The newest edition of Economic Freedom of the World has been released by the Fraser Institute and I will continue my tradition (2023, 2022, 2021, 2020, 2019, etc) of sharing the big-picture highlights.
I normally start by applauding the jurisdictions with the highest scores, but today’s column will start with some bad news for the global economy. As shown by Figure 1.2, there’s been a significant drop in average economic liberty over the past three years.
This is a depressing reversal of what had been a very positive trend this century.
What’s particularly disappointing is that rise in the global average had been driven by pro-growth reforms in the developing world (scores have dropped this century for the United States and European Union). Now it seems policy is getting worse in all regions.
Now that we’ve shared that bad news, let’s look at the (relative) good news.
Here are the world’s 25-freest jurisdictions. Interestingly, Hong Kong is still at the top even though the report warns that “Hong Kong’s rating continues to fall precipitously from 9.05 in 2018 to 8.58 in 2022.”
Kudos to Singapore, Switzerland, New Zealand, and the United States for being in the top 5 (though the U.S. score has fallen significantly since 2000 – from 8.83 to 8.09).
Before sharing other visuals, here are a few excerpts that explain the methodology in the report.
The EFW index is designed to measure the degree to which the institutions and policies of countries permit people to make their own economic choices. To achieve a high EFW rating, a country’s government must do some things, but refrain from others. Governments protect economic freedom when their laws safeguard voluntary exchange and defend individuals and their property from aggressors who might use fraud or force. To this end, the legal system is a particularly important guarantor of economic freedom. In more economically free places, legal institutions protect the person and property of all individuals from the aggressive acts of others and enforce contracts in an even-handed manner. These governments also permit people to access sound money and do not expropriate property through unexpected inflation or deflation. In economically free places, governments refrain from actions like high taxation, barriers to trade, and excessive regulations that restrict personal choice, interfere with voluntary exchange, and limit entry into markets. The EFW index might be thought of as an effort to identify how closely the institutions and policies of a country correspond with the classical liberal ideal of a limited government, where the government protects people and property rights from aggressors but otherwise allows them to make their own economic choices.
And good things happen when people “make their own economic choices.”
Here’s a chart showing the very clear relationship between economic freedom and national prosperity.
Let’s now close with bad news. Unsurprisingly, the world’s lowest-ranked nation is Venezuela (though Cuba and North Korea would probably be even lower if there was enough reliable data to include them in the report).
P.S. Argentina is still one of the world’s worst nations for economic policy because EFW measures policy as of the end of 2022. Yes, that nation now arguably has the world’s best leader, but he didn’t take office until the end of 2023 and his positive reforms (see here, here, and here) have been implemented this year. So we’ll have to wait two years to see (what I predict will be) a big improvement.
In 2022, Chris Edwards released his Fiscal Policy Report Card on America’s Governors and calculated that Kim Reynolds of Iowa was the best in the nation.
How did she do this year (the Report Card is issued every two years)?
She held on to first place in the 2024 Report Card, thanks to policies that are making Iowa the “Florida of the North.” Here are the best and worst governors in the nation, with Reynolds on top by a comfortable margin.
Notice, however, who is in last place.
Tim Walz of Minnesota has been very unfriendly to taxpayers, earning an F thanks to a dismally low score of 19.
In his Report Card, Chris provides details on why Reynolds came in first place and Walz came in last place.
We’ll start with Table A.1, which shows that Reynolds presided over spending restraint. Walz, by contrast, increased his state’s spending burden more than seven times faster.
Next we have Table A.2. Once again, wee see a big gap between the two governors. Reynolds has dramatically reduced both personal and corporate income tax rates. Walz, however, increased Minnesota’s already-high top tax rate on households.
John Hendrickson of Iowans for Tax Reform must have suspected Reynolds would be first and Walz would be last. He compared the two governors last month in a column for Townhall. Here is some of his analysis.
Under the leadership of Gov. Walz and a Democrat-Farmer-Labor (DFL) legislature, Minnesota is being transformed into a California-style socialist state. This is the opposite of what is occurring in Iowa under the leadership of Gov. Kim Reynolds and its Republican-led legislature. …Minnesota has some of the highest tax rates in the Midwest and, just as with other high-tax states, a mass exodus is taking place as families and businesses pack their bags for states friendlier to the pocketbook. …Overall, Gov. Walz and the DFL legislature increased taxes by $10 billion… Gov. Walz and the DFL legislature are also increasing the size and scope of government by increasing spending. The governor and DFL legislature exhausted an $18 billion budget surplus. A $1.5 billion deficit is looming as a result of unsustainable spending. …Iowa seems like another world by comparison. Since 2018, Gov. Reynolds has made tax reform a priority. Iowa once had some of the highest income taxes in the nation. The income-tax rate in Iowa was close to 9 percent and the corporate tax rate was 12 percent, the highest in the nation. Starting in 2025, however, Iowa will have a 3.8 percent flat tax and a corporate tax rate of 7.1 percent, which is scheduled to fall until it reaches a flat 5.5 percent. Gov. Reynolds also places a priority on conservative budgeting. The budget has been in surplus the past several years. The surplus for Fiscal Year 2024 is projected to be $1.9 billion and the surplus for Fiscal Year 2025 is projected to be $2.4 billion. …In Iowa, Gov. Reynolds and the legislature removed barriers to education by establishing a strong school-choice program based on Education Savings Accounts.
Some very damning analysis, at least for those who like Walz.
This explains why I have so much disdain when politicians like Biden and Harris promote hate-and-envy tax policy. And why I am equally critical of the class-warfare agenda of left-wing bureaucracies such as the OECD and IMF.
But I have one exception. Though it deals with punishment rather than taxation.
Here are some excerpts from a column in the Washington Post. Authored by Lee Hockstader, it defends the way some European nations hit rich people with very high penalties (called “day fines”) when they speed.
…income-based penalties for speeding and other relatively minor criminal infractions seem a straightforward progressive idea, in line with other redistributive policies that prevail across much of Europe. What began as an egalitarian-inspired policy in Scandinavia now applies in more than half the European Union’s 27 member countries, plus Norway and some others outside the E.U. …Last year, a rich businessman in Finland who exceeded the approximately 30 mph speed limit by 20 mph was assessed a fine of about $130,000. …Finland’s income-based system, Europe’s first, was enacted in 1921. Over the years, violators who made headlines there by being hit with punitive fines — which also apply to shoplifting and securities-exchange infractions, among others — include a National Hockey League player and a Nokia executive. …The European countries that have adopted day fines apply them to a variety of violations — theft, fraud, drug crimes, even minor sex offenses. In the case of traffic enforcement, they often kick in for major speeding violations.
Hockstader prefers the European approach over the American approach.
…day fines have one big advantage over the one-size-fits-all variety, which is widely enshrined in the United States. Fixed fines are regressive, disproportionately hurting the poor. That argument should register in the United States, where legal sanctions are often assessed without regard to social justice — or where they exact a disproportionately heavy toll on the poor and minorities, as a 2015 Justice Department report on Ferguson, Mo., showed.
This will sound strange since I frequently argue that we should not copy Europe (including a column just two days ago), but I’m sympathetic to Hockstader’s argument.
But that’s because I understand that both taxes and fines are a deterrent. That being said, I don’t want to deter good things (earning money), but I do want to deter bad things (committing crimes).
And a $100 fine may have a big deterrent effect on a poor person but it will be utterly irrelevant to a rich person.
Before anyone accuses me of being a leftist, allow me to stress that my main motive is protecting low-income people, not hurting rich people. I find it reprehensible that many state and local governments aggressively figure out ways to take money from the less fortunate.
I’ll close with a very important caveat. I don’t want to treat rich people as badly as poor people. I want everyone treated equally and humanely.
Here are the three principles that I outlined in 2020 when addressing the same issue.
Have fewer nuisance laws that lead to fines, fees, and charges.
Have income-based fines for things we want to deter, but at a modest level for rich and poor alike.
Perhaps most important, control government spending so politicians have less incentive to grab more money from people.
The bottom line is that I don’t want government to screw over poor people, just as I don’t want government to screw over middle-class people or rich people. Or to screw over me.
P.S. I also addressed this issue in 2010 and 2015.
But I confess that I normally don’t spend any time on the final bullet point (though, as shown below, at least I include it when presenting slides). We’re going to remedy that oversight today and highlight this oft-overlooked feature of a logical tax system.
Let’s start with some background information. Americans who live and work abroad obviously are subject to taxes where they reside.
But they are then forced to also pay taxes to the IRS on that already-taxed income because of America’s system of “worldwide taxation.”
Fortunately, they do get a credit for some of the taxes they pay to foreign governments. And there’s also a “Section 911” exclusion that allows them to avoid double taxation on income below a certain level.
But the overall effect is a system that – at best – is a compliance nightmare. And in many cases, it means overseas Americans are being taxed by two governments on the same income.
The reason we’re exploring this issue today is that Donald Trump recently said he wants to help overseas Americans by addressing this problem. Here are some excerpts from a report by Richard Rubin and Alex Leary in the Wall Street Journal.
Republican presidential nominee Donald Trump said he supports lowering taxes on U.S. citizens who live abroad… The U.S. has an unusual system for taxing its citizens on their total income regardless of where they earned it and where they live, making America alone among major countries with such a rule. …Essentially, an American living in Paris would have tax obligations to both France and the U.S., though the U.S. tax code already contains features meant to mitigate double taxation. A French citizen residing in New York typically wouldn’t owe France any taxes on U.S. income. …Roughly 4.4 million U.S. citizens lived abroad in 2022… Some 2.8 million of those were 18 years or older and eligible to vote in their former states… The Trump campaign is hoping the proposal will appeal to many of those voters.
I’ll be the first to admit that Trump almost certainly is engaged in election-year pandering.
But unlike some of his other vote-buying initiatives (such as no taxes on tips or overtime), his proposal to get rid of worldwide taxation is very good policy.
The flat tax, for instance, gets rid of worldwide taxation and replaces it with territorial taxation.
And many experts have written in favor of making this shift. Here are some excerpts from a recent column by Kristian Fors for the Independent Institute.
The American tax-net extends far beyond the country’s borders and applies to Americans who are living abroad, even those who have not been in the United States for decades. The United States is one of only two countries in the entire world with a global taxation policy, the other being the East African country, Eritrea. Most countries operate on a residency-based taxation system, meaning that people owe taxes to the country where they physically reside. …For many Americans living abroad, this means that their American citizenship is more of a liability than an asset. According to Forbes, from 2005 to 2009, less than 2,500 Americans gave up their citizenship, whereas from 2010 to 2020, the number was a staggering 36,840. …Even former British Prime Minister Boris Johnson gave up his US citizenship in 2016, stating that it was outrageous to tax American citizens “everywhere, no matter what.” A 2024 survey by Greenback Expat Tax Services reveals that nearly 1 in 3 American expats plan to renounce their US citizenship.
Michael Rubin of the American Enterprise Institute wrote about this issue a few years ago, hoping that President Biden might be good on the issue.
Biden fancies himself as a globalist, but he now presides over a country whose taxation system punishes people who embrace the globalized economy. While most countries tax income earned in that country, the United States taxes income based on the citizenship of those earning money, regardless of whether or not they live in the U.S. …Not only is citizenship-based taxation unfair, subjecting Americans abroad to double taxation, …it also exposes expatriate Americans to onerous regulations. …The frustrating thing for almost every person caught in the expatriate tax mess is that few people, if anyone, defend the current system. …It is not just an issue of fairness and revenue. …It is time to stop punishing Americans abroad. There literally is nothing to lose and everything to gain by switching to residency-based taxation.
Needless to say, Biden was not good on that issue.
Now let’s travel back in time to 2018, when Kurt Couchman addressed the problem for National Review.
Americans who live and work around the world face crushing burdens from U.S. tax laws. …The December 2017 Tax Cuts and Jobs Act replaced an anti-competitive global system with pro-growth territorial taxation for businesses. Companies now pay income taxes where they produce, not where they’re based. This smart move leveled the playing field between U.S.-headquartered firms and their foreign competitors. Individual Americans should also pay taxes based on residence, rather than citizenship. …This is easy to fix. …Even if more Americans were to seek their livelihoods abroad, the increased economic activity would more than offset any lost revenue. …Of course, the main idea is to remove foolish barriers to flourishing, not to fixate on filling government coffers. …Adopting territorial taxation for individual Americans is good policy.
Last but not least, we have another column from 2018.
Writing for the Foundation for Economic Education, Ross Marchand explained why territorial taxation is the way to go. Here are some excerpts.
Under American law, citizens working abroad must report their income to the Internal Revenue Service (IRS) and pay their “fair share” to Uncle Sam in addition to host country government levies. This global assertion of US taxation power puts America in league with Eritrea as one of the only countries to subject citizens to taxation regardless of location. Moving back to the system of territorial taxation for individuals would be fair and would stem the flow of American citizens renouncing their citizenships. …the US system of global individual taxation creates undue burdens for individuals seeking to make a living abroad. …Tax compliance rules drive more than 5,000 Americans each year to renounce their citizenship, a figure that usually increases each year. …By nixing an absurd and cumbersome system, policymakers can restore fairness and decency for citizens everywhere.
There are many other articles I could cite, but I’ll simply close with something for wonky readers.
Back in 2006, the Center for Freedom and Prosperity did a report on America’s unfair system of worldwide taxation and included this table looking at some of the research that existed at the time.
I worry about public policy in the United States. It’s gotten worse in recent decades and I worry it will get worse in the future.
But there are not many better alternatives. A few small countries allow more economic liberty, such as Singapore and Switzerland, but most of the world is suffering from more onerous versions of statism.
And that matters because some people argue that the United States should be more like Europe. Or they seem to think the Chinese economic model is superior.
Today’s column will tell people to be careful what they wish for.
Here’s some World Bank data on per-capita economic output (gross domestic product, or GDP) in the United States, the European Union, and China.
Suffice to say, it’s not mere boosterism or misplaced patriotism to say that the United States (with 2023 per-capita GDP of $65K) has the economic system producing the best results.
Nearly twice as high as the average for the European Union ($34K) and more than five times higher than China ($12K).
By the way, let’s add two caveats to the discussion.
First, per-capita GDP is correlated with other measures, such as per-capita income, but it’s not a perfect match. That’s why I often cite (as I did just two days ago) data on “average individual consumption. Unfortunately, that data is only available for member states of the OECD.
Second, it’s perfectly fair to point out that average economic output in the European Union is suppressed because many member countries from Eastern Europe are still trying to catch up after decades of communist enslavement.
With regards to that second caveat, here are the World Bank’s per-capita GDP numbers for the “G-7” countries of the United States, Canada, Germany, France, Italy, Japan, and the United Kingdom. In other words, including the four biggest economies of Western Europe.
Still a huge lead for the United States, $18K higher than second-place United Kingdom.
The numbers for Italy are especially depressing. Basically no growth for the entire 21st century.
Since I’m sharing lots of data, I’ll also include the World Bank’s chart for the “G-8”, which is the term used when Russia was part of the club.
As you can see, Putin’s unfortunate subjects are even worse off than China.
The lesson from these last two charts is that there are plenty of nations that the United States should not copy.
What about the nations that are positive role models?
Well, here’s the World Bank chart on per-capita GDP for the United States, Singapore, and Switzerland.
I’m also a big fan of Switzerland (see here and here), though this is a case where there is a big difference between the per-capita GDP numbers and the data on average individual consumption. Switzerland is a big success by world standards, but it does not a have a big advantage over the United States.
P.S. For wonky readers who want to learn about quirks in GDP data, click here.
According to a new study from the Paragon Institute and the Committee to Unleash Prosperity, Obamacare has been a failure. The study, co-authored by Brian Blase, Casey Mulligan, and Phil Kerpen, lists the promises and results.
James Capretta of the American Enterprise Institute also looked at what Obamacare has meant.
Here are some excerpts from his article for the Dispatch. He starts by reminding readers what was in the law.
In short, after 14 years, the law that was a signature initiative of President Obama has a mixed record… While the ACA is a sprawling measure with scores of disparate provisions addressing the nation’s vast health system, its core changes were relatively few. Perhaps most notably, the law pushed states to expand their Medicaid programs… To date, 40 states plus the District of Columbia have expanded Medicaid. Among the 10 states still holding out are Texas, Florida, and Georgia. …the ACA made it much easier for less-healthy Americans to secure and retain insurance by outlawing premium adjustments based on health status. …These changes lowered premiums for people with pre-existing conditions and raised them for everyone else. …the ACA created a new premium and cost-sharing subsidy system.
He then reviews the results.
Most Americans did not benefit from the Medicaid expansion or the new premium subsidies because they were already enrolled in coverage… The ACA has increased the percentage of the U.S. population enrolled in health insurance. …Those with budgetary concerns about the ACA were right that the spending was near certain to occur (and likely would be expande) and that the offsets were on much shakier political ground. Since 2010, many provisions in the original ACA that would have imposed more budgetary discipline have been repealed. Congress also increased the generosity of the premium and cost-sharing subsidies and made millions of additional households eligible for assistance. These changes point clearly toward higher long-term budgetary costs.
And he has a very depressing – but sadly accurate – conclusion.
Heading into the 2024 election, …the ACA will largely look similar regardless of who wins. …On the Republican side, there is no prevailing theory of enduring cost control. Many in the party say they favor less regulation and a “free market,” but they have little appetite for actually moving in a market-oriented direction.
My two cents is that Obamacare was bad legislation, but the U.S. already had a system that was messed up by government.
The bottom line is that we need to move health care in the “market-oriented direction” mentioned by Mr. Capretta, even if neither Republicans nor Democrats are interested in doing the right thing.
Needless to say, this is not good news for European households.
But that’s just part of the bad news. You also have to consider that Europeans are much less likely to earn as much money as their American counterparts.
There’s an enormous gap between the U.S. and E.U. when looking at per-capita GDP. But GDP doesn’t directly translate into living standards, so let’s look at another chart from Adam’s paper.
Here’s a comparison of per-capita consumption (using the same AIC data I’ve shared in 2012, 2014, 2017, 2019, and 2022). Only the tiny tax haven of Luxembourg is close to the United States.
By the way, I don’t blame Eastern European nations for being way behind the United States. They still have to catch up after suffering from communist enslavement (though some of them are doing a much better job than others).
But I’m digressing. The main lesson to be learned from today’s column is that America should not become more like Europe. That’s a recipe for earning less income and paying higher taxes. I hope Trump and Harris are paying attention.
During the 2012 election cycle, I took a quiz that said Ron Paul was the candidate closest to my views.
During the 2016 election cycle, I took another quiz that said Rand Paul was my ideal candidate.
I didn’t bother doing a quiz in 2020, but I took one earlier this year that assessed my ideology rather than my affinity for a candidate.
But I wasn’t happy with that quiz since it said I was a “traditional conservative.”
So I was interested when I saw that the U.K.-based Telegraph has a quiz that purports to tell you which political party is closest to your views.
The quiz is divided into five issue categories and here’s how the Telegraph‘s readers have voted as of this morning.
Needless to say, this is not a scientific poll.
The Telegraph is a right-leaning publication, so that will skew the results. And presumably most respondents are British rather than American, so the results almost surely tell us nothing about what may happen in next month’s elections.
But at least the quiz correctly identifies my philosophical orientation.
So congratulations to me.
P.S. Here’s a sampling of how I’ve been labeled in other tests and quizzes.
When I talk to folks on the left, I tell them that even Paul Krugman admits there is a revenue-maximizing tax rate and that revenues will fall if the rate goes above that level.
When I talk to folks on the right, I tell them about the revenue-maximizing tax rate and remind them that tax revenues will fall if the rate drops below that level.
All this is common sense. When giving lectures about the Laffer Curve, I often begin by asking the audience what would happen if a pizza restaurant doubled its prices? Would revenues double?
Almost everyone correctly says no. They instinctively understand that most customers will go to other restaurants or eat at home.
I then ask what would happen if politicians doubled tax rates? Would tax revenues double?
Once again, almost everyone correctly says no. They instinctively understand that many taxpayers will change their behavior in ways that would limit the amount of new revenue being collected (as confirmed by a survey of certified public accountants who specialize in taxes).
It’s reasonable to think revenues will climb if there’s a big increase in tax rates, but the government obviously won’t collect twice as much money.
I call this the “prudent understanding of the Laffer Curve” and this is Part III in my series (feel free to peruse Part I and Part II).
I’m addressing this issue today because of a column just published by Bloomberg. Authored by Rick Pearlstein, it portrays the Laffer Curve and supply-side economics as a “fairy tale.” Here are some excerpts.
Donald Trump’s…statement that after he signed the Tax Cuts and Jobs Act into law in 2017, the federal government “took in more revenues the following year than we did when the tax rate was much higher.” …Trump’s bunkum repeated an article of right-wing faith: Federal tax cuts “pay for themselves,”… The story starts in the 1970s with…“supply-side theory,”… Arthur Laffer—a real-life economist who attached himself to the project after inception—claimed the whole thing could be distilled into a single chart. …All it took was fixing tax rates at precisely the correct point—the apex of the so-called Laffer curve. …by the end of Reagan’s presidency…Republicans…had locked themselves into thinking that tax cuts did result in higher government revenue. …just this September, Trump said that with the even more ambitious tax cuts he’s promising—an assortment that includes everything from further reductions to the rates on corporate income to special exemptions for tipped workers and senior citizens—“I look forward to having no deficits within a fairly short period of time.” Being on the supply side means never having to say you’re sorry.
Is Pearlstein correct that many Republicans overstate and exaggerate? Of course.
But does that mean that the core insights of supply-side theory are wrong? Of course not.
For readers who want to get into the details, this column from 2014 debunked a similar straw-man attack on the Laffer Curve.
What happened with rich people in the 1980s is an (admittedly rare) example of lower tax rates producing more revenue.
I’m citing this data not to claim that other tax cuts are self-financing, but instead to provide some evidence that is indisputable even to folks on the left. Suffice to say I’ve been sharing this data for decades and I’ve yet to have anyone provide an alternative explanation for why the rich dramatically increases their tax payments.
P.S. Our friends on the left sometimes have bumper stickers that say “Think globally, act locally.” With that in mind, here are six city-specific examples (here, here, here, here, here, and here) of the Laffer Curve.
Unfortunately, it is likely that the next four years will be just as bad as the past eight years. That’s because both Donald Trump and Kamala Harris are big spenders.
Not only are they unwilling to deal with the looming entitlement crisis, they want to make a bad situation even worse with additional schemes to expand the burden of government.
The 2024 fiscal year just ended in Washington and federal spending reached a record of more than $6.8 trillion. That’s nearly twice as much as Washington spent just 10 years earlier, a staggering expansion in the burden of government. Some fiscal restraint is desperately needed, but that will not happen anytime soon. Both major presidential candidates are proposing to spend more money… Donald Trump wants about $1 trillion more spending over the next 10 years and…Kamala Harris wants about $4 trillion of additional spending. …all of this new spending is in addition to the spending increases that already are part of the “baseline”. To be more specific, the Congressional Budget Office estimates that the burden of federal spending will climb to more than $10.3 trillion by 2034 if government is left on autopilot. …Responsible politicians would be proposing to reform entitlements as part of an agenda of spending restraint. But responsible is not a word to describe either Trump or Harris.
I then make two additional points.
First, the new spending would be bad, regardless of whether it is paid for with taxes, borrowing, or money printing.
All of these spending increases (by both candidates) would be bad news for the American economy, regardless of whether they are financed by higher taxes, more borrowing, or money printing. …The bottom line is that the United States needs another Ronald Reagan. Or, to be bipartisan, another Bill Clinton. Both of those presidents did a decent job of limiting spending growth.
By the way, the data in my Telegraph column came from a new report by the Committee for a Responsible Federal Budget.
That report focused on how the plans of both candidates would produce more debt.
About two weeks ago, I shared a new study that warned about potential fiscal crises in developed nations. The study specifically warned about “sustainable debt limits” in the United States, Italy, France, the United Kingdom, and Canada.
Using a different methodology, let’s now look at a chart that suggests which European nations might be most likely to face a fiscal crisis.
The horizontal axis measures the existing debt burden, so it’s not good to be on the right side of the chart. And it’s also not good to be toward the top of the chart since that’s a sign of systemic vulnerability according to the “GFN Financeability Index.”
Looking at individual nations, Italy (ITA) and Greece (GRC) have the highest debt levels, followed by France (FRA), the United Kingdom (GBR), and Belgium (BEL), while Iceland (ISL), Romania (ROU), and Albania (ALB) are perceived to have vulnerability.
The above chart comes from a new report from the International Monetary Fund.
Here are some of its conclusions.
The challenging outlook for public debt and financing in most European countries calls for decisive economic policies that reinforce fiscal sustainability while preserving long-term growth. The probability of debt not stabilizing five years out has increased in most euro area and emerging European countries, mainly driven by higher primary deficits. In the medium term, the main risks are insufficient primary balance adjustment to stabilize debt and lower-than-expected growth. Sustained growth is expected to become a main driver for debt reduction in most countries, while risks to growth are tilted to the downside. Moreover, financing needs are expected to remain above pre-pandemic averages due to elevated public debt levels in most European economies. …as market conditions normalize, sovereign bond holders will shift away from central banks, and domestic and global financial market factors will be reflected more in the risk premia, likely increasing the interest costs for more vulnerable countries. Carefully-designed medium-term consolidation is key to address debt sustainability risks while supporting growth. Some countries need to phase out untargeted fiscal support more quickly, prioritize spending, and improve its efficiency, while others may need additional revenue-enhancing measures. Growth-enhancing reforms will be especially critical in high-debt countries. In EU countries… The need for fiscal reforms across Europe is even more pressing as spending pressures are expected to increase significantly and reforms can take time to yield results. Some spending pressures, like defense and climate, are more immediate, while others, like pension and health, are expected to rise over time.
But instead the IMF report promotes “additional revenue-enhancing measures.” So typical, so wrong.
P.S. Ironically, IMF economists have repeatedly found that spending caps are the only fiscal rule with a good track record (see here, here, and here). Too bad the political hacks in charge of the IMF are unfamiliar with this research. Or, more likely, they simply don’t care since their main goal is keeping their lucrative and tax-free jobs. And that means not pushing good policies, since that will upset the politicians in places such as Washington, Berlin, London, and Paris (i.e., the ones who ultimately decide who is in charge of the IMF).
The debate is over the shape of the curve. To be more specific, most people argue about the location of the revenue-maximizing point. Is it when the top tax rate is 30 percent? 70 percent? Or where?
But I often try to convince well-meaning leftists that it’s definitely a bad idea to set tax rates so high that governments actually collect less revenue.
That’s not a compelling argument for the leftists who are motivated by spite.
But it does work for others and we’re going to cross the Atlantic Ocean today and look a real-world example involving potential tax increases on “carried interest” and “non-doms.” Here are some excerpts from an article in the U.K.-based Times.
Keir Starmer said in Labour’s manifesto that he would halt arrangements where money made in private equity deals is taxed as a capital gain at 28 per cent rather than at the additional — and highest — 45p income tax rate. Labour said it could raise £560 million for public services by changing the tax system for what is known as “carried interest”, a share of profits from a private equity fund. …The Times has been told that internal Treasury analysis found that the policy could have a “net cost to the exchequer” because wealthy individuals could choose to leave the UK rather than pay the money and deter investment. The cost could rise to as much as £350 million a year after five years. …A government source said: “We are absolutely in the revenue raising maximising space rather than doing things for ideological reasons.” …Rachel Reeves, the chancellor, is also reassessing a key manifesto commitment to crack down on non-dom perks after being warned that her plans might not raise any money. …Andy Haldane, a former chief economist at the Bank of England, had questioned the plan’s effectiveness. “Is this really garnering us any extra tax revenue? …Does that make it more or less likely people will park their money, set up businesses here and therefore generate growth?”
Congratulations to the unnamed bureaucrats who conducted the internal Treasury analysis. I very much doubt that they have any libertarian inclinations, but at least they recognize that taxes impact behavior. Especially for people with a lot of control over the timing, level, and composition of their income.
Maybe they learned from prior experiences (see here, here, and here) that tax increases can backfire?
P.S. If Kamala Harris wins next month, hopefully some of her crazy ideas will be derailed by similarly sensible people in the U.S. Treasury Department.
I’m motivated to write on this issue today because of a very strange column by David Brooks in the New York Times.
He basically acknowledges that industrial policy has a track record of failure, but he somehow hopes that things will be different in the future.
A new bipartisan we-need-to-rebuild-manufacturing mantra is taking hold. …Joe Biden has…been an industrial policy president. He’s tried to use hundreds of billions of dollars to help America build things — through big infrastructure projects and in factories. …The government chooses key sectors that will spur economic growth… The government supports those sectors with direct subsidies, tax credits, trade protections and other measures. …Will it contribute to social cohesion and an American economic renaissance, or just become a sinkhole of debt-funded spending that will drag us to stagnation? …I have no philosophic objections to aggressive government efforts to reshape the American economy. …But I wasn’t born yesterday. Industrial policy has been around for a while, and it’s often been a miserable failure. …If I were an economist I might be wary, given industrial policy’s mostly unsuccessful record. But I’m a journalist… So, at the end of the day, I agree with those who say the question is not whether we do industrial policy, but how.
Well, looks let at two recent examples of “how” Washington does it.
The Wall Street Journal has a new editorial about the Biden-Harris initiative to subsidize and promote broadband access. At the risk of understatement, it’s been a disaster.
…consider the “internet for all” plan that President Biden tapped Kamala Harris to lead. Fiasco is the word for it. The 2021 infrastructure law included $42.5 billion for states to expand broadband to “unserved,” mostly rural, communities. Three years later, ground hasn’t been broken on a single project. …Blame the Administration’s political regulations. States must submit plans to the Commerce Department about how they’ll use the funds and their bidding process for providers. Commerce has piled on mandates that are nowhere in the law and has rejected state plans that don’t advance progressive goals. …Commerce hoped to spread the cash to small rural cooperatives, but the main beneficiaries will be large providers that can better manage the regulatory burden. Bigger businesses always win from bigger government. …The Administration has also stipulated hiring preferences for “underrepresented” groups, including “aging individuals,” prisoners, racial, religious and ethnic minorities, “Indigenous and Native American persons,” “LGBTQI+ persons,” and “persons otherwise adversely affected by persistent poverty or inequality.” …The broadband non-rollout is a classic of modern progressive government. Authorize money for a cause that private industry could do better, but then botch the execution with identity politics and union favoritism.
And here are some excerpts from an Autoweek report back in May about the Biden-Harris plan to subsidize the use of electric cars.
The Biden Administration’s $7.5 billion effort to jump-start the electric-vehicle charging landscape is moving very, very slowly. Now more than two years after the program was signed into law in late 2021, only eight chargers have been put in place. …Americans remain worried about range anxiety and finding a place to charge, and the federal funding hasn’t yet been a big factor in changing that—or reversing the current slump in EV sales. …Alexander Laska, deputy director for transportation and innovation in the Climate and Energy Program at the Third Way think tank, puts a positive spin on the pace of charger installation, attributing it in part to complicated regulations on the federal and state level. The money, Laska says, “comes with dozens of rules and requirements around everything from reliability to interoperability, to where stations can be located, to what certifications the workers installing the chargers need to have.”
Wow. If that’s the “positive spin,” no wonder the proponents of intervention are doing such a bad job.
But, to be fair, at least eight new chargers now exist, which is better than the number (zero!) of new broadband customers that are being served.
In neither case, though, is there even the slightest scent of success. Washington is squandering tens of billions of dollars in exchange for almost nothing.
Our first item notes that one failure under socialist economics can sometimes be offset by another failure.
Our next item could have been used in a stand-alone column as counter-tweet of the year.
I guess @clarasorrenti believes in killing with love.
Since we’re on the topic of communist butchery, that’s a perfect segue to our third item.
Our next example of satire looks at how things designed for one group of people are sometimes patronized by another group of people.
And if you wonder why a member of the proletariat (a blue-collar worker) isn’t enamored with communism, our final bit of satire provides the answer.
This is a good follow-up from yesterday’s column, which explained that some folks on the left hate rich people so much that they’re willing to hurt poor people so long as rich people are hurt even more.
My leftist friends will say that can’t be true because inequality increased during those decades.
I respond by pointing out that average incomes dramatically increased during those 30 years and there was a huge reduction in poverty.
The lesson to be learned (echoing my Eighth Theorem of Government) is that nobody should care if some people get richer faster than others get richer. The goal should be better policy so everyone has the chance to rise as far and as fast as possible, given their talents, abilities, and willingness to work hard.
Today, let’s look at American history to see the same principle at work.
Here’s a chart from Professor Vincent Geloso looking at data from 1870 to 1910. It shows what happened to inequality in various nations on the vertical axis (as measured by income share of the top 1 percent) and average income (as measured by per-capita income for the bottom 90 percent).
The first thing to notice is that inequality increased in every nation and per-capita income increased in every country.
But the data from the United States is particularly instructive. Here’s some of what Geloso shared in a tweet.
America had a very mild increase in inequality between 1870 and 1910… However, its also in America that the living standard of the bottom 90% surged the most. By 1910, their living standard had increased by a factor of 2.37. Only Canada got close to that increase and it was still immensely behind America. …only America went fast and hard at improving the living standards of the bottom 90%. By 1910, America not only had confirmed its historical position as the “Best Poor Man’s Country”, it had widened the lead. No country ever before witnessed such a level of living standards for the poor as witnessed in America.
Given this information (as well as the data about China), the challenge for my left-leaning friends who fixate on inequality is deciding which of these two options they prefer.
Do they hate the rich so much that they are willing to reduce living standards for lower-income people so long as upper-income people suffer an even greater reduction?
Do they love the poor so much that they are willing to let rich people get richer (even disproportionately richer) so long as poor people get to enjoy higher living standards?
Sadly, many folks on the left pick option #1. They hate the rich more than they care about the poor.
One of Margaret Thatcher’s famous observations was that socialist governments fail because they inevitably run out of other people’s money.
If I’m in a pedantic mood, I will nit-pick that statement by pointing out that she should have said redistributionist governments.
For today’s column, though, let’s not get bogged down in a debate over how socialism is defined.
Instead, I want to share a very depressing set of maps from a report by the Economic Innovation Group. As you can see, the United States went from being a mostly green nation in 1970 to being a mostly tan nation in 2022.
And since green signifies self-reliance (government transfers representing less than 15 percent of personal income) and tan suggests dependency (transfers equaling more than 25 percent of personal income), this is a very worrisome trend.
I don’t want societal capital being eroded as more and more people think it’s okay to be wards of the state.
And when you combine that with demographic change (more elderly recipients of government goodies and fewer young people to pay the bills), that is a recipe for an ever-expanding burden of government. In America, Japan, and Europe.
When people (correctly) complain about Washington’s inefficiency and incompetence, I tell them that one of the problems is that the federal government is simply too big.
Simply stated, when politicians expand the size and scope of government, that increases the likelihood that there won’t be energy, expertise, or resources to address problems where government should play a role.
Let’s expand on that argument. The U.K.-based Economist has an article that summarizes the insight of the 7th Theorem. Here are some excerpts.
You may sense that governments are not as competent as they once were. …A flagship plan to expand access to fast broadband for rural Americans has so far helped precisely no one. Britain’s National Health Service soaks up ever more money, and provides ever worse care. …You may also have noticed that governments are bigger than they once were. Whereas in 1960 state spending across the rich world was equal to 30% of GDP, now it is above 40%. …All of which raises a paradox: if governments are so big, why are they so ineffective? The answer is that they have turned into what can be called “Lumbering Leviathans”. …governments have overseen an enormous expansion in spending on entitlements. …On average across the OECD, social expenditure in countries with available data rose from 14% of GDP in 1980 to 21% in 2022. …Leviathans may not remain lumbering for ever. Running large deficits in order to fund transfer payments will, eventually, become too expensive—as countries such as Greece and Italy discovered in the 2010s.
I have two comments about the article.
First, I was initially tempted to simply write a column with a snarky title such as “Most Accurate Headline, Ever.”
Second, the article raises an important issue, but the Economist (as you might suspect) got some things wrong. It wants readers to think that the problem is that “redistribution is crowding out spending on other functions of government” and that politicians “fail to raise revenues.”
Since tax revenues are at or near record highs in almost all nations, there’s no need to waste any space on that issue.
With regards to the “crowding out” assertion, the Economist uses this chart of US data to claim that non-entitlement spending “has crashed” from 25 percent of GDP to 15 percent of GDP.
Moreover, the article fails to point out that inflation-adjusted non-entitlement spending has increased significantly.
The Office of Management and Budget has detailed data going back to 1962 for domestic discretionary spending. This is the type of spending (not Social Security or other entitlements) that has been slashed according to the article.
But here’s what actually happened. As you can see, outlays for this type of spending have jumped by more than 400 percent. And it would be an even bigger jump if we had data going back to the early 1950s.
If this is crashing, I hope my household budget crashes to the same degree.
If you want to rigorously assess a nation’s economic outlook, investigate how it is scored based on the dozens of variables included in Economic Freedom of the World and the Index of Economic Freedom. And also look at whether its overall score is trending in the right direction or wrong direction.
But if you want a shortcut method, simply look at whether successful people are trying to leave the country or trying to enter the country.
On that basis, it is difficult to be optimistic about India. It is one of the world’s worst countries, based on migration trends for millionaires.
Earlier this month, Sadanand Dhume wrote a column for the Wall Street Journal about this issue. Here are some excerpts.
For the past century, dating to the final decades of colonial rule, Indian politics and public discourse have been dominated by leftists quick to demonize wealth. Since the demise of the Swatantra Party in 1974 no Indian party has espoused economic liberalism. The economic reforms of the 1990s occurred because India was broke, not because its political class suddenly embraced free enterprise. Because nonpoor Indians have almost no ability to affect electoral outcomes, they have largely “seceded” from the public sphere… Many of those who can have left: According to Henley & Partners, a firm that helps the wealthy acquire foreign residency, 7,500 millionaires exited India in 2022. Even today, no Indian politician can bring himself to lament that a tiny part of the population shoulders a disproportionate amount of the tax burden and receives few government services in return.
While I always like to condemn politicians, voters deserve a good chunk of the blame when looking at India.
To understand this point, here are some excerpts from a 2019 column in the New York Times by Ruchir Sharma.
Like many global investors, I am leery of big government. …this view…came to me growing up in India, watching lives ruined by the broken state… When I was an idealistic 20-something in the late 1990s, my hope was that India would one day elect a free-market reformer like Ronald Reagan, who would begin to shrink the dysfunctional bureaucracy and free the economy to grow faster. Looking back, I see how clueless I was. In Delhi every politician is wedded to big government, and there is no constituency for free-market reform. I kept hoping for Reagan, and India kept electing Bernie Sanders. Prime Minister Narendra Modi is no exception. …India’s political DNA is fundamentally socialist. …every Indian party is on the left, by Western standards. The Congress traces its economic ideology to socialist thinkers, but the B.J.P.’s thinking is grounded in Swadeshi, a left-wing economic nationalism.
This is very depressing, but it confirms what I felt as a result of my 2018 visit. I gave a few speeches and met with lots of people and I was left with the feeling that almost nobody wants free markets.
P.P.S. India shows why the “war against cash” is a dumb idea.
P.P.P.S. India has a member in the Bureaucrat Hall of Fame.
P.P.P.P.S. One tiny sliver of good news is that there are a lot of private schools in India. But the bad news is that this is a result of dysfunction in government schools rather than because of school choice. Moreover, the government is trying to squash the private schools, presumably because they help expose the failure of the government schools.
Since I’m a numbers wonk, I think the most powerful evidence for the failure of Cuban socialism is comparing that nation’s growth (or lack thereof) to what’s happened in Taiwan and (pre-crackdown) Hong Kong.
They all had similar levels of economic development 60-70 years ago.
While decades of data tell a compelling story, it also is instructive to examine how ordinary people suffer because of Cuba’s socialist system.
Here are some depressing excerpts from a recent Reuters report by Mario Fuentes and Alien Fernandez.
Cuba’s communist-run government on Monday slashed by a quarter the weight of its subsidized ration of daily bread, the latest shortage to strain a decades-old subsidies scheme created by the late Fidel Castro. The bread…will be reduced from 80 grams to 60 grams (2.1 oz), or approximately the weight of an average cookie or a small bar of soap. …The Caribbean island nation is suffering from extreme shortages of food, fuel and medicine, shortfalls that have primed a record-breaking exodus of its citizens to the nearby United States. …Cuba earlier this year sought help from the World Food Programme to guarantee the supply of subsidized powdered milk for children, another key staple of the Cuban ration book that has recently grown scarce. Beyond the few remaining centrally planned economies like Cuba’s and North Korea’s, rationing is typically only used during war-time, natural disasters or specific contingencies.
Cookie-sized bread rations? If nothing else, the Cuban system probably limits obesity.
Well, Cuba’s socialists are doing the same thing to that nation’s once-iconic sugar industry. Here are some excerpts from a BBCstory by Will Grant.
For hundreds of years, sugar was the mainstay of the Cuban economy. It was not just the island’s main export but also the cornerstone of another national industry, rum. …Today, though, …the sugar industry as broken and depressed as it is now – not even when the Soviet Union’s lucrative sugar quotas dried up after the Cold War. …”There’s not enough trucks and the fuel shortages mean sometimes several days pass before we can work,” says Miguel, waiting in a tiny patch of shade for the Soviet-era lorries to arrive. …Last season, Cuba’s production fell to just 350,000 tonnes of raw sugar, an all-time low for the country, and well below the 1.3 million tonnes recorded in 2019. …Cuba now imports sugar to meet domestic demand – once unthinkable, and a far cry from the glory years when Cuban sugar was the envy of the Caribbean and exported around the world.
Cuba importing sugar?!?
Reminds me of Milton Friedman’s sarcastic quote about government and the Sahara Desert.
Only Cuba has turned satire into reality.
Let’s close by debunking (again) the silly notion that Cuba has an admirable healthcare system. Daniel Raisbeck and Jim Epstein wrote about the system for Reason. Here are some highlights.
“If there’s one thing they do right in Cuba, it’s health care,” said Michael Moore in a 2007 interview. “Cuba has the best health care system in the entire area,” according to Angela Davis… It’s a testament to the effectiveness of the Castro regime’s propaganda apparatus that this myth, so deeply at odds with reality, has persisted for so long. “The Cuban health care system is destroyed,” Rotceh Rios Molina, a Cuban doctor who escaped the country’s medical mission while stationed in Mexico… “People are dying in the hallways,” says José Angel Sánchez, another Cuban doctor who defected from the medical mission in Venezuela… Clinics lack the most routine supplies, from antibiotics to oxygen and even running water, and their hallways are often occupied by ailing patients because there aren’t enough doctors to treat their most basic needs. Cuban hospitals are unsanitary and decrepit. It’s exactly what you’d expect in a country impoverished by communism.
That being said, it’s beyond disgusting when politicians misuse taxpayer money to advance themselves.
I have a personal example. Now that I’m over 65 and mooching off the taxpayers, I get occasional e-mails from Medicare. The one that just arrived shows how the Biden-Harris White House is misappropriating our tax dollars to engage in naked politics.
But I would settle for a very neutral email about the “open enrollment process.”
However, what I received was a message lobbying in favor of Kamala Harris (“Vice President Harris cast the tie-breaking vote” and “Vice President Harris and I believe that health care should be a right, not a privilege”).
By the way, there’s nothing partisan about my argument.
Yes, the current White House is engaged in sleazy self-promotion using the machinery of government. But Trump did the same thing back in 2020 by adding his name to the pandemic “stimulus” checks.
There is one difference between these two examples.
The media made a stink about Trump misusing government to promote himself. By contrast, I don’t expect to see any stories about the Biden-Harris White House doing the same thing.
Simply stated, governments get in trouble because politicians spend too much money. To be more specific, they don’t follow my Golden Rule.
And that’s exactly what happened in Colombia.
In theory, there might be exceptions, but I’m not aware of any country that has ever faced a fiscal crisis when it followed a policy of spending restraint.
But then I read about France’s budgetary problems and I wondered if I found that theoretical exception.
Here are some excerpts from a report in the New York Times by Liz Alderman. From her report, it sounds like France is in a fiscal ditch because of big tax cuts.
Faced with a rapid deterioration in the nation’s finances, Mr. Macron’s recently appointed prime minister, Michel Barnier, is opening the door to higher taxes on businesses and the rich, in a last-ditch bid to plug France’s widening budget deficit… Borrowing costs for France, which has Europe’s second-largest economy after Germany’s, soared Tuesday to their highest level since the 2008 financial crisis, as investors increased the premium they demand to hold French debt. …How did France reach this critical point? …Mr. Macron has made it a hallmark of his presidency to burnish France’s reputation as a place to do business. He cut taxes on companies and curbed a national wealth tax… Macron’s tax policies included lowering the official corporate tax rate to 25 percent from 33 percent, and reducing taxes for manufacturers and industry… And he introduced a flat tax of 30 percent on investment income. …A study by the Institute Montaigne, an independent French think tank, found that the combined measures cost the French Treasury nearly €15 billion in lost income. …Mr. Barnier needs to find an eye-popping €110 billion in savings over the next several years to bring France’s ballooning debt and deficit back in line with European Union rules. …Mr. Barnier has…not divulged specific tax increases. …Among the avenues being explored are increasing the flat tax to as much as 35 percent… Also under consideration is a temporary tax on “superprofits” earned by corporations… And some within Mr. Barnier’s camp have floated the idea of raising the corporate tax closer to where it was before Mr. Macron cut it.
Sounds like Macron has done some good things. And he has done some good things with regards to tax policy.
But notice that the article contains no analysis of what’s happened to the burden of government spending.
That made me suspicious, so I went to the IMF’s massive database so I could see what actually happened.
Lo and behold, we have further confirmation of the 20th Theorem of Government. Whether we’re looking at two decades of data or at what’s happened since Macron took power, we see that the spending burden has grown faster than the economy.
To be fair, the problem of excessive spending growth in France is not as bad as what I found in Colombia. And it’s trivial compared to what I found in Brazil.
But that doesn’t change the fact that France’s problem is too much spending, not inadequate tax revenue. Especially over the long run. As noted in the chart, government spending now consumes 57 percent of France’s economy, up from 53 percent of GDP just 20 years ago.
By the way, the tax burden increased from 49.4 percent of GDP to 52 percent of GDP over that same period, further confirming that France’s problem is on the spending side of the fiscal ledger.
However, an article in May did a very good job of debunking the hate-the-rich mentality. Here are some excerpts.
How, exactly, can one abolish the rich? …that implies something very close to a marginal tax rate of 100%. Such a policy would provoke tax-avoidance on an epic scale. …many rich folk would emigrate. And if governments all adopted similar wealth-banning policies and enforcement was tight, as the authors desire, the effects would be even worse. …Highly productive people—such as surgeons and engineers, never mind word wizards like J.K. Rowling—would have no financial incentive to keep working after that point was passed. …many would be tempted to kick back, relax and deprive the world of their exceptional skills, drive and imagination. Consider, too, the incentives such a system would create for entrepreneurs. You have an idea for a better mousetrap. Under the old system, you might mortgage your house to raise cash to build a mousetrap factory, in the hope of making a fortune. …Even if your mousetrap is so good that the world might reasonably be expected to beat a path to your door, it would be irrational to borrow money to expand production. The financial risks of trying to build a global business fall on you. The rewards go to someone else.
In other words, marginal tax rates matter. As shown in my four-part series (here, here, here, and here), when governments grab larger shares of our income, the inevitable result is less prosperity for people.
In 2018, I shared a study that gave people a way to predict when a country would suffer a fiscal crisis.
I liked the findings because the authors concluded that spending restraint was the best way of staying out of trouble.
Now there’s a new study by Mark Warshawsky and Giorgi Bokhua of the American Enterprise Institute.
Here’s the part that will grab everyone’s attention. It’s a chart showing estimates of the amount of debt developed nations can incur before they hit a tipping point and are vulnerable to a fiscal crisis (for American readers, the United States is highlighted in red).
Here’s some of the authors’ analysis.
Sadly, the United States is among the countries that are running out of “fiscal space.”
Prudent policymakers and worried market participants…want to know…when in the future will the federal government face an economic limit to its issuance of debt. This would be manifest in substantial incrreases in interest rates on is debt, difficulties in marketing bonds, and existing bondholders experiencing losses through runaway inflation or financial restrictions. …Knowing actual figures of net and gross debt in 2022, allows us to gauge how far countries are away from their sustainable debt limits. When looking at net debt, figures indication that most countries have a relatively flexible fiscal space… Gross debt limits give more concerning picture. For example, the United States, Italy, and France have tight sustainable debt limits and modest remaining fiscal space using both historical and projected differentials, while the United Kingdom and Canada have limited fiscal spaces when using projected differentials. …these countries appear to have limited flexibility to accumulate additional debt, particularly if an economic or financial crisis or war were to occur.
Here’s some of the U.S.-specific analysis.
…our model gives a sustainable gross debt limit of 154 percent using OECD interest rate and economic growth projections. Combining long-term projections of net debt…from the CBO…, that sustainable debt limit will be reached in 2034.
Ten years does not give America a lot of time.
The bad news is that both Trump and Harris are big spenders, so the day of reckoning in the study (gross debt reaching 154 percent of GDP) will probably happen before 2034.
The answer is bad public policy. Both Economic Freedom of the World (China ranked #111) and the Index of Economic Freedom (China ranked #151) quantify the nation’s bad policies.
But I have a shortcut way of showing the bad news. When people manage to get rich in China, they often want to escape to countries with better policies and brighter futures.
That’s a proverbial canary in the coal mine.
That’s the bad news. The good news is that the Chinese government knows that changes are needed.
But now we are back to bad news. According to a story in today’s Washington Post by Christian Shepherd and Anna Fifield, the government is proposing more government intervention. Here are some excerpts.
China’s financial authorities unleashed…the most significant stimulus package since the pandemic struck almost five years ago. These measures…include cutting interest rates and supporting the beleaguered property and stock markets… Chinese authorities have been struggling to boost demand and stem a fall in prices amid widespread gloom about the economic outlook. …Recent data has revealed the Chinese economy is slowing faster than expected: Growth in industrial output and retail sales has slowed, while the stock market and investment in real estate took a nosedive. Unemployment is up, and deflation remains an urgent issue.
My two cents is that the so-called stimulus will fail because the Chinese government is trying to keep bubbles inflated.
In other words, the government made mistakes when it created stock and property bubbles, and now it is making mistakes by trying to keep the bubbles from deflating.
China needs more capitalism, not more intervention.
Let’s not look at some other recent articles.
A column in the New York Times last month, authored by Peter Beckley, has more bad news.
China’s boom, as we now know, was unsustainable. It was fueled in large part by years of inefficient stimulus spending at home, which has saddled China with a crushing debt hangover of its own. President Xi Jinping has stifled entrepreneurship, resisted reform and provoked a protectionist response from the United States. Since Mr. Xi took over a decade ago, Chinese economic growth has slowed significantly; some experts believe it is barely growing at all. …China is, of course, not solely responsible for weakness in the global economy, which has been buffeted by a pandemic, wars and trade tensions. But the country is making things worse at a delicate time.
Another article last month confirmed China’s unfortunate trajectory. Here are excerpts from Melissa Lawford’s article in the U.K.-based Telegraph.
Foreign investors have pulled a record £12bn out of China in an economic blow for President Xi Jinping. …It was…a massive swing from the net $10bn pumped into the country during the first three months of the year. …Foreign direct investment in China last turned negative in the autumn of 2023, when investors pulled out $12bn. Chinese companies also invested a record $71bn overseas between April and June, up 80pc year on year. Combined, this meant China suffered a record net outflow of $86bn in direct investment.
Let’s close with an article by Don Boudreaux about the failure of industrial policy.
Written for the American Institute for Economic Research, it includes some discussion of China’s misguided effort to subsidize electric vehicles.
The government in Beijing is keen on picking industrial ‘winners’ for that country, and one such chosen winner in recent years is the electric-vehicle industry. Using a variety of means, Chinese Communist Party officials and mandarins in Beijing have directed substantial resources into EV production… But as matters are developing, this ‘winner’ in China is turning into a loser. …This development is unsurprising. No matter how smart and clever are President Xi and his lieutenants, they cannot work miracles. If the Chinese have no comparative advantage at producing EVs on a scale as large as the one desired by these government officials, diverting resources on this scale into EV production is likely to backfire — as it’s now doing. …It’s impossible for officials in Beijing to know which Chinese industries their EV subsidies are destroying. It’s also impossible for them to know if the advantage that China will gain if and when it gets a comparative advantage at producing EVs will have been worth the cost. Indeed, because the money spent by government officials isn’t their own, and because these officials are not directed in their economic decisions by market prices, it’s almost certain that government-engineered economic outcomes are worse than would be the outcomes generated by freer markets.
By the way, Don’s article also explains that industrial policy in the United States is a big mistake. As a Canadian economist wisely observed, “Governments are not great at picking winners, but losers are great at picking governments.”
But let’s not digress.
Returning to China, I’ll conclude by calling attention to the four-part series I wrote while visiting China in July (see here, here, here, and here).
Even though Trumpies and establishment Republicans don’t like each other, they both have the same reaction when I share my right-of-center Venn Diagram.
They say that the American people would not support a modern-day version of Ronald Reagan. They either explicitly or implicitly believe that Reagan’s libertarianish vision would not attract enough support to win a national election.
I certainly hope that’s not the case, and today I’m going to share some polling data showing that the American people still have views that make them sympathetic to a candidate who believes in limited government and free markets.
We’ll start with these results from a new poll from NBC. It shows capitalism with a +26 favorability rating while socialism has a -37 favorability rating.
These results are especially encouraging since “capitalism” generally does not poll as well as terms like “free market” or “free enterprise.”
And it also may be that the failed policies of the Biden-Harris Administration have led to s shift in favor of economicliberty.
Now let’s look at some polling data from Pew Research about trust in government. It’s not as low as it should be, but only about 20 percent of respondents have any degree of faith in government to do what is right.
We’ll start with fresh polling data showing people have negative views of the federal government.
And polling data from last year show that people also recognize that Washington has too much power.
They didn’t get updated results on this question, either, but it’s nonetheless very encouraging that there are a lot more people who want less spending and lower taxes compared to those who want more spending and higher taxes.
P.S. When I discuss polling data, people sometimes respond by saying that people are inconsistent. They say they want smaller government, but they also say they want various goodies from Washington. I certainly agree that some people lack coherent views, but I also think that this inconsistently can be partially explained by looking at what happens when people are asked if they favor government goodies that they would have to pay for.
P.P.S. Since we started today’s column by asking whether a modern-day Reagan could win the White House, I can’t resist linking to this 2013 poll and this 2021 poll.
But there are exceptions. Sometimes a richer country will grow faster than a poorer country over a significant period of time, and we can learn from these examples. This is why I created the anti-convergence club.
Our latest example is Canada, which has never been as rich as the United States. But what’s remarkable, as shown in this chart, is that the shortfall has expanded over the past five-plus decades.
The chart comes from an article by Trevor Tombe. Here’s some of his analysis.
Canada’s economy has fallen behind its population growth for the fifth straight quarter, with real GDP per capita declining by 0.1 percent in Q2 2024… This downturn becomes even more striking when viewed in comparison to the United States, which continues to see gains. …A longer historical perspective reveals a striking reality: the gap between the Canadian and American economies has now reached its widest point in nearly a century. …Real GDP per capita in the U.S. now stands at approximately $66,300 (in 2015 dollars), compared to Canada’s $44,400. …Let that sink in for a moment. The U.S. is on track to produce nearly 50 percent more per person than Canada will.
In a column for National Review, Dominic Pino cites Tombe’s work and shares additional unflattering comparisons.
Ontario, home of Canada’s business capital of Toronto, would be the fifth-poorest U.S. state if it joined the union today. Ontario’s GDP per capita is $59,700. Only four states — Alabama ($58,800), Arkansas ($57,400), West Virginia ($56,200), and Mississippi ($49,800) — have lower GDPs per capita. Quebec, with a GDP per capita of $54,400, exceeding only Mississippi’s, would be the second-poorest U.S. state. If Nova Scotia ($45,200), New Brunswick ($47,100), or Prince Edward Island ($48,200) joined the U.S., they would each be the poorest U.S. state. …the U.S. in general is pulling away from Canada, just as it is pulling away from Europe, in economic growth.
Let’s look today at two of the worst public policy ideas, proposals that are so economically illiterate that they get support only from very dogmatic leftists.
You can make a strong argument that the worst special tax breaks are the fringe benefits exclusion and the muni-bond exemption, but I have special disdain for the state and local tax deduction.
Before it was curtailed by the 2017 Tax Cut and Jobs Act, that loophole basically gave a huge subsidy to leftist policies in high-tax states. When California and New York imposed ever-higher tax rates, the sting of those bad policies was lessened because taxpayers (especially rich taxpayers) could use those tax payments as a deduction when figuring out their federal tax bills.
In effect, some of the tax burden was being shifted to taxpayers in sensible states, such as Florida and Texas.
That’s bad, but here’s something that may be even worse.
2. Another terrible idea in Washington is to impose price controls on credit card interest rates.
Financial companies take big risks when they give consumers credit cards. When we use those cards, we are using their money and not our money, and the sad reality is that some of us then don’t pay those bills.
To compensate for that inevitable risk, the companies have various ways to make money, such as imposing a small fee on transactions, imposing annual fees, and charging interest on unpaid balance. The net effect is that financial companies wind up with small profit margins.
But what happens if politicians impose arbitrary price controls on interest charges?
The obvious and inevitable response – based on centuries of evidence showing the negative impact of price controls – will be that financial companies are forced to cancel credit cards for people with lower incomes and/or weaker credit histories.
Let’s now close this column with a quiz. Which big-government politician from New York supports both of these awful policy proposals, Donald Trump or Alexandria Ocasio-Cortez?
It’s a trick question because the answer is both of them.
To be fair, you sometimes get good policies from both AOC and Trump. But can you trust either one of them to do the right thing when they embrace some of the worst ideas floating around Washington?
P.S. Sadly, Trump’s embrace of the state and local tax deductions would reverse one of the genuine accomplishments of his presidency.
P.P.S. It goes without saying that Kamala Harris supports both bad tax policy and price controls, so perhaps we are looking at a ménage à trois of statism.
For today’s column, I want to focus on the portion of my presentation dealing with demographics.
I started with this chart from the OECD showing the old-age dependency ratio in member nations. As you can see, Japan currently has the most old people relative to the rest of the population.
Simply stated, the number of old people receiving benefits (government pensions and health care) is very large compared to the number of working-age people paying taxes.
And that brings me to my second chart, which shows the estimated 2075 old-age dependency ratio.
At first glance, these two charts may not look that different, but notice that the vertical axis on the top chart only goes up to 60 while the bottom chart goes up to 100.
So the critical takeaway is that almost every developed country 50 years from now will have a demographic profile that is worse than today’s Japan.
And when they pursue those policies, uncompetitive governments will have even greater incentives to undermine low-tax jurisdictions in hopes of reducing the freedom of people to escape bad policy.
Today, let’s bestow this distinguished honor on another public servant (and give auxiliary membership to several of her colleagues).
Here are some excerpts from a Fox Newsreport about Linda Wilson, a manager in New York City’s Department of Education.
Linda Wilson, the regional manager for the NYC Department of Education’s Queens Students in Temporary Housing, took her two daughters on city-funded excursions while encouraging her colleagues to do the same with their families, according to the SCI report released this month. While some students were brought on these trips, investigators alleged that spots were taken up by the employees’ family members. DOE rules state that employees cannot bring family on trips even if the DOE is reimbursed. Wilson allegedly skirted the rules by “forging permission slips in the names of students,” the report said. …Workers have blamed Wilson for telling staff that they could bring family on these trips, with one employee telling the Post that Wilson instructed them “to lie to investigators.” “She said everyone should stick to the same story that we did not take our children on the trip,” the employee said.
Alas, there is no honor among thieves. Some of Ms. Wilson’s fellow bureaucrats apparently have confessed an exposed her scam.
I’ll close by making a broader point about the benefits of decentralization and federalism. I’m sure that there is both federal funding and state funding of New York City’s Department of Education.
What incentive is there for the bureaucracy to spend that money wisely (or, as we just learned, honestly)? One benefit of raising money locally and spending money locally is that there presumably will be more accountability. At the very least, it reduces the likelihood of me paying for nonsense (though my local government likes squandering money as well).
To this end, the legal system is a particularly important guarantor of economic freedom. In more economically free places, legal institutions protect the person and property of all individuals from the aggressive acts of others and enforce contracts in an even-handed manner. These governments also permit people to access sound money and do not expropriate property through unexpected inflation or deflation. In economically free places, governments refrain from actions like high taxation, barriers to trade, and excessive regulations that restrict personal choice, interfere with voluntary exchange, and limit entry into markets. The EFW index might be thought of as an effort to identify how closely the institutions and policies of a country correspond with the classical liberal ideal of a limited government, where the government protects people and property rights from aggressors but otherwise allows them to make their own economic choices.
International Liberty 