The IMF Is the Dumpster Fire of the Global Economy

I thought the Organization for Economic Cooperation and Development had cemented its status as the world’s worst international bureaucracy when it called for a Keynesian spending binge even though the global economy is still suffering from previous schemes for government “stimulus.”

But the International Monetary Fund is causing me to reconsider my views.

First, some background about the IMF. Almost all of the problems occur when the political appointees at the top of the organization make policy choices. That’s when you get the IMF’s version of junk science, with laughable claims about inequality and growth, bizarrely inconsistent arguments about infrastructure spending, calls for massive energy taxes,

By contrast, you do get some worthwhile research from the career economists (on issues such as spending caps, fiscal decentralization, and the Laffer Curve).

But that kind of professional analysis gets almost no attention. The IMF’s grossly overpaid (and untaxed!) Managing Director seemingly devotes all her energy to pushing and publicizing bad policies.

The Wall Street Journal reports, for instance, that the IMF is following the OECD down the primrose path of fiscal recklessness and is also urging nations to throw good money after bad with another Keynesian spending spree.

The world’s largest economies should agree to a coordinated increase in government spending to counter the growing risk of a deeper global economic slowdown, the International Monetary Fund said Wednesday. …the IMF is pushing G-20 finance ministers and central bankers meeting in Shanghai later this week to agree on bold new commitments for public spending.

Fortunately, at least one major economy seems uninterested in the IMF’s snake-oil medicine.

The IMF’s calls will face some resistance in Shanghai. Fiscal hawk Germany has been reluctant to heed long-issued calls by the U.S., the IMF and others to help boost the eurozone’s weak recovery with public spending.

Hooray for the Germans. I don’t particularly like fiscal policy in that nation, but I at least give the Germans credit for understanding at the end of the day that 2 + 2 = 4.

I’m also hoping the British government, which is being pressured by the IMF, also resists pressure to adopt Dr. Kevorkian economic policy.

The International Monetary Fund has urged the UK to ease back on austerity… IMF officials said the Treasury had done enough to stabilise the government’s finances for it to embark on extra investment spending… The Treasury declined to comment on the IMF report. The report said: “Flexibility in the fiscal framework should be used to modify the pace of adjustment in the event of weaker demand growth.” …Osborne has resisted attempts to coordinate spending by G20 countries to boost growth, preferring to focus on reducing the deficit in public spending to achieve a balanced budget by 2020.

But you’ll be happy to know the IMF doesn’t discriminate.

It balances out calls for bad policy in the developed world with calls for bad policy in other places as well. And the one constant theme is that taxes always should be increased.

I wrote last year about how the IMF wants to sabotage China’s economy with tax hikes.

Well, here are some excerpts from a Dow Jones report on the IMF proposing higher tax burdens, tax harmonization, and bigger government in the Middle East.

The head of the International Monetary Fund on Monday urged energy exporters of the Middle East to raise more taxes… “These economies need to strengthen their fiscal frameworks…by boosting non-hydrocarbon sources of revenues,” Christine Lagarde said at a finance forum in the United Arab Emirates capital. …Ms. Lagarde called on the Persian Gulf states to introduce a valued added tax, which, even at a relatively low rate, could lift gross domestic product by 2%, she said. …Ms. Lagarde, who on Friday clinched a second five-year term as the IMF’s managing director, also urged governments in the region to consider raising corporate income taxes and even prepare for personal income taxes. Income taxes in particular could prove a sensitive move in the Gulf, which in recent decades has attracted millions of workers from abroad by offering, among other things, light-touch tax regimes. Ms. Lagarde also wants to discourage “overly aggressive tax competition” among countries that allow international companies and wealthy individuals to shift their wealth to lower tax destinations.

Wow, Ms. Lagarde may be the world’s most government-centric person, putting even Bernie Sanders in her dust.

She managed, in a single speech, to argue that higher taxes “strengthen…fiscal frameworks” even though that approach eventually leads to massive fiscal instability. She also apparently claimed that a value-added tax could boost economic output, an idea so utterly absurd that I hope the reporter simply mischaracterized her comments and that instead she merely asserted that a VAT could transfer an additional 2 percent of the economy’s output into government coffers. And she even urged the imposition of income taxes, which almost certainly would be a recipe for turning thriving economies such as Dubai back into backward jurisdictions where prosperity is limited to the oil-dependent ruling class.

And it goes without saying that the IMF wants to export bad policy to every corner of the world.

The IMF chief said taxation allows governments to mobilize their revenues. She noted, however, that the process can be undermined by “overly aggressive tax competition” among countries, and companies abusing the system of international taxation. …She argued that the automatic exchange of taxpayer information among governments could make it harder for businesses to follow the scheme.

And don’t forget that the IMF oftentimes will offer countries money to implement bad policy, like when the bureaucrats bribed Albania to get rid of its flat tax.

P.S. Now perhaps you’ll understand why I was so disappointed that last year’s budget deal included a provision to expand the IMF’s authority to push bad policy around the world.

P.P.S. In other words, American taxpayers are being forced to subsidize the IMF so it can advocate higher taxes on American taxpayers! Sort of like having to buy a gun for the robber who wants to steal your money.

P.P.P.S. Though I’ll also be grateful that the IMF inadvertently and accidentally provided some very powerful data against the value-added tax.

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The Middle Class Is Voting with its Feet against California and other High-Tax States

Long-run trends are an enormously important – yet greatly underappreciated – feature of public policy.

• Slight differences in growth can have enormous implications for a nation’s long-run prosperity.
• Gradual shifts in population trends may determine whether a nation faces demographic decline.
• Modest changes in the growth of government can make the difference between budgetary stability and fiscal crisis.
• And migration patterns can impact a jurisdiction’s viability.

Or, in the case of California, its lack of viability. Simply stated, the Golden State is committing slow-motion suicide by discouraging jobs, entrepreneurs, investors, and workers.

Let’s look at some of the data. Carson Bruno of the Hoover Institution reviews data showing that the aspirational class is escaping California.

California’s consistent net domestic out-migration should be concerning to Sacramento as it develops state policy. As the adage goes, people vote with their feet and one thing is clear, more people are choosing to leave California than come. …Between 2004 and 2015, roughly 930,000 more people left California than moved to the Golden State… The biggest beneficiaries of California’s net loss are Arizona, Texas, Nevada, Oregon, and Washington. California is bleeding working young professional families. …those in the heart of their prime working-age are moving out. Moreover, while 18-to-24 year olds (college-age individuals) make up just 1% of the net domestic out-migrants, the percentage swells to 17% for recent college graduates (25 to 39 year olds).

And here’s why these long-run migration trends matter.

…while there is a narrative that the rich are fleeing California, the real flight is among the middle-class. …the Golden State’s oppressive tax burden – California ranks 6th, nationally, in state-local tax burdens – those living in California are hit with a variety of higher bills, which cuts into their bottom line. …which leads to a less economically productive environment and less tax revenue for the state and municipalities, but a need for more social services. And when coupled with the fact that immigrants – who are helping to drive population growth in California – tend to be, on average, less affluent and educated and also are more likely to need more social services, state, county, and municipal governments could find themselves under serious administrative and financial stress. …the state’s favorable climate and natural beauty can only anchor the working young professionals for so long.

We’re concentrating today on California, but other high-tax states are making the same mistake.

Here’s some data from a recent Gallup survey.

Residents living in states with the highest aggregated state tax burden are the most likely to report they would like to leave their state if they had the opportunity. Connecticut and New Jersey lead in the percentage of residents who would like to leave… Nearly half (46%) of Connecticut and New Jersey residents say they would like to leave their state if they had the opportunity. …States with growing populations typically have strong advantages, which include growing economies and a larger tax base. Gallup data indicate that states with the highest state tax burden may be vulnerable to migration out of the state…data suggest that even moderate reductions in the tax burden in these states could alleviate residents’ desire to leave the state.

Writing for the Orange County Register, Joel Kotkin explains how statist policies have created a moribund and unequal society.

…in the Middle Ages, and throughout much of Europe, conservatism meant something very different: a focus primarily on maintaining comfortable places for the gentry… California’s new conservatism, often misleadingly called progressivism, seeks to prevent change by discouraging everything – from the construction of new job-generating infrastructure to virtually any kind of family-friendly housing. …since 2000 the state has lost a net 1.7 million domestic migrants. …California’s middle class is being hammered. …Rather than a land of opportunity, our “new” California increasingly resembles a class-bound medieval society. …California is the most unequal state when it comes to well-being… Like a medieval cleric railing against sin, Brown seems somewhat unconcerned that his beloved “coercive power of the state” is also largely responsible for California’s high electricity prices, regulation-driven spikes in home values and the highest oil prices in the continental United States. Once the beacon of opportunity, California is becoming a graveyard for middle-class aspiration, particularly among the young.

In other words, class-warfare policies have a very negative impact_ on ordinary people.

Meanwhile, returning to California, a post at the American Interest ponders some of the grim implications of bad policy.

…many of the biggest, bluest states in the country—including New York, Illinois, and Massachusetts—have also experienced major exoduses over the last five years (although these outflows have been offset, to varying degrees, by foreign immigration). These large out-migrations represent serious policy failures… The new statistics out of California are a bad omen for the future of the state’s doctrinaire blue model governance. …if families and the young continue to flee California, the population will become older and less economically dynamic, creating a shortfall in tax revenue and possibly pressuring Sacramento raise rates even higher. Meanwhile, California faces a severe pension shortfall, both at the state and local level.

Here’s a map from the Tax Foundation showing top income tax rates in each state. If you remember what Carson Bruno wrote about California’s emigrants, you’ll notice that states with no income tax (Washington, Texas, and Nevada) are among the main beneficiaries.

So the moral of the story is that states with no income taxes are winning, attracting jobs and investment. And high-tax states like California are losing.

But remember that the most important variable, at least for purposes of today’s discussion, is how these migration trends impact long-run prosperity. More jobs and investment mean a bigger tax base, which means the legitimate and proper functions of a state government can be financed with a modest tax burden.

In states such as California, by contrast, even small levels of emigration begin to erode the tax base. And if emigration is a long-run trend (as is the case in California), there’s a very serious risk of a “death spiral” as politicians respond to a shrinking tax base by imposing even higher rates, which then results in even higher levels of emigration.

Think France and Greece and you’ll understand what that means in the long run.

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Higher Taxes Are a Recipe for Higher Spending, not Lower Debt

With both Hillary Clinton and Bernie Sanders agitating for higher taxes (and with more than a few Republicans also favoring more revenue because they don’t want to do any heavy lifting to restrain a growing burden of government), it’s time to examine the real-world evidence on what happens when politicians actually do get their hands on more money.

Is it true, as we are constantly told by the establishment, that higher tax burdens a necessary and practical way to reduce budget deficits and lower debt levels?

This is an empirical question rather than an ideological one, and the numbers from Europe (especially when looking at the data from the advanced nations that are most similar to the US) are especially persuasive.

I examined the European fiscal data back in 2012 to see whether the big increase in tax revenue starting in the late 1960s led to more red ink or less red ink.

You won’t be surprised to learn that giving more money to politicians didn’t lead to fiscal probity. The burden of taxation climbed by about 10-percentage points of economic output over four decades, but governments spent every single penny of the additional revenue.

They actually spent more than 100 percent of the additional revenue. The average debt burden in these Western European nations jumped from 45 percent of GDP to 60 percent of GDP.

I often share this data when giving speeches since it is powerful evidence that tax increases are not a practical way of dealing with debt and deficits.

But in recent years, audiences have begun to ask why I compare numbers from the late 1960s (1965-1969) with the data from the last half of last decade (2006-2010). What would the data show, they’ve asked, if I used more up-to-date numbers.

So it’s time to re-calculate the numbers using the latest data and share some new charts about what happened in Europe. Here’s the first chart, which shows on the left that there’s been a big increase in the tax burden over the past 45 years and shows on the right average debt levels at the beginning of the period. And I ask the rhetorical question about whether higher taxes led to less red ink.

Now here’s the updated answer.

What we find is that debt levels have soared. Not just from 45 percent of GDP to 60 percent of GDP, as shown by the 2012 numbers, but now to more than 80 percent of economic output.

In other words, we can confirm that the giant increase in the tax burden over the past few decades has backfired. And we can also confirm that the big income tax hikes and increases in value-added taxes in more recent years have made matters worse rather than better.

I can’t imagine that anyone needs any additional evidence that tax increases are misguided.

But just in case, let’s look at the findings in some newly released research from the European Central Bank.

Since the start of the sovereign debt crisis, in early 2010, many Euro area countries have adopted fiscal consolidation measures in an attempt to reduce fiscal imbalances and preserve their sovereign creditworthiness. Nonetheless, in most cases, fiscal consolidation did not result.

That doesn’t sound like good news.

I wonder whether it has anything to do with the fact that “fiscal consolidation” in Europe almost always means higher taxes? And, indeed, the ECB number crunchers have confirmed that the tax-hike approach is bad news.

The aim of this paper is to investigate the effects of fiscal consolidation on the general government debt-to-GDP ratio in order to assess whether and under which conditions self-defeating effects are likely to materialise… In the case of revenue-based consolidations the increase in the debt-to-GDP ratio tends to be larger and to last longer than in the case of spending-based consolidations. The composition also matters for the long term effects of fiscal consolidations. Spending-based consolidations tend to generate a durable reduction of the debt-to-GDP ratio compared to the pre-shock level, whereas revenue-based consolidations do not produce any lasting improvement in the sustainability prospects as the debt-to-GDP ratio tends to revert to the pre-shock level.

The two scholars at the ECB then highlight the lessons to be learned.

…strategy is more likely to succeed when the consolidation strategy relies on a durable reduction of spending, whereas revenue-based consolidations do not appear to bring about a durable improvement in debt sustainability. Moreover, delaying fiscal consolidation until financial markets pressures threaten a country’s ability to issue debt, may have a cost in terms of a less sizeable reduction in the debt-to-GDP ratio for given consolidation effort, even if it is undertaken on the spending side. This is an important policy lesson also in view of the fact that revenue-based consolidations tend to be the preferred form of austerity, at least in the short run, given also the political costs that a durable reduction in government spending entail.

In other words, the bottom line is a) that tax hikes don’t work, b) reform is harder if you wait until a crisis has begun, and c) the real challenge is convincing politicians to do the right thing when they instinctively prefer tax hikes.

P.S. It’s worth pointing out that the value-added tax has generated much of the additional tax revenue (and therefore enabled much of the added burden of government spending) in Europe.

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Puerto Rico’s Economically Illiterate Government Imposes Price Controls

When I point out that Puerto Rico got in trouble by allowing the burden of government spending to grow faster than the private economy, thus violating my Golden Rule, honest leftists will admit that’s true but then challenge me on what should happen next.

That’s a very fair – and difficult – question. The amount of government debt in Puerto Rico is so large that repayment would be a big challenge. In effect, today’s taxpayers and tomorrow’s taxpayers would suffer because of the reckless choices of yesterday’s politicians.

It could be done, to be sure, just like Greece could dig its way out of debt with a sufficient degree of spending restraint.

That being said, I’m not necessarily opposed to debt relief. Whether you call it default, restructuring, or something else, debt relief would give Puerto Rico a better chance of getting back on its feet. Moreover, I’m not exactly overflowing with sympathy for investors who lent money to Puerto Rico’s profligate government. Maybe they’ll be more prudent in the future if they lose some of their money today.

But here’s my quandary (and I feel the same way about Greece): I don’t mind debt relief if it’s part of a deal that actually produces better policy.

But I’m opposed to debt relief if it simply gives an irresponsible government “fiscal space” to maintain wasteful programs and other counterproductive forms of spending.

And I see very little evidence that Puerto Rico is interested in making the needed structural reforms to alter the long-run trend of ever-rising outlays.

Nor do I see any evidence that Puerto Rican officials are pushing for much-needed reforms in areas other than fiscal policy. Where’s the big push to get exempted from the Jones Act, a union-friendly piece of legislation that significantly increases the cost of shipping goods to and from the mainland? Where are the calls to get Puerto Rico an exemption from minimum wage laws that are harmful on the mainland but devastating in a less-developed economy?

These are some of the reasons why I don’t want to reward Puerto Rico’s feckless political class by granting debt relief.

And here’s something else to add to the list. Notwithstanding 40 centuries of evidence that price controls are a form of economic malpractice, the government has decided to use coercion to prohibit voluntary transactions between consenting adults.

The excuse is the Zika virus, but the result will be failure. Here’s some of what CNN is reporting.

The government of Puerto Rico has ordered a price freeze on condoms… Any store that hikes prices to try to capitalize on people’s fears of the virus will be fined up to $10,000. Other items on the price-freeze list: insect repellent, hand sanitizer and tissues. …The price gauging [sic] ban went into effect at the end of January on mosquito repellents. Condoms were added to the list in early February… “The price freeze remains in effect until after the emergency is over,” Nery Adames, Secretary of the Department of Consumer Affairs, tells CNN.

By the way, you’ll notice that the government didn’t address the one thing it legitimately could have done to reduce condom prices.

Condoms are subject to the island’s 11.5% sales tax, one of the highest in the nation.

But let’s focus on the policy of price controls.

With his usual clarity, Professor Don Boudreaux explains the consequences of these horrid restrictions on market forces.

 The price freeze will prevent the Zika-inspired rise in the demand for condoms from calling forth an increase in the quantity of condoms supplied to satisfy that higher demand.  The resulting shortage of condoms will prompt some people to wait in queues to buy condoms, cause other people to turn to black-market suppliers, and cause yet other people simply to not use condoms during sex.  Each of these consequences reflects the reality that the price freeze, rather than keeping the cost of condoms “cheap,” will raise that cost inordinately – and, in the process, further promote the spread of Zika.

Amen. Don is spot on about the negative consequences of allowing politicians and bureaucrats to interfere with market prices.

So we have a government “solution” that actually makes a problem worse.

Just as price controls have contributed to economic misery in Venezuela.

Or caused shortages after hurricanes in the United States.

Puerto Rico needs its version of Ludwig Erhard. Instead, it’s governed by people who apparently learned economics from Hugo Chavez.

P.S. Speaking of condoms, I hope I’m not the only one who is both amused and disgusted that politicians and bureaucrats simultaneously squander money to discover men don’t like poorly-fitting condoms while also imposing regulations that prevent condom companies from offering a greater variety of sizes.

P.P.S. Though I guess those examples of government foolishness are comparatively frugal compared to the “stimulus” grant that spent $6,000 per interview to discover why some men don’t get “stimulus.”

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Glass-Steagall and Financial Mythology

I try to avoid certain issues because they’re simply not that interesting. And I figure if they bore me – even though I’m a policy wonk, then they probably would be even more painful for everyone else.

But every so often, I feel compelled to address a topic simply because the alternative is to let the other side propagate destructive economic myths.

That’s why I’ve written about arcane topics such as depreciation and carried interest.

In this spirit, it’s now time to write about “Glass-Steagall,” which is the shorthand way of referring to the provision of the Banking Act of 1933 that imposed a separation between commercial banking and investment banking.

This regulatory barrier has been relaxed over the years, in part by the Financial Services Modernization Act of 1999 (often known as Gramm-Leach-Bliley).

Our friends on the left are big fans of Glass-Steagall. They think the law fixed a problem that helped cause the Great Depression and they think its partial repeal is one of the reasons for the recent financial crisis.

Bernie Sanders, for instance, has made Glass-Steagall reinstatement one of his big issues, probably in part because Hillary Clinton’s husband signed the 1999 law that eased that regulatory burden.

That may or may not be smart politics for Senator Sanders, but it is based on economic illiteracy. Let’s look at what the experts say.

Peter Wallison of the American Enterprise Institute, for instance, offers some very important insights about Glass-Steagall and the financial crisis.

The so-called “repeal” of Glass-Steagall in 1999…had absolutely nothing to do with the financial crisis. The 1999 changes in one sector of Glass-Steagall Act made only one change in existing law: it permitted affiliations between commercial banks and investment banks. But by the time of the 2008 crisis, none of the large investment banks (like Goldman Sachs, Morgan Stanley or Lehman Brothers) had affiliated with any of the large commercial banks (like Citi, JP Morgan Chase or Bank of America). Commercial banks and investment banks had remained fierce competitors with one another right up to the time of Lehman Brothers’ bankruptcy. The simplest way to think about the financial crisis is that the largest investment banks and commercial banks got into financial trouble by acquiring and holding risky mortgages or mortgage backed securities based on these risky loans. This was permitted for both of them before Glass-Steagall was “repealed,” and it was permitted afterward. In other words, if Glass-Steagall had never been touched by Congress in any way, the financial crisis would have unfolded exactly as it did in 2008.

Bingo.

If the leftists are right and the partial repeal of Glass-Steagall was bad and destabilizing, shouldn’t they be able to point to some real-world evidence? To any real-world evidence? To a shred of real-world evidence?

Megan McArdle, writing for Bloomberg, also is baffled by the anti-empirical emotionalism of the Glass-Steagall crowd.

…those intrepid souls who continue to fiercely agitate for the return of the Glass-Steagall financial regulations…have become a powerful force in the Democratic Party. …there is a small problem… It’s very hard to think of the mechanism by which the repeal of this rule made any significant contribution to the meltdown. …The problems appeared first at Bear Stearns, and then Lehman Brothers, straight investment banks and lenders like Countrywide.

By the way, there’s a bipartisan consensus on this matter.

Catherine Rampell of the Washington Post certainly couldn’t be called a libertarian or conservative, yet she also is flummoxed by the fixation on Glass-Steagall.

the Glass-Steagall Act…’s become the left’s litmus test for whether a politician is “tough” on Wall Street. …But Glass-Steagall had nothing to do with the 2008 financial crisis. …If the repealed provisions of Glass-Steagall had still been on the books, almost none of the institutions at the epicenter of the crisis would have been covered by it. Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley were basically stand-alone investment banks. AIG was an insurance company. Fannie Mae and Freddie Mac were government-sponsored entities that bought and securitized mortgages. Washington Mutual was a traditional savings-and-loan. And so on. Glass-Steagall, or the lack thereof, is a red herring.

Steven Pearlstein of the Washington Post – another columnist who has never been accused of being in love with free markets – is similarly baffled. And for the same reasons. The facts simply don’t match the left-wing narrative.

Bear Stearns, Lehman Brothers and Merrill Lynch — three institutions at the heart of the crisis — were pure investment banks that had never crossed the old line into commercial banking. The same goes for Goldman Sachs, another favorite villain of the left. The infamous AIG? An insurance firm. New Century Financial? A real estate investment trust. No Glass-Steagall there. Two of the biggest banks that went under, Wachovia and Washington Mutual, got into trouble the old-fashioned way – largely by making risky loans to homeowners. Bank of America nearly met the same fate, not because it had bought an investment bank but because it had bought Countrywide Financial, a vanilla-variety mortgage lender. Meanwhile, J.P. Morgan and Wells Fargo — two large banks with big investment banking arms — resisted taking government capital and arguably could have weathered the crisis without it.

The inescapable conclusion is that Glass-Steagall had nothing to do with the financial crisis.

Instead, the main causes of the 2008 meltdown were bad government policies, such as easy-money from the Fed and corrupt housing subsidies from Fannie Mae and Freddie Mac.

But even if you’re a leftist and want to say that the crisis was caused by “greed,” the various institutions that got burned by “greed” were not giant investment bank/commercial bank conglomerates.

Let’s cover two more issues. First, my colleague Mark Calabria points out that one of the core beliefs of the left simply isn’t true. Commercial banking isn’t always a safe and boring line of business (which therefore has to be protected from the vagaries of investment banking).

…the bizarre implicit assumption behind Glass-Steagall: that somehow commercial banking is risk free.  Anyone ever hear of the savings-and-loan crisis of the late 1980s and early 1990s?  No investment banking angle there.  How about the 400+ small and medium banks that failed in the recent crisis? According to the FDIC, not one of them was brought down by proprietary trading.

Second, let’s dispel the notion that the Great Depression was caused by – or exacerbated by – the pre-Glass-Steagall mixing of commercial banking and investment banking.

Stephen Miller of the Mercatus Center debunks this myth.

The narrative justifying the Banking Act of 1933 always derived from myths that large securities dealing banks caused the banking crisis during the Great Depression. The myths hold that: (1) securities dealing banks were more unstable and contributed to the Great Depression, and (2) securities dealing banks pushed people to purchase what turned out to be low-quality assets that performed poorly during the Great Depression. However, both myths have been disproven. For instance, on the first myth, a 1986 Rutgers University study found that banks involved in securities dealing were less likely to fail. …none of the 5,000 banks that failed during the 1920s had securities dealing affiliates. From 1930 to 1933, more than 25 percent of all national banks failed, but the number of failures among those with securities dealing affiliates was less than 10 percent. On the second myth, …a 1994 study in the American Economic Review found evidence to the contrary — that the public understood this conflict of interest, which resulted in commercial banks that dealt securities prior to the Great Depression tending to underwrite high quality assets. These banks tended to do better during the Great Depression.

Oh, and by the way, the Great Depression wasn’t caused by deregulated markets. The real blame belongs to all the policy mistakes made by Herbert Hoover and Franklin Roosevelt.

So here’s the bottom line.

Glass-Steagall is a meaningless distraction, but restoration of that law nonetheless attracts support from know-nothings who have a religious-type belief that financial markets are intrinsically evil.

P.S. Financial markets are imperfect, of course, but they’re only evil when investors and institutions want private profits and socialized losses.

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Critical Charts about the Future of the American Economy and the 2016 Election?

James Pethokoukis of the American Enterprise Institute has an intriguing idea. Instead of a regular debate, he would like presidential candidates to respond to a handful of charts from the recent Economic Report of the President that supposedly highlight very important issues.

We’d quickly find out — I hope — who has real deep knowledge on key economic issues and challenges facing America.

I don’t always agree with Pethokoukis’ views (see here, here, and here), but he has a very good idea. He may not have picked the charts I would rank as most important, but I think 5 of the 6 charts he shared are worthy of discussion (I’m not persuaded that the one about government R&D spending has much meaning).

Let’s look at them and elaborate on why they are important.

We’ll start with the chart of labor productivity growth, which has been declining over time.

I think this is a very important chart since productivity growth is a good proxy for the growth in living standards (workers, especially in the long run, get paid on the basis of what they produce).

So what should we think about the depressing trend of declining productivity numbers?

First, some of it is unavoidable. The United States has an advanced economy and we don’t have a lot of “low-hanging fruit” to exploit. Simply stated, it’s much easier to boost labor productivity in a poor country.

Second, to the degree we want to boost labor productivity, more investment is the best option. That’s why I’m so critical of class-warfare policies that penalize capital formation. When politicians go after the “evil” and “bad” rich people who save and invest, workers wind up being victimized because there’s less saving and investment.

But this isn’t just an issue of machines, equipment, and technology. We also should consider human capital, which is why it is a horrible scandal that America spends more on education – on a per-capita basis – than any other nation, yet we get very mediocre results because of a government monopoly school system that – at least in practice – seems designed to protect the privileges of teacher unions.

The next chart looks at the number of companies entering and exiting the economy. As you can see, the number of businesses that are disappearing is relatively stable, but there’s been a disturbing decline in the rate of new-company formation.

As with the first chart, some of this may simply be an inevitable trend. In a mature economy, perhaps the rate of entrepreneurship declines?

But that’s not intuitively obvious, and I certainly haven’t seen any evidence to suggest why that should be the case.

So this chart presumably isn’t good news.

Some of the bad news is probably because of bad government policy (capital gains taxes, regulatory barriers, licensing mandates, etc) and some of it may reflect undesirable cultural trends (less entrepreneurship, more risk-aversion, more dependency).

Speaking of which, the next chart looks at the share of the workforce that is regulated by licensing laws.

This is a very disturbing trend.

Licensing rules basically act as government-created barriers to entry and they are especially harmful to poor people who often lack the time and money to jump through the hoops necessary to get some sort of government-mandated certification.

By the way, this is one area where the federal government is not the problem. These are mostly restrictions imposed by state governments.

The next chart looks at how much money is earned by the rich in each country.

I think this chart is very important, but only in the sense that any intelligent candidate should know enough to say that it’s almost completely irrelevant and misleading.

The economy is not a fixed pie. Income earned by the “rich” is not at the expense of the rest of us (assuming honest markets rather than government cronyism). It doesn’t matter if the rich are earning more money. What matters is whether there’s growth and mobility for people on the lower rungs of the economic ladder.

A good candidate should say the chart should be replaced by far more important variables, such as what’s happening to median household income.

Lastly, here’s a chart comparing construction costs with housing prices.

This data is important because you might expect there to be a close link between construction costs and home prices, yet that hasn’t been the case in recent years.

There may be perfectly reasonable explanations for the lack of a link (increased demand and/or changing demographics, for instance).

But in all likelihood, there may be some undesirable reasons for this data, such as Fannie-Freddie subsidies and restrictionist zoning policies.

As with the licensing chart, this is an area where the federal government doesn’t deserve all the blame. Bad zoning policies exist because local governments are catering to the desires of existing property owners.

By the way, while I think Pethokoukis shared some worthwhile charts, I would have augmented his list with charts on the rising burden of government spending, the tax code’s discrimination against income that is saved and invested, declining labor-force participation, changes in economic freedom, and the ever-expanding regulatory burden.

If candidates didn’t understand those charts and/or didn’t offer good solutions, they would be disqualifying themselves (at least for voters who want a better future).

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Are Young People too Stupid to Vote?

Which group has suffered the most because of Obamanomics?

That’s hard to answer. We know that the average family has less income today than when Obama took office.

If we want to narrow things down, we know that blacks have endured hardship because of a weak economy.

But you also could make a strong case that young people have been the biggest victims.

Which is why it is so discouraging that many of them support big government. Here are some depressing numbers from a Frank Luntz survey, as reported by U.S. News & World Report.

Fifty-eight percent of young people choose socialism over capitalism (33 percent) as the most compassionate system. …A plurality of 28 percent say the most pressing issue facing the country is income inequality – one of Sanders’ top themes.

I strongly suspect, by the way, that these young people (just like Hillary Clinton and Debbie Wasserman-Schultz) have no idea how to define socialism.

But that’s hardly a cause for cheer. Even if they simply think socialism is class-warfare taxation and lots of redistribution, it’s still bad news that so many of them have been seduced by the politics of hate and envy.

It’s like they’re totally oblivious to the damage that big government has caused for young people in Europe.

Their views on income inequality are similarly flawed, though perhaps slightly more understandable since millennials have suffered through a very weak economy.

But that’s what makes this polling data so puzzling. Why on earth are young people supportive of statism when they’ve been among the main victims of the weak Obama economy?!?

Writing in the Wall Street Journal, Daniel Arbess ponders the bizarre fact that so many young people support Bernie Sanders.

…voters in the millennial bracket, 18- to 34-year-olds, will for the first time equal the baby-boomer share of the electorate, at 31%. These young voters appear to be falling headlong for the Vermont senator’s plaintive narrative of economic “unfairness.”…throwaway prescriptions for redistributing income and wealth… These young voters seem not to realize that the economic policies they find so resonant are the least likely to promote the growth and the social mobility they desire.

Arbess looks at some of the data about how Obamanomics has been bad for young people.

The millennials can’t be faulted for being anxious about their economic prospects. They are coming of age in the weakest economy in generations. The underemployment rate (measuring those working a job for which they’re overqualified and underpaid) for young adults below age 30 is 60%. The overall employment-to-population ratio of 77.4% for those in the prime-of-working-life 25-54 age bracket translates into 1.5 million jobs below the 20-year average. The college graduate living in his parents’ basement and working a marginal job to service a student loan is by now an archetype of the Obama era.

He then elaborates on the self-destructive instincts of many young voters.

…Why wouldn’t young voters want “free stuff” paid for by the rich, as the Bernie Sanders and Hillary Clinton narrative promises? Because the no-free-lunch axiom is still true: Mr. Sanders’s socialized education, health care and other policies would cost up to $20 trillion, according to analysts, requiring tax collections to increase up to 47%. And have we not at least learned from the collapse and dismantling of socialism over the past quarter century that governments lack the incentives and resources to effectively allocate and manage capital in the microeconomy? …Yet millennials, who would most benefit from a real economic recovery, replacing the false one of the past several years, so far seem intent on voting against their interests.

This video is a good summary of the issue.

Given all this evidence, I’m mystified that young people are big supporters of statism.

And it’s not just what we’ve looked at today. I’ve previously shared data indicating that they are clueless on public policy issues.

At the risk of sounding like some old guy who yells “you kids get off my lawn,” maybe the solution is to raise the voting age. Or, better yet, change the rules to that you only get to vote when you have a job and pay taxes!

More seriously, the answer is more education.

P.S. The good news is that suffering through Obamacare may change the minds of some young people.

P.P.S. In any case, the polling data on guns shows that young people are not totally hopeless.

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Leftist Tax Policy: Shoot at the Rich, Wound the Poor

Folks on the left tell us that they want to help the less fortunate.

I sometimes wonder if their real motive is to penalize success and punish the “rich,” but let’s be charitable and assume that many of them truly wish to help the poor.

That’s a noble sentiment, to be sure, but this is why it’s also important to look at the consequences of policy, not just the intentions.

I explained last year that certain left-wing fiscal, regulatory, and monetary policies actually harm the poor and help the rich, and I augmented that analysis earlier this year by showing how farm policies line the pockets of upper-income people.

Let’s now add to this research by looking at a new study (h/t: Tyler Cowen) from Mario Alloza of University College London. Here are some of the key findings from the study’s abstract.

Household panel…between 1967 and 1996 is employed to analyse the relationship between marginal tax rates and the probability of staying in the same income decile. …higher marginal tax rates reduce income mobility. An increase in one percentage point in marginal tax rates causes a decline of around 0.8% in the probability of changing to a different income decile. …the effect of taxes on income mobility…is particularly significant when considering mobility at the bottom of the distribution.

And here are some of the findings from the study.

…to the extent that income mobility is a desirable feature of an economy, it is then relevant to consider how fiscal policy may affect it. …The results obtained suggest that higher marginal tax rates reduce income mobility. Particularly, I find that an increase of one percentage point in the marginal rate is associated with declines of about 0.5-1.3% in the probability of changing deciles of income. …The economic mechanism that induces this impact seems to be related to the labour market incentives created by changes in the tax schedule. …While some studies have pointed out to the importance of progressive taxation in addressing inequality, the results from this paper suggest that such changes may have a detrimental impact on income mobility.

Not surprisingly, it turns out that marginal tax rates are the most important variable, as we learned in our discussion of Cam Newton’s (fiscally) disastrous Super Bowl.

The effect of a percentage point reduction in marginal tax rates fosters relative income mobility across deciles…by about 1%. Similarly, households are about 6% more likely to stay in the same quintile of income when the marginal tax rates goes up by one percentage point… This evidence suggests that the economic mechanism that determines the effect of taxes on income mobility is based on incentives.

And here are more details on how higher tax rates appear to disproportionately harm the less skilled, while lower tax rates are more likely to help.

…non-college are, on average, more likely to move down in the income distribution, while college households are likely to move up (or, at least, less likely to move down) as a result of an increase in the marginal tax rates. …Fiscal reforms that homogeneously reduce marginal tax rates seem to contribute to income mobility by making households with non-college education more likely to occupy relatively higher positions within the income distribution (and vice versa for college-graduated households).

The bottom line is that some of our friends on the left want to shoot at the rich, but they wind up wounding the poor instead by greasing the rungs on the ladder of economic opportunity.

Which is why, for the umpteenth time, I’ll emphasize that market-driven growth is the moral and practical way to help the less fortunate.

P.S. Here’s an update on my travels. I’m in Beijing for a couple of speeches and I probably should say something substantive about how genuine federalism is an ideal long-run outcome for China, Hong Kong, Macau, and Taiwan. They can all be one country, if that’s what everyone wants (and that’s already the case for China, Hong Kong, and Macau), but that doesn’t mean there’s a need for a one-size–fits-all approach to domestic policy. In other words, a version of the advice I offered on Ukraine,Scotland, and Belgium basically applies in this part of the world as well. Call it one nation with three or four systems.

But the most memorable part of the trip (in a bad way) is that my communication lines with the world have been severed. The problem started when I left my phone in an airport security scanner on my way from Cambodia to Hong Kong.

Then I get to China and I learn that my laptop can’t access either the Cato remote desktop or my Gmail account. Or Twitter. Or Facebook.

This is a not a trivial problem since I got to Beijing in the evening, had a speech in the morning, but couldn’t access any of the information (and I’m not organized enough to print things out ahead of time). I eventually figure out a solution for my morning event by asking the front desk to connect me with the person who made the room reservation, which eventually leads to me getting in contact with someone else in the hotel who is there for the same event.

But that’s only part of the story. I still haven’t had email for several days. And I obviously don’t have a phone, either. So while I’m able to access a lot of stuff on the Internet using my laptop, I’m in the dark about what’s happening at Cato or what’s happening in the rest of my life. By the way, if you’re asking why I don’t create a new email address, that’s not as easy as it sounds since the widely-used email sites have security features such as asking to send you a text to confirm your new account, something that obviously wouldn’t work for me.

Oh, and I’m not able to access my blog while in China. So to maintain my pattern of producing a column every single day for however many years, I had to create a word document and then randomly approach someone in the hotel restaurant to ask if he could upload my column from a thumb drive and email it to friends back in Washington.

Oh well, nobody said the fight for liberty was easy.

P.P.S. Now that I’m done whining, let’s return to our original topic and look at a cartoon showing what Obama wants.

But then let’s look at what Obama has actually delivered, which sort of confirms the research discussed above.

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Another Great Moment in the Annals of Government-Run Healthcare

I wrote last June about an unfortunate British guy who, after his leg was broken by thieves, was told by the government that his injury wasn’t serious enough for an ambulance.

The poor chap eventually was driven home by some cops and then had to take an Uber to the hospital.

While writing about this story, I semi-joked about what would be required to get an ambulance.

If you’re about to die, they’ll send an ambulance. But not for anything less than that.

Little did I realize that the bureaucrats would prove me wrong.

Here are some amazing excerpts from a story in the U.K.-based Telegraph.

A dying pensioner wrote a heartbreaking ‘I love you note’ to his daughters while he waited two hours for an ambulance to respond to his call for help following a heart attack. …The retired mechanical fitter… pulled a cord in his flat in Prenton in Birkenhead, Merseyside, to sound an alarm in a 24/7 emergency call centre and could be heard by the call handler shouting: “Help”. …The call handler dialled 999 but Mr Volante’s case was given a low priority by the ambulance service and paramedics took 1hr 40mins to arrive. They found him dead on his living room floor.

In a touching but tragic gesture, the deceased spent some of his wait time writing a note to his daughters.

A heartbreaking note was found in Mr Volante’s flat after his death, which read: “I love you Rita, I love you Deb, Dad.” This was a reference to his two daughters, Debbie Moore and Rita Cuthell.

I suppose, to be fair, that we can’t fully blame Mr. Volante’s death on government incompetence. He may have died even if the ambulance arrived in a timely fashion.

But imagine what it would be like to place a very serious call and to be treated like an afterthought.

Though the government at least offered an insincere apology, so I guess that counts for…um, nothing.

…a North West Ambulance Service spokesperson said: “The Trust would like to express its sincere condolences to Mr Volante’s family during this difficult time.

But let’s look at the bright side. If the ambulance had been on time and Mr. Volante had been admitted to the hospital, the government may have starved him to death instead.

I’m guessing a heart attack – even one where it takes you 90 minutes to die – would be preferable.

Particularly since you can’t be sure whether government-run healthcare will kill you accidentally or kill you deliberately.

P.S. Here’s my collection of horror stories about the U.K.’s version of Obamacare: here, here, here, here, here, here, here, here, here, here, here, here, here, here, here and here. By the way, Paul Krugman tells us that all these stories are false. So who are you going to believe, him or your lying eyes?

P.P.S. To be fair, some screw-ups are inevitable, even in a perfectly designed healthcare system. But I would argue that horror stories are more common when the profit motive is weakened or eliminated. If you’re a Brit and you die or suffer because of crappy government-run healthcare, there’s no feedback mechanism to punish the doctor and/or hospital (or, in the above case, ambulance service). Their budgets already are pre-determined. Likewise, if you’re an American and you die or suffer because of sub-standard Medicare or Medicaid treatment, there’s presumably no effective feedback budgetary mechanism.

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A Warning from Greece About Greedy Politicians

Greece is special, though not in a good way.

The nation has such a pro-welfare mentality that pedophiles get disability benefits. And the regulatory mindset is so nutty that you need to submit a stool sample if you want to create an online company.

While those are bizarre examples of foolish government, Greece is probably best known for bailouts. Lots of them.

The politicians spent too much money and drove the economy into a ditch. And ever since, they’ve been trying to tax their way back to solvency, apparently oblivious to the fact that the private sector can’t rescue the economy if it’s being taxed into oblivion.

And that’s not idle rhetoric. A new report from The Economist gives us a very good warning of what happens when politicians get too greedy.

The story starts with an anecdote about a Greek entrepreneur who failed. But he didn’t fail because of a bad idea or a poor work ethic. Instead, the government got too greedy and taxed him into exile.

Panagiotis Korfoksyliotis set up a business in Athens in 2011, ferrying tourists around by car…he paid his staff a decent wage and declared all his earnings. Unfortunately, the taxman did not repay the kindness. Sharp increases in business taxes have prompted Mr Korfoksyliotis to pack his bags and move his company and his life to Bulgaria. Now he employs drivers to take foreign visitors around that country’s tourist spots instead.

And it turns out that Mr. Korfoksyliotis has lots of company.

He is part of a growing trend. …Greek governments desperate for cash have sought to squeeze it from companies, despite evidence that this is driving them away to places like Bulgaria, Cyprus and Albania. …by some estimates more than 200,000 businesses have closed or in some cases left Greece since then. ……accountants, lawyers and businesspeople reckon that perhaps as many as 10,000 Greek-owned firms have moved abroad. In a recent survey of 300 firms, Endeavor Greece, a non-profit organisation that helps entrepreneurs, found that more than a third had either left or were thinking about going.

And guess what? When a whole bunch of entrepreneurs and businesses decide that it’s no fun to work hard when the government is the main beneficiary, they leave. And all of sudden the politicians no longer have as much income to tax.

Between 2009 and 2014 the taxable profits declared by the country’s businesses fell by more than €5 billion ($5.6 billion) to €10 billion.

Wow, that’s a big Laffer Curve effect, even when including all the other factors that would have caused taxable income to decline over the past few years.

We also see the impact of tax competition in this story. The nations that are being sensible are attracting jobs and investment. Greece, of course, isn’t in that category.

Other euro-crisis countries, such as Portugal and Ireland, cut business taxes or kept them low, to encourage investment and growth. …But Greece has raised its corporation-tax rate from 20% in 2012 to 29% in 2015… Greece’s tax rise makes Bulgaria’s rate of just 10% even more alluring; likewise Cyprus’s 12.5% rate and Albania’s 15%.

But what’s really amazing is that Greece will probably go from bad to worse.

…the left-wing ruling coalition is not listening. It is now proposing a 20% rise in a levy on companies’ profits that goes toward pensions. Carry on in this vein, and there will not be many businesses, or much profit, left to tax.

Let that final sentence sink in. Our friends at The Economist are very much part of the left-leaning establishment. Yet they ended the story with about as powerful of an endorsement of the Laffer Curve as one could imagine.

In the meantime, I’ll end my column with an utterly depressing assessment of Greece’s future.

The country is basically doomed. In part, this is because government is too big. But it’s even more because the social capital of the Greek people has been eroded by decades of handouts and subsidies.

And when people think that it’s morally acceptable to use the coercive power of government to take money from their neighbors, it’s just a matter of time before than society collapses.

Why? Because people like Mr. Korfoksyliotis eventually decide that it’s no fun being enslaved by a bunch of looters and moochers.

The Economist slowly but surely seems to be waking up to this reality.

But I have very little hope for Bernie Sanders. Like the Syriza government, he would double down on higher taxes even as more and more taxpayers decided to “go Galt.” And just like Greece, there will be no turning back when we reach that dependency tipping point.

P.S. While part of me wants Greece to suffer because of bad politicians and scrounging voters, even I don’t want to subject the Greeks to this much torture.

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To Boost a Global Economy Burdened by too much Government, OECD Endorses…an “Urgent” Keynesian Spending Binge

I don’t know whether Keynesian economics is best described as a perpetual motion machine or a Freddy Krueger movie (or perhaps even the man behind the curtain in the Wizard of Oz), but it’s safe to say I’ll be fighting this pernicious theory until my last breath.

That’s because evidence doesn’t seem to have any impact on the debate.

It doesn’t matter that Keynesian spending binges didn’t work for Hoover and Roosevelt in the 1930s. Or for Japan in the 1990s. Or for Bush or Obama in recent years.

What does matter, by contrast, is that politicians instinctively like Keynesianism because it tells them their vice is a virtue. Instead of being a bunch of hacks that can’t resist overspending in their quest to buy votes, Keynesian theory tells them that they are “compassionate” souls simply trying to “stimulate” the economy.

And to make matters worse, there are plenty of economists (many of whom are on the government teat) who act as enablers, telling politicians that bigger government somehow can jump-start growth.

For instance, the Paris-based Organization for Economic Cooperation and Development (OECD) has just issued recommendations for ways to boost a sluggish global economy. Given that the organization’s lavish budget comes from its member governments, you won’t be surprised that it is licking the hand that feeds it and recommending that politicians should get to spend more money.

A stronger collective fiscal policy response is needed to support growth… Governments in many countries are currently able to borrow for long periods at very low interest rates, which in effect increases fiscal space. Many countries have room for fiscal expansion to strengthen demand. …Investment spending has a high-multiplier, while quality infrastructure projects would help to support future growth.

If the OECD is right, there are supposedly a lot of “shovel-ready” infrastructure jobs that would be wise investments, so why not borrow lots of money in today’s low-interest rate environment, finance a bunch of new spending, and magically boost growth at the same time?

Needless to say, I’m very skeptical about the federal government having an infrastructure party. We would get a bunch of bridges to nowhere, lots of fat contracts to line the pockets of unions, some mass transit boondoggles, and more horror stories about cost overruns.

Oh, and don’t forget that the politicians would decide that all sorts of additional categories of spending count as “investment,” so money also would get squandered in other areas as well.

But let’s set that aside and deal with the underlying economic issue of so-called stimulus.

Politicians in America and elsewhere engaged in several years of Keynesian spending when the downturn began in 2008. That didn’t work. In more recent years, they’ve been engaging in lots of Keynesian monetary policy, and that hasn’t been working either.

Now they want to return to the option of more deficit spending.

Why should we believe that a policy that has repeatedly failed in the past somehow will work this time?

If you ask the OECD bureaucrats, they say it will work because they have a model that’s programmed to say more government spending is good for growth.

I’m not joking. Just like the Congressional Budget Office, the OECD uses a model that automatically assumes that more spending will lead to more growth. So you plug in a number for some “stimulus” outlays and the model mechanically cranks out data showing better performance.

Here’s what the OECD is claiming.

Gee, if this is accurate, why don’t we have governments confiscate all the money in the economy, spend it on so-called public investment, and then we can all be rich!

Actually, I shouldn’t joke. Some Keynesian reader might take the idea and run with it.

P.S. What makes all this especially irritating is that American taxpayers are subsidizing the OECD’s statism.

And it’s not just this recent foray into Keynesian economics. Here are other examples of the OECD pushing policies that are directly contrary to the interests of the American people.

• The OECD allied itself with the nutjobs from the so-called Occupy movement to push for bigger government and higher taxes in the United States.
• The bureaucrats are advocating higher business tax burdens, which would aggravate America’s competitive disadvantage.
• The OECD is pushing a “Multilateral Convention” that is designed to become something akin to a World Tax Organization, with the power to persecute nations with free-market tax policy.
• It supports Obama’s class-warfare agenda, publishing documents endorsing “higher marginal tax rates” so that the so-called rich “contribute their fair share.”
• The OECD advocates the value-added tax based on the absurd notion that increasing the burden of government is good for growth and employment.
• It even concocts dishonest poverty numbers to advocate more redistribution in the United States.
• The OECD published a report suggesting numerous schemes to increase national tax burdens.
• Earlier this year, the bureaucrats endorsed a big energy tax on American consumers.
• And, most recently, the OECD embraced quota-driven interventionism on wages for men and women.

Now you can understand why I rank the OECD as the worst international bureaucracy.

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Atlas Is Shrugging in Venezuela

According to a “Happy Planet” index put together by some leftists a few years ago, Venezuela is supposed to be one of the world’s best nations.

But I strongly suspect that the vast majority of these people would be horrified if they actually had to live there.

That’s because Venezuela is proving that Margaret Thatcher was right when she said socialists eventually run out of other people’s money.

But what’s really killing the country, above and beyond the government being out of money, is pervasive statism. There are so many forms of regulation and intervention that the private sector, for all intents and purposes, has gone on strike. Venezuela is like a real-world example of Ayn Rand’s famous novel, Atlas Shrugged.

I was writing about the Venezuelan disaster six years ago, but it’s even gotten to the point that left-leaning establishment media outlets are finally recognizing the handwriting on the wall.

The Economist has a very gloomy assessment.

…around 120 people are queuing for food at government-controlled prices from a state-run supermarket. The food queue starts at 3am. “Sometimes there’s food and sometimes there isn’t,” one would-be shopper says. In this district of Caracas, once a Chávez stronghold, his aura is fading amid the struggle for daily survival. …his “Bolivarian revolution”, a mishmash of indiscriminate subsidies, price and exchange controls, social programmes, expropriations and grand larceny by officials…has exposed the revolution as a monumental swindle.

Needless to say, the government elite still enjoy very comfortable lives.

But for average people, statism has created untold misery.

Real wages fell by 35% last year… According to a survey by a group of universities, 76% of Venezuelans are now poor, up from 55% in 1998. …Many pills are unavailable; patients die as a result. In Caracas food queues at government stores grow longer by the week. …Violent crime is out of control. …Violent scuffles in food queues and localised looting are everyday occurrences.

Sounds like fun, huh? Maybe it’s Atlas Shrugged mixed with Lord of the Flies.

In any event, it’s gotten so bad that even the Washington Post has taken notice. Here are some excerpts from that paper’s story.

…the country of 30 million people is facing an economic collapse and a humanitarian disaster. Venezuela already suffers from the world’s highest inflation rate — expected to rise from 275 percent to 720 percent this year — one of its higher murder rates and pervasive shortages of consumer goods, ranging from car parts to toilet paper. Power outages and the lack of raw materials are forcing surviving factories and shops to close or limit opening hours. …the U.S. dollar is worth 150 times more on the black market than it is at the official rate.

Wait, did the Washington Post acknowledge that Venezuela has a very high murder rate? But how can that be when there are strong gun control laws, just like the Post wants to impose on America?

I’m being sarcastic, of course, because I couldn’t resist a momentary digression.

Let’s get back to Venezuela’s economic mess.

Here are some examples of what it’s like to be an imploding statist economy. The U.K.-based Times reports on the surreal details.

Shopping centres across Venezuela have cut their trading time by four hours a day because of electricity rationing ordered by the Socialist government. President Maduro has suggested that people grow their own food to survive a possible economic collapse, after revealing last month that he and his wife kept 50 chickens at home. …Inflation is estimated at more than 700 per cent, there are endless queues outside shops, and crime rates have soared — leading some analysts to report that Venezuela’s economy is in a “death spiral”. …the state-subsidised supermarkets, where thousands of people line up to get their meagre ration of basic supplies every day, and fights are common. …The nation’s health services are breaking down.

At the risk of (further) outing myself as a typical libertarian, a core premise of Atlas Shrugged was the economy entering a death spiral because the political class kept figuring out new ways to expand the size and scope government.

So I guess it’s nice that Venezuela is giving us a real-world example of what happens when government places too many straws on the camel’s back.

Last but not least, here’s some of what the New York Times has reported.

In the capital, water is so expensive and scarce that residents wait for hours with bottles at the side of a mountain where it trickles out onto the highway. In the countryside, sugar cane fields rot, and milk factories stand idle, even as people carry bags of money around to buy food on the black market in every city and town. …And it is all about to get much worse. …Ransoms are a business across this country.

The entire story is filled with heartbreaking stories of suffering families and maddening anecdotes about how unconstrained government has wrecked a potentially rich nation.

Which gives me a good reason to make the most important point of this article.

All the bad policies in Venezuela were imposed because politicians supposedly “cared” about ordinary people. That was the rationale for higher welfare payments, minimum wages, price controls, subsidies, and all sorts of other “compassionate” policies.

Yet the news reports above show that it’s regular people who are now suffering the most because excessive government is causing an economic collapse.

Which is why this chart comparing Venezuela, Argentina, and Chile is so powerful. Ordinary people did the best in the nation with a government that did the least.

P.S. Since I’ve already used it when writing about France, Greece, and Detroit (as well as what happens in Washington), I probably be careful about going back to the well too often with the Atlas Shrugged comparison.

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How Private Social Security Is Helping Hong Kong Deal with Major Demographic Challenges

I’m in Hong Kong for series of meeting and briefings on various economic and policy issues.

As you can imagine, I’m a huge fan of the jurisdiction’s simple 15 percent flat tax. It’s basically about as close to a pure flat tax as anyplace in the world. There is zero double taxation of income that is saved and invested.

That’s not an exaggeration. You don’t get double taxed on the interest you earn on your bank balances and other financial accounts. There’s no capital gains tax. There’s no death tax. And there’s no double taxation of dividends.

There are only a few deviations from a pure flat tax that even merit a mention. First, taxpayers with modest amounts of income don’t have to use the flat tax system. Instead, they can opt for a “progressive” tax system that has a top rate of 17 percent, but also has tax rates of 2 percent and 7 percent, and 12 percent.

Imagine, taxpayers getting to choose the system that works best for them, instead of the government forcing them into the system that requires the highest payment!

The other deviations are that businesses are not always allowed full expensing of business investment, and there also are a handful of deductions.

All things considered, though, Hong Kong gets almost everything right on tax policy, whereas the United States gets a majority of things wrong.

Oh, and I should mention that there are no payroll taxes in Hong Kong. Nor is there a value-added tax.

That’s all very impressive, but let’s actually focus on something that may be even more remarkable about Hong Kong.

It currently has a modest-sized government, with spending consuming less than 20 percent of economic output. That’s not as good as the United States 100 years ago, but it’s far better than where America is today.

That being said, Hong Kong has some major challenges. I’ve explained before that demographic changes will put pressure on fiscal policy in America, but demographic change is far more profound in Hong Kong.

As you can see from this data, it has the seventh-highest level of life expectancy in the world.

That’s good news, of course, but it does mean a lot of fiscal pressure, even for a jurisdiction that is justly famous for its very small welfare state.

But then you have to consider the fact that Hong Kong also has the fourth-lowest birthrate in the entire world.

In other words, Hong Kong faces a perfect storm of demographics. More and more non-working elderly over time, combined with fewer and fewer taxpayers to pull the wagon.

Given these unfriendly numbers, the Hong Kong government put together a working group to look at long-run fiscal issues.

In its recent report, the group presented a fiscal forecast that shows how the burden of government spending will slowly climb to nearly 24 percent of GDP over the next 25 years.

Here’s a chart showing actual data starting in the late 1990s and then projections until 2042.

To those of us from North America and Western Europe, where the overall burden of government spending, on average, consumes more than 40 percent of economic output, it seems like Hong Kong has a trivial problem.

But it’s still a problem and something has to change. Hong Kong could finance a bigger public sector by dipping into its large reserves (currently the jurisdiction has saved enough money to finance about two years of government spending) or by increasing the tax burden.

But hopefully Hong Kong will abide by Article 107 of its Basic Law (its constitution) and limit government spending so that it doesn’t grow faster than the private economy.

And there are some positive signs.

About 15 years ago, Hong Kong set up a system of private retirement accounts in order to create a self-funded source of retirement income.

Based on a recent government report on retirement income, here are some key features of this Mandatory Provident Fund (MPF) system.

The MPF System is an employment-based, privately-managed mandatory defined contribution system. …Employers are required under the Mandatory Provident Fund Schemes Ordinance (Cap. 485) to arrange for their employees aged 18 or above but under 65 to join… The MPF System has been implemented for 15 years only. …about 2.55 million employees are enrolled in MPF schemes, representing 100% of the employees required by law to join the schemes. This is a very high rate by international standards. In addition, another 210 000 self-employed persons are also scheme members. …An employer and an employee are each required to contribute 5% of the relevant employee’s income… As at end October 2015, MPF assets had increased to $594.2 billion, of which about $123.1 billion were investment returns.

Here’s a chart from the report, showing the cumulative growth of assets, based on both contributions and investment returns.

Keep in mind, though, that it takes 7.8 Hong Kong dollars to equal 1 U.S. dollar, so $594.2 billion is not nearly as large as it sounds.

In part, this is because the system isn’t yet mature. Workers have only been making contributions from 15 years, while a working lifetime is 40-45 years.

But there also are concerns that the level of mandatory saving is insufficient. Here’s additional language from the report, which cites the private retirement systems in Australia and Denmark.

There are views that the contribution rate or the maximum relevant income level should be raised to strengthen the retirement protection function of the MPF System. Take the privately-managed mandatory occupational contributory pension plans in Denmark and Australia as examples. In Denmark, employers and employees generally contribute a total of 9% to 17%. In Australia, only employers make contributions and the contribution rate will be raised progressively from 9% in 2013 to the present 9.5% and further to 12% in 2025.

I’m personally agnostic on the precise level of mandatory savings. My goal is simply to shrink tax-and-transfer entitlement programs, particularly before demographic changes lead to a larger burden of government spending.

And since I have great fondness for Hong Kong (how can you not get a thrill up your leg about a jurisdiction that routinely gets the highest score in Economic Freedom of the World?), I want it to remain a beacon for advocates of economic liberty.

P.S. Lest anyone think I’m being too fawning, Hong Kong has several policies that are misguided. Public housing is pervasive, there’s government-run healthcare, and one peculiar legacy of British rule is that only one piece of land is privately owned. Fixing these warts would make Hong Kong even more vibrant.

P.P.S. Another quirky feature of Hong Kong policy is that currency is issued by private banks. If you pull a $20 bill from your wallet, you’ll see that it was printed by HSBC, Standard Chartered, or Bank of China. Unfortunately, this isn’t because Hong Kong has a market-driven system of competing currencies. But it does have a currency board, which – by standards of government-controlled monetary systems – is one of the least-worst options. Of course, that means Hong Kong’s money is only as good as the currency to which it’s linked. And since the Hong Kong dollar is pegged to the U.S. dollar, that might be a cause for long-run concern.

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Maine and Wisconsin Show How to Reduce Food Stamp Dependency

For a wide range of reasons, the federal government should get out of the redistribution racket.

Welfare programs are costly, but they’re also not among the enumerated powers granted to the federal government by the Constitution.

But for those who don’t care whether the nation abides by its legal rule book, there’s also a very compelling argument that better policy can be achieved by ceding responsibility for anti-poverty initiatives to state and local governments.

As shown by the 1996 welfare reform, you’re likely to get changes that are good for both taxpayers and poor people.

We even see some glimmers of progress now that states have more ability to police the fraud-riddled food stamp program.

The Heritage Foundation recently published a report on what happened in Maine when the state started to impose a modest work requirement on childless beneficiaries.

Food stamps is one of the government’s largest means-tested welfare programs, with roughly 46 million participants and costing $80 billion a year. Since 2009, the fastest growth in participation has occurred among able-bodied adults without dependents (ABAWDs). …Maine implemented a work requirement for ABAWDs. As a result, their ABAWD caseload dropped by 80 percent within a few months, declining from 13,332 recipients in December 2014 to 2,678 in March 2015.

And here’s a very powerful chart from the study.

Wow, more than 4 out of 5 recipients decided to drop off the rolls rather than get a job.

Which shows that they never needed the handouts in the first place, already had a job in the shadow economy, or got a new job.

Investor’s Business Daily summarizes the situation with characteristic clarity.

The number of childless, able-bodied adult food stamp recipients in a New England state fell by 80% over the course of a few months. This didn’t require magic, just common sense. …This is a remarkable change and needs to be repeated in government programs across the country. How Maine achieved this is no mystery. Gov. Paul LePage simply established work requirements for food stamp recipients who have no dependents and are able enough to be employed.

This type of reform should be replicated, with big savings for taxpayers and even bigger benefits for those who shake off the emotionally crippling burden of dependency and become self sufficient.

The Heritage report says that if the Maine policy were repeated nationally, and the caseload dropped “at the same rate it did in Maine (which is very likely), taxpayer savings would be over $8.4 billion per year.” “Further reforms could bring the savings to $9.7 billion per year: around $100 per year for every individual currently paying federal income tax.” On top of the savings, there would be the added benefit of increasing the number of productive members of the economy, and cutting the cycle of government dependence that is ruinous to a society. …putting the able-bodied in position to be self-sufficient is a service to them, helping them shake their soul-strangling dependency on the state.

By the way, Maine isn’t the only state that is trying to be responsible and proactive.

Wisconsin also is taking some modest steps to curtail dependency. Here are some blurbs from a story in the Wisconsin State Journal.

The 2013-15 state budget created a rule for some recipients of the state’s food stamp program known as FoodShare: If you’re an able-bodied adult without children living at home, you must work at least 80 hours a month or look for work to stay in the program. That rule went into effect in April, and between July and September, about 25 percent of the 60,000 recipients eligible to work were dropped from the program when the penalty took effect, according to DHS data.

That’s good news for taxpayers.

But there’s also even better news for some of the recipients.

…about 4,500 recipients found work.

Yup, sometimes a bit of tough love is what’s needed to save people from life-destroying dependency.

That’s the good news.

The bad news is that these reforms in Maine and Wisconsin are just drops in the bucket. The federal government mostly has been a destructive force in recent years, working to expand the welfare state (in some cases using utterly dishonest means).

And even when Washington hasn’t been trying to make things worse, many state and local governments are perfectly content to watch federal money flow into the their state, even if the net result is to trap people in poverty.

Which bring us back to the main policy lesson. We need to get Washington out of the business of redistributing income. To the extent government involvement is necessary, state and local governments should be responsible for both raising and spending the money.

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Beating the VAT Horse Until It’s Dead

This is a very strange political season. Some of the Senators running for the Republican presidential nomination are among the most principled advocates of smaller government in Washington.

Yet all of them have proposed tax plans that, while theoretically far better than the current system, have features that I find troublesome. Marco Rubio, for instance, leaves the top tax rate at 35 percent, seven-percentage points higher than when Ronald Reagan left town.

Meanwhile, both Ted Cruz and Rand Paul (now out of the race) put forth plans that would subject America to value-added tax.

This has caused a kerfuffle in Washington, particularly among folks who normally are allies. To find common ground, the Heritage Foundation set up a panel to discuss this VAT controversy.

You can watch the entire hour-long program here, or you can just watch my portion below and learn why I want Senator Cruz to fix that part of his plan.

Allow me to elaborate on a couple of the points from my speech.

First, a good tax system is impossible in a nation with a big welfare state. If the public sector consumes 50 percent of economic output, that necessarily means very high marginal tax rates.

Second, all pro-growth tax reform plans tax income only one time, either when earned or when spent, which means those plans all are consumption-base taxes in the jargon of public finance economists. Which is also just another way of saying that these tax plans get rid of double taxation.

On this basis, a VAT is fine in theory. Moreover, it could even be good in reality (or, to be technical, far less destructive than the current system in reality) if all income taxes were totally abolished.

Third, since Cruz’s plan leave other taxes in place, I’m worried that future politicians would do exactly what happened in Europe – use the new revenue source to finance an expansion of the welfare state.

Proponents of the Cruz VAT correctly point out that the plan simultaneously will abolish both the corporate income and the payroll tax, which sort of addresses my concern.

But keep in mind this is only an acceptable swap if you think, 1) the plan will survive intact as it move through the legislative process, and 2) the VAT won’t raise more money than the taxes that are abolished.

I’m not sure either assumption is valid.

Last but not least, proponents of the Cruz VAT plan keep denying that the plan includes a VAT. If you recall from my remarks, I think this is silly. It is a VAT.

To bolster my argument, here’s what Alan Viard wrote for the American Enterprise Institute.

Cruz’s proposed VAT would have a 16 percent tax-inclusive rate, and Paul’s proposed VAT would have a 14.5 percent tax-inclusive rate. Both VATs would be administered through the subtraction method rather than the credit invoice method used by most countries with VATs. The use of the subtraction method would not alter the fundamental economic properties of the VAT. A VAT is equivalent to an employer payroll tax plus a business cash flow tax.

Let’s close by citing some very wise words from Professor Jeffrey Dorfman of the University of Georgia (Go Dawgs!). Here are the key parts of his column for Forbes.

Conservatives are worried about national consumption taxes for several reasons, principally: these taxes’ ability to raise large sums of revenue and the ease with which politicians can raise the rates. Because national consumption taxes are efficient and can be applied to a larger base than is typical of state and local sales taxes they can raise large sums of money. While liberals think this is a plus, conservatives are rightly wary of taxes that could supply government with more money. More importantly, conservatives are suspicious of the semi-hidden nature of consumption taxes and the ability to raise them incrementally.

Bingo.

The bottom line is that even if we decide to call the VAT by another name, it won’t alter the fact that some of us think it’s too risky to give politicians an additional revenue source.

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The Right Kind of Class Warfare: Workers vs. Looters

Over the years, I’ve latched on to several images that do a very good job of capturing the essence of an issue.

Here are some of my favorites.

• The philoso-raptor explaining supply-side economics.
• The apple tree and the downside of double taxation.
• In the same vein, the double taxation flowchart.
• America’s sprawling and Byzantine welfare state.
• The U.S. population pyramid becoming a cylinder.
• Pizza slices and the inequality paradox.

Now I have a new addition to the list.

Here’s an image Steve Conover shared with me. It comes from his book, Neutering the National Debt, and it’s the perfect way to explain why the Bernie Sanders, Hillary Clinton, and the rest of the class warriors are wrong.

The problem isn’t rich people. It’s looters and moochers, regardless of their income.

What makes this image so helpful is that it’s true. If you look at the “right enemy” part of the image, the rich in the red zone are the cronyists who get Ex-Im subsidies, the Wall Street crowd that fed at the TARP trough, and other well-connected folks (like Warren Buffett) who use government coercion to line their pockets.

What we have is basically the visual that I would have liked to include in my 2011 column that discussed the “good rich” and the “bad rich.” When debating those who are motivated by class warfare, I’m defending the rich in the white zone, but it would be helpful to have a way of distinguishing between the worthy and unworthy people with money.

And the same is true for the non-rich. Most of them are good and decent folks earning an honest living and they belong in the white zone. But there are also some non-rich people who rely on government coercion. They could be overpaid government bureaucrats. They could be folks scamming the food stamp program or fraudsters bilking the EITC.

P.S. For what it’s worth, I suspect that more than 50 percent of the folks in Washington belong in the red zone.

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The Utter Depravity and Horror of Communism

I’m in Cambodia, where I just finished a series of speeches to civic groups on some of my usual topics, in this case tax policy, the recipe for growth, and libertarian principles.

All that was par for the course.

What will always stay with me and haunt my thoughts, by contrast, was my visit to the Tuol Sleng camp, which was used as a processing center during the genocide carried out by the Khmer Rouge communist dictatorship in the late 1970s.

The bottom line, as you can see from this sign, is that 14,000-20,000 civilians went through this facility and only about 200 survived.

Here’s a sign showing the English translation of rules governing camp behavior.

The sixth rule, which says prisoners could not make noise while being beaten and tortured, seems especially perverse.

Wow, reads like the rules governing campus anti-free speech tribunals.

But I shouldn’t joke because so much of this camp contains horrifying memories of communist barbarity.

Here you see some of the children who were processed through this death facility.

For some reason, this pile of clothes taken from butchered prisoners was very powerful.

Keep in mind that this big pile of clothes is actually a drop in the bucket. During the few years the Khmer Rouge was in power, the communists slaughtered at least 2 million out of a total population of less than 8 million.

But if a mountain of clothes is too abstract, how about this pile of bones at one of the nearby killing fields where Tuol Sleng prisoners were taken for the Cambodian version of the final solution.

As I toured this somber death camp, I couldn’t stop myself from thinking about the jerks who wander around in “Che” t-shirts.

Yes, I realize that butchery by Castro’s regime was minor compared to what happened in Cambodia, but Cuba nonetheless has been a brutal police state. And Che was one of Castro’s murderous enforcers. How can any decent human being wear a t-shirt designed to portray him, or the regime, in a positive fashion?!?

P.S. Let’s shift to a much lighter topic.

Back in 2012, I wrote about being flummoxed by a fancy toilet in Switzerland. It had all sorts of fancy controls, yet I couldn’t get them to work.

Well, I was in Seoul, South Korea, a few days ago for a different speech and something similar happened. I checked into my hotel late in the evening, and went to …err… use the facilities before going to sleep.

Lo and behold, I found a toilet with no flushing mechanism. No handle. No button. No pedal. Nothing.

It was late, so I didn’t give the matter too much thought. I simply went to sleep and pretended I was a water-conserving environmentalist.

The next day, though, I was more determined to figure out how to flush the toilet. My Ph.D. has to be good for something, after all.

And that’s when I noted this set of instructions posted above the toilet paper.

You’ll be happy to know that I eventually figured out the purpose of most of the buttons.

Indeed, later in the day when I …um… well, let’s be delicate and simply say I issued an executive order, I even was able to activate the automatic hands-free wash and dry system for one’s backside.

It’s remarkable what capitalism is capable of producing.

P.P.S. Let’s return to the dour topic of government-imposed genocide.

If you’re curious how the Khmer Rouge in Cambodia rank compared to other evil regimes, they only killed a tiny fraction of the death toll achieved by the Soviet Union and Maoist China.

But if you’re scoring on a per-capita basis, the communist killers in Cambodia arguably might be at the top of the list.

Next time I see some despicable jerk wearing a Che t-shirt, I think I’ll ask whether he has the matching Pol Pot version.

I’m quite sure that the brainless kid won’t even know that Pol Pot was the dictator who presided over the Cambodian genocide, so my snide comment will fall on deaf ears.

But maybe, just maybe, the kid will go online, learn about the profound evil of communism and throw Che in the trash.

Heck, the morons at Mercedes-Benz were shamed out of using Che as a marketing gimmick, so there is hope!

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The Bureaucrat Hall of Fame Gets its First Spanish Member (Plus an Update on Porn Stars and the 2016 GOP Contest)

I should get an award for equal opportunity.

The Bureaucrat Hall of Fame has plenty of American members, but it also has civil servants from India, France, and Italy, and the United Kingdom, all of whom have gone above and beyond the call of duty in their efforts to rip off taxpayers.

And now we have a new applicant from overseas, so maybe we’ll enjoy even more diversity.

The U.K.-based Times reports on a Spanish bureaucrat that didn’t bother to show up for work for six consecutive years.

A civil servant in Spain didn’t turn up to work for six years. …He had continued to collect his annual salary. Records show that the engineer started working for a water company run by the municipal authorities in Cádiz in 1990 but last did a day’s work in 2004.

Even though this bureaucrat is an amateur compared to the Indian civil servant who skipped work for two decades, I think he’s worthy of membership in the Hall of Fame.

Especially since one aspect of the story perfectly symbolizes the mind-boggling inefficiency of government.

…his absence was noticed only when he was due to collect a long-service award. …Mr Blas said: “We thought the water company had supervised him but it was not the case. We discovered this when we were about to present him with a commemorative plaque for his 20 years of service.”

You may be thinking that this combination of sloth and incompetence at least led to a termination.

Not exactly.

…he cannot be sacked from his €37,000-a-year job as he has since retired.

For what it’s worth, Senor Garcia supposedly is now obliged to return 30,000 euro of his ill-gotten loot.

I’m not holding my breath expecting that to happen.

However, even though it’s not mentioned in the story, I feel very confident that he’ll get a bloated pension courtesy of the Spanish taxpayers.

Why do I think a deadbeat will get a pension?

For the simple reason that Spain – even though it’s in the middle of a deep fiscal crisis – has an above-average burden for bureaucratic compensation.

P.S. Back in 2012, I pointed out that Obama and Romney both were endorsed by different porn stars.

So you probably won’t be surprised to learn that porn stars also are playing a role in the 2016 campaign.

First, the Cruz campaign put together a commercial featuring an actress who is better known for her other roles. The Daily Caller has the details.

Amy Lindsay, the actress featured in films such as Kinky Sex Club, Milf, Carnal Wishes and Sex Sent Me to the ER starred in Sen. Ted Cruz ‘s latest campaign ad entitled “Conservatives Anonymous.” In the ad, the Lindsay said, “Maybe you should vote for more than just a pretty face next time.” Seconds before this story was to be published, the Cruz campaign removed the ad from YouTube.

The Daily Caller also reports that the other conservative senator in the race also has a link to the adult industry.

Jenna Jameson…former porn star recently criticized the $1.1 trillion omnibus federal spending plan, and on Monday, she expressed some serious support for Republican presidential candidate Sen. Marco Rubio.

But she apparently doesn’t like compassionate conservatives.

Jameson told TheDC that she isn’t a fan of Bush.

Though maybe I’m making a mistake by assuming that she’s referring to President Obama’s big-spending predecessor.

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Economic Mobility, Class Warfare, and Poverty

The quality of economic analysis from politicians is never good, but it becomes even worse during election season.

The class-warfare rhetoric being spewed by Bernie Sanders and Hillary Clinton is profoundly anti-empirical. Our leftist friends genuinely seem to think the economy is a fixed pie and that it’s their job to use coercive government power to reallocate the slices.

The only real quandary is whether Bernie’s sincere demagoguery is more disturbing or less disturbing than Hillary’s hypocritical attacks on the top 1 percent.

Since I mentioned that the left’s rhetoric is anti-empirical, let’s look at the evidence.

I’ve previously shared very detailed IRS data showing that the so-called rich pay a hugely disproportionate share of the tax burden.

Let’s augment that analysis by perusing some data on income mobility.

Writing for Money, Chris Taylor explains that America is not a land of dynastic wealth.

…70% of wealthy families lose their wealth by the second generation, and a stunning 90% by the third, according to the Williams Group wealth consultancy. …When I asked financial planners why…second- and third-generation heirs turn out to be so ham-handed, the answers were surprisingly frank. A sampling: “Most of them have no clue as to the value of money or how to handle it.” “Generation Threes are usually doomed.” “It takes the average recipient of an inheritance 19 days until they buy a new car.”

But you don’t have to examine several generations to recognize that American society still has a lot of income mobility.

Tami Luhby looks at how people move up and down the income ladder during their lives.

The Top 1% is often considered an exclusive, monolithic group, but folks actually rise up into it and fall out of it quite often. …Some 11% of Americans will join the Top 1% for at least one year during their prime working lives (age 25 to 60), according to research done by Thomas Hirschl, a sociology professor at Cornell University. But only 5.8% will be in it for two years or more. As for holding onto this status for at least 10 years? Only a miniscule 1.1% of Americans are this fortunate. “Affluence is dynamic, said Hirschl… “The 1% really isn’t the 1%. People move around a lot.”

The same is true for the super-rich, the upper-middle class, and the poor.

The IRS looked at how frequently the same Top 400 taxpayers appeared on the list over a 22-year period ending in 2013. Some 72% ranked that high for just one year. Only 3% were listed for a decade or more. …While just over half of Americans reach the Top 10% at least once in their careers, only 14% stay in it for a decade or more, Hirschl found. …On the flip side, it’s not uncommon for Americans to spend some time at the bottom of the heap. Some 54% of Americans will be in or near poverty for at least one year by their 60th birthday, Hirschl said.

Here’s a table of numbers for those who like digging into the data.

Now let’s shift back toward public policy.

The good news (relatively speaking) is that the politics of envy don’t seem to work very well. This polling data finds that most Americans do not support higher taxes (presumably from the rich) to impose more equality.

And when you combine these numbers with the polling data I shared back in 2012, I’m somewhat comforted that the American people aren’t too susceptible to the poison of class warfare.

Let’s close with some ideological bridge building.

I certainly don’t share the same perspective on public policy as Cass Sunstein since the well-known Harvard law professor leans to the left.

But I think he makes an excellent observation in his column for Bloomberg. Smart leftists should focus on how to help the poor, not demonize the rich.

Bernie Sanders and Hillary Clinton have been operating within the terms set by Top 1 Percent progressivism. …For Top 1 Percent progressives, the accumulation of riches at the very top is what gets the juices flowing. They prioritize much higher taxes on top-earners, more aggressive regulation of Wall Street, restrictions on the compensation of chief executives, and criminal prosecution of those responsible for the financial crisis. Top 1 Percent progressivism emphasizes the idea of fairness — but it’s nevertheless a politics of outrage, animated by at least a trace of envy.  It’s as if “millionaires and billionaires” were the principal problem facing America today.

Sunstein correctly says the focus should be helping the less fortunate.

Bottom 10 Percent progressives  are not  enthusiastic about concentrations of wealth. But that’s not what keeps them up at night. Their focus is on deprivation and lack of opportunity. They’re motivated by empathy for people who are suffering, rather than outrage over unjustified wealth. They want higher floors for living standards, and do not much care about lower ceilings.

So far, so good.

I’ve also argued that our goal should be reducing poverty, not punishing success.

This is why I want pro-growth tax reform, a smaller government, and less suffocating red tape.

Unfortunately, Prof. Sunstein then wanders into very strange territory when it comes to actual policy. He actually endorses the utterly awful economic “bill of rights” proposed by one of America’s worst presidents.

Their defining document is one of the 20th century’s greatest speeches, delivered by Franklin Delano Roosevelt in 1944, in which he called for a Second Bill of Rights, including the right to a decent education, the right to adequate medical care and food, and the right to “adequate protection from the economic fears of old age, sickness, accident, and unemployment.”

If you think I’m exaggerating about FDR being an awful President, click here.

And if you want more information about FDR’s terrible “bill of rights,” click here.

So I like his diagnosis of why the left is wrong to fixate on hating success.

But he needs to look at real-world evidence so he can understand that free markets and small government are the right prescription for prosperity.

P.S. Here’s my video listing five arguments against class-warfare taxation.

There’s a lot of material in a short period of time, though I think the most disturbing part occurs at about 4:30. What sort of person would actually want to impose tax policy that is so punitively destructive that the government doesn’t collect any additional revenue?!?

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Accelerating on the Path to Greece with Bernie Sanders

Remember when I wrote about a week ago that I was somewhat optimistic about entitlement reform?

Well, given what just happened in New Hampshire, I must have been smoking crack. It would now be more accurate to say something will happen with entitlements, but it will be deform rather than reform.

That’s because a Bernie Sanders nomination victory followed by a win in November might pave the way for a massive expansion of government. Much of this would be a result of a single-payer healthcare scheme (oh, and don’t forget that the Republican victor in New Hampshire also has endorsed government-run healthcare).

Now that we have to take Senator Sanders seriously, let’s investigate his agenda.

Holman Jenkins of the Wall Street Journal is not a fan of the Vermont Senator’s statism.

His socialism is farcical in a country that can’t afford the entitlements it already has. …Mr. Sanders, far from being a radical departure, is merely a perfection of what Democrats have offered since the Clinton era, namely denial. Ignore the problem. If forced to acknowledge it, insist there’s no problem because the rich will pay. In the meantime, savage every reform proposal as an attack on “unmet needs.” Collect the political rents from serving as defender of every spending interest in our overcommitted republic. …Bernie…, for all his exotic pretenses, is just another machine Democrat.

I think Holman nails it. Sanders’ socialism is just a gimmick. He just a standard-issue redistributionist, and he doesn’t even have any idea of how to finance those empty promises.

Like many other leftists, Sanders presumably knows that “taxing the rich” doesn’t work because they can alter their behavior.

As Europe demonstrates, the only way to finance large government is to have big tax burdens on ordinary people.

Yes, Sanders endorses a few tax hikes on the middle class, but mostly he relies on unicorns and fairy dust.

Consider, for instance, his very prominent proposal for a single-payer health system. Avik Roy of Forbes digs into the details.

In Sanders’ eight-page campaign white paper, entitled “Medicare for All,” the self-described “democratic socialist” outlines his plan’s core principles. The plan would effectively abolish the private health insurance industry… Berniecare would also abolish cost-sharing by patients; i.e., no co-pays, deductibles, or coinsurance payments, and minimal premiums. …Berniecare would also abolish cost-sharing by patients; i.e., no co-pays, deductibles, or coinsurance payments, and minimal premiums.

And what would all this cost?

Citing estimates prepared by Gerald Friedman, an economist retained by the Sanders campaign, Avik finds the numbers very unconvincing.

…even by Friedman’s own optimistic projections about what single-payer health care could save, Berniecare would increase federal spending by $28.3 trillion over ten years. If Friedman is wrong, and the plan fails to reduce the growth of health care spending, it would result in $32.7 trillion in new federal spending. The Congressional Budget Office projects that total federal spending from 2017 to 2026, under current law, will exceed $51 trillion. So, under Friedman’s rosy scenario, Sanders’ health care plan would increase federal spending by an astounding 55 percent. If the promised savings fail to materialize, it would increase federal spending by 64 percent—or more.

That’s a huge expansion in the burden of government, even by Washington standards.

But Avik may be an optimist.

Also writing for Forbes, Professor Chris Conover of Duke thinks the spending increase would be even larger.

…the actual cost of the Sanders health plan will be at least 40% more than he claims. In the worst case, it will be 49% higher….In short, the Sanders health plan would require a 71% increase in federal spending over the next decade. …everyone with even a passing knowledge of economics knows that if you lower the cost of something, demand for it will increase.

Based on a RAND Corporation study, he looks at behavioral responses.

So the empirical question is how much of an increase in demand to expect from this expansion in coverage. …The HIE demonstrated convincingly that among those with “free” health of the sort being proposed by Senator Sanders–i.e., zero copays or deductibles–health spending was 32% higher compared to those who had been randomly assigned to a cost-sharing plan having no deductible but required patients to pay 25% of every bill up to a maximum out-of-pocket limit of $1,000 (about $1,972 in 2016 dollars. …the RAND study showed the actual figure will be more than 10 times that amount. Correcting this error adds $12 trillion to the cost of the Sanders plan (whoops!).

In effect, Conover is generating more accurate numbers based on dynamic analysis (in the same way advocates of dynamic scoring try to fix mistakes in revenue estimates that assume no behavioral responses).

He includes a pie chart is his column so readers can get a sense of proportion.

By the way, guess what? All the new spending will mean lots of new taxes.

…the actual increase in federal taxes required by the Sanders plan is $28 trillion over 10 years, not the $13.8 trillion originally estimated by Prof. Friedman. When we further adjust this figure to more realistically account for higher demand due to moral hazard, the figure comes to $36.3 trillion

Yet if you look at all the new taxes proposed by Senator Sanders (including those designed to finance other expansions of government), the total is nowhere near $28 trillion or $36 trillion.

So when you look at this horrifying list, which the Washington Examiner estimates is a 47 percent increase in the tax burden, keep in mind that the actual increase would be larger and more pervasive.

And we shouldn’t forget that Senator Sanders wants lots of spending in other areas, not just government-run healthcare.

So everything you’ve already read is actually the best-case scenario.

P.S. These images (here, here, and here) tell you everything you need to know about socialism/statism vs markets/liberty.

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New Obama Budget: The Usual Reckless Spending Hikes…and a Big New Tax on American Energy Consumers

We have good news and bad news.

The good news is that President Obama has unveiled his final budget.

The bad news is that it’s a roadmap for an ever-growing burden of government spending. Here are the relevant details.

• The President wants the federal budget to climb by nearly $1.2 trillion over the next five years.
• Annual spending would jump by an average of about $235 billion per year.
• The burden of government spending would rise more than twice as fast as inflation.
• By 2021, federal government outlays will consume 22.4% of GDP, up from 20.4% of economic output in 2014.

I guess the President doesn’t have any interest in complying with Mitchell’s Golden Rule, huh?

While all this spending is disturbing (should we really step on the accelerator as we approach the Greek fiscal cliff?), the part of this budget that’s really galling is the enormous tax increase on oil.

As acknowledged in a report by USA Today, this means a big tax hike on ordinary Americans (for what it’s worth, remember that Obama promised never to raise their taxes).

Consumers will likely pay the price for President Obama’s proposed $10 tax per-barrel of oil, an administration official and a prominent analyst said Thursday. Energy companies will simply pass along the cost to consumers, Patrick DeHaan, senior petroleum analyst for GasBuddy.com, which tracks gas prices nationwide, said in an interview with USA TODAY. ….a 15-gallon fill-up would cost at least $2.76 more per day.  It would also affect people who use heating oil to warm their homes and diesel to fill their trucks.

Isn’t that wonderful. We’ll pay more to fill our tanks and heat our homes, and we’ll also pay more for everything that has oil as an input.

While middle-class consumers will see a big hit on their wallet, the Washington Post explains that Obama wants the new tax revenue to fund an orgy of special-interest spending.

…the tax would raise about $65 billion a year when fully phased in. …The administration said it would devote $20 billion of the money raised to expand transit systems in cities, suburbs and rural areas; make high-speed rail a viable alternative to flying in major regional corridors and invest in new rail technologies like maglev; modernize the nation’s freight system; and expand the Transportation Investment Generating Economic Recovery program launched in the 2009 economic stimulus bill to support local projects. …The budget would also use roughly $10 billion per year in revenues for shifting how local and state governments design regional transportation projects. Obama would also propose investing just over $2 billion per year in “smart, clean vehicles” and aircraft.

More railway money pits and Solyndra-style boondoggles? Gee, what could go wrong?

By the way, the Administration is claiming that the big new energy tax won’t really hurt our pocketbooks because oil prices have been falling. Here are parts of a story by the Washington Examiner.

President Obama said the oil supply glut that has forced prices down to about $30 a barrel makes his proposal to levy a $10 per-barrel tax on crude oil timely. …the White House appears to be of the view that consumers would have an easier time paying it during record low prices.

Gee, how thoughtful of them.

But is anybody under the illusion that the politicians in Washington will repeal the tax when energy prices rise?

Anybody? Bueller?

Here’s one last gem. As cited by the Los Angeles Times, the President offered this pithy statement.

“Rather than subsidize the past, we should invest in the future,” Obama said during his weekly Saturday address.

Now think about what he’s saying. Obama wants us to believe that the absence of a tax today and in the past is actually a subsidy!

Not that we should be surprised. Our friends on the left have a strange habit of arguing that we’re getting a subsidy when we’re allowed to keep our own money. Indeed, they even have a concept called “tax expenditures” that is based on that perverse notion.

P.S. The folks at Politico have a story about Obama’s plan, and there’s a bit of speculation about how it could become an issue for Hillary Clinton in the 2016 presidential race.

…the proposal could be particularly awkward for Hillary Clinton, who has embraced most of Obama’s policies but has also vowed to oppose any tax hikes on families earning less than $250,000 a year.

I think this analysis is absurd.

Hillary will promise all through the campaign that she opposes tax hikes on everyone other than the rich. But then, just like Obama, she’ll break that promise if she gets to the White House.

P.P.S. Lest anyone think I’m taking a partisan jab at Hillary because she’s a Democrat, keep in mind that I’m terrified that Republicans may decide (not withstanding their “dead on arrival” comments) to like Obama’s scheme. After all, many of them last year were very tempted by gas tax hikes to fund more pork-barrel spending.

P.P.P.S. And what’s really depressing is that I explained just last month that it would be very simple to shrink the relative burden government (and also balance the budget very quickly if that’s what you care about) if the federal budget “only” grew by the rate of inflation.

P.P.P.P.S. One final comment is that I might be tempted to accept an oil tax in exchange for the abolition of a tax – perhaps the death tax or capital gains tax – that collects a similar amount of revenue.

But I’d have two condition: First, the net result has to be a tax system that is less destructive to prosperity. Second, I’d have to be convinced that the swap wouldn’t backfire, with politicians somehow winding up with more power and/or money when the dust settles (which has been my concern about the Rand Paul and Ted Cruz plans to impose a value-added tax, even though their plans theoretically would produce a much less destructive tax system).

P.P.P.P.P.S. Oops, several people have reminded me that I forgot to include predictions for New Hampshire. These are only worth what you’re paying for them (in other words, nothing).

Trump  31
Kasich  17
Bush     12
Rubio   11
Cruz     10
Christie  7
Fiorina   5
Carson   4

Sanders   57
Clinton    42

Given what he did to expand Medicaid dependency in Ohio, I’m not sure I’m happy about Kasich’s strong showing. On the other hand, he played a key role in the spending restraint of the 1990s.

Since Hillary and Bernie are two peas in a pod, I have no strong thoughts about that race.

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Europe, Welfare Migration, and Hypocrisy

Taxpayers don’t like coughing up big amounts of money so other people can choose not to work.

And they really get upset when welfare payments are so generous that newcomers are encouraged to climb in the wagon of government dependency.

This has an effect on the immigration debate in the United States. Most Americans presumably are sympathetic to migrants who will boost per-capita GDP, but there is legitimate concern about those who might become wards of the state.

Welfare migration also has become a big issue in Europe.

Reuters has a report on efforts by the U.K. government to limit and restrict the degree to which migrants from other E.U. nations can take advantage of redistribution programs.

Cameron says he needs a pact to curb benefits for new migrant workers from EU countries… Proposals to allow British authorities to withhold in-work benefits for up to four years from EU citizens moving to work in Britain are under intense scrutiny.

You can understand why Cameron feels pressure to address this issue when you read horror stories about foreigners coming to England and living comfortable lives at taxpayer expense.

This isn’t just a controversy in Britain.

The U.K.-based Guardian has a story on support for such measures in Austria.

The Austrian foreign minister, Sebastian Kurz,…would not only call on the chancellor, Werner Faymann, to vote in favour of Cameron’s “emergency brake” on migrants’ benefits, but also to adopt the measure in Austria as soon as possible. …”Those who don’t pay into the system will get fewer benefits or none at all,” Kurz told the newspaper Kronen Zeitung. “We should embrace that principle if we want to guarantee that our welfare state remains affordable and attractive for top talent.” …he also supported Cameron’s call for the UK to be allowed to stop paying child benefit to EU migrants whose children live abroad.

European politicians are right to be worried. There’s evidence even from Sweden that welfare programs lure migrants into dependency.

And studies of American data show that excessive levels of redistribution can be at least a partial magnet for welfare recipients.

Here are some of the findings from a 2005 scholarly article by Professor Martin Bailey of Georgetown University.

…the results also indicate that welfare benefits exert a nontrivial effect on state residential choice. …the welfare migration hypothesis does not require welfare to exert a dominant effect, only a real effect. And here, the results provide strong, robust indications that the effect is real. …the results imply that migration may discourage states from providing high welfare benefits because such generosity attracts and retains potential welfare recipients.

Professor Bailey then found in a 2007 academic study that states understandably impose some restraints on welfare spending because of concerns that excessive benefits will lure more dependents.

Whether states keep welfare benefits low in order to prevent in-migration of benefit-seeking individuals is one of the great questions in the study of federalism. …This article develops a model which…suggests that competition on redistributive programs does…constrain spending to be less than what the states would spend if migration were not a concern.

This makes sense, and it echoes the findings of a study I wrote about in 2012 by some German economists.

Simply stated, you get better policy when governments compete.

But that doesn’t mean Cameron and other European politicians are doing the right thing. Instead of limiting handouts just for migrants, they should be lowering redistribution payments for everybody, including natives.

After all, European nations (like many American states) have elaborate redistribution systems that often make dependency more attractive than work.

Indeed, the United Kingdom has a more generous package of handouts that almost every other European nation.

The bottom line is that it’s a bit hypocritical (and in some cases perhaps even racist) for Cameron and others to target welfare for migrants without also addressing the negative impact of similar payments for natives.

P.S. To give British politicians credit, there have been some recent positive steps to reduce welfare dependency by cutting back on handouts.

P.P.S. In any event, Americans shouldn’t throw stones because we live in a glass house based on our foolish laws that shower refugees with initiative-sapping handouts.

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The Super Bowl and Marginal Tax Rates

When I give speeches in favor of tax reform, I argue for policies such as the flat tax on the basis of both ethics and economics.

The ethical argument is about the desire for a fair system that neither punishes people for being productive nor rewards them for being politically powerful. As is etched above the entrance to the Supreme Court, the law should treat everyone equally.

The economic argument is about lowering tax rates, eliminating double taxation, and getting rid of distorting tax preferences.

Today, let’s focus on the importance of low tax rates. More specifically, let’s look at why it’s important to have a low marginal tax rate, which is the rate that applies when people earn more income.

Here’s the example I sometimes use in my remarks. Imagine a taxpayer who earns $50,000 and pays $10,000 in tax.

With that information, we know the taxpayer’s average tax rate is 20 percent. But this information tells us nothing about incentives to earn more income because we don’t know the marginal tax rate that would apply if the taxpayer was more productive and earned another $5,000.

Consider these three simple scenarios with wildly different marginal tax rates.

1. The tax system imposes a $10,000 annual charge on all taxpayers (sometimes referred to as a “head tax”). Under this system, our taxpayer pays that tax, which means the average tax rate on $50,000 of income is 20 percent. But the marginal tax rate would be zero on the additional $5,000 of income. In this system, the tax system does not discourage additional economic activity.
2. The tax system imposes a flat rate of 20 percent on every dollar of income. Under this system, our taxpayer pays that tax on every dollar of income, which means the average tax rate on $50,000 of income is 20 percent. And the marginal tax rate would also be 20 percent on the additional $5,000 of income. In this system, the tax system imposes a modest penalty on additional economic activity.
3. The tax system has a $40,000 personal exemption and then a 100 percent tax rate on all income about that level. Under this system, our taxpayer pays $10,000 of tax on $50,000 of income, which means an average tax rate of 20 percent. But the marginal tax rate on another $5,000 of income would be 100 percent. In this system, the tax system would destroy incentives for any additional economic activity.

These examples are very simplified, of course, but they accurately show how systems with identical average tax rates can have very different marginal tax rates. And from an economic perspective, it’s the marginal tax rate that matters.

Remember, economic growth only occurs if people decide to increase the quantity and/or quality of labor and capital they provide to the economy. And those decisions obviously are influenced by marginal tax rates rather than average tax rates.

This is why President Obama’s class-warfare tax policies are so destructive. This is why America’s punitive corporate tax system is so anti-competitive, even if the average tax rate on companies is sometimes relatively low.

And this is why economists seem fixated on lowering top tax rates. It’s not that we lose any sleep about the average tax rate of successful people. We just don’t want to discourage highly productive investors, entrepreneurs, and small business owners from doing things that result in more growth and prosperity for the rest of us.

We’d rather have the benign tax system of Hong Kong instead of the punitive tax system of France. Now let’s look at a real-world (though very unusual) example.

Writing for Forbes, a Certified Public Accountant explains why Cam Newton of the Carolina Panthers is guaranteed to lose the Super Bowl.

Not on the playing field. The defeat will occur when he files his taxes.

Remember when Peyton Manning paid New Jersey nearly $47,000 in taxes two years ago on his Super Bowl earnings of $46,000? …Newton is looking at a tax bill more than twice as much, which will swallow up his entire Super Bowl paycheck, win or lose, thanks to California’s tops-in-the-nation tax rate of 13.3%.

You may be wondering why California is going to pillage Cam Newton since he plays for a team from North Carolina, but there is a legitimate “nexus” for tax since the Super Bowl is being playing in California.

But it’s the level of the tax and marginal impact that matters. More specifically, the tax-addicted California politicians impose taxes on out-of-state athletes based on how many days they spend in the Golden State.

Before we get into the numbers, let’s do a quick review of the jock tax rules… States tax a player based on their calendar-year income. They apply a duty day calculation which takes the ratio of duty days within the state over total duty days for the year.

Now let’s look at the tax implication for Cam Newton.

If the Panthers win the Super Bowl, Newton will earn another $102,000 in playoff bonuses, but if they lose he will only net another $51,000. The Panthers will have about 206 total duty days during 2016, including the playoffs, preseason, regular season and organized team activities (OTAs), which Newton must attend or lose $500,000. Seven of those duty days will be in California for the Super Bowl… To determine what Newton will pay California on his Super Bowl winnings alone, …looking at the seven days Newton will spend in California this week for Super Bowl 50, he will pay the state $101,600 on $102,000 of income should the Panthers be victorious or $101,360 on $51,000 should they lose.

So what’s Cam’s marginal tax rate?

The result: Newton will pay California 99.6% of his Super Bowl earnings if the Panthers win. Losing means his effective tax rate will be a whopping 198.8%. Oh yeah, he will also pay the IRS 40.5% on his earnings.

In other words, Cam Newton will pay a Barack Obama-style flat tax. The rules are very simple. The government simply takes all your money.

Or, in this case, more than all your money. So it’s akin to a French-style flat tax.

Some of you may be thinking this analysis is unfair because California isn’t imposing a 99.6 percent or 198.8 percent tax on his Super Bowl earnings. Instead, the state is taxing his entire annual income based on the number of days he’s working in the state.

But that’s not the economically relevant issue. What matters if that he’ll be paying about $101,000 of extra tax simply because the game takes place in California.

However, if the Super Bowl was in a city like Dallas and Miami, there would be no additional tax.

The good news, so to speak, is that Cam Newton has a contract that would prevent him from staying home and skipping the game. So he basically doesn’t have the ability to respond to the confiscatory tax rate.

Many successful taxpayers, by contrast, do have flexibility and they are the job creators and investors who help decide whether states grow faster and stagnate. So while California will have the ability to pillage Cam Newton, the state is basically following a suicidal fiscal policy.

Basically the France of America. And that’s the high cost of high marginal tax rates.

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Educating Congress and Debunking the White House on the Debt Limit

Whenever there’s a fight over raising the debt limit, the political establishment gets hysterical and makes apocalyptic claims about default and economic crisis.

For years, I’ve been arguing that this Chicken-Little rhetoric is absurd. And earlier this week I testified about this issue before the Oversight and Investigations Subcommittee of the House Financial Services Committee.

By the way, when I first showed up, my placard identified me as Ms. Mitchell.

Since I work at a libertarian think tank, I reckon nobody would object if I wanted to change my identity. But since I’m the boring rather than adventurous kind of libertarian, I guess it’s good that I wound up being Dr. Mitchell.

More important, here’s some elaboration and background links to some of the information from my testimony.

America’s long-run fiscal problem isn’t debt. That’s just a symptom. The real challenge is a rising burden of government spending, largely because of demographic change and poorly designed entitlement programs.

Measured as a share of economic output, the tax burden already is above historical levels. Moreover, taxes are projected to rise even further, so there is zero plausible evidence for the notion that America’s future fiscal crisis is the result of inadequate tax revenue.

International bureaucracies such as the IMF, BIS, and OECD show America in worse long-run shape than Europe, but the U.S. is actually in a better position since a spending cap easily would prevent the compounding levels of debt that are driving the terrible long-run outlook in the United States.

It’s good to have debt limit fights today if such battles enhance the possibility of averting a future Greek-style economic calamity.

Arguments against using the debt limit as an action-forcing event usually are based on the bizarre claim that an inability to borrow more money would cause a default and wreck the “full faith and credit” of the United States. Nonsense. Treasury would be able to avoid default in the absence of a higher debt limit for the simple reason that tax receipts are far greater than what’s needed to pay interest on the debt.

This last point is worth some extra attention. I’ve been arguing for years that debt limit fights are harmless since there’s no risk of default. I even explained to the Senate Budget Committee a few years ago that it would be easy for the Treasury Department to “prioritize” payments to ensure that bondholders would never be adversely impacted.

The Obama Administration routinely denied that it was sufficiently competent to engage in “prioritization” and even enlisted the then-Fed Chairman Ben Bernanke to dishonestly fan the flames of economic uncertainty.

Well, thanks to the good work of the Subcommittee on Oversight and Investigations, we now have a report outlining how the White House was prevaricating. Simply stated, of course there were and are contingency plans to prioritize in the event of a standoff on the debt limit.

By the way, I didn’t get the chance to mention it in my oral testimony, but my full written testimony addressed the silly assertion that any delay in a government payment is somehow a “default.”

I will close by noting the utterly disingenuous Administration tactic of trying to…make it seem as if delaying payments of things like crop subsidies and Medicaid reimbursements is somehow equivalent to default on interest payments.

One final point. Let’s imagine that we’re four years in the future and political events somehow have given us a Republican president and a Democratic Congress. Don’t be surprised if the political parties then reverse their positions and the GOPers argue for “clean” debt limits and make silly claims about default and Democrats argue the opposite.

That’s why I’m glad I’m at the Cato Institute. I can simply tell the truth without worrying about partisanship.

P.S. Here are some jokes about the debt limit, and you can find some additional humor on the topic here and here.

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Wisdom from Reagan: More Arguments against the Value-Added Tax

The left is very clever about accepting “compromise,” so long as the result is a larger burden of government.

This is one of the reasons why I’m so concerned about Senator Cruz’s proposal for a value-added tax. Even though he wants a VAT for good reasons (to finance lower tax rates and also to reduce the tax bias against saving and investment), my fear is that the statists will say yes, then quickly use the VAT to finance a big expansion of the welfare state.

Which is exactly what happened in Europe.

Some folks think I’m being paranoid, to which there are two responses. First, there’s the old joke that even paranoid people have enemies.

But the second and more serious response is to point out that lots of statists openly say they want a VAT to make government bigger.

Indeed, some of these folks already are semi-embracing Cruz’s VAT because of their desire to have a new source of revenue for Washington. Consider, for instance, these excerpts from an editorial in USA Today.

The VAT is a kind of national sales tax used by virtually every other nation in the world because it can raise lots of money …partly because deficits are set to explode again as Baby Boomers retire, the VAT is back. Texas Republican Ted Cruz, winner of the Iowa GOP caucuses, is proposing a VAT… The concept has a lot going for it. …Cruz’s plan is flawed, but he’s on to something. A more progressive, phased-in VAT deserves to be part of any future conversation

You don’t have to read between the lines to understand that the editors at USA Today want a VAT to expand the public sector. The editorial even favorably cites Senator Cardin and former Treasury official Michael Graetz.

Do they want a VAT for the same reasons as Senator Cruz?

Not exactly. Senator Cardin acknowledges that the VAT could lead to a spigot of new tax revenue (“enacting a consumption tax could mean enacting a new and easy-to-adjust lever to raise taxes irresponsibly”), but he claims to have a mechanism that supposedly will guard against ever-higher tax burdens.

The Progressive Consumption Tax Act addresses this concern with a circuit breaker that returns overages from the PCT to taxpayers when revenues exceed predetermined levels.

This is a joke. The politicians in Washington get to set the “predetermined levels,” so it goes without saying that those levels will go from predetermined to redetermined in a blink of an eye, just as we’ve seen in other nations.

And what about Michael Graetz’s plan? Well, here are a few excerpts from an article he wrote.

…tax increases will be necessary to…address the nation’s unsustainable fiscal condition fairly… With this plan in place, our ability to raise additional revenue would be increased…

To be fair, Graetz is not a leftist. He basically wants a VAT because it’s a less-destructive way of financing bigger government.

I agree. It’s highly likely that a $100 billion VAT hike would do less damage than a $100 billion increase in income taxes, but why on earth would anyone want higher taxes to fund bigger government, particularly when we know sensible entitlement reforms could fix the nation’s long-run fiscal problem?

No wonder Avik Roy, writing for Forbes, is so worried about a VAT.

Sen. Ted Cruz…favors replacing the corporate income tax with what Cruz calls a “business flat tax,” and what Canadians and Europeans call a “value-added tax.” But the real debate isn’t about terminology; it’s about whether or not Cruz’s approach would drive an explosion of government taxes—and spending—over the mid- to long-term.

One reason it’s a money machine is that it’s actually a hidden tax on wages and salaries.

…businesses would no longer be able to deduct the cost of labor. As my colleague Ryan Ellis has detailed, that amounts to a “16 percent wage tax withheld at the employer level under the Cruz plan.”

And that creates a very large tax base, so any increase in the tax rate transfers a lot of money from the private sector to Washington.

…the most important problem with the Cruz plan is how Democrats would take advantage of it. Cruz envisions a VAT tax rate of 16 percent. But his plan would hand progressives a simple tool to raise taxes to far higher rates in the future. …the vast majority of federal revenue will hit voters indirectly, because it will come from businesses. From a political standpoint, Cruz’s plan would pave the way to higher tax rates in the future. …every one percent increase in the VAT would yield $1.6 trillion in new revenue over a decade. The temptation for a Democratic president and Congress to raise VAT rates to higher levels will be enormous.

And Avik echoes one of my concerns, warning that a VAT will greatly undermine and perhaps even kill any opportunity for genuine entitlement reform.

Under Cruz’s tax system, there would be absolutely no pressure on Washington to reform Medicare and Medicaid. Why reform entitlements when you can simply increase the “business flat tax” rate from 16 percent to 17 percent to 18 percent to 19 percent? This is exactly what has happened in Canada and Europe, where VAT rates started out low, and have gone up and up over time.

I should point out (as he does in his column) that Avik supports Marco Rubio, so he has a political motive to trash the VAT.

Indeed, he even makes some anti-VAT arguments that strike me as unfair, so I’ve omitted them from this analysis.

But the parts I have shared are completely accurate and they are more than adequate to make a very powerful case against giving Washington a new source of revenue.

Let’s close with some wisdom from the 1980s. I wrote that one of America’s worst presidents wanted a VAT to expand the welfare state. And I also mentioned that one of the best presidents in American history was on the right side of the issue. And it’s worth listening to the Gipper’s wisdom on this issue.

P.S. Here’s a short update to my recent post about the craziness of Keynesian economics. You may recall that the economic illiterates at the International Monetary Fund said diverting money from the private sector to finance government outlays on refugees would be good for growth.

Well, we now have estimates of how much will be spent on this so-called stimulus.

Shelter, medical care and integration policies for refugees will cost the German state €22 billion in 2016, and €27.6 billion in 2017.

Gee, according to the perpetual motion machine of Keynesianism, maybe the German government should put the entire population on welfare and the economy will really boom.

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On Campaign Finance, Bernie and Hillary Put the Cart before the Horse

Once again, I threw myself on a proverbial grenade. Yes, that means I watched politicians last night as part of the Cato Institute’s live-tweeting about issues that were raised (or not raised) in the CNN Townhall featuring Bernie Sanders and Hillary Clinton.

Although painful, this exercise enabled me to share my thoughts on topics such as corporate inversions, Planned Parenthood, government-run healthcare, Obamanomics, and the morality (or lack thereof) of government-coerced redistribution.

But one issue I neglected was campaign finance, which was an oversight since both Sanders and Clinton made a big deal about the ostensibly corrupting mix of money and politics.

I confess that their arguments were somewhat seductive. After all, corrupt ethanol handouts and the cronyist Export-Import Bank only exist because politicians easily can raise tens of thousands of dollars by voting yes for these boondoggles.

Moreover, a law professor from the University of Minnesota made “The Conservative Case for Campaign-Finance Reform” yesterday in the New York Times. Here’s some of what Richard Painter wrote.

…big money in politics encourages big government. Campaign contributions drive spending on earmarks and other wasteful programs — bridges to nowhere, contracts for equipment the military does not need, solar energy companies that go bankrupt on the government’s dime… When politicians are dependent on campaign money from contractors and lobbyists, they’re incapable of holding spending programs to account. Campaign contributions also breed more regulation. Companies in heavily regulated industries such as banking, health care and energy are among the largest contributors. Such companies donate with the hope of winning narrowly tailored exceptions to regulations that help them and disadvantage their competitors. …conservatives…need to drive the big spenders out of the temples of our democracy.

I have no idea if Mr. Painter actually is a conservative, but he makes a superficially compelling case.

But then I remind myself of a very important point. The sun doesn’t rise because roosters crow. It’s the other way around. What Mr. Painter fails to understand is that there’s a lot of money in politics for the simple reason that government has massive powers to tax, spend, and regulate.

Politicians in Washington every year redistribute more than $4 trillion, so interest groups have an incentive to “invest” money in campaigns so they can get some of that loot. Those politicians have created a 75,000-page tax code that is a Byzantine web of special preferences, so interest groups have an incentive to “invest” money in campaigns so they get favorable treatment. And the politicians also have created a massive regulatory morass, so interest groups have an incentive to “invest” so that red tape can be used to create an unlevel playing field for their advantage.

By the way, I’m not saying that campaign contributions are improper, or even necessarily bad.

After all, political speech (and the money that makes it meaningful) is protected by the 1st Amendment. Moreover, some people give money simply for reasons of self defense. They’re not looking for handouts of favoritism, but rather are giving money in hopes that politicians will leave them alone.

Instead, I’m simply making the point that big government is what encourages unseemly and/or corrupt political contributions.

If I’m allowed to shift to a new metaphor, Sanders and Clinton make the mistake of putting the cart of campaign finance in front of the horse of big government.

There’s a great column in today’s Wall Street Journal on this topic. It’s motivated by corruption scandals in New York, but the lessons apply equally to Washington. Here’s some of what Tom Shanahan wrote.

…whenever a public official is found guilty of wrongdoing, there’s a call for new laws. Logic cannot explain the impulse. …If they’re not obeying the laws we already have, what makes anyone believe new statutes will change that? …a host of “good government” groups, such the New York Public Interest Research Group, proposed making the legislature a “full-time job” by limiting outside income.

Mr. Shanahan suspect these reforms will backfire.

That’s a major problem for limiting the size of government. An analysis of “The Length of Legislative Sessions and the Growth of Government” byMwangi S. Kimenyi and Robert D. Tollison, in a 1995 article in Rationality and Society, demonstrated that the more time Congress spent in session, the more bills were enacted, and the more expensive government grew. …A legislator with other work also has a better understanding of the economic conditions confronting the public than one who subsists on a government check. …Legislators with outside incomes are less susceptible to the pay-to-play temptation of campaign contributions. When your sole source of income is the public office you hold, the incentive is far greater to do anything necessary to get re-elected.

So here’s the bottom line is that there’s no reason to think new laws will reduce corruption. Indeed, more rules will probably lead to more sleaze since politicians will have an even greater incentive to exploit their positions of power.

The people who will get hurt, however, are the ordinary citizens who already lose out from the current system.

New York continues to suffer a net migration of citizens to other states, as people flee a growing tax burden. The last thing the state needs is a legislature working full time to spend even more taxpayer money.

By the way, I’m not under the illusion that “money in politics” is a solution. I’m simply saying that new rules about campaign finance and ethics won’t have any impact on sleaze and corruption.

Which is my message in this video from the Center for Freedom and Prosperity.

Allow me to make one final point on this issue. I think the proponents of further regulation and control in some cases have good intentions, but they are being extremely naive. Why would anybody think that politicians would approve rules unless the net effect was to increase the powers of incumbency?

Since I shared my video on the topic, I’ll close by strongly recommending that you watch this George Will video.

P.S. I warned last month that governments were engaged in a war on cash. Well, the Germans are planning a Blitzkrieg.

The German government is considering introducing a limit of 5,000 euros ($5,450) on cash transactions in an effort to combat money laundering and financing of terrorism. Deputy finance minister Michael Meister said Wednesday that…there’s “…we also have the problem of how to clear up money-laundering offenses properly” when large transactions are conducted anonymously. …Opposition Green Party lawmaker Konstantin von Notz tweeted that trying to limit cash payments “is a new fundamental attack on data protection and privacy.”

Since criminals will be modestly inconvenienced – at best – by such an initiative, it’s important to understand the real goal is easier tax collection. Indeed, I suspect Herr von Notz will change his tune once he realizes that the German government will get more money to waste if cash is restricted.

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Time for some Optimism on Entitlement Reform

If pessimism was an Olympic event, I used to think I might be favored to win a medal. After all, growing levels of dependency outside of Washington and rampant corruption inside of Washington sometimes lead me to conclude that America is doomed to a Greek fiscal future.

But compared to some people, maybe I’m just an amateur Cassandra. Or even a Pollyanna.

Holman Jenkins of the Wall Street Journal has an ultra-pessimistic column today arguing that “many of us believe the entitlement programs need to be reformed” but worrying about “Republicans who pose as ‘conservative’ defenders of Social Security and Medicare.”

And part of his column is rather convincing since he points out that Donald Trump has criticized Republicans who favor reform.

…the meaning of Trumpism…goes like this: “…Every Republican wants to do a big number on Social Security, they want to do it on Medicare, they want to do it on Medicaid. And we can’t do that. And it’s not fair to the people that have been paying in for years and now all of the sudden they want [it] to be cut.” Mr. Trump is a political harbinger here of a new strand of populist Republicanism.

To be fair, Trump’s comments aren’t necessarily anti-reform. One could argue that he’s simply saying that benefits for existing retirees and older workers shouldn’t be adversely impacted.

But since “The Donald” hasn’t expressed any support for reforms that would create better and more viable options for younger workers, Jenkins is probably right to be pessimistic.

But he also argues that Tea Party-type Republicans are opposed to reform.

The tea party animus toward ObamaCare is…means-tested new entitlements…are viewed as a threat to the traditional, universal, “earned,” middle-class retirement programs of Social Security and Medicare. …The unspoken tea party stance of defending the good old-fashioned entitlements of “real” Americans is increasingly, in dog-whistle terms, what differentiates one Republican from another.

While it’s almost certainly true that there’s more animosity to redistribution-oriented programs such as Obamacare than there is to so-called earned entitlements, I think Holman misreads the Tea Party crowd.

Based on my speeches to – and other interactions with – these activists, I have never detected any measurable hostility to Social Security reform and Medicare reform. Fixing those programs may not be at the top of their agenda, but they’re not on the wrong side.

Moreover, I work closely with folks on Capitol Hill and I almost never hear about any meaningful opposition from Tea Partiers. And since House GOPers have approved budgets with genuine entitlement reform for five consecutive years, there’s been plenty of time for opposition to materialize.

Jenkins also is glum because Governor Christie, who has openly expressed support for reform, hasn’t fared well. And he notes that Senator Rubio has rejected reforms that would harm current seniors.

Chris Christie, who went nowhere in Iowa, did himself no favor by dragging Social Security and Medicare into every debate, however much those programs need to be addressed. Marco Rubio was just as quick to modify any implication that Republicans therefore are entitlement reformers: “We are talking about reforms for future generations. Nothing has to change for current beneficiaries. My mother is on Medicare and Social Security. I’m against anything that’s bad for my mother.”

I’m not a political expert, so I won’t pretend to know why Chris Christie didn’t get many votes in Iowa, but I don’t think it’s right to label Marco Rubio as an opponent. He’s been very upfront about supporting much-needed structural reform of Medicare and Medicaid. He simply doesn’t want to change the rules for existing retirees and older workers.

You can argue that such a condition makes it harder to save money in the short run, but I’m more concerned about dealing with the long-run fiscal challenge (as seen in these IMF, BIS, and OECD numbers). So Rubio’s position doesn’t strike me as a problem. Indeed, I think he’s pushed the envelope in the right direction, particularly since he comes from a state with so many seniors.

And since Ted Cruz also has said similar things about entitlement reform, that means both top-tier GOP candidates (other than Trump) are willing to do the right thing to restore fiscal sanity.

To be sure, maybe I am being naively optimistic. Perhaps Rubio or Cruz will win and will decide to kick the can down the road, even with a GOP Congress that might be primed for reform.

If that happens and we miss what may be a once-in-a-lifetime opportunity for genuine entitlement reform, I’ll be very unhappy and Holman Jenkins will have demonstrated that pessimism is a much smarter assumption when contemplating the actions of politicians.

In which case my already-low opinion of politicians would drop to a record depth. And it also might be time to escape to a country that still has some sensible people and is less likely to suffer fiscal collapse.

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Donald Trump’s Missed Opportunity and other Iowa Observations

What’s the link between government employees and the Iowa Republican Caucus?

You’re probably thinking there’s little or no connection. After all, bureaucrats presumably would more likely be interested in the choice on the other side between the two peas in the statist pod, right?

That’s true, but bear with me. To understand the link I’m going to make, start by reading Kevin Williamson’s scathing column posted at National Review. Here are my favorite passages.

Veterans Affairs hospitals had, through their negligence and stupidity, killed more of our servicemen than died during any year of the Iraq war, and then engaged in a massive criminal cover-up. Legislation was introduced to make it easier to fire people for — let’s focus here — killing veterans through their negligence and stupidity. But government employees are the single most important Democratic interest group, and the president and his congressional allies complained that the bill was too harsh on public servants who were killing veterans through their negligence and stupidity. And so the bill died in the Senate… In the Treasury Department, the EPA, and the FCC, employees have been found to routinely spend the equivalent of a full workday every week watching pornography on their office computers. Most of those crank-yanking bureaucrats are still on your payroll. At the Commerce Department, paralegals spent their days shopping online and trolling dating sites because they were assigned no work — their supervisors were afraid giving their employees work would “antagonize the labor union.” …The IRS and the AFT are routinely used as political weapons. …Beyond spending on (overwhelmingly Democratic) political campaigns, government workers and their unions also show up to vote, to knock on doors, and to bully, harass, and threaten nonconformists. They are the backbone of the Democratic party — and they are thieving, lazy, grasping, thieving, dishonest, thieving, pervy, thieving, detestable, despicable, thieving, thieving thieves… We are ruled by criminals.

Wow, I thought I sometimes employed a bit of sarcasm when writing about overpaid scroungers in the bureaucracy. Heck, I even created a Bureaucrat Hall of Fame to mock our paper-pushing overseers. But Kevin doesn’t mince words.

At this point, you’re probably wondering what this has to do with the GOP contest in Iowa.

Well, I think “The Donald” had a great opportunity to exploit this issue. He’s the guy who’s famous for “You’re fired” and he could have used that reputation to argue he would clean house in the federal bureaucracy.

Best of all, he wouldn’t even have to try very hard.

According to Government Executive, a non-trivial number of federal workers would retire or quit if Donald Trump is elected.

One in four federal workers would consider leaving their jobs if Trump were elected president, according to a new survey conducted by the Government Business Council, Government Executive Media Group’s research arm. About 14 percent of respondents said they would definitely consider leaving federal service under President Trump, while an additional 11 percent said they might. The findings indicate those leaving government would come from agencies’ top ranks… Among Democrats, 42 percent said they would consider leaving, while 48 percent would not.

Imagine what would have happened if Trump’s people had run commercials with this information, or handed out copies of the article at the Caucus.

Just think of all the taxpayers who might have been convinced that there was finally a candidate who would get rid of some of the over-compensated dead wood in Washington.

Definitely a missed opportunity for The Donald.

By the way, I should take this opportunity to point out that bureaucrats aren’t necessarily bad people. I realize it’s a trite phrase, but some of my best friends work for the government.

Nor are they all leftists.

The article reports that a majority would have been embarrassed with Trump in the White House, but there was also widespread disdain for Hillary. And Rubio actually did better than either Democrat.

…a majority — about six in 10 — would be “embarrassed” to have him as their boss. About half of respondents said the same of Hillary Clinton, compared to 45 percent for Sen. Ted Cruz, R-Texas, and 37 percent for Sen. Bernie Sanders, I-Vt. Just one in five said the same of Sen. Marco Rubio, R-Fla.

I have two additional observations about Iowa.

First, it was great to see that the corrupt and sleazy ethanol industry failed in its all-out effort to defeat Cruz. Hopefully this will be interpreted as a sign that politicians no longer have to kneel at the altar of King Corn.

Second, I find it remarkable that Rubio is now being portrayed as the “establishment” candidate. This is a guy who was part of the Tea Party revolt. A guy who defeated the establishment-endorsed governor to win his Senate seat. A guy who has one of the most pro-market voting records in the Senate. A guy from a state filled with old people who is openly pro-entitlement reform. So if he’s the “establishment,” that’s a major victory.

By the way, the first observation doesn’t mean you should vote for Cruz and the second observation doesn’t mean you should vote for Rubio. I’m simply making two points that should be encouraging for advocates of good policy.

Actually, let me add a third observation. In my prediction yesterday, I guessed Cruz would come in first with 28 percent, and…drum roll, please…he came in first with 28 percent. And I said he would be followed by Trump, Rubio, Carson, Paul, and Bush, all of which was true. And I predicted Hillary would beat Bernie.

Sure, some of my percentages were off, but I’ll take this as a partial victory.

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New Rankings Reveal How Obamanomics Is Undermining American Competitiveness

The Index of Economic Freedom, my favorite Heritage Foundation publication, was released today.

As one might predict, Hong Kong once again ranks as the jurisdiction with the most liberty to engage in mutually beneficial exchange, followed by Singapore. Other highly ranked nations include New Zealand, Switzerland, and Australia.

Chile deserves special attention since it is the highest-ranked nation from its region and also the highest-ranked nation from what is considered to be the developing world. Estonia also deserves plaudits for being the highest-ranked nation to emerge from the former Soviet Empire.

The United States, sadly, isn’t in the top 10.

Now let’s look at some of the details from the report, starting with the important observation that good policy produces good results.

…lasting prosperity is a result of a persistent commitment to limited government, strong private property rights, openness to global trade and financial flows, and sensible regulation. Together, these interrelated factors have been proven to empower the individual and induce dynamic entrepreneurial activity. …nations that have focused on improving their competitiveness and opening their societies to new ideas, products, and innovations have done a much better job of achieving the high levels of social progress.

Looking at specific data, the good news from a global perspective is that there’s never been more economic freedom.

…economic freedom has advanced for the fourth year in a row. The world average economic freedom score for 178 economies…recorded an overall average improvement of 0.3 point from the previous year. The global average economic freedom score of 60.7 is the highest recorded in the 22-year history of the Index.

To be sure, a global average of less than 61 percent means a barely passing grade. But that’s better than a failing grade.

Moreover, there’s been some noteworthy improvement in selected countries.

Hong Kong, Singapore, New Zealand, Switzerland, and Australia…earned the designation of “free” with scores above 80. …Ninety-seven countries, the majority of which are less developed, gained greater economic freedom over the past year; 32 countries, among them Burma, Germany, India, Israel, Lithuania, the Philippines, Poland, and Vietnam, achieved their highest economic freedom scores ever in the 2016 Index. …Score improvements in eight countries were significant enough to merit upgrades in the countries’ economic freedom status in the Index. Notably, Latvia became a “mostly free” economy for the first time.

But we also have some bad news.

Declining economic freedom was reported in 74 countries, including 19 advanced economies such as the United States, Japan, and Sweden. …Within the top five freest economies, Switzerland is the only economy whose overall score did not decline in the 2016 Index.

Indeed, I’m worried that Hong Kong’s score fell by a full point and Singapore tied for the 5th-biggest decline with a drop of 1.6 points. Those two jurisdictions are supposed to be role models!

And if you’re an American reader, you probably won’t be happy to learn that the United States has never had a lower score.

The United States continues to be mired in the ranks of the “mostly free,” the second-tier economic freedom category into which the U.S. dropped in 2010. Worse, with scores in labor freedom, business freedom, and fiscal freedom notably declining, the economic freedom of the United States plunged 0.8 point to 75.4, matching its lowest score ever.

You can see from this chart how policy has been moving in the wrong direction.

I don’t want to be overly glum. Only 10 nations rank above the United States and more than 160 jurisdictions get lower scores. And being “mostly free” is better than being “moderately free” or “mostly unfree.” Or, Heaven forbid, being a “repressed” nation such as Argentina, Venezuela, Cuba, or North Korea.

That being said, the trend is not in the right direction. Heck, America is only 1/10th of a point ahead of Denmark (though, to be fair, Bernie Sanders would be horrified to learn that the Danes have very pro-market policies once you get past their awful fiscal system).

One final comment. The much-vaunted BRICS have hit a speed bump.

Progress among the so-called BRICS nations (Brazil, Russia, India, China, and South Africa) has stalled, except in India, which improved by 1.6 points. Russia plunged 10 places in the rankings to 153rd, with its score deteriorating by 1.5 points. The rankings of the other BRICS countries—South Africa, Brazil, and China—declined to 80th, 122nd, and 144th, respectively.

By the way, India’s improvement is welcome news, but don’t break out the champagne. It still only ranks #123 in the world, which is not a recipe to become an Asian Tiger.

Indeed, the big lesson from the BRICS (as I’ve explained in my analyses of Brazil, South Africa, and China) is that a little bit of economic liberalization is a good thing and  can help save a huge number of people from destitution. But you don’t become a rich nation with “mostly unfree” policy.

P.S. While I’m a big fan of the Index of Economic Freedom, I’m an even bigger fan of Economic Freedom of the World. But both tell a very similar story about the relationship between good policy and good outcomes.

For more information, here’s the video I narrated on the recipe for growth and prosperity.

P.P.S. Even though my 2012 predictions for the Iowa Caucus were less than stellar, some folks have emailed to ask what I think will happen this evening.

For what it’s worth, here’s my best guess.

For the GOP:

Cruz                  28
Trump               27
Rubio                19
Carson               8
Paul                    7
Bush                   4
Christie               2
Santorum           2
Fiorina                1
Kasich                 1
Huckabee           1

For the Dems:

Hillary               55
Bernie               45

But don’t place any bets on this basis. After my near-perfect 2010 prediction (at least for the House), my predictions for the 2012 and 2014 elections were decent at best.

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