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Largely because of my support for jurisdictional competition, I’m a big fan of federalism.

Simply stated, our liberties are better protected when there’s decentralization since politicians are less like to over-tax and over-spend when they know potential victims of plunder have the option of moving across a border.

Indeed, I cited some academic research back in 2012 which showed that there as less economy-weakening redistribution in nations with genuine federalism (see, for instance, how Vermont politicians were forced to backtrack when they try to impose government-run healthcare).

Now let’s look at some additional scholarly evidence. A study published by the OECD, authored by Hansjörg Blöchliger, Balázs Égert and Kaja Fredriksen, investigates the impact of federalism on outcomes in developed nations.

Here are the key findings from the abstract.

This paper presents empirical research on the potential effects of fiscal decentralisation on a set of outcomes such as GDP, productivity, public investment and school performance. The results can be summarised as follows: decentralisation, as measured by revenue or spending shares, is positively associated with GDP per capita levels. The impact seems to be stronger for revenue decentralisation than for spending decentralisation. Decentralisation is strongly and positively associated with educational outcomes as measured by international student assessments (PISA). While educational functions can be delegated either to sub-central governments (SCG) or to schools, the results suggest that both strategies appear to be equally beneficial for educational performance. Finally, investment in physical and – especially – human capital as a share of general government spending is significantly higher in more decentralised countries.

Here’s some detail from the body of the paper about the pro-growth impact of decentralization (especially when sub-national governments are responsible for raising their own funds).

Across countries, sub-central fiscal power, as measured by revenue or spending shares, is positively associated with economic activity. Doubling sub-central tax or spending shares (e.g. increasing the ratio of sub-central to general government tax revenue from 6 to 12%) is associated with a GDP per capita increase of around 3%. …Revenue decentralisation appears to be more strongly related with income gains than spending decentralisation. This empirical finding may reflect that “true” fiscal autonomy is better captured by the sub-central revenue share, as a large part of sub-central spending may be mandated or regulated by central government. … the estimated relationship never becomes negative and is not hump-shaped, i.e. “more decentralisation always tends to be better”.

The part of “more decentralisation always tends to be better” is a good result.

But it’s also a sad result since the United States has moved in the wrong direction in recent decades.

Though we’re still less centralized than most nations, as you can see from this chart from the OECD study.

Kudos to Canada and Switzerland for leading the world in federalism.

Here are some additional details from the study. I’m especially interested to see that the authors acknowledge how jurisdictional competition helps to explain why nations with federalism perform better.

Decentralised fiscal frameworks can raise TFP through an increase in the efficiency and productivity of the public sector… Public sector productivity is influenced by competition between SCGs and inter-jurisdictional mobility. Most SCGs aim at attracting and retaining mobile production factors, in order to promote investment and economic activity. They can do so by using fiscal policy, among other instruments. Since firms are choosing their location based on where they expect the highest returns on investment, and since returns depend (partly) on public inputs, SCGs have an incentive to raise the productivity of their public sector. SCGs may also try to improve the relationship between taxation and public service levels, by lowering taxes… The more decentralised a country, the stronger these competitive forces could be. Competition and inter-jurisdictional mobility could be weakened by large intergovernmental transfer systems, in particular fiscal equalisation.

As a aside, it’s rather ironic that that the professional economists at the OECD produce rigorous studies (here’s another one) showing the benefits of jurisdictional competition while the political appointees push for anti-growth policies such as tax harmonization.

Let’s close by looking at the study’s estimates of how nations would enjoy more prosperity by shifting in the direction of decentralization.

…an assessment of what a country might gain in terms of higher GDP if it moved to the benchmark of the most decentralised country. To be more specific, the gains were calculated for each federal country if it moved tax decentralisation to the level of Canada, and for each unitary country if it moved tax decentralisation to the level of Sweden (Figure 6). Further decentralisation could potentially be associated with an average increase of GDP of around 1% to 2% for federal countries and 3% to 4% for unitary countries, with values for more centralised countries being larger.

Here’s the accompanying chart.

Since the U.S. still has some federalism, our gain isn’t very large, but nations such as Austria, Belgium, Slovakia, Ireland, Luxembourg, and the United Kingdom could get big boosts.

P.S. I didn’t focus on the findings about better educational outcomes in decentralized nations. But I can’t resist pointing out that this is an additional reason to abolish the Department of Education.

P.P.S. Here’s a video discussing how Switzerland benefits from federalism.

P.P.P.S. And here’s what scholars from the Austrian school of economics wrote about federalism.

We did not get good policy during the economic crisis of the 1930s. Indeed, it’s quite likely that bad decisions by Herbert Hoover and Franklin Roosevelt deepened and lengthened the Great Depression.

Likewise, George Bush and Barack Obama had the wrong responses (the TARP bailout and the faux stimulus) to the economic downturn of 2008-09.

But people in government don’t always make mistakes. If we go back nearly 100 years ago, we find that Warren Harding oversaw a very rapid recovery from the deep recession that occurred at the end of Woodrow Wilson’s disastrous presidency.

In a column for the Foundation for Economic Education, Robert Murphy has a very helpful tutorial on what happened.

…the U.S. experience during the 1920–1921 depression—one that the reader has probably never heard of—is almost a laboratory experiment …the government and Fed did the exact opposite of what the experts now recommend. We have just about the closest thing to a controlled experiment in macroeconomics that one could desire. To repeat, it’s not that the government boosted the budget at a slower rate, or that the Fed provided a tad less liquidity. On the contrary, the government slashed its budget tremendously… If the Keynesians are right about the Great Depression, then the depression of 1920–1921 should have been far worse. …the 1920–1921 depression was painful. The unemployment rate peaked at 11.7 percent in 1921. But it had dropped to 6.7 percent by the following year and was down to 2.4 percent by 1923. …the 1920–1921 depression “purged the rottenness out of the system” and provided a solid framework for sustainable growth. …The free market works. Even in the face of massive shocks requiring large structural adjustments, the best thing the government can do is cut its own budget and return more resources to the private sector.

Writing for National Review, David Harsanyi points out that there are many reasons why Warren Harding should be celebrated over Woodrow Wilson.

Wilson was one of the most despicable characters in 20th-century American politics: a national embarrassment. The Virginian didn’t merely hold racist “views;” he re-segregated the federal civil service. He didn’t merely involve the United States in a disastrous war in Europe after promising not to do so; he threw political opponents and anti-war activists into prison. Wilson, the first president to show open contempt for the Constitution and the Founding, was a vainglorious man unworthy of honor. Fortunately, we have the perfect replacement for Wilson: Warren Harding, the most underappreciated president in American history… Harding, unlike Wilson — and most of today’s political class, for that matter — didn’t believe politics should play an outsized role in the everyday lives of citizens. …Where Wilson had expanded the federal government in historic ways, creating massive new agencies such as the War Industries Board, Harding’s shortened term did not include any big new bureaucracies… Wilson left the country in a terrible recession; Harding turned it around, becoming the last president to end a downturn by cutting taxes, and slashing spending and regulations. Harding cut spending from $6.3 billion in 1920 to $3.3 billion by 1923.

Walter Block, in an article for the Mises Institute, explains that what happened almost 100 years ago can provide a good road map if President Trump wishes to restore prosperity today (especially when compared to the disastrous policies of Hoover and Roosevelt).

…let us look back a bit at some economic history regarding recessions and depressions… The depression in 1921 was short lived—maybe not a V, but at least a very narrow U. …Happily, during the 1921 depression, the government of President Warren G. Harding did not intervene…and the entire episode was over not in a matter of weeks (the V) or years (a fattish U), but months (a narrow U). The Great Depression, which stretched from 1929–41 (a morbidly obese U) stemmed from identical causes. …But Presidents Herbert Hoover and Franklin D. Roosevelt “fixed” this by propping up heavy industries whose extent was overblown by the previous artificially lowered interest rates, in an early “too big to fail” paroxysm. The Smoot-Hawley Tariff added insult to injury, and put the kibosh on any early recovery. …I now predict the sharpest of Vs, but if and only if, all other things being equal, the Trump administration cleaves to market principles. …So, Mr. President, embrace the free enterprise system, attain a V, a very narrow and sharp one, and the prognostication for November will be significantly boosted.

Professor Block’s analysis is very sound…except for the part where he speculates that Trump will do the right thing and copy Harding.

Given Trump’s awful track record on spending, it would be more accurate to speculate that I’ll be playing in the outfield for the Yankees when they win this year’s World Series.

Suffice to say, though, that it would be great to find another Warren Harding. Here’s a chart based on OMB data showing that he actually cut spending (and we’re looking at genuine spending cuts, not the make-believe spending cuts that happen in DC when politicians boost the budget by less than previously planned).

According to fans of Keynesian economics, these spending cuts should have tanked the economy, but instead we got a boom.

P.S. By the way, something similar happened after World War II.

P.P.S. Back in 2012, I shared some insightful analysis from Thomas Sowell about Harding’s economic policy.

P.P.P.S. Harding also lowered tax rates.

Even though Joe Biden has embraced a very left-wing agenda, I suspect many of the items on his wish list are designed to placate Bernie-type activists who have considerable influence in the Democratic Party.

As such, I don’t think Biden will push “Medicare for All” if he’s elected. But I fear he may support a “public option” that is less radical but still misguided.

The strongest argument in the video is that a government-created competitor to private insurance companies will be much more expensive than politicians are promising.

This is what always happens with government programs (see Medicare, Medicaid, and Obamacare) because politicians have a never-ending incentive to buy votes with other people’s money. And it will happen with any new program.

But I think the video overlooks an argument that would be even more politically effective, which is the fact that a public option would slowly but surely begin to strangle employer-based health insurance.

Simply stated, vote-buying politicians will deliberately under-price the cost of the public option. And the presence of a subsidized and under-priced government health plan will make employer-based policies less attractive over time – especially since the subsidies almost certainly will expand.

However, people generally like their employer-based health plans and presumably will be skeptical of any plan that threatens that system (and it’s probably safe to assume that health insurance companies will have an incentive to educate people about that likely outcome).

By the way, it’s not my intention to defend the employer-based system, which largely exists because of a foolish loophole in the tax code. As far as I’m concerned, that system is a convoluted and inefficient mess that has contributed to the health care system’s third-party payer crisis.

What we need is a restoration of free markets in health care.

But with the public option, the best-case scenario is that many people over time will get pushed from the top line of this image to the bottom line.

And that’s also the worst-case scenario since no problems will be fixed, but overall costs will be even higher thanks to greater government involvement.

For what it’s worth, some advocates of the public option claim it can actually save money by lowering reimbursement rates to doctors and hospitals. That could happen in theory, but exploding costs for Medicare, Medicaid, and Obamacare show that it doesn’t happen in reality.

The bottom line is that more government intervention in health care won’t solve the problems caused by existing levels of government intervention in health care (a tragic example of Mitchell’s Law). Which is why I fear that the public option ultimately would be a slow-motion version of Medicare for All.

In early June, I pontificated about the upside-down incentives that are created when government pays people more to be idle than they could get by working.

This is a real-world concern because the crowd in Washington earlier this year approved a $600-per-week bonus for people getting unemployment benefits.

And that resulted in many people getting far more from benefits than they could get from employment. In some cases, even twice as much.

Anyhow, that bonus expired at the end of July, which has triggered a debate on whether to renew the policy.

In her Washington Post column, Catherine Rampell argues that super-charged benefits don’t discourage employment.

State benefits, on average, cover about 40 percent of the typical worker’s lost wages…  Given the extraordinary economic crisis, federal lawmakers wanted to “top up” state benefits so that workers would get close to 100 percent of their lost wages. …So Congress passed a $600 weekly supplement because it seemed about the right amount to make the average worker whole. …a majority of unemployed workers received more in benefits than they earned in their most recent paychecks. …this prompted concerns that the benefits themselves might slow down the recovery, discouraging people from returning to work because being on the dole was too darn comfortable. …five…recent studies…concluded the…$600 federal supplement does not appear to have depressed job growth. …Yes, at some point, …fears about work disincentives may materialize, as the economy recovers and job opportunities become more plentiful. We’re nowhere near that point now.

The Wall Street Journal also opined on this topic, specifically debunking one of the studies cited by Ms. Rampell.

Most Americans understand intuitively that if people make more money by not working, fewer people will work. Then there are politicians and economists who want to pass out more money while claiming that disincentives to work are irrelevant. …a study by Yale economists…purportedly finds the $600 federal enhancement to jobless benefits hasn’t affected the incentive to work. …Yet the study excluded part-time workers and those who hadn’t been working at a business in their sample last year. In other words, the study focused on workers with more loyalty to their employers. …Notably, states with more generous unemployment benefits for low-wage workers generally have had larger declines in labor-force participation. In Kentucky the lowest-paid 25% of unemployed workers on average have made 216% of what they did working. The state’s labor-force participation has declined 4.8 percentage points since February. …If you subsidize not working, you get less work.

In this Rampell vs. WSJ debate, I’m more sympathetic to the latter.

When the big fight over extended unemployment benefits during the Obama years was finally resolved, it showed that people are significantly more likely to find jobs when they’re no longer getting paid for not working.

This doesn’t mean that it will be easy (especially in an environment where there is still uncertainty about the coronavirus), or that we shouldn’t have sympathy for people facing pressure to find jobs after losing their previous positions.

But if we want prosperity and rising living standards, there’s really no alternative.

I’ll close with another excerpt from Ms. Rampell’s column She cites an economist who found that some people went back to work even though they received less money than they were getting from the government.

Evercore ISI economist, Ernie Tedeschi, …observed that in June, around 70 percent of unemployment recipients who resumed working had been receiving more from benefits than their prior wage — yet nonetheless returned to work.

This is largely good news since it shows that America still enjoys a high degree of societal capital (work ethic, desire to earn rather than get handouts, etc).

But this underscores why we shouldn’t erode that valuable form of capital by making people feel like chumps for doing the right thing (a point I emphasized earlier this year when criticizing Elizabeth Warren’s dependency agenda).

Otherwise we wind up with the real-world version of this satirical Wizard-of-Id cartoon.

P.S. Speaking of satire, Nancy Pelosi actually argued that paying people not to work was a form of stimulus.

P.P.S. Here are a couple of anecdotes, one from Ohio and one from Michigan, about the perverse impact of excessive unemployment benefits during the last downturn.

P.P.P.S. If you want more academic literature on the relationship between government benefits and joblessness, click here and here.

P.P.P.P.S. Last but not least, prominent economists on the left (including Paul Krugman) actually agree the unemployment benefits encourage joblessness.

There’s a reason that Greece is almost synonymous with bad economic policy. The country has endured some terrible prime ministers, most recently Alexis Tsipras of the far-left Syriza Party.

Andreas Papandreou, however, wins the prize for doing the most damage. He dramatically expanded the burden of government spending in the 1980s (the opposite of what Reagan and Thatcher were doing that decade), thus setting the stage for Greece’s eventual fiscal collapse.

But Greek economic policy isn’t a total disaster.

Policy makers in Athens are trying a bit of supply-side tax policy, at least for a limited group of people.

The U.K.-based Times has a report on Greece’s campaign to lure foreigners with low tax rates.

“The logic is very simple: we want pensioners to relocate here,” Athina Kalyva, the Greek head of tax policy at the finance ministry, said. “We have a beautiful country, a very good climate, so why not?” “We hope that pensioners benefiting from this attractive rate will spend most of their time in Greece,” Ms Kalyva told the Observer. Ultimately, the aim is to expand the country’s tax base, she added. “That would mean investing a bit — renting or buying a home.” …The proposal goes further than other countries, however, with the flat tax rate in Greece to apply to other sources of revenue as well as pensions, according to the draft law. “The 7 per cent flat rate will apply to whatever income a person might have, be that rents or dividends as well as pensions,” said Alex Patelis, chief economic adviser to Kyriakos Mitsotakis, the prime minister. “As a reformist government, we have to try to tick all the boxes to boost the economy and change growth models.”

Here are excerpts from a Reuters report.

Greece will offer financial incentives to encourage wealthy individuals to move their tax residence to the country, part of a package of tax relief measures… Greece’s conservative government is keen to attract investments to boost the recovering economy’s growth prospects. …The so-called “non-dom” programme will offer qualified wealthy investors who opt to shift their tax residence to the country a flat tax of 100,000 euros ($110,710) on global incomes earned outside Greece annually. “The tax incentive will run for a duration of up to 15 years and will include the benefit of no inheritance tax for assets outside Greece,” a senior government official told Reuters. One of the requirements to qualify will be residing in Greece for at least 183 days per year and making an investment of at least 500,000 euros within three years. …Investments of 3 million euros will reduce the flat tax to just 25,000 euros. There will also be a grandfathering clause protecting investors from policy changes by future governments.

By the way, Greece isn’t simply offering a flat-rate tax to wealthy foreigners. It’s offering them a flat-amount tax.

In other words, because they simply pay a predetermined amount, their actual tax rate (at least for non-Greek income) shrinks as their income goes up.

And since tax rates matter, this policy is luring well-to-do foreigners to Greece.

That’s good news. I’m a big fan of cross-border tax migration, both inside countries and between countries. And I’ve specifically applauded “citizenship by investment” programs that offer favorable tax rates to foreigners who bring much-needed investment to countries wanting more growth.

But I want politicians to understand that if low tax rates are good for newcomers, those low rates also would be good for locals.

But here’s the bad news. Fiscal policy in Greece is terrible (ranked #158 for “size of government” out of 162 nations according to the latest edition of Economic Freedom of the World).

What’s especially depressing is that Greece’s score has actually declined ever since the fiscal crisis began about 10 years ago.

In other words, the country got in trouble because of too much government, and politicians responded by actually making fiscal policy worse (aided and abetted by the fiscal pyromaniacs at the IMF).

And the bottom line is that it’s impossible to have overall low tax rates with a bloated public sector – a lesson that applies in other nations, including the United States.

Yesterday’s column mocked Congresswoman Alexandria Ocasio-Cortez and her crazy leftism (though WordPress inexplicably posted it as July 1 rather than August 1).

So today, let’s fire in the opposite direction and enjoy some libertarian-themed satire.

Our first example points out that there’s sometimes a difference between libertarians in theory and libertarians in reality (very reminiscent of this image).

I also found this next image amusing (though I can’t resist pointing out that a libertarian society would have things like traffic lights for the simple reason that the the people operating private roads would have an incentive to maintain a smooth flow of traffic).

Reminds me of the equally funny (but equally inaccurate) example of libertarian breakfast cereal.

Here’s a libertarian brain, at least according to the left-wing stereotype. Since I have an entire collection of libertarian humor, much of which involves self-mockery, I like to think my “satire recognition lobe” is reasonably well developed.

I assume there’s a reason for fedora/trilby section, but I don’t know what it is.

For what it’s worth, my anti-Venezuela and anti-tax lobes are very advanced.

Last but not least, I do have some pro-libertarian satire today.

Heck, name one thing that isn’t regulated, prohibited, or taxed.

All of which reminds me that libertarians get very frustrated when the free market gets blamed for crises that occur because of all the regulation, prohibition, and taxation that does exist (think Great Depression, 2008 financial crisis, etc).

I wrote last month about “anarcho-capitalists” who think we don’t need any government because markets can provide everything.

Most people, though, think that there are certain things (such as national defense and the rule of law) that are “public goods” because they won’t exist if they’re not provided by government.

Academics tell us, if we want to be rigorous, that there are two characteristics that define public goods.

  1. They are goods that people won’t buy because they can reap the benefit without paying (economists say this means the good is “non-excludable” while normal people refer to this as the free-rider problem).
  2. They are goods that can be universally shared since one person’s consumption of the good doesn’t limit another person’s consumption of the good (economists say such goods are “non-rival”).

That’s a bit wonky, so let’s consider the example of national defense.

In a world with bad countries (or, to be more accurate, a world with nations governed by bad people), there’s a risk or external aggression. Since most people wouldn’t want to be conquered – and presumably mistreated – by foreign aggressors, national defense is valuable.

But how would it be provided in the absence of government? Maybe Bill Gates and Jeff Bezos would have an incentive to cough up some cash since they have a lot of wealth to protect, but most people (including most rich people) might figure that someone else would cover the cost and they could enjoy protection for free.

This two-part series from Marginal Revolution University explains public goods, using the example of asteroid defense. Here’s an introductory video.

And here’s a follow-up version that has a bit more detail.

I’m writing about this wonky issue because the debate over public goods, at least in some quarters, also is a debate about the size of government.

Consider this image of supposed public goods.

It shows all sorts of activities where governments today play a role, but most of those things aren’t actually public goods since they can be – and sometimes are – privately provided (see examples for fire protection, money, roads, education, health, air traffic control, and parks).

In other words, as Professor Tabarrok noted in the second video, something isn’t a public good just because it’s currently being handled by government.

Indeed, let’s look at the classic example of lighthouses, which often are cited as an example of something that absolutely must be provided by government. Yet scholars have found that the private sector led the way (before being supplanted by government).

For a more prudent view of public goods, Ronald Reagan’s FY1987 budget included a set of principles to help guide whether the federal government should play a role in various areas.

Those six principles could even be boiled down to one principle: Always opt for the private sector whenever possible.

I’ll close by identifying the bureaucracies in Washington that provide genuine public goods. As you can see, much of the federal government (Department of Housing and Urban Development, Department of Education, Department of Energy, Department of Agriculture, Department of Transportation, etc) doesn’t qualify.

To be sure, I’m using a broad-brush approach with this image. Some of the bureaucracies that I crossed out do a few things that qualify as public goods (such as nuclear weapons research at the Department of Energy), and the bureaucracies that didn’t get crossed out do lots of things (such at veterans health care) that should be in the private sector.

The bottom line is that much of the federal government isn’t needed, based on what’s a genuine public good. And for much of America’s history, at least prior to the 1930s, Washington was only a tiny burden because it was only involved in a few areas, such as national defense.

Though it’s worth noting that government could – and should – be much smaller even using an expansive definition of public goods and the role of government.

Because of changing demographics and poorly designed entitlement programs, the burden of government spending in the United States (in the absence of genuine reform) is going to increase dramatically over the next few decades.

That bad outlook will get even worse thanks to all the coronavirus-related spending from Washington.

This is bad news for America since more of the economy’s output will be consumed by government, leaving fewer resources for the private sector. And that problem would exist even if all the spending was magically offset by trillions of dollars of unexpected tax revenue.

Many people, however, think the nation’s future fiscal problem is that politicians will borrow to finance  that new spending. I think that’s a mistaken view, since it focuses on a symptom (red ink) rather than the underlying disease (excessive spending).

But regardless of one’s views on that issue, fiscal policy is on an unsustainable path. And that means there will soon be a fight between twho different ways of addressing the nation’s grim fiscal outlook.

  • Restrain the growth of government spending.
  • Divert more money from taxpayers to the IRS.

Fortunately, we now have some new evidence to help guide policy.

A new study from the Mercatus Center, authored by Veronique de Rugy and Jack Salmon, examines what actually happens when politicians try to control debt with spending restraint or tax increases.

Here’s what the authors wanted to investigate.

Fiscal consolidation can take two forms: (1) adopting a debt-reduction package driven primarily by tax increases or (2) adopting a package mostly consisting of spending restraint. …What policymakers might not know is which of these two forms of consolidation tend to be more effective at reining in debt levels and which are less harmful to economic performance: tax-based (TB) fiscal consolidation or expenditure-based (EB) fiscal consolidation.

Here’s their methodology.

Our analysis focuses on large fiscal consolidations, or consolidations in which the fiscal deficit as a share of GDP improves by at least 1.5 percentage points over two years and does not decrease in either of those two years. …A successful consolidation is defined as one in which the debt-to-GDP ratio declines by at least 5 percentage points three years after the adjustment takes places or by at least 3 percentage points two years after the adjustment. …Episodes in which the consolidation is at least 60 percent revenue increases are labeled TB, and episodes in which the consolidation is at least 60 percent spending decreases are labeled EB.

And here are their results.

…of the 45 EB episodes, more than half were successful, while of the 67 TB episodes, less than 4 in 10 were successful. …The results in table 2 show that while in unsuccessful adjustments most (74 percent) of the changes are on the revenue side, in successful adjustments most (60 percent) of the changes are on the expenditure side. In successful adjustments, for every 1.00 percent of GDP increase in revenues, expenditures are cut by 1.50 percent. By contrast, in unsuccessful adjustments, for every 1.00 percent of GDP increase in revenues, expenditures are cut by less than 0.35 percent. From these findings we conclude that successful fiscal adjustments are those that involve significant spending reductions with only modest increases in taxation. Unsuccessful fiscal adjustments, however, typically involve significant increases in taxation and very modest spending reductions.

Table 2 summarizes the findings.

As you can see, tax increases are the least effective way of dealing with the problem. Which makes sense when you realize that the nation’s fiscal problem is too much spending, not inadequate revenue.

In my not-so-humble opinion, I think the table I prepared back in 2014 is even more compelling.

Based on IMF data, it shows nations that imposed mutli-year spending restraint and how that fiscally prudent policy generated very good results – both in terms of reducing the spending burden and lowering red ink.

When I do debates at conferences with my left-wing friends, I almost always ask them to show me a similar table of countries that achieved good results with tax increases.

Needless to say, none of them have ever even attempted to prepare such a list.

That’s because nations that repeatedly raise taxes – as we’ve seen in Europe – wind up with more spending and more debt.

In other words, politicians pull a bait-and-switch. They claim more revenue is needed to reduce debt, but they use any additional money to buy votes.

Which is why advocates of good fiscal policy should adamantly oppose any and all tax increases.

Let’s close by looking at two more charts from the Mercatus study.

Here’s a look at how Irish politicians have mostly chose to restrain spending.

And here’s a look at how Greek politicians have mostly opted for tax increases.

It goes without saying (but I’ll say it anyhow) that the Greek approach has been very unsuccessful.

P.S. For fiscal wonks, one of the best parts of the Mercatus study is that it cites a lot of academic research on the issue of fiscal consolidation.

Scholars who have conducted research find – over and over again – that spending restraint works.

In a 1995 working paper, Alberto Alesina and Roberto Perotti observe 52 efforts to reduce debt in 20 Organisation for Economic Co-operation and Development (OECD) countries between 1960 and 1992. The authors define a successful fiscal adjustment as one in which the debt-to-GDP ratio declines by at least 5 percentage points three years after the adjustment takes place. In successful adjustments, government spending is reduced by almost 2.2 percent of gross national product (GNP) and taxes are increased by less than 0.5 percent of GNP. For unsuccessful adjustments, government expenditure is reduced by less than 0.5 percent of GNP and taxes are increased by almost 1.3 percent of GNP. These results suggest that successful fiscal adjustments are those that cut spending and include very modest increases in taxation.

International Monetary Fund (IMF) economists John McDermott and Robert Wescott, in a 1996 paper, examine 74 episodes of fiscal adjustment in which countries attempted to address their budget gaps. The authors define a successful fiscal adjustment as a reduction of at least 3 percentage points in the ratio of gross public debt to GDP by the second year after the end of an adjustment. The authors then divide episodes of fiscal consolidation into two categories: those in which the deficit was cut primarily (by at least 60 percent) through revenue increases, and those in which it was reduced primarily (by at least 60 percent) through expenditure cuts. Of the expenditure-based episodes of fiscal consolidation, almost half were successful, while of the tax-based episodes, less than one out of six met the criteria for success.

Jürgen von Hagen and Rolf Strauch observe 65 episodes in 20 OECD countries from 1960 to 1998 and define a successful adjustment as one in which the budget balance stands at no more than 75 percent of the initial balance two years after the adjustment period. …it does find that successful consolidations consist of expenditure cuts averaging more than 1.2 percent of GDP, while expenditure cuts in unsuccessful adjustments are smaller than 0.3 percent of GDP. The opposite pattern is true for revenue-based adjustments: successful consolidations consist of increases in revenue averaging around 1.1 percent, while unsuccessful adjustments consist of revenue increases exceeding 1.9 percent.

American Enterprise Institute economists Andrew Biggs, Kevin Hassett, and Matthew Jensen examine over 100 episodes of fiscal consolidation in a 2010 study. The authors define a successful fiscal adjustment as one in which the debt-to-GDP ratio declines by at least 4.5 percentage points three years after the first year of consolidation. Their study finds that countries that addressed their budget shortfalls through reduced spending burdens were far more likely to reduce their debt than countries whose budget-balancing strategies depended upon higher taxes. …the typical successful adjustment consists of 85 percent spending cuts and just 15 percent tax increases.

In a 1998 Brookings Institution paper, Alberto Alesina and coauthors reexamined the research on the economic effects of fiscal adjustments. Using data drawn from 19 OECD countries, the authors assess whether the composition of fiscal adjustments results in different economic outcomes… Contrary to the Keynesian view that fiscal adjustments are contractionary, the results of this study suggest that consolidation achieved primarily through spending reductions often has expansionary effects.

Another study that observes which features of fiscal adjustments are more or less likely to predict whether the fiscal adjustment is contractionary or expansionary is by Alesina and Silvia Ardagna. Using data from 20 OECD countries during 1960 to 1994, the authors label an adjustment expansionary if the average GDP growth rate in the period of adjustment and in the two years after is greater than the average value (of G7 countries) in all episodes of adjustment. …The authors conclude, “The composition of the adjustment appears as the strongest predictor of the growth effect: all the non-expansionary adjustments were tax-based and all the expansionary ones were expenditure-based.”

French economists Boris Cournède and Frédéric Gonand adopt a dynamic general equilibrium model to compare the macroeconomic impacts of four debt reduction scenarios. Results from the model suggest that TB adjustments are much more costly than spending restraint when policymakers are attempting to achieve fiscal sustainability. Annual consumption per capita would be 15 percent higher in 2050 if consolidation were achieved through spending reductions rather than broad tax increases.

In a review of every major fiscal adjustment in the OECD since 1975, Bank of England economist Ben Broadbent and Goldman Sachs economist Kevin Daly found that “decisive budgetary adjustments that have focused on reducing government expenditure have (i) been successful in correcting fiscal imbalances; (ii) typically boosted growth; and (iii) resulted in significant bond and equity market outperformance. Tax-driven fiscal adjustments, by contrast, typically fail to correct fiscal imbalances and are damaging for growth.”

Economists Christina and David Romer investigated the impact of tax changes on economic activity in the United States from 1945 to 2007. The authors find that an exogenous tax increase of 1 percent of GDP lowers real GDP by almost 3 percent, suggesting that TB adjustments are highly contractionary.

…the IMF released its annual World Economic Outlook in 2010 and included a study on the effects of fiscal consolidation on economic activity. The results of studying episodes of fiscal consolidation for 15 OECD countries over three decades…reveals that EB fiscal adjustments tend to have smaller contractionary effects than TB adjustments. For TB adjustments, the effect of a consolidation of 1 percent of GDP on GDP is −1.3 percent after two years, while for EB adjustments the effect is just −0.3 percent after two years and is not statistically significant. Interestingly, TB adjustments also raise unemployment levels by about 0.6 percentage points, while EB adjustments raise the unemployment rate by only 0.2 percentage points.

…a 2014 IMF study…estimates the short-term effect of fiscal consolidation on economic activity among 17 OECD countries. The authors of the IMF study find that the fall in GDP associated with EB consolidations is 0.82 percentage points smaller than the one associated with TB adjustments in the first year and 2.31 percentage points smaller in the second year after the adjustment.

Focusing on the fiscal consolidations that followed the Great Recession, Alesina and coauthors…find that EB consolidations are far less costly for economic output than TB adjustments. They also find that TB adjustments result in a cumulative contraction of 2 percent of GDP in the following three years, while EB adjustments generate very small contractions with an impact on output not significantly different from zero.

A study by the European Central Bank in 2018…finds that macroeconomic responses are largely caused by differences in the composition of the adjustment plans. The authors find large and negative multipliers for TB adjustment plans and positive, but close to zero, multipliers for EB plans. The composition of adjustment plans is found to be the largest contributor to the differences in economic performance under the two types of consolidation plans.

The bottom line is that nations enjoy success when they obey fiscal policy’s Golden Rule. Sadly, that doesn’t happen very often because politicians focus mostly on buying votes in the short run rather than increasing national prosperity in the long run.

My view of the U.S. economic policy often depends on whether I’m writing about absolute levels of laissez-faire or relative levels of laissez-faire.

If my column is about the former, I generally complain about excessive spending, punitive taxation, senseless red tape, easy-money monetary policy, and trade protectionism.

But if I’m writing about relative levels of economic liberty, I often turn into a jingoistic, pro-American flag-waver.

That because – with a few exceptions such as Singapore, Hong Kong, New Zealand, and Switzerland – the United States enjoys more economic freedom than other nations.

And because of the relationship between policy and prosperity, this means that Americans tend to have much higher living standards than their counterparts in other nations. Even when compared to people in other developed countries.

(Which is why it’s so disappointing that many American politicians want to make the U.S. more like Europe.)

Let’s examine some data. In a column for National Review, Joseph Sullivan compares recent increases in living standards for major nations.

If you want to answer questions about how economic wellbeing for individuals in a country has evolved, the actual change in the value of real GDP per capita may tell you more than the rate of its change. Why? Individuals buy goods and services with dollars and cents — not the rates of change that economists, politicians, and pundits tend to focus on when it comes to growth. …By this metric, between 2016 and 2019, economic growth in the U.S. was the best in its class. …The U.S. surpasses…its peers…by no small margin. It bests the silver medalist in this category, Finland, by $1,100. That is almost as big as the $1,160 that separates the runner-up from the peer country that comes in dead last, Sweden.

Here’s the chat from his article.

The key takeaway is that Americans started the period with more per-capita GDP and the U.S. lead expanded.

That’s one way of looking at the data.

A 2017 report from the Pew Research Center also has some fascinating numbers about the relative well-being of the middle class in different nations.

…the middle class in a country consists of adults living in households with disposable incomes ranging from two-thirds to double the country’s own median disposable household income (adjusted for household size). This definition allows middle-class incomes to vary across countries, because national incomes vary across countries. …That raises a question: What shares of adults in Western European countries have the same standard of living as the American middle class? …When the Western European countries the Center analyzed are viewed through the lens of middle-class incomes in the U.S., the share of adults who are middle class decreases in most of them. …In most Western European countries studied, applying the U.S. standard shrinks the middle-class share by about 10 percentage points… Applying U.S. incomes as the middle-class standard also boosts the estimated shares of adults who are in the lower-income tier in most Western European countries… Overall, regardless of how middle class fortunes are analyzed, the material standard of living in the U.S. is estimated to be better than in most Western European countries examined.

The main thing to understand is that there’s a big difference between being middle class in a rich country and being middle class in a not-so-rich country.

And if you peruse the chart from the Pew Report, you’ll notice that a lot of middle-class Europeans would be lower-income if they lived in the United States.

And if you looked at the issue from the other perspective, as I did last year, many poor Americans would be middle class if they lived in Europe.

Let’s augment that analysis by looking at a graphic the Economist put together several years ago. It’s based on the OECD’s Better-Life Index, which is a bit dodgy since it includes measures such as the Paris-based bureaucracy’s utterly dishonest definition of poverty.

That being said, notice that the bottom 10 percent of Americans would be middle class (or above!) if they lived in other nations.

I’ll close with the data on Actual Individual Consumption from the OECD, which are the numbers that (I believe) most accurately measure relative living standards between nations (indeed, I shared data from this source in 2010, 2014, and 2017).

As you can see, the United States easily surpasses other industrialized nations, with a score of 145.9 in 2017 (compared to the average of 100).

My final observation is that all this data is contrary to traditional convergence theory, which assumes that poor nations should grow faster than rich nations.

In other words, Europe should be catching up to the United States.

Indeed, that actually happened for a couple of decades after World War II, but then many European nations expanded welfare states in the 1960s and 1970s, while the U.S. for more economic freedom under both Ronald Reagan and Bill Clinton in the 1980s and 1990s.

And since policies diverged, convergence stalled.

The bottom line is that rich nations can consistently out-perform poor nations if they have allow more economic freedom.

P.S. Not only do ordinary Americans have a big edge over their European counterparts, they also enjoy much lower taxes.

Back in 2011, the Center for Freedom and Prosperity released this video citing four nations – Canada, Ireland, Slovakia, and New Zealand – that achieved very good results with multi-year periods of genuine spending restraint.

Today, let’s focus on what’s been happening with government spending in Canada.

As explained in the video, America’s northern neighbor enjoyed a five-year period in the 1990s when government spending increased by an average of just 1 percent annually, with most of that progress occurring when the Liberal Party was in charge.

This fiscal probity – an example of my Golden Rule before I even invented the concept – paid big dividends.

The overall burden of government spending, measured as a share of economic output, declined substantially.

And because Canadian lawmakers dealt with the underlying problem of too much spending, that automatically solved the symptom of red ink.

That’s the good news.

The bad news is that Canada’s current prime minister, Justin Trudeau, has been spending a lot of money.

Jon Hartley, in an article for National Review, looks at his fiscal policy.

In June, Fitch downgraded Canada’s sovereign debt, revoking its prized AAA status. …Canadian finance minister Bill Morneau recently revealed that Canada’s projected 2020 deficit is now C$343 billion, a whopping 16 percent of GDP. …The Trudeau government now finds itself in a quandary over how to get to grips with its increased government spending. …This won’t be the first time that Canada has had to wrestle with its federal debt… Perhaps unsurprisingly, there has been speculation that the Trudeau government is now looking to institute a controversial federal housing-equity tax on primary residences… Canada now has high middle-class tax rates and, if federal and provincial taxes are combined, a top marginal tax rate of over 53 percent in the most populous province, Ontario. …Simply printing money to pay for Canadian sovereign debt is probably not on the cards either. …What’s lacking for now is any obvious policy path to return the country to economic normality and restore a semblance of control to the nation’s finances.

This is helpful analysis, especially when thinking about how Canada will try to climb back out of the fiscal hole caused by the coronavirus.

But I think it’s more revealing to see Trudeau’s track record before the virus.

So I went to the database for the IMF’s World Economic Outlook, which was released late last year before the disease wreaked havoc with government finances.

Here’s the data showing the spending burden has grown almost twice as fast under Trudeau (2016-2020) as it did in the previous five years (2011-2015).

Since Canada has a federal system, this data includes spending increases by sub-national governments. So it’s not clear how much Trudeau should be blamed compared to his predecessor.

But surely we can conclude that fiscal policy has deteriorated during his reign.

Also, the IMF data for the Trudeau years is preliminary. But since we want to see what was happening before the coronavirus, these numbers are actually the ones we want to use.

The bottom line is that Canada was moving in the wrong direction before the coronavirus and the spending burden has jumped dramatically since the disease hit.

This does not bode well for Canada’s long-run economic health.

P.S. Notwithstanding fiscal deterioration under Trudeau, Canada is still a surprisingly pro-market country, ranked #8 in the world. Moreover, it has some very sensible policies involving school choice, welfare reformcorporate tax reform, bank bailoutsregulatory budgeting, the tax treatment of saving, and privatization of air traffic control.

P.P.S. Here’s my early assessment (from 2016) of Trudeau’s agenda, and here’s what I wrote last year about his misguided tax policy.

Way back in January of 2017, I predicted for a French TV audience that Donald Trump would be a big spender like George Bush instead of a small-government conservative like Ronald Reagan.

Sadly, I was right.

I crunched the numbers earlier this year and showed that Trump has been a big spender, no matter how the data is sliced.

Perhaps most shocking, he’s even allowed domestic spending to increase faster than it did under Bill Clinton, Jimmy Carter, and Barack Obama.

That’s a terrible track record, especially compared to Reagan’s impressive performance (by the way, these calculations were made before all the coronavirus-related spending, so updated numbers would make Trump look even worse by comparison).

Anyhow, I’m looking at this issue today because of a recent story in the Washington Post.

The Reagan Foundation just told the Trump people to stop using the Gipper’s likeness in their fundraising appeals.

The Ronald Reagan Presidential Foundation and Institute, which runs the 40th president’s library near Los Angeles, has demanded that President Trump and the Republican National Committee (RNC) quit raising campaign money by using Ronald Reagan’s name and likeness. …What came to the foundation’s attention — and compelled officials there to complain — was a fundraising email that went out July 19… The solicitation offered, for a donation of $45 or more, a “limited edition” commemorative set featuring two gold-colored coins, one with an image of Reagan and one with an image of Trump. …Proceeds from the coin sales went to the Trump Make America Great Again Committee, a joint fundraising operation that benefits both the Trump campaign and the RNC. …In the 1990s, both Reagan and his wife Nancy signed legal documents that granted the foundation sole rights to their names, likenesses and images. …the RNC accepted the foundation’s demand regarding the fundraising emails.

It’s unclear why the Reagan Foundation made the request.

For what it’s worth, I hope officials were motivated at least in part by disappointment with Trump’s anti-conservative record on government spending (and also on trade).

Simply stated, Trump is no Reagan.

While I’m a big fan of the Gipper, I don’t pretend he had a perfect track record. But I think it’s correct to say that his goal was to advance liberty by shrinking government, even if there were occasional detours.

For instance, Holman Jenkins noted in his Wall Street Journal column that Reagan always had the right long-run goals even when he made short-run comprises on trade that were unfortunate.

Reagan slapped import quotas on cars, motorcycles, forklifts, memory chips, color TVs, machine tools, textiles, steel, Canadian lumber and mushrooms. There was no market meltdown. Donald Trump hit foreign steel and aluminum, and the Dow Jones Industrial Average fell more than 600 points… The real difference is that Reagan’s protectionist devices were negotiated. They were acts of cartel creation… This was unattractive but it wasn’t a disaster, and Reagan’s protectionism quickly fell away when a global upswing began. …Mr. Trump wants a spectacle with himself at the center. …His confused and misguided ideas about trade are one of his few long and deeply held policy commitments.

And if you need more evidence, look at what Reagan said about trade here, here, and here.

Can you imagine Trump giving such remarks? Or even understanding the underlying principles?

There are also important differences in the populism of Trump and Reagan, as explained by Jonah Goldberg of the American Enterprise Institute.

…there are different kinds of conservative populism. Until recently, right-wing populism manifested itself in the various forms of the tea party, which emphasized limited government and fiscal restraint. That populism…is very different from Trump’s version. …Reagan’s themes and rhetoric were decidedly un-Trumpian. The conservative populist who delivered “A Time for Choosing” used broadly inclusive language, focusing his ire at a centralized government that reduced a nation of aspiring individuals to “the masses.” …Reagan’s populist rhetoric was informed by a moderate, big-hearted temperament, a faith in American exceptionalism… He warned of concentrated power that corrodes self-government.

I’ll close with the observation that Trump has enacted some good policies, especially with regard to taxes and red tape.

The bottom line is that I’m not trying to convince anyone to vote for Trump or to vote against Trump.

Instead, I simply want people to be consistent and principled advocates of economic liberty instead of blind partisans.

As explained in my Ninth Theorem of Government.

In other words, I don’t care if you’re an enthusiastic supporter of Trump. Just don’t let that support lead you to somehow rationalize that wasteful spending and protectionism are somehow good ideas.

And I don’t care if you’re an enthusiastic never-Trumper. Just don’t let that hostility lead you to somehow decide that tax cuts and deregulation are bad ideas.

P.S. In my speeches over the past few years, I’ve run into many people who tell me that Trump must be good because the media hates him the same way they hated Reagan. It’s certainly true that the establishment press has visceral disdain for both of them. I’ll simply point out that media hostility is a necessary but not sufficient condition for determining whether a Republican believes in smaller government.

When I write about socialism, I often point out that there’s a difference between how economists define it (government ownershipcentral planning, and price controls) and how normal people define it (lots of taxes, redistribution, and intervention).

These definitions are blurry, of course, which is why I created a “socialism slide” to show how countries oftentimes are an odd mix of markets and government.

But one thing that isn’t blurry is the evidence on what works. Simply stated, there is less prosperity in nations with big government compared to nations with small government.

And it doesn’t matter whether socialism is the result of democracy or tyranny.

Kristian Niemietz is with the Institute of Economic Affairs in London. He explained for CapX that mixing democracy with socialism doesn’t fix anything.

Mention the economic failures of the former Eastern Bloc countries, or Maoist China, or North Vietnam, or today, of Cuba or Venezuela or North Korea, and the answer will invariably be: “But that was a dictatorship! That’s got nothing to do with me, I’m a democratic socialist!” …“[S]ocialism means ‘economic democracy’… But the…economic failures of socialism never had anything to do with a lack of democracy. Democratisation improves many things, and is desirable for many reasons. But it does not, in and of itself, make countries richer. …The empirical literature on this subject finds no relationship either way between economic development, and the system of government. …If socialists want to make the case that democracy was the magic missing ingredient… How exactly would democracy have closed the economic gap between East and West Germany, or North and South Korea, or Cuba and Puerto Rico, or Maoist China and Taiwan, or the People’s Republic of Angola and Botswana, or Venezuela and Chile?

Meanwhile, Kevin Williamson pointed out in National Review that post-war socialism in the United Kingdom failed for the same reason that socialism fails anywhere and everywhere it is tried.

History counsels us to consider the first adjective in “democratic socialist” with some skepticism. …the socialism that reduced the United Kingdom from world power to intermittently pre-industrial backwater in the post-war era was thoroughly democratic. …In the United States, we use the word “democratic” as though it were a synonym for “decent” or “accountable,” but 51 percent of the people can wreck a country just as easily and as thoroughly as 10 percent of them. …The problems of socialism are problems of socialism — problems related to the absence of markets, innovation, and free enterprise… Socialism and authoritarianism often go hand in hand (almost always, in fact), but socialism on its own, even when it is the result of democratic elections and genuinely democratic processes, is a bottomless well of misery. …rights — property rights and the right to trade prominent among them — also find themselves on the wrong side of majorities, constantly and predictably. But they are…necessary for a thriving and prosperous society. Socialism destroys societies by gutting or diminishing those rights. Doing so with the blessing of 50 percent plus one of the population does not make that any less immoral or any less corrosive.

Thankfully, Margaret Thatcher saved the United Kingdom from socialism.

But other nations haven’t been so lucky. Democratically elected governments adopted socialism in Greece and Argentina, but neither country found a savior to restore economic liberty (or maybe voters didn’t want to reverse the failed policies).

What about the United States? Will we vote ourselves into socialism?

Given the wretched track records of Wilson, Hoover, FDR, Nixon, Obama, etc, I’m tempted to say that we’ve been doing that for more than 100 years.

But I don’t want to be unduly pessimistic. America hasn’t slid too far down the socialism slide. Indeed, we’re actually ranked #6 in the world for economic liberty.

That’s the good news. The bad news is that there are lots of proposals for additional bad policy and plenty of politicians clamoring to move in the wrong direction.

To see what that might mean, I’ll close with some polling data that the Washington Examiner shared earlier this year. Here are things that might happen if socialists (however defined) get power in the United States.

And here are things that the American people say would qualify as socialism.

Ugh, that’s a recipe for the Venezuela-fication of the U.S. economy.

P.S. For what it’s worth, notwithstanding his statist platform, I think Joe Biden only intends to incrementally go down the slide (whereas Bernie Sanders would have greased the slide for a rapid descent).

I recently speculated whether Seattle should be considered the worst-governed city in the country.

Though there’s lots of competition for that honor from places like San Francisco, Detroit, New York City, and Chicago. And John Stossel makes a compelling case for Minneapolis in this new video.

As I’ve previously noted, statist policies are never a good idea, but they’re especially foolish when adopted by local or state governments.

Why? Because it’s relatively easy for productive people to escape bad policy by moving across borders.

And that happens. A lot.

Yet the folks in Minnesota – at least if the anti-capitalism comments in the video are any indication – must not care whether the geese with the golden eggs fly away.

To learn more, let’s take a look at the Washington Post story referenced in the Stossel video.

Authored by Tracy Jan, it looks at all the big-government policies imposed by local and state government.

The Twin Cities…and…progressive policies… Taxes, for decades, have been redistributed from wealthy suburbs to poorer communities to combat inequality — an effort bolstered in recent years by raising state income taxes on the rich. The result: more money for schools, affordable housing and social services in lower-income neighborhoods. …Minnesota’s progressive reputation was cemented nearly five decades ago… Gov. Wendell Anderson…worked with the Republican-controlled legislature to pass…a redistributive tax policy introduced in 1971 that required wealthy communities in the Twin Cities region to share their commercial property tax revenue with the poorest areas. Income and sales tax revenue from rich suburbs across the state also was shared with less-affluent cities and rural communities to fund schools, police and housing. …It would be the beginning of a suite of policies that over subsequent decades increased investments in housing, schools and small businesses in disadvantaged communities. …more state aid poured into poor communities in 2013, when then-Gov. Mark Dayton raised taxes on the wealthiest Minnesotans. The Democrat…campaigned to “Tax the Rich!” — saying everyone should pay their “fair share” to keep society “functional.” The income tax rate, already fairly high for top income earners compared with other states, increased from 7.85 percent to 9.85 percent for individuals making more than $150,000.

I fully agree with Stossel that the story’s headline is hopelessly biased, though that’s usually the fault of editors rather than reporters.

But let’s set that aside and focus on the details in the report.

What conclusions are warranted? The reporter can’t resist making a silly assertion that growth isn’t part of the solution (she’s obviously not familiar with Census Bureau data).

Those enduring disparities…highlight the flawed premise…that economic prosperity is a remedy for racial inequality.

Though she does acknowledge that the mess in Minneapolis poses a challenge for the left’s argument that big government is the answer.

…progressive policies ha[ve] not translated into economic equality. Instead, the wealth gap between Minneapolis’s largely white population and the city’s black residents has deepened, producing some of the nation’s widest racial disparities in income, employment and homeownership. …The shortcomings have given rise to an urgent debate about where Minneapolis went wrong and what measures would bring better results. …The typical black family in the Twin Cities earned $39,851 in 2017, lower than the median income for African Americans nationally… A quarter of black households lived in poverty, five times the poverty rate for white households. …the outcome for black residents in Minneapolis and St. Paul…undercuts the liberal argument that spending on progressive policies can create systemic change. …Black residents…are worse off today by some measures than they were 20 and 30 years ago, even as the fortunes of their white counterparts held steady or improved, according to census data. …Despite a slew of programs to help first-time home buyers, only a quarter of black residents in the Twin Cities own their homes…much lower than the national black homeownership rate of 42 percent.

I’ll make four points in response to this story.

First, there is no substitute for growth, and – as Stossel observed in the video, but as Ms. Tan doesn’t seem to appreciate – we shouldn’t care if some groups get rich faster than other groups.

Second, stronger growth not only explains why average living standards in the United States are higher than in other nations, but also why the average low-income person in America does better than the average middle class person in many other countries.

Third, the only effective and successful way to achieve long-run growth is with free markets and small government, but Minnesota doesn’t fare well in rankings of economic liberty (see here, here, and here) and Minneapolis scores poorly when cities are ranked.

Fourth, the redistribution programs from both local and state governments doubtlessly have trapped many poor residents in dependency, especially since there are high implicit marginal tax rates if they seek self-sufficiency and financial independence.

The bottom line is that Minneapolis has poor governance, as does the entire state of Minnesota, but the politicians will have to try harder to achieve worst-in-nation status.

I participated in a debate yesterday on “tax havens” for the BBC World Service. If you read last month’s two-part series on the topic (here and here), you already know I’m a big defender of low-tax jurisdictions.

But it’s always interesting to interact with people with a different perspective (in this case, former Obama appointee David Carden and U.K. Professor Rita de la Feria).

As you might imagine, critics generally argue that tax havens should be eliminated so politicians have greater leeway to increase tax rates and finance bigger government. And if you listen to the entire interview, that’s an even bigger part of their argument now that there’s lots of coronavirus-related spending.

But for purposes of today’s column, I want to focus on what I said beginning at 49:10 of the interview.

I opined that it’s reasonably to issue debt to finance a temporary emergency and then gradually reduce the debt burden afterwards (similar to what happened during and after World War II, as well as during other points in history).

The most important part of my answer, however, was the discussion about how revenues didn’t decline when tax rates were slashed beginning in 1980.

Let’s first take a look at what happened to top tax rates for 24 industrialized nations from North America, Western Europe, and the Pacific Rim. As you can see, there’s been a big reduction in tax rates since 1980.

In the interview, I mentioned OECD data about taxes on income and profits, which can be found here (specifically data series 1000). So let’s see what happened to revenues during the period of falling tax rates.

Lo and behold, it turns out that revenue went up. Not just nominal revenues. Not just inflation-adjusted revenues. Tax revenues even increased as a share of gross domestic product.

In part, this is the Laffer Curve in action. Lower tax rates meant better incentives to engage in productive behavior. That meant higher levels of taxable income (the variable that should matter most).

For what it’s worth, I suspect that the lower tax rates – by themselves – did not cause tax revenue to rise. After all, there are many policies that determine the overall vitality of an economy.

But there’s no question that there’s a lot of “revenue feedback” when tax rates are changed.

The bottom line is that the folks advocating higher tax rates shouldn’t expect a windfall of tax revenue if they succeed in imposing class-warfare tax policy.

P.S. For the folks on the left who are motivated by spite rather than greed, it doesn’t matter if higher tax rates generate more money.

P.P.S. Interestingly, both the IMF and OECD have admitted, at least by inference, that lower corporate tax rates don’t result in lower tax revenues.

There are many reasons to be depressed about Italy.

Bad policy is part of the problem, of course, but this chart shows that the country also is facing a demographic crisis. The blue lines show that there are now more deaths than births.

The chart comes from a Bloomberg column by Flavia Rotondi and Giovanni Salzano, and they explain some of the adverse consequences of this demographic change.

Italy isn’t just in an economic slump, its population is also sagging, pushing the country into its biggest demographic crisis in more than a century. The number of people in the country fell for a fifth year in 2019, and deaths exceeded births by almost 212,000, the biggest gap since 1918. …Italy already has huge long-term economic challenges, and the population trends, if they continue, are going to make surmounting them even harder. Italy won’t have enough young workers, and funding a rapidly aging population will strain an already stretched fiscal situation. Pension costs now amount to almost 17% off the economy. …“With an aging population and a consistent decrease of workers who pay taxes, our retirement system may go haywire” said Pietro Reichlin, a professor of economics.

Politicians naturally will want to compensate for these changes by raising the tax burden.

But Italy already is at a breaking point because of punitive taxation. Writing for the Foundation for Economic Education, Daniel Di Martino discusses his nation’s dirigiste system.

Italy’s problem, similar to many of its southern European neighbors, is an oppressively high tax burden, irresponsible welfare programs that encourage high measured unemployment and increase the debt, and high levels of regulation. …the share of average wages collected by the Italian government via income and social security taxes is 48 percent, among the highest in the Organization for Economic Co-operation and Development (OECD). In addition, Italy imposes a value-added tax of 22 percent on most goods and services, one of the highest in Europe. Plus, Italy’s corporate, capital gains, gift, and myriad other taxes are passed on to individuals and borne directly by workers. …At the same time, Italy’s complex regulations are a barrier to starting or continuing productive activities. A study by economist Raffaela Giordano of the Bank of Italy concluded that the main reason behind Italy’s underperformance was burdensome regulations and corrupt and inefficient government structure.

Adam O’Neal makes similar points about bad policy in a column for the Wall Street Journal.

Even before the pandemic, Italy hadn’t recovered fully from the 2008-09 financial crisis. Unemployment hovered around 10% in 2019. Adjusting for inflation, the average Italian worker earned the same as he did 20 years ago. Italian banks were Europe’s weakest. …What ails Italy? …Italy’s greatest challenge is a gargantuan government that destroys wealth as efficiently as the private economy creates it. …In 2018 government revenue was 42% of GDP, nearly 8 points above the Organization for Economic Cooperation and Development average. Yet profligate outlays—Rome spent 16.2% of GDP on public pensions in 2015—brought debt to about 135% of GDP last year.

The net effect of all this misguided policy is that Italy’s economy is moribund.

In his column for Bloomberg, Professor Tyler Cowen summarizes the problem.

One striking fact about Italy is that, over the last 20 years, growth in per capita income has been close to zero. …a zero-growth environment cannot be stable forever. …If the pie doesn’t grow, eventually it becomes harder to sustain productive activity… Aging is another reason economic growth is necessary. …many countries (including Italy) have expensive pension systems. Someone has to pay the bill, and without innovation and economic growth, taxes will have to rise. That in turn discourages work, pushing people into untaxed black-market activity, necessitating higher tax rates, and the vicious cycle starts again.

And when you combine bad demographics and bad policy, that not only means stagnation in the short run, it also could mean fiscal crisis in the long run.

Except “long run” may be just around the corner.

Desmond Lachman of the American Enterprise Institute warns that an Italian fiscal crisis will make the mess in Greece seem trivial by comparison.

…markets are displaying remarkable complacency toward a rapidly deteriorating Italian political and economic situation. They are doing so in a manner that is painfully reminiscent of how complacent they were in 2009 on the eve of the Greek sovereign debt crisis. This could have major consequences for global financial markets considering that the Italian economy…has around 10 times as much public debt as Greece had at the time of its crisis. …One has to hope that while markets might be turning a blind eye to Italy’s deteriorating economic and political fundamentals, global economic policymakers are not. As experience with the Greek sovereign debt crisis reaffirmed, crises often take a lot longer than one would have thought to occur, but when they do occur they do so at a very much faster rate than one would have expected.

Some people argue that a fiscal crisis can be avoided if the European Central Bank buys up Italy’s government debt.

That certainly can avert a panic, at least for a while, but this approach can cause a different set of problems.

Joseph Sternberg opines for the Wall Street Journal that the European Central Bank’s easy-money policy has backfired by giving politicians in Rome the leeway to postpone desperately needed reforms.

If the ECB had not stepped in as a buyer of government debt, Rome long since would have faced fiscal catastrophe. Only a miracle—or €365 billion in ECB purchases of Italian sovereign debt since 2015—can explain how in recent years a country whose debt has ballooned to 130% of gross domestic product paid nearly the same interest rate as Germany… Even after selling so many sovereign bonds to the central bank, Italy’s banks continue to be large holders of their government’s debt. Such bonds constitute around 10% of Italian bank assets, nearly three times the eurozone average. …Mr. Draghi hoped his interventions would give wayward governments such as in Rome breathing room to overhaul the supply side of their economies—deregulating markets, privatizing state assets, trimming welfare programs and the like. But Rome has mainly slid backward.

While intervention by the European Central Bank isn’t the solution to Italy’s problems (and may actually make problems worse), this is also a good opportunity to make the related point that the euro currency also shouldn’t be blamed for the nation’s stagnation.

I’m not a big fan of the European Union and the crowd in Brussels, but Italy’s challenges overwhelmingly are the fault of policies adopted by Italian politicians.

Indeed, if you look at the data from the most-recent edition of the Fraser Institute’s Economic Freedom of the World, you can see monetary policy isn’t a problem. Instead, the nation’s big impediment to prosperity (highlighted in red) is terrible fiscal policy.

To put this data in perspective, Italy has the next-to-lowest-ranked economy in Western Europe, with only Greece having less economic liberty.

The numbers from the Heritage Foundation’s Index of Economic Freedom tell a very similar story.

If you peruse the data from the most-recent edition of that publication, you’ll see that Italy gets weak scores for its approach to labor issues, the judiciary, and taxes.

But it gets an utterly dismal score (highlighted in red) for government spending.

Sadly, there’s no political party in Italy that wants to solve the problem of excessive spending – even though I explained how it could be done while in Milan many years ago. And without spending restraint, that means it’s almost impossible to adopt pro-growth tax reform.

P.S. No wonder some people in Sardinia want to secede from Italy and instead become part of Switzerland.

P.P.S. Amazingly, a New York Times’ columnist actually argued that the United States should be more like Italy.

New York is ranked dead last for fiscal policy according to Freedom in the 50 States.

But it’s not the worst state, at least according to the Tax Foundation, which calculates that the Empire State is ranked #49 in the latest edition of the State Business Tax Climate Index.

Some politicians from New York must be upset that New Jersey edged them out for last place (and the Garden State does have some wretched tax laws).

So in a perverse form of competition, New York lawmakers are pushing a plan to tax unrealized capital gains, which would be a form of economic suicide for the Empire State and definitely cement its status as the place with the worst tax policy.

Here are some excerpts from a CNBC report.

The tax, part of a new “Make Billionaires Pay” campaign by progressive lawmakers and activists, would impose a new form of capital gains tax on New Yorkers with $1 billion or more in assets. …“It’s time to stop protecting billionaires, and it’s time to start working for working families,” Rep. Alexandria Ocasio-Cortez, D-N.Y., said… Currently, taxpayers pay capital gains tax on assets only when they sell. The new policy would tax any gain in value for an asset during the calendar year, regardless of whether it’s sold. Capital gains are taxed in New York at the same rate as ordinary income, so the rate would be 8.8%.

Given her track record, I’m not surprised that Ocasio-Cortez has embraced this punitive idea.

That being said, the proposal is so radical that even New York’s governor understands that it would be suicidal.

Gov. Andrew Cuomo said raising taxes on billionaires and other rich New Yorkers will only cause them to move to lower-tax states. …“If they want a tax increase, don’t make New York alone do a tax increase — then they just have the people move… Because if you take people who are highly mobile, and you tax them, well then they’ll just move next door where the tax treatment is simpler.”

Actually, they won’t move next door. After all, politicians from New Jersey and Connecticut also abuse and mistreat taxpayers.

Instead, they’ll be more likely to escape to Florida and other states with no income taxes.

In a column for the New York Post, E.J. McMahon points out that residents already have been fleeing.

…there were clear signs of erosion at the high end of New York’s state tax base even before the pandemic. Between 2010 and 2017, according to the Internal Revenue Service, the number of tax filers with incomes above $1 million rose 75 percent ­nationwide, but just 49 percent in New York. …Migration data from the IRS point to a broader leakage. From 2011-12 through 2017-18, roughly 205,220 New Yorkers moved to Florida. …their average incomes nearly doubled to $120,023 in 2017-18, from $63,951 at the start of the period. Focusing on wealthy Manhattan, the incomes of Florida-bound New Yorkers rose at the same rate from a higher starting point— to $244,936 for 3,144 out-migrants in 2017-18, from $124,113 for 3,712 out-migrants in 2011-12.

What should worry New York politicians is that higher-income residents are disproportionately represented among the escapees.

And the author also makes the all-important observation that these numbers doubtlessly will grow, not only because of additional bad policies from state lawmakers, but also because the federal tax code no longer includes a big preference for people living in high-tax states.

These figures are from the ­period ending just before the new federal tax law temporarily virtually eliminated state and local tax deductions for high earners, raising New York’s effective tax rates higher than ever. …soak-the-rich tax sloganeering is hardly a welcome-home signal for high earners now on the fence about their futures in New York.

The bottom line is that it’s a very bad idea for a country to tax unrealized capital gains.

And it’s a downright suicidal idea for a state to choose that perverse form of double taxation. After all, it’s very easy for rich people to move to Florida and other states with better tax laws.

And since the richest residents of New York pay such a large share of the tax burden (Investor’s Business Daily points out that the top 1 percent pay 46 percent of state income taxes), even a small increase in out-migration because of the new tax could result in receipts falling rather than rising.

Another example of “Revenge of the Laffer Curve.”

In its early days, the European Union increased economic liberty since it largely existed as a free-trade pact for member nations.

Unfortunately, it has subsequently shifted to a more statist approach, with countries like France and Germany pushing for ever-increasing levels of harmonization, bureaucratization, and centralization.

Indeed, the E.U. has just taken a big step in the wrong direction. Notwithstanding very clear language in the Treaty on the Functioning of the European Union, politicians from member countries just approved a big bailout for some of the bloc’s most poorly governed nations.

The Washington Post, in a report by Michael BirnbaumQuentin Ariès, and Loveday Morris, has the details of the redistribution plan.

European leaders on Tuesday morning agreed to a vast spending plan to rescue the economies of coronavirus-hit countries…The negotiations had been bogged down by the objections of a handful of rich, northern countries on the scope of the fund and the strings attached to it. But…they hammered out a compromise. …The final agreement earmarks $859 billion in loans and grants to largely be spent over the next four years. …The main disagreement between the leaders of a handful of self-dubbed “frugal” countries — the Netherlands, Sweden, Austria, Denmark and Finland — and their peers was about how much money to ship to hard-hit countries such as Italy and Spain and how much oversight donor countries ought to have over how the funds are spent. …The others didn’t, offering a vision that would be a small step closer to a federal European Union…some analysts dubbed it Europe’s “Hamiltonian moment” — a burst of centralization that would forever hand more power to Brussels. “It’s an upgrading of supranational institutions’ role and power. It’s really upgrading them in a very significant way,” said Rosa Balfour, the director of the Brussels office of the Carnegie Endowment for International Peace, a think tank. …Italy, Spain and Poland would be the biggest beneficiaries of the plan.

I can’t resist the observation that both the first sentence and the headline are examples of either explicit or implicit media bias. Fair and knowledgeable reporters would have added words such as “supposed” or “alleged” rather than naively accepting the spin from Brussels that a bailout would “rescue the economies” of recipient nations.

But let’s set that aside and focus on the policy problem, which is that the agreement expands the size and scope of government in countries that already are suffering from statist policies.

Even worse, the new pact means more power for Brussels, thus opening the door for much greater levels of European-wide redistribution.

Some call this Europe’s Hamiltonian moment, in reference to the deal to have the federal government in the United States assume the debts that states incurred during the Revolutionary War, but that’s nonsense. The new agreement is akin to the proposals to have Uncle Sam provide bailouts of poorly governed states such as California, New Jersey, and Illinois.

The Dutch took the lead in fighting the E.U.’s new scheme, but ultimately capitulated.

Dutch leaders and their allies said countries such as Italy and Spain are to blame for pre-pandemic economic difficulties that left them struggling to pay their way out of the current crisis. They said they do not want to send money to those countries if they have no guarantees of economic reform in return. The Netherlands wants “truly enforcing reforms in exchange for loans,” Dutch Prime Minister Mark Rutte said Monday. “And if loans still have to become subsidies, then these reforms must really be enforceable” by allowing E.U. leaders to have oversight, he said.

The Dutch made very sound arguments. The E.U. scheme will reward nations with bad policy.

Here’s a look at the average level of economic liberty for the countries that resisted the bailout compared to the average for the three nations that will get the biggest shares of bailout money.

For what it’s worth, it’s a mistake to provide bailouts, especially if there are no strings attached to force recipients to fix bad policies.

But an ever-bigger problem, as noted in the excerpt above, is that the agreement could set the stage for a “burst of centralization that would forever hand more power to Brussels.”

P.S. British voters were very wise to approve “Brexit” so they won’t have to pay for this foolish scheme.

Back in 2017, the Center for Freedom and Prosperity released this video, which shows that free markets and small government are the best recipe for poor nations that want to become rich nations.

The CF&P video was motivated in part by a need to debunk international bureaucracies such as the OECD and IMF, which abandoned the “Washington Consensus” for economic liberalization and instead have been making the odd argument that prosperity can be achieved with higher taxes and a bigger burden of government spending.

Needless to say, neither of these international organizations has bothered to explain how such dirigiste policies produce more growth.

But the politicians who fund and control such bureaucracies doubtlessly appreciate the message.

You probably won’t be surprised that the United Nations also is on the wrong side of this issue.

A recent report from the New York City-based group regurgitates the anti-market viewpoint.

The argument that pro-market policies automatically benefit the poor is likewise at odds with the evidence. Traditional pro-growth polices, such as lower corporate tax rates, labor ‘reforms,’ deregulation, austerity-driven cuts to services, and privatization can have devastating effects on the well-being of poor people and the state’s capacity to reduce poverty. …There are various ways to reduce extreme inequality, but redistribution is an essential element. …Significant redistribution is indispensable. …Fair and equitable taxation can lay the foundations for a society that respects and promotes well-being for all. …Low tax revenue has hobbled the capacity of governments to undertake redistributive policies. …The time has come to take social protection seriously.

For those who don’t follow these issues closely, “social protection” is the buzz phrase to describe an ever-bigger welfare state.

As you might imagine, the report doesn’t provide any evidence to justify the assertion that higher taxes and bigger government will lead to less poverty and deprivation.

Which is an excuse to recycle my “never-answered question” since I’m still waiting for someone to show me a nation that became rich with the types of statist policy that the U.N. has embraced.

The most remarkable part of the report is buried toward the end. The United Nations actually argues that the poor will be better off if there is less economic growth.

A ‘pro-poor’ growth scenario necessitates a far smaller increase in global GDP and eradicates poverty much sooner. If every country reduced its Gini index by 1 percent per year, it would have a larger impact on global poverty than increasing each country’s annual growth one percentage point above current forecasts.

This is bad math, bad logic, and terrible economics.

And it assumes politicians can deftly re-slice a shrinking pie so that poor somehow get more than they have now (while ignoring Thomas Sowell’s sage warning that wealth can only be redistributed one time).

I’d like the United Nations (or any person or group) to show me a single example – at any point in world history – where less growth has improved conditions for poor people.

For what it’s worth, I can show lots of evidence that growth is the best recipe for helping the less fortunate, even though folks on the left may not be happy since rich people also benefit from economic growth.

I can’t resist pointing out one additional passage from the report. And this one was on the first page.

Poverty is a political choice.

In reality, poverty is the normal state of human existence (an observation that Tim Worstall also made in his CapX column criticizing the U.N. report).

What’s unusual – as explained in videos by Don Boudreaux and Deirdre McCloskey – is that parts of the world became rich beginning a couple of hundred years ago thanks to a new approach called capitalism.

(Though I suppose those five words from the U.N. report can be viewed as accurate. After all, governments perpetuate poverty by failing to copy the good policies of places such as Hong Kong and Singapore. But that’s not what the report means. Instead, we’re supposed to believe that politicians are allowing poverty by not choosing big government.)

P.S. If there was a contest for worst analysis from an international bureaucracy, I still think the IMF deserves to win since it has explicitly embraced the crazy notion that it’s okay to hurt the poor so long as the rich are hurt even more.

P.P.S. Indeed, the report I’m writing about today isn’t even the U.N.’s worst publication. That “honor” belongs to the 2018 report that blatantly lied about the prevalence of poverty in the United States.

The coronavirus has been horrible news, most obviously because of death and suffering. But the disease has also wreaked havoc with the economy and given politicians an excuse to push counterproductive policies.

But if you want to find a silver lining to that dark cloud, the virus may be putting pressure on America’s government school monopoly. For instance, John Stossel explains that it may lead to more homeschooling.

Given the large amount of evidence showing superior outcomes for home-schooled students, this is definitely a much-needed bit of good news.

Matthew Hennessey, in a column for the Wall Street Journal, also opined about how the coronavirus may produce a permanent expansion of home schooling.

Most students will return to traditional classrooms when the crisis passes. But some families—perhaps many—will…decide that homeschooling is not only a plausible option, but a superior one. …An economy of high-quality online educational materials has sprouted in the past decade. All you need is a laptop, headphones and a quiet corner of the house, and your kid can study everything from calculus to ancient Greek. …Education has managed to stave off innovation for a variety of reasons. Inertia is one—most people have a hard time reimagining something as basic as school. …Teachers unions are politically strong and uninterested in anything that threatens their power. But now the pandemic…can shake up the established order… If more Americans come to see the viability and value of home education, it could be a silver lining in a very dark cloud.

Private schools also provide a superior alternative to the government’s monopoly system.

That was true before the coronavirus, and it’s even more true today. This report from the New York Times has some details.

Public schools plan to open not at all or just a few days a week, while many neighboring private schools are opening full time. …the ways in which private schools are reopening show it can be done with creative ideas…reopening plans are just another way the pandemic has widened gaps in education. Private schools were able to offer much more robust online learning last spring, and research suggests that school closures have widened achievement gaps. …Independent schools don’t have all the same regulations for the curriculum or facilities that public schools have, and teachers generally aren’t unionized.

Writing for Reason, Corey DeAngelis highlights the more competent response of private schools.

A nationally representative survey conducted by Ipsos Public Affairs found that private and charter schools were substantially more likely to continue providing students with meaningful education services during the lockdown than traditional public schools. …Private and charter schools were about 20 percent more likely to introduce new content to their students during the lockdown. …Another national survey…found…students were more than twice as likely to connect with their teachers each day, and about 1.5 times as likely to attend online classes during the closures. …Parents of children in private and charter schools were at least 50 percent more likely to report being “very satisfied” with the instruction provided during the lockdown than parents of children in traditional public schools. …Private schools can adapt to change more effectively because they are less hampered down by onerous regulations than their government-run counterparts. …Private and charter schools know that their customers—families—can walk away and take their money with them if they fail to meet their needs.

Unsurprisingly, defenders of the status quo often claim that the government monopoly does a poor job because of inadequate money.

This is utter nonsense. I periodically share a chart put together by the late Andrew Coulson which shows how per-pupil spending in government schools has skyrocketed (with zero improvement in educational outcomes).

Perhaps even more relevant, it costs more, on average, for kids to attend government schools than it does for them to attend private schools.

And that assumes government schools are actually being honest about their true costs.

Yet that doesn’t seem to be the case. Researchers who have investigated the numbers have discovered pervasive under-counting (or non-counting) of big expenses such as building costs and pension obligations).

Adam Schaeffer narrated a video on this topic about ten years ago. Here’s a screenshot of the official numbers from various local governments compared to the actual costs.

What’s the bottom line? Instead of throwing good money after bad by rewarding under-performing government schools with bigger budgets, the right answer is comprehensive school choice.

P.S. School choice doesn’t automatically mean every child will be an educational success, but evidence from SwedenChile, Canada, and the Netherlands shows good results when competition replaces government education monopolies.

Gun Control Humor

I shared some gun control humor in December and then again in April, so it’s probably time to add to the collection.

We’ll start with a bit of cost-benefit analysis.

The serious point to be made, of course, is that bad people are less likely to engage in criminal behavior if the potential costs of such misbehavior are higher.

Speaking of which, this guy obviously doesn’t understand cost-benefit analysis.

Next we have an amusing exchange of text messages between an unhappy voter and a representative from Congresswoman Ilhan Omar’s reelection campaign.

Once again, there’s a serious point to be made, in this case about the importance of private gun ownership when local governments are too incompetent to protect life, liberty, and property.

Next we have an amusing depiction of why gun-free zones are absurd.

Though let’s not forget that there are real – indeed, deadly – consequences when governments impose policies that only disarm law-abiding people.

Last but not least, here’s a good way to make sure a leftist doesn’t find your revolver.

I suppose you could also store all your weapons in a closet and then slap a label on the door that says “job applications.”

If you enjoy this kind of humor, there’s an entire collection to peruse.

There are lots of millionaires in the world. About 20 million of them, including about 6 million of them in the United States.

I’d like those numbers to increase, which is why I’m always advocating pro-market policies. Capitalism is not only superior to socialism, it’s also better than other alternatives (social justice, redistributionism, state planning, etc).

As Walter Williams reminds us, capitalism is a wonderful system in part because people can only become rich by providing value to others.

That means investment, entrepreneurship, innovation, competition and other behaviors that make the rest of us better off – even if we never become millionaires ourselves.

Remember, the normal state of humanity is grinding poverty and material deprivation. It’s only in the past few hundred years that many of us have escaped that fate – thanks to a system of free enterprise that channeled human greed in a productive direction.

The bottom line is that I don’t hate rich people or resent their success. Indeed, I applaud them for improving my life.

Though there are 83 exceptions, at least according to this BBC report.

Some of the world’s richest people have urged governments to raise taxes on the wealthy to help pay for measures aimed at tackling the coronavirus pandemic. A group of 83 millionaires called for “permanent” change… Signatories include heiress Abigail Disney and Ben & Jerry’s co-founder Jerry Greenfield. The letter says: “…we do have money, lots of it. Money that is desperately needed now and will continue to be needed in the years ahead… Government leaders must take the responsibility for raising the funds we need and spending them fairly.”

I’ve actually gone on TV in the past to debate “neurotic” and “guilt-ridden” rich people like this.

My best suggestion is that if they they have too much money, they give their excess cash to me.

But since that doesn’t seem to be a persuasive argument, I now remind them that they don’t have to wait for politicians to impose a tax increase.

They Treasury Department actually has a website for people who want to voluntarily give extra money to Washington.

So they can put their money where their mouths are.

Though you probably won’t be surprised to learn that they don’t take advantage of that opportunity, even when people have shown them exactly how it can be done.

P.S. While they’ve made similar arguments in the past, Warren Buffett and Bill Gates did not sign the letter. It’s unclear if this is a sign they’re becoming more rational.

P.P.S. Leftist politicians may be even worse than guilt-ridden rich people. Not only do they fail to voluntarily pay higher taxes, they do everything they can to minimize their tax burdens. Just look at the Clintons. And John Kerry. And Obama’s first Treasury Secretary. And Obama’s second Treasury Secretary. And Governor Pritzker of Illinois.

Not all bad city governments are alike. In places like Chicago, local politicians generally impose bad policy because they’re buying votes (especially the votes of bureaucrats), not because they’re motivated by ideology.

But as you can see from this video, some Seattle politicians are genuinely crazy.

And those crazy local lawmakers are very serious about their class-warfare tax agenda.

The Wall Street Journal recently opined on the proposed tax hike in Seattle.

Seattle’s…City Council has decided this is the perfect moment to slap businesses with a large new tax on employment. …Recall that in 2018 Seattle passed a $47 million annual “head tax,” only to repeal it after a furious public realized it penalized job creation. No matter, the socialists who dominate the City Council passed a new iteration this week that’s more than four times bigger and punishes employers for paying good wages. Beginning next year, some 800 businesses with a payroll over $7 million will pay a tax of between 0.7% and 2.4% on all salaries over $150,000. …Councilwoman Teresa Mosqueda says the tax will create a “more robust and resilient economy,” but how taxing job creation accomplishes that is a mystery. The tax will stifle economic upward mobility, since employers will have an incentive not to raise pay above $150,000. …the new tax has veto-proof support on the City Council, which passed it 7-2.

What’s especially absurd, as explained by Brad Polumbo in a column for the Foundation for Economic Education, is that Seattle’s politicians want to exempt government bureaucrats from the tax.

…the tax could seriously hurt the economy… “As the region enters a deep recession and faces near-record job losses, the city council will be sending tax bills to companies across multiple sectors that have their doors closed and have been forced to layoff employees,” the business organization Downtown Seattle Association said… in an infuriating but sadly typical twist, the Seattle City Council exempted all government employees from their new tax. That’s right: The supposedly benevolent socialist city officials who thrust this upon their constituents made sure to carve out a giant exception for their peers on the taxpayer dime. …the city council’s new tax is…imposed on working people by politicians who made sure to spare the government class from sharing any of the burden.

By the way, this is a repeat fight.

Seattle lawmakers tried to impose a similar tax back in 2018 but were thwarted by opposition from private-sector workers and businesses (it’s also unclear whether such a tax would survive a legal challenge since the state’s constitution bars taxes on income).

If the tax ultimately is approved and implemented, it’s easy to predict the consequences. Businesses and workers will migrate to surrounding communities without the tax.

Not all of them, of course, but enough to make a difference. And that difference will get bigger with the passage of time.

What Ms. Mosqueda and Ms. Sawant don’t understand is that this cartoon only partially explain why socialism doesn’t work.

To be fully accurate, it also needs a door called “Escape” for the geese that fly away with their golden eggs.

I realize this is a perverse thought, but part of me wants this tax hike to be implemented just so we’ll have some powerful new evidence about why statism is a bad idea.

P.S. The proposed tax hike is just one reason why investors, entrepreneurs and business owners should be leery about creating jobs in Seattle. There’s also the big increase in the minimum wage and the recent (failed) experiment in autonomous socialism.

Two days ago, I looked at top income tax rates for the various states.

Yesterday, I shared the data for the states on sales tax rates.

The big takeaway from those two sources of data is that California politicians are very greedy.

But are they the greediest politicians in the country? What if we also measure other sources of tax revenue (property taxes, excise taxes, severance taxes, etc)?

And what about the various fees and charges that also are imposed by state and local governments?

To account for all these factors, we obviously need a comprehensive measure. And since the real cost of government is how much it is spending (regardless of whether the outlays are financed by taxes or borrowing), the most accurate approach is to calculate the relative spending burdens imposed by state and local governments.

The Census Bureau actually collects that data (albeit with a lag, so the most-recent data is for 2017).

But you don’t simply want to look at total spending by state and local governments. You also want to adjust for population (specifically, the population data for 2017) so we can calculate the per-capita burden of state spending.

Moreover, it’s also important to understand that some states have varying levels of income (for historic reasons, policy reasons, and difference in the cost of living). So if you want to calculate the economic burden of state and local spending, you also need data on state personal income for 2017.

So I put all these numbers into an excel file and crunched the numbers to see how the 50 states (plus Washington, DC) compare based on these two ways of showing fiscal burdens.

The following table shows the good states, at least relatively speaking. I’m amazed to see Connecticut and New Jersey in the top 10 for spending as a share of personal income. This merits further investigation, but one obvious takeaway is that it’s good to be a high-income state.

The goal, of course, should be to appear on both lists. On that basis, Idaho, Florida, and Nevada deserve praise.

But this three-part series isn’t designed to highlight the good states.

We want to know which states have the greediest politicians. And greed is being measured by their propensity to buy votes by spending other people’s money.

Once again, we’ll show the spending data both as a share of personal income and as a per-capita calculation. On this basis, Alaska is terrible (the politicians spend oil money with reckless abandon), as is the District of Columbia.

Wyoming also is a state with profligate politicians. It has no income tax and a modest sales tax, but lawmakers (just like in Alaska) can’t resist buying votes with all the money generated by energy taxes (which is why I penalized the state when writing about good state tax systems back in 2015).

This explains why North Dakota is on both lists as well.

If we focus on states that don’t get lots of money from energy taxes, than New York and Oregon deserve special scorn for appearing in both columns.

P.S. One area that requires further exploration (partially explained by the Third Theorem of Government) is the impact of 1,386 federal transfer programs that subsidize/encourage more spending by state and local governments.

Yesterday, in Part I of our series about greedy state politicians, we looked at top income tax rates.

The worst state, not surprisingly, was California with a top tax rate of 13.3 percent.

This onerous tax rate, combined with low-quality government and absurd levels of red tape, helps to explain why so many people have fled the Golden State.

(And because California’s problems are self-inflicted, that’s the biggest reason why the state should not get a bailout from Uncle Sam.)

Today, we’re going to look at another major source of tax revenue for state politicians.

Here are some excerpts from the Tax Foundation’s report on sales tax rates.

While graduated income tax rates and brackets are complex and confusing to many taxpayers, sales taxes are easier to understand; consumers can see their tax burden printed directly on their receipts. In addition to state-level sales taxes, consumers also face local sales taxes in 38 states. These rates can be substantial, so a state with a moderate statewide sales tax rate could actually have a very high combined state and local rate compared to other states. This report provides a population-weighted average of local sales taxes… Five states do not have statewide sales taxes: Alaska, Delaware, Montana, New Hampshire, and Oregon. Of these, Alaska allows localities to charge local sales taxes. The five states with the highest average combined state and local sales tax rates are Tennessee (9.55 percent), Arkansas (9.53 percent), Louisiana (9.52 percent), Washington (9.23 percent), and Alabama (9.22 percent). The five states with the lowest average combined rates are Alaska (1.76 percent), Hawaii (4.44 percent), Wyoming (5.34 percent), Wisconsin (5.43 percent), and Maine (5.50 percent). California has the highest state-level sales tax rate, at 7.25 percent.

Here’s the map that accompanied the report.

It’s good to be gray. By contrast the states with the darkest colors have the most onerous rates.

As noted in the excerpt above, Tennessee, Arkansas, Louisiana, and Washington have the greediest politicians, at least measured by sales tax rates.

But this is the point where it makes sense to merge today’s map with yesterday’s map. Because Tennessee and Washington don’t impose income taxes, while Louisiana and Arkansas both make that mistake.

And if you combine the tax rates from both maps, you’ll find that Tennessee and Washington are relatively low-tax states while Louisiana and Arkansas are relatively high-tax states.

So one of the lessons to be learned is that it’s never a good idea to give politicians multiple sources of revenue (something to remember every time greedy officials in D.C. broach the idea of a value-added tax).

But let’s keep our focus on the main topic, which is identifying the state with the greediest politicians?

If we continue with the methodology of combining the numbers from both maps, California easily ranks as the worst state, with a combined rate of 21.98 percent.

Indeed, it has a huge lead compared to the next-worst states (New York, New Jersey, and Minnesota), all of which have combined rates of between 17-18 percent.

What’s the best state?

Depends on the approach. If you count only wages and salaries, then New Hampshire wins with a combined rate of 0.0 percent. But if you include New Hampshire’s unfortunate policy of imposing income tax on interest and dividends, then Alaska wins with a combined rate of 1.76 percent.

Wyoming, South Dakota, and Florida also deserve applause. Those states are ranked #3, #4, and #5 because they have no income taxes and also manage to keep sales taxes at semi-reasonable levels.

P.S. Alaska and Wyoming both collect large amounts of energy taxes, so their good scores don’t necessarily reflect a commitment to low overall tax burdens.

When considering which state has the greediest politicians, the flippant (but understandable) answer is to say “all of them.”

A more serious way of dealing with that question, though, is to look at overall rankings of economic policy.

According to the Fraser Institute, we can assume that Delaware apparently has the worst politicians and New Hampshire has the best ones.

According to comprehensive calculations in Freedom in the 50 States, New York’s politicians seem to be the worst and Florida’s are the best.

But what if we just want to know the state where politicians squeeze the most money from taxpayers? In other words, which state has the worst tax system?

The Tax Foundation gives us part of the answer in their review of state income tax burdens.

Individual income taxes are a major source of state government revenue, accounting for 37 percent of state tax collections. …Forty-one tax wage and salary income… Of those states taxing wages, nine have single-rate tax structures… Conversely, 32 states levy graduated-rate income taxes… Top marginal rates range from North Dakota’s 2.9 percent to California’s 13.3 percent.

Here’s the accompanying map.

It’s very good to live in a gray state (no income tax!) and you definitely don’t want to live in a red or maroon state.

Unsurprisingly, California is the worst of the worst, with a top tax rate of 13.3 percent. No wonder productive people have been escaping the not-so-Golden State.

Hawaii and New Jersey are the next worst states, followed by Oregon and Minnesota. Though it’s definitely worth noting that there’s a local income tax in New York City, which would put the residents of that unfortunate community (if NYC was a state) in second place after California.

P.S. The disadvantage of living in a high-tax jurisdiction is especially significant now that there’s no longer a loophole in the federal tax code that subsidizes state profligacy.

P.P.S. The maroon and red states are obviously among the worst places to be an entrepreneur, investor, or business owner, though people with lots of unrealized capital gains fortunately don’t have to worry (yet!) about punitive tax laws.

Socialism Humor

As a libertarian who focuses on public finance, the 21st century hasn’t been fun.

  • Bush made government bigger.
  • Obama made government bigger.
  • Trump is making government bigger.
  • And I fully expect that Biden will make government bigger.

To be sure, we still have a long way to go on the “socialism slide” before the United States becomes Greece, or some other nation that might be considered socialist (however defined).

That being said, I don’t like the current trend. Which is why, in addition to my serious columns about the failure of socialism, I also like mocking that evil ideology.

Here are three new additions to the satire collection.

Our first example is partly based on the “not-real-socialism” excuse.

Next we have some satire about the left doesn’t learn any lessons from grocery stores in capitalist societies (to be fair, an American supermarket did change at least one mind).

As usual, I’ve saved my favorite item for last.

Venezuela is a tragic case study of what happens when economic liberty is smothered, But at least we get some clever humor.

I am surprised, for what it’s worth, that I haven’t seen more Venezuela-themed humor (here’s my only other example).

And I’ll close with the serious observation that I’m genuinely mystified that so many (especially young people) are attracted to an ideology with a wretched track record. Makes me genuinely worried that statism is on the winning side of history.

I’ve already written that state governments shouldn’t get a bailout from Washington.

Today, let’s specifically focus on California, a beautiful state that – as explained in this video – is being ruined by an even-worse-than-average collection of politicians.

This video was produced in 2018, so it goes without saying that California is in even worse shape today, in part because of a coronavirus-caused economic downturn.

But the Golden State also is in trouble because the politicians in Sacramento have been spending like drunken sailors (with apologies to drunken sailors for that unfair comparison).

That’s only part of the problem. California also imposes onerous taxes, an approach that is causing a steady exodus of households and business to states with better policy.

And when you consider other policies, the net result is that the Golden State is ranked only #48 out of 50 for overall economic freedom.

Should this bad track record be rewarded?

Writing yesterday in the Wall Street Journal, Gerald Parsky is willing to give a bailout if strings are attached.

California is facing a $54 billion budget deficit… To help address the shortfall, Gov. Gavin Newsom wants billions of federal dollars. Not so fast. Any bailout should come with strings attached. Washington should tie assistance to tax reform… California’s finances are too dependent on the personal income tax, which is the most volatile form of taxation. California’s revenues from personal income taxes amount to about 67% of all state revenues (up from 11% in 1950). Moreover, less than 1% of taxpayers contribute more than 50% of the tax revenue. The result is that when the economy softens and people earn less—or move out of the state—tax revenue plunges. …A survey of California residents showed that 53% of them are considering leaving.

Here’s Mr. Parsky’s specific proposal.

…these developments underscore the need for dramatic tax reform. …the California Legislature created a bipartisan commission, which I chaired… The commission recommended that California reduce its dependence on the personal income tax by…dropping the top rate from 9.3% to 6.5% and reducing or eliminating many deductions. The commission also recommended eliminating the corporate and sales-and-use taxes, replacing them with a broad new “business net receipts tax.” …A few years later, Gov. Jerry Brown and state policy makers did the opposite…they put forward a statewide initiative that raised the top marginal rate to 13.3%, thus making state revenues even more dependent on a volatile tax and California’s income-tax rate the highest in the nation. …there is an opportunity for the Trump administration to link any federal assistance to an overhaul of the way California taxes its residents.

For all intents and purposes, the author wants to extort California into adopting better (or less-worse) tax policy.

And if Trump (being a big spender) decided to bail out the states, it would be good to attach requirements so that there would be a silver lining to that dark cloud.

But here’s a better approach: Tell the politicians in Sacramento that they caused the mess and it’s their responsibility to fix it. Taxpayers elsewhere in America shouldn’t have to cough up cash to keep California from committing suicide.

Especially since it would simply be a matter of time before the Golden State’s politicians reneged on the deal and re-imposed class-warfare tax policy.

The bottom line, as illustrated by this cartoon from Michael Ramirez, is that California is on a downward trajectory and I don’t see any feasible way of reversing the trend.

P.S. Ramirez has a comfortable lead (as of today) in the best-political-cartoonist contest.

P.P.S. Paul Krugman attacked me a few years ago for being pessimistic about California. He was wrong then and he’s even more wrong today.

P.P.P.S. Some leftists in California have advocated for secession. I wonder if they still have that view.

It doesn’t get as much attention as basket-case nations such as Venezuela, North Korea, Zimbabwe, or Cuba, but Argentina is one of the world’s worst-governed nations.

Though the most damning indictment, in my humble opinion, is that Argentina in the late 1940s used to be one of the world’s 10-richest nations.

But beginning in 1946 under Juan Peron’s statist presidency (much beloved by Pope Francis for inexplicable reasons), policy shifted to the left and Argentina become one of the world’s least market-oriented nations.

Not surprisingly, the country’s relative living standards then began a steady decline, thus providing us with a painful lesson that rich nations that adopt bad policy don’t remain rich.

Recent history hasn’t made things better. Populist-left governments were in charge from 2003-2015, followed by an ineffective right-reformist government (akin to Nixon-Bush-Trump-style Republicanism) from 2015-2019, and now the left is back in charge.

But one thing that hasn’t changed is that Argentina has bloated, corrupt, and ineffective government.

Here are some details from a column that wrote last September for Project Syndicate.

Argentina has fallen back into crisis for the simple reason that not enough has changed since the last debacle. …Argentinian authorities succumbed to the same temptation that tripped up their predecessors. In an effort to compensate for slower-than-expected improvements in domestic capacity, they permitted excessive foreign-currency debt, aggravating what economists call the “original sin”: a significant currency mismatch between assets and liabilities, as well as between revenues and debt servicing. …Undeterred by Argentina’s history of chronic volatility and episodic illiquidity – including eight prior defaults – creditors gobbled up as much debt as the country and its companies would issue… The search for higher yields has been encouraged by unusually loose monetary policies… Then there is the IMF, which readily stepped in once again to assist Argentina… So far, Argentina has received $44 billion under the IMF’s largest-ever funding arrangement.

This latest bailout is a classic case of throwing good money after bad, which seems to be the IMF’s primary purpose – especially with regards to Argentina.

Later that same month, Anne Krueger weighed in with another column for the same publication.

Argentina is…chronically overspending and over-regulating until it is forced to go to the International Monetary Fund for a new round of treatment. In 2001, the country suffered a major crisis, and…entered into an IMF loan program. But its debt restructuring was messy, and policies to address its underlying structural problems – lowering trade barriers, allowing public-utility prices to rise – were pursued halfheartedly or not at all. …government spending and fiscal deficits began to increase once again. Consolidated public expenditures rose from a low of 22.9% of GDP in 2002 to 30.1% of GDP in 2008, and to 42.2% in 2015. …For an economy as distorted as Argentina’s, there is no medicine that can prevent a period of painful adjustment. …By early 2018, Argentina was in another crisis. …in June 2018 the IMF approved a $50 billion loan program, the largest in the Fund’s history. …The problem, once again, is that the medicine was not strong enough. At the patient’s insistence, the measures were too mild to be effective, and more difficult structural reforms were delayed. …the country needs structural reforms, especially a further reduction in the size of the government sector, starting with pensions. More gradualism will only prolong the pain and allow political opposition to mount.

Ms. Krueger is correct. Only good policy will cure Argentina’s woes.

Sadly, bailouts actually undermine that goal give the country’s awful politicians an excuse to postpone necessary reforms.

Though there is a silver lining to the dark cloud of Argentine statism. James Pethokoukis of the American Enterprise Institute pointed out earlier this year that we now has a real-world example of democratic socialism.

…the Nordic nations are “firmly rooted in capitalism and free markets,” wrote Michael Cembalest of JP Morgan Asset Management in a note last summer… The closest Cembalest could find to a true democratic socialist state, at least by his definition, is Argentina, “which has defaulted 7 times since its independence in 1816, which has seen the largest relative standard of living decline in the world since 1900, and which is on the brink of political and economic chaos again in 2019.” …Argentina met most of the following criteria: a) higher personal and corporate tax rates, and higher government spending; b) more worker protections restricting the ability of companies to hire and fire, and less flexibility for companies to set wages based on worker productivity and/or to hire foreign labor; c) more reliance on regulation, more constraints on real estate development; d) more anti-trust enforcement and more state intervention in product markets; and a shift away from a shareholder-centric business model; e) protections for workers and domestic industries through tariff and non-tariff barriers, and more constraints on capital inflows and outflows.

Not exactly a ringing endorsement of so-called democratic socialism.

If you prefer hard data, this chart shows that Argentina has the world’s worst economic performance over the past 100 years.

And I imagine the country would look even worse if 1945 was the base year.

Let’s close with this recently tweeted video from Human Progress, which shows relative levels of per-capita economic output over a 100-year period for 16 different nations.

Pay specific attention to how high Argentina was ranked in the late 1940s if you want to appreciate the awful consequences of Peronist statism.

P.S. Also make sure to note that Chile was in last place in the 1970s and then significantly improved in the rankings by liberalizing the economy and reducing the burden of government in the 1980s. Yet another reminder that the world is a laboratory and every experiment tells us the same thing: Statism produces bad results and markets deliver good results.

 

I know pro-market people who plan on voting to re-elect Trump because they like his record on taxes or regulation. I also know pro-market people who plan on voting against Trump because they don’t like his record on spending or trade.

I understand their motives. What baffles me, however, are people who have decided – because of their views on Trump – to change their views on policy issues. Which is one of the clever aspects of this amusing video from Ryan Long.

By the way, this is not a new phenomenon.

During the 2001-2008 period, I constantly interacted with people who were against proposals for bigger government when Bill Clinton was in the White House, but then decided to rationalize George Bush’s profligacy and interventionism.

There’s a word for this: Hypocrisy.

This accusation certainly applies to politicians, who face pressure to “be a team player” when a member of their party is in the White House and issuing foolish proposals.

But it also applies to ordinary people. And this Ninth Theorem of Government is dedicated to both groups.

I’ll close by revisiting what I wrote about understanding the motives of pro-market people who are either voting for Trump or against Trump.

That being said, I don’t the pro-Trump voters to suddenly decide that it’s a good idea to squander money or impose trade taxes. I want them to vote for Trump in spite of those bad policies.

And I don’t want the anti-Trump voters to decide that it’s a a good idea to oppose pro-growth tax cuts and deregulation.  I want them to vote against Trump in spite of those good policies.

This analysis also applies to folks who are motivated by other issues (immigration, foreign policy, guns, judges, decorum, etc). Simply stated, put principles first.

P.S. Here are the eight previous Theorems of Government.

  • The “First Theorem” explains how Washington really operates.
  • The “Second Theorem” explains why it is so important to block the creation of new programs.
  • The “Third Theorem” explains why centralized programs inevitably waste money.
  • The “Fourth Theorem” explains that good policy can be good politics.
  • The “Fifth Theorem” explains how good ideas on paper become bad ideas in reality.
  • The “Sixth Theorem” explains an under-appreciated benefit of a flat tax.
  • The “Seventh Theorem” explains how bigger governments are less competent.
  • The “Eighth Theorem” explains the motives of those who focus on inequality.

I periodically share tweets that have some sort of remarkable feature, either good or bad.

Clever counter-tweets are especially appreciated. I even started giving recognition to the most brutally effective response each year.

But I may have been too quick to assign a winner for this year.

That’s because a Twitter account called @architecturpic published this tweet yesterday.

While it’s accurate to point out that highway exits don’t produce scenic architecture, is this an indictment of capitalism?

Not if you compare it to the slums of socialism, which is the message in this devastating response from @BrentCochran1.

Ouch. As the announcers might say at a tennis tournament, “game, set, and match for Brent Cochran.”

Suffice to say that there will have to be co-winners for the best counter-tweet of 2020.

By the way, it’s normally quite easy to find both nice and ugly architecture in any nation.

So to add a bit of hard data to today’s column, I’ll simply note that the average poor American has more spacious housing than the average middle-class person in Europe.

That doesn’t mean the housing will be architecturally significant, but it does indicate that people are better off in countries with smaller government and more economic liberty (indeed, it’s also worth noting that the average poor American enjoys higher overall living standards than middle-class folks in most other industrialized nations).

Which is why any tweet comparing socialism and capitalism has a foregone conclusion.

P.S. At some point, I’ll probably set up a special page for “Remarkable Tweets.” But since that hasn’t yet happened, here are the other tweets that I found to be noteworthy.

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