Rent Relief Act, anyone who spends more than 30% of their income on rent would be eligible for a federal tax credit. What would you do with that extra money in your pocket?

— Kamala Harris (@KamalaHarris) July 28, 2018

Why is this a crackpot idea? Because prices go up in every sector of the economy that is subsidized. This is why health care keeps getting more expensive. It’s why higher education keeps getting more expensive.

And if Washington politicians decide to subsidize rent, the same thing will happen.

Writing for National Review, Jibran Khan explains why Harris has the wrong solution for the wrong problem. He starts by explaining why there’s a housing shortage.

Harris’s subsidy won’t improve the situation, and could even make things worse by drawing attention away from actual solutions. The Bay Area’s rent crisis is driven by a drastic shortage in housing. Strict rent control in San Francisco and “NIMBY” (not in my backyard) zoning policies have ensured that the area constructs only a fraction of the housing it needs. The San Francisco metro area added 373,000 new jobs between 2012 and 2017, but it allowed the construction of only 58,000 new units of housing. …Per Lawrence Yun, an economist who studies housing trends, the norm is for one housing unit to be built for every two jobs created. In the San Francisco area, there is less than one unit built for every six jobs created. …under Harris’s proposal, the currently homeless would remain homeless, while renters would receive some very short-term relief at the cost of other taxpayers.

He then explains why a subsidy will lead to higher rents, and a windfall for landlords.

Why would the relief be short-term? Because as landlords become aware that renters are receiving a subsidy, they will simply raise rents by the amount of the subsidy. The cost will be the same for the renters — who today are lining up for a chance to rent, showing that they are willing to pay it. In the end, then, this would be an effective subsidy for landlords, not renters.

Which, as mentioned above, is exactly what’s happened in other sectors that have received subsidies.

It’s not just libertarians who understand that Harris will make a bad situation worse.

Matt Yglesias is hardly a small-government zealot. He’s accused me, for example, of being insane and irrational because of my libertarian views. But we both agree that the real problem in California is government rules that limit development.

A good federal housing policy, IMO, would be to take something like Harris’ Rent Relief Act and make it an incentive program where cities can get the money if they change land use regulations.

— Matthew Yglesias (@mattyglesias) August 1, 2018

And I assume he also would agree that Harris’ plan will wind up enriching landlords rather than helping renters.

So why, then, is Harris proposing such a destructive policy?

There are three possible answers.

  1. She’s ignorant, and her staff is ignorant. Simply stated, there’s no understanding of indirect effects. Bastiat would be very disappointed.
  2. She’s malicious. In other words, she’s smart enough to realize the policy is bad, but she doesn’t care. Call this the Venezuela approach.
  3. She’s ambitious. In this scenario, she has no intention of pushing a bad idea, but she thinks it’s a good way of getting votes from renters.

I assume #3 is the right answer.

Regardless of her motives, she’s doing the wrong thing.

I’ve shared this chart on many occasions because it does a great job of showing that subsidized sectors are characterized by rising prices.

Give politicians enough leeway and maybe the entire economy can be dysfunctional!

P.S. I’m not being partisan. Republicans are quite capable of supporting very stupid policies in exchange for votes or campaign contributions. Just look at the GOPers who support the Export-Import BankFannie-Freddie subsidies, or ethanol handouts.

P.P.S. Needless to say, I also object to the Harris scheme because it would make the tax code an even bigger mess. I realize it’s unlikely that I’ll ever see a simple and fair flat tax, but is it too much to ask for politicians not to make the system even worse?

Trump and Trade: Protectionist Buffoon…or Master Negotiator Using 3-Dimensional Chess to Lower Tariffs?

Wed, 08/01/2018 - 12:13pm

By starting a trade war, President Trump is playing with matches in a gunpowder factory. Other nations are retaliating, creating the risk of escalating tit-for-tat protectionism.

But is that really what’s happening? Is it possible that the President instead is playing hardball to get other nations (who generally have more trade barriers than America) to open their markets?

Depending on who you ask, you get different answers to those questions.

Steve Moore of the Heritage Foundation lavishes praise on Trump for being a de facto proponent of free trade.

Trump and the European Union reached a handshake deal that is designed to LOWER tariffs on both sides of the Atlantic. They agreed to shoot for zero tariffs on both sides of the Atlantic. ‎ Sounds like freer and fairer trade to me. …It gets better: the two sides also agreed in principle to find ways to combat “unfair trading practices, including intellectual property theft, forced technology transfers, industrial subsidies and distortions created by state-owned enterprises.” …Before Trump came on the scene most nations denied that this cheating and stealing were even happening.  Any progress in ending these unfair trade practices is an indisputable victory for the U.S.  Well done, Mr. President. You’ve accomplished something in 18 months that no president has in at least 30 years. …We have here more evidence that the American president is the master negotiator. …the key point: Trump’s tariffs are meant to force other countries to LOWER theirs.

Likewise, Marc Thiessen of the American Enterprise Institute argues in the Washington Post that Trump is playing a clever game designed to produce free trade.

Trump was roundly criticized for publicly berating allies over their trade practices and provoking a needless trade war. Well, once again, it appears Trump is being proved right. On Wednesday, he and European Commission President Jean-Claude Juncker announced a cease-fire in their trade war and promised to seek the complete elimination of most trade barriers between the United States and the European Union. …Zero tariffs. Wednesday’s breakthrough with the European Union shows that, contrary to what his critics allege, Trump is not a protectionist; rather, he is using tariffs as a tool to advance a radical free-trade agenda. …Trump’s hard-line trade strategy is being vindicated. …the E.U. negotiating zero tariffs… That’s three-dimensional trade chess. …If Trump succeeds in using trade wars to bring down European and Chinese trade barriers, he may end up being one of the greatest free-trade presidents in history.

Claude Barfield of AEI doesn’t agree with his colleague that Trump is a closet free trader.

…one cannot be counted a free trader if one subscribes to the flat-earth equivalent theory that trade deficits (or surpluses) can be changed dramatically by trade policy rather than by changes in a nation’s savings/investment ratio — or indeed that bilateral trade deficits are evidence of “unfair” trade practices or the US being “raped” by its trading partners. One cannot be a free trader if one supports, as the president does, a “Buy American” policy, no matter the ultimate cost to US businesses and consumers. One cannot be a free trader if one prostitutes the concept of national security by invoking it for purely protectionist trade actions against historical allies. One cannot be a free trader, or free market leader, if one compounds protection with outsized subsidies, as the president contemplates with a $12 billion farm bribe. …Thiessen made a valiant effort to craft a silk purse out of sow’s ear. But, given their vehement protests over Trump’s tariffs, it seems that even pig farmers aren’t buying it.

Veronique de Rugy also has a very jaundiced view of Trump’s actions on trade, explaining that higher tariffs aren’t the right route to achieve free trade.

…trade…is one policy area where he’s been remarkably consistent over the years. That’s why I’m always surprised whenever articles, TV commentators, or friends in casual conversations argue that his real goal in boldly imposing unilateral tariff hikes is to achieve freer trade. …Nothing in what the president has ever said suggests that he’s anything but a diehard mercantilist. …unilaterally increasing tariffs against other nations has never been an effective way to get them to lower theirs. Other government officials, often protectionists themselves, use the attack as an excuse to raise their own tariffs even higher to protect domestic interests. Retaliation from Mexico, Canada, China, and the European nations is proving this point once again. …Historically, the only way the United States has managed to get other countries to drop their trade barriers has been through multilateral agreements where everyone commits to behaving better. It is not a perfect process, but it beats pretending that Trump’s protectionism will do any good.

So who’s right, the Thiessen-Moore team or the Barfield-de Rugy team?

For what it’s worth, I hope Thiessen and Moore are right, but I’m afraid that Barfield and de Rugy have a stronger argument (as illustrated by this scale that I recycled from two days ago).

Trump repeatedly has demonstrated that he has no idea how trade works. He actually thinks a trade deficit is somehow evidence of economic defeat. But that’s nonsensical. The “deficit” in trade only exists because foreigners are anxious to invest in the U.S. economy. In other words, it’s really a sign of a capital “surplus.”

Veronique mentioned this in her column, and also noted that this won’t change in a zero-tariff world. Indeed, the so-called deficit would probably increase since America would become an even more attractive place to invest.

Trump’s obsession with increasing exports relative to imports is misguided. The imports are a means to achieve what Mark Perry of the American Enterprise Institute calls “job-generating foreign investment surpluses for a better America.” That also means that a world with no tariffs will not necessarily translate to a lower U.S. trade deficit. …Thus the president would likely hate the outcome of a zero-tariff world, putting us back where we are today.

Moreover, let’s not forget that the tax reform legislation – particularly the lower corporate rate – also will make America more attractive to foreign investors. And that also will lead to a higher trade deficit.

So unless Trump learns that a trade deficit is not a bad thing, he’d probably react by pushing for more protectionism instead of more trade liberalization.

That being said, I’m going to conclude with some optimism. Not because I think Trump wants the right thing or believes the right thing, but rather because he a) doesn’t pay attention to details, and b) values appearance over substance.

Consider what happened with the big spending battle with Congress last year (which actually dragged into this year). Trump’s big issue was illegal immigration and building a wall, yet he capitulated to a spending bill that basically ignored his demands. Yet he signed it because he decided that more defense spending could be portrayed as a victory (even though the bill was larded with additional domestic spending).

Maybe the same thing can happen on trade. In this fantasy scenario, he’ll huff and puff about the trade deficit and then wind up agreeing to a good pact because the other side makes some splashy concession that Trump can portray as a win.

At least that’s what I hope will happen. Especially since I don’t enjoy thinking about the alternative outcome.

Pro-Growth Tax Reform: Evidence from Canadian Provinces

Tue, 07/31/2018 - 12:01pm

In the past few years, I’ve bolstered the case for lower tax rates by citing country-specific research from ItalyAustraliaGermanySwedenIsraelPortugalSouth Africa, the United StatesDenmarkRussiaFrance, and the United Kingdom.

Now let’s look to the north.

Two Canadian scholars investigated the impact of provincial tax policy changes in Canada. Here are the issues they investigated.

The tax cuts introduced by the provincial government of British Columbia (BC) in 2001 are an important example… The tax reform was introduced in two stages. In an attempt to make the BC’s economy more competitive, the government reduced the corporate income tax (CIT) rate initially by 3.0 percentage points with an additional 1.5 percentage point reduction in 2005. The government also cut the personal income tax (PIT) rate by about 25 percent. …The Canadian provincial governments’ tax policies provide a good natural experiment for the study of the effects of tax rates on growth. …The principal objective of this paper is to investigate the effects of taxation on growth using data from 10 Canadian provinces during 1977-2006. We also explore the relationship between tax rates and total tax revenue. We use the empirical results to assess the revenue and growth rate effects of the 2001 British Columbia’s incentive-based tax cuts.

And here are the headline results.

The results of this paper indicate that higher taxes are associated with lower private investment and slower economic growth. Our analysis suggests that a 10 percentage point cut in the statutory corporate income tax rate is associated with a temporary 1 to 2 percentage point increase in per capita GDP growth rate. Similarly, a 10 percentage point reduction in the top marginal personal income tax rate is related to a temporary one percentage point increase in the growth rate. … The results suggest that the tax cuts can result in significant long-run output gains. In particular, our simulation results indicate that the 4.5 percentage point CIT rate cut will boost the long-run GDP per capita in BC by 18 percent compared to the level that would have prevailed in the absence of the CIT tax cut. …The result indicates that a 10 percentage point reduction in the corporate marginal tax rate is associated with a 5.76 percentage point increase in the private investment to GDP ratio. Similarly, a 10 percentage point cut in the top personal income tax rate is related to a 5.96 percentage point rise in the private investment to GDP ratio.

The authors look specifically at what happened when British Columbia adopted supply-side tax reforms.

…In this section, we attempt to gauge the magnitude of the growth effects of the CIT and PIT rate cuts in BC in 2001… the growth rate effect of the tax cut is temporary, but long-lasting. Figure 2 shows the output with the CIT rate cut relative to the no-tax cut output over the 120 years horizon. Our model indicates that in the long-run per capita output would be 17.6 percent higher with the 4.5 percentage point CIT rate cut. …We have used a similar procedure to calculate the effects of the five percentage point reduction in the PIT rate in BC. …The solid line in Figure 3 shows simulated relative output with the PIT rate cut compared to the output with the base line growth rate of 1.275. Our model indicates that per capita output would be 7.6 percent higher in the long run with the five percentage point PIT rate cut.

Here’s their estimate of the long-run benefits of a lower corporate tax rate.

And here’s what they found when estimating the pro-growth impact of a lower tax rate on households.

In both cases, lower tax rates lead to more economic output.

Which means that lower tax rates result in more taxable income (the core premise of the Laffer Curve).

The amount of tax revenue that a provincial government collects depends on both its tax rates and tax bases. Thus one major concern that policy makers have in cutting tax rates is the implication of tax cuts for government tax receipts. …The true cost of raising a tax rate to taxpayers is not just the direct cost of but also the loss of output caused by changes in taxpayers’ economic decisions. The Marginal Cost of Public Funds (MCF) measures the loss created by the additional distortion in the allocation of resources when an additional dollar of tax revenue is raised through a tax rate increase. …if…government is on the negatively-sloped section of its present value revenue Laffer curve…, a tax rate reduction would increase the present value of the government’s tax revenues.

And the Canadian research determined that, measured by present value, the lower corporate tax rate will increase tax revenue.

…computations indicate that including the growth rate effects substantially raises our view of the MCF for a PIT. Our computations therefore support previous analysis which indicates that it is much more costly to raise revenue through a PIT rate increase than through a sales tax rate increase and that there are potentially large efficiency gains if a province switches from an income tax to a sales tax. When the growth rate effects of the CIT are included in the analysis, …a CIT rate reduction would increase the present value of the government’s tax revenues. A CIT rate cut would make taxpayers better off and the government would have more funds to spend on public services or cut other taxes. Therefore our computations provide strong support for cutting corporate income tax rates.

Needless to say, if faced with the choice between “more funds to spend” and “cut other taxes,” I greatly prefer the latter. Which is why I worry that people learn the wrong lesson when I point out that the rich paid a lot more tax after Reagan lowered the top rate in the 1980s.

The goal is to generate more prosperity for people, not more revenue for government. So if a tax cut produces more revenue, the immediate response should be to drop the rate even further.

But I’m digressing. The point of today’s column is simply to augment my collection of case studies showing that better tax policy produces better economic performance.

P.S. The research from Canada also helps to explain the positive effect of decentralization and federalism. British Columbia had the leeway to adopt supply-side reforms because the central government in Canada is somewhat limited in size and scope. That’s even more true in Switzerland (where we see the best results), and somewhat true about the United States.

Economic Boom from the Trump Tax Cuts? A Pro-Con Analysis

Mon, 07/30/2018 - 12:59pm

Earlier this month, I talked about the economy’s positive job numbers. I said the data is unambiguously good, but warned that protectionism and wasteful spendingwill offset some of the good news from last year’s tax reform.

This is what’s frustrating about the Trump presidency.

Good policies in some areas are being offset by bad policies in other areas, so it’s not easy assigning an overall grade.

And it’s also difficult to predict the effect on economic performance. If you look at the formulafor a prosperous economy, there’s no way of predicting whether Trump is a net positive or a net negative. At least in my humble opinion.

As such, I’ll be very curious to see what happens to America’s score in subsequent issues of Economic Freedom of the World.

It would be nice if the United States got back into the Top 10. For what it’s worth, I’m guessing America’s score won’t measurably improve.

That being said, if there was a pro-con debate on Trump’s performance, some people would be quite confident about declaring victory.

Mike Solon, a former budget staffer on Capitol Hill, offers the “pro” assessment in the Wall Street Journal.

Are low taxes key to a booming economy? Their success is harder than ever to deny after Friday’s report that the U.S. economy grew 4.1% in the second quarter, bringing the average quarterly growth rate during the Trump presidency to 2.9%. …In the first five quarters of the Trump presidency, growth has been almost 40% higher than the average rate during the Obama years, and per capita growth in gross domestic product has been 63% faster. …The CBO now projects that additional revenue from this economic surge will offset 88.2% of the estimated 10-year cost of the tax cut. …The CBO’s April revision projected an extra $6.1 trillion in GDP over the next decade—more than $18,000 of growth for every man, woman and child in America. …the Labor Department reports that worker bonuses have hit the highest level ever recorded. The Commerce Department reports that wages and salaries are growing almost 25% faster under President Trump than under Mr. Obama.

Since I have great confidence that lower tax rates are good for growth and that Laffer Curve-type feedback effects are real, I want to applaud what Mike wrote.

And since I’ve also dissed the idea of “secular stagnation,” I also like this part of his column.

Perhaps the most important narrative discredited by the economic revival is the “secular stagnation” excuse. Throughout the Obama years, progressive economists said Americans had become too old, lazy and complacent to achieve the growth that was regular before 2009. But somehow American workers overcame all of these supposed weaknesses when Mr. Trump changed federal policy. The problem was not our people but our government. Stagnation is not fate but a political choice.

Amen to that final sentence. Stagnation is the result of bad policy.

But my problem is that Trump has some bad policies that are offsetting his good tax reform. So I can’t help but think Mike is being too optimistic.

Let’s look at another perspective. It would be an exaggeration to state that Jimmy Pethokoukis of the American Enterprise Institute is in the “con” camp, but he definitely is skeptical.

GOP hot takes will come as fast and furious as the economic growth. “The tax cuts worked!” “Trumponomics rocks!” …Celebrating a stronger economy is not a bad thing, of course. Over the long run, sustainable economic growth is what generates higher living standards and greater social mobility. But drawing sweeping conclusions from a single three-month period is problematic…it doesn’t necessarily tell you a whole lot about where the economy is heading. There were eight quarters of 3 percent growth or faster scattered across the Obama presidency, including four of 4 percent or faster and one of 5.2 percent. But there was never much follow-through, and overall the expansion muddled through at roughly a 2 percent annual pace. …even a very strong report won’t tell us whether the Trump tax cuts, passed in December, are “working.” It’s just too soon. …that process will play out over a numbers of years.

This is a very sensible perspective. I’ve repeatedly warned not to overstate the importance of short-run data. And I also fully agree that there’s often a time lagbetween the adoption of good policy and the evidence of good results.

But I have the same complaint about the Pethokoukis column as I did about the Solon column. There’s a sin of omission because both focused on the tax reform.

As I noted above, we also need to consider the other policies that have changed in the last 18 months.

don’t know the answer, but maybe this image will illustrate why we should hesitate before making sweeping assessments.

And also keep in mind that we have no way of knowing whether there’s a Fed-created bubble in the economy. As I said in the interview, what if 2018 is akin to 2006? Back then, most people underestimated the possibility that easy moneyand Fannie-Freddie subsidies had created an unsustainable housing boom.

But even if we ignore that wild card, I can’t help but wonder whether Trump’s pro-growth polices and Trump’s anti-growth policies are resulting in a wash.

Rich Nations that Enact Big Government Don’t Remain Rich

Sun, 07/29/2018 - 12:02pm

Move over, Crazy Bernie, you’re no longer the left’s heartthrob. You’ve been replaced by Alexandria Ocasio-Cortez, an out-of-the-closet socialist from New York City who will enter Congress next January after beating a member of the Democratic leadership.

Referring to the boomlet she’s created, I’ve already written about why young people are deluded if they think bigger government is the answer, and I also pointed out that Norway is hardly a role model for “Democratic socialism.”

And in this brief snippet, I also pointed out she’s wrong to think that you can reduce corporate cronyism by giving government even more power over the economy.

But there’s a much bigger, more important, point to make.

Ms. Ocasio-Cortez wants a radical expansion in the size of the federal government. But, as noted in the Washington Examiner, she has no idea how to pay for it.

Consider…how she responded this week when she was asked on “The Daily Show” to explain how she intends to pay for her Democratic Socialism-friendly policies, including her Medicare for All agenda. “If people pay their fair share,” Ocasio-Cortez responded, “if corporations paid — if we reverse the tax bill, raised our corporate tax rate to 28 percent … if we do those two things and also close some of those loopholes, that’s $2 trillion right there. That’s $2 trillion in ten years.” She should probably confer with Democratic Socialist-in-arms Sen. Bernie Sanders, I-Vt., whose most optimistic projections ($1.38 trillion per year) place the cost of Medicare for All at roughly $14 trillion over a ten-year period. Two trillion in ten years obviously puts Ocasio-Cortez a long way away from realistically financing a Medicare for All program, which is why she also proposes carbon taxes. How much she expects to raise from this tax she didn’t say.

To be fair, Bernie Sanders also didn’t have a good answer when asked how he would pay for all the handouts he advocated.

To help her out, some folks on the left have suggested alternative ways of answering the question about financing.

I used to play basketball with Chris Hayes of MSNBC. He’s a very good player (far better than me, though that’s a low bar to clear), but I don’t think he scores many points with this answer.

I think a good answer for “How will you pay for your agenda?” is “We’re a very rich country. We’ll figure it out.”

— Chris Hayes (@chrislhayes) July 27, 2018

Indeed, Professor Glenn Reynolds of the University of Tennessee Law School required only seven words to point out the essential flaw in Hayes’ approach.

Venezuela was once a very rich country.

— (@instapundit) July 28, 2018

Simply stated, there’s no guarantee that a rich country will always stay rich.

wrote earlier this month about the importance of long-run economic growth and pointed out that the United States would be almost as poor as Mexico today if growth was just one-percentage point less every year starting in 1895.

That was just a hypothetical exercise.

There are some very sobering real-world examples. For instance, Nima Sanandaji pointed out this his country of Sweden used to be the world’s 4th-richest nation. But it has slipped in the rankings ever since the welfare state was imposed.

Venezuela is another case study, as Glenn Reynolds noted.

Indeed, according to NationMaster, it was the world’s 4th-richest country, based on per-capita GDP, in 1950.

For what it’s worth, I’m not familiar with this source, so I’m not sure I trust the numbers. Or maybe Venezuela ranked artificially high because of oil production.

But even if one uses the Maddison database, Venezuela was ranked about #30 in 1950, which is still impressive.

Today, of course, Venezuela is ranked much lower. Decades of bad policy have led to decades of sub-par economic performance. And as Venezuela stagnated, other nations become richer.

So Glenn’s point hits the nail on the head. A relatively rich nation became a relatively poor nation. Why? Because it adopted the statist policies favored by Bernie Sanders and Alexandria Ocasio-Cortez.

I want to conclude, though, with an even better example.

More than seven years ago, I pointed out that Argentina used to be one of the world’s richest nations, ranking as high as #10 in the 1930s and 1940s (see chart to right).

Sadly, decades of Peronist policies exacted a heavy toll, which dropped Argentina to about #45 in 2008.

Well, I just checked the latest Maddison numbers and Argentina is now down to #62. I was too lazy to re-crunch all the numbers, so you’ll have to be satisfied with modifications to my 2011 chart.

The reverse is true as well. There are many nations that used to be poor, but now are rich thanks to the right kind of policies.

The bottom line is that no country is destined to be rich and no country is doomed to poverty. It’s simply a question of whether they follow the right recipe for growth and prosperity.

Greek Politicians Exacerbate a Spending Problem with Never-Ending Tax Increases

Sat, 07/28/2018 - 12:50pm

Shortly after the fiscal crisis began in Greece, I explained that the country got in trouble because of too much government spending.

More specifically, I pointed out that the country was violating my Golden Rule, which meant that the burden of spending was rising relative to the private economy.

That’s a recipe for trouble.

Unfortunately, thanks in large part to bad advice from the International Monetary Fund, Greek politicians decided to deal with an overspending problem by raising taxes.

Then doing it again.

And raising taxes some more.

And raising them again.

Then adding further tax hikes.

The tax burden is now so stifling that even the IMF admits the country may be on the wrong side of the Laffer Curve.

And establishment media sources are noticing. Here are some excerpts from a report in the Wall Street Journal.

Greece is…raising taxes so high that they are strangling the small businesses that form the backbone of its economy. …The tax increases have left Greece with some of Europe’s highest tax rates across several categories, including 29% on corporate income, 15% on dividends, and 24% on value-added tax (a rough equivalent of U.S. sales tax). Individuals pay as much as 45% income tax, plus an extra “solidarity levy” of up to 10%. Furthermore, workers and employers pay social-security levies of up to 27% of their salaries. …small and midsize businesses and self-employed people…are fighting the government in court over having to pay what they say is up to 80% of their average monthly takings in taxes and levies. Some also have to pay retroactive social-security contributions, to the point where professional associations say some of their members are having to pay more to the state than they make.

Paying more than they make? Francois Hollande will applaud when he learns that another nation has an Obama-style flat tax.

…economists and Greek entrepreneurs say heavy taxation doesn’t help. The tax burden is considered the most problematic factor for doing business in Greece, according to the World Economic Forum. “The tax burden creates a serious disincentive for economic activity. It mainly hits the most productive part of the Greek society… Aris Kefalogiannis, the CEO of olive-oil and food company Gaea, said the fiscal straitjacket is keeping highly qualified executives he would like to hire from coming to Greece. It has also made him more sparing with investments. …“But this abusive taxation is not backed by any actual reforms that would make the state efficient.”

Of course the state hasn’t been made more efficient. Why would politicians shrink government if higher taxes are an option?

It’s not as if Greek voters are poised to elect a Ronald Reagan or Margaret Thatcher, after all.

In any event, all of the tax increases are having predictably bad effects.

Tax evasion has led to higher tax rates on those Greeks who can’t or won’t evade taxes. The so-called gray economy is estimated at 26.5% of GDP… “Overtaxation is a vicious circle, which is not fixing the problem,” said 40-year-old electrician Antonis Alevizakis. “Only a third of customers want a receipt. The incentive to avoid a 24% value-added tax surcharge is big for them.” …More than 100,000 self-employed professionals have closed their businesses since mid-2016, to avoid rising taxation and social-security contributions, according to Finance Ministry data. Some of these people stopped self-employment, while others turned to the gray economy. …tax consultant Chrysoula Galiatsatou said. “A financially active part of the population sees no reason to try to do more.”

Why “try to do more” when the government gets the lion’s share of any additional income?

And why even stay in the country when there are better (less worse) tax systems in neighboring nations? Indeed, Greece is one of the few nations to raise corporate tax rates as the rest of the world is taking the opposite approach.

Here are some of the details. It appears that Bulgaria is a preferred destination for tax exiles.

Greece’s direct competitors for investment in its poorer, southeastern region of Europe have much lower taxes. For that reason, many Greek businesses and professionals are migrating to neighboring countries such as Bulgaria and Cyprus. …Around 15,000 Greek companies are registered in Bulgaria. Greece’s Finance Ministry estimates that 80% of them have a registration number but no activity in Bulgaria, and are only there to avoid Greek taxes. “If I stayed in Greece I would most certainly be in jail by now,” said John Douvis, who used his remaining savings in 2015 to move his family’s furniture factory from Athens to Blagoevgrad in Bulgaria. In Greece, he said, “it’s almost impossible for a company to survive unless it evades tax.”

In other words, the problem is tax rates, not tax evasion.

Lower the rates and evasion falls.

Let’s wrap up today’s column with a final observation. The WSJ story states that there have been spending cuts in addition to tax increases.

That’s basically true, but net effect of the Greek fiscal crisis is that government has become a bigger burden, relative to private economic output. Here’s a chart, based on data from the IMF.

The bottom line is that Greek politicians did way too much spending last decade and now they’re augmenting that mistake with way too much taxing this decade.

P.S. To reward everyone who read to the end, here’s some Greek-related humor.

This cartoon is quite  good, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

We also have a couple of videos. The first one features a video about…well, I’m not sure, but we’ll call it a European romantic comedy and the second one features a Greek comic pontificating about Germany.

Last but not least, here are some very un-PC maps of how various peoples – including the Greeks – view different European nations. Speaking of stereotypes, the Greeks are in a tight race with the Italians and Germans for being considered untrustworthy.

P.P.S. If you want some unintentional humor, did you know that Greece subsidizes pedophiles and requires stool samples to set up online companies?


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