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Since I’ve accused the Congressional Budget Office of “witch doctor economics and gypsy forecasting,” it’s obvious I’m not a big fan of the organization’s approach to fiscal analysis.

I’ve even argued that Republicans shouldn’t cite CBO when the bureaucrats reach correct conclusions on policy (at least when such findings are based on bad Keynesian methodology).

So nobody should be surprised that I think the incoming Republican majority should install new leadership at CBO (and the Joint Committee on Taxation as well).

So why, then, are some advocates of smaller government – such as Greg Mankiw, Keith Hennessey, Alan Viard, and Michael Strain – arguing that Republicans should keep the current Director, Doug Elmendorf, who was appointed by the Democrats back in 2009?

Before answering that question, let’s look at some of what was written today for the Washington Post’s Wonkblog.

After a series of highly-regarded conservatives voiced their support for Doug Elmendorf, the director of the Congressional Budget Office whose term is up in January, Elmendorf haters fired back on Friday, urging Republicans to jettison the Democratic appointee as soon as possible. …This argument is advanced most forcefully in an open letter to GOP congressional leaders by Grover Norquist of Americans for Tax Reform, who…is most famous as the author of the anti-tax pledge that binds virtually every Republican in Congress never to vote to raise taxes. So why is Norquist against Elmendorf? For one thing, because CBO, under Elmendorf, has not demonized higher taxes. Instead, the agency promotes a “Failed Keynesian Economic Analysis,” Norquist says, that asserts that “higher taxes are good for the economy, even to the point of implying that growth is maximized when tax rates are 100 percent.”

And where did Grover get the idea that CBO believes that ever-higher taxes lead to more growth?

Umm…well, from something I wrote.

As evidence, Norquist points to a 2010 post by the Cato Institute’s Dan Mitchell, titled “Congressional Budget Office Says We Can Maximize Long-Run Economic Output with 100 Percent Tax Rates.” “I hope the title of this post is an exaggeration,” Mitchell writes, “but it’s certainly a logical conclusion based on” CBO’s claim that paying down the national debt — regardless of whether it’s through higher taxes or lower government spending — would be a good thing for the economy. “There’s nothing necessarily wrong with CBO’s concern about deficits,” Mitchell goes on. But “what’s missing from CBO’s analysis is any recognition or understanding that the real problem is excessive government spending.” In other words, what’s missing is conservative ideology about fiscal policy.

I have two reactions, one minor and one major.

My minor point is that the author of the piece is supposed to be a neutral, even-handed reporter, yet she refers to opponents of Elmendorf as “haters” and she implies that we’re simply upset because CBO’s analysis is missing “conservative ideology about fiscal policy.”  Given that she was writing for Wonkblog, which is more akin to an editorial page, there’s nothing wrong with being opinionated. But ask yourself whether someone with such hostility can be impartial when doing straight news stories.

My major point is about policy. Why is my concern about the size of government characterized as “ideology” while we’re supposed to believe CBO’s analysis is “scrupulously impartial” even though it produced analysis which implies you maximize growth with 100 percent tax rates?!?

If my views are blind ideology, then why is there research showing the economic damage of excessive government from international bureaucracies such as the World Bank and European Central Bank? And why are there studies about the harmful economic impact of government spending from the International Monetary Fund and the Organization for Economic Cooperation and Development? Nobody has ever accused these institutions of being hotbeds of libertarian thought.

But perhaps I’m not being fair to CBO. Did the bureaucrats really imply, as part of their analysis on what would happen to the economy if the Bush tax cuts were allowed to expire, that you maximize growth with 100 percent tax rates?

You can read my original post, which holds up very well four years later. And here’s some of what I wrote yesterday to someone who asked me to justify my views on the issue.

…let’s focus on the “subsequent years,” when CBO projectst that GDP would be lower with extended tax cuts. …I’m happy to be corrected, but my reading is that CBO was stating that fiscal balance is the tail that wags the economic dog. The extended tax cuts cause larger deficits, and CBO says that these larger deficits will divert national saving from productive investment and lead to lower output. But if the tax burden is higher, as in the baseline forecast, then deficits are lower and more saving is available for productive investment and output is higher. As far as I’m aware, CBO didn’t have any limiting language back then to suggest that higher tax rates led to growth, but only up to X point. So I think I was on solid ground in asserting the CBO’s analysis implied that ever-higher tax rates led to ever-higher growth.

Seems reasonable. Moreover, I strongly suspect the Wonkblog reporter would have found several people to condemn me had I over-stated the implications of CBO’s analysis.

Now let’s return to the issue of whether Mr. Elmendorf should be re-appointed. Which fiscal conservatives are correct, the ones who want to keep him or the ones who want him replaced?

I’m in the latter category, as explained here, but Elmendorf’s defenders make plenty of good points.

The bottom line is that he is a nice guy (based on my limited interactions), a thoughtful economist, and he has been a big improvement over his predecessor. Indeed, he’s almost certainly the best CBO Director ever appointed by Democrats.

Here’s an analogy that may help make sense of this issue. Elmendorf’s predecessor was a doctrinaire leftist named Peter Orszag. If Orszag’s policy views were a country, they would be France or Greece. By contrast, I’m guessing that Elmendorf would be like Sweden or Germany.

In other words, he wants more government than I do, but at least Elmendorf basically understands that there’s no such thing as a free lunch. He realizes 2+2=4, and he’s aware that there are tradeoffs. And since his arrival, CBO has been much better on issues such as the adverse impact of higher marginal tax rates and the debilitating effect of higher transfer payments.

That being said, while it’s much better to be Sweden rather than Greece, I obviously would prefer to be Hong Kong (or, even better, pre-1913 America).

Though, to continue the analogy, the best I can probably hope for is that Republicans appoint someone akin to Australia or Switzerland.

P.S. For more information about the economics of deficits and fiscal balance, here’s a video I narrated for the Center for Freedom and Prosperity.

P.P.S. The Congressional Research Service made the same argument about higher taxes being pro-growth, asserting in 2010 that “The expiration of the tax cuts would nevertheless reduce the budget deficit, absent other policy changes, which economic theory predicts would have a positive effect on the economy in the long run.”

I’ve argued that the crowd in Washington profits by plundering America, but that’s just part of the equation.

There are also plenty of big companies that have their snouts in the public trough.

No wonder many people have become disgusted

Writing for the Wall Street Journal, James Freeman points out that a growing number of Americans think the system is rigged against them and he links this disillusionment to an ever-expanding federal government.

According to the latest Wall Street Journal/NBC News poll, a full 56% of Americans agree with this statement: “The economic and political systems in the country are stacked against people like me.” This disillusionment index has been rising for more than a decade and coincides with an explosion in the size of the federal government. …The last time Americans had this little faith in the country’s political and economic systems was for a brief period in 1992, in the aftermath of President George H.W. Bush’s breaking of his no-new-taxes pledge in a deal with Congressional Democrats that enabled more spending. …more government enables people to get rich through political favoritism. In the era of the Beltway boom, no wonder so many people feel the deck is stacked against them.

So is this just empty anti-government rhetoric?

I don’t think so.

Consider the way a select handful of big companies use the Export-Import Bank to obtain undeserved profits.

Or look at the way the major pharmaceutical companies and big insurance companies got into bed with the White House to line their pockets via Obamacare.

And examine how big financial firms pillaged taxpayers as part of the sleazy TARP bailout.

How about the way big agri-businesses rip off consumers with the ethanol scam.

Don’t forget H&R Block is trying to get the IRS to drive competitors out of the market.

Big Sugar also gets a sweet deal by investing in politicians.

Another example is the way major electronics firms enriched themselves by getting Washington to ban incandescent light bulbs.

Needless to say, we can’t overlook Obama’s corrupt green-energy programs that fattened the wallets of well-connected donors.

And General Motors became Government Motors thanks to politicians fleecing ordinary Americans.

After looking at that list, I’m surprised that 100 percent of Americans haven’t concluded that the system is rigged for corrupt insiders.

But just in case you think that list is inadequate, let’s look at some new examples.

But first, allow me to reiterate my view on markets.

Simply stated, I believe in genuine unfettered capitalism within a system that protects life, liberty, and property (in other words, “unfettered capitalism” obviously doesn’t include the right to hire a hit man to kill your mother-in-law).

Within those boundaries, I have no objection to people taking risks, accumulating wealth, or losing all their money. Heck, it’s not just that I have “no objection.” I welcome such a system since it means the maximum freedom and prosperity for people, particularly the less fortunate.

But I don’t want people to get rich(er) because they have political allies who will adopt cronyist policies that tilt the playing field in favor of well-connected insiders.

And that’s exactly what’s happening in my two new examples.

First, we have the case of a big Democratic donor who invested a lot of money in a short sell position on Herbalife, which means he will profit if the stock falls in value.

Nothing wrong with that, at least in theory. Short selling can be a very economically beneficial way of correcting markets when something is over-valued. Heck, we would all be much better off today if there had been some short selling to pop the housing bubble before it got so big.

But as Tim Carney explains in a column for the Washington Examiner, this short-selling insider isn’t relying on market forces. Instead, he is asking his buddies in the Obama Administration to use coercive government to hurt the company and lower its value.

Here are some excerpts.

Politically connected hedge-funder Bill Ackman…shorted the nutritional supplement company Herbalife in late 2012… After Ackman’s announcement, Herbalife shares fell from $46 to $27. Ackman kept hammering away, taking his compelling slide show on the road to convince the investing public that Herbalife was a house of cards. But after the initial drop, Herbalife stock rebounded… But Ackman had another weapon in his arsenal. Namely: Big Government. Ackman lobbied congresswoman Linda Sánchez, D-Calif., to sic the Federal Trade Commission on Herbalife. Sanchez complied. Ackman also…“paid civil rights organizations at least $130,000 to join his effort by helping him collect the names of people who claimed they were victimized by Herbalife in order to send the leads to regulators…” Ackman’s firm, Pershing Square Capital Management, hired an army of K Street lobbyists — paying a combined $14,000 a month to three firms that disclose lobbying for him — to turn the government against Herbalife.

What reprehensible behavior on the part of Ackman.

I have no idea whether Herbalife is a good company or a bad company. And I have no idea whether its stock is over-valued or under-valued.

But I do know that Ackman shouldn’t be getting his political buddies to intervene. As Tim points out, this is a recipe for rampant cronyism.

This is different from ordinary lobbying. Typically, companies lobby to protect or subsidize their business. When hedge funds play Ackman’s game, helping or hurting some other company is the entirety of that business — and so lobbying can become the core of their business plan. We’ve seen it before. Investor Steve Eisman took a short position on for-profit colleges and lobbied Congress and the Department of Education to crack down on them. The Obama administration this month announced new proposed regulations on these colleges.

Now let’s look at another example.

Only this time it involves a big-donor Republican who wants favors from big government.

As the Washington Post reports, Sheldon Adelson doesn’t want his casinos to face competition from the Internet.

Given the more than $100 million that Sheldon Adelson has donated lately to Republican causes, the billionaire casino tycoon is well-positioned to get what he wants from a GOP-dominated Congress. But it turns out that the item on top of Adelson’s wish list — a ban on Internet gambling — is encountering resistance. And it’s not Democrats who stand in his way but a small group of fellow conservatives. …Online betting has been embraced by a number of Adelson’s industry rivals and several states eager for the additional tax revenue it provides….Yet the move to the Internet has also been seen as a threat that could deplete the customer base for Adelson’s brick-and-mortar casino resorts. …Half of the 22 Republican members of the House Judiciary Committee have co-sponsored the Adelson-backed legislation.

So what’s the status of the battle?

…conservative opposition began to emerge. …leaders of the other groups, including the American Conservative Union, did not mention Adelson by name. But their letter follows the publication this week of a fiery online column by former congressman Ron Paul (R-Tex.), the libertarian hero and father of potential presidential candidate Sen. Rand Paul (R-Ky.). He called the bill an example of “crony capitalism” written “for the benefit of one powerful billionaire.” …Adelson called the 2011 Justice Department legal opinion a mistake and has taken steps to rein in online gambling, fighting state-level proposals to authorize it and pushing for the federal ban. A company lawyer penned an initial draft of the Restoration of America’s Wire Act — later refined and introduced last year by Sen. Lindsey O. Graham (R-S.C.) and Rep. Jason Chaffetz (R-Utah) — which would effectively prevent states from authorizing online betting.

Ugh, how nauseating.

Though I’m glad to see that there is opposition inside the GOP to Adelson’s self-serving proposal.

I realize we can’t say for sure whether opponents are motivated solely by good principles of non-intervention and federalism. Perhaps they’ve received money from interest groups on the other side, but at least there is resistance and presumably some of that opposition is for the right reasons.

By contrast, I’m not aware of any Democrats who are opposed to Ackman’s cronyist attack on Herbalife.

The moral of the story is that big government enables insider corruption. Which is the message of this video from the Center for Freedom and Prosperity.

But if you don’t want to watch the video, just remember the simple lesson of today’s column, which is that all the examples of sleazy cronyism we discussed (both the new ones and the old ones) were only possible because government had the power to trump free markets.

Now let’s return to where we started. Yes, a growing number of Americans are getting disillusioned, and with good reason. But will the good people in Washington appeal to them with a principled campaign against corporate welfare and other policies that help insider fat cats?

Or will it be business as usual, with GOP cronyists replacing Democrat cronyists?

Even worse, will statists latch onto the issue and say the solution is to impose higher tax rates? That presumably would take some money from rich insiders, but it also would penalize folks who earn money honestly.

And it means the money that consumers lose because of cronyism winds up in the pockets of politicians.

Wouldn’t it be better to simply get rid of the bad subsidies and handouts and solve the real problem?

P.S. Since today’s column looks at capitalism vs cronyism, here’s the famous example of how you can explain various economic systems using two cows.

I don’t know whether it’s because I’m a libertarian or because I’m an economist, but I get very frustrated by the issue of corporate inversions.

It galls me to hear demagogic politicians like Obama make absurd statements about “unpatriotic” corporations that re-domicile overseas when the problem is entirely the result of bad policy that penalizes U.S.-domiciled firms trying to compete in global markets.

1. The United States imposes the world’s highest corporate tax rate.

2. The United States is one of the few countries to impose “worldwide tax” on domestic firms.

3. The United States maintains very anti-competitive tax rules.

So when politicians grouse about “Benedict Arnold” companies, my reaction is to be happy that companies are taking steps to protect workers, consumers, and shareholders.

But, given what he’s done on amnesty and Obamacare, you won’t be surprised to learn that the President has unilaterally changed policy to make inversions more difficult.

That’s the bad news. The good news is that the President’s bad policy doesn’t change reality.

An editorial in the Wall Street Journal looks at the latest example of an American company getting a new address.

Ireland-based drug company Actavis on Monday announced a $66 billion agreement to buy California’s Allergan , maker of the Botox anti-wrinkle treatment. …the tax savings…could be hundreds of millions a year beginning in 2015.

The folks at the WSJ make the obvious point about bad American tax laws.

…the deal highlights how desperately U.S. tax policy needs a makeover. …As if a combined state and local corporate tax rate of 40%—the highest in the industrialized world—isn’t harsh enough, the U.S. is also one of the few countries in which the government demands to be paid even on earnings that have already been taxed in foreign jurisdictions. Given this competitive disadvantage for U.S.-based firms, it’s no coincidence that both of the suitors that have been seeking to acquire Allergan are based overseas.

And what’s really remarkable is that both the suitors used to be U.S.-based companies!

Both Actavis and Valeant used to be based in the U.S. but moved their headquarters offshore in so-called inversion transactions in which they adopted the home country of businesses they acquired. Moving offshore allows businesses to invest more in the U.S., as Actavis has already done with its recent purchase of New York’s Forest Laboratories.

But hold on a second, didn’t the Obama Administration enact rules to prevent inversions?

President Obama views such rational decisions as unpatriotic, because he wants to tax both foreign and U.S. operations. So this fall Treasury Secretary Jack Lew reinterpreted longstanding tax regulations to make it more expensive to execute such deals—a punishment for companies that didn’t exit the U.S. when they had the chance. …Mr. Lew has decided the best response to foreign tax competition is to bolt the door to prevent more corporate escapes.

But here’s the catch. The White House and Treasury Department did make it more costly for companies to re-domicile, but the Administration can’t actually prohibit cross-border mergers.

So let’s summarize the net effect.

Before the Obama Administration imposed new rules, American-based companies would acquire foreign-based companies and use that maneuver to technically re-domicile in a nation with less punitive corporate taxation. But there’s very little risk of American jobs being lost.

After the rule changes, American-based companies are the ones being acquired by their overseas competitors. This means the White House can’t argue that the change in domicile isn’t real. And it means that there’s a far higher probability of jobs going overseas.

I guess the White House thinks this is a victory.

Let’s now step back and put this issue in context. This is the educational part of today’s column.

Here are some slides from a presentation by Professor Dick Harvey at Villanova University School of Law. He presents lots of information, but here are the three slides that are probably most interesting to non-tax geeks.

First, here’s the key thing to know about inversions. They’re a do-it-yourself version of territorial taxation.

And since territorial taxation is the right policy, nobody should be upset about inversions.

Second,  here’s a look at how many inversions occur each year. As you can see, we’re in the midst of another wave.

You’ll notice that these waves roughly coincide with periods featuring corporate tax rate reductions in other nations.

So the lesson is that bad American policy is making it more and more difficult for U.S.-domiciled firms to compete in global markets.

Third, here’s a slide showing where companies are re-domiciling.

Some of my favorite places, particularly Cayman, Bermuda, Switzerland, and Hong Kong!

Now let’s zoom out even further and consider the leftist view that multinational corporations are getting away with some sort of scam because of so-called stateless income.

Sinclair Davidson, a professor at Australia’s RMIT University, writes about the issue. Here are a few excerpts from his scholarly paper.

It is commonly argued that the corporate income tax system is ‘broken’. …The latest theoretical argument suggesting that the corporate income tax base is likely to be eroded is the ‘stateless income doctrine’.

But there’s an itsy-bitsy problem with this theory, as Sinclair explains.

…there is no evidence to support the view that the corporate income tax base is being eroded. At best, the concern about the tax base is not so much that it is being eroded, but rather that multinational corporations do not pay tax in every host economy.

He also points out that companies are obeying the law, which is a point I’ve also made on this topic.

…there is little evidence of any wrongdoing by any of the three corporations that are regularly singled out for abuse. It is true that these corporations do not pay as much tax in the UK or the US as those governments would like them to pay, but they pay as much tax as is required by the laws that those governments have passed. …‘None of this required a Senate “investigation” to  discover because Apple is constantly inspected by the IRS and other tax authorities. These tax collectors are well aware of Apple’s corporate structure, which has remained essentially the same since 1980. An Apple executive said Tuesday that the company’s annual US tax return adds up to a stack of paperwork more than two feet high. …These corporations are fully compliant with the tax law in the jurisdictions in which they operate.

So what’s his bottom line?

There is no such thing as ‘stateless income’, rather there is income that the governments of the UK and the US do not tax because under their own legal systems that income is not sourced in their economy. When these governments complain about stateless income, the question rather should be, ‘Why do the owners of intellectual property not locate their property in your economy?’. An implicit assumption of the stateless income doctrine is that multinational corporations maximise their value to society only when they pay tax. Of course, this is not the case. … It is one thing to point out that multinational corporations do not pay tax in some jurisdictions but that says nothing about the actual corporate  income tax base. … So-called ‘stateless income’ is a return on intellectual property.

Amen.

Let’s close with another perspective on the issue. Stewart Dompe and Adam Smith of Johnson and Wales University in North Carolina have a column in The Freeman.

…the United States is unique in that it taxes corporations at 35 percent regardless of where the income is earned, and hence regardless of whether the corporation benefited from any public goods. Payment without benefit is simply bad business. Avoiding particularly high tax rates like those of the United States can yield significant savings for companies—and their shareholders. Charlotte-based Chiquita Brands International, for instance, hopes to save $60 million via its recent acquisition of Ireland-based Fyffes PLC. Burger King’s merger, according to analyst estimates, could cut its overall tax bill by 13 percent. …Populist themes like “economic patriotism” may appeal to voters, but such arguments are nonsensical: Firms are ultimately responsible to their shareholders. As Judge Learned Hand wrote, “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” If anything, firms have a moral responsibility to minimize their taxable liabilities. The legal structure of a firm establishes the relationship between shareholders, who own the capital, and managers that make operating decisions. Executives have a fiduciary responsibility to pay the lowest tax possible because they are the stewards of their shareholders’ wealth.

I particularly like their conclusion.

This competition among legal regimes is a powerful constraint on government—and that is a good thing for all of us. America has the second-highest corporate tax rate in the world—the highest when state taxes are included. The solution to this problem lies not in closing loopholes or imitating poor Oliver pleading for more, but in offering a simpler, more competitive tax system.

They hit the nail on the head. As I argued just yesterday, we need to restrain the greed of the political class.

But the fight isn’t limited to national capitals. International bureaucracies such as the Organization for Economic Cooperation and Development also are promoting schemes to squeeze more money out of companies – which, of course, means harming workers, consumers, and shareholders.

The pro-tax crowd can concoct all sorts of theories, such as stateless income, but this assault on companies is happening because government have spent themselves into a fiscal ditch and they want taxpayers to pay the price for this profligacy.

P.S. If you read this far, you deserve a reward. You can enjoy a good Michael Ramirez cartoon about inversions by clicking here, and there are several additional cartoons included in this post.

P.P.S. But if you’re a glutton for punishment, you can watch my video on international corporate taxation instead.

P.P.P.S. One final point worth sharing is that folks who try to complain about “low tax burdens” on the foreign-source income of American multinationals need to remember that they pay a lot of tax to foreign governments.

Tax competition is a very important tool for constraining the greed of the political class. Simply stated, politicians are less likely to impose bad tax policy if they are afraid that jobs and investment (and accompanying tax revenue) will move to jurisdictions with better tax policy.

This works to limit revenue grabs by politicians at the state level and it works to control the craving for money on the part of politicians at the national level.

But this doesn’t mean all forms of tax competition are equally desirable.

If a country lowers overall tax rates on personal income or corporate income in hopes of attracting business activity, that’s great for prosperity. If a jurisdiction seeks faster growth by reducing double taxation – such as lowering the tax rate on capital gains or abolishing the death tax, that’s also very beneficial.

Some politicians, however, try to entice businesses with special one-off deals, which means one politically well-connected company gets a tax break while the overall fiscal regime for other companies stays the same (or even gets worse).

That’s corrupt cronyism, not proper tax competition.

With this in mind, let’s consider the growing controversy about tax planning by multinational companies. There’s lot of controversy, both in the United States and in Europe, about whether companies are gaming the system.

The most recent kerfuffle deals with Luxembourg, which is accused of having a very friendly regime for business taxation.

Syed Kamall, a Tory member of the European Parliament, has a column in the Wall Street Journal Europe about the right kind of corporate tax competition.

It seems to have come as a great shock to many in the European Parliament that Luxembourg may have encouraged multinational companies to domicile there to pay lower taxes. I’m not sure where these members of parliament have been living for the past 20 years.

What worries Syed is that many European politicians want to use the news from Luxembourg as an excuse to push tax harmonization.

…an agenda of EU-wide tax harmonization…is rapidly gaining popularity in some quarters despite being exactly the wrong prescription for Europe. …tax harmonization…would hang the “Closed for Business” sign at Europe’s border. Tax competition across the single market helps keep tax rates competitive and drives inward investment. The Organization for Economic Co-operation and Development has said that “the ability [of companies] to choose the location of economic activity offsets shortcomings in government budgeting processes, limiting a tendency to spend and tax excessively.”

By the way, the OECD is a big proponent of tax harmonization, so it’s especially noteworthy that even those bureaucrats admitted that tax competition constrains greedy government.

You can click here for further examples of OECD economists admitting that tax competition is necessary and desirable, notwithstanding the anti-market policies being advocated by the political appointees who run the institution.

And since we’re discussing the merits of tax competition, we should point out that Mr. Kamall also mentioned those benefits.

The clearest example of that came with the tax reductions enacted by Margaret Thatcher and Ronald Reagan in the 1980s. Those tax-rate cuts in the U.K. and U.S. forced other industrialized nations to cut their average top marginal rate for personal income to 42% today from more than 67% in 1980 simply to remain competitive, according to the Adam Smith Institute. Tax competition has driven down the average top rate for corporate income in the developed world to less than 27% today from 48% in 1980. Tax competition in Europe encouraged many EU members from the former Soviet bloc to enact flat taxes, which have benefitted them substantially. …it’s important for leaders to keep making the case that tax-policy competition within the single market has been good for Europe.

And he correctly warns that tax harmonization would be a vehicle for higher tax burdens.

Imposing uniform rates under a harmonized system would turn the EU into a convoy that can move only as fast as the slowest ship. Europe’s tax rate would be only as low as the highest-taxing member. …A harmonized tax system would encourage companies and investors to seek new solutions outside the EU in order to avoid paying what would inevitably be higher, French-style levels of European taxation.

And if you don’t believe Mr. Kamall, just look at what’s happened over the past couple of years in Europe.

Last but not least, Syed points out that there is a pro-growth way of improving tax compliance.

The best way to cut down on tax avoidance is to cut tax rates and simplify tax codes. That way people and companies would be willing and able to pay their money to Europe’s exchequers, rather than paying accountants to find loopholes.

But that would require politicians to be responsible, so don’t hold your breath.

So what’s the bottom line? Is there a good way of identifying the desirable forms of tax competition that should be defended.

The simple answer is that it’s always a good idea to compete with lower tax rates that apply to all taxpayers. That’s true for tax rates on companies and households.

The more complex (but equally important) answer is that it’s also good to compete by having a properly designed tax system. On the business side, that means expensing instead of depreciation and territorial taxation rather than worldwide taxation. For households, it means having the proper definition of income so that there’s no longer pernicious discrimination against saving and investment.

Misguided tax competition, by contrast, exists when there are very narrow preferences that apply to a small handful of powerful taxpayers.

For more information on the general topic, here’s my video on the virtues of tax competition.

P.S. My support for tax competition is so intense that I even try to bring the message to unfriendly audiences, such as Capitol Hill and the New York Times.

P.P.S. Heck, my support for tax competition is so intense that I almost got tossed in a third-world jail. That’s true dedication!

P.P.P.S. In you admire hypocrisy, you’ll be very impressed that many rich statists utilize tax havens to protect their money even though they want you to give more of your income to government.

P.P.P.P.S. Speaking of hypocrisy, the main anti-tax competition international organization gives its bureaucrats tax-free salaries.

P.P.P.P.P.S. Since I just mentioned the OECD, I should note that it has a project to curtail business tax competition. They claim that their intention is to go after misguided forms of tax competition, but I’m not surprised that the real goal is to simply extract more money from companies.

P.P.P.P.P.P.S. I’m not sure how to classify this final bit of information, but it’s surely worth mentioning that Bill Clinton defends corporate tax competition. As does Bono.

I don’t like coerced redistribution. When the government uses the threat of force to take from Person A to give to Person B, it simultaneously reduces Person A’s incentives to produce while also luring Person B into dependency.

But not all coerced redistribution and government intervention is created equal.

I don’t like welfare programs, for instance, in part because taxpayers are writing huge checks to support a plethora of programs, but also because there is very strong evidence that the modern welfare state has caused more poverty.

Nonetheless, I understand that there are well-meaning people who support these programs. Their motives are pure in that they simply want to alleviate perceived suffering. And since they’ve never learned about the adverse indirect effects of government intervention and presumably haven’t given any thought to the ethics of government coercion, I don’t think of these people as being bad or immoral. Just uninformed.

But there are some forms of redistribution and intervention that are so self-evidently odious and corrupt that you can’t give supporters the benefit of the doubt. Simply stated, there’s no justifiable argument for using government coercion to hurt poor people in order to benefit rich people.

Let’s look at two examples.

First, the Export-Import Bank is a quintessential example of corporate welfare. The program forces taxpayers to guarantee the contracts of big corporations and foreign buyers, and there’s now a fight over whether it should be extended.

Needless to say, ordinary voters don’t want their money being used enrich big companies.

So if you were one of the beltway insiders who benefited from this corrupt institution, how would you try to get the program extended? Would you be upfront and argue that big companies like Boeing deserve tax dollars? Would you argue that politicians are really smart and wise and that they should interfere with the free market?

That would be the honest way of supporting the Ex-Im Bank. But you won’t be surprised to learn that advocates instead have resorted to lies. Here are some excerpts from a Reuters story.

The U.S. Export-Import Bank has mischaracterized potentially hundreds of large companies and units of multinational conglomerates as small businesses, a flaw in its record keeping that could undermine the export lender’s survival strategy. …A comparison of some 6,000 businesses characterized by Ex-Im as “small” with information supplied by corporate data collector Dun & Bradstreet, which Ex-Im also uses to vet applicants, and other sources turns up some 200 companies that appear to be mislabeled and many more whose classification is uncertain.

Um… I would say they lied rather than characterize it as a “flaw in its record keeping.” But let’s set that aside and look at some of the “small businesses” that had their snouts in the Ex-Im trough.

…analysis showed companies owned by billionaires such as Warren Buffet and Mexico’s Carlos Slim, as well by Japanese and European conglomerates, were listed as small businesses and Ex-Im acknowledged errors in its data in response to those findings.  …A division of Austria’s Swarovski jewelers shows up, as does North Carolina’s Global Nuclear Fuels, which is owned by General Electric and Japan’s Toshiba and Hitachi. …The list of small businesses in Texas, for example, includes engineering and construction company Bechtel, which has 53,000 employees.

Gee, Warren Buffet and foreign conglomerates don’t exactly sound like my idea of small businesses.

Hopefully this will provide more ammunition of those fighting to wean big companies from the public teat.

Bank officials and supporters have used the Ex-Im’s support for American small business as a first line of defense against a campaign by conservatives to shut it down as an exponent of “crony capitalism.” …“Rarely does Ex-Im miss a (public relations) opportunity to claim that it primarily helps small business, but Ex-Im is again playing fast and loose with the facts,” said Representative Jeb Hensarling, a Texas Republican who chairs the House Financial Services Committee. “The bulk of Ex-Im’s help indisputably goes to large corporations that can finance their own operations without putting it on the taxpayer balance sheet.”

For our second example, we have the absolutely horrifying spectacle of the Obama Administration trying to shut down Wisconsin’s school choice system.

Why? Well, because currying favor with union bosses is more important than improving educational opportunities for students from disadvantaged communities.

George Will explains what’s happening in his Washington Post column.

It is as remarkable as it is repulsive… Eager to sacrifice low-income children to please teachers unions, the Justice Department wants to destroy Wisconsin’s school choice program. Feigning concern about access for disabled children, the department aims to handicap all disadvantaged children by denying their parents access to school choices of the sort affluent government lawyers enjoy. …Wisconsin’s school choice program was pioneered by an American hero, Mississippi-born Annette Polly Williams, who died Nov. 9 at age 77. During her three decades in Wisconsin’s legislature, she overcame the opposition of fellow Democrats to offering education choices to low-income parents. At the end of her life, however, she saw an African American attorney general, serving an African American president, employing tortured legal reasoning in an attempt to bankrupt private schools that enlarge the education options of disadvantaged children. …Closing the voucher program is the obvious objective of the teachers unions and hence of the Obama administration. Herding children from the choice schools back into government schools would swell the ranks of unionized teachers, whose union dues fund the Democratic Party as it professes devotion to “diversity” and the downtrodden.

By the way, you probably won’t be surprised (given the White House’s cavalier approach to the rule of law) to learn that the Obama Administration is using is utterly nonsensical legal theory.

…federal lawyers argue that because public funds, in the form of tuition vouchers empowering parents to make choices, flow to private schools, the schools become “public entities.” …this is like arguing that when food stamps are used for purchases at Wal-Mart, America’s largest private employer ceases to be private — it becomes an extension of the government. Inconveniently for the Justice Department, the U.S. Supreme Court has said the fact that a “private entity performs a function which serves the public does not make its acts state action.”

The preposterous legal reasoning is a farce, but that doesn’t get me overly upset.

What does bother me is the way the White House is acting like the modern-day equivalent of George Wallace, standing in the schoolhouse door to prevent low-income (and largely minority) students from getting an opportunity for better education.

I guess that a black President (who sends his own kids to private school) consigning black children to the back of the proverbial bus shouldn’t surprise me too much. After all, some divisions of the NAACP also have decided that being politically allied with union bosses is more important that educational opportunity for minority kids.

But that doesn’t make it morally acceptable. Put yourself in the shoes of a low-income parent. Wisconsin’s school choice programs gives you some hope that your kids can break free of poverty. Imagine what it feels like, then, when some of the politicians who claim to be on your side then decide that your children are expendable pawns. How disgusting.

Since we’re talking about things that are disgusting, let’s shift back to the Ex-Im Bank. I’ve actually had some Republican types tell me that corporate welfare is okay because it “helps to offset” some of the redistribution from rich to poor.

I confess that I’m dumbstruck by such arguments. It’s sort of like hearing someone say it’s okay to murder, rape, and steal because other people are doing it.

This is why it’s not easy being a libertarian. Yes, we believe in small government for utilitarian reasons such as faster growth, higher living standards, and more jobs. But we’re also motivated by morality, by the belief that there’s right and wrong and that good people should strive to uphold the former and fight the latter.

That’s not a popular view in Washington, which is best characterized as an incestuous racket for the benefit of interest groups, politicians, cronyists, lobbyists, bureaucrats, contractors, and other insiders.

P.S. On a completely separate (and non-political) issue, I can’t resist seeking some sympathy after what happened to me this morning. I took two of my cats to the vet for their spay and neuter appointments. Some of you pet owners already know that most cats don’t like car rides, so you might have some inkling of what I’m about to report.

In happier times

About five minutes into the drive, one of the cats vomits in the little cat carrier. That obviously wasn’t a happy development, particularly since it left me with an unpleasant choice of enduring a very unpleasant smell or having the window open and enduring a very bitter chill. But then, a few minutes later, the other cat…um, how should I phrase this…loses control of her bowels.

Which means that the next 20 minutes was almost as unbearable as watching a state-of-the-union address. I was running late for the appointment, so I couldn’t stop someplace and try to deal with the mess. And the two cats kept moving around in their carrier, making things worse. Trying to breathe through my mouth, even with the window down, was at best a pitiful attempt to mitigate my suffering.

An utterly miserable situation. Almost 1/10th as bad as an IRS audit.

A couple of days ago, I wrote that Republicans should not be intimidated if the White House threatens a government shutdown.

Simply stated, prior shutdowns have yielded meaningful policy victories without causing measurable political damage.

This isn’t to say that the goal of any fiscal fight is a shutdown. Instead, my point is simply that Republicans shouldn’t strengthen the bargaining position of the White House by announcing that they will do whatever it takes to avoid a government shutdown.

This shouldn’t be a controversial assertion.

For instance, Obama could threaten that he won’t sign a spending bill unless Republicans agree to a top tax rate of 90 percent.* Do Republicans acquiesce to that demand?

Or what if the President says he will veto spending legislation if it doesn’t include nationalization of the oil industry. Or expanded Obamacare. Should the GOP say yes?

Based on the no-shutdown-for-any-reason rule, Republicans would have to surrender to these hypothetical demands. I’ve called this the “French Army” approach to budget policy since Obama always wins.

But that won’t happen. I’m guessing 90 percent-plus of GOP politicians and GOP-friendly pundits would agree that a line should be drawn in the sand based on the extreme examples I provided, even if it means a shutdown of the government because Obama vetoes a spending bill that doesn’t include those provisions.

In other words, Republicans presumably don’t actually believe in the no-shutdown-for-any-reason rule. Instead, they are simply signalling that they don’t think it makes sense to have a shutdown fight based on the fights that are likely to occur in the near future.

But that creates a problem for the GOP. In the short run, it means the White House gets to unilaterally grant amnesty to certain illegal aliens. More important (at least from my perspective as a fiscal policy wonk), it gives Obama the upper hand in battles that may take place next year over issues such as spending caps and Obamacare funding.

To their credit, Republican leaders recognize the problem, so they’re searching for a strategy that would achieve their objectives without a government-wide shutdown.**

A story in Politico lays out their most recent maneuvering.

Republican leaders have intensified their planning to prevent a government funding showdown, weighing legislative options that would redirect GOP anger at Barack Obama’s expected action on immigration and stave off a political disaster, according to sources involved with the sessions. …Speaker John Boehner, Senate Minority Leader Mitch McConnell and their top aides and deputies are mulling several options that would give Capitol Hill Republicans the opportunity to vent their frustration with what they view as an unconstitutional power grab by the White House — without jeopardizing the government financing bill. The options include…passing two separate funding bills — a short-term bill with tight restrictions on immigration enforcement agencies, and another that would fund the rest of the government until the fall.

I’m tempted to grouse about the reporter’s bizarre claim of “political disaster” for the GOP. After all, the recent mid-term elections were a huge victory for Republicans.

But let’s instead focus on the idea of having two spending bills, one that funds 99 percent of the government, presumably without controversy, and one that funds – with controversial restrictions – the relatively tiny parts of government that deal with immigration enforcement.

The story continues, pointing out that some sort of fight is inevitable.

…what exactly Republicans can do outside of the funding process to stop Obama remains an open question. Even if they had enough votes to pass a stand-alone bill, it would almost certainly be vetoed by Obama — and the GOP would likely lack the votes to overturn it.

So does this mean part of the immigration bureaucracy would be shut down for the rest of the fiscal year?

Presumably not, though it’s unclear whether Obama or Congress would have any incentive to compromise and strike a deal.

Regardless, some pundits like this potential strategy for the GOP. Ramesh Ponnuru, writing for Bloomberg, thinks it puts pressure on the Democrats.

Why not try to pass a funding bill that pays for all of the operations of the federal government except for Citizenship and Immigration Services, the agency in the Homeland Security Department that would carry out Obama’s order? They could then try to pass another bill that just funds that agency — but with a restriction saying no money can be used for the president’s amnesty. What would the Democrats do then? If they block a big funding bill that has nothing to do with immigration over the issue, it becomes hard to deny that they’re the ones shutting down the government to get their way. If they don’t block it, they’ll have no government shutdown to complain about — and the parties could move on to a more narrowly focused fight about the immigration budget.

And in a column for the Washington Examiner, Byron York also seems favorable toward the strategy.

…in January, with the GOP in control — and, presumably, Obama’s edict in hand — Republicans will work on crafting a new spending measure that funds the entire government, with the exception of the particular federal offices that will do the specific work of enforcing Obama’s order.

Byron assumes that Obama will sign the big bill that funds almost everything and then fight about the mini-bill funding the small part of the Department of Homeland Security that deals with immigration enforcement.

…the president will veto it. At that point, a shutdown battle could occur — but it would be a battle over shutting down the small part of the federal government tasked with enforcing the immigration order. Everything else would remain up and running.

So is this a successful approach, one that not only can derail Obama’s executive amnesty but also could be used for next year’s fiscal battles?

I’m not as confident as Ramesh and Byron for the simple reason that (if he asked me) I would tell Obama to veto the bill that funds 99 percent of the government and justify his actions by stating that he “won’t be blackmailed” by Congress.

Ramesh correctly points out in his column that the resulting shutdown won’t be the fault of Republicans, but will that be apparent to voters? Particularly in the midst of a battle when the establishment press will be acting as an echo chamber for White House talking points?

Maybe I’m wrong, but a government-wide shutdown seems like the most effective strategy for Obama. He won’t be asking my opinion, of course, but I’m sure he has plenty of advisers who would reach the same conclusion about how to proceed.

Which means that Republicans ultimately will have to decide whether they have any policy preferences that are sufficiently important that they’re willing to fight for them even if Obama forces a shutdown.

It’s a judgement call, and here are two examples to illustrate why you shouldn’t tilt at windmills and launch suicide missions, but also why you shouldn’t unilaterally disarm.

Example #1: The Department of Education should be abolished, a goal that theoretically could be largely achieved by not appropriating any funds when spending bills are put together in 2016, though it certainly would lead to a shutdown fight beginning about one month before the presidential election.

Example #2: The debt limit fight of 2011 produced some much-needed spending caps and sequester enforcement, but the White House is very opposed and may be so committed to undoing those policies and expanding the size of government that it forces a shutdown fight next year.

Looking at these options, even a curmudgeonly libertarian such as myself won’t be urging lawmakers to have the shutdown fight in Example #1.

However, I’m hoping that establishment GOPers will show a similar blend of principle and pragmatism by being willing to have the fight with Obama outlined in Example #2.

*Spending bills (known as appropriations bills inside the beltway) technically are not supposed to include the types of policy changes used in my examples, but Obama could say he won’t sign a spending bill if there isn’t accompanying legislation to accomplish one of more of the listed objectives. Or he could even demand that a spending bill include language stating that a certain amount of money should be dedicated to a particular bureaucracy for purposes of achieving a specific policy.

**One surreal part of this debate is that “shutdown” is a somewhat misleading term since most of the government (the military, air traffic control, etc) actually continues to operate.

P.S. I’ve already shared some amusing video, commentary, and cartoons about “Grubergate.”

Well the folks at American Commitment have put together a highlight video for your enjoyment.

And here are some Grubergate cartoons. We’ll start with one from Robert Gorrell.

Michael Ramirez is in fine form as usual.

Here’s one from Dana Summers.

Eric Allie has an amusing addition to our collection.

Henry Payne also gets in a good jab.

Last but not least, Chip Bok nicely captures the attitude of Washington DC.

These are all funny cartoons, but you know who’s laughing the hardest right now?

The answer is Jonathan Gruber, because he got about $6 million of our money as part of insider contracts from government.

In other words, I wasn’t kidding when I wrote that Obamacare is a get-rich-quick scheme for the political elite.

Just another example of how big government enables sleazy corruption.

When I wrote last week about “social capital” as a key determinant of long-run prosperity, I didn’t realize I would generate a lot of feedback. Including several requests for more information.

Which creates a small problem since the field is so large that it’s difficult to provide an overview.

If people were asking questions on the flat tax, Laffer Curve, or the economic impact of government spending, I could give succinct and targeted responses. On the topic of social capital, by contrast, I almost don’t know where to start.

The first thing I should say is that scholars have been addressing these issues for centuries, even if in some cases they didn’t use the phrase “social capital” and instead talked about tradition, culture, ethics, morality, or civic attitudes.

Many people know Adam Smith wrote An Inquiry into the Nature and Causes of the Wealth of Nations, but he also wrote The Theory of Moral Sentiments in the 1700s, and that book deals with issues relating to social capital.

Or consider the work of Alexis de Tocqueville, who wrote about social capital in Democracy in America in the 1800s. More recently, in the 1970s, Friedrich Hayek discussed ethics and attitudes as part of his three-volume masterpiece on Law, Legislation, and Liberty.

Moving into the 21st Century, the issue of “culture” and economics also was the subject of an in-depth online symposium at the Cato Institute in 2006. Here’s some of what Lawrence Harrison wrote.

Some economists have confronted culture and found it helpful in understanding economic development. Perhaps the broadest statement comes from the pen of David Landes: “Max Weber was right. If we learn anything from the history of economic development, it is that culture makes almost all the difference.” Elaborating on Landes’s theme, Japanese economist Yoshihara Kunio writes, “One reason Japan developed is that it had a culture suitable for it. The Japanese attached importance to (1) material pursuits; (2) hard work; (3) saving for the future; (4) investment in education; and (5) community values.” …More broadly, the analysis of religions suggests that Protestant, Jewish, and Confucian societies do better than Catholic, Islamic, and Orthodox Christian societies because they substantially share the progress-prone Economic Behavior values of the typology whereas the lagging religions tend toward the progress-resistant values. Symbolic of this divide is the persistent ambivalence of the Catholic Church toward market economics… But religion is not the only source of progress-prone economic behavior: the Basques are highly entrepreneurial and highly Catholic; and Chile, boasting the most successful sustained economic performance in Latin America, is also the most Catholic.

And here are portions of Gregory Clark’s contribution.

The standard economist emphasizes that stability, incentives, and laissez-faire are all the magic needed for riches. …attempts to introduce culture into economic discussions so far have been generally either ad hoc, vacuous, blatantly false, or void of testability. …Weber, as is well known, thought that certain types of Protestant ideology were conducive to economic growth. …The Catholics of modern southern Germany, however, would think they have a thing or two to teach their Protestant compatriots of the north about the virtues of hard work and self-reliance. The dour and thrifty Calvinists of my native Scotland look with envy now at the successes of the Catholic Irish, and ask how they can emulate this.Protestants on average may have values associated with economic growth, but that seems to have nothing to do with their specific theology. Lawrence Harrison may seem to escape some of this problem of identifying cultural variation by using a survey of 25 factors that purports to identify systematically the essential elements of cultures that promote high incomes and growth: universal progress cultures. He divides cultures into the “progress-prone” and the “progress-resistant.” In progress-prone societies, for example, people assert “I can influence my destiny.” In progress-resistant societies “fatalism” rules. Progress-prone societies have better economic performance. …The problem with both the Harrison and McClelland approaches is that the responses may reflect just the realities of the institutional framework people live within, rather than their cultural attitudes. A North Korean who reports “fatalism” or “resignation” is plausibly no different culturally from a South Korean who states “I can influence my destiny.”

My grad school classmate and now Professor Pete Boettke adds his two cents.

…we do need to have market prices to allocate resources efficiently. The “getting the prices right” mantra is not wrong, just incomplete. In order to get market prices, we do need to have private property rights and the enforcement of contracts. The “getting the institutions in place” mantra isn’t wrong either. Many of the significant advances in political economy during the 1990s, when the problems of socialist transition were at the forefront of professional and public policy attention, were related to a change of emphasis from “getting the prices right” to “getting the institutions in place.” …In economic terms, culture is a tool for the self-regulation of behavior, and as such it either lowers or raises the costs of enforcing the rules of the game. A free society works best when the need for policemen is least. If the rules of conduct correlated with high levels of economic well-being are viewed by a culture as illegitimate, then those rules will be violated unless there are strong monitors. The costs of monitoring may be so high that the social order cannot in fact be sustained. …Scholars such as Joel Moykr in The Levers of Riches have documented the great technological innovations that fueled growth during the Industrial Revolution, but Mokyr also documents the underlying belief systems and attitudes that had to be present for those innovations to be discovered, implemented, and put into common practice. Without that underlying cultural commitment to scientific discovery, innovation would have been stifled. We can say the same for beliefs and attitudes that undermine private property, mutually beneficial exchange, and commercial development. …Whatever advantages a culture may have, they will not be realized under bad institutions. And whatever disadvantages a culture may have, they will slowly erode, and the culture will improve, when people get to live under institutions of political and economic freedom. Culture can act as a constraint, but it is also a malleable constraint.

James Robinson uses China and Chile as examples that suggest good policies and institutions are key.

If the Chinese do well in Indonesia because they have such a good culture, then why is China one of the world’s poorest countries?  …surely the culture which supposedly is conducive to prosperity in China is an old one and long predates the acceleration of growth which took place in the late 1970s. …culture was held constant and institutions and policies changed while growth accelerated. From this it seems to follow that the reasons countries are poor has nothing to do with culture but rather policies and institutions that do not create the right incentive environment. …What about Chile, the one Latin American success story? Lawrence Harrison argues that Chile has a unique culture, but then why did it manifest itself so recently? It is only since the mid-1980s that the growth path of Chile has distinguished it from other Latin American countries. …culture might matter, but doubters like me will not be convinced by the evidence here.

But this topic gets attention at places other than libertarian think tanks.

Here are some excerpts from a World Bank study looking at the degree to which culture matters for development.

In the abstract there is no doubt a general acceptance that a particular work ethic, a system of personal values and attitudes must have a role in guiding a population along a particular development path; indeed, how could it be otherwise? …Guiso, Sapienza and Zingales (2006) conducted a regression analysis combining survey and macroeconomic data across 53 countries and found that “a 10 percentage point increase in the share of people who think thriftiness is a value that should be taught to children is linked to a 1.3 percentage point increase in the national saving rate”. Tabellini (2010) also showed that European regions with a stronger belief in individual effort tend to have higher GDP per capita and GDP growth. …Lee Kuan Yew speaks of a set of values—“thrift, hard work, filial piety and loyalty to the extended family, and, most of all, the respect for scholarship and learning”—as having provided a powerful cultural backdrop for the development of East Asian countries… Max Weber famously made the case about the role of culture in development in his essay “The Protestant Ethic and the Spirit of Capitalism,” arguing that Protestantism promoted the rise of modern capitalism “by defining and sanctioning an ethic of everyday behavior that conduced to business success” comprising “hard work, honesty, seriousness, the thrifty use of money and time.

Last but not least, let’s consider some practical applications based on a recently published New York Times column by David Brooks.

Twenty-five years after the fall of the Berlin Wall, the biggest surprise is how badly most of the post-communist nations have done since. …In the bottom group are basket-case nations that haven’t even recovered the level of real income they had in 1990, as measured by real G.D.P. per capita. These failures include Ukraine, Georgia, Bosnia, Serbia and others — about 20 percent of the post-communist world. “Basically,” Milanovic writes, these “are countries with at least three to four wasted generations. …The next group includes those nations that are merely moderate failures, with per capita economic growth rates under 1.7 percent a year. These are nations like Russia and Hungary that continue to fall steadily behind the West — about 40 percent of the post-communist world by population. The third group includes those with growth rates between 1.7 percent and 1.9 percent. These countries, like the Czech Republic and Slovenia, are holding steady with the capitalist world. Finally there are the successes, the nations that are catching up. …There are only five countries that have emerged as successful capitalist economies: Albania, Poland, Belarus, Armenia and Estonia. To put it another way, only 10 percent of the people living in post-communist nations are living in a place that successfully made the transition to capitalism.

I wouldn’t necessarily have listed Albania and Belarus as success stories, but it’s certainly true that the countries that comprised the former Soviet Bloc have seen a lot of divergence.

Heck, check out this graph comparing Ukraine and Poland if you want a remarkable example.

The question is why did they behave differently?

Why did some countries succeed while others failed? First, leaders in some countries simply made better political decisions. Most of these countries enacted economic reforms, like deregulating prices and privatizing nationalized companies. Some nations like Estonia and Poland enacted reforms radically and quickly… The quick and radical group saw a slightly bigger output drop over the near term but much more prosperity over the long run. …Finally, and most important, there is the level of values. A nation’s economy is nestled in its moral ecology. Economic performance is tied to history, culture and psychology. …[Some] countries lacked this cultural brew. Worse, life was marked by fear, by arbitrary power, by suspicion that people are watching you, by distrust. People raised in this atmosphere of distrust have trouble forming companies and associations. They are more likely to be driven by a grab-what-you-can logic — a culture of corruption and appropriation. …The lesson of the past 25 years is that democratic prosperity is built on layers of small achievements 10,000 fathoms deep. Communism ripped at all that bottom-up society-making and damaged the psyches of its victims. Healing from those wounds is gradual.

So what’s the bottom line?

I’m not really sure, other than to assert that we will never triumph over statism if Americans think it is morally acceptable to live off their neighbors via the coercive power of government.

In many of my fiscal policy speeches, I explain that we face a major crisis because of demographics and poorly designed entitlement programs, but then tell audiences that we can solve the problem with structural program reforms.

To wrap things up, I often close with this Powerpoint slide. As you can see, the first two themes are very familiar to regular readers. Our problem is too much government spending and the solution is my Golden Rule of spending restraint.

But the third bullet point is really about social capital.

In other words, we can share all sorts of evidence about how some nations grow faster with small government and free markets.

We can also highlight how statist policies slow growth.

But none of those arguments will mean much in the long run if people prefer to be wards of the state.

P.S. My concern with personal morality helps to explain why I think libertarians and social conservatives should be natural allies.

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