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President-Elect Trump has picked Ben Carson as his Secretary for the Department of Housing and Urban Development (HUD), which immediately produced two thoughts.

First, since he had the best tax plan of all the 2016 candidates, too bad he wasn’t named Secretary of Treasury.

Second, I hope his job at HUD is to shut down the department, raze the building, and get the federal government out of the housing business.

Then I realized I was thinking too narrowly. Shouldn’t all Trump appointees start with the assumption that their department, agency, or program is an unconstitutional waste of money? I’ve already written columns explaining why some cabinet-level bureaucracies should be abolished.

Now let’s expand this list by taking  a look at the Department of Energy.

And our job will be easy since William O’Keefe has a very persuasive column for E21. Let’s look at some of the highlights, starting with the observation that the bureaucracy was created based on the assumption that the world was running out of energy and that somehow politicians and bureaucrats could fix that supposed problem.

The Department of Energy (DOE) traces its roots to the energy crisis of 1973, which was made worse by misguided government policy.  …there was, at the time, a firm belief that the world was going to run out of oil by the end of the century. Not only does the world have plenty of oil, but the United States is now a net exporter of natural gas–and would be exporting more if DOE was faster with its approvals. …Prior to DOE, the federal government played a very limited role in energy policy and development.  Presumed scarcity, excessive dependence on OPEC nations, distrust in markets, and the search for energy independence became the foundation for what is now a $32.5 billion bureaucracy in search for relevance.

In other words, the ostensible problem that led to the creation of the department was preposterously misdiagnosed.

The market produced lots of energy once the shackles of government intervention (including those from the Energy Department) were sufficiently loosened.

So what, then, does the department do?

What DOE has done is squander money on the search for alternative energy sources. In the process, it enabled Bootlegger and Baptist schemes that enriched crony capitalists who are all too willing to support the flawed notion that government can pick winners and losers.  For 2017, a large chunk of DOE spending–$12.6 billion, or 39 percent—is earmarked to “support the President’s strategy to combat climate change.” This is not a justifiable use of taxpayer dollars. Over 36 years, DOE’s mission has morphed from energy security to industrial policy, disguised as advanced energy research and innovation.  There is a long and failed history of industrial policy by the federal government.

Here’s the bottom line.

DOE has become the Department of Pork. …Energy firms do not need government subsidies to innovate and develop new technologies.  Horizontal drilling and fracking came from the private sector because the incentives to develop shale oil and gas were stronger than the illusions driving alternative energy sources. …Abolishing DOE would punish only the crony capitalists who have become addicted to its support.

Amen.

By the way, Mr. O’Keefe’s argument is primarily based on the fact that DOE doesn’t produce value.

Since I’m a fiscal wonk, I’ll add another arrow to the quiver. We also should abolish the department so that we can save a lot of money.

My colleague Chris Edwards has an entire website filled with information about the uselessness of the department. You can – and should – spend hours perusing all of the information he has accumulated.

But here’s the part that jumped out to me. Over the years, the federal government has squandered hundreds of billions of dollars on a department that is most famous for wasteful Solyndra-style scams.

By the way, there are a small handful of activities at DOE that should be shifted to other departments (such as transferring nuclear weapons responsibilities to the Department of Defense).

But the vast majority of DOE activities never should have been created and produce zero value, so the sooner the bureaucracy is eliminated, the better.

P.S. We can have tons of evidence about the desirability of shutting down the Department of Energy, but it doesn’t matter if there aren’t politicians who think it is more important to protect taxpayers rather than to funnel money to cronyists and interest groups. We’ll have to wait and see whether Trump chooses wisely, though I’m not holding my breath. We certainly didn’t get any pro-taxpayer shift of policy the last time GOPers were in charge of the White House. And Trump’s commitment to the notion of smaller government doesn’t seem overly robust, though I very much hope I’m wrong.

I wrote a rather favorable column a few days ago about a new study from economists at the Organization for Economic Cooperation and Development. Their research showed how larger levels of government spending are associated with weaker economic performance, and the results were worth sharing even though the study’s methodology almost certainly led to numbers that understated the case against big government.

Regardless, saying anything positive about research from the OECD was an unusual experience since I’m normally writing critical articles about the statist agenda of the international bureaucracy’s political appointees.

That being said, I feel on more familiar ground today since I’m going to write something negative about the antics of the Paris-based bureaucracy.

The OECD just published Revenue Statistics in Asian Countries, which covers Indonesia, Singapore, Malaysia, South Korea, Japan, and the Philippines for the 1990-2014 period. Much of the data is useful and interesting, but some of the analysis is utterly bizarre and preposterous, starting with the completely unsubstantiated assertion that there’s a need for more tax revenue in the region.

…the need to mobilise government revenue in developing countries to fund public goods and services is increasing. …In the Philippines and Indonesia, the governments are endeavoring to strengthen their tax revenues and have established tax-to-GDP targets. The Philippines aims to increase their tax-to-GDP ratio to 17% (excluding Social Security contributions) by 2016…and Indonesia aims to reach the same level by 2019.

Needless to say, there’s not even an iota of evidence in the report to justify the assertion that there’s a need for more tax revenue. Not a shred of data to suggest that higher taxes would lead to more economic development or more public goods. The OECD simply makes a claim and offers no backup or support.

But here’s the most amazing part. The OECD report argues that a nation isn’t developed unless taxes consume at least 25 percent of GDP.

These targets will contribute to increasing financial capacity toward the minimum tax-to-GDP ratio of 25% deemed essential to become a developed country.

This is a jaw-dropping assertion in part because most of the world’s rich nations became prosperous back in the 1800s and early 1900s when government spending consumed only about 10 percent of economic output.

And not only were taxes a concomitantly minor burden during that period, but many nations didn’t have any income taxes at all.

At this point, you may be thinking the OECD bureaucrats are merely guilty of not knowing history.

That certainly would be a charitable explanation of their gross oversight/mistake.

But there’s something else in the study that makes this benign interpretation implausible. The study explicitly notes that Singapore is a super-prosperous developed nation with a very low tax burden – way below the supposed minimum requirement identified by the OECD.

Singapore has the highest GDP per-capita of the six countries and one of the lowest tax-to-GDP ratios. …The low tax-to-GDP ratio is explained by lower income tax rates (particularly on corporate income) and VAT rates, compared to other Asian countries. …The tax-to-GDP ratio in Singapore is lower in 2014 relative to 2000, driven by the decrease of individual income tax rates and corporate income tax rates.

Here’s a chart from the report showing that taxes consume less than 14 percent of economic output in Singapore.

Needless to say, there’s nothing in the report to square the circle. Nothing to explain why Singapore manages to be so rich with such a small burden of government. It’s as if the bureaucrats hoped that nobody would notice that numbers in the study undermined their ideologically driven claim that tax burdens should climb in Asia.

Indeed, I wonder if Hong Kong was omitted from the study simply because that would have further undermined the OECD’s preposterous assertion that higher taxes are a route to economic development.

P.S. Having low taxes and a modest burden of government certainly is part of what can make a nation rich and successful, but the real goal should be to have a good mix of free markets and small government. Singapore does that, ranking #2 in Economic Freedom of the World.

Other Asian nations, by contrast, may have modest fiscal burdens, but the potential economic benefit is undermined by statist policies in areas such as trade, regulation, monetary policy, and property rights. This certainly helps to explain why countries such as Indonesia (#79), Malaysia (#62), and the Philippines (#80) have much lower scores for overall economic liberty.

P.P.S. I’m not sure why the OECD would produce such sloppy research. If they simply wanted to create a false narrative, why didn’t the bureaucrats omit Singapore and simply hope nobody knew the numbers from that country (or the historical numbers for North America and Western Europe)? My suspicion is that the senior political types at the OECD wanted to produce a study that would be helpful for certain politicians  in the region (i.e., allow them to justify higher tax burdens) and they figured a lot of people would only pay attention to the press release.

P.P.P.S. The OECD certainly has a track record of dishonest research.

I wrote a couple of days ago about a global ranking showing which nations enjoy the most personal and economic freedom.

Surprisingly, European nations dominated the top 20, which suggests (given the depressing amount of statism in Europe) that libertarians have a lot of work to do if we want good liberty-oriented role models for the world.

Heck, even the top three jurisdictions (Hong Kong, Switzerland, and New Zealand), while very admirable compared to most other nations, still have too much government.

In the fight for libertarian policy, we face several obstacles, including the “public choice” pressure for ever-growing government, as well as the fact that we simply need to learn how to be more persuasive.

And if we want to be more persuasive, we need to somehow convince people to apply sensible principles in a consistent manner. And this is why this Venn Diagram from Mark Perry’s collection is so valuable. It’s addressed to leftists and it challenges them to consistently apply their beliefs about the liberty of consenting adults.

Mark obviously hopes that the people who think there should be freedom for personal relationships will realize that it is inconsistent to simultaneously want to restrict freedom in economic relationships (in this case, the freedom to accept a job that doesn’t pay as much as some politicians would prefer).

But the Venn Diagram also could apply to conservatives by changing a few words. Folks on the right generally understand that consenting adults should be free to engage in voluntary economic exchange, but they sometimes want to limit consenting adults in the personal sphere.

By the way, a belief in freedom doesn’t imply that people have to be happy about the choices others make. You can think that it’s wrong and sad and unfortunate that some people have very limited skills and are able to earn only $5 per hour in the marketplace. And you can you personally disapprove of certain relationships between consenting adults.

Libertarianism is simply the principle and theory that you don’t support government coercion to prevent other adults from engaging in behaviors that you don’t like. Assuming, of course, that other people’s actions don’t conflict with your rights to life, liberty, and property.

P.S. You can enjoy other Mark Perry Venn Diagrams here, here, here, and here (newly added).

If you ask what worries me about the incoming Trump Administration, I’ll immediately point to a bunch of policy issues.

Others, though, are more focused on whether Trump’s business empire will distort decisions in the White House.

Here’s what Paul Krugman recently wrote about Trump and potential corruption.

…he’s already giving us an object lesson in what real conflicts of interest look like, as authoritarian governments around the world shower favors on his business empire. Of course, Donald Trump could be rejecting these favors and separating himself and his family from his hotels and so on. But he isn’t. In fact, he’s openly using his position to drum up business. …The question you need to ask is why this matters. …America is a very rich country, whose government spends more than $4 trillion a year, so even large-scale looting amounts to rounding error. What’s important is not the money that sticks to the fingers of the inner circle, but what they do to get that money, and the bad policy that results. …what’s truly scary is the potential impact of corruption on foreign policy. …someplace like Vladimir Putin’s Russia can easily funnel vast sums to the man at the top… So how bad will the effects of Trump-era corruption be? The best guess is, worse than you can possibly imagine.

I’m tempted to ask why Krugman wasn’t similarly worried about corruption over the past eight years. Was he fretting about Solyndra-type scams? About the pay-to-play antics at the Clinton Foundation? About Operation Choke Point and arbitrary denial of financial services to law-abiding citizens?

He seems to think that the problem of malfeasance only exists when his team isn’t in power. But that’s totally backwards. As I wrote back in 2010, people should be especially concerned and vigilant when their party holds power. It’s not just common sense. It should be a moral obligation.

But even if Krugman is a hypocrite, that doesn’t mean he’s wrong. At least not in this case. He is absolutely on the mark when he frets about the “incentives” for massive looting by Trump and his allies.

But what frustrates me is that he doesn’t draw the obvious conclusion, which is that the incentive to loot mostly exists because there’s an ability to loot. And the ability to loot mostly exists because the federal government is so big and has so much power.

And as Lord Acton famously warned, power is very tempting and very corrupting.

Which is why I’m hoping that Krugman will read John Stossel’s new column for Reason. In the piece, John correctly points out that the only way to “drain the swamp” is to shrink the size and scope of government.

…today’s complex government allows the politically connected to corrupt… most everything. …In the swamp, no one but taxpayers pays for their mistakes. …it’s well worth it for companies to invest in lobbyists and fixers who dive into the swamp to extract subsidies.For taxpayers? Not so much. While the benefits to lobbyists are concentrated, taxpayer costs are diffuse. …Draining the swamp would mean not just taking freebies away from corporations—or needy citizens—but eliminating complex handouts like Obamacare. Candidate Trump said he would repeal Obamacare. Will he? He’s already backed off of that promise, saying he likes two parts of the law—the most expensive parts.

As you can see, Stossel understands “public choice” and recognizes that making government smaller is the only sure-fire way of reducing public corruption.

Which is music to my ears, for obvious reasons.

By the way, the same problem exists in many other countries and this connects to the controversies about Trump and his business dealings. Many of the stories about potential misbehavior during a Trump Administration focus on whether the President will adjust American policy in exchange for permits and other favors from foreign governments.

But that temptation wouldn’t exist if entrepreneurs didn’t need to get permission from bureaucrats before building things such as hotels and golf courses. In other words, if more nations copied Singapore and New Zealand, there wouldn’t be much reason to worry whether the new president was willing to swap policy for permits.

Libertarians are sometimes described as people who don’t want the government to interfere in either the bedroom or boardroom, which is a shorthand way of saying that there should be both personal freedom and economic freedom.

Based on this preference for liberty and a desire to avoid government coercion, what’s the most libertarian nation in the world? Is it Australia, which I recommended as the best option for escaping Americans if the U.S. becomes a failed welfare state?

Not quite. According to the new Human Freedom Index, Australia gets a very good score, but the most libertarian-oriented place in the world isn’t even a country. It’s Hong Kong, a “special administrative region” of China.

Hong Kong earns its high score thank to it’s number-one status for economic freedom, combined with a top-20 score for personal freedom.

For what it’s worth, European nations dominate the rankings. Other than top-rated Hong Kong, New Zealand (#3), Canada (tied for #6), and Australia (tied for #6), every single nation in the top 20 is from the other side of the Atlantic.

So kudos to our friends from across the ocean. Most of them have big welfare states, but at least they compensate with free market policy in other areas, along with lots of personal freedom.

And what about the United States? We’re ranked #23, which certainly is decent considering that there are 159 countries that are scored, but obviously not worthy of superlatives.

The infographic below contains the specific scores for the United States. As you can see, our economic freedom score (7.75 out of 10) is worse – in absolute terms – than our personal freedom score (8.79 out of 10). But since more nations (especially in Europe) get high scores for personal freedom, our relative ranking for economic freedom (16 our of 159) is better than our relative ranking for personal freedom (28 our of 159).

And if we look at the sub-categories for personal freedom on the left side, you’ll notice that America’s main problem is a very mediocre score for rule of law. Thanks, Obama!

Let’s now look at the nations that have the most personal freedom.

I already mentioned that the United States is in 28th place, so we obviously don’t show up on this top-20 list. But you will find 17 European nations, along with Australia (tied for #12), Canada (#15), and Hong Kong (tied for #19).

By the way, Switzerland is the only nation to be in the top 10 for both personal and economic freedom. So maybe that country’s improbable success isn’t so improbable after all. You do the right thing and you get good results.

And honorable mention to Ireland, Australia, and the United Kingdom for just missing being in the top 10 in both categories.

In case you’re wondering why Hong Kong had the highest overall score even though it was “only” #19 for personal freedom, the answer is that the jurisdiction scores so much higher for economic liberty than the European nations.

P.S. For what it’s worth, I find it surprising that China, which ranks rather low for overall freedom (141 out of 159), is so tolerant of widespread freedom in Hong Kong. I assume (hope?) this is a positive sign that China will evolve in a positive direction.

P.P.S. The very last country on the list is Libya, so perhaps we can conclude that the Hillary Clinton/Barack Obama intervention has not produced good results. Meanwhile, I’m guessing that the thugs in Caracas (154 out of 159) are happy that Venezuela isn’t in last place.

When I write about gun control, I generally make two arguments.

  • First, criminals are lawbreakers, so the notion that they will be disarmed because of gun control is a fantasy. Crooks and thugs who really want a gun will always have access to black-market weapons.
  • Second, to the extent that good people obey bad gun-control laws (and hopefully they won’t), that will encourage more criminal activity since bad people will be less worried about armed resistance.

These points are common sense, but they doesn’t seem to convince many leftists, who have a religious-type faith that good intentions will produce good results (they need to read Bastiat!).

Every so often, however, the other side accidentally messes up.

As part of its never-ending, ideologically driven campaign to undermine gun rights, the New York Times ran a big 5,000-plus word story last month about mass shootings. Creating hostility to guns was the obvious goal of this “news” report.

But buried in all that verbiage was a remarkable admission. A big majority of shooters already are in violation of gun laws.

The New York Times examined all 130 shootings last year in which four or more people were shot, at least one fatally, and investigators identified at least one attacker. …64 percent of the shootings involved at least one attacker who violated an existing gun law.

And for the 36 percent of the nutjobs in the story who purchased or obtained guns legally, almost all of them presumably would have gotten their hands on weapons even if they had to violate minor laws on guns prior to violating major laws against murder.

So what the New York Times and other anti-second amendment activists are really saying is that honest people should be defenseless even though bad guys always will have the ability to arm themselves. And by making such a preposterous claim, they actually provided ammo (pun intended) for those of us who defend the Second Amendment.

P.S. Maybe we should give the New York Times a “Wrong-Way Corrigan Award” for inadvertently helping to make the libertarian case for more freedom! Oh, and give Trevor Noah the Award at the same time.

P.P.S. Years ago, I used to post lots of gun-control humor. I’ve gotten out of the habit, but I can’t resist sharing some items that popped into my inbox yesterday.

This one of my favorites.

And this brought back fond childhood memories. Somehow I avoided becoming a killer even though I grew up watching Yosemite Sam, Elmer Fudd, and other trigger-happy angry white men. Not to mention shows like Combat and Rat Patrol!

Last but not least, this reminds me that crazed mass shooters are always sufficiently un-crazy that they manage to pick out gun-free zones before engaging in their rampages.

So maybe, just maybe, the problem isn’t guns. Indeed, perhaps we can draw the conclusion that society will be safer if more good people are armed.

Heck, even big-city police chiefs are beginning to reach that conclusions.

The War against Cash is a battle that shouldn’t even exist. But politicians don’t like cash because it’s hard to control something that people can freely trade back and forth. So folks on the left are arguing that governments should ban or restrict paper money.

  • In Part I, we looked at the argument that cash should be banned or restricted so governments could more easily collect additional tax revenue.
  • In Part II, we reviewed the argument that cash should be curtailed so that governments could more easily impose Keynesian-style monetary policy.
  • In Part III, written back in March, we examined additional arguments by people on both sides of the issue and considered the risks of expanded government power.
  • In Part IV, a few months ago, there was additional discussion of the dangers that would be unleashed if politicians banned cash.

Now let’s add a fifth installment in this series, and we’ll focus on the destructive turmoil resulting from India’s decision earlier this month to ban “large” notes.

The Financial Times explains what happened.

India unexpectedly scrapped all larger-denomination banknotes overnight… Prime Minister Narendra Modi said 500 and 1,000 rupee notes — worth around $7.50 and $15, respectively — would cease to be legal tender from midnight on Tuesday. The announcement stunned Indians, who were given four hours’ notice that much of their cash would be “mere paper”. RBI data suggests that the Rs500 and Rs1,000 notes account for 86 per cent of the value of all cash in circulation in India at present. …The shock move is the latest step by Mr Modi’s administration to crack down on the vast shadow economy, which remains beyond the reach of India’s tax authorities.

Before delving into why this is an unfortunate development, I can’t resist pointing out that banknotes worth $7.50 and $15 are neither large nor inappropriate for an economy at India’s level of development.

When the United States had a similar level of per-capita GDP (back in the late 1800s), there were $500 and $1000 notes. Yet America didn’t have serious problems with corruption and tax evasion. So why should the existence of far smaller bills be a problem in India today?

I’ll return to that question in the conclusion, but let’s first look at the impact of Prime Minister Modi’s unilateral attack on currency. A column in the New York Times explains why the policy does more harm than good.

On Nov. 8, the Indian government announced an immediate ban on two major bills that account for the vast majority of all currency in circulation. …In the two weeks after the measure was announced, millions of Indians stricken with small panic rushed out to banks; A.T.M.s and tellers soon ran dry. Some 98 percent of all transactions in India, measured by volume, are conducted in cash. …So far its effects have been disastrous for the middle- and lower-middle classes, as well as the poor. And the worst may be yet to come.

The ripple effect of the policy is large and unpleasant.

…demonetization is a ham-fisted move that will put only a temporary dent in corruption, if even that, and is likely to rock the entire economy. …Anyone seeking to convert more than 250,000 rupees (about $3,650) must explain why they hold so much cash, or failing that, must pay a penalty. The requirement has already spawned a new black market to service people wishing to offload: Large amounts of illicit cash are broken into smaller blocks and deposited by teams of illegal couriers. Demonetization is mostly hurting people who aren’t its intended targets. Because sellers of certain durables, such as jewelry and property, often insist on cash payments, many individuals who have no illegal money build up cash reserves over time. Relatively poor women stash away cash beyond their husbands’ reach.

As is so often the case, the bogeyman of terrorism is being used as a rationale for bad policy, even though everyone realizes that terrorists won’t be affected.

When the government announced demonetization, it also justified the measure as a way to curb terrorism financing that relies on counterfeit rupee notes… Catching fake notes already in circulation neither helps trap the terrorists who minted them nor prevents more such money from being injected into the economy. It simply inconveniences the people who use it as legal tender, the vast majority of whom had no hand in its creation.

I’m sympathetic, by the way, to the notion that the government should fight counterfeiting. Crooks printing up fake notes is even worse than central banks printing up too many real notes.

In any event, this indirect attack on the shadow economy imposes considerable costs on regular Indians.

In a country like India, where the illegal economy is so intimately intertwined with the mainstream economy, one inept government intervention against shadow activities can do a lot of harm to the vast majority, who are just trying to make a legitimate living.

Writing for Bloomberg, Elaine Ou has a negative assessment of this proposal.

India is conducting a big test of the idea that getting rid of cash can help address crime and corruption. Unfortunately, it might achieve nothing more than a lot of inconvenience. Criminals and corrupt officials often conduct business in cash, because it’s hard to trace. So in a sense it’s logical to assume that abolishing cash will help reduce criminal activity. …This rationale has led Indian Prime Minister Narendra Modi to declare a surprise cancellation of the nation’s two highest-denomination notes, effectively invalidating 86 percent of total currency in circulation. Anyone with outstanding notes must either deposit them in a bank — potentially incurring a tax — or exchange them for replacements in strictly limited sums.

Ms. Ou explains that the policy will be traumatic for the hundreds of millions of Indians who don’t have bank accounts.

In a country where most transactions are conducted in cash, many people have been unable to pay for necessities like food or medical services. Banks have had to work overtime to handle the exchange, bringing other financial services to a halt. It’s certainly likely that the sheer trauma will leave people less keen to hoard rupees, creating a big incentive to move economic activity out of cash and into banks. Except that a huge number of Indians don’t have a bank account.

In any event, she points out, banning cash won’t have much impact on corruption since politicians and public officials have plenty of ways to extort wealth from the productive sector.

…the prevalence of cash is far from a foolproof indicator of criminality and corruption. Consider Nigeria, which is perceived as one the world’s most corrupt countries and has a currency-to-GDP ratio even lower than Sweden’s… Nigerians have abandoned cash because they have so little trust in government-issued currency. Instead of using banks, they tend to transact in mobile airtime minutes. …Those with more substantial wealth put it in foreign currency. By undermining faith in its cash notes, India may go the way of Nigeria. Villagers are already resorting to barter. …corrupt public officials were believed to have their wealth in real estate and gold.

A news report highlights the real-world impact of the Indian government’s bad policy. Starting with the impact on a poor single mother.

With demonetisation, Sayyed’s family has been forced to cut costs across the board to make sure their limited cash resources don’t get exhausted faster than the banks can exchange money. “Last week it took me four hours of waiting in line to get my old notes exchanged,” said Sayyed. “And because no one had change for a Rs 2,000 note, I had to buy ration on credit for six whole days.” Vegetables and foodgrains, says Sayyed, have grown more expensive in the past 10 days, because of the impact of demonetisation on wholesalers and retailers.

And the impact on a small-business owner.

His salon, which charges Rs 40 for a haircut, used to make anywhere between Rs 1,000 to Rs 1,200 on the weekend. But now, he said, that has fallen to Rs 500. …How is he coping with this liquidity crunch? Not by going cashless. In part because he doesn’t have a bank account. “I tried to open one but they wanted too many proofs of identity,” Sharma said.

By the way, Sharma is a victim of pointless anti-money laundering laws, something even the World Bank recognizes as being particularly harmful for the poor.

A farmer also has been hit hard.

It has been three weeks since Vedagiri’s single acre of land had been tilled and paddy seedlings had been sown. …“The cooperative bank cannot lend us money now, so for the whole of last week, our crop has been standing without pesticides,” said Vedagiri. Several times last week, Vedagiri and the other farmers of Royalpattu were turned away by bank employees. New currency notes have been slow to reach most rural cooperative banks across India. While sowing the crop, Vedagiri had employed 20 labourers. But he has been unable to pay any of them since he had not still received the rest of the money…Vedagiri does not know how he will get through this cropping season without incurring a loss.

Bloomberg reports on some of the bizarre unintended consequences of this bad policy.

Indian ingenuity is being stretched by Prime Minister Narendra Modi’s cash ban to crackdown on unaccounted money. India’s cash economy has been thrown into turmoil since Modi announced last week that 500 and 1,000 rupee notes would cease to be legal tender and would have to be deposited at banks by year-end, leaving about one-seventh of currency in circulation. …Here are some unintended consequences. Indian defense jets are on standby to airlift cash from mints across India to remote corners of the country. …wealthy Indians rushed to make costly purchases with unaccounted cash. One luxury watch outlet in north-west Mumbai saw 45 units of Rolex watches sold on a single day, according to a representative of a watchmaker, who was present when the sales took place. Demand matched what the shop would usually sell in a month and the store had to turn away customers… A new gold rush also emerged soon after Modi’s announcement. “Jewelers who had shut shop for the day on Nov. 8 had to reopen their stores within a couple of hours and were selling gold up to 4 a.m.,” Chirag Thakkar, a director at gold wholesaler Amrapali Group, said by phone… Customers paid as much as 52,000 rupees per 10 grams, almost double the current prices, he said. …About half of an estimated 9.3 million trucks under the All India Motor Transport Congress were off the road eight days after the announcement as drivers abandoned vehicles mid-way into their trips after running out of cash, according to Naveen Gupta, secretary general of the group. India’s roads carry about 65 percent of the country’s freight. Drivers don’t have enough money for food, truck maintenance and to make payments at border check posts. …Compounding the problem of pumping new money into the system is the need to reconfigure the country’s 220,000 cash machines so that they can dispense the new 500 and 2,000 rupee notes, which do not fit into existing ATM cash trays.

To be fair, some of these costs are transitory in nature, so it’s important to distinguish between those consequences and others that might linger.

Though the part of this story that doesn’t make sense is that the government plans on issuing new high-value banknotes. So the Prime Minister is not actually banning large banknotes (or even all non-digital currency), which is the usual goal of the war-on-cash crowd.

So why did the Modi cause so much turmoil with an overnight ban rather than allow for an orderly transition? I’m assuming that the answer has something to do with inconveniencing those with large cash holdings, some of whom will be crooks or counterfeiters or corrupt public officials.

As already noted, the battle against counterfeit currency surely is worthwhile.

But I have considerable doubts about whether this currency swap will have much impact on the shadow economy or public corruption.

And that brings me back to the rhetorical question I posed early in this column about why the United States didn’t have massive problems with crime and public corruption back in the late 1800s (when our per-capita GDP was akin to India’s today according to the Maddison data), even though we had banknotes that were far more valuable ($500 and $1000 compared to $7.50 and $15).

The answer, at least in part, is that the United States had a very tiny government. Government spending consumed at most 10 percent of economic output, with most of that spending at the state and local level. And there was no income tax.

And since people weren’t penalized for earning money and creating wealth, there was no incentive to be part of the shadow economy. And since government was small, there weren’t that many favors to distribute, so there wasn’t much need to bribe politicians or bureaucrats.

If Prime Minister Modi wants a vibrant, above-ground economy with minimal corruption, maybe that’s the path he should follow.

Let’s close with a very sage warning from Richard Fernandez’s column in PJ Media.

Money in its various forms has become the new battleground between a State that needs to reward its constituencies with and the actual economy which produces most of the real goods and services required to do it. The sad experience of command economies suggests in end the Real always wins over the Official.  As Ramesh Thakur said of India’s demonitization policy: “a better solution would have been to shift the balance of economic decision-making away from the state to firms and consumers; simplify, rationalize and reduce taxes; cut regulations and curtail officials’ discretionary powers; eliminate loopholes; and widen the tax net.”

And my favorite Russian-Irish-Californian economist also has a very apt summary of this issue.

Remember, if the answer is more government, you’ve asked a very silly question.

P.S. If he wants more future prosperity, Modi also should make sure the government no longer attacks private schools.

P.P.S. And it also would be a good idea to reform civil service rules so that it doesn’t take two decades to get rid of no-show bureaucrats.

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