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Archive for the ‘Economics’ Category

I’ve written about the success of Hong Kong (particularly when compared to nations such as Cuba, France, and China), but haven’t paid as much attention to Singapore.

But it’s time to correct that oversight. I’m motivated to write about Singapore because of a story that reveals one of the unique features of that jurisdiction: The bureaucracy gets monetarily rewarded if the economy prospers.

Here are some passages from a Bloomberg report.

In Singapore, civil-servant bonuses rise and fall with the economy’s performance… The nation…links civil servants’ bonuses to how well the $298 billion economy does. …Civil servants are typically paid a variable incentive twice a year, on top of a fixed one-month bonus. The mid-year payment was skipped in 2009, when the economy contracted during the global recession. …“Singapore may be one of the few countries that explicitly pegs bonuses to growth,” said Vishnu Varathan, an economist in Singapore at Mizuho Bank Ltd.

Wow. Think of what that might mean if applied in the United States. Would we get as many crazy growth-sapping regulations from bureaucracies such as the EPA, IRS, and EEOC if the paper pushers knew they would lose bonuses?

To be honest, I’m not actually sure that this system makes much difference in Singapore or, if it does work there, whether it would work the same way in the United States (where bureaucrats seem to get bonuses based on bad behavior!).

But one thing we can say with certainty is that Singapore is an economic success story.

Look at the rankings for per-capita gross national income from the World Bank. You’ll notice a few trends, such as it’s good to be a tax haven (Monaco, Liechtenstein, Bermuda, Switzerland, Luxembourg, Isle of Man, etc) or to have a lot of oil (Qatar, Kuwait, Norway, UAE, etc).

But you’ll also notice that Singapore is one of the world’s most prosperous jurisdictions, regardless of which methodology is used.

So why is Singapore so rich?

Well, there aren’t many natural resources other than ocean access, so the only reasonable explanation is that the country has good economic policy.

And if you look at the latest data from Economic Freedom of the World, you’ll see that Singapore ranks second for economic liberty.

I’m particularly impressed by the nation’s fiscal policy. The corporate tax rate is just 17 percent and the top tax rate for households is only 20 percent. In other words, there’s no Obama-Hollande class warfare against successful taxpayers.

Equally important, the burden of government spending is very small by world standards, averaging less than 20 percent of economic output since 1990 according to the IMF.

And the one time government spending climbed significantly about 20 percent of GDP (during the Asian financial crisis), the government then did a remarkable job of implementing the Golden Rule of spending restraint.

Singapore’s fiscal discipline between 1998 and 2003 was particularly impressive as spending was cut (genuine cuts, not the make-believe cuts you find in Washington) by an average of 9 percent each year.

But the statistic that matters most is that the burden of government spending dropped to 12 percent of GDP by 2007, a reduction of almost 16 percentage points (even larger than Sweden’s budget cutting between 1992 and 2001).

Government spending in Singapore has since 2007 slowly climbed back to about 18 percent of economic output, but that’s still quite good by modern standards (though much larger than government was in America back in the 1800s and early 1900s).

Let’s close by preemptively dealing with the statist argument that relatively small government somehow prevents the provision of genuine public goods.

Earlier this month, I shared some remarkable data from a study published by the European Central Bank. That research showed that “countries with small public sectors report the ‘best’ economic performance” and also receive the highest scores for providing public goods in a cost-efficient manner (referred to as “public sector efficiency”).

Looking at country groups, “small” governments post the highest efficiency amongst industrialised countries. Differences are considerable as “small” governments on average post a 40 percent higher scores than “big” governments. …This illustrates that the size of government may be too large in many industrialised countries, with declining marginal products being rather prevalent.

But as part of that post, I groused that the researchers were only looking at OECD member nations. Yet none of those countries have small public sectors.

I can’t help but wonder what the results would have been if Hong Kong and Singapore also were added to the mix. After all, I don’t consider the United States to have a “small” government. Same for Japan, Switzerland, and Australia. Those are simply nations where government isn’t as big and bloated as it is in France, Italy, Sweden, and Greece.

Well, I’m happy to report that I found another study from the European Central Bank that broadens the net to include some nations from Asia, Eastern Europe, and Latin America.

Singapore was one of the nations in the study and you won’t be surprised to learn that it received the highest score for “public sector efficiency.” But not merely the highest score, Singapore’s 2.39 was dramatically higher than the scores in the earlier study for the nations that supposedly had “small” governments (even though the actual burden of government spending in those countries is almost two times larger than it is in Singapore).

So what’s the bottom line?

The first ECB study clearly concluded that “small” government is more efficient and productive than either “medium” government or “big” government.

Based on the second ECB study, we can conclude that it’s even better if government is…well, I guess we’ll have to use the term “smaller than small.”

So congratulations to Singapore for readjusting the rankings. Now if we can find a jurisdiction where government consumes just 5 percent of GDP, we’ll be able to complete the research and finally figure out the “correct” size of government.

P.S. As I noted back in 2009, Singapore is a multi-ethnic (like Bermuda) and multi-religious society, yet diversity isn’t a problem when government doesn’t practice favoritism.

P.P.S. By the way, I’m not claiming Singapore is an ideal society. It is only #39 in a ranking of total freedom, which includes measures of personal liberty. And Singapore’s version of privatized Social Security is far from perfect since government controls the investment of private savings. In other words, Singapore isn’t libertarian Nirvana. But it is reaping the rewards of being more pro-market than almost all other nations.

P.P.P.S. If you read this far, you deserve a reward. Here are a couple of Thanksgiving-themed cartoons.

We’ll start with Henry Payne’s look at another example of Obama governing by “executive order.”

And here’s Rick McKee’s contribution. But since I’m not partisan, I’ll simply say that McKee has identified the first member of the Moocher Hall of Fame.

P.P.P.P.S. At this time last year, there were a bunch of great Thanksgiving-themed cartoons about the Obamacare disaster.

P.P.P.P.P.S. And if you want some serious Thanksgiving-themed policy analysis, I strongly recommend this video on how the Pilgrims were saved by property rights.

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Early this year, I shared an amusing but accurate image that showed an important difference between capitalism and socialism.

And in 2012, I posted a comparison of Detroit and Hiroshima to illustrate the damage of big government.

Well, if you combine those concepts, you get this very pointed look at the evolution of Cuban socialism and Hong Kong capitalism.

Some might dismiss these photos as being unrepresentative, and it’s reasonable to be skeptical. After all, I’m sure it would be easy to put together a series of photos that make it seem as if the United States is suffering from decay while France is enjoying a boom.

So let’s go to the data. In previous posts, I’ve shared comparisons of long-run economic performance in market-oriented nations and statist countries. Examples include Chile vs. Argentina vs. VenezuelaNorth Korea vs. South Korea, Cuba vs. Chile, Ukraine vs. Poland, Hong Kong vs. ArgentinaSingapore vs. Jamaica, and the United States vs. Hong Kong and Singapore.

Now let’s add Cuba vs. Hong Kong to the mix.

Wow, this is amazing. Through much of the 1950s, Hong Kong and Cuba were economically similar, and both were very close to the world average.

Then Hong Kong became a poster child for capitalism while Cuba became an outpost of Soviet communism. And, as you might expect, the people of Hong Kong prospered.

What about the Cubans? Well, I suppose a leftist could argue that they’re all equally poor and that universal deprivation somehow makes Cuban society better Hong Kong, where not everybody gets rich at the same rate.

But even that would be a lie since Cuba’s communist elite doubtlessly enjoys a very comfortable lifestyle. So while the rest of the country endures hardships such as a toilet paper shortage, the party bosses presumably drink champagne and eat caviar.

The bottom line is that statists still don’t have an acceptable answer for my two-part challenge.

P.S. If you prefer stories rather than images or data, this updated version of the fable of the ant and the grasshopper makes a key point about incentives and redistribution. And you get a similar message from the PC version of the Little Red Hen.

P.P.S. Cuba’s system is so wretched that even Fidel Castro confessed it is a failure. So maybe there’s hope that Obama will have a similar epiphany about American-style statism!

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I generally focus on the profligate habits and abusive tactics of the federal government in Washington, but that doesn’t mean other levels of government are well behaved.

In a column for the Washington Post, Catherine Rampell outlines some of the reprehensible ways that state and local governments extract money from the citizenry.

Think of recent, infuriating stories on civil asset forfeiture, in which law enforcement seizes cash and other property from people who are never charged with crimes. Often the departments that do the seizing get to keep the proceeds, which leads to terrible incentives. …Onerous traffic fees and court fines — which have been blamed for long-simmering tensions in places like Ferguson, Mo. — often have a similarly mercenary motive.

She’s right to be infuriated.

Policies like asset forfeiture are disgusting ways of stealing money, particularly from the less fortunate. Indeed, it’s worth noting that the two first leaders of the Justice Department’s asset forfeiture office now say the practice should be ended because of rampant abuses.

But other revenue-raising policies also are objectionable.

…states and cities are also increasingly trying to monetize other behaviors seen as sinful or wayward, like marijuana use, strip club patronage, and gambling. Hence the explosion of state-sponsored lotteries, which prey on (mostly poor) people’s mathematical illiteracy… States have also been jockeying to expand casinos and other venues for legalized gambling, which voters seem to see as generating free money. …Then there are the expensive occupational licensure requirements for jobs that don’t seem to require state-level gatekeeping, like hair-braiding.

At this point, after reading various examples of greedy governments pillaging citizens, you may be thinking Ms. Rampell is a good libertarian.

Unfortunately, that doesn’t seem to be the case.

Her anger is misdirected. Instead of holding politicians accountable, she blames voters for their unwillingness to acquiesce to tax hikes as a way of dealing with “widespread budget crunches.”

If the political toxicity of spending and tax hikes encourages obfuscation at the federal level, it has led to far more destructive and distortionary policies at the state and local levels. Voters hate taxes and will punish any politician who threatens to raise them (or, in many cases, does not accede to cutting them). But schools, roads, police forces, garbage collection, firefighters, jails and pensions still cost money, even when you cut them back as much as voters will tolerate. So instead of raising taxes, state and municipal governments have resorted to nickel-and-diming constituents through other kinds of piecemeal, non-tax revenue raisers, an outcome that is less transparent, and likely to worsen the economy, inequality and social injustice. …It’s time to take off the fiscal blinkers and start rewarding politicians who have the courage to advocate raising revenues the old-fashioned way: through taxes.

Reward a politician for raising taxes? Isn’t that like rewarding a mosquito for taking your blood?

But I shouldn’t be snarky. After all, maybe Ms. Rampell is right and that budgets for state and local governments have been cut as much as possible.

That being said, I noticed she didn’t include any figures on the trends in spending by state and local governments.

So I went to the Office of Management and Budget’s historical tables, specifically Table 15-2 which includes state and local government expenditures. And after adjusting the data for inflation, based on the composite deflator in Table 1-3, I put together a graph to determine whether there was a “budget crunch” for state and local government.

Um…not so much.

As you can see, state and local government spending has jumped dramatically, even when looking at inflation-adjusted dollars.

Indeed, the 164 percent increase in outlays since 1980 is four times greater than the 40 percent increase in the nation’s population over the same period.

In other words, the only “budget crunch” is the one being imposed on long-suffering taxpayers by state and local politicians.

Those officials are the folks who deserve Ms. Rampell’s ire.

P.S. Since this column corrects a big oversight in a Washington Post column, I suppose this would be a good time to point out other mistakes or misstatements I’ve noticed in that newspaper.

Such as the time it asserted in a news report that Germany is “fiscally conservative.”

Or the time the newspaper claimed a 0.158 percent cut would “slash” the federal budget.

And how about the time the Post said the tiny sequester would impose a “sledgehammer of budget cuts.”

P.P.S. On the other hand, the Washington Post has produced genuinely good editorials on school choice and postal service privatization, so it isn’t all bad.

P.P.P.S. And it presumably is better than the New York Times, which has a bigger list of preposterous stories (and I’m not even counting Paul Krugman’s mistakes, some of which can be seen here, here, here, here, here, here, here, and here).

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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.

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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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The Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) are congressional bureaucracies that wield tremendous power on Capitol Hill because of their role as fiscal scorekeepers and referees.

Unfortunately, these bureaucracies lean to the left. When CBO does economic analysis or budgetary estimates, for instance, the bureaucrats routinely make it easier for politicians to expand the burden of government spending. The accompanying cartoon puts it more bluntly.

And when JCT does revenue estimates, the bureaucrats grease the skids for anti-growth tax policy by overstating revenue losses from lower tax rates and overstating revenue gains from higher tax rates.

Here are some examples of CBO’s biased output.

The CBO – over and over again – produced reports based on Keynesian methodology to claim that Obama’s so-called stimulus was creating millions of jobs even as the unemployment rate was climbing.

CBO has produced analysis asserting that higher taxes are good for the economy, even to the point of implying that growth is maximized when tax rates are 100 percent.

Continuing a long tradition of under-estimating the cost of entitlement programs, CBO facilitated the enactment of Obamacare with highly dubious projections.

CBO also radically underestimated the job losses that would be caused by Obamacare.

When purporting to measure loopholes in the tax code, the CBO chose to use a left-wing benchmark that assumes there should be double taxation of income that is saved and invested.

On rare occasions when CBO has supportive analysis of tax cuts, the bureaucrats rely on bad methodology.

But let’s not forget that the JCT produces equally dodgy analysis.

The JCT was wildly wrong in its estimates of what would happen to tax revenue after the 2003 tax rate reductions.

Because of the failure to properly measure the impact of tax policy on behavior, the JCT significantly overestimated the revenues from the Obamacare tax on tanning salons.

The JCT has estimated that the rich would pay more revenue with a 100 percent tax rate even though there would be no incentive to earn and report taxable income if the government confiscated every penny.

This means the JCT is more left wing than the very statist economists who think the revenue-maximizing tax rate is about 70 percent.

Unsurprisingly, the JCT also uses a flawed statist benchmark when producing estimates of so-called tax expenditures.

Though I want to be fair. Sometimes CBO and JCT produce garbage because they are instructed to put their thumbs on the scale by their political masters. The fraudulent process of redefining spending increases as spending cuts, for instance, is apparently driven by legislative mandates.

But the bottom line is that these bureaucracies, as currently structured and operated, aid and abet big government.

Regarding the CBO, Veronique de Rugy of Mercatus hit the nail on the head.

The CBO’s consistently flawed scoring of the cost of bills is used by Congress to justify legislation that rarely performs as promised and drags down the economy. …CBO relies heavily on Keynesian economic models, like the ones it used during the stimulus debate. Forecasters at the agency predicted the stimulus package would create more than 3 million jobs. …What looks good in the spirit world of the computer model may be very bad in the material realm of real life because people react to changes in policies in ways unaccounted for in these models.

And the Wall Street Journal opines wisely about the real role of the JCT.

Joint Tax typically overestimates the revenue gains from raising tax rates, while overestimating the revenue losses from tax rate cuts. This leads to a policy bias in favor of higher tax rates, which is precisely what liberal Democrats wanted when they created the Joint Tax Committee.

Amen. For all intents and purposes, the system is designed to help statists win policy battles.

No wonder only 15 percent of CPAs agree with JCT’s biased approach to revenue estimates.

So what’s the best way to deal with this mess?

Some Republicans on the Hill have nudged these bureaucracies to make their models more realistic.

That’s a helpful start, but I think the only effective long-run option is to replace the top staff with people who have a more accurate understanding of fiscal policy. Which is exactly what I said to Peter Roff, a columnist for U.S. News and World Report.

…the new congressional leadership should be looking at ways to reform the way the institution does its business – and the first place for it to start is the Congressional Budget Office. Most Americans don’t know what the CBO is, how it was created or what it does. They also don’t know how vitally important it is to the legislative process, especially where taxes, spending and entitlement reform are concerned. As Dan Mitchell, a well-respected economist with the libertarian Cato Institute, puts it in an email, the CBO “has a number-crunching role that gives the bureaucracy a lot of power to aid or hinder legislation, so it is very important for Republicans to select a director who understands the economic consequences of excessive spending and punitive tax rates.”

Heck, it’s not just “very important” to put in a good person at CBO (and JCT). As I’ve written before, it’s a test of whether the GOP has both the brains and resolve to fix a system that’s been rigged against them for decades.

So what will happen? I’m not sure, but Roll Call has a report on the behind-the-scenes discussions on Capitol Hill.

Flush from their capture of the Senate, Republicans in both chambers are reviewing more than a dozen potential candidates to succeed Douglas W. Elmendorf as director of the Congressional Budget Office after his term expires Jan. 3. …The appointment is being closely watched, with a number of Republicans pushing for CBO to change its budget scoring rules to use dynamic scoring, which would try to account for the projected impact of tax cuts and budget changes on the economy.

So who will it be? The Wall Street Journal weighs in, pointing out that CBO has been a tool for the expansion of government.

…the budget rules are rigged to expand government and hide the true cost of entitlements. CBO scores aren’t unambiguous facts but are guesses about the future, biased by the Keynesian assumptions and models its political masters in Congress instruct it to use. Republicans who now run Congress can help taxpayers by appointing a new CBO director, as is their right as the majority. …The Tax Foundation’s Steve Entin would be an inspired pick.

I disagree with one part of the above excerpt. Steve Entin is superb, but he would be an inspired pick for the Joint Committee on Taxation, not the CBO.

But I fully agree with the WSJ’s characterization of the budget rules being used to grease the skids for bigger government.

In a column for National Review, Dustin Siggins writes that Bill Beach, my old colleague from my days at the Heritage Foundation, would be a good choice for CBO.

…few Americans may realize  that the budget process is at least as twisted as the budget itself. While one man can’t fix it all, Republicans who want to be taken seriously about budget reform should approve Bill Beach to head the Congressional Budget Office (CBO). Putting the right person in charge as Congress’s official “scorekeeper” would be an important first step in proving that the party is serious about honest, transparent, and efficient government. …CBO has several major structural problems that a new CBO director should fix.

Hmm… Entin at JCT and Beach at CBO. That might even bring a smile to my dour face.

But it doesn’t have to be those two specific people. There are lots of well-regarded policy scholars who could take on the jobs of reforming and modernizing the work of JCT and CBO.

But that will only happen if Republicans are willing to show some fortitude. And that means they need to be ready to deal with screeching from leftists who want to maintain their control of these institutions.

For example, Peter Orszag, a former CBO Director who then became Budget Director for Obama (an easy transition), wrote for Bloomberg that he’s worried GOPers won’t pick someone with his statist views.

The Congressional Budget Office should be able to celebrate its 40th anniversary this coming February with pride. …The occasion will be ruined, however, if the new Republican Congress breaks its long tradition of naming an objective economist/policy analyst as CBO director, when the position becomes vacant next year, and instead appoints a party hack.

By the way, it shows a remarkable lack of self-awareness for someone like Orszag to complain about the possibility of a “party hack” heading up CBO.

In any event, that’s just the tip of the iceberg. I fully expect we’ll also see editorials very soon from the New York Times, Washington Post, and other statist outlets about the need to preserve the “independence” of CBO and JCT.

Just keep in mind that their real goal is to maintain their side’s control over the process.

P.S. There’s another Capitol Hill bureaucracy, the Congressional Research Service, that also generates leftist fiscal policy analysis. Fortunately, the CRS doesn’t have any scorekeeper or referee role, so it doesn’t cause nearly as much trouble. Nonetheless, any bureaucracy that produces “research” about higher taxes being good for the economy needs to be abolished or completely revamped.

P.P.S. This video explains the Joint Committee on Taxation’s revenue-estimating methodology. Pay extra attention to the section beginning around the halfway point, which deals with a request my former boss made to the JCT.

P.P.P.S. If you want to see some dramatic evidence that lower tax rates don’t necessarily lead to less revenue, check out this amazing data from the 1980s.

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I don’t pretend that tax reform, by itself, will create economic Nirvana.

After all, the experts who measure economic policy and economic performance say that only about 20 percent of a nation’s prosperity is determined by fiscal policy.

Nonetheless, I’m a big fan of simple and fair tax systems such as the flat tax. Not only because I think we will get more growth, but also because I want to rein in the power of the IRS and reduce corruption in Washington.

So did the Republican wave in the mid-term elections make reform more likely?

Interestingly, the normally left-leaning Washington Post editorial page seems to have the right attitude about the issue.

There is broad agreement that the Internal Revenue Code is an unfair, inefficient mess and that the solution is to lower marginal rates and apply them to a broader base of income. A simpler code, purged of its market-distorting loopholes, would foster economic equality and economic growth, both of which the United States desperately needs.

So does the election make reform more likely?

Does the rise of a newly elected Republican Senate change that calculus? We’d say that it might… To be sure, Democrats want tax reform to raise money; Republicans want cuts. Still, a good deal of work has already been done on basic principles of a tax overhaul by Democrats and Republicans in both houses of Congress. …With a strong push from Mr. Obama, early in the new Congress, they might just be willing to finish the job their predecessors started.

I suspect the Washington Post is being far too optimistic about bipartisan compromise.

Not only would lawmakers have to overcome the big divide over whether reform should produce more revenue for Washington or less money for Washington, but there’s also a big divide on how to properly measure income.

And don’t forget that Obama (unlike the Washington Post) wants higher marginal tax rates because of his class-warfare ideology.

But maybe I’m just being a pessimist.

Scott Hodge of the Tax Foundation, for instance, also offers a semi-optimistic assessment about the possibility of reform.

One of the most obvious questions from Tuesday’s election results is: what does this mean for tax reform? I think it certainly enhances the prospects of Congress and the president reaching a grand bargain on overhauling the tax code… Starting in January 2015, expect the new chairmen of the House Ways and Means Committee and the Senate Finance Committee begin holding a series of hearings on various aspects of reforming the tax system and the numerous “off-the-shelf” options available to them—such as the Flat Tax, X-Tax, FairTax, Cash Flow Tax, and the Camp draft. …Considering the energy to reform the tax code in both the House and Senate, it is quite possible that lawmakers could deliver a comprehensive tax reform bill to President Obama’s desk in 2015.

Scott makes several other points, including the long-overdue need to reform the biased revenue-estimating methodology of the Joint Committee on Taxation.

However, he also acknowledges that President Obama very likely would veto good tax reform. So even though our economy needs a less-destructive tax code, folks shouldn’t hold their breath expecting it to happen in the next two years.

I also addressed the topic as part of a recent forum at the Heritage Foundation, and I outlined several issues that have to be addressed if there is a serious effort to pursue tax reform. Here’s my part of the presentation.

But if you don’t want to watch me pontificate for ten-plus minutes, particularly since the video quality isn’t that great, here are my key points:

1. The tax base matters. If you don’t fix the double taxation of saving and investment, you may as well not even bother.

2. Bold beats timid. This is why I think a pure flat tax actually is more realistic than a proposal, such as Lee-Rubio, that makes compromises in hopes of being more politically realistic.

3. Highlight international competitiveness. Simply stated, globalization increases the benefits of good policy and increases the costs of bad policy.

4. International bureaucracies hinder good policy. Good tax reform is based on taxing income only once and only taxing income earned inside national borders, yet the OECD wants to impose global rules based on extra-territorial double taxation.

5. Good tax reform is good health reform. The biggest genuine loophole in the tax code is for fringe benefits, and this is a big reason for the third-party-payer crisis in healthcare.

6. Fix the biased scorekeeping of the JCT. The Joint Committee on Taxation uses methodology that it farther to the left than Paul Krugman.

7. Growth trumps fairness. The left will always use class-warfare arguments against good policy and the only effective counter-argument is that economic growth benefits all taxpayers.

One final point. Folks often ask me about plans – such as the Fair Tax – that would abolish the income tax and instead collect revenue with a national sales tax.

That approach is theoretically sound, but I have some practical concerns based on my distrust of politicians.

P.S. Here’s some humorous fallout from the election. Hitler learns that Democrats lost the Senate.

Hitler parody videos have appeared many places in recent years. Here are my favorites.

The head of the National Socialist Workers Party gets a double-dose – here and here – of bad news about Obamacare.

Here’s Hitler learning about Europe being downgraded.

And here’s the Fuehrer finding out that Scott Walker prevailed in his fight against government bureaucrats in Wisconsin.

P.P.S. I shared some cartoons before the election with the theme that Obama has been bad news for the Democratic Party.

Now that the election is over, that theme is even more appropriate.  Here’s Glenn McCoy’s assessment of the change Obama delivered.

Robert Ariail has a similar perspective.

In other words, as I suggested back in 2012, lots of non-leftist people should be happy that Obama got reelected.

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