IMF Bailouts and Moral Hazard

One of the (many) unfortunate tendencies of politicians is that they focus on the short run (i.e., their upcoming reelection battles).

Why is this unfortunate? Because there are some policy changes that may be costly in the short run, but they are nonetheless very worthwhile because they generate big long-run benefits.

• Shifting to a system of personal retirement accounts means trillions of dollars of near-term “transition costs” in order to protect current retirees and older workers, but reform will solve the program’s long-term $40 trillion-plus unfunded liability.
• Messy fights over the debt limit create (almost certainly exaggerated) concerns about potential default, but that potential cost would be trivial compared to the long-run benefits of figuring out how to limit the growing burden of federal spending.
• When bad monetary policy causes a financial bubble or housing bubble, shifting to good monetary policy presumably will lead to short-run pain as markets adjust, but that’s far better than producing a 2008-style crisis by letting the bubble(s) expand further.

I offer the above examples because similar short-run and long-run tradeoffs exist when looking at what happens when the International Monetary Fund provides bailouts for profligate governments.

The Economist has an article that perfectly illustrates the IMF’s pernicious role.

The year was 1958. …Argentina turned to the fund for its first “standby arrangement”, a line of credit accompanied by a plan to stabilise the economy. …Sixty years later, in June 2018, Argentina was back for its 21st arrangement: a $50bn loan, later increased to $57bn, backed by the government’s promises to cut the budget deficit and strengthen the central bank in the hope of quelling inflation and stabilising the peso. The loan was the largest in the imf’s history. …Despite its size, the rescue failed to save Argentina from default and despair. …Foreign capital kept retreating, the peso kept falling and inflation kept rising. The evaluation speculates that the size of the imf’s loan may even have been “self-defeating”, eroding confidence rather than inspiring it.

Just in case you missed it, the article mentions that Argentina has received 21 different bailouts since 1958, which works out to be one bailout every three years (Professor Steve Hanke counts 22 bailouts, for what it’s worth).

In probably every case, IMF bureaucrats presumably thought a bailout was a way of minimizing economic pain (and they probably thought the same thing for dozens of bailouts provided to Haiti, Colombia, Peru, Honduras, Philippines, etc).

But what actually has happened is that politicians – in Argentina and elsewhere – have learned that it’s okay to pursue bad policy because there’s always another bailout.

In other words, IMF policy is a glaring example of “moral hazard.” By shielding politicians from the consequences of bad policy, the bureaucracy is actually encouraging those politicians to engage in additional bad policy.

To be blunt, the IMF is the arsonist rather than the firefighter.

The article in the Economist included this observation.

Conservative critics think the fund has been seduced by its dance partner, wasting public money in a futile battle.

My right-leaning friends are correct, but their criticisms are too mild.

It’s not just that the IMF is wasting money. It’s dampening growth by pushing policies that misallocate capital.

It’s not just that the IMF is engaging in a futile battle. It’s making problems far worse by enabling ever-more government.

Here’s what should have happened to Argentina in 1958 (and what should have happened in 2018, and what should happen when there’s pressure for yet another bailout).

• The investors who buy Argentinian government bonds should learn that lending to dodgy governments is a risky practice.
• The politicians in Argentina who spend excessively should learn that there’s a tipping point when they can no longer borrow.
• The interest groups in Argentina should learn that parasites also suffer when they kill their host animal by being too greedy.
• The voters in Argentina should learn that there are serious adverse consequences when you elect “Peronist” politicians.

Sadly, none of these lessons get learned so long as the IMF is standing by to provide never-ending bailouts.

So instead of some short-run pain, which is then offset by better long-run policy, we get bailouts that mask short-run pain and encourage more long-run damage.

The moral of the story? Shut down the IMF.

The sad reality? The IMF is getting more power.

P.S. To add injury to injury, the IMF usually insists that governments raise taxes in exchange for getting bailed out.

P.P.S. To be fair, the IMF recommends tax increases even in the years when bailouts aren’t needed, so at least the bureaucrats have a consistent (albeit nutty) message.

The 2nd Amendment Protects the Rights of All Americans

When I wrote about race and gun control two years ago, I included five short videos to help show the value of the 2nd Amendment for minorities.

For today’s column on the same topic, we’ll start with this full-length video.

If you don’t have time to watch the video, one of the key messages is that gun control has a racist history, both in principle and in practice.

Gun control was used to make it difficult for freed blacks to own guns after the civil war. And gun control was used to hassle and intimidate blacks during the battle for civil rights last century.

That’s the bad news.

The good news is that civil rights for gun owners have been expanding in the United States.

And the latest issue of the U.K.-based Economist has an article that looks at the growth of gun ownership specifically among minorities.

Annette Evans…is Chinese-American, lives in the suburbs of Philadelphia and identifies herself as socially liberal—not the archetypal conservative, rural white man. Yet she owns over a dozen rifles, pistols and shotguns (“one for every occasion, like purses or shoes”) and teaches self-defence courses to women. …Of the 7.5m Americans who bought firearms for the first time between January 2019 and April 2021—as gun-buying surged nationwide—half were female, a fifth black and a fifth Hispanic, according to a recent study… The share of black adults who joined the gun-owning ranks, 5.3%, was more than twice that of white adults. …Blacks have a long history of owning guns: Harriet Tubman toted them, Martin Luther King kept them at home. …The broadening tent is good for manufacturers and bad for gun-control advocates.

Not everyone is happy about this expansion of civil liberties.

In a column for National Review, David Harsanyi reviews a book that makes a twisted argument about the 2nd Amendment.

Left-wing academic Carol Anderson’s new book, The Second: Race and Guns in a Fatally Unequal America, is all over the news. “The Second Amendment is not about guns — it’s about anti-Blackness, a new book argues,” reads a CNN headline. …This is wishful thinking. The Second is an attempt — much like the 1619 Project — to reimagine history in purely racial terms. The result is tendentious polemic that suffers not only from a paucity of historical evidence, but from a dishonest rendering of the facts we do know. …This is a contention that isn’t backed by a single contemporaneous quote or piece of hard evidence in the book. …Anderson ignores the tradition of militias in English common law — codifying the “ancient and indubitable” right in the 1689 English Bill of Rights — which had nothing to do with chattel slavery. Anderson ignores the fact that nearly every intellectual, political, and military leader of the Founding generation — many of whom had no connection to slavery — stressed the importance of self-defense in entirely different contexts.

Opining for the Boston Globe, Jeff Jacoby explains why gun control is a civil rights issue, notwithstanding the ACLU’s moral blindness.

The American Civil Liberties Union caused some double takes last Sunday with a tweet blaming racism and “anti-Blackness” for the presence of the Second Amendment in the Constitution. It was jarring to see the ACLU, once an indomitable champion of the Bill of Rights, endorse the revisionist view that one of its core components, the right to keep and bear arms, exists for malevolent racial reasons. …the real racism associated with the Second Amendment isn’t in the rights of gun ownership that the Bill of Rights cemented into the Constitution’s text. It is in the long and shameful record of those rights being denied. …In blatant disregard of the Second Amendment’s guarantee, Southern states enacted laws prohibiting Black people, enslaved and free alike, from owning firearms. …After the Civil War, racists continued to use gun control as a tool of white supremacy. …The most notorious of those gun-control posses called itself the Ku Klux Klan. …A favorite formulation of Frederick Douglass was that if Black people were to be really free, “they must have the cartridge box, the jury box, and the ballot box to protect them.”

Amen.

Olivia Rondeau and Hannah Cox (narrator of the above video), in an article for the Foundation for Economic Education, also point out that gun control has a racist history.

The Second Amendment has indeed been selectively upheld throughout our nation’s history, with gun control frequently being used to block black Americans from accessing their right to self-defense. Additionally, enforcement of gun control laws has been discriminatory, and the rhetoric around guns has often framed black people as a threat. …black people were prohibited from owning guns under the “Slave Codes” and “Black Codes.” …in the 1870s, racists in power turned to the use of “facially neutral laws” to continue blocking black people from gun ownership. …They used things like police-issued licenses, permit laws, and business and transaction taxes on guns that disproportionately affected black people, thus successfully disarming them. …By no means was this the end of discriminatory gun control laws or enforcement in our country. To date, black Americans are more likely than any other group to suffer the adverse impacts of gun control laws.

Last but not least, Jacob Sullum adds his two cents, writing for Reason about how gun control is bad news for minorities.

Progressive politicians nowadays overwhelmingly oppose pot prohibition and criticize the war on drugs, in no small part because of its bigoted origins and racially skewed costs. Yet they overwhelmingly favor tighter restrictions on guns, even though such policies have a strikingly similar history and contemporary impact. Drug control and gun control are unjust because they criminalize conduct that violates no one’s rights, which erodes civil liberties, contributes to mass incarceration, and unfairly imposes lifelong restrictions on millions of Americans. …Both types of policies have long targeted racial and ethnic minorities, at first explicitly and later in practice. …”The historical record provides compelling evidence that racism underlies gun control laws—and not in any subtle way,” historian Clayton Cramer noted in a 1995 Kansas Journal of Law and Public Policy article. “Throughout much of American history, gun control was openly stated as a method for keeping blacks and Hispanics ‘in their place,’ and to quiet the racial fears of whites.”

Since the War on Drugs is wasteful and inane, I obviously have no problem with Sullum’s analogy.

P.S. If you like feel-good stories about racial harmony (and assuming you’re not Michael Bloomberg), click here.

P.P.S. As illustrated by columns from Charles Blow and Danielle King, a growing number of African-Americans are embracing gun ownership.

What Should Be Done about Academic Bias?

I’ve only addressed academic bias one time and that was back in 2018.  So let’s thoroughly examine that topic today, starting with this video from Prager University.

Let’s now augment the video with some additional data.

First, let’s confirm that academics lean far to the left. Here’s how professors rate their own ideology.

Even economists lean overwhelmingly to the left, though not quite so bad as the other fields of study.

Meanwhile, professors of tax law overwhelmingly support class warfare, including really punitive policies such as higher death taxes, global minimum taxes for business, and more punitive taxation of capital gains.

By the way, I’m guessing that tax law professors oppose a consumption tax (like the value-added tax) for the wrong reason. They’re not against more revenue for politicians, just against higher taxes that don’t specifically target upper-income taxpayers.

Academic bias is a problem at Ivy League schools. As illustrated by this headline from a report about Harvard.

And this headline from a story about Yale.

But the problem is not confined to the supposedly elite colleges.

This story shows an overwhelming tilt to the left in the middle of the country.

Heck, it’s a nationwide phenomenon, as illustrated by the headline of this story.

I could share dozens of similar headlines (including data from the Legatum Institute showing similar bias in other nations), but let’s now focus on why this bias exists and whether it’s a problem.

In a column for the Foundation for Economic Education, Brian Balfour asks why academics are so sympathetic to statism.

…an overwhelming majority of university professors in America are on the political Left. A common response from leftists circulating to this reality is that “academics are liberal because that is the way intelligent people think.” …Intellectuals, according to Hayek, are drawn to utopian visions. First and foremost among those visions is the creation of a new social order, specifically one designed by “experts.” …In short, progressive intellectuals fancy themselves as radicals, desiring to overturn capitalism and traditional Western culture, with themselves at the helm. …For the ambitious among them, an academic career provides a rosy opportunity. …There is an inherent liberal bias favoring greater social control by the state among academics in part because it’s the only avenue academics have to become the social reformists they desire to be. …Finally, there is the role played by naked self-interest. Government subsidies and student financial aid make up a significant share of revenue for universities. Furthermore, government grants dominate funding for academic research. Academics reap financial benefits from government largesse. What a tidy coincidence that most academics favor big government.

There’s also an issue of self-selection bias.

In other words, smart kids on the right focus on business-oriented careers while smart kids on the left focus on academic-oriented careers.

Some of the research on this topic is discussed in this article for Inside Higher Ed by Scott Jaschik.

…professors’ political lopsidedness reflects self-selection… Gross and Fosse, and Catherine Cheng, a graduate student at the time, contributed to a 2010 book, Diversity in American Higher Education: Toward a More Comprehensive Approach (Routledge), that built on the theory of self-selection. Their research suggested that academics tend to form their views on politics early in life… Yet more evidence for the self-selection theory comes from a 2007 study, “Left Pipeline: Why Conservatives Don’t Get Doctorates,” by the husband-and-wife social science team of Matthew Woessner of Pennsylvania State University at Harrisburg and April Kelly-Woessner of Elizabethtown College. …They found that in both choices of majors and in personal values, conservatives seem to be taking themselves off the track for academic careers well before graduate school. The authors did not find evidence of statistically significant differences in grades or measures of academic performance… For starters, the paper finds that conservatives are much more likely to pick majors in professional fields — areas that tend to put students on the fast track for an M.B.A. (or for a job) more than a Ph.D. Only 9 percent of students on the far left and 18 percent of liberals major in professional fields, compared to 33 percent of conservatives and 37 percent of those who identify as being on the far right.

Now that we’ve established that there is academic bias, and also speculated on the factors that lead leftists to dominate higher education, let’s ask whether this is a problem.

I’m tempted to say yes because I don’t want students getting nothing but a Keynesian perspective when learning about economics.

But a biased education is just one potential problem. There’s also a quasi-totalitarian suppression of alternative views.

This left-wing groupthink in academia is not good for professors. I recommend this column in the Atlantic by Professor John McWhorter, but the headline may suffice if you’re pressed for time.

And this headline from another story in the Atlantic, this one by Conor Friedersdorf, shows that there’s a chilling effect on open discourse by students.

The problem even exists in secondary education, as captured by this headline from an article by Samuel Abrams in National Review.

I’m also worried about a decline in academic rigor.

We’ve all presumably heard horror storied about grade inflation.

But I think this data, shared in Psychology Today by Glenn Geher, is even more worrisome.

We designed a study with academics in mind. In short, we surveyed nearly 200 academics from around the US and asked them to rate the degree to which they prioritize each of the five following academic values:

• Academic rigor
• Knowledge advancement
• Academic freedom
• Students’ emotional well-being
• Social Justice

Some highlights of the findings are as follows:

• Relatively conservative professors valued academic rigor and knowledge advancement more than did relatively liberal professors.
• Relatively liberal professors valued social justice and student emotional well-being more so than did relatively conservative professors…
• Business professors placed relative emphasis on knowledge advancement and academic rigor while Education professors placed relative emphasis on social justice and student emotional well-being…

Our Discussion focuses largely on how these data are consistent with a highly politicized portrait of academia.

The bottom line is that professors are overwhelmingly on the left and such professors openly admit they are guided by social justice and emotions rather than rigor and knowledge.

That doesn’t bode well for America’s future.

So what is the solution?

There isn’t one, at least nothing that directly would solve the problem. I don’t want politicians telling professors what to teach. And I don’t want politicians imposing ideological quotas.

But there is an indirect step that might help. Get rid of taxpayer subsidies.

I’ve previously pointed out that grants and loans are bad policy because they lead to higher tuition and fees, as well as bureaucratic bloat.

But there’s also an ethical issue. As shown in this cartoon, taxpayers should not be coerced into financing bad ideas. Heck, they shouldn’t be coerced into financing good ideas, either.

I also think there are problems with the accreditation process, as well as the bias for college training over vocational training (see this excellent set of tweets by Oren Cass).

P.S. For a particularly horrifying example of leftist groupthink in action, watch these three videos.

P.P.S. Media bias is also an important issue (see here, here, here, here, and here).

Joe Biden, Wokeness, Big Government, and Popularity

Other than just-for-the-fun-of-it election predictions, I generally stick to economic analysis rather than politics.

But I acted as a pundit in this interview about Joe Biden’s waning popularity (in my defense, I also used the opportunity to slip is some criticism of his agenda).

My assertions about Biden pushing a hard-left agenda aren’t new.

I made the same point during the 2020 election campaign.

And I take second place to nobody in criticizing what he’s been doing ever since he got inaugurated.

Indeed, the only thing I’m uncertain about is whether I should be more upset about his class-warfare tax agenda or his proposals to expand the burden of government spending.

And, for what it’s worth, I don’t think my comments about Biden’s leftist ideology are controversial. Not even back in 2020.

For instance, here’s the headline from a Vox column that year by Matt Yglesias.

And here’s a headline from a column that same year by Michael Kazin in the New York Times.

Both of those columns said the same thing – namely, that Biden had embraced a leftist agenda (and both authors were very happy about that development).

I also would direct people to this 2019 Washington Post column by Lane Kenworthy, which observes (with approval) that Democrats have moved to the left.

If you want even more evidence, this analysis from 538 also makes the same point.

And a report from Pew notes that there’s a much bigger gap now between Republicans and Democrats – and it’s almost entirely because the median Democrat is now much farther to the left.

There’s one other point from my RT interview that’s worth highlighting.

I mentioned that we’ve had a strange realignment in the United States. Many rich people have moved to the left while lots of low-income people have moved to the right.

Is this because Democrats are pushing some policies that disproportionately help upper-income people, such as student loan bailouts and expanding the deduction for state and local taxes?

Maybe that’s part of the answer, but I mentioned in the discussion that social and cultural issues are probably the main reason.

In other words, wokeness may be the big dividing line nowadays in American politics – which is not exactly good news for libertarians who want the focus to be statism vs. liberty.

P.S. I also used the interview to explain that Reagan was special because he was able to enact big changes (notwithstanding America’s separation-of-powers system). But unlike other presidents who oversaw big changes (such as LBJ and FDR), Reagan actually pushed through reforms that were good for the nation.

P.P.S. I don’t like the idea of government-financed media, but my philosophical objections haven’t prevented me from appearing on PBS, BBC, and France 24, so I figured it was okay to also appear on Russia Today.

Communism Humor

My most-recent edition of communism mockery was last October.

So let’s take this opportunity to add to our ever-growing collection.

We’ll start with this list of nations that have achieved success by following the ideas of Karl Marx.

Speaking of Marx, he’s bragging in this meme about the most notable cuisine of communist nations.

In other next item, Marx is peeved that he is a clown compared to Ayn Rand and the famous duo of Austrian economics, Ludwig von Mises and Friedrich Hayek.

Let’s stop picking on Marx since it’s too much like taking candy from a baby.

Instead, let’s mock the consequences of his evil ideology.

Our fourth item shows the results of a real-world experiment between capitalism and communism.

A comparison of East Germany and West Germany tells the same story.

Per tradition, I’ve saved the best for last.

Here’s an item from The Onion about how communism would have been a great success if the Soviet Union had somehow managed to kill 20.1 million people rather than “just” 20.0 million.

Sadly, there are some leftists who won’t understand this satire.

These are the nutjobs who claim that “real communism hasn’t been tried.”

ECB and IMF Studies Show Spending Caps Are the Ideal Fiscal Rule

Back in 2017, the Center for Freedom and Prosperity released this video to help explain why spending caps are the most sensible and sustainable fiscal rule.

Switzerland actually has a spending cap in its constitution, and similar fiscal rules also exist in Hong Kong and the state of Colorado.

These policies have produced very good results.

There are many reasons to support a spending cap, including the obvious observation that an expenditure limit (as it is sometimes called) directly addresses the actual problem of excessive government.

And addressing the underlying disease works better than rules that focus on symptoms, such as balanced budget requirements or anti-deficit mandates.

You’ll notice toward the end of the video that the narrator cites pro-spending cap research from international bureaucracies, which is remarkable since those institutions normally have a bias for bigger government.

I’ve also written about that research, citing studies by the International Monetary Fund (here and here), the Organization for Economic Cooperation and Development (here and here) and the European Central Bank (here).

Today, let’s look at more evidence from these bureaucracies.

We’ll start with a new study from the European Central Bank. Here’s some of what the authors (Nicholai Benalal, Maximilian Freier, Wim Melyn, Stefan Van Parys, and Lukas Reiss) found when comparing spending limits and anti-deficit rules.

…this paper provides an in-depth assessment of two alternative measures of fiscal consolidation and expansion: the change in the structural balance (dSB) and the expenditure benchmark (EB). Both the dSB and the EB are currently used to assess compliance with the fiscal rules under the Stability and Growth Pact (SGP). …The EB was introduced as an indicator in 2011, and has gained in importance relative to the dSB since the European Commission began to put more emphasis on it in 2016. …A comparison of the fiscal performance of euro area countries reveals significant differences depending on whether the assessment is based on the dSB or the EB. …this paper finds that the EB has advantages over the dSB as a fiscal performance indicator. …expenditure rules…provide more predictability in fiscal requirements. …Even more importantly, the EB can be shown to be less procyclical as a fiscal rule than the dSB. 

Let’s also review some 2019 research from the International Monetary Fund.

This study (authored by Kodjovi Eklou and Marcelin Joanis) looks at whether fiscal rules can constrain vote-buying politicians.

In order to increase their chances of reelection, politicians are known to undertake fiscal manipulations, especially in election years. These fiscal manipulations typically take the form of increased public expenditure… Many countries, both developed and developing, have adopted fiscal rules in recent decades as an attempt to enforce fiscal discipline. …In this paper, we employ a cross-country panel dataset in order to test whether fiscal rules adopted in developing countries have been effective in constraining political budget cycles. The dataset covers 67 developing countries over the period 1985-2007. …Our dependent variable is the general government’s final consumption expenditure as a share of GDP.

Here’s what the authors concluded about the effectiveness of spending caps.

Our empirical evidence in a sample of 67 developing countries over the period 1985-2007, shows that fiscal rules cause fiscal discipline over the electoral cycle. More specifically, in election years with fiscal rules in place, public consumption is reduced by 1.65% point of GDP as compared to election years without these rules. Furthermore, the effectiveness of these rules depends on their type… In particular, expenditure rules, rules covering the general government and rules characterized by a monitoring body outside the government dampen political budget cycles in government consumption.

Indeed, footnote 12 of the paper specifically notes the superiority of expenditure limits.

…the results show that public consumption is reduced by 2.44% points during election years with expenditure rules in place. The findings on expenditure rules are consistent with Cordes et al. (2015) who show that the compliance rate for these rules are high.

Last but not least, the fiscal experts at the Office of Management and Budget included in Trump’s final budget some very encouraging language at the end of Chapter 10 of the Analytical Perspectives.

…additional efforts to control spending are needed. Several budget process reforms should be considered, including setting spending caps… Outlay caps that are consistent with the historical average as a share of gross domestic product (GDP), post-World War II levels could be enforced with sequestration across programs similar to other budget enforcement regimes. An outlay cap on mandatory spending would complement discretionary caps, which have been in place since 2013. The Budget proposes to continue discretionary caps through 2025 at declining levels and declining levels through 2030.

Trump was a big spender, of course, but at least there were people in his administration who realized there was a problem.

And they recognized the right solution.

P.S. It’s also interesting that the authors of the IMF study found that fiscal rules work better in democracies.

…estimates focusing on the subsample of democratic elections. The effect of fiscal rules on the political budget cycle is larger… More specifically, public consumption is reduced by 2.46% point of GDP (while it is 1.65% point in the baseline).

This may not bode well for the durability of Hong Kong’s spending cap.

The authors also found that foreign aid makes it less likely that a government will follow sensible policy.

Foreign aid, which relaxes the budget constraint of the government, is negatively correlated with the probability of having fiscal rules.

Needless to say, nobody should be surprised to learn that foreign aid undermines good policy.

Iowa Adopting a Flat Tax?

I wrote last year about an encouraging trend of lower tax rates at the state level.

As you can see from this map, one of the states moving in the right direction is Iowa.

But Governor Kim Reynolds isn’t satisfied with just lowering tax rates, which is a worthy goal, of course.

She is now proposing to get rid of the state’s so-called progressive tax and replace it with a flat tax.

This would be very good news for Iowa’s economy and Iowa’s taxpayers.

An article in the Quad-City Times explains Governor Reynolds’ proposal.

In four years, every Iowan’s income would be taxed at 4% by the state under a new proposal from Gov. Kim Reynolds. Reynolds introduced her flat income tax proposal during last week’s annual Condition of the State address to the Iowa Legislature, encouraging the lawmakers to pass her idea.“Flat and fair,” Reynolds proclaimed during the speech. …Ten states currently have a flat state income tax, including Iowa’s eastern neighbor, Illinois. The list includes more blue states like Michigan and Massachusetts, but also red states like Kentucky and Utah. …Under Reynolds’ new plan, top state income tax rate would be eliminated each year over the next four years, until in 2026 every Iowa worker, regardless of income level, pays 4 percent. …The plan would reduce state revenue by $226 million in the first year, and by $1.6 billion at full implementation… Reynolds said during her speech. “Yes, we’ll have less to spend once a year at the Capitol, but we’ll see it spent every single day on Main Streets, in grocery stores, and at restaurants across Iowa. We’ll see it spent in businesses instead of on bureaucracies.” …Republican legislative leaders praised Reynolds’ proposal and said they are eager to begin working on legislation.

The article also explains the previous tax reform, which focused on lowering marginal tax rates.

In 2021, Iowa had nine state income tax rates, tied for the second-most in the country. Most Iowa workers’ income was taxed at between 4.14%, with rates increasing as income increased, up to a top rate of 8.53% for those earning over $78,435 of taxable income. As a result of tax reform passed by the Iowa Legislature and signed into law by Reynolds in 2018, the number of tax brackets will be reduced to four, ranging between 4.4 and 6.5%.

I showed last year how that legislation moved Iowa up one level in a ranking of state income taxes.

Well, here’s an updated look at the state’s total improvement if the governor’s plan for a flat tax is enacted.

Iowa jumps from the worst column to the next-to-best column.

And if I ranked states by the rate of their flat tax, Iowa’s 4 percent rate would be lower than the rates in North Carolina, Kentucky, Illinois, Michigan, Utah, and Massachusetts.

Not as good as the states with no income taxes, but still impressive.

P.S. I’ll be curious to see how much Iowa will improve in the Tax Foundation’s rankings if the proposed flat tax gets approved.

 

The Case Against Price Controls, Part II

To explain why politicians should not interfere with prices, I’ve shared videos from Marginal Revolution, Don Boudreaux, Learn Liberty, and Russ Roberts.

To add to that collection, here’s part of a lecture by Professor Antony Davies.

The bottom line is that price controls have a history of failure, anywhere and everywhere they’ve been tried.

• They have led to catastrophic outcomes when implemented as part of command-and-control socialism, as we saw in the Soviet Union and Maoist China.
• They have produced terrible consequences when imposed on an economy-wide basis to ostensibly fight inflation, as was the case in post-war West Germany and in the United States with the (pro-statism) Nixon Administration.
• And they have generated awful results when politicians interfere with prices in specific sectors of the economy (rent control, community rating, minimum wages, gouging laws, etc).

But some folks on the left want to resuscitate this awful idea, as reported in an article in the New York Times by Ben Casselman and Jeanna Smialek.

America’s recent inflation spike has prompted renewed interest in an idea that many economists and policy experts thought they had long ago left behind for good: price controls. …the phrase “price controls” has, at least for many people, called to mind images of product shortages and bureaucratic overreach. …As consumer prices soared this fall, however, a handful of mostly left-leaning economists reignited the long-dormant debate, arguing in opinion columns, policy briefs and social-media posts that the idea deserves a second look. …Few economists today defend the Nixon price controls. But some argue that it is unfair to consider their failure a definitive rebuttal of all price caps. …Democrats and the administration have stopped short of suggesting actual price limits.

In a column for the U.K.-based Guardian, Professor Isabella Weber of the University of Massachusetts Amherst argues for price controls to counter corporate greed.

Inflation is near a 40-year high. …In 2021, US non-financial profit margins have reached levels not seen since the aftermath of the second world war. This is no coincidence. …large corporations with market power have used supply problems as an opportunity to increase prices and scoop windfall profits. …we need…a serious conversation about strategic price controls… Price controls would buy time to deal with bottlenecks that will continue as long as the pandemic prevails. Strategic price controls could also contribute to the monetary stability needed to mobilize public investments towards economic resilience, climate change mitigation and carbon-neutrality. The cost of waiting for inflation to go away is high. 

For what it’s worth, I agree that businesses want as much profit as possible (just as workers want wages to be as high as possible).

But the notion that corporate greed is causing inflation is laughable. After all, weren’t businesses also greedy in the 1990s, 2000s, and 2010s? Yet we didn’t see a big uptick in consumer prices.

So we shouldn’t be surprised that the vast majority of economists, both right and left, reject Prof. Weber’s hypothesis.

Needless to say, the Federal Reserve deserves blame for inflation, not greedy companies (or greedy workers).

It’s possible, of course, that today’s rising prices are partly or even mostly transitory. But, given the easy-money policy we’ve had (including under Trump), it’s perhaps more likely that prices are going up as an inevitable consequence of mistakes by the central bank.

Let’s close with Alberto Mingardi’s 2020 column in the Wall Street Journal about how a product-specific price control failed.

Italy is trying to control the price of face masks, …a fixed price of 50 European cents… The Italian newspaper Il Foglio reports that the government is buying face masks wholesale at a price between 38 and 70 European cents each—essentially admitting it can’t abide by its own price controls. …The Civil Protection Department, Italy’s national body that deals with emergencies, …discouraged entrepreneurs from importing masks, right as more masks were needed. …Those who were buying up masks to hoard risked government confiscation. These moves clamped down on price gouging but created a shortage. …pharmacists can’t get masks cheap enough to sell at a retail price of 50 European cents. …The price fixers have promised a subsidy to pharmacists to mitigate losses. But the price was fixed by executive order, whereas the subsidy was merely promised. Quite a few pharmacists elected to stop selling masks.

P.S. Politicians in Washington want to impose price controls on the pharmaceutical industry. That concerns me since I’m getting older and might be in a position where I would benefit from new therapeutics. But companies will have much less incentive for research and innovation if government makes it very difficult to make money.

The Ongoing Horror of Cuban Socialism

Back in 2014, I compared the long-run economic performance of Cuba and Hong Kong.

Both jurisdictions were roughly equal about 60 years ago. But the data show a dramatic performance gap ever since the communists took power in Cuba, with Hong Kong (which was very pro-market back then) enjoying much bigger increases in prosperity.

Sadly, not much has changed in Cuba since I wrote that column.

The communist dictatorship is still there, and the economy is still socialist (notwithstanding even Castro admitting its failure).

And this means ongoing misery for ordinary people.

Here are some excerpts from a story published by Agence France-Presse.

Cubans are no strangers to queuing for everything from bread to toothpaste, often standing for hours under a blazing sun with no access to a toilet or drinking water, and always with the fear of leaving empty-handed. It is a daily ordeal Cubans have endured for about 60 years of communist rule… Cuba recorded an official inflation rate of 70 percent in 2021, when the economy recovered a modest two percent after an 11-percent drop in 2020, signaling the nation’s worst economic crisis in almost three decades. With government reserves dwindling, food imports — some $2 billion worth per year before the pandemic struck — had to be drastically cut back in the country of 11.2 million. …The shortages affect everyone; even the well-heeled have to contend with long lines, though they often pay other people to hold their place. …It is common for shops to have only two or three products at a given time, or none. Sometimes, people queue not knowing what, if any, product they will be able to buy that day.

Some defenders of Cuba blame the hardship on the United States, which imposes considerable restrictions on trade and tourism with Cuba.

I’m always happy when people recognize the downside of trade barriers, but blaming Cuba’s economic misery on the partial embargo is akin to a football team blaming its field goal kicker after getting shut out, 56-0.

Virtually all economists, including left-leaning ones, agree that bad Cuban economic policy is what’s causing deprivation and suffering.

Mary Anastasia O’Grady opined on this issue in her Wall Street Journal column.

Repression and propaganda are the only two things that Havana does well. …For decades, Cuba has blamed what it calls the U.S. “blockade” for island privation. Regime talking points have been repeated ad nauseam in U.S. media and beyond. …Why life for most Cubans is primitive in the 21st century is not hard to discern. Shortages caused by communism have been made infinitely worse during the Covid-19 pandemic because, as tourism dollars dried up, the regime naturally diverted diminishing hard currency to itself. There is no gasoline or diesel for ambulances… Military vehicles and secret-police cars are always ready to go. Nurturing the island’s nomenklatura also takes real money, as does caring for the children of elite kleptocrats who display their obscene wealth—like car collections, thoroughbred horses and luxurious travel—on social media. …Havana is sore because it doesn’t qualify for credit from the U.S. But Cuba is a proven deadbeat, having defaulted on hundreds of millions of dollars in debt to Russia, Europe, Latin America and Japan. The despots are pouting too because they can’t stick their snouts in troughs at the International Monetary Fund and World Bank.

Let’s close by looking at some long-run economic trends.

I started this column by charting the difference between Cuba and Hong Kong. But since Hong Kong’s economic attractiveness is being eroded by China, let’s instead see how Cuba compares to a handful of other nations.

I’ve previously compared Cuba and pro-market Taiwan, as well as Cuba and sort-of-pro-market Panama. Now let’s add sort-of-pro-market Botswana to the analysis.

As you can see, the Maddison data shows you don’t need perfect policy to get much better results than Cuba.

The moral of the story is that you get great results with lots of economic liberty, okay results with some economic liberty, and miserable results with almost no economic liberty (i.e., lots of socialism).

Which is the lesson of my anti-convergence club.

P.S. The AFP story from above included this hopeful sentence.

The government in Havana has said that boosting national production is the best way to deal with shortages and queues, and has slowly started opening the economy to private enterprise.

I certainly hope this is true, though I’m skeptical since previous promises economic liberalization have not been fulfilled (heck, they’ve even attracted mockery from late-night TV hosts).

P.P.S. Communism has always attracted dupes and apologists. In the case of Cuba, that list includes Bernie Sanders, Nicholas Kristof, and Nikole Hannah-Jones. And maybe we should add Jeffrey Sachs and some environmentalists to that list as well.

America’s Most Libertarian State Is…

When I wrote about the 2018 edition of Freedom in the 50 States, Florida ranked as the nation’s most libertarian state.

In the 2021 version, New Hampshire takes the top spot (reclaiming the lead it had back in 2016).

Here’s a map showing the 10 best and 10 worst states. One obvious takeaway is that New Hampshire deserves extra praise because it is in a region where there seems to be a general disdain for economic and personal liberty.

And here’s a table showing how all the states rank.

As you can see, Florida is still a very good state.

Indeed, Florida is getting better over time. All that happened in the new edition of Freedom in the 50 States is that New Hampshire got better even faster.

This seems to be a pattern.

You can see from Figure 9 that the best states have been getting better over the past 10 years while the worst states are stagnating.

If you want some background on the publication, here’s how the authors (Will Ruger and Jason Sorens) describe their index.

…the 2021 edition examines state and local government intervention across a wide range of policy categories—from taxation to debt, from eminent domain laws to occupational licensing, and from drug policy to educational choice. …We…strive to make it the most comprehensive and definitive source for economic freedom data on the American states. …Although the United States has made great strides toward respecting each individual’s rights regardless of race, sex, age, or sexual preference, some individuals face growing threats to their interests in some jurisdictions. Those facing more limits today include smokers, builders and buyers of affordable housing, aspiring professionals wanting to ply a trade without paying onerous examination and education costs, and less-skilled workers priced out of the market by minimum-wage laws. Moreover, although the rights of some have increased significantly in certain areas, for the average American, freedom has declined generally because of federal policy that includes encroachment on policies that states controlled 20 years ago.

For more information, here’s how the states rank for economic freedom.

And here are the rankings for personal freedom.

Let’s look at the some other tables.

Since I’m most interested in fiscal policy, I’m reflexively drawn to Table 7. Kudos to Florida, Tennessee, New Hampshire, and South Dakota (the absence of a state income tax really helps). And I’m surprised to see Massachusetts in the top 10 (it helps to a have a flat tax).

For what it’s worth, Hawaii really stinks. And I’m not surprised to see New York next to last.

Here’s a look at how states have changed since 2000.

No big surprises, though it’s interesting to note that North Dakota (which was ranked #1 back in 2013) has suffered a relative decline (now ranked #15) simply because its improvement has been rather modest compared to the big improvements in other states.

P.S. For those interested in methodological issues, here’s a look at the formula used to determine which states have the most freedom and least freedom.

P.P.S. If you look at the weighting for personal freedom, you’ll find that educational freedom is 2 percent of a state’s score. Given the importance of school choice (for both individual education outcomes and national economic competitiveness), I wonder if that variable is insufficiently appreciated.

Plenty of Waste at the Pentagon, but America’s Big Fiscal Problem Is Domestic Spending

As a libertarian, I view defense spending with the same jaundiced eye that I apply to domestic spending.

• I’ve pointed out that the U.S. represents a big share of global military outlays.
• I’ve pointed out that sequestration wasn’t a threat to military preparedness.
• I’ve pointed out that legacy defense commitments may be senseless nowadays.

And here’s a more-updated view of how much the United States spends on the military compared to other nations.

Call me crazy, but this chart indicates that the United States is probably spending too much on the Pentagon.

For what it’s worth, it’s possible that America’s lead is exaggerated because China and Russia get more bang for their buck on their military spending, but it’s also worth noting that the rest of the nations on the list are largely allied with the United States.

Farhad Manjoo of the New York Times writes there is too much spending on defense. But he undermines the credibility of his position with a deceptive comparison of domestic and defense outlays.

…the nearly three-quarters of a trillion dollars that we are spending this year on a military that has become the epitome of governmental dysfunction, self-dealing and overspending. …does it make any sense to keep spending so many hundreds of billions on the Pentagon? …The Pentagon has never passed an audit… Congress is projected to spend about $8.5 trillion for the military over the next decade — about half a trillion more than is budgeted for all nonmilitary discretionary programs combined… You don’t have to be a pacifist to wonder if this imbalance between military and nonmilitary spending makes sense.

The problem with what he wrote is that he compares defense spending only to the portion of domestic spending that is considered “discretionary.”

And this leaves out all the entitlement programs – which are the biggest and fastest growing part of the federal budget.

So I went to section 8 of the Historical Tables of the Budget and put together this chart, based on inflation-adjusted dollars, showing total domestic spending (huge and growing), total defense spending (relatively flat), and interest payments on the national debt (relatively flat).

Next, let’s look at the data showing what share of the budget goes to different types of spending.

For this chart, I’ve separated domestic entitlements and domestic discretionary.

Once again, the obvious and unambiguous takeaway is that domestic spending is the problem in general, with entitlements being the problem in particular.

Now that we know that entitlement programs are America’s main fiscal challenge, let’s close with a couple of reminders that we also should take a knife to the Pentagon’s budget.

This headline for a story in USA Today.

This heading from a story in Stars & Stripes.

This headline from a story in the New York Times.

And if you want other examples of military waste, click here, here, and here.

But don’t forget that the big savings from defense budget can be achieved by reevaluating whether it makes sense to maintain alliances against enemies that no longer exist, along with reconsidering the wisdom of nation building.

Yes, Starve the Beast

As part of a recent discussion with Gene Tunny in Australia, I explained why I support “Starve the Beast,” which means keeping taxes as low as possible to help achieve the goal of spending restraint.

The premise of Starve the Beast is very simple.

Politicians like to spend money and they don’t particularly care whether that spending is financed by taxes or financed by borrowing (both bad options).

As Milton Friedman sagely observed, that means they will spend every penny they collect in taxes plus as much additional spending financed by borrowing that the political system will allow.

The IMF published a study on this issue about 10 years ago. The authors (Michael Kumhof, Douglas Laxton, and Daniel Leigh) assert that there’s no way of knowing whether Starve the Beast will lead to good or bad results.

…there is no consensus regarding the macroeconomic and welfare consequences of implementing a starve-the-beast approach, henceforth referred to as STB. …it could be beneficial in the ideal case in which it results in cuts in entirely wasteful government spending. In particular, lower spending frees up resources for private consumption, and the associated lower tax rates reduce distortions in the economy. On the other hand, …lower government spending may itself entail welfare losses…if it augments the productivity of private factors of production. …the paper examines whether the principal macroeconomic variables such as GDP and consumption, both in the United States and in the rest of the world, respond positively to this policy. …In addition, the paper assesses how the welfare effects depend on the degree to which government spending directly contributes to household welfare or to productivity.

The authors don’t really push any particular conclusion. Instead, they show various economic outcomes depending on with assumptions one adopts.

Since plenty of research shows that government spending is not a net plus for the economy (even IMF economists agree on that point), and because I think a less-punitive tax system is possible (and desirable) if there’s a smaller burden of government spending, I think the findings shown in Figure 4 make the most sense.

Now let’s shift from academic analysis to policy analysis.

In a piece for National Review back in July 2020, Jim Geraghty notes that Starve the Beast has an impact on government finances at the state level.

…we’re probably not going to see a massive expansion of government at the state level in the coming year or two. …Thanks to the pandemic lockdown bringing vast swaths of the economy to a halt, state tax revenues are plummeting. …So states will have much less tax revenue, constitutional balanced-budget requirements that are not easily repealed, and a limited amount of budgetary tricks to work around it. State governments could attempt to raise taxes, but that’s going to be unpopular and hurt state economies when they’re already struggling. Add it all up and it’s a tough set of circumstances for a dramatic expansion of government, no matter how ardently progressive the governor and state legislatures are.

For what it’s worth, Geraghty warned in the article that fiscal restraint by state governments wouldn’t happen if the federal government turned on the spending spigot.

And that, of course, is exactly what happened.

Now let’s look at the most unintentional endorsement of Stave the Beast.

A couple of years ago, Paul Krugman sort of admitted that cutting taxes was a potentially effective strategy for spending restraint.

…the same Republicans now wringing their hands over budget deficits…blew up that same deficit by enacting a huge tax cut for corporations and the wealthy. …this has been the G.O.P.’s budget strategy for decades. First, cut taxes. Then, bemoan the deficit created by those tax cuts and demand cuts in social spending. Lather, rinse, repeat. This strategy, known as “starve the beast,” has been around since the 1970s, when Republican economists like Alan Greenspan and Milton Friedman began declaring that the role of tax cuts in worsening budget deficits was a feature, not a bug. As Greenspan openly put it in 1978, the goal was to rein in spending with tax cuts that reduce revenue, then “trust that there is a political limit to deficit spending.” …voters should realize that the threat to programs… Social Security and Medicare as we know them will be very much in danger.

In other words, Krugman doesn’t like Starve the Beast because he fears it is effective (just like he also acknowledges the Laffer Curve, even though he’s opposed to tax cuts).

Let’s close by looking at some very powerful real-world evidence. Over the past 50 years, there’s been a massive increase in the tax burden in Western Europe.

Did all that additional tax revenue lead to lower deficits and less debt?

Nope, the opposite happened. European politicians spent every penny of the new tax revenue (much of it from value-added taxes). And then they added even more spending financed by additional borrowing.

To be fair, one could argue that this was an argument for the view of “Don’t Feed the Beast” rather than “Starve the Beast,” but it nonetheless shows that more money in the hands of politicians simply means more spending. And more red ink.

P.S. I had a discussion last year with Gene Tunny about the issue of “state capacity libertarianism.”

California and Economic Suicide

I wrote back in 2012 that California voters opted for “slow-motion economic suicide” by voting to raise the state’s top income tax rate to 13.3 percent.

Sure enough, having the nation’s highest state income tax rate has been bad news.

More and more companies and households are leaving the (no-longer) Golden State for zero-income-tax states such as Texas, Nevada, and Florida.

Unfortunately, it appears that California politicians aren’t learning any lessons from this exodus.

They’re now pushing for a massive tax increase to fund a government takeover of health care.

The Wall Street Journal opined about the new plan.

California Democrats are busy reviving government-run, single-payer health care, despite its failure in the state five years ago. …Their revived legislation would replace Medicare, Medicaid and private health insurance with a state-run system… Californians would also be entitled to an expansive list of benefits including vision, dental, hearing and long-term care. A board of bureaucrats would control costs—i.e., ration care. …While Californians would technically be entitled to a “free” knee replacement, they might not get one if bureaucrats consider them too old—but the state won’t let people know that’s the reason. …Arizona could soon become a hot destination for medical tourism. …As for the tax increases… Start with a 2.3% excise tax on business with more than $2 million in annual gross receipts… Employers with 50 or more workers would also pay a 1.25% payroll tax, which would be passed onto workers. Workers earning more than $49,900 would pay an additional 1% payroll tax. …would raise the effective income tax on wage earners making more than $61,213 to 11.55%—more than millionaires pay in every state but New York. …An additional progressive surtax would start at 0.5% on income over $149,509 and rise to 2.5% at $2,484,121. …The top marginal rate would rise to 15.8% on unearned income, including capital gains, and 18.05% on wage income.

In a column for Reason, Joe Bishop-Henchman and Andrew Wilford of the National Taxpayers Union explain the likely impact of the proposed tax increases.

As the mad scientist laboratory for bad tax policy in America, California is constantly striving to come up with poorly designed and harmful taxes to pay for ever-increasing spending. But even by its own lofty standards, California has truly outdone itself with its latest proposal to fund a state single-payer health care system. …Not only would the proposed $163 billion in new tax revenue nearly double last year’s total revenue for the tax-happy state, but California would structure these new taxes in such a way as to be even more harmful than doubled tax liabilities already imply. …the 2.3 percent gross receipts tax sticks out. …whether a business has a profit margin of 0.1 percent or 10 percent, it would still have to pay the same percentage of its total revenues. …a rate that is three times the level of the nation’s current highest. …the proposal to institute a payroll tax on businesses with 50 or more employees…would create an obvious disincentive for businesses to hire their 50th employee. …the payroll tax would discourage both hiring employees and paying them higher wages, a disastrous outcome for workers. …individual income tax rates…would effectively be…an 18-bracket tax structure with a top marginal tax rate of 18.05 percent. …a trend that California appears to have its head in the sand about: overtaxed businesses and individuals fleeing for greener pastures.

Let’s elaborate on that final sentence and ask ourselves what the tipping point will be for various taxpayers.

• Imagine you run a business and you have to pay a 2.3 percent tax on all your receipts, even if you happen to be losing money? Do you leave the state?
• Imagine if you are a typical employee and government takes more than 10 percent of your income in exchange for bad roads and bad schools? Do you leave the state?
• Imagine that you are a high-value entrepreneur facing the possibility of having to pay more than 18 percent of your income to state politicians? Do you leave?
• Imagine being an investor who is thinking about forgoing consumption in order to make an investment that might result in a punitive capital gains tax? Do you leave?

And while you contemplate those questions, remember that California is already very unfriendly to taxpayers, ranking #48 according to the Tax Foundation and ranking #49 according to the Fraser Institute.

Moreover, while California politicians consider a massive tax increase, other states are lowering tax rates.

In other words, California already is in trouble and many state politicians now want to double down on a losing bet.

P.S. California considered a government-run health plan a few years ago and backed off, so maybe there’s hope.

P.P.S. Illinois has been the long-time leader in the poll that asks which state will be the first to suffer political collapse. That may change if this California plan is enacted.

P.P.P.S. When I’m feeling petty and malicious, I sometime hope jurisdictions adopt bad policy because that will give me more evidence showing the adverse consequences of bad policy.

Statism Humor, in Five Images

I have no energy for serious analysis today after being at last night’s championship victory for my beloved Georgia Bulldawgs, so let’s expand upon my celebratory mood by taking candy from a baby.

In other words, time to once again mock big government.

Our first item is a simple graph showing the relationship historical knowledge and trust in government.

Next we have some memes that illustrate how government “works.”

Here’s your front porch, as designed by bureaucrats (probably the same ones in charge of shower head regulations).

Next we have cutlery, as designed by bureaucrats (probably the same ones who regulate gas cans).

Then we have a breakfast being prepared by bureaucrats (the same ones who regulate dishwashers, I’m guessing).

Last but not least, we have a visual depiction of “Mitchell’s Law.”

Ugh, what a disgusting photo.

But is it as disgusting as the way government mistreats people?

As disgusting as politicians who disregard rules they impose on others?

Or as disgusting as politicians who enrich themselves by impoverishing us?

P.S. If you want more images that mock government, click here, here, and here.

Biden’s “Stimulus” Failure

At the risk of understatement, economists are not good forecasters.

And they are especially incompetent when they make forecasts based on bad policy, such as when the Obama White House projected that his so-called stimulus would quickly lead to falling unemployment.

In reality, the jobless rate immediately increased and then remained much higher than projected for the remainder of the five-year forecast.

The failure of Obama’s stimulus should have been a learning moment for Washington politicians.

But Joe Biden must have slept through that lesson because his first big move after taking office was to saddle the nation with a $1.9 trillion “stimulus” package.

The White House claimed this orgy of new spending would lead to four million additional jobs in 2021, on top of the six million new jobs that already were expected.

So what happened? Matt Weidinger of the American Enterprise Institute looked at the final numbers for 2021 and discovered that employment actually fell compared to pre-stimulus baseline projection.

The nonpartisan Congressional Budget Office projected on February 1, 2021…a gain of 6.252 million jobs over…2021…we now know payroll employment in the fourth quarter of 2021 averaged 148.735 million — an increase of 6.116 million compared with the average of 142.619 million in the fourth quarter of 2020. That means the job growth the President praised this week has fallen 136,000 jobs short of what was expected under the policies he inherited. …President Biden and congressional Democrats promised their $1.9 trillion American Rescue Plan would create millions of additional new jobs this year — on top of what White House economists called the “dire” baseline of 6.252 million new jobs reflected in CBO’s projection without that enormous legislation. …House Speaker Nancy Pelosi (D-CA) repeated that claim, stating that “if we do not enact this package, the results could be catastrophic,” including “4 million fewer jobs.” Yet…not one of those four million additional jobs supposedly resulting from that $1.9 trillion spending plan has appeared, as job creation in 2021 did not even match CBO’s projection without that legislation.

Below you’ll see the chart that accompanied the article.

As you can see, the White House projected more than 10 million new jobs (right bar).

Yet we would up with 6.1 million new jobs (left bar), about 140,000 less than we were projected to get (center bar) without wasting $1.9 trillion.

If pressed, I’m sure the Biden Administration would use the same excuse that we got from the Obama White House (and from the Congressional Budget Office), which is that the initial forecast was wrong and that the so-called stimulus did create jobs.

In other words, the Biden economists now would say they should have projected 2 million new jobs, which means that the $1.9 trillion spending spree added 4 million jobs, for a net increase of 6 million.

You may think I’m joking, but that is exactly how the Keynesian economists tried to justify Obama’s stimulus failure.

The moral of the story is that the best way to really create jobs is to get government out of the way rather than adding new burdens.

The Zero-Sum Fallacy

There are many well-meaning people who support statist policies such as punitive taxation because they believe in the zero-sum fallacy, which is explained in this short video by Madsen Pirie of London’s Adam Smith Institute.

The zero-sum fallacy is especially noxious because it naturally leads to all sorts of misguided policies. Not just class-warfare taxation, but also protectionism and the welfare state.

But I can understand why people are drawn to such ideas. If they sincerely believe that people like Jeff Bezos and Elon Musk only become richer because the rest of us become poorer, it’s hard to blame them.

This is why I repeatedly share evidence showing that the zero-sum fallacy is, well, a fallacy.

• Data showing that Americans today are far richer than previous generations – and this didn’t happen at the expense of people at the bottom.
• Data showing that Western Europeans became rich during the 1800s and early 1900s – and this didn’t happen at the expense of the poor.
• Data showing the entire world is far richer today than in the past – and this didn’t happen at the expense of the less fortunate.
• Data showing that China’s partial liberalization made that society richer – and this didn’t happen at the expense of low-income people.

Indeed, one very powerful lesson from the above examples is that poor people have been huge winners from economic growth.

As shown by U.S. Census Bureau data, there’s a strong correlation between rising income and falling income among all groups.

Given the importance of this issue, let’s take a closer look at the zero-sum fallacy.

In an article for the Foundation for Economic Education, John Williams used the example of a poker game to explain this cornerstone of bad economics.

Economic activity is depicted in terms of a poker game. One player’s chips are observed to have increased. Immediately one concludes that some other player has lost chips. Poker is, as they say, a zero-sum game: Gains enjoyed by one party must be balanced by losses suffered by another. So it is, people embracing the fallacies of “static wealth” and “the zero-sum game” insist, with economic exchanges. “Winners” must be balanced by corresponding “losers.” …According to the mercantilists, wealth was a constant, a given—like the chips in a poker game. If one community—and typically the mercantilists thought in terms of communities—improved its overall economic situation, another community must have lost out. …What Adam Smith perceived, essentially, was first that “wealth” was not something static and given like gold, or, indeed, poker chips, but rather consisted of goods and services that could be created, and second that both parties to an economic exchange could improve their respective situations. …There are two winners, not one. This is a positive-sum, rather than a gem-sum game.

This type of thinking may even be hard-wired in our brains, as explained by Professor Paul Rubin of Emory University in a column for the Wall Street Journal.

…the worldview of Marxists and woke leftists alike is fundamentally primitive. …It is the economic view of the world that evolved in our brains before the development of the modern economy. …Zero-sum thinking was well-adapted to this world. Since there was no economic growth, incomes and wealth didn’t grow. If one person had access to more food or other goods, or greater access to females, it was likely because of expropriation from others. Since there was little capital, a “labor theory of value”—the idea that all value is created by labor alone—would have been appropriate… Adam Smith and other economists challenged this worldview in the 18th century. They taught that specialization of labor was valuable, that capital was productive, and that labor and capital could work together to increase income. …the creation of wealth would benefit everyone in a society, not only the wealthy. …Members of the woke left want to return to policies based on this primitive economic thinking. One of their major errors is thinking that the world is zero-sum. …Dislike of the rich makes sense in a world where one can become rich only by exploiting others, but not in a society full of creativity and useful inventions.

Prof. Rubin also wrote about this topic back in 2010.

P.S. The good news is that very few left-leaning economists believe in the zero-sum fallacy. They recognize that growth benefits all income groups. Where they go wrong is thinking that bigger government is needed for growth and/or thinking that less growth is okay if rich people suffer more than poor people (they tend to be so fixated on inequality that they overlook very good news).

P.P.S. Just as poor people aren’t poor because of rich people (at least the ones that get rich by markets rather than cronyism), poor nations aren’t poor because of rich nations.

The Case for Capitalism, Part VI

I have shared five videos (Part I, Part II, Part III, Part IV, and Part V) that make the case for capitalism.

Here’s a sixth example.

The video notes that poverty was the natural condition for humanity (notwithstanding the economic illiteracy of Congresswoman Pressley).

But then, starting a couple of hundred years ago, capitalism gained a foothold and – for the first time in world history – there were nations with mass prosperity.

We learn about how various places became rich, including the United States, Hong Kong, and New Zealand.

The narrator also pointed out that Ireland experienced a period of dramatic market-driven growth.

Which gives me a good excuse to make the following comparison, which shows the dramatic divergence between Ireland and Greece beginning in the mid-1980s.

Why the stunning divergence (one of many examples I’ve collected)?

Ireland controlled spending and cut tax rates and now routinely ranks among the nations with the most economic liberty.

Greece, by contrast, has imposed more and more government over time.

Let’s close with this tweet, which nicely summarizes Walter Williams’ famous observation.

P.S. This comparison of Sweden and Greece also makes the key point about the superiority of markets over statism.

P.P.S. Don Boudreaux and Deirdre McCloskey have must-watch videos on how capitalism enabled (some) nations to escape poverty.

Which Nations Do Best at Providing Rule of Law…and Why It Matters

Back in 2014, I shared a video explaining why the “rule of law” is important for a just and free society.

Here’s another video on the same point.

When I discuss rule of law (generally when explaining the various components that are used to calculate rankings of economic freedom), I often use a shortcut definition – namely that rule of law exists when government officials don’t have arbitrary power.

In other words, rule of law is present when even politicians and bureaucrats have to adhere to laws and rules.

Where is the rule of law strongest?

According to the World Justice Project, Scandinavian nations are at the top, led by Denmark.

Other European nations – and European offshoot nations – dominate the rankings (there is a benefit to Western Civilization).

A handful of East Asian jurisdictions also get good scores.

And you’ll notice I had to include 27 nations in order to see where the United States ranks.

That’s depressing, especially considering that the U.S. ranked #19 when I first wrote about this report back in 2014.

But at least we’re not Venezuela (gee, what a surprise), which is in last place of the 139 nations included in the rankings.

Readers also should note that the dismal rankings of some other major nations, most notably China (#98) and Russia (#101).

Now let’s consider the economic implications.

In a new working paper from the University of Rome, Esther Acquah, Lorenzo Carbonari, Alessio Farcomeni, and Giovanni Trovato estimate the impact of rule of law on economic outcomes.

We estimate the impact that our measures of institutional quality have on the level and the growth rate of per capita GDP, using a large sample of countries over the period 1980-2015. …Institutions matter especially in low and middle-income countries, and not all institutions are alike for economic development. For this group of countries, we find: i) a positive correlation between our main institutional index and the GDP growth and ii) that improvement in the reliability and fairness of the legal system leads to a higher long-run per capita GDP level. We also document non-linearities in the causal effects that different institutions have on growth, and the presence of threshold effects.

For what it’s worth, I sometimes state in my speeches that rule of law is akin to the foundation of a building.

It needs to be solid in order for the rest of the building (fiscal policy, trade policy, regulatory policy, and monetary policy) to be livable.

One final point is that you don’t necessarily get more rule of law by enacting additional laws. Indeed, that may actually reduce the rule of law because politicians and bureaucrats then can engage in capricious enforcement.

As pointed out back in the 1800s by the great Frederic Bastiat.

Simply stated, over-criminalization is not a good thing.

P.S. In the are of economic development, there’s a big discussion over whether there needs to be more “state capacity” if we want more growth.

I’ve criticized some advocates because they use “state capacity” as an excuse to push for bigger government.

But it is true that very weak and incompetent governments do a poor job of providing rule of law, so it’s also true that there are instances where it would be good to boost state capacity. Assuming the term is properly defined.

More Nonsense from the OECD’s Poverty Hucksters

I created the Eighth Theorem of Government to illustrate the difference between well-meaning people (who want to help the poor) and zero-sum people (who seem to think some people are poor because other people are rich).

This raises the interesting question of whether folks in the latter group are misguided or malicious?

For what it’s worth, I assume most people who fixate on inequality simply don’t understand the issue.

I like to think that they would change their minds if – for instance – they were shown Scott Winship’s devastating, slam-dunk response to Gabriel Zucman.

But there are others (like Zucman) who almost certainly know better, yet they push the inequality narrative for political or ideological reasons.

The bureaucrats at the Organization for Economic Cooperation and Development definitely also belong in the malicious category.

I first exposed the OECD’s disingenuous approach back in 2012, noting that the Paris-based bureaucrats used an utterly dishonest definition of poverty to make the laughably inaccurate claim that there was more poverty in the United States than in nations such as Greece, Hungary, Turkey, and Portugal.

Well, the OECD is still being dishonest. Here’s a look at the bureaucracy’s latest “poverty” measurement.

For those of us who actually pay attention to details, the data in the above chart have nothing to do with poverty.

Instead, the OECD is showing a particular way of measuring how income is distributed (in this case, the share of the population with less than half of the average income).

To see why it is profoundly absurd to measure poverty by looking at the distribution of income, consider these two examples.

1. Haiti is a wretchedly poor nation, with per-capita yearly income of $1729. But since almost everyone (other than the political elite) in the country is equally destitute, Haiti would have almost no poverty according to the OECD’s perverse definition.
2. Poor people in the United States have income equal to (or greater than) than middle class people in other developed nations, yet OECD bureaucrats want people to think poverty is a bigger problem in America than in a backward economy like Mexico’s.

I’ll close by pointing out the greatest absurdity of all.

If something miraculous happened and everyone in the United States somehow wound up with ten times as much income next year, guess what would happen to America’s poverty rate, as measured by the OECD? How much would it decrease?

Give yourself a gold star if you correctly answered that it would not change. At all.

What a crock of you-know-what.

P.S. The OECD is not the only guilty party when it comes to lying about poverty. Others who (willingly or unwittingly) misrepresent distribution data as poverty data include:

• The United Nations
• The New York Times
• The Equal Welfare Association
• Eduardo Porter of the New York Times
• Germany’s Institute of Labor Economics
• The Obama Administration
• The European Commission
• Professor Noah Smith
• The Economist

P.P.S. It’s also worth noting that poor nations aren’t poor because rich nations are rich.

World Bank Data: Comparing the U.S. and Europe

As I warned a few days ago, Biden’s so-called Build Back Better plan is not dead.

There’s still a significant risk that this economy-sapping plan will get enacted, resulting in big tax increases and a larger burden of government spending.

Proponents of a bigger welfare state say the President’s plan should be approved so that the United States can be more like Europe.

This argument is baffling because it doesn’t make sense to copy countries where living standards are significantly lower.

In some cases dramatically lower.

Let’s explore this issue in greater detail.

In a column for Bloomberg, Allison Schrager analyzes America’s supply-chain problems and the impact on consumption patterns.

But what caught my eye were the numbers comparing the United States and Europe.

Americans can’t spend like they used to. Store shelves are emptying, and it can take months to find a car, refrigerator or sofa. If this continues, we may need to learn to do without — and, horrors, live more like the Europeans. That actually might not be a bad thing, because the U.S. economy could be healthier if it were less reliant on consumption. …We consume much more than we used to and more than other countries.  Consumption per capita grew about 65% from 1990 to 2015, compared with about 35% growth in Europe. …What would that mean for the U.S. economy? European levels of consumption coexist with lower levels of growth.

Here’s the chart that accompanied her article.

As you can see, consumption in the United States is far higher than it is in major European nations – about $15,000-per-year higher than the United Kingdom and about double the levels in Germany, Belgium, and France.

So when someone says we should expand the welfare state and be more like Europe, what they’re really saying is that we should copy nations that are far behind the United States.

Some of you may have noticed that Ms. Schrager is citing per-capita consumption data from the World Bank and you may be wondering whether other numbers tell a different story.

After all, if higher levels of consumption in America are simply the result of borrowing from overseas, that would be a negative rather than a positive.

So I went to the same website and downloaded the data for per-capita gross domestic product instead. I then created this chart (going all the way back to 1971). As you can see, it shows that Americans not only consume more, but we also produce more.

For those interested, I also included Japan and China, as well as the average for the entire world.

The bottom line is that it’s good to be part of western civilization. But it’s especially good to be in the United States.

Since we’re on the topic of comparative economics, David Harsanyi of National Review recently wrote about the gap between the United States and Europe.

More than anything, it is the ingrained American entrepreneurial spirit and work ethic that separates us from Europe and the rest of the world. …Europe, despite its wealth, its relatively stable institutions, its giant marketplace, and its intellectual firepower, is home to only one of the top 30 global Internet companies in the world (Spotify), while the United States is home to 18 of the top 30. …One of the most underrated traits we hold, for instance, is our relative comfort with risk — a behavior embedded in the American character. …Americans, self-selected risk-takers, created an individual and communal independence that engendered creativity. …Because of a preoccupation with “inequality” — one shared by the modern American Left — European rules and taxation for stock-option remuneration make it difficult for start-up employees to enjoy the benefits of innovation — and make it harder for new companies to attract talent. …But the deeper problem is that European culture values stability over success, security over invention…in Europe, hard work is less likely to guarantee results because policies that allow people to keep the fruits of their labor and compete matter far less.

In other words, there’s less economic dynamism because the reward for being productive is lower in Europe (which is simply another way of saying taxes are higher in Europe).

P.S. The main forcus of Ms. Schrager’s Bloomberg article was whether the U.S. economy is too dependent on consumption.

It feels like our voracious consumption is what fuels the economy. But that needn’t be the case. Long-term, sustainable growth doesn’t come from going deep into debt to buy stuff we don’t really need. It comes from technology and innovation, where we come up with new products and better ways of doing things. An economy based on consumption is not sustainable.

I sort of agree with her point.

Simply stated high levels of consumption don’t cause a strong economy. It’s the other way around. A strong economy enables high levels of consumption.

But this doesn’t mean consumption is bad, or that it would be good for America to be more like Europe.

Instead, the real lesson is that you want the types of policies (free markets and limited government) that will produce innovation and investment.

That results in higher levels of income, which then allows higher levels of consumption.

Leftism and Hypocrisy

I periodically write about our leftist friends who display remarkable hypocrisy on issues such as taxation, education, Covid, and climate.

Here are just a few examples.

• Joe Biden
• Barack Obama 
• Elizabeth Warren
• Hillary Clinton
• Bernie Sanders
• John Kerry
• Bill Clinton
• Gov. J.B. Pritzker

Gee, it’s almost as if there’s a pattern.

Writing for Reason, Professors Jason Brennan and Christopher Freiman highlight more of the hypocrisy that seems so prevalent on the left.

It’s been a bad year in public relations for Champagne socialists—or if you prefer, Neiman Marxists. The socialist Twitch streamer and Young Turks host Hasan Piker bought a $2.7 million house in Beverly Hills, complete with a swimming pool and an outdoor widescreen… Millionaire Aurora James designed Democratic New York Rep. Alexandria Ocasio-Cortez’s show-stealing “Tax the Rich” dress, which she wore to the $35,000-per-ticket Met Gala. The phenomenon of egalitarians living in luxury while denouncing the evils of inequality is not new. …socialist Vermont Sen. Bernie Sanders…remains within the top 1 percent of U.S. earners and the top .02 percent worldwide. Curious observers may question why Sanders, a tireless critic of the 1 percent, doesn’t sell his $575,000 vacation home and give the proceeds to charity or offer them as a general donation to the U.S. government via pay.gov. The same goes for Massachusetts Sen. Elizabeth Warren, a longtime progressive who has a net worth of over $10 million… When the disconnect between personal behavior and expressed ideology is this dramatic, and when the person gets rich and famous for expressing that ideology, we have to wonder whether he was ever sincere or was instead merely trying to promote himself. …Talking about socialism is cheap (indeed, even lucrative); a $2 million donation is not. Yet rather than bear a real cost to really help the poor, Piker and other prominent egalitarians adopt a philosophy that they think demonstrates their good hearts but that allows them to live high.

So is there any defense of this type of hypocrisy?

Sort of, though I’m not sure it’s very persuasive.

In a Wall Street Journal column last year, Ted Rall defended rich leftists by claiming that put values above self-interest.

‘Limousine liberals” have driven full circle—or rather the term has returned to its origins. Coined in 1969 by Mario Procaccino, the Democratic Party’s unsuccessful challenger to New York Mayor John Lindsay, the epithet described “hypocritical wealthy do-gooders insulated from the negative fallout of their bad ideas,” in historian David Callahan’s definition. “This theme,” Mr. Callahan has written, “remained a staple of conservative attacks.” Sen. Ted Kennedy was a classic example. He sent his kids to exclusive private schools at the same time he was telling working-class whites to bus their kids to distressed schools in the slums. …The accusation of hypocrisy or inauthenticity is…less logical… Had Kennedy gotten the tax system of his dreams, he and his family would have been poorer. He voted his values, not his self-interest. That’s admirable.

P.S. Libertarians can be hypocrites, of course, but the only article I’ve analyzed on the issue was not convincing.

P.P.S. By contrast, there are plenty of hypocritical Republicans.

P.P.P.S. The champion hypocrites are the bureaucrats at the OECD and IMF, who reflexively support higher taxes while receiving very generous tax-free salaries.

The Need for Global Tax Competition

In my recent column listing the “Best and Worst News of 2021,” I included Joe Biden’s global tax cartel as one of the awful things that happened in the past 12 months.

It’s bad news for workers, consumers, and shareholders that politicians approved a system that will require all nations to have a corporate tax rate of at least 15 percent.

From the perspective of politicians, it’s easy to understand why they want a tax cartel. it’s a way for them to get their hands on more money. Just as gas stations would want a system that rigs gas prices at a high level. Or grocery stores would want a system to rig high food prices.

From the perspective of taxpayers, however, tax competition is much better. Politicians have a much harder time raising tax rates (and in many cases feel pressure to lower tax rates) when they know that jobs and investment can shift across borders from high-tax nations to low-tax nations.

As illustrated by this visual.

To explore this issue in greater detail, let’s look at a new article, written by Sven Larson for the European Conservative.

First, a quick history of the global campaign against low taxes. …it has been spearheaded by the Organization for Economic Cooperation and Development, OECD. This government-funded international think tank has built an international cartel of more than 130 governments to battle tax competition. …People who want to keep more of their own money, and who want to enjoy strong privacy laws, are being told by the OECD and the tax cartel that their financial planning is “harmful.” The purpose behind the OECD-led campaign is both sinister and transparent: to make sure taxpayers in high-tax countries have no low-tax options. …It won a big victory this past summer when the countries in the G-7 group complied with the directives of the OECD and agreed to create a global minimum corporate-income tax.

This is spot on.

The OECD is a pro-statism international bureaucracy that looks after the interests of politicians rather than citizens.

Sven also makes a great point about how the corporate tax cartel is just the beginning.

This tax cartel is only the beginning. Once countries with costly governments have created a Berlin Wall around their high-tax jurisdictions, they will be free to collude on other taxes beyond the corporate income tax. Personal income taxes, wealth taxes, death taxes… there is no end to the imagination of a government that does not have to worry about tax competition.

Also spot on.

You should read the entire article. But for purposes of my column, I’m going to highlight one additional point – which is Sven’s observation about how human rights are better protected in a world where people can safely invest their money where national governments can’t grab it.

There are also reasons related to individual freedom to preserve low-tax jurisdictions. To take just one example, in 2017, …Turkish President Erdogan accused investors of “treason” if they moved their assets out of the country. Erdogan’s comments, France24 explains, came on the heels of Turkish prosecutors seizing the assets of an investor who had testified in a court in New York on how a Turkish bank circumvented U.S. sanctions against Iran. The asset seizure easily comes across as retaliatory and meant to send a signal to others who might act in ways that would displease Mr. Erdogan. A total of 23 individuals were affected by the asset seizure. If these individuals had been able to shield their assets from the Turkish government, they would have been free to oppose the Erdogan regime while working, investing, and developing their businesses.

Another argument that is spot on.

The bottom line is that low-tax jurisdictions should be celebrated rather than persecuted.

If the goal is better lives for ordinary people, policy makers should be criticizing tax hells rather than tax havens.

Especially when you consider that politicians have a very strong tendency to over-tax and over-spend (leading to goldfish government) in the absence of some sort of external constraint.

Or, to be more blunt, we need to restrain the “stationary bandit” that leads to “predatory government.”

P.S. Click here or here to learn about the economics of tax competition (and click here to see how many winners of the Nobel Prize agree).

P.P.S. Click here, here, and here for interesting examples of what happens when you oppose the left’s anti-tax competition agenda.

P.P.P.S. Leftists who don’t like tax competition occasionally can be clever.

Socialism Humor

Socialism is a total and miserable failure, anywhere and everywhere it’s been tried.

But there’s a silver lining to that dark cloud.

We’ve been able to enjoy lots of socialism satire over the years, and we’re going to continue that tradition with our first collection of socialism humor for 2022.

For our first item, we have a book of fairy tales, which surely will include the politically correct versions of The Little Engine that Could, The Ant and the Grasshopper, and The Little Red Hen.

Even better, these fables can be read by Bernie Sanders.

But not everyone is sympathetic to the world of make-believe, as we can see from our second item.

Our third example of satire is this timeline of Venezuela’s 20-year decline.

There’s actually nothing funny about the above list, but it does remind me of how many leftists praised Venezuela’s socialist policies in the early years.

But now they’re strangely silent (or they make bizarre arguments).

So let’s get back to direct satire. Here’s a look at our friends on the left ignoring the rampant inequality in socialist nations (a small handful of people connected to government get rich while everyone else is impoverished) while fixating on inequality in market-oriented nations (where the non-problem problem is that some people get richer faster than other people get richer).

Last but not least, here’s my favorite item from today’s collection.

I’m the boring kind of libertarian who doesn’t like drugs.

But even I can understand this meme.

To end on a serious point, I challenge any and all leftists to respond to my never-answered question. Or to show me their version of the anti-convergence club.

I won’t be holding my breath.

P.S. If you like the fairy tales in the second item, there’s also a version about gun control and an adaptation from Dr. Seuss.

Hopes and Fears for 2022

It’s an annual tradition (2021, 2020, 2019, 2018, etc) to list a handful of things that I hope might happen in the upcoming year, as well as the things I fear may happen.

Sadly, since I understand the economics of “public choice” (something Thomas Jefferson also implicitly understood) it’s always easier to envision the latter category.

But it’s good to begin a new year with optimism, so here are the good things that hopefully will happen in 2022.

Biden’s So-Called Build Back Better Stays Dead – The President squandered money on a fake stimulus and an infrastructure boondoggle, but we dodged the biggest bullet when Democrats couldn’t get all 50 of their Senators to support a multi-trillion dollar, growth-sapping expansion in taxes and spending.

The Supreme Court Ends Civil Asset Forfeiture – This was on my list last year, but the odious practice of “theft by government” continues. That being said, I still think it won’t survive if the Supreme Court has a chance to make a ruling (especially since America’s best Justice is very aware of the problem).

Republicans Win Congress in 2022 – I don’t have much faith in Republicans to do the right thing (especially when a Republican is in the White House), but I hope they win the House and Senate in November because they will oppose big tax increases while Democrats control the White House – even if only for partisan reasons.

In the “honorable mention” or “runner-up” category, I also hope to see further progress for school choice in 2022.

And I used to list a collapse of Venezuela’s reprehensible socialist government as one of my annual “hopes,” but I’ve largely given up (particularly since Latin Americans seem foolishly susceptible to “leftist saviors“).

Now let’s shift to the bad things that I fear will happen over the next 365 days.

Biden’s BBB Budget Plan Springs Back to Life – The President’s “Build Back Better” plan may be on life support, but sadly it’s not quite dead. I fear a scaled-down (but still horrible) version of the legislation may get approved this year. Senator Manchin of West Virginia, for instance, says he is willing to support a $1.5 trillion package and I fear the left eventually will decide that 50 percent of a (moldy and weevil-ridden) loaf is better than none.

Biden’s Remains a Protectionist – I hoped last year that Biden would reduce government trade taxes. Not because he believes in economic liberty, but simply because he wouldn’t want to continue a Trump-era policy. But that didn’t happen, and I now fear he’ll continue with protectionism in 2022. I don’t even have much hope that he’ll resuscitate the World Trade Organization.

New Tax Cartels – One of last year’s big defeats was the creation of a global tax cartel by governments. Barring some sort of miracle that prevents implementation, greedy politicians have set up a system that will require all nations to have a minimum corporate tax of 15 percent. That’s very bad news for workers, consumers, and shareholders, but I’m even more worried about the precedent it creates for additional tax cartels and ever-higher tax rates.

I’ll close by noting that last year’s list included the possibility of Kamala Harris becoming president.

But Biden has been so bad that it’s unclear that Harris would make things worse.

P.S. For the “fears” category, I could – and probably should – list entitlements every single year. Simply stated, the country is in deep long-run trouble because of an aging population and poorly designed tax-and-transfer programs. Years ago, I was semi-hopeful that we would get Medicaid and Medicare reform.

Now that seems like a distant dream and the real battle is preventing further entitlement expansions such as Biden’s per-child handout.

Best and Worst News of 2021

Per tradition (2020, 2019, 2018, etc), we highlight the best and worst developments of the year on December 31.

The choices are based on whether a particular policy increases or decreases individual liberty, either in a big way or a symbolic way.

Interestingly, the coronavirus pandemic doesn’t show up on either the good list or bad list.

Why? Because governments continue to make things worse, but not in ways that are significantly new or different.

With that in mind, let’s look at what happened in 2021, starting with the good news.

The Death of (the horribly misnamed) Build Back Better – President Biden somehow decided a very narrow victory over a very unpopular incumbent meant that he had a mandate for a radical expansion of the welfare state, accompanied by a plethora of class-warfare tax increases. Fortunately, Congress did not approve Biden’s growth-sapping plan.

School Choice Advances – Led by a sweeping plan to empower parents in West Virginia, there were many encouraging victories this year for school choice. And as teacher unions continue to mishandle the pandemic, there’s hope for continued progress next year.

Arizona Tax Reform – Several states lowered tax rates in 2021, but what happened in Arizona deserves special attention. Lawmakers reversed the outcome of a class-warfare referendum, meaning the state’s top tax rate on households will be 4.5 percent rather than 8 percent.

Speaking of referendum results, if we had an “honorable mention” or “runner-up” category, I would list three results from  2021

• Swiss voters rejected class-warfare tax increases.
• Voters in the state of Washington gave a big thumbs down to a proposed capital gains tax.
• Voters in Louisiana voted for lower tax rates.

Now let’s look at the three worst policy developments of 2021.

Biden’s Fake Stimulus and Infrastructure Boondoggle – Even though the so-called Build Back Better plan failed to advance, President Biden was able to significantly increase the burden of government spending with a supposed stimulus plan early in the year, followed by a grab-bag of special-interest handouts as part of “infrastructure” legislation later in the year.

Chile Elects a Hard-Core Leftist President – Much to my dismay, Chilean voters opted for a hard-core leftist president who wants to dismantle the nation’s very successful private social security system. The most economically successful nation in Latin America is now in danger of becoming another Argentina. Or worse.

Global Tax Cartel – While Biden’s proposal for a higher corporate tax rate in the United States did not succeed, he seems to have successfully paved the way for a global tax cartel that will require all nations to have a corporate tax rate of at least 15 percent. This is a victory for politicians over workers, consumers, and shareholders. And it creates a very dangerous precedent.

Let’s also have an honorable mention for bad news.

One positive development during the Trump years was the unwinding of regulations that forced Americans to use crummy, low-flow showerheads.

Well, that victory was short-lived, as captured by this headline from a Reason article.

For what it’s worth, I suspect this bit of bad news will be followed by some bad news on a related issue.

P.S. I thought about including inflation as one of the bad things that happened in 2021, but I think that’s the results of years of misguided monetary policy. Politicians from both parties seem perfectly happy with Keynesian policy from the Federal Reserve.

According to the Human Freedom Index, Switzerland Is the Most Libertarian-Oriented Nation

A new edition of the Human Freedom Index has been released. When you combine measures of personal freedom and economic freedom, the “sensible nation” of Switzerland is at the top of the rankings.

I don’t know if this means we should view Switzerland as the world’s most libertarian nation (or perhaps the world’s least statist nation), but it’s obviously good to lead this list.

And it’s not surprising that New Zealand is next, though many people are probably shocked to see Denmark in third place (it has very bad fiscal policy, but otherwise is a very laissez-faire nation).

The United States is #15, which is good but not great.

Here are a few passages from the report’s executive summary.

The Human Freedom Index (HFI) presents a broad measure of human freedom, understood as the absence of coercive constraint. This seventh annual index uses 82 distinct indicators of personal and economic freedom… The HFI covers 165 jurisdictions for 2019, the most recent year for which sufficient data are available. …fully 83 percent of the global population lives in jurisdictions that have seen a fall in human freedom since 2008. That includes decreases in overall freedom in the 10 most populous countries in the world. Only 17 percent of the global population lives in countries that have seen increases in freedom over the same time period. …Jurisdictions in the top quartile of freedom enjoy a significantly higher average per capita income ($48,748) than those in other quartiles; the average per capita income in the least free quartile is $11,259. The HFI also finds a strong relationship between human freedom and democracy

If you want to know the world’s worst nations, here are the bottom 10.

Venezuela is normally the worst of the worst, but in this case Syria wins the Booby Prize.

Let’s now give some extra attention to Hong Kong.

The report notes that there’s been a very unfortunate decline in human freedom in Hong Kong, mostly because of an erosion of personal freedom.

And Hong Kong’s score is expected to drop even further in future editions.

Freedom has suffered a precipitous decline in Hong Kong. The territory was once one of the freest places in the world, but the Chinese Communist Party’s (CCP) escalating violations of Hong Kong’s traditional liberties has caused its ranking in our index to fall from 4th place in 2008—when the first globally comprehensive data appeared—to 30th place in 2019, the most recent year in our report… Our survey does not yet capture the suppression of 2020 and 2021, including the CCP’s imposition of a draconian security law that enabled its aggressive takeover of Hong Kong.

Thanks to the recent election, I expect we will see a similar discussion of Chile’s decline in future editions.

Here’s a final observation that should be highlighted.

Because the report relies on hard data (which often takes a year or two to be finalized and reported), this year’s HFI is based on 2019 data.

And that means we won’t see the effect of pandemic-related restrictions, which generally were adopted in early 2020, until next year’s version.

…this year’s report does not capture the effects of the coronavirus pandemic on freedom.

P.S. Here’s what I wrote about the previous edition of the Human Freedom Index. And if you want to dig into the archives, I also wrote about the publication in 2016 and 2018.

P.P.S. For what it’s worth, I still think Australia might have the best long-run outlook for human freedom.

The Best and Worst States for Tax Policy

Yesterday’s column included a map showing which states gained and lost the most population over the past year.

I speculated that some of America’s internal migration was driven by differences in tax policy.

So it’s appropriate today that I share this map from the Tax Foundation’s annual State Business Tax Climate Index, showing Wyoming, South Dakota, Alaska, and Florida with the best scores and Connecticut, California, New York, and New Jersey with the worst scores.

Comparing today’s map with yesterday’s map, I immediately noticed that two states losing a lot of people – New York and California – also are states that have very bad tax systems.

And if you examine other states, you’ll confirm that there’s a relationship between tax policy and people “voting with their feet.”

Does that mean taxes are the only thing that matters? Of course not.

But as Janelle Cammenga and Jared Walczak explain in their report, they definitely have an effect on where money gets invested and where jobs get created.

Taxation is inevitable, but the specifics of a state’s tax structure matter greatly. The measure of total taxes paid is relevant, but other elements of a state tax system can also enhance or harm the competitiveness of a state’s business environment. …all types of businesses, small and large, tending to locate where they have the greatest competitive advantage. The evidence shows that states with the best tax systems will be the most competitive at attracting new businesses and most effective at generating economic and employment growth. …State lawmakers are right to be concerned about how their states rank in the global competition for jobs and capital, but they need to be more concerned with companies moving from Detroit, Michigan, to Dayton, Ohio, than from Detroit to New Delhi, India. …Tax competition is an unpleasant reality for state revenue and budget officials, but it is an effective restraint on state and local taxes.

One of the more interesting parts of the report is that you get to see where states rank when considering different types of taxes.

Here’s Table 1, which has the overall ranking in the first column, followed by the rankings for the main revenue sources for states.

If you read the report’s methodology, you’ll notice that there are different weights.

The worst tax (assuming a state wants a competitive system) is the personal income tax, followed by the sales tax and corporate income tax.

No state ranks in the top 10 for all five categories, though Florida, North Carolina, and Utah have relatively good scores across the board.

P.S. One important caveat is that the report does not list energy severance taxes, which are major sources of revenue for states such as Alaska and Wyoming. To be sure, those taxes that largely are borne by out-of-state consumers, so there’s a reason for the omission. Nonetheless, those taxes enable excessive government spending, which is why I think South Dakota and Florida actually have the nation’s best fiscal systems.

Americans Are “Voting with their Feet” against High Taxes

I’ve written many times about how Americans are moving from high-tax states to low-tax states.

Now we have even more evidence because the Census Bureau has issued its annual report on state population changes, along with this accompanying map.

You don’t need to be an expert in map reading to see that California, Illinois, and New York are losing people at the fastest rate (orange states).

Likewise, the states gaining population at the fastest rate (purple states) include Texas.

This chart from the Wall Street Journal shows the biggest changes, as measured by the number of people moving in and out.

To be sure, taxes are not the only factor that drive internal migration.

But it’s also clear that people tend to move to lower-tax states, either because they overtly want to keep more of their money, or because they are attracted to the job opportunities that tend to be more plentiful where taxes are lower.

As you might expect, the coverage from Fox News highlights the fact that people are leaving blue states and moving to red states.

Between 2020 and 2021, the country has seen the lowest population growth since its founding, at only a 0.1% increase, but the biggest declines have occurred in Washington, D.C., and Democrat-led states, according to a report Tuesday by the Census Bureau. …New York with a 1.6% decline, Illinois with a 0.9% decline, and Hawaii and California that both saw a 0.7% decline. Meanwhile, the states that saw the biggest increase in population growth were Republican-run states, starting with Idaho at a 2.9% increase, followed by Utah with 1.7%, Montana with 1.7%, Arizona with 1.4% and South Carolina with 1.2%. …Florida and Texas, each saw a population growth of 1%.

Citing a different report, he Wall Street Journal opined a few days ago about the implications of migration for Illinois.

The Land of Lincoln is one of only three states, including West Virginia and Mississippi, to have lost population since 2010. But its population over age 55 has grown as Baby Boomers have aged. …Illinois is losing young people while Florida is gaining them. State development specialist Zach Kennedy notes that “the U.S. population actually grew in the prime working age, young adult age cohorts, 25 to 29, 30 to 34 and 35 to 39 year olds.” Illinois was among the few states to see a decline in these age cohorts. …“Only New Jersey lost more college-aged individuals out of state who never returned,” Mr. Kennedy says. Hmmm. What do the two have in common? …a shrinking population of prime-age working people and children means a smaller tax base will have to support growing retirement liabilities. Folks who stick around will have to pay higher and higher taxes. …each Illinois household on average is on the hook for $110,000 in government-worker retirement debt, up from $90,000 in 2019. …The per-household pension burdens in Iowa and Wisconsin were $3,500 and $3,200, respectively. Both states have gained young people. State and local government in Illinois is run by public-worker unions, and people are fleeing the economic and fiscal consequences.

The most important sentence in the preceding excerpt points out that “Folks who stick around will have to pay higher and higher taxes.”

And that will encourage even more of them to leave, which leads to even-further pressure for higher taxes on the chumps who remain.

Needless to say, that won’t end well, for Illinois or other blue states. Either they go bankrupt or future politicians do a big blue-state bailout.

P.S. This helps to explain why curtailing the federal tax code’s subsidy for excessive state and local tax burdens was so important.

P.P.S. This is also why federalism is both good politics and good policy.

Gimmicky Public Policy from Japan

It’s hard to be optimistic about Japan’s economic future, in large part because the burden of government is expanding thanks to an aging population and a tax-and-transfer entitlement system.

Maintaining that approach is a recipe for ever-higher taxes (especially since Japan already has record levels of debt).

And Japanese politicians definitely have been grabbing more money, enabled to a considerable extent by a money-grabbing value-added tax.

To make matters worse, the country’s economy has not enjoyed much growth ever since a bubble burst about thirty years ago.

Sadly, the current prime minister, Fumio Kishida, doesn’t seem to have any sensible ideas for his country.

Instead, as reported by Ben Dooley and Hisako Ueno in the New York Times, he’s latched on to a very silly proposal.

Japan’s prime minister…wants…to…Give…employees a substantial raise. The reasoning is simple. Wage growth has been stagnant for decades in Japan, the wealth gap is widening and the quickest fix is nudging people…to pay their employees more. Higher wages, the thinking goes, will jump-start consumer spending and lift Japan’s sputtering economy. …the prime minister is calling on employers to increase pay as much as 4 percent in 2022. Companies that comply will be allowed to increase their overall corporate tax deductions by up to 40 percent. …Mr. Kishida said…Increasing pay “is not a cost,” he added. “It’s an investment in the future.”

Kishida’s scheme is a bizarre mix of industrial policy and Keynesian economics.

He wants a special loophole in the tax code, but only if companies jump through certain hoops.

All based on the flawed notion that consumer spending drives the economy (it’s actually the economy that drives consumer spending).

Unsurprisingly, the private sector isn’t very impressed by the prime minister’s approach.

Business groups, union leaders and others have questioned the feasibility… That businesses would resist increasing wages even when essentially paid to do so shows just how intractable the problem is. Years of weak growth…have left companies little room to raise prices. …The reaction to the wage proposal is an inauspicious sign for Mr. Kishida, who took office two months ago promising to…put Japan’s economy back on track through a “new capitalism.”

Kishida’s “new capitalism” sounds even worse than some of the gimmicky ideas that have been pushed on the right in the United States (reform conservatism, common-good capitalism, nationalist conservatism, and compassionate conservatism).

From an economic perspective, he needs to learn that sustained higher wages are only possible if there’s more productivity, which translates into more income for both companies and workers.

And that’s not a description of what we find in Japan.

…there is the issue of unprofitability. For nearly a decade, a majority of Japanese businesses have been unprofitable — around 65 percent in 2019, the lowest figure since 2010. They have been kept afloat by cheap money underwritten by the Bank of Japan, but no profits mean no corporate tax liability, so those businesses would not be eligible for Mr. Kishida’s incentives.

The bottom line is that Japan’s political elite has been marching steadily in the wrong direction, and they never seem to learn from previous mistakes.

The government has long tried to find something, anything, to stimulate the economy and push up prices. It has pumped money into financial markets and made borrowing nearly free. But it’s been to little avail…the Japanese government has turned to even larger amounts of stimulus, showering consumers with cash handouts and companies with zero-interest loans. …In 2013, Prime Minister Shinzo Abe introduced a similar plan, with little success. Today, average wages remain stuck at around $2,800 a month, about the same level as two decades ago.

P.S. Part of the problem is that Japanese politicians may be listening to terrible advice from left-leaning bureaucracies such as the International Monetary Fund and Organization for Economic Cooperation and Development.

P.P.S. Here’s another example of a foolish gimmick by Japanese politicians.

P.P.P.S. And let’s not forget that Japan may win a prize for the strangest example of regulation.

Celebrating the Death of the Evil Empire

There are not many advantages to being old, but I feel lucky to have been alive to see the collapse of the Berlin Wall and the dissolution of the Soviet Union.

We should celebrate this victory over evil every day.

But especially on December 26, which is the 30th anniversary of the Soviet Union’s downfall (the Soviet flag was replaced by the Russian flag on Christmas, but the USSR wasn’t formally dissolved until the following day).

In a column for the American Institute for Economic Research, Doug Bandow writes joyfully about the end of the Soviet Union.

…the Union of Soviet Socialist Republics, which Reagan accurately labeled the Evil Empire…assuredly was evil. …the Evil Empire’s death wasn’t the miracle that occurred three decades ago. The Soviet Union’s peaceful death was. …Reagan was vital. He recognized the USSR as a national Humpty Dumpty, ready for its great fall. Contra the widespread assumption among foreign policy specialists that communism was likely to be with us for years, even decades, Reagan saw weakness, economic, to be sure, but also moral and spiritual. …Gorbachev…kept Red Army troops in their barracks in the breakthrough year of 1989, when the East European “satellites” slipped their orbits. …Poland and Hungary began the cascade. Czechoslovakia and Bulgaria followed more slowly. Most dramatically, the Berlin Wall fell on November 9, 1989, after East Germany’s leadership refused to commit mass murder and mow down protestors. …The Soviet Union staggered along for two more years. The regime increasingly failed to manage the economy. …Three decades ago this month the Evil Empire—created by Vladimir Ilyich Lenin, empowered by Joseph Stalin, dessicated by Leonid Brezhnev, and buried by Mikhail Gorbachev—ended. Disappeared. Collapsed. Vanished. Disintegrated. Failed. And all the misguided intellectuals, venal apparatchiks, and murderous ideologues could not put it back together again. …good people can, and sometimes do, win.

The point about the “moral and economic” weakness of the Soviet Union is probably not sufficiently appreciated.

Reagan pointed out (often using humor) that communism was a moral abomination, not some sort of legitimate competing system (I’d be rich today if I had a dollar for every time some supposed expert asserted that we needed to find a middle ground with communism).

It’s probably not possible to measure the extent to which foundational criticism played a role in the collapse of the Soviet Union, but these excerpts from James Pethokoukis seem very relevant.

December will mark the 30th anniversary of the dissolution of the Soviet Union. …One of the best brief analytical accounts of Soviet Union’s demise is by AEI scholar Leon Aron — a 2011 piece in Foreign Policy, “Everything You Think You Know About the Collapse of the Soviet Union Is Wrong.” …To Aron, the sudden demise of the Soviet Empire is ultimately a story of moral renaissance, an “intellectual and moral quest for self-respect and pride that, beginning with a merciless moral scrutiny of the country’s past and present, within a few short years hollowed out the mighty Soviet state, deprived it of legitimacy, and turned it into a burned-out shell that crumbled… The long-run decline and demise of the Soviet Union is also, of course, a story of the economic failure of socialism and central planning.

While Reagan deserves considerable credit, he wasn’t the only leader to help push the Soviet Union into the dustbin of history.

In an article for Reason, Stephanie Slade discusses the role of Pope John Paul II.

In 1979, less than a year after ascending to the Catholic Church’s highest office, Pope John Paul II returned to his home country, then under communist rule. He disembarked at the airport, knelt, and kissed the Polish ground. That moment was arguably the beginning of the end of the Soviet Union. …While celebrating Mass at Warsaw’s Victory Square, John Paul…said, “that there can be no just Europe without the independence of Poland marked on its map!” It was an astonishing political rebuke to the Soviets, who following World War II had installed communist governments across Eastern Europe that were “independent” in name only. …As the labor organizer and future Polish president Lech Wałęsa put it, John Paul’s pilgrimage “awakened in us, the Poles, the hope for change….I have no doubt that without the pope’s words, without his presence, the birth of Solidarity would not have been possible.” …In 1987, Pope John Paul II made his third pilgrimage to Poland. Independent unions were still outlawed at the time, but that did not stop supporters from hoisting Solidarity banners during a papal Mass attended by some 800,000 people. That same week, Reagan, during a speech at the Brandenburg Gate, intoned: “Mr. Gorbachev, tear down this wall!” Two years later, the Berlin Wall would indeed come down. We often think of that as the first domino to fall in Eastern Europe. But in fact, it occurred a few months after Poland held its first semi-free parliamentary elections. Solidarity claimed 99 percent of the open seats. …The events of the period were a triumph for individual liberty.

I’ve pointed out how a grocery store in Texas also helped bring about the end of the Soviet Union.

A TV show about the same state may have played a role as well. Here are some excerpts from a report in the U.K.-based Sun.

Classic soap Dallas brought down communism in the Soviet Union, Eurythmics star Dave Stewart has claimed. …And the claim comes from an impeccable source — a conversation the songwriter had with former Soviet leader Mikhail Gorbachev in the 1990s. Dave, 68, said: “What ­Gorbachev was saying — it was Dallas, the TV show. …“Somebody managed to get a VHS to work and broadcast it to part of Russia and they thought, ‘Hang on, that’s how people live in America’. “He said that had more effect, that half an hour, than anything else.” …watching such shows was banned behind the Iron Curtain.

For what it’s worth, I don’t think grocery stories and TV shows were quite as important as Reagan and the Pope.

But I think such factors helped to erode the confidence of the communist elite (the bosses who were much more likely to be exposed to the superior economic outcomes in capitalist nations).

Let’s close with a final observation about the failures of the American policy elite.

I’ve previously opined on the glaring inability of some academic economists to understand the inherent flaws of communism. Well, a recent column by George Will contains these amazing observations about a similar blindness by supposed experts inside the U.S. government.

In 1992, Sen. Daniel Patrick Moynihan (D-N.Y.) remembered a warning by CIA Director Allen Dulles (who would become a Washington casualty of the Bay of Pigs) in 1959 that the Soviet Union’s economy was humming so efficiently that by 1970 the gap between the Soviet and U.S. economies would be dangerously narrow. But, then, the 1957 Gaither Commission projected that the Soviet gross domestic product would surpass the U.S. GDP in 1993. (The sclerotic Soviet Union did not live that long.) Moynihan noted that in 1987 the CIA reported that East Germany’s per capita GDP was higher than West Germany’s, an assessment that “any taxi driver in Berlin” could have refuted.

I don’t like majoritarianism, but passages like this are why I’m also not a fan of rule by self-styled experts. But that’s a topic for another day.

The moral of today’s column is that communism was an evil failure.

As epitomized by the Soviet Union, it was an economic failure and a humanitarian failure.

P.S. If you want to learn more about the economic performance of East Germany and West Germany, you can click here.

P.P.S. If you want other examples of how communist economics led to terrible outcomes, you can also compare Czechoslovakia to nations in Western Europe, as well as Cuba vs Chile and North Korea vs South Korea.