But those are arguments that I make all the time. Today, I want to call attention to the mid-point of the interview when I explain that President Trump is actually in a strong position to get a win, notwithstanding all the rhetoric about his budget being “dead on arrival.”
Simply stated, while he can’t force Congress to enact a bill that reforms entitlements, his veto power means he can stop Congress from appropriating more money that he wants to spend.
But if he wants to win that battle, he needs to be willing to allow a partial government shutdown.
Which he wasn’t willing to let happen when he approved a bad deal a few weeks ago to fund the government for the rest of the 2017 fiscal year.
But we have some good news. He may have learned from that mistake, at least if we take this tweet seriously.
either elect more Republican Senators in 2018 or change the rules now to 51%. Our country needs a good "shutdown" in September to fix mess!
Amen. Trump should be firm and explicitly warn Congress that he will veto any appropriations bill that spends one penny above what he requested in his budget.
And if Congress doesn’t comply, he should use his veto pen and we’ll have a partial shutdown, which basically effects the “non-essential” parts of the federal government that presumably shouldn’t be funded anyhow.
The only way Trump loses that fight is if enough Republicans join with Democrats to override his veto. But that’s unlikely since it is mostly Democrat constituencies (government bureaucrats and other recipients of taxpayer money) who feel the pinch if there’s a partial shutdown.
This is a big reason why, as we saw during the Clinton years, it’s Democrats who begin to cave so long as Republicans don’t preemptively surrender.
The bottom line is that being tough on the budget isn’t just good policy. As Ronald Reagan demonstrated, there are political rewards when you shrink the burden of government and enable faster growth.
P.S. I’m not convinced that Trump actually wants smaller government, but I hope I’m wrong. This upcoming battle will be very revealing about where he really stands.
P.P.S. And if we do have a shutdown fight, I hope it will generate some amusing political humor, such as what’s at the bottom of this post. Other examples of shutdown-related humor can be enjoyed by clicking here, here, here, here, and here.
What’s the best argument for reducing the onerous 35 percent corporate tax rate in the United States?
1. Should the rate be lowered because it’s embarrassing that America has the highest corporate tax rate in the developed world, and perhaps the entire world? That’s certainly a persuasive reason for a lower rate.
3. Should the rate be lowered so companies no longer will have a big incentive to “invert” to other countries? That’s probably a strong argument for some people, but not for me since I’ve never objected to inversions.
4. Should the rate be lowered to mitigate the anti-competitive impact of America’s worldwide tax system? Sure, that would help, but I would prefer to directly solve the problem by shifting to territorial taxation.
6. Should the rate be lowered because the corporate tax is actually a levy on workers, consumers, and shareholders? It is silly that we pretend to tax companies when the ultimate tax is paid by individuals.
7. Should the rate be lowered to reduce the bias for debt? A lower rate would mitigate that problem, though it would be better to directly solve the problem by getting rid of the double tax on dividends.
8. Should the rate be lowered to reduce the amount of money going to Washington? I’m in favor of “starving the beast,” but a lower corporate rate may not be effective because there will be considerable revenue feedback.
9. Should the rate be lowered to trigger a new round of tax competition, even though that will make politicians unhappy? Actually, the fact that politicians will be unhappy is a feature rather than a bug.
I’ve shared lots of examples showing how jurisdictional competition leads to better tax policy.
Simply stated, politicians are less greedy when they have to worry that the geese with the golden eggs can fly away.
And the mere prospect that the United States will improve its tax system is already reverberating around the world.
The German media is reporting, for instance, that the government is concerned that a lower corporate rate in America will force similar changes elsewhere.
The German government is worried the world is slipping into a ruinous era of tax competition in which countries lure companies with ever-more generous tax rules to the detriment of public budgets. …Mr. Trump’s “America First” policy has committed his administration to slashing the US’s effective corporate tax rate to 22 from 37 percent. In Europe, the UK, Ireland, and Hungary have announced new or rejigged initiatives to lower corporate tax payments. Germany doesn’t want to lower its corporate-tax rate (from an effective 28.2 percent)… Germany’s finance minister, Wolfgang Schäuble, …left the recent meeting of G7 finance ministers worried by new signs of growing beggar-thy-neighbor rivalry among governments.
A “ruinous era of tax competition” and a “beggar-thy-neighbor rivalry among governments”?
I”d much rather have “competition” and “rivalry” instead of an “OPEC for politicians,” which is what occurs when governments impose “harmonization” policies.
The Germans aren’t the only ones to be worried. The Wall Street Journal observes that China’s government is also nervous about the prospect of a big reduction in America’s corporate tax burden.
China’s leaders fear the plan will lure manufacturing to the U.S. Forget a trade war, Beijing says a cut in the U.S. corporate rate to 15% from 35% would mean “tax war.” The People’s Daily warned Friday in a commentary that if Mr. Trump succeeds, “some powerful countries may join the game to launch competitive tax cuts,” citing similar proposals in the U.K. and France. …Beijing knows from experience how important tax rates are to economic competitiveness. …China’s double-digit growth streak began in the mid-1990s after government revenue as a share of GDP declined to 11% in 1995 from 31% in 1978—effectively a supply-side tax cut. But then taxes began to rise again…and the tax man’s take now stands at 22%. …Chinese companies have started to complain that the high burden is killing profits. …President Xi Jinping began to address the problem about 18 months ago when he launched “supply-side reforms” to cut corporate taxes and regulation. …the program’s stated goal of restoring lost competitiveness shows that Beijing understands the importance of corporate tax rates to growth and prefers not to have to compete in a “tax war.”
Amen.
Let’s have a “tax war.” Folks on the left fret that this creates a “race to the bottom,” but that’s because they favor big government and think our incomes belong to the state.
As far as I’m concerned a “tax war” is desirable because that means politicians are fighting each other and every bullet they fire (i.e., every tax they cut) is good news for the global economy.
Now that I’ve shared some good news, I’ll close with potential bad news. I’m worried that the overall tax reform agenda faces a grim future, mostly because Trump won’t address old-age entitlements and also because House GOPers have embraced a misguided border-adjustment tax.
Which is why, when the dust settles, I’ll be happy if all we get a big reduction in the corporate rate.
President Trump’s new budget is getting attacked by politicians and interest groups in Washington. These critics say the budget cuts are too severe and draconian.
My main reaction is to wonder whether these people are illiterate and/or innumerate. After all, even a cursory examination of Trump’s proposal shows that the federal government will expand over the next decade by an average of 3.46 percent every year, considerably faster than inflation.
For what it’s worth, I’m sure most of the critics actually do understand that government will continue growing under Trump’s budget. But they find it politically advantageous to engage in “Washington math,” which is when you get to claim a program is being cut if it doesn’t get a sufficiently large increase. I’m not joking.
That being said, while the overall federal budget will get bigger, there are some very good proposals in the President’s budget to terminate or reduce a few specific programs. I don’t know if the White House is actually serious about any of these ideas, but some of them are very desirable.
Shutting down the wasteful National Endowment for the Arts.
Defunding National Public Radio and the Corporation for Public Broadcasting.
Terminating the scandal-plagued Community Development Block Grant program.
Block-granting Medicaid and reducing central government funding and control.
Today, let’s add a fifth idea to our list. The Trump budget proposes a substantial reduction in foreign aid (for numbers, see line 18 of this OMB excel file).
I hope these cuts are implemented.
In part, I want to save money for American taxpayers, but I’m even more motivated by a desire to help the rest of the world. Simply stated, foreign aid is counterproductive.
The great paradox of government-to-government aid transfers is that they won’t work if recipient nations have bad policy. Yet we also know that nations with good policy don’t need handouts.
My colleague at the Cato Institute, Marian Tupy, embraces the idea of less foreign aid in a Reasoncolumn.
President Donald Trump is said to be considering large cuts to foreign aid. Those cuts cannot come soon enough.
And he explains why in the article. Here’s the passage that caught my eye.
Graham Hancock’s 1994 book, The Lords of Poverty: The Power, Prestige, and Corruption of the International Aid Business, is still worth reading. As the author explains, much of foreign aid is used to subsidize opulent lifestyles within the aid establishment. “Only a small portion of [aid money],” Hancock writes, “is ever translated into direct assistance. Thanks to bureaucratic inefficiency, misguided policies, large executive salaries, political corruption, and the self-perpetuating ‘overhead’ of the administrative agencies, much of this tremendous wealth is frittered away.”
The problems are not specific to the United States. Foreign aid also is used as a scam to line the pockets of contractors in the United Kingdom.
The British aid contracting industry has more than doubled in value from £540 million in 2012 to £1.34 billion last year. The proportion of every pound of taxpayers’ aid money that is spent on consultants has risen from 12p in 2011 to 22p. …Budget breakdowns showed the public being charged twice the going rate for workers. One contractor on a project had a margin of 141 per cent between staffing costs charged to Dfid and the cost at market rates.
By the way, one study even found that foreign aid undermines democracy.
Foreign aid provides a windfall of resources to recipient countries and may result in the same rent seeking behavior as documented in the “curse of natural resources” literature. …Using data for 108 recipient countries in the period 1960 to 1999, we find that foreign aid has a negative impact on democracy. In particular, if the foreign aid over GDP that a country receives over a period of five years reaches the 75th percentile in the sample, then a 10-point index of democracy is reduced between 0.6 and one point, a large effect.
Last but not least, Professor William Easterly explains in the Washington Post that foreign aid does not fight terrorism.
President Trump’s proposed budget includes steep cuts in foreign assistance. Aid proponents such as Bill Gates are eloquently fighting back. …The counter-terrorism argument for foreign aid after 9/11 indeed succeeded for a long time at increasing and then sustaining the U.S. foreign aid budget. …the link from aid to counter-terrorism never had any evidence behind it. As it became ever less plausible as terrorism continued, it set up aid for a fall. …the evidence for a link from poverty to terrorism never showed up. …studies since 9/11 have consistently shown that terrorists tend to have above-average income and education. Even if there had been a link from poverty to terrorism, the “aid as counter-terrorism” argument also required the assumption that aid has a dramatic effect on the poverty of entire aid-receiving nations. Today’s proponents of aid no longer make the grandiose claims of aid lifting whole societies out of poverty.
Heck, foreign aid keeps societies in poverty by enabling bigger government.
Yet international bureaucracies such as the United Nations keep peddling the discredited notion that developing nations should have more money to finance ever-bigger government.
The bottom line is that people who care about the world’s poor people should be advocating for freedom rather than handouts.
P.S. If you’re still skeptical, I invite you to try to come up with an example that answers either of these two questions.
Here are the three most important things to understand about what the President has proposed.
First, the budget isn’t being cut. Indeed, Trump is proposing that federal spending increase from $4.06 trillion this year to $5.71 trillion in 2027.
Second, government spending will grow by an average of almost 3.5 percent per year over the next 10 years.
Third, because the private economy is projected to grow by an average of about 5 percent per year (in nominal terms), Trump’s budget complies with the Golden Rule of fiscal policy.
Now that we’ve established a few basic facts, let’s shift to analysis.
But for those who prefer to see the glass as half-full, here are a couple of additional takeaways from the budget.
Fourth, as I wrote yesterday, there is real Medicaid reform that will restore federalism and save money.
Fifth, domestic discretionary spending will be curtailed.
But not just curtailed. Spending in the future for this category will actually be lower if Trump’s budget is approved. In other words, a genuine rather than fake budget cut.
I’ll close with my standard caveat that it’s easy to put good ideas (or bad ideas) in a budget. The real test is whether an Administration will devote the energy necessary to move fiscal reforms through Congress.
Based on how Trump was defeated in the battle over the final spending bill for the current fiscal year, there are good reasons to be worried that good reforms in his budget won’t be implemented. Simply stated, if Trump isn’t willing to use his veto power, Congress will probably ignore his proposals.
P.S. You may have noticed that I didn’t include any discussion of deficits and debt. And I also didn’t address the Administration’s assertion that the budget will be balanced in 10 years if Trump’s budget is approved. That’s because a fixation on red ink is a distraction. What really matters is whether the burden of spending is falling relative to the private sector’s output. In other words, the entire focus should be on policies that generate spending restraint and policies that facilitate private sector growth. If those two goals are achieved, the burden of red ink is sure to fall. Whether it happens fast enough to balance the budget in 2027 is of little concern.
When President Trump released his so-called “skinny budget” back in March (dealing with the parts of Leviathan that are annually appropriated), I applauded several of the specific recommendations.
Shutting down the wasteful National Endowment for the Arts.
Defunding National Public Radio and the Corporation for Public Broadcasting.
Terminating the scandal-plagued Community Development Block Grant program.
The only problem is that I didn’t sense – and still don’t see – any serious effort to push through these much-needed fiscal reforms (and the same is true for his proposed tax cut).
The bottom line is that Trump has the power to achieve the bulk of his agenda, but only if he is willing to veto pork-filled bills and force a partial government shutdown. But he’s already blinked once in this type of battle, so the spending lobbies feel confident that he can be rolled again.
But let’s set that aside. The White House is about to release the President’s full budget and there already is considerable angst about potential reforms to Medicaid. Here are some excerpts from a report in the Washington Post.
President Trump’s first major budget proposal on Tuesday will include massive cuts to Medicaid…more than $800 billion over 10 years. …Trump’s decision to include the Medicaid cuts is significant because it shows he is rejecting calls from a number of Senate Republicans not to reverse the expansion of Medicaid that President Barack Obama achieved as part of the Affordable Care Act. The House has voted to cut the Medicaid funding… The proposed changes will be a central feature of Trump’s first comprehensive budget plan…it will seek changes to entitlements — programs that are essentially on autopilot and don’t need annual authorization from Congress.
I have two reactions to this story.
First, the Washington Post is lying (and not for the first time). There will be no Medicaid cuts in Trump’s budget. Contrary to the headline, there aren’t “big cuts” and there won’t be any “slashing.” We won’t see the actual numbers until tomorrow, but I can state with complete certainty that the Trump Administration is merely going to propose a reduction in how fast the program’s budget increases.
Second, it’s a very good idea to slow down the growth of Medicaid spending.
Here is some background information on the program, starting with an article in The Week by Shikha Dalmia
Medicaid is arguably the civilized world’s worst health insurance program. …This joint federal and state program has historically allowed the feds to give states 50 cents for every dollar they spent on purchasing health coverage for the poor. Because of this federal largesse, Medicaid has grown astronomically, becoming the single biggest ticket item on virtually every state budget. …President Obama essentially money-bombed states into expanding it even further. He told states that Uncle Sam would pick up 100 percent of the tab for the first three years for every additional person they covered up to 138 percent of the poverty level. …Medicaid now covers almost 75 million Americans. And even before ObamaCare took effect, Medicaid paid for almost half of all births in America. …The combined annual cost of the program now exceeds half a trillion dollars (with the feds’ share at 63 percent and states’ at 37 percent) — which adds up to roughly $7,000 for every man, woman, and child covered by the program. …Several reputable studies have found that Medicaid patients experience no better health outcomes than uninsured people, and arguably even slightly worse outcomes. …ObamaCare is like a Rube Goldberg contraption. Taking it apart and reassembling it is easier said than done — even if it’s the right and smart thing to do. And if Republicans can’t figure out a way to do so, American patients and taxpayers will be the big losers.
And here are some excerpts from a Wall Street Journaleditorial.
The…important goal is to change the incentives over the long term and eliminate the perverse formulas that discount the welfare of the truly needy. …A helpful revolution in Medicaid would be to end the match rate that rewards higher spending and move to block grants. States would get some fixed pot of money annually, determined by how many people are enrolled. The pots might be expensive in the early years, but states would become accountable for marginal per capita spending growth over time. Governors can be assuaged by ending Medicaid’s command-and-control regulatory model, freeing them to use new tools to control costs.
James Capretta of the American Enterprise has additional details, particularly showing how the “federal medical assistance percentage” encourages higher spending.
In 1965, the authors of Medicaid thought they were creating a program that would provide federal structure, uniformity, and some funding for the many state programs that were already providing relatively inexpensive “indigent care” services to low-income households. …Medicaid has grown into the largest health care program in the country by enrollment, with 66 million participants and with annual federal and state costs of more than $550 billion. …Medicaid spending has increased rapidly nearly every year since the program was enacted, creating significant pressure in federal and state budgets. …The Medicaid FMAP is the fundamental flaw in the program’s current design and the main reason it is so costly. States can initiate new spending in Medicaid—spending that often will boost economic activity in the state—and federal taxpayers pay for at least half the cost. At the same time, savings from state-initiated Medicaid-spending cuts are also shared with federal taxpayers. For instance, in a state where the FMAP is 60 percent, the governor and state legislators face the unattractive prospect of keeping only $1.00 of every $2.50 in Medicaid savings they can identify and implement. The other $1.50 goes to the federal treasury. Put another way, governors and state legislators are reluctant to impose $2.50 in budgetary pain for a $1.00 gain to their bottom line.
The solution to this rigged system, he explains, is block grants or per-capita caps.
The…important structural change would be the switch to some form of fixed federal funding to states. The federal government would continue to heavily support the Medicaid program, but the commitment would have a limit, which would give states a strong incentive to manage the program for efficiency and cost control. One approach would be a block grant. Under a block grant, the federal government would make fixed, aggregate payments to the states based on historical spending patterns. Cost overruns at the state level would require the state to find additional resources within the state budget. Conversely, states that were able to control costs would enjoy the full benefits of their efforts. …Under per capita caps, the federal government would establish for each state a per-person payment for each of the main eligibility categories in the Medicaid program: the elderly, the blind and disabled, nondisabled adults, and children. The federal government would then make payments to the states based on the number of Medicaid enrollees in each of these categories. The per capita payment would be based on historical spending rates for the various categories of beneficiaries in each state and, again, would be indexed to a predetermined growth rate.
In a 2012 column for Forbes, Avik Roy explains why reform will produce good results.
People on Medicaid have far worse health outcomes than those with private insurance, and in many cases those with no insurance at all. …there are…substantial efficiencies that can be gained by giving states broad flexibility in the way they care for the poor. Indeed, this is what made block-granting welfare in 1996 such a spectacular success. …three states—Rhode Island, Indiana, and New York—have taken advantage of more flexibility to save money while delivering better care. …Rhode Island was able to save $100 million, and slow the growth of Medicaid from 8 percent per year to 3 percent, by making a few tweaks to their program that they couldn’t before…under a block-grant system, states can identify ways to save money while improving care, and other states can adopt best practices.
Writing for the Wall Street Journal, Professor Regina Herzlinger and Dr. Richard Boxer elaborate on how a new system would work.
Republicans should combine two ideas popular in their party: block grants and health savings accounts. The former would let states tailor their Medicaid policies to their local communities, while the latter would give enrollees the ability to choose their own insurers and providers. In essence, Washington could give the states Medicaid block grants, allocated per capita, to provide beneficiaries with high-deductible insurance and health savings accounts. …Health savings accounts, which force medical providers to compete for consumers who pay out of their own pocket, also reduce overall costs. When employers introduce such accounts, health-care costs are reduced by about 5% for each of the next three years, according to a 2015 study from the National Bureau of Economic Research.
Nicholas Eberstadt, in an article for Commentary, points out the Medicaid is an employment killer.
21st-century America has witnessed a dreadful collapse of work. …According to the Census Bureau’s SIPP survey (Survey of Income and Program Participation), as of 2013, over one-fifth (21 percent) of all civilian men between 25 and 55 years of age were Medicaid beneficiaries. For prime-age people not in the labor force, the share was over half (53 percent). …means-tested benefits cannot support a lavish lifestyle. But they can offer a permanent alternative to paid employment, and for growing numbers of American men, they do. The rise of these programs has coincided with the death of work for larger and larger numbers of American men not yet of retirement age.
And the icing on the cake is that Medicaid finances much of the opioid problem in America.
[The Medicaid card] pays for medicine—whatever pills a doctor deems that the insured patient needs. …For a three-dollar Medicaid co-pay, therefore, addicts got pills priced at thousands of dollars, with the difference paid for by U.S. and state taxpayers. A user could turn around and sell those pills, obtained for that three-dollar co-pay, for as much as ten thousand dollars on the street. …Medicaid inadvertently helped finance America’s immense and increasing appetite for opioids in our new century.
And if we want a cherry on top of the icing, Medicaid also is a cesspool of fraud, as reported by Reason.
Every year, the Government Accountability Office (GAO) releases a report putting a dollar figure on the amount of improper payments in Medicaid. …it shows that the program…spends a substantial portion of its annual budget…On fraud, on waste, on services not rendered, not medically necessary, or incorrectly billed. Last year, for example, the GAO found that about 9.8 percent of federal Medicaid expenditures, or about $29 billion, was spent improperly. …This year, the total has risen once again. About 10.5 percent, or $36 billion, of federal spending on the program isn’t up to snuff, according to a GAO report released this morning.
Last but not least, Charlie Katebi discusses Medicaid problems in a column for the Federalist.
Trump advisor Kellyanne Conway said Trump wants to “block-grant Medicaid to the states” to ensure “those who are closest to the people in need will be administering.” …Block grants would cap federal Medicaid funding and let states decide how to use those dollars. It would introduce flexibility and budget discipline to a program that sorely needs both. …Medicaid’s funding formula incentivizes policymakers to expand the program at the expense of core state government functions. …Medicaid’s structure also hurts its beneficiaries. …Washington bars reformers from making meaningful changes without going through a lengthy and restrictive approval process. This forces states to control costs the only way they can: paying doctors less. States have cut Medicaid’s reimbursement so low that many providers simply refuse to treat its beneficiaries. …Block grants promise to break Medicaid’s vicious cycle of rising costs and declining care. Spendthrift politicians would no longer be able to expand Medicaid and expect the federal government to foot the bill. But state-level reformers will enjoy greater authority to streamline and improve the program.
I may as well close with the video I narrated for the Center for Freedom and Prosperity.
The video was released in 2011, but nothing has changed…except that the numbers today are far worse, in part because of Obama’s Medicaid expansion.
So it’s time to assess overall economic policy in India, which means this is an opportunity to point out that there are some positive developments in the world’s second-most populous nation.
One of my Cato colleagues, Swaminathan S. Anklesaria Aiyar, wrote an exhaustive study on India’s economy last year. The bottom line is that there’s been some progress, most of which took place in the 1990s.
India’s economic reforms over 25 years have transformed it from a low-income country to a middle-income one. But to become a high-income country, India must liberalize the economy much further.
At the risk of oversimplification, India has gone through three phases since its independence after World War II.
It began with a long period of statism and socialism.
Here are some additional excerpts from the study describing that grim period. And I’ve augmented those passages with India’s awful score from Economic Freedom of the World in 1975, when it only scored 4.33 on a 0-10 scale.
…until 1990, India was…hamstrung by a million controls, imposed in the holy name of socialism and then used by politicians to create patronage networks and line their pockets. …The public sector was supposed to gain the commanding heights of the economy. Nothing could be manufactured without an industrial license or imported without an import license, and those licenses were scarce and difficult to get. Any producers who exceeded their licensed capacity faced possible imprisonment for the sin of violating the government’s sacred plan targets. …Indian socialism reached its zenith in the 1970s, when the banks and several major industries were nationalized. The top income tax rate rose to 97.75 percent, and the wealth tax to 3.5 percent. …India’s poverty ratio did not improve at all between independence in 1947 and 1983; it remained a bit under 60 percent. Meanwhile, the population virtually doubled, meaning the absolute number of poor people doubled.
Now let’s look at some good news.
There was a small amount of reform in the 1980s, which became much more significant amount of reform in the 1990s.
In 1991 India embarked on major reforms to liberalize its economy after three decades of socialism… P. V. Narasimha Rao became prime minister in 1991. The Soviet Union was collapsing at the time, proving that more socialism could not be the solution for India’s ills. Meanwhile, Deng Xiaoping had revolutionized China with market-friendly reforms. And so Indian politicians turned in the direction of the market too. …After 1991 direct tax rates gradually came down substantially… The wealth tax on shares was abolished, making it possible to raise shareholder value without being penalized for it. …The corporate tax was cut from a maximum of 58 percent to 30 percent, yet corporate tax collections increased from 1 percent of GDP to almost 6 percent at one point. …Personal income tax rates also fell from 50 percent to 30 percent, but once again collections rose, from 1 percent of GDP to almost 2 percent.
Notice, by the way, that lower tax rates led to more tax receipts. Yet another piece of evidence for the Laffer Curve.
Though I’m much more interested in whether people benefited, not whether politicians collected more money.
And the paper reveals that the reform era generated significant dividends.
Twenty-five years later, the outcome has been an outstanding economic success. India has gone from being a poor, slow growing country to the fastest-growing major economy in the world in 2016. …Per capita income is up from $375 per year in 1991 to $1,700 today. India has long ceased to be a low-income country as defined by the World Bank, which uses a threshold of $1,045, and has become a middle-income country. …areas that were comprehensively liberalized saw the disappearance of corruption. Before 1991, bribes were needed for industrial licenses, import licenses, foreign exchange allotments, credit allotments, and much else. But economic reform ended industrial and import licensing, and foreign exchange became freely available. Lower import and excise duties ended most smuggling and excise tax evasion
There’s even been good news on poverty.
Now let’s shift to bad news. Simply stated, India needs a lot more reform, but it doesn’t seem to be happening.
As illustrated by this chart showing the country’s annual scores from Economic Freedom of the World, India is mired in a modern era of policy stagnation.
In other words, so much more is needed to help India become a rich nation. Yet the reform agenda has been spotty in the past two decades, or even nonexistent.
Here are some final excerpts, accompanied by India’s most-recent EFW scores.
Many old price and quantitative controls should be abolished, and yet more are being enacted. Extensive controls permeate the entire chain of agricultural inputs, outputs, and processed agricultural goods (notably sugar). New price controls have been clamped on seeds and even on royalties paid by seed companies to suppliers of technology. The tax regime is uncertain, and many cases of retrospective taxation have tarnished the investment climate. …Even as old controls have been liberalized, dozens of new regulations are issued every year relating to new areas like the environment, health and safety standards, forests, and tribal areas. As with the old controls, the new controls are issued in the name of the public good and are then used by politicians and inspectors to line their pockets. …The bureaucracy is notoriously corrupt and slow moving… Public-sector corporations remain large, wasteful, and unreformed. Government banks still control 70 percent of bank lending, have the worst record of bad loans and financial losses, and yet are such convenient cash cows for politicians that no party wants to privatize them. …To reach high-income status, India must become a much better governed country that opens markets much further.
The good news, if you compare the 1975 and 2014 EFW scores, is that India now enjoys much more freedom than it did at the peak of the socialist era.
That being said, there are 111 nations with more economic freedom, so there is a lot of room for improvement.
Let’s close with a very powerful factoid. America has many immigrant populations that earn above-average incomes. But, by far, Indian-Americans are the most successful.
Just imagine, then, how fast India would grow and how rich the people would be with Hong Kong-style economic liberty?
For almost all of human history, the norm for 99 percent of the population was poverty and deprivation.
Then, starting a few hundred years ago, something amazing happened. There was a sudden explosion of prosperity. In past years, I’ve shared two videos explaining this remarkable phenomenon, which is linked to the unleashing of free markets, the rule of law, and property rights.
Now let’s look at some similar data, but for a different purpose. Here are some fascinating charts put together by Professor Max Roser of Oxford. As you can see at the top, almost everybody used to be poor. But as you look below, you’ll notice that an increasing share of the world’s population is middle class or above.
There are three takeaways from this data.
The first conclusion, as noted above, is that the world is getting richer. Hundreds of millions of people have been lifted out of extreme poverty. That’s wonderful news.
The second conclusion, as seen by the red section of the chart, is that a modest bit of reform in India and China has paid big dividends (and, given the success of Indian-Americans and Chinese-Americans, I imagine those nations could become much richer with additional market-friendly reform).
But I want to focus today on a third conclusion, which is that pro-growth policies are the best way to help the poor, not redistribution driven by a fixation on inequality.
More specifically, notice how there was a lot of inequality in the chart for 1975, particularly compared to the chart for 1800. My leftist friends, with their flawed belief that the economy is a fixed pie, would instinctively assume that Europe and the Americas somehow became comparatively rich because Asia and Africa stayed comparatively poor.
In reality, the real story is that the economies of the western world expanded because they found the recipe for growth and prosperity.
And the 2015 chart shows that the rest of the world is finally moving in that direction as well (as confirmed by long-run data from Economic Freedom of the world).
What would have happened, however, if our friends on the left had control of global policy in 1975 and imposed high tax rates in order to redistribute lots of income from rich nations to poor nations? In other words, what would have happened if they imposed on the world the policies that they try to impose in various nations?
If that had happened, the world economy would have underperformed. As Thomas Sowell has explained, such policies penalize productive behavior and subsidize unproductive behavior.
It’s possible that such policies would have reduced inequality, to be sure, but global income would have been far lower.
…there are…substantial efficiencies that can be gained by giving states broad flexibility in the way they care for the poor. Indeed, this is what made block-granting welfare in 1996 such a spectacular success. …three states—Rhode Island, Indiana, and New York—have taken advantage of more flexibility to save money while delivering better care. …Rhode Island was able to save $100 million, and slow the growth of Medicaid from 8 percent per year to 3 percent, by making a few tweaks to their program that they couldn’t before…under a block-grant system, states can identify ways to save money while improving care, and other states can adopt best practices.
