Trump’s Spending Splurge Is a Long-Run Recipe for Higher Taxes and Less Prosperity

I sometimes sardonically comment about Democratic politicians playing Santa Claus, but Republicans can play that game as well.

Trump and his allies in Congress recently agreed on a big-spending budget deal that lavishes more money on both the Pentagon and domestic programs, and that was only a few weeks after agreeing on a tax reform plan that lower taxes (though only for nine years).

Even if I like part of what’s been happening, that kind of populist approach at some point becomes unsustainable. And when the D.C. swamp ultimately has to choose between lower taxes or higher spending, they’ll go with the latter and make things even worse by jacking up the tax burden.

My frustration is apparent in this recent interview.

And I’m not the only one who sees the long-run dangers.

In a column for the Wall Street Journal, Professor Edward Lazear of Stanford explores the economic damage of ever-expanding government.

The budget deal President Trump signed earlier this month will send federal spending and the deficit skyrocketing. On top of this spending explosion, the administration now plans to add a $500 billion infrastructure bill. …over time high spending necessitates high taxes, and high taxes reduce work and restrain growth. Economic trends in developed nations consistently show that low taxes and hard work are linked to robust growth.

He looks at some of the cross-country evidence.

European countries trail the U.S. in working hard and controlling taxes, and their economies have lagged in comparison. France has a tax-to-GDP ratio of about 44%, and in Italy it’s 43%. The French and Italians work almost 30% fewer hours per person than Americans. Notably, the French economy has flatlined since 2010 while Italy’s has contracted. …Data from the Organization for Economic Cooperation and Development suggests that a 1% increase in a nation’s tax rate is associated with a 1.4% decrease in hours worked per person in the working-age population.

Here’s the part that resonated with me. It’s excessive spending that ultimately is the problem.

…taxes are ultimately dictated by spending. Countries can borrow to finance short-run spending, but they must eventually levy taxes to repay the loans. Whether a government raises taxes now or later to pay for expenditures is a minor consideration compared with its decision to spend in the first place. …Higher spending goes hand in hand with higher taxes, higher deficits, fewer worked hours and less growth. The international comparisons suggest that a 4% increase in spending is associated with a decrease of roughly 0.5 percentage point in the average annual growth rate. Furthermore, it is spending—rather than the deficit—that correlates with sluggish growth. …Deficits often coincide with low growth because deficit increases are usually caused by heightened spending, not reduced taxes. Raising taxes, or keeping them high without lowering spending, stifles growth.

Heck, even the OECD has produced research on the negative impact of government spending on economic performance.

And this approach can lead to a downward spiral.

To the extent that government spending goes to programs such as welfare that directly discourage work, it has an additional growth-reducing effect. When fewer people work, those who do must be taxed even more to cover public expenses. These heightened taxes on labor discourage work in turn, pushing more potential workers toward government support.

In other words, if we stay on this path, we’ll eventually become Greece. Not a good idea, to put it mildly.

Since we’re on the topic, let’s look at some additional evidence. Three economists from Australia and the United Kingdom did a meta-analysis of studies on the relationship between government spending and economic growth. Here are some of the findings.

One of the most contentious issues in economics is whether ‘big government’ is good or bad for economic growth. …Theoretically, big government can have both negative and positive effects on growth. …In this study, we include all effect-size estimates reported by empirical studies that examine the direct effect of government size on growth.

Here’s what they found.

… findings indicate that: (i) total government expenditures have a medium and adverse effect on per-capita income growth in developed countries only; (ii) the effect of government consumption on per-capita income growth is also medium in developed countries and in developed and LDCs pooled together; and (iii) neither total expenditures nor government consumption has a significant effect on per-capita income growth in LDCs.

I’m not surprised that they didn’t find a strong link in poor nations. The data show that those countries are generally too mismanaged and corrupt to collect much revenue. Therefore, as I noted in my recent analysis of Indian economic policy, they can’t spend much.

What’s primarily holding back those countries is weak rule of law, excessive regulation, and protectionism.

But I’m digressing. The study also acknowledges the Rahn Curve, though they call it the Armey Curve.

…government size tends to have a negative effect on per-capita income growth as the level of income increases. This finding ties in with the Armey curve hypothesis (Armey, 1995), which posits an inverted-U relationship between government size and economic growth. The theoretical argument here is that government size may be characterised by decreasing returns. Another theoretical argument relates to the distortionary nature of taxes, which is minimal for low levels of taxation, but beyond a certain threshold, they grow rapidly and become extremely large.

Quite true.

Sadly, some people mistakenly conclude that if a little bit of government is associated with more prosperity, then a bloated public sector must be even better.

On a related note, Professor Alexander Salter dismisses the assertion (pushed by international bureaucracies) that big government is a pre-condition for prosperity. Here’s some of what he wrote.

Why are Western countries like the United States and Germany so much richer today than other countries around the world? …One explanation for the success of the West is, in a word, liberty. Over the last few hundred years, classical liberal ideas such as the rights of man and the rule of lawput constraints on European governments’ power, which resulted in a strong protection of private property rights. This resulted in meteoric economic growth, which delivered the modern cornucopia of wealth. …Free countries get rich; unfree countries stay poor.

But there’s a competing theory.

…another explanation — state capacity…is the idea that economic development requires strong, centralized states to uphold the rule of law and provide crucial public goods. …The state capacity literature in economics…places heavy emphasis on a single, strong, central legal authority. In this framework, the fractured and decentralized legal authorities in medieval and early modern Europe are now seen as antithetical to economic development.

Salter is skeptical of the second theory.

…it is undeniable that economic growth in the West did not take off until the rise of modern nation-states. … While governance institutions obviously began centralizing at the beginning of the modern era, …that’s insufficient as a causal explanation. …the state capacity literature has a hard time dealing with a very troubling counterexample: the totalitarian states of the 20^th century: like the USSR and China. These states had plenty of capacity, as evidenced by their ability to murder millions of their own citizens… Needless to say, these kinds of things aren’t conducive to economic development.

So he concludes that the first theory must be the answer, at least in part.

…whatever is “doing the work” of promoting economic growth, it is upstream of the creation of states. …State capacity may or may not be a valuable steppingstone to an explanation, but it is not itself an explanation that social scientists should accept. …it seems the old hypothesis — that the big ideas of classical liberalism created Western economic growth — is worth another look!

My bottom line, for what it’s worth, is that the classical-liberalism approach is the necessary condition, but that doesn’t automatically make it a sufficient condition.

In a column last year on the emerging micro-state of Liberland, I tried to square the circle. Here’s some of what I wrote after looking at the literature on state capacity.

…the key to prosperity is having a state strong enough and effective enough to provide rule of law, but to somehow constrain that state so that it doesn’t venture into destructive redistribution policies. This is why competition between governments played a key role in the economic development of the western world. When governments have to worry about productive resources escaping, that forces them to focus on things that help an economy (i.e., rule of law) while minimizing the policies that hinder prosperity (i.e., high taxes and spending). …America’s Founding Fathers dealt with the same issues… Their solution was a constitution that explicitly limited the size and scope of the federal government. …that system worked reasonably well until the 1930s.

I find this issue fascinating, but I suspect most people are more concerned about the real-world consequences rather than the theoretical underpinnings.

So I’ll end on a pessimistic note by observing that we normally get bad fiscal policy from Democrats and worse fiscal policy from Republicans (Reagan being the only modern-era exception).

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A Visceral Cheer for the Motorist Who Destroyed D.C.’s Speed-Trap Cameras

I periodically fret that individualism is dying in the United States and that Americans are morphing into handout-loving Europeans.

Well, the spirit of 1776 is not completely dead. There are still some Americans who stand up against the greedy, grasping, and oppressive state. I heartily applaud the guy in this video (and not just for personal reasons) for doing what I have thought about many times.

Video of the alleged suspect destroying a DC speeding camera. pic.twitter.com/NmLHulmrzu

— DC Maryland Virginia (@DMVFollowers) February 25, 2018

Sonny Bunch, writing for the Washington Free-Beacon, applauds pro-liberty vandalism.

Obviously we shouldn’t cheer all those who destroy the state’s property or all those who circumvent efforts to enforce the law. But some laws are unjust. Some of the state’s property serves to oppress. Sometimes you need a hero. …some laws are good and just. Prohibitions against rape and murder, for instance. We need them. Without laws we are savages. But speed cameras are not included in the “good and just” category. They are revenue-producing monstrosities designed to suck people of their money in order to fill the coffers of bureaucrats… If the corruptocrats in D.C. try to imprison this hero, I promise to lead the resistance in an effort to spirit him southward. We shall protect you, brother. You are one of us now.

I fully concur.

Moreover, this apparently wasn’t a one-off gesture. Washingtonian reports that numerous cameras were knocked out of action.

An unidentified man suspected of smashing 11 of the District’s traffic cameras that produce tickets for drivers who speed or run red lights is being celebrated by some as a hero after DC Police released footage of one camera’s violent demise. Police say that the cameras, located mostly around Northeast DC, were reported to be malfunctioning last Tuesday. When officers checked out the locations, they found the cameras damaged as a result of vandalism.

By the way, I have no objection to cameras that nail jerks who blow through an intersection 3 seconds after a light has turned red. Those are people who risk innocent lives.

But the cameras I’ve noticed are set in spots where the speed limit is set absurdly low. In other words, they are the modern-day version of the speed traps that used to characterize corrupt small towns.

Some people object to speed cameras but think red-light cameras are okay. As already noted, I agree with their safety concerns, but that’s not how government operates.

They’ve turned red-light cameras into a scam, as explained in this Reason video. Greedy politicians actually do dangerous things like shortening the yellow light simply because they want to produce more cash. No wonder they actually cause accidents!

Moreover, Holman Jenkins of the Wall Street Journal explained several years ago how cameras are first and foremost set up to generate money, not to promote safety.

And here’s something else that irritates me. I’m guessing that the cops will put a lot of time and energy into tracking down the guy who knocked the cameras out of commission. Why? Because this is an issue that generates revenue for politicians.

Which raises the bigger issue of whether law enforcement resources are wisely allocated. We saw in Florida that local cops ignored dozens of calls and warnings about the nutjob loser who killed the students in Parkland, Florida (the FBI also dropped the ball as well since they were tipped off). I wonder how often those same cops were busy operating speed traps, engaging in asset forfeiture, and otherwise shaking down residents for cash?

The good news is that the heroic vandal who has gone after D.C.’s cameras is just the tip of the iceberg. Arizona residents basically killed a revenue-camera scam with civil disobedience. And Houston voters voted to shut down the shakedown being operated by their city government.

This spirit of resistance should be nationwide.

Here are three closing observations.

1. Let’s hope this guy doesn’t get caught.
2. Let’s also hope that other motorists follow his example and destroy other speed-trap cameras.
3. Finally, let’s hope that a jury will engage in nullification if the guy is caught.

P.S. There’s also a group of people in England who are acting to thwart greedy, grasping government, albeit in a less revolutionary way.

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California Has Many Natural Advantages, but How Long Can It Survive Big Government?

In 2016, here’s some of what I wrote about the economic outlook in Illinois.

There’s a somewhat famous quote from Adam Smith (“there is a great deal of ruin in a nation“) about the ability of a country to survive and withstand lots of bad public policy. I’ve tried to get across the same point by explaining that you don’t need perfect policy, or even good policy. A nation can enjoy a bit of growth so long as policy is merely adequate. Just give the private sector some “breathing room,” I’ve argued.

I subsequently pointed out that politicians in Illinois were doing their best to suffocate the private sector, and also warned that a tax hike would push the state even closer to a day of reckoning.

Let’s apply this same analysis to California.

So here are some excerpts from a column I wrote about the Golden State in 2016

Something doesn’t add up. People like me have been explaining that California is an example of policies to avoid. Depending on my mood, I’ll refer to the state as the France, Italy, or Greece of the United States. But folks on the left are making the opposite argument. … statists…do have a semi-accurate point. There are some statistics showing that California has out-performed many other states over the past couple of years. … California may have enjoyed some decent growth in recent years as it got a bit of a bounce from its deep recession, but it appears that the benefits of that growth have mostly gone to the Hollywood crowd and the Silicon Valley folks. I guess this is the left-wing version of “trickle down” economics.

So what’s happened in California since I wrote that article?

Well, lots of California-type policies.

• Huge cost overruns on a boondoggle train project that unfortunately is being partially subsidized by Uncle Sam (i.e., the rest of us).
• Flirtation with a single-payer healthcare plan that would be such a fiscal disaster that even Vermont deep-sixed the idea.
• Legalizing marijuana but then imposing such onerous taxes that consumers decide that it smarter to stick with the black market.

And where does that leave the state? Is California heading in the wrong direction faster or slower than Illinois?

Victor Davis Hanson’s column in Investor’s Business Daily has a grim assessment. He explains that California residents pay a lot for lousy government.

Some 62% of state roads have been rated poor or mediocre. There were more predictions of huge cost overruns and yearly losses on high-speed rail — before the first mile of track has been laid. One-third of Bay Area residents were polled as hoping to leave the area soon. Such pessimism is daily fare, and for good reason. The basket of California state taxes — sales, income and gasoline — rates among the highest in the U.S. Yet California roads and K-12 education rank near the bottom. …One in three American welfare recipients resides in California. Almost a quarter of the state population lives below or near the poverty line. Yet the state’s gas and electricity prices are among the nation’s highest. One in four state residents was not born in the U.S. Current state-funded pension programs are not sustainable. California depends on a tiny elite class for about half of its income tax revenue. Yet many of these wealthy taxpayers are fleeing the 40-million-person state, angry over paying 12% of their income for lousy public services.

In effect, statist policies have created two states, one for the rich and the other for the poor.

…two antithetical Californias. One is an elite, out-of-touch caste along the fashionable Pacific Ocean corridor that runs the state and has the money to escape the real-life consequences of its own unworkable agendas. The other is a huge underclass in central, rural and foothill California that cannot flee to the coast and suffers the bulk of the fallout from Byzantine state regulations, poor schools and the failure to assimilate recent immigrants from some of the poorest areas in the world. The result is Connecticut and Alabama combined in one state.

Jonah Goldberg is not quite as pessimistic. He opines that the state has certain natural advantages that help it survive bad policy.

California attracts an enormous number of rich people who think it’s worth the high taxes, awful traffic, and even the threat of tectonic annihilation to live there — for reasons that literally have nothing to do with the state’s liberal policies. Indeed, most of the Californians I know live there despite those policies, not because of them. No offense to South Dakota, but if it adopted the California model of heavy regulation, high taxes, and politically correct social engineering, there’d be a caravan of refugees heading to states such as Wyoming and Minnesota. …Wealthy liberal Californians can be quite smug about how they can afford their strict land-use policies, draconian environmental regulations, and high taxes. And wealthy Californians can afford them — but poor Californians are paying the price.

Regarding the state’s outlook, I’m probably in the middle. Goldberg is right that California is a wonderful place to live, at least if you have plenty of money. But Hanson is right about the deteriorating quality of life for the non-rich.

Which may explain why a lot of ordinary people are packing up and leaving.

A columnist from the northern part of the state writes about the exodus of the middle class.

The number of people packing up and moving out of the Bay Area just hit its highest level in more than a decade. …Operators of a San Jose U-Haul business say one of their biggest problems is getting its rental moving vans back because so many are on a one-way ticket out of town. …Nationwide, the cities with the highest inflows, according to Redfin are Phoenix, Las Vegas, Atlanta, and Nashville.

And a columnist from the southern part of the state also is concerned about the middle-class exodus.

All around you, young and old alike are saying goodbye to California. …2016 census figures showed an uptick in the number of people who fled…the state altogether. …Las Vegas is one of the most popular destinations for those who leave California. It’s close, it’s a job center, and the cost of living is much cheaper, with plenty of brand-new houses going for between $200,000 and $300,000. …”There’s no corporate income tax, no personal income tax…and the regulatory environment is much easier to work with,” said Peterson. …Nevada’s gain, our loss.

What could immediately cripple state finances, though, is out-migration by the state’s sliver of rich taxpayers. Especially now that there’s a limit on how much the federal tax system subsidizes California’s profligacy.

Here are some worrisome numbers, as reported by the Sacramento Bee.

Will high taxes lead the state’s wealthiest residents to flee the Golden State for the comparable tax havens of Florida, Nevada and Texas? Republicans reliably raise that alarm when Democrats advocate for tax increases, like the 2012 and 2016 ballot initiatives that levied a new income tax on very high-earning residents. But now, with the federal tax bill cutting off deductions that benefited well-off Californians, the state’s Democrats suddenly are singing the GOP song about a potential millionaire exodus. …Democratic state lawmakers are worried because California relies so heavily on the income taxes it collects from high earners to fund government services. The state’s wealthiest 1 percent, for instance, pay 48 percent of its income tax, and the departure of just a few families could lead to a noticeable hit to state general fund revenue. …Among high-income brackets, about 38 percent of Californians who earn more than $877,560 – the top 1 percent – would see a tax hike. About 25 percent of Californians earning between $130,820 and $304,630, also would see a tax increase… “The new tax law is kind of like icing on the cake for some who were thinking about moving out of the state,” said Fiona Ma, a Democrat on the tax-collecting Board of Equalization who is running for state treasurer. …Joseph Vranich, who leads an Orange County business that advises people on where to locate their businesses, called the tax law “one more nail in the coffin” that would cause small- and middle-size entrepreneurs to leave California.

Politicians and tax collectors get resentful when the sheep move away so they no longer can be fleeced.

This powerful video from Reason should be widely shared. Thankfully it has a (mostly) happy ending.

One of the reasons the state has awful tax policy is that interest groups have stranglehold on the political system. And that leads to ever-higher levels of spending.

Writing for Forbes, for example, Josh Archambault examines the surge of Medicaid spending in the state.

Over the past ten years, Medicaid spending in California has almost tripled, growing from $37 billion per year to a whopping $103 billion per year—including both state and federal funding. And things have only accelerated since the state expanded Medicaid to a new group of able-bodied adults. …nearly 4 million able-bodied adults are now collecting Medicaid, which was once considered a last-resort safety net for poor children, seniors, and individuals with disabilities. …California initially predicted that its ObamaCare expansion would cost roughly $11.6 billion in the first three fiscal years of the program. The actual cost during that time? An astounding $43.7 billion. …Though California represents only 12 percent of the total U.S. population, it receives more than 30 percent of all Medicaid expansion spending.

And the Orange County Register recently opined about the ever-escalating expenses for a gilded class of state bureaucrats.

California’s annual state payroll grew by 6 percent in 2017, an increase of $1 billion and twice the rate of growth of the previous year. …Employee compensation is one of the largest components of the General Fund budget. In 2015-16, salaries and benefits accounted for about 12 percent of expenditures from the General Fund, a total of over $13 billion. …pay increases drive up pension costs. …The administration estimated that the annual cost to the state for the pay raises would be $2 billion by 2020-21, but the LAO said that didn’t take into account the higher overtime costs that would result from higher base pay, or the extra pension costs from that overtime. …if an economic downturn caused state revenues to decline, taxpayers would still have to pay the high and rising salaries for the full length of the contract.

The last sentence is key. I’ve previously pointed out that California has a very unstable boom-bust fiscal cycle. The state looks like it’s in good shape right now, but it’s going to blow up when the next recession hits.

Let’s close by acknowledging that poor residents also pay a harsh price.

Kerry Jackson’s article in National Review is rather depressing.

California — not Mississippi, New Mexico, or West Virginia — has the highest poverty rate in the United States. According to the Census Bureau’s Supplemental Poverty Measure — which accounts for the cost of housing, food, utilities, and clothing, and which includes non-cash government assistance as a form of income — nearly one out of four Californians is poor. …the question arises as to why California has so many poor people… It’s not as if California policymakers have neglected to wage war on poverty. Sacramento and local governments have spent massive amounts in the cause, for decades now. Myriad state and municipal benefit programs overlap with one another; in some cases, individuals with incomes 200 percent above the poverty line receive benefits, according to the California Policy Center. California state and local governments spent nearly $958 billion from 1992 through 2015 on public welfare programs.

That’s probably a partial answer to the question. There’s a lot of poverty in the state because politicians subsidize idleness. In effect, poor people get trapped.

The author agrees.

…welfare reform passed California by, leaving a dependency trap in place. Immigrants are falling into it: Fifty-five percent of immigrant families in the state get some kind of means-tested benefits… Self-interest in the social-services community may be at work here. If California’s poverty rate should ever be substantially reduced by getting the typical welfare client back into the work force, many bureaucrats could lose their jobs. …With 883,000 full-time-equivalent state and local employees in 2014, according to Governing, California has an enormous bureaucracy — a unionized, public-sector work force that exercises tremendous power through voting and lobbying. Many work in social services. …With a permanent majority in the state senate and the assembly, a prolonged dominance in the executive branch, and a weak opposition, California Democrats have long been free to indulge blue-state ideology.

And one consequences of California’s anti-market ideology is that poor people are falling further and further behind.

P.S. If Golden State leftists really do convince their neighbors to secede, I suspect the country would benefit and the state would suffer.

P.P.S. And if California actually chooses to move forward with secession, the good news is that we already have a template (albeit satirical) for a national divorce in the United States.

P.P.P.S. Closing with some California-specific humor, this Chuck Asay cartoon speculates on how future archaeologists will view the state. This Michael Ramirez cartoon looks at the impact of the state’s class-warfare tax policy. And this joke about Texas, California, and a coyote is among my most-viewed blog posts.

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If Scandinavian Nations Are Socialist, so Is the United States

In yesterday’s column, I shared a humorous video mocking the everywhere-its-ever-been-tried global failure of socialism.

And I tried to preempt the typical response of my left-wing friends by pointing out that Scandinavian nations are not role models for statism.

In global ranking of economic liberty, Nordic nations score relatively high, with Denmark and Finland in the top 20. Scandinavian nations have large welfare states, but otherwise have very laissez-faire economic policies. Nordic nations got rich when government was small, but growth has slowed since welfare states were imposed.

Based on some of the emails I received, some critics have a hard time understanding this argument.

All of which is very frustrating since I’ve repeatedly tried to make this point. So I pondered the issue for hours, trying to figure out whether there was some way of helping people grasp the issue.

Maybe this chart from Economic Freedom of the World will help. It shows, based on the five major categories of economic liberty, that the once-significant gap between the United States and Scandinavia has almost completely disappeared.

In other words, anyone who claims that Scandinavian nations are socialist must also think that the United States also is socialist.

To be sure, there are differences. If you look at specific categories of economic liberty, America gets a noticeably better score than Nordic nations on fiscal policy.

But we get a significantly worse score for governance issues such as property rights, corruption, and the rule of law.

We also do a bit worse on trade and slightly better on regulation.

The bottom line is that both the United States and Scandinavian nations are market-oriented, but also saddled with plenty of bad government policies. If that makes us socialist, then what’s the right term for nations where government has a much bigger footprint, such as France, Italy, or Greece?

How about Venezuela and Zimbabwe?

Or North Korea and Cuba?

What I’m saying is that there’s a spectrum and we should be cognizant that there are different degrees of statism. And nations closer to one end are much different from countries closer to the other end.

Plenty of other people make similar arguments about the Nordic countries.

Tim Worstall, writing about Finland for CapX, emphasizes the laissez-faire nature of Scandinavian nations, while also pointing out that there’s a degree of decentralization that makes big government somewhat less inefficient.

…high tax rates do indeed reduce economic growth rates by undercutting incentives. So do interfering bureaucracy and state planning. And so if you’re going to go overboard on one of those two then you’ve got to be minimalist on the other point. In other words, you’ve got to kill off bureaucracy in order to leave room for the tax rates and still have a growing economy. …That is more or less how Finland and other Scandinavians do things. …The other important point is quite how decentralised they all are. …A much larger piece of the pay packet goes to the local government… That money raised locally is then spent locally too. …There’s thus an efficiency to the system, something that gets lost when…people send their cash off to the national government to be distributed without that local accountability. …if you want that Scandi life then you’ve got to do it as they do. Very local government and taxation plus a distinctly less economically interventionist government.

Amen. Local government oftentimes is bad, but it’s rarely as bad as a centralized system.

I also found a must-read 2016 article for FEE by Corey Iacono.

Democratic socialism purports to combine majority rule with state control of the means of production. However, the Scandinavian countries are not good examples of democratic socialism in action because they aren’t socialist. In the Scandinavian countries, like all other developed nations, the means of production are primarily owned by private individuals, not the community or the government, and resources are allocated to their respective uses by the market, not government or community planning. …it is true that the Scandinavian countries provide…a generous social safety net and universal healthcare, an extensive welfare state is not the same thing as socialism. …The Scandinavians embrace a brand of free-market capitalism… The Economist magazine describes the Scandinavian countries as “stout free-traders who resist the temptation to intervene even to protect iconic companies.” …These countries all also rank in the top 10 easiest countries to do business.

If you don’t believe Worstall and Iacono, check out this table of data I prepared back in 2015.

I took the Economic Freedom of the World rankings and I removed the variables for fiscal policy.

And what you find is that Denmark, Sweden, and Finland were all in the top 10 for economic liberty. And Norway was #14.

That’s compared to #24 for the United States.

Heck, there were plenty of other European nations that ranked as being more free market than the United States.

So we should be grateful that we only have a medium-sized welfare state. Because our better score on fiscal policy helps to offset our comparatively anemic scores on the other four variables.

Having pointed out that the United States now has only a rather small advantage over Scandinavian nations when looking at all five measures of economic liberty, that’s still better than nothing.

It probably explains, for instance, why Americans of Scandinavian descent earn so much more than their cousins who remained back home.

And why Americans of all backgrounds generally enjoy higher living standards than folks in Europe, even the ones in Nordic nations.

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Socialism Humor

I like to share examples of political/policy humor, including self-deprecating jokes that poke fun at libertarians (we may be dorky, but at least we don’t want to control your life!).

But I have a challenge. When sharing jokes that make mock leftist economics, I have to decide whether something is socialist humor, communist humor, or generic anti-leftist or anti-Democrat humor. And that’s sometimes not easy because the technical definition of socialism (government ownership of the means of production) makes it very similar to communism, but the man-on-the-street definition of socialism (a big welfare state) makes it very similar to Obamanomics or Clintonomics (Hillary, not Bill).

Well, whoever put this together wants us to believe that there’s no difference between Democrats and socialists, which is arguable (as Debbie Wasserman-Schultz will agree). But I think the part about the difference between socialism and communism is very clever.

Kudos to whoever created this. I wrote an entire column on the difference between liberal socialism and Marxist socialism, but this gets across the same point much more succinctly.

Moving on, I’m convinced that many of my leftist friends support bad policy because they have the mistaken view that the economy is a fixed pie. And when they start with that inaccurate assumption, they naturally think that a rich person’s wealth means poverty for others.

And that’s reflected in this comparison.

By the way, some people do get expensive houses under socialism, and you can probably guess which ones.

Our next image wins the prize for subtle humor.

Though I’m guessing Bernie didn’t laugh at this practical application of his philosophy.

Next, from Reddit’s libertarian page, here’s an image that mocks the endless failure of statist economics. Yes, I realize that Venezuelan statism and North Korean statism aren’t the same (and that Ukraine is a failed kleptocracy more than anything else), but the broad point about the failure of big government makes this meme worth sharing.

And since we’re on the topic of how big government fails everyplace where it’s tried, let’s conclude today with a video that was turned into humor by the addition of a five-word caption.

At the risk of injecting some serious discussion into today’s column, allow me to preemptively address the leftist argument that Scandinavian nations show that socialism can work.

• In global ranking of economic liberty, Nordic nations score relatively high, with Denmark and Finland in the top 20.
• Scandinavian nations have large welfare states, but otherwise have very laissez-faire economic policies.
• Nordic nations got rich when government was small, but growth has slowed since welfare states were imposed.

P.S. If you want even more socialism humor, click here, here, here, here, here, here, here, here, here, and here.

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When America’s Fiscal Crisis Hits, Be Forewarned that Tax Increases Will Make a Bad Situation Worse

At some point in the next 10 years, there will be a huge fight in the United States over fiscal policy. This battle is inevitable because politicians are violating the Golden Rule of fiscal policy by allowing government spending to grow faster than the private sector (exacerbated by the recent budget deal), leading to ever-larger budget deficits.

I’m more sanguine about red ink than most people. After all, deficits and debt are merely symptoms. The real problem is excessive government spending.

But when peacetime, non-recessionary deficits climb above $1 trillion, the political pressure to adopt some sort of “austerity” package will become enormous. What’s critical to understand, however, is that not all forms of austerity are created equal.

The crowd in Washington reflexively will assert that higher taxes are necessary and desirable. People like me will respond by explaining that the real problem is entitlements and that we need structural reform of programs such as Medicaid and Medicare. Moreover, I will point out that higher taxes most likely will simply trigger and enable additional spending. And I will warn that tax increases will undermine economic performance.

Regarding that last point, three professors, led by Alberto Alesina at Harvard, have unveiled some new research looking at the economic impact of expenditure-based austerity compared to tax-based austerity.

…we started from detailed information on the consolidations implemented by 16 OECD countries between 1978 and 2014. …we group measures in just two broad categories: spending, g, and taxes, t. …We distinguish fiscal plans between those that are expenditure based (EB) and those that are tax based (TB)… Measuring the macroeconomic impact of a plan requires modelling the relationship between plans and macroeconomic variables.

Here are their econometric results.

There is a large and statistically significant difference between the effects on output of EB and TB austerity. EB fiscal consolidations have, on average, been associated with a very small downturn in output growth: a spending based plan worth one percent of GDP implies a loss of about half of a percentage point relative to the average GDP growth of the country, which lasts less than two year. Moreover, if an EB austerity plan is launched when the economy is not in a recession, the output costs are zero on average. …On the other hand TB plans are associated with large and long lasting recessions. A TB plan worth one per cent of GDP is followed, on average, by a two percent fall in GDP relative to its pre-austerity path. This large recessionary effect lasts several years.

Here’s a chart from the study showing that economic performance drops farther and farther to the extent taxes are part of an austerity package.

In addition to the core results, the authors explain why tax-based austerity packages are bad for capital…

…investment growth responds very differently following the introduction of the two types of austerity plans. It responds positively to EB plans and negatively to TB plans. …in their sample of OECD countries, business confidence increases immediately at the start of an EB consolidation plan, much more so that at the beginning of a TB plan.

…and why tax-based austerity packages are bad for labor.

…clearly tax hikes and spending cuts – beyond other effects – have different effects on labor supply. …EB plans are the least recessionary the longer lived is the reduction in government spending. Symmetrically, TB plans are more recessionary the longer lasting is the increase in the tax burden and thus in distortions.

Since capital and labor are the two factors of production, the obvious and inevitable conclusion is that the economy does worse when taxes are higher.

The study also make a critical point about the futility of tax increases when the burden of government spending is rising faster than the private sector. Simply stated, that’s a recipe for ever-increasing taxes, sort of like a dog chasing its tail.

…a TB plan which does not address the automatic growth of entitlements and other spending programs which grow over time if much less like likely to produce a long lasting effect on the budget. If the automatic increase of spending is not addressed, taxes will have to be continually increased to cover the increase in outlays.

That’s why spending restraint is the only way to successfully address red ink.

It doesn’t even require dramatic spending cuts, even though that would be desirable. All that’s needed is some modest fiscal restraint so that spending grows slower than the productive sector of the economy.

Nations that follow this approach for a multi-year period always get good results. But if you want examples of nations that have achieved good outcomes with tax increases, you’ll have to explore a parallel universe because there aren’t any on this planet.

P.S. I need to update the table because both the United States (between 2009-2014) and the United Kingdom (between 2010-2016) enjoyed dramatic improvements in fiscal outcomes in recent years because of spending restraint.

P.P.S. Politicians don’t like spending restraint, which is why most periods of good fiscal policy come to an end. To achieve good long-run outcomes, some sort of constitutional spending cap is probably necessary.

P.P.P.S. The study cited above builds upon research I cited in 2016.

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ECB Research: Pro-Market Reforms Generate Very Positive Results, but not Overnight Miracles

I wrote three days ago about the worst-international-bureaucracy contest between the International Monetary Fund and the Organization for Economic Cooperation and Development.

A reader emailed to ask me whether I had a favorite international bureaucracy. I confess I’ve never given that matter any thought. My gut-instinct answer would be the World Trade Organization since its mission is to discourage protectionism.

But I’m also somewhat fond of the European Central Bank, both because the euro has been better than many of the currencies it replaced and because the ECB often publishes good research.

• Two studies (here and here) on the benefits of spending caps.
• Two studies (here and here) showing small government is more efficient.
• Two studies (here and here) on how large public sectors retard growth.
• And also studies on the adverse impact of regulation, bureaucracy, and welfare.

And here’s a study on regulation to add to the collection. The European Central Bank published a working paper that looks at the effect of selected pro-market reforms. Here’s their methodology.

In this paper, we investigate the relationship between a wide range of structural reforms and economic performance over a ten-year time horizon. …we identify 23 episodes of wide-reaching structural reform implementation (so-called “reform waves”). These are based on a database…which provides detailed information on both real and financial sector reforms in 156 advanced and developing countries over a 40 year period. Indicators considered specifically cover trade-, product market-, agriculture-, and capital-account liberalisation, together with financial and banking sector reform. Then, we track top-reforming countries over the 10 years following adoption and estimate the dynamic impact of reforms.

And here’s an excerpt that describes the theoretical assumptions.

…orthodox economic theory has made a strong case for structural reforms, identified as measures aimed at removing supply-side constraints in an economy. This in turn would favour efficient factor allocation and contribute to medium- to long-term growth. Such measures include, but are not limited to, product and labour market liberalisations, current and capital account openness, and financial liberalisation. For a long time, a collection of these policies has fallen under the name of Washington Consensus.

I agree with this theory, though allow me to elaborate.

The Fraser Institute’s Economic Freedom of the World is the gold standard when looking at overall economic policy. It considers five major factors – fiscal policy, trade policy, regulatory policy, monetary policy, and governance policy (indicators such as rule of law and property rights).

The “Washington Consensus” also is based on good policy, but it undervalues the importance of a small burden of government spending.

But I’m digressing. Let’s return to the ECB study, which basically looks at the impact of trade liberalization and deregulation. Here’s what the authors found.

Our main findings are as follows: on average, reforms had a negative but statistically insignificant impact in the short term. This slowdown seems to be connected to the economic cycle, and the tendency to implement reforms during a downturn, rather than an effect of reforms per se. Reforming countries however experienced a growth acceleration in the medium-term. As a result, ten years after the reform wave started, GDP per capita was roughly 6 percentage points higher than the synthetic counterfactual scenario.

Here’s a chart from the study illustrating the positive effect of reform.

And here’s another chart from the ECB report looking at the results from another perspective.

The obvious good news from this research is that we have new evidence about the benefits of pro-market reforms. Boosting economic output by an extra 6.3 percent is nothing to sneeze at. And it reinforces my oft-made point that even small improvements in growth – if sustained over time – can lead to dramatic improvements in living standards.

What might be most noteworthy in this study, however, is the finding that pro-market reforms are associated with a short-run dip in economic performance. The authors suggested that it might be a statistical quirk related to the fact that governments have a “tendency to implement reforms during a downturn”.

That’s certainly plausible, but I’m also open to the notion that good reforms sometimes may have short-run costs. Simply stated, if bad policy has produced a misallocation of labor and capital, then pro-growth reforms are going to cause some temporary disruption.

But unless you’re planning on dying very soon and also don’t care about your heirs, that’s not an argument against reform. For example, I think the housing lobby’s opposition to the flat tax is misguided since every sector will enjoy long-run benefits from faster growth, but it’s certainly possible that residential real estate will endure some short-run weakness as some resources shift to business investment.

Unfortunately, politicians tend to have very short time horizons (i.e., the next election), so they fixate on short-run costs and under-value long-run benefits.

But I’m digressing again. Let’s look at one final passage from the ECB study. For those interested in additional research, there’s a section citing some of the other literature on liberalization and growth.

Post-Soviet countries moving towards a market economy have received considerable attention in this respect. Fischer et al. (1996) looked at 26 transition economies over the period 1989-1994. They conclude that structural reforms played a vital role in reviving economic growth. This finding for transition economies was echoed by de Melo et al. (1996), and more recently by Havrylyshyn and van Rooden (2003) and Eicher and Schreiber (2010). Focussing more broadly on countries implementing wide reform packages covering domestic finance, trade, and the capital account, Christiansen et al. (2013) find a strong impact of the former two on growth in middle-income countries. Moreover, they show how well-developed property rights are a precondition in order to reap fully the benefits of structural reforms. The importance of institutions in explaining cross-country heterogeneity is further remarked by Prati et al. (2013), who illustrate how the positive relationship between structural reforms and growth depends on a country’s constraints on the authority of the executive power. Distance from the technological frontier seems also to play a role.

If you’re not familiar with technological jargon, “distance from the technological frontier” is basically a way of saying that nations with lots of bad policy – and thus lots of misallocated and/or underutilized labor and capital – probably have more ability to enjoy fast growth. Sort of a version of convergence theory.

I also like the reference to “constraints on the authority of the executive power,” which presumably a recognition of the importance of the rule of law.

The bottom line is that the ECB study reconfirms that free enterprise is the answer if the goal is reducing poverty and increasing prosperity.

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Argentina, Trump, and Perón

Since I called Trump a big-government Republican during the 2016 campaign and just condemned his capitulation to a spendaholic budget deal, it goes without saying that I’m not a huge fan of the President.

Heck, I also recently criticized his protectionism, warning that additional barriers to trade could offset the pro-growth effect of lower tax rates.

But I like to think I’m fair in my criticisms. I stay away from the personal stuff (other than for humor purposes) and and simply focus on whether liberty is increasing or decreasing.

Today, though, I want to quasi-defend Trump because a professor from the University of Richmond wrote a really strange column for the Washington Post with a very bizarre assertion about Juan Perón, the populist post-World War II president of Argentina.

It’s en vogue for enraged liberals to compare Trumpism to Argentine Peronism, wielding the analogy as a warning about the potential apocalypse that they fear is about to engulf us. …Like so many familiar historical cliches, however, this one is incomplete, if not downright wrong.

The professor who wrote the piece, Ernesto Semán, wants us to believe Perón is someone to admire, sort of the Argentine version of Bernie Sanders.

…the core of Peronism was a vision that is the exact opposite of Trumpism. Peronism led a process of expanding economic equality, collective organization and political enfranchisement. …Juan Perón presided over a process of massive wealth redistribution on behalf of the emerging working classes. …his government increased its intervention in the economy and provided…free public health care and education for everyone, as well as a wide array of union-managed social services. Peronism enacted strong regulations on private capital… Argentina’s social transformations resembled in some ways those that took place in the United States during the New Deal. Perón certainly thought so…in 1946 quoted entire paragraphs from President Franklin Roosevelt’s second inaugural address.

And he says that today’s Democrats should embrace Perón’s policies.

…comparison of Trumpism to Peronism…ignores how in fundamental ways the two are polar opposites… Instead of fearing Latin American populism, …Democrats should look to it as offering a potential path forward for a more equal and fair country.

Wow. This isn’t quite as bizarre as arguing that Venezuela should be a role model (looking at you, Bernie Sanders, Joe Stiglitz, and others), but it’s close.

Here’s everything you need to know about Peronism, from a 2014 article in the Economist.

The country ranked among the ten richest in the world…its standing as one of the world’s most vibrant economies is a distant memory… Its income per head is now 43% of those same 16 rich economies… As the urban, working-class population swelled, so did the constituency susceptible to Perón’s promise to support industry and strengthen workers’ rights.

Takes a look at this chart from the article showing Argentina’s per-capita GDP relative to other nations. As you can see, the country used to be much richer than Brazil and considerably richer than Japan. And all through the first half of the 20th century, Argentina was not that far behind the United States and other wealthy nations. But then look at the lines starting after Perón came to power in the late 1940s.

In other words, Peronist policies reduced the comparative prosperity of the ordinary people.

Just like similar policies have reduced the comparative prosperity of ordinary people in Venezuela.

What makes these numbers especially powerful is that convergence theory assumes that the gap between rich nations and poor nations should shrink. Yet statist policies are causing the gap to widen.

I put together a chart back in 2011 showing the relative rankings of both Argentina and Hong Kong. As you can see, Argentina used to be one of the world’s richest nations. Indeed, it was the world’s 10th-richest country when Perón took over. And Hong Kong was relatively poor. But look at what’s happened over time. Perón’s statist policies produced a steady decline while Hong Kong’s laissez-faire approach has now made it one of the richest jurisdictions on the planet.

Yet Mr Semán says we should copy Perón. Go figure.

Let’s conclude by circling back to Trump. Semán is upset because some people are equating Trump (who he despises) with Perón (who he admires).

I’m vaguely sympathetic to part of his argument. He’s right that Trump’s version of populism is not the same as Perón’s left-wing version of populism (basically the Bernie Sanders agenda).

But since I care about the less fortunate, I have nothing for disdain for Semán’s assertion that Perón’s policies should be adopted in America.

P.S. Given his remarkable level of  economic illiteracy, you won’t be surprised to learn that Pope Francis was influenced by Peronism.

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Jurisdictional Competition, Mutual Recognition, and European Prosperity

If you’re reading this, you are a very lucky person because you were born at the right time. If you were born 500 years ago, 1000 years ago, or 1500 years ago, the odds are overwhelming that you would have endured a very short and difficult life, one that was characterized by unimaginable poverty.

But then, as explained in short videos by Professors Deirdre McCloskey and Don Boudreaux, the world suddenly became much richer starting a few hundred years ago.

And Western Europe led the way. But why?

In 2012, I shared lots of academic research showing how jurisdictional competition enabled rising levels of prosperity in Europe. And I then augmented that research a few years later by highlighting two very important developments in 1356 that helped set the stage for that competition.

Today, let’s expand on that evidence by looking at some recent analysis.

Here are some excerpts from a fascinating Aeon article by Professor Joel Mokyr.

How and why did the modern world and its unprecedented prosperity begin? …One of the oldest and most persuasive explanations is the long political fragmentation of Europe. …The modern European economic miracle was…neither designed nor planned. …How did this work? In brief, Europe’s political fragmentation spurred productive competition. It meant that European rulers found themselves competing for the best and most productive intellectuals and artisans. …the existence of multiple competing states encouraged scientific and technological innovation. …the rivalries between the states, and their examples to one another, also meliorated some of the worst possibilities of political authoritarianism. …interstate competition was a powerful economic mover. More important, perhaps, the ‘states system’ constrained the ability of political and religious authorities to control intellectual innovation.

Mokyr then explains that the benefits of jurisdictional competition were augmented and enabled by a form of labor mobility.

…political fragmentation was not enough. …more was needed. The size of the ‘market’ that intellectual and technological innovators faced was one element of scientific and technological development that has not perhaps received as much attention it should. …political and religious fragmentation did not mean small audiences for intellectual innovators. Political fragmentation existed alongside a remarkable intellectual and cultural unity. Europe offered a more or less integrated market for ideas, a continent-wide network of learned men and women, in which new ideas were distributed and circulated. …In early modern Europe, national boundaries mattered little in the thin but lively and mobile community of intellectuals in Europe. Despite slow and uncomfortable travel, many of Europe’s leading intellectuals moved back and forth between states. …If Europe’s intellectuals moved with unprecedented frequency and ease, their ideas travelled even faster. …Europe’s unique combination of political fragmentation and its pan-European institutions of learning brought dramatic intellectual changes in the way new ideas circulated. …Europe’s intellectual community enjoyed the best of two worlds, both the advantages of an integrated transnational academic community and a com­petitive states system.

By the way, I don’t consider this the “best of two worlds.” Labor mobility is a feature of jurisdictional competition, so I would say it’s simply one of the benefits. But six of one, half dozen of the other.

Let’s now look at another benefit of capitalism. Here are some passages from a CapX column on how the development of a merchant class constrained militarism. Here’s the thesis.

Although a number of things contributed to the huge decline in violence of the late medieval period, …the development of capitalism, and the rise of a merchant class whose wealth was not won with a sword, played a huge part.

And here’s an example.

This order was first shaken in 1302 when France’s cavalry confidently marched north to suppress a revolt by the Flemish. Flanders is not naturally rich in resources –Vlaanderen means flooded – but its people had turned swamps into sheep pastures and towns, building a cloth industry that made it the wealthiest part of Europe, its GDP per capita 20 per cent greater than France and 25 per cent better than England. …The Flemish were traders, not knights, which is why the French were sure of victory. And yet, with enough money to pay for a large, well-drilled infantry they were able for the first time to destroy the cavalry at the Battle of the Golden Spurs. It was the beginning of the end – no longer could the aristocracy simply push around the bourgeoisie, and as the latter grew in strength so it undermined the violence-obsessed culture of the nobility.

And another example.

European capitalism had begun in northern Italy, chiefly Venice, one of nine Italian cities that had surpassed 50,000 people by this point. …Venice was high in trust, a vital component for the growth of sophisticated markets, and so was the first to develop joint-stock companies and banks. …The Venetians, along with their arch-rivals the Genoese and Pisans, had been involved in the crusades, but despite papal prohibition had continued to trade with the infidel. Indeed, nothing would stop their desire to engage in commerce, and Arab geographer and traveller Ibn Jubayr noted that “It is amazing to see that the fires of discord burn” between Christians and Muslims when it comes to politics but, when trading, travellers “come and go without interference”.

And another case study.

London was behind Italy or Flanders but it was catching up. The city had started to grow as a trading hub in the 12^th century, and its mayor, William Hardel, was the only commoner to witness Magna Carta in 1215 and helped secure Clause 41, which stated that all foreign “merchants are to be safe and secure in departing from and coming to England” without “evil exactions”. London expanded rapidly in the later middle ages, increasing its share of England’s wealth from two to nine per cent, and Henry IV (1399-1413) was the first king to invite its merchants on to the royal council, among them Sir Richard Whittington…the merchants purposefully avoided conflict, so that when in the 1380s Richard II tried to raise an army in the city to fight his various internal enemies he was met with apathy

What makes this analysis especially important is that military conflict is one of the putative downsides of political fragmentation. Indeed, Mokyr mentions that in his article.

I confess I don’t know enough to judge that issue. For instance, I’d like to know if there were there more wars in Europe, or were European wars between countries as opposed to an equal amount of civil wars elsewhere in the world?

In any event, at least there is some evidence that the prosperity generated by capitalism produced resistance to militarism.  Sort of brings to mind Bastiat’s famous statement about trade and war.

(Something to keep in mind given Trump’s self-destructive protectionist impulses.)

Let’s close by looking at Europe today and exploring whether jurisdictional competition on the continent. The good news is that the principle of “mutual recognition” has produced a form of competitive federalism, as explained in an article by Professor Michael Greve.

…the principle of reciprocity and “mutual recognition”…allows decentralized political institutions to coexist with a common, open, and efficient economic market. …cross-border trade…must be governed either by the rules of the country where a particular good or service ends up or by the rules of its origin country. The former “destination” principle would compel each company to comply with different and often conflicting regulations in all the member states where its products might end up. The result is not a common market but a collection of regulatory fiefdoms. The solution to this dilemma is the opposite, origin-based rule: so long as a company in a member state complies with the laws of its home state, it may freely sell its goods and services in other member states. …the origin principle…is commonly called the principle of “mutual recognition.” …it is the only principle that is consistent with both a common economic market and political decentralization. Mutual recognition integrates member states without central intervention. …Mutual recognition, then, liberates commerce by eliminating the cost of complying with different, conflicting, and often incomprehensible rules. Beyond that, mutual recognition institutionalizes jurisdictional competition. …The ability of individuals and firms to vote with their feet, modems, and pocketbooks will liberate markets and discipline politicians. …Trade unions, environmental interests, and any other interest group whose agenda rests on redistribution consistently oppose mutual recognition: they cannot rob Peter to pay Paul if Peter is allowed to escape to more hospitable climes.

Incidentally, the “origin principle” is at the core of the battle over the so-called Streamlined Sales Tax Proposal, a scheme by certain state governments to impose destination-based tax laws on out-of-state merchants.

And that principle also was a big reason for my fight against the border-adjustment tax, which was a destination-based levy.

For what it’s worth, Europe generally has been better than the United States about using the origin-based approach.

Europeans [are] ahead of the United States in viewing mutual recognition as an efficient means of harmonizing, as it were, the demands of economic integration and political diversity. Here at home, mutual recognition governs corporate chartering—but almost nothing else. Tort law, insurance and financial regulation, state taxation, product labeling, and most other areas of regulation are either subject to a destination rule or else preempted under federal law. No American legislator or corporate executive has ever heard of mutual recognition, let alone pressed it as a serious policy option.

Insurance regulation is a key example. Many states impose costly mandates that drive up the cost of health insurance. But if consumers had the freedom to buy health insurance from companies based in more market-oriented states, they would be able to save money.

Unfortunately, statists in Europe are moving in the wrong direction, seeking to replace mutual recognition with one-size-fits-all harmonization.

The European political class is bent on establishing pan-European, sovereign political institutions. …As political aspirations begin to dominate the process of European integration, mutual recognition will be jettisoned. …Habermas denounces the premises on which mutual recognition rests as the “building blocks of a neoliberal world view,” and he declares them at odds with “the Europeans’ normative self-understanding.” The European Union must therefore construct a European society of citizens, a pan-European “public sphere,” and a shared European political culture…precisely to confine economic competition and choice to a subordinate sphere. …the Europeans will harmonize their way toward a common constitution and citizenship, with dental care for all.

If the centralizers in Europe succeed (and they’ve already moved policy in the wrong direction), that will not bode well.

Europe already faces severe challenges because of excessive government and bad demographics.

Harmonization will exacerbate the problem of too much government because the “stationary bandit” no longer will face competitive pressure.

So “goldfish government” will become one step closer to reality.

P.S. This helps to explain my support for Brexit.

P.P.S. Speaking of Brexit, here’s a UKIP member of the European Parliament expounding on the benefits of mutual recognition over harmonization.

P.P.P.S. Mutual recognition also allows for regulatory diversity, which reduces systemic risk.

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The International Monetary Fund Doubles Down on a Pro-Tax Agenda

The worst-international-bureaucracy contest is heating up.

In recent years, the prize has belonged to the Paris-based Organization for Economic Cooperation and Development for reasons outlined in this interview. Indeed, I’ve even argued that subsidies for the OECD are the worst expenditure in the federal budget, at least when measured on a damage-per-dollar-spent basis.

But the International Monetary Fund stepped up its game in 2017, pushing statism to a much higher level.

• In June, I wrote about the IMF pushing a theory that higher taxes would improve growth in the developing world.
• In July, I wrote about the IMF complaining that tax competition between nations is resulting in lower corporate tax rates.
• In October, I wrote about the IMF asserting that lower living standards are desirable if everyone is more equally poor.
• Also in October, I wrote about the IMF concocting a measure of “fiscal space” to justify higher taxes across the globe.
• In November, I wrote about the IMF publishing a study expanding on its claim that equal poverty is better than unequal prosperity.

And the IMF is continuing its jihad against taxpayers in 2018.

The head bureaucrat at the IMF just unleashed a harsh attack on the recent tax reform in the United States, warning that other nations might now feel compelled to make their tax systems less onerous.

IMF Managing Director Christine Lagarde said the Trump administration’s $1.5 trillion tax cut could prompt other nations to follow suit, fueling a “race to the bottom” that risks hemming in public spending. …It also will fuel inflation, she said. “What we are beginning to see already and what is of concern is the beginning of a race to the bottom, where many other policy makers around the world are saying: ‘Well, if you’re going to cut tax and you’re going to have sweet deals with your corporates, I’m going to do the same thing,”’ Lagarde said.

Heaven forbid we have lower tax rates and more growth!

Though the really amazing part of that passage is that Ms. Lagarde apparently believes in the silly notion that tax cuts are inflationary. Leftists made the same argument against the Reagan tax cuts. Fortunately, their opposition we ineffective, Reagan slashed tax rates and inflation dramatically declined.

What’s also noteworthy, as illustrated by this next excerpt, is that Lagarde doesn’t even bother with the usual insincere rhetoric about using new revenues to reduce red ink. Instead, she openly urges more class-warfare taxation to finance ever-bigger government.

The IMF chief’s blunt assessment follows an unusually public disagreement between the fund and President Donald Trump’s administration last fall over an IMF paper arguing that developed nations can share prosperity more evenly, without sacrificing growth, by shifting the income-tax burden onto the rich. Competitive tax cuts risk holding back governments in spending on anything from defense and infrastructure to health and education, Lagarde said.

What makes her statements so absurd is that even IMF economists have found that higher taxes and bigger government depress economic activity. But Ms. Largarde apparently doesn’t care because she’s trying to please the politicians who appointed her.

By the way, keep in mind that Ms. LaGarde’s enormous salary is tax free, as are the munificent compensation packages of all IMF employees. So it takes enormous chutzpah for her to push for higher taxes on the serfs in the economy’s productive sector.

But it’s not just Lagarde. We also have a new publication by two senior IMF bureaucrats that urges more punitive taxes on saving and investment.

Although Thomas Piketty has famously proposed a coordinated global wealth tax of the wealthiest at two percent, there are now very few effective explicit wealth taxes in either developing or advanced economies. Indeed between 1985 and 2007, the number of OECD countries with an active wealth tax fell from twelve to just four. And many of those were, and are, of limited effectiveness. …This hot topic of how tax systems can assist in addressing excessive increases in wealth inequality was discussed at the regular IMF-World Bank session on taxation last October. …some among the very rich recognize some social benefit from being taxed more heavily (for instance, Bill Gates’ father). Perhaps then there is more that can be done to foster that sense of social responsibility… The exchange of tax information between countries is a powerful tool…and perhaps ultimately game-changing approach to the taxation of the wealthy…we do see good cause to be less pessimistic than even a few years ago.

Once again, we can debunk the IMF by….well, by citing the IMF. The professional economists at the bureaucracy have produced research showing that discriminatory taxes on capital are very bad for prosperity.

But the top bureaucrats at the organization are driven by either by statist ideology or by self interest (i.e., currying favor with the governments that decide senior-level slots).

The bottom line is that perhaps the IMF should be renamed the Anti-Empirical Monetary Fund.

And with regards to worst-international-bureaucracy contest, I fully expect the OECD to quickly produce something awful to justify its claim to first place.

P.S. I’m not a fan of the United Nations, but that bureaucracy generally is too ineffective to compete with the IMF and OECD.

P.P.S. The World Bank also does things I don’t like (as well as some good things), but it generally doesn’t push a statist policy agenda, at least compared to the nefarious actions of OECD and IMF.

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Bureaucrats Behaving Badly

Time for a confession.

I routinely mock bureaucrats, but I don’t really think they are any worse than other people. Indeed, I have plenty of friends and acquaintances who work for various levels of government and they are fundamentally decent people.

The real problem is that bureaucracies create bad incentives. So even people who are generally good will be tempted to exploit rules that reward bad behavior.

And some of these folks, operating in systems with bad incentives, will morph into bad people. Heck, some of them are so awful that I elect them to the Bureaucrat Hall of Fame.

But it’s also important to recognize other bureaucrats – as well as the perverse rules that encourage their bad actions.

Let’s start with a cop in New Jersey who went above and beyond the call of duty, at least if the call of duty involves ripping off taxpayers.

…former Police Chief Philip Zacche…could spend the first decade of his retirement in federal prison after he admitted to stealing $31,713 from an agency that serves the city’s neediest families. Federal prosecutors said Friday that Zacche filled out phony time sheets to get paid for security work that he never performed for the Jersey City Housing Authority. …As a member of the department’s brass, Zacche pulled a six-figure salary before overtime. He earned even more by working an off-duty part-time gig as a security officer for the Authority’s Marion Gardens housing development. When he retired in June, city taxpayers had to cut Zacche a check for $512,620 to compensate him for 450 unused comp and vacation days. The 61-year-old Manalapan resident is now set to collect a pension of at least $11,946 every month for the rest of his life.

That’s a pension of more than $140,000 per year. And he gets it well before age 65. No wonder New Jersey is a fiscal mess.

Let’s also highlight a senior federal bureaucrat who specialized in exploiting immigrants to steal money.

A chief counsel at US Immigration and Customs Enforcement (ICE) has admitted stealing immigrants’ identities to defraud banks. Raphael Sanchez, 44, forged identity documents on his government computer to open bank accounts and credit cards in the names of seven immigrants. He racked up more than $190,000 (£135,000) in personal loans, transferred funds and card-spending during the four-year scam. …He claimed three were dependent relatives on his tax returns for 2014 to 2016. …He resigned from his role at the ICE’s Office of the Principal Legal Advisor after his crimes came to light.

I’m almost impressed by this guy’s depravity. Not only did he steal identities, but he even listed some of the victims as dependents on his tax return. That’s real chutzpah!

And notice that theft and fraud apparently are not enough to get a bureaucrat fired. Instead, he resigned.

And since we’re on the topic of bureaucrats doing bad things and not getting fired, we may as well note that the guy who sent the false alert in Hawaii is still getting checks from the taxpayers he terrified.

The worker who sent a false missile alert to Hawaiian residents on Saturday has reportedly been reassigned. The civil defence employee has been moved to another role, but not fired, according to multiplemedia reports. In a press conference on Saturday, the head of Hawaii’s Emergency Management Agency, Vern Miyagi, said the worker “feels terrible.” …The Post also confirmed that there are no plans to fire the employee.

Here’s a fourth example, dealing with a former Obama appointee who was unmasked for screwing taxpayers.

Vikrum Aiyer liked to commute to his government job by taxi. On at least 130 occasions over two years — the majority during a four-month stretch in 2016 — the then-chief of staff for the U.S. Patent and Trademark Office called a taxi to pick him up near his home in the District. He was chauffeured across the Potomac River 10 miles or so to the agency’s headquarters in downtown Alexandria. And then…Aiyer billed the government for each ride. To escape notice, Aiyer impersonated current and former high-level agency officials, writing their names on cab receipts and vouchers he submitted to the taxi company, which then billed the government, investigators found. …Aiyer…released a statement saying he had a “misunderstanding of agency taxi rules.”

Hmmm…, I think I’ll go to the grocery store later today and slip a couple of steaks into my jacket. If I get caught leaving the store, I’ll say I had a “misunderstanding of store rules.”

The good news, at least if we’re grading on a curve, is that it only took about two years for the government to realize what was happening.

Aiyer’s unauthorized rides apparently went unnoticed for at least two years by budget officials who reviewed the invoices from Alexandria Yellow Cab, which has a contract to provide authorized taxi services for agency officials. The patent office paid the taxi company more than $4,000 for Aiyer’s rides, the report says. …For most of the cab rides, Aiyer was picked up on a street corner a tenth of a mile from his home, according to the report. But he wrote on the invoice that he was leaving from Commerce Department headquarters in downtown Washington. …investigators found…that he “used the Agency’s Cab Company account to facilitate his weekend social activity… Aiyer also racked up $15,000 in expenses on his government-issued credit card, charging for food and drink at local bars, clubs, coffee shops, restaurants, grocery stores, dry cleaners and at least one liquor store, the report said. …The report says he also misstated his educational credentials on résumés he submitted to the Obama administration, claiming to have a postgraduate degree that he did not receive.

By the way, the article mentioned that Aiyer was a technology adviser for the White House. Did he advise on how to lie on your resume and how to get taxpayers to finance one’s social life?

A common problem in most of these stories is that politicians and bureaucrats conspire together to create rules that enable bad behavior.

Government employee unions, for instance, give lots of money to politicians and then sit down with those lawmakers to “negotiate” pay and benefit packages.

Needless to say, the interests of taxpayers don’t get represented. And that’s why many state and local governments are careening toward bankruptcy.

What’s especially discouraging is how these deals often include loopholes that are designed to be exploited.

For instance, the Los Angeles Times has a very depressing exposé showing how senior bureaucrats in the police and fire departments benefited from a scam allowing them to double dip. But not just double dip. They get extra compensation and oftentimes then don’t do any work.

When Capt. Tia Morris turned 50, after about three decades in the Los Angeles Police Department, she became eligible to retire with nearly 90% of her salary. But like many cops and firefighters in her position, the decision to keep working was a financial no-brainer, thanks to a program that allowed her to nearly double her pay by keeping her salary while also collecting her pension. A month after Morris entered the program, her husband, a detective, joined too. Their combined income for four years in the Deferred Retirement Option Plan was just shy of $2 million, city payroll records show. But the city didn’t benefit much from the Morrises’ experience: They both filed claims for carpal tunnel syndrome and other cumulative ailments about halfway through the program. She spent nearly two years on disability and sick leave; he missed more than two years… The couple spent at least some of their paid time off recovering at their condo in Cabo San Lucas.

Yes, I’m sure they were “recovering” at their luxurious place on the beach.

Just like the other bureaucrats who exploited the system.

The Morrises are far from alone. In fact, they’re among hundreds of Los Angeles police and firefighters who have turned the DROP program — which has doled out more than $1.6 billion in extra pension payments since its inception in 2002 — into an extended leave at nearly twice the pay… Former Police Capt. Daryl Russell, who collected $1.5 million over five years in the program, missed nearly three of those years because of pain from a bad knee, carpal tunnel and multiple injuries he claimed he suffered after falling out of an office chair. …Former firefighter Thomas Futterer, an avid runner who lives in Long Beach, hurt a knee “misstepping off the fire truck,” three weeks after entering DROP, according to city records. The injury kept him off the job for almost a full year.Less than two months after the knee injury, a Tom Futterer from Long Beach crossed the finish line of a half-marathon in Portland, Ore.

Yes, you read correctly. His knee supposedly was so damaged that he couldn’t work, but he nonetheless runs long-distance races.

I’m beginning to think that firefighters in big cities are the most cossetted of all bureaucrats. I now understand the hostility in this video.

Here’s some background on the DROP scam.

The idea of allowing retirement-age public employees to collect their pensions while working and receiving paychecks originated more than three decades ago in tiny East Baton Rouge, La. …the goal was the opposite: to discourage older employees from staying so long that they limited upward mobility for younger workers. And it had a two-year time limit. Since then, versions of the program have been adopted by dozens of states, counties and cities across the country. The details vary — some have short terms to encourage early retirement, others have long terms to retain experience — but the central appeal for employees is constant: two large checks instead of one. …former Mayor Richard Riordan…said: “Oh, yeah, that was a mistake…it’s total fraud.” …in recent years, a growing number of jurisdictions have abandoned or drastically scaled back DROP programs because the math doesn’t work. …Instead of saving money, or remaining “cost-neutral,” the programs lead to ballooning pension costs and accusations that employees are simply double-dipping.

Needless to say, the taxpayers who finance all this aren’t treated nearly as well as government insiders.

When most Los Angeles taxpayers reach the standard retirement age, 65, they face a stark choice: keep working and collecting their paychecks or quit and start collecting Social Security, which replaces only a small fraction of annual wages for most people.When city firefighters or police officers reach their retirement age, 50, the choices are far better. They can keep working for a paycheck, they can retire with up to 90% of their salary in pension and city-subsidized health insurance for life, or they can enter DROP. For many, the choice is easy. …they keep working and collecting their paychecks for up to five years while their pension checks are deposited into a special account. …the city guarantees 5% interest on the money in the account. The city also adds annual cost-of-living raises to the pension checks to make sure they keep pace with inflation.

Disgusting.

Let’s close by speculating whether Trump will do anything to fix this mess, at least the part that occurs on the federal level.

Some pro-Trump readers sent me this story from the Washington Post and suggested it shows that the President is making progress.

…a year into his takeover of Washington, President Trump has made a significant down payment on his campaign pledge to shrink the federal bureaucracy… By the end of September, all Cabinet departments except Homeland Security, Veterans Affairs and Interior had fewer permanent staff than when Trump took office in January — with most shedding many hundreds of employees, according to an analysis of federal personnel data… The falloff has been driven by an exodus of civil servants, a diminished corps of political appointees and an effective hiring freeze. …Federal workers fret that their jobs could be zeroed out amid buyouts and early retirement offers that already have prompted hundreds of their colleagues to leave, according to interviews with three dozen employees across the government. Many chafed as supervisors laid down new rules they said are aimed at holding poor performers and problem workers to account. …“Morale has never been lower,” said Tony Reardon, president of the National Treasury Employees Union, which represents 150,000 federal workers at more than 30 agencies. “Government is making itself a lot less attractive as an employer.”……Agencies have told employees that they should no longer count on getting glowing reviews in their performance appraisals, according to staff in multiple offices, as has been the case for years. Housing and Urban Development managers, for example, are being evaluated for the first time on how effectively they address poor performers.

If I was planning to die in the next month, I would probably agree with readers that Trump made progress in this area.

But as I wrote last year, the only way to successfully shrink bureaucracy in the long run is to shrink government.

Yet Trump just capitulated to a budget deal that increases spending.

I’m willing to praise this President when he does good things, but his weak record on spending almost surely is going to translate into a bigger bureaucracy over time. Though I hope I’m wrong.

Here are two final additional passages from the story that deserve some attention. Starting with an honest bureaucrat.

…some civil servants said they welcome the focus on rooting out waste and holding federal workers to high standards. “Oftentimes we run on autopilot and continue to fund programs that don’t produce the results that were intended,” said Stephanie Valentine, a program analyst at the Education Department. “You can’t keep blindly spending because that’s what we’ve always done.”

And since I’ve previously contrasted Bill Clinton’s good record and Obama’s bad record, this passage is added confirmation of my findings.

Trump already has begun to reverse the growth of the Obama era, when the government added a total of 188,000 permanent employees, according to Office of Personnel Management data. …The last time federal employment dropped during a president’s first year, President Bill Clinton was in the White House.

It’s also worth noting that the bureaucracy didn’t contract during the big-government Bush years.

I’ll conclude by circling back to my original point. Most bureaucrats are no better or no worse than the rest of us. Given the perverse “public choice” incentives inherent in government, however, the good bureaucrats often are lured into bad behavior and the bad bureaucrats frequently become scam artists and crooks.

P.S. If my conclusion was too grim and pessimistic, you can cheer yourself up with another example of bureaucrat humor.

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Name-Calling Contest Between Libertarians and Leftists: Autistic Dorks vs. Ugly Weaklings

In TV debates, I’ve asserted that folks on the left are “neurotic” and “guilt-ridden.” And I shared a make-believe divorce agreement that exploited every negative stereotype about left wingers.

So I’m not averse to philosophical mockery, at least if it’s done with humor rather than malice.

As you might imagine, this is a two-way street. Folks on the other side make fun of libertarians quite frequently.

And not always with a smile. According to one leftist academic, we are borderline autistic.

Speaking at New York City’s Unitarian Church of All Souls…, MacLean…answered an audience member’s question about the motivations of the late economist James Buchanan, whom she considers to be one of the founders of libertarianism. In response, she suggested that Buchanan might have been on the “autism spectrum.” “It’s striking to me how many of the architects of this cause seem to be on the autism spectrum,” she said an hour into the talk. “You know, people who don’t feel solidarity or empathy with others and who have difficult human relationships sometimes.”

I don’t know anything about how autism is measured, so I can’t agree or disagree with her assertion. Though I’m tempted to reflexively disagree because MacLean’s book on Buchanan was incredibly shoddy.

But I will admit that libertarians can be a bit dorky. Heck, I’ve specifically shared humor noting our nerdy tendencies.

Moreover, Jonathan Haidt, who is a serious and non-shoddy academic, has done some work quantifying the libertarian psyche.

We’ve been deluged in recent years with research on the psychology (and brain structure) of liberals and conservatives. But very little is known about libertarians — an extremely important group in American politics that is not at home in either political party. …In a project led by Ravi Iyer, we analyzed data from nearly twelve thousand self-described libertarians, and compared their responses to those of 21,000 conservatives and 97,000 liberals. …The findings largely confirm what libertarians have long said about themselves, but they also shed light on why some people and not others end up finding libertarian ideas appealing. Here are three of the major findings:

Here’s how libertarians score on “moral values”.

Libertarians match liberals in placing a relatively low value on the moral foundations of loyalty, authority, and sanctity (e.g., they’re not so concerned about sexual issues and flag burning), but they join conservatives in scoring lower than liberals on the care and fairness foundations (…e.g., they don’t want a welfare state and heavy handed measures to enforce equality). This is why libertarians can’t be placed on the spectrum from left to right: …They really do put liberty above all other values.

Here’s how they score on “reasoning and emotions”.

Libertarians have the most “masculine” style, liberals the most “feminine.” We used Simon Baron-Cohen’s measures of “empathizing” (on which women tend to score higher) and “systemizing”, which refers to “the drive to analyze the variables in a system, and to derive the underlying rules that govern the behavior of the system.” Men tend to score higher on this variable. Libertarians score the lowest of the three groups on empathizing, and highest of the three groups on systemizing. …On this and other measures, libertarians consistently come out as the most cerebral, most rational, and least emotional. On a very crude problem solving measure related to IQ, they score the highest.

And here’s what characterizes libertarians on “relationships”.

Libertarians are the most individualistic; they report the weakest ties to other people. They score lowest of the three groups on many traits related to sociability, including extroversion, agreeableness, and conscientiousness. They have a morality that matches their sociability – one that emphasizes independence.

In other words, based on the final category, maybe there is some truth to the stereotype that we’re introverted, disagreeable, and self-centered.

I don’t know if that means we are more likely to be autistic, but dorkiness might be a semi-fair insult.

But folks on the left should be careful about stereotyping since they have vulnerabilities of their own.

Here’s a story from the U.K.-based Times, for instance, on how leftists are more likely to be weaklings.

A study has found that weaker men are more likely to be in favour of redistributive taxation. …That is one interpretation of research by academics from Brunel University, who assessed 171 men for how buff they were – looking at strength, bicep circumference, weight and height. Writing in the journal Evolution and Human Behaviour, they found that those men who looked more formidable were…much less likely to back policies that redistribute wealth. Michael Price, from Brunel University London, said that this fitted with some of the predictions of evolutionary psychology. …“Our minds evolved in environments where strength was a big determinant of success. If you find yourself in a body not threatened by other males, if you feel you can win competitions for status, then maybe you start thinking inequality is pretty good.” The question was which way did the relationship go? Were men who were naturally strong also more likely to be less egalitarian – calibrating their morals to fit their abilities? Or was it that men who were less egalitarian felt more need to go to the gym, unconsciously believing they needed the strength in order to reach a better place in a red-in-tooth-and-claw social hierarchy? When Dr Price factored in time spent in the gym some, but not all, of the link disappeared – implying some truth to the second explanation.

For what it’s worth, I shared a similar story on this kind of research back in 2012.

There’s also academic research indicating leftists are not as attractive.

The researchers claim that never before has the effects of physical attractiveness on politics been examined on this level and that there is “good reason to believe that individuals’ physical attractiveness may alter their political values and worldviews”. They said that their findings prove attractive people tend to lean towards the right because they have better social skills and are more popular, competent and intelligent due to the “halo effect”… Writing about their findings in the Politics and Life Sciences journal published in December 2017, the pair said that on average, hotter people have an easier life so don’t see the need for more welfare, aid and government support, unlike their left-wing counterparts.

And there’s more than one study reaching this conclusion.

A recently published study in the Journal of Public Economics concludes that the attractiveness of a candidate does correlate with their politics. They find that politicians on the right are more good looking in Europe, the United States and Australia. The study shows correlation, not causation, but the researchers float a simple economic explanation for why this might happen. Numerous studies have shown that good-looking people are likely to earn more, and that people who earn more are typically more opposed to redistributive policies, like the progressive taxes and welfare programs favored by the left. The researchers also offer a more general psychological explanation for the trend: That good-looking people are often treated better than others, and thus see the world as a more just place. Past studies have found that the more attractive people believe themselves to be, the lower their preference for egalitarianism, a value typically associated with the political left.

For what it’s worth, the three articles I just cited don’t reflect well on folks on the left, but conservatives shouldn’t feel good either since the research sort of implies that they’re entitled and arrogant jerks.

It’s unclear where libertarians score on these measures.

Incidentally, there is research on how attractiveness means higher earnings and some folks actually think government should somehow intervene to compensate for “lookism.”

Now let’s shift from soft science to hard science. A 2012 study from Trends in Genetics advances the hypothesis that ideology and values may be hard-wired.

…we review the ‘genetics of politics’, focusing on the topics that have received the most attention: attitudes, ideologies, and pro-social political traits, including voting behavior and participation. …there has been a recent shift in perspective by both life and social scientists that emphasizes the interplay between genes and the environment, and gene–culture coevolution, which has proven more accurate than any position favoring either nature or nurture. It is against this background that a growing movement has begun to address the substantial, but not exclusive, role of genetic influences in the manifestation of political differences. …These findings are summarized in Figure 1, which shows that genetic influences account for a substantial proportion of individual differences in political traits.

And here is Figure 1, which shows that genetics (the blue bars) matters a lot for certain things like overall ideology and doesn’t matter at all for other factors such as party identification.

By the way, I have no way of judging whether this is good science or bad science, and I don’t even know if the results are positive or negative from a libertarian perspective. I’m simply sharing the results because they’re potentially illuminating/interesting.

Let’s close with some research that teases out some differences between libertarians (or “economic conservatives,” which I assume is a proxy) and other groups.

Here’s some academic research on attitudes about science.

It is frequently asserted that conservatives exhibit a cognitive style that renders them less well disposed toward science than progressives, and that they are correspondingly less trusting of scientific institutions and less knowledgeable about scientific ideas. Here we scrutinize these assertions, using data from the U.S. General Social Survey. We distinguish between three different definitions of ‘conservative’: first, identifying as conservative, rather than as liberal; second, holding socially conservative views, rather than socially progressive views; and third, holding economically conservative views, rather than economically leftist views. We find that self-identified conservatives and social conservatives are less scientifically literate and optimistic about science than, respectively, self-identified liberals and social progressives. However, we find that economic conservatives are as or more scientifically literate and optimistic about science than economic leftists.

In other words, folks that lean more libertarian rank at the top in terms of knowledge and attitudes.

And here’s an article about underlying value systems.

Political battles in the US are often portrayed as a clash between “bleeding heart” liberals and “pull yourself up by your bootstraps” conservatives. …Scientists are beginning to zero in on a few key differences in the ways that people on opposite ends of the political spectrum react to stimuli. …A study published in the journal Behavioural Brain Research in January suggests that you might be able to tell whether someone is liberal or conservative simply by the way they react to pictures of gross things like blood, feces or vomit. The authors found that socially conservative students will physically look away from “disgusting” images more quickly than their liberal peers (but the same didn’t hold true for people with fiscally conservative beliefs). …There’s also evidence that the areas of the brain that process and express fear are more active in conservative voters, which might make them more likely to quickly turn away from something that could make them sick. …New research on compassion is de-bunking the myth that liberal voters might inherently be more empathetic and kind-hearted people than conservatives.

Since folks on the right donate more than folks on the left, I’ve always thought the stereotype about generous leftists was absurd.

As “Libertarian Jesus” teaches, you’re not supposed to be charitable with other people’s money.

But what I noticed in the article was the difference between fiscal conservatives (presumably more libertarian?) and general conservatives. We may be allies on some issues, but we’re not the same (though I’m not sure why anyone would want to look any longer than necessary at pictures of blood, feces, and vomit).

My last item is a video exploring the research of Haidt and others on libertarian values.

Haidt isn’t a libertarian, but his research (which I’ve cited before) seems honest and rigorous.

My goal in all this is to figure out how nerdy libertarians can be more persuasive.

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The Trump Administration and Food Stamps: Right Diagnosis, Wrong Prescription

Federalism is the gold standard for reforming redistribution programs. This was the approach used in the very successful Clinton-era welfare reform, and it should be replicated for other means-tested programs.

The core argument is that the federal government does a very poor job of managing such programs, resulting in a maze of handouts that produce lots of fraud and dependency.

If states were in charge of such programs, by contrast, there would be lots of innovation and experimentation. This would help policy makers understand the best way of taking care of the truly destitute while helping others transition to productive and self-sufficient lives.

Today, let’s look specifically at food stamps. I’ve already explained why federalism is the right way of fixing the program.

And here are some additional reasons to support reform.

Writing for USA Today, Jim Bovard opined on the program’s glaring shortcomings – many of which were exacerbated by the Obama Administration’s efforts to expand dependency.

Why did the food stamp program spiral out of control? The Obama administration believed that maximizing handouts would maximize prosperity… So the feds bankrolled massive recruiting campaigns to sway people to abandon self-reliance. A North Carolina social services agency won a USDA “Hunger Champions Award” for attacking “mountain pride” as a reason not to accept government handouts. In Alabama, people received fliers proclaiming: “Be a patriot. Bring your food stamp money home.” The state of Florida paid individual recruiters to sign up at least 150 new food stamp recipients per month. …enrollment also skyrocketed after Obama effectively suspended the three-month limit for able-bodied adults without dependents to collect food stamps. From 2008 to 2010, the number of able-bodied recipients doubled.

Jim points out several reasons why the program is bad for the economy and bad for poor people.

A 2012 Journal of Public Economics study concluded that receiving food stamps sharply reduces work hours by single mothers. …state governments have little or no incentive to police the program because losses from fraud or waste don’t come out of state budgets. …the program is a dietary disaster. Walter Willett, chair of Harvard University’s Department of Nutrition, observed in 2015, “We’ve analyzed what (food stamp) participants are eating and it’s horrible food. It’s a diet designed to produce obesity and diabetes.” A 2017 study published in BMC Public Health found that food stamp recipients were twice as likely to be obese as eligible non-recipients. …A 2016 USDA report revealed that soft drinks and other sweetened beverages are the most common purchase in food stamp households, accounting for almost 10% of monthly expenditures. “Desserts, salty snacks, candy and sugar” account for another 10% of food stamp expenditures.

And it’s definitely bad for taxpayers. In a column for the Wall Street Journal, Kristina Rasmussen explained how rich people are able to bilk the system.

Consider the food stamp program’s longstanding policy of “broad-based categorical eligibility.” You probably assume that food stamps go to poor people only. But this policy, which the U.S. Department of Agriculture instituted during the Clinton administration, allows state food-stamp programs to grant benefits to anyone who has moderately low wage income, regardless of net worth. A family with a seven-figure bank account can be eligible for food stamps. That’s how lottery winners—including actual millionaires—wind up getting food stamps. In 2012 Amanda Clayton of Detroit was revealed to be receiving $200 in monthly food aid despite having won $1 million the year before. “I feel that it’s OK because I have no income,” she said, “and I have bills to pay. I have two houses.” In 2011 Leroy Fick of Bay County, Mich., was found to be receiving food assistance despite having taken home $850,000 in lottery winnings the previous year. …more than 30 states continue to have no asset limits. All you need to collect food aid is two things: an income below a multiple of the poverty line, ranging from 130% to 200%; and eligibility for some sort of benefit funded by Temporary Assistance for Needy Families (TANF), the main welfare program for single parents. And there’s the “one weird trick.” The state spends TANF dollars to print a welfare brochure. The brochure itself is defined as a “benefit,” which everybody is “eligible” to receive, thereby meeting the USDA requirement. Of the 47 million Americans who received food stamps in 2014, some four million got them under “broad-based categorical eligibility”—most because their wealth would have made them ineligible otherwise.

The good news is that the White House wants to reform the scandal-plagued program.

The bad news is that Trump and his people have chosen paternalism rather than federalism.

Here’s what is in the Administration’s budget (scroll to page 128).

The Budget would also create a new approach to nutrition assistance that combines traditional SNAP benefits with U.S. Department of Agriculture Foods provided directly to households. This cost-effective approach supports American agriculture, prevents certain types of program abuse, provides state flexibility in delivering food benefits, and ensures the nutritional value of the benefits provided. …Under the proposal, households receiving $90 or more per month in SNAP benefits will receive a portion of their benefits in the form of a USDA Foods package, which would include items such as shelf-stable milk, ready to eat cereals, pasta, peanut butter, beans and canned fruit, vegetables, and meat, poultry or fish. …This cost-effective approach will generate significant savings to taxpayers with no loss in food benefits to participants.

I can understand that people don’t like it when food stamp recipients are buying junk food. Or luxury items.

And I can also understand the desire to make dependency somewhat discomforting.

But I have zero faith in the federal government’s ability to send food boxes to people every month and somehow save money and avoid extra bureaucracy.

What’s frustrating about the plan in Trump’s budget is that they actually proposed a semi-decent policy of partial federalism last year. So I view this as a step in the wrong direction.

By the way, the fact that I don’t like the plan doesn’t mean I agree with some of the leftist critics. As this “perplexed meme” illustrates, the folks who correctly mock the White House’s proposal are also the same ones who want the government to have massive powers over matters that are far more complex than delivering food.

While the budget plan takes the wrong approach, the White House has done something good via the regulatory process by giving states more flexibility for work requirements.

Kansas, Maine, Wisconsin, and Alabama have achieved good results already, and now the same thing is happening in Georgia, as noted by PJ Media.

Thousands of Georgia residents who depend on food stamps are losing their benefits because they have failed to meet the state’s new requirements that force the able-bodied without children to find jobs. …“The greater good is people being employed, being productive and contributing to the state,” Bobby Cagle, director of the state Department of Family and Children Services, said. …State Rep. Greg Morris (R) said the fact that thousands of people have lost their benefits only showed the magnitude of the problem of welfare fraud in Georgia. He said the new mandate is working. “This is about protecting taxpayer dollars from abuse, and taking people off the cycle of dependency,” Morris said. However, Benita Dodd, vice president of the conservative Georgia Public Policy Foundation, wrote that saving taxpayer dollars was not the program’s ultimate goal. “The goal must be to focus aid on those who truly need help and restore the dignity of work to able-bodied adults,” Dodd wrote. “Reducing dependency and promoting economic opportunity help end the cycle of poverty, reinforce the temporary nature of assistance and encourage personal responsibility.”

The bottom line is that I don’t know how much work should be required, or what kind. I also don’t know whether the idea of direct food delivery in Trump’s budget is necessarily a bad idea.

Which is why I want decentralization of the program. Let states try different approaches and then learn from each other. That’s good for taxpayers and good for poor people.

Which is basically what I said in this interview more than six years ago.

P.S. Here’s a map showing which states (as of a few years ago) had the highest rate of food stamp dependency.

P.P.S. And here’s a table showing which states have the highest levels of food stamp dependency relative to the eligible population.

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Trump=Bush=Nixon: Republicans Are Big Spenders, Worse than Democrats

I’ve received several emails and Facebook messages asking me why I haven’t written about Trump’s recently unveiled budget proposal for the 2019 fiscal year.

My answer is that I don’t want to waste my time.

Let me explain what I mean. I wrote during the 2016 campaign that Trump was a big-government Republican.

But when he got elected and appointed some good people to fiscal positions, I decided to partially suppress my concerns. After all, maybe I was wrong.

So I wrote last year about his budget and praised specific provisions (dealing with government-funded media, food stamps, government-funded art, foreign aid, OECD subsidies, community development block grants, and Medicaid).

And I even outlined the strategy that was necessary to achieve success, at least with regards to so-called discretionary spending. But I included a very important postscript as part of that column.

P.S. I’m not convinced that Trump actually wants smaller government, but I hope I’m wrong. This upcoming battle will be very revealing about where he really stands.

Well, that battle occurred and the result was a disaster for taxpayers. The budget caps were busted again, with the net effect being even worse than the big-spending agreements back in 2013 and 2015.

But it’s not that the Trump Administration lost. They never even tried. The folks I know on Capitol Hill said the White House didn’t lift a finger to urge spending restraint, much less fight to limit budgetary growth. Never.

And the painful experience of the profligate Bush years taught me that most Republican Senators and Representatives will partake in a spending spree when they sense the White House is soft on the issue (the common excuse I get from them is that “the floodgates have opened, I can’t do anything to stop it, so I may as well get a chunk for my voters”).

What’s extra depressing is that Trump’s fiscal incontinence is actually par for the course for Republican presidents, at least in recent decades.

I recently crunched the numbers for every president since the 1960s who served at least one full term, and I measured the average annual growth of government spending (adjusted for inflation) for the years they held power.

Moreover, I sliced and diced the numbers in several ways. I wanted readers to understand what happened to total spending (the combined growth of defense and domestic outlays), as well as what happened to domestic spending.

And the bottom line is that Republicans generally do worse than Democrats. Not just on total spending. They’re even more profligate on domestic spending!

The only exceptions to this pattern are Reagan (the only good Republican) and LBJ (the only really awful Democrat).

By the way, I’m not claiming that Clinton, Carter, or Obama were fiscal conservatives or that they believed in small government. I’m simply pointing out government grew slower when they were in office, at least compared to the growth of government under Nixon, Bush I, or Bush 2. The numbers don’t lie.

I suspect these counter-intuitive results are because of two factors.

1. Presidents try to deflect and/or preempt criticism, so that leads Democrats to be cautious about spending money (they don’t want to be called “big spenders”) and it leads Republicans to squander a lot of cash (they don’t want to be called “heartless” or “mean”).
2. The party controlling the White House often loses seats in mid-term elections and that subsequently limits the ability of presidents to push an agenda that is opposed by the other party, or even leads them to acquiesce to initiatives pushed by the other party.

Needless to say, this is rather depressing for those of us who want to limit the size and scope of government. It’s quite likely that Trump will spend the next three years or seven years instigating and/or accepting bigger government. And then we’ll probably have a Democrat in the White House who will – at least for the first two years – push for even more government.

But I get more upset when Republicans are big spenders because they should know better. Most Democrats actually believe it’s a good idea to make America more like Greece. Republicans, by contrast, make us more like Greece because they put short-term politics ahead of the national interest.

Let’s close this depressing column with some anti-GOP humor, starting with a look at how libertarians see Republicans (h/t: Reddit‘s libertarian page).

Reminds me, for obvious reasons, of my “Charlie Brown Award.”

Next we have a gathering of Republicans who actually believe in smaller government (h/t: Reddit‘s libertarian page).

I guess you would say “like father, like son.”

Last but not least, here’s some very clever satire from Babylon Bee.

During a budgetary discussion Friday, Republican lawmakers announced a plan to pretend to be fiscally conservative again if a Democrat takes office again in 2020 or 2024. The GOP said it would begin to decry deficit spending and the $20 trillion debt in order to win votes as soon as political power swung back to the opposing party. “The second a Democrat is back in the White House, we will once again start yelling about fiscal responsibility,” Speaker Paul Ryan said in an address to the House of Representatives Friday. “For now, we will continue to vote for unsustainable and irresponsible budgets that your children’s children’s children will pay for for centuries to come.” At publishing time, Republicans further announced they would pretend to oppose giving Planned Parenthood a half billion dollars year after year once they need conservative voters’ support to regain their offices.

Good dig about Planned Parenthood, needless to say.

But as we laugh about these jokes, just remember that the recklessness in Washington is going to come back to bite us at some point. No, we won’t have a Greek-style fiscal crisis in the next five years. Or even in the next 10 or 20 years.

But more spending and more dependency is not a good recipe for long-run economic health. Republicans understand that and I despise them for putting politics first and country second.

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Sugar Subsidies Impose a Bitter Price on Workers, Consumers, and Taxpayers

Government intervention is not good for economic prosperity. That general observation is both accurate and appropriate, but it might also be helpful to contemplate what sector of the economy suffers the most damage and distortion because of government.

• In terms of aggregate impact, there’s a strong case to be made that government intervention – via spending, tax breaks, and price controls – wreaks the most havoc with the health sector.
• In terms of perverse results, it’s hard to imagine a more convoluted sector than higher education, where government intervention causes higher tuition and transfers wealth from the poor to the rich.
• In terms of all-encompassing, Soviet-style central planning, the plethora of handouts, subsidies, protectionism, and cronyism in the agriculture sector is hard to match.

Speaking of agriculture, let’s commemorate Valentine’s Day by exploring how politicians shower sugar producers with undeserved wealth every time one of us buys something sweet for a sweetheart.

Vincent Smith of the American Enterprise Institute shares some grim news on who is reaping unearned benefits.

Valentine’s Day is here again, and still the US sugar lobby has its hand in everyone’s wallet when they buy chocolate and other candy for their friends and families. For over four decades, the sugar lobby has managed to persuade Congress to maintain a Soviet-style supply control program that, by sharply limiting imports and curtailing domestic production, keeps US sugar prices well above free market levels. The program costs US consumers an average of about $3.4 billion every year, effectively a hidden annual tax of over $40 for a typical family of four, all to benefit fewer than 5,000 farm businesses. Further, the program raises production costs for the US food processing industry, damaging the food industry’s ability to compete in export markets and causing them to sacrifice a share of the domestic market to exporters from other countries. The impact of the US sugar program on employment for US citizens consistently has been estimated to be negative, costing the US economy between 10,000 and 20,000 jobs on a net basis. While the program creates employment for some workers in sugar refineries, it destroys far more employment opportunities in the US food processing sector by making the sector less competitive.

Two of his colleagues, John C. Beghin and Amani Elobeid, produced a detailed study on the topic for AEI. Here are the key findings.

The sugar program is a protectionist policy, which increases the domestic price of sugar above the corresponding world price. It restricts imports of raw and refined sugar, depresses world sugar prices, and substantially changes the mix of sweeteners used in processed food. Domestic markets are distorted, sugar users are effectively taxed by the program, and sugar producers are subsidized by it. The welfare transfer to sugar growers and processors is quite large in the aggregate, hovering around $1.2 billion. Losses to households are diffused, about $10 per person per year but large for the population as a whole, in the range of $2.4–$4 billion. …Gains to producers are concentrated in a few hands, especially in the cane sugar industry. Labor effects from lost activity in food industries are between 17,000 and 20,000 jobs annually.

For those who like the quantitative details, here’s a table with the most important numbers in the study.

Writing for the Federalist, Eric Peterson explains the high costs and inefficiency associated with this bit of central planning.

The history of candy canes dates back over 300 years… While this iconic symbol of Christmas saw its first mass production in America, Washington politicians have too often behaved like Scrooge, enacting policies that have sent all but one maker of this holiday classic fleeing abroad. One reason for the mass exodus is the little known U.S. sugar program. …Government interference in the sugar market comes in four flavors: Price supports, marketing allotments, import quotas, and the Feedstock Flexibility Program. …Although programs such as price supports (which mandate domestic prices for sugar at nearly double the world price) are fairly straightforward, programs such as Feedstock Flexibility are far more opaque. It allows sugar producers to sell sugar to the government at above market value, which the government then sells to ethanol producers at a loss. …Companies that need sugar for their products…can’t even import cheaper sugar from abroad thanks to import quotas that strictly limit foreign sugar. It’s no one wonder that some companies like Atkinson Candy Co have responded by moving some of their peppermint-candy production to Guatemala, where sugar is cheap and plentiful. …Consumers pay higher prices on everything from chocolate to cranberry sauce thanks to these big-government mandates, with the estimated annual costs to consumers and food manufacturers adding up to a whopping $3.5 billion annually. …Since 1997, for example, over 120,000 jobs have been lost in the sugar industry. It’s estimated for every job subsidies prop up, three are destroyed.

Notice, by the way, the consistent theme that subsidies and protectionism result in fewer jobs. This is not a surprising result for anybody who has looked at the fourth item in this column.

Let’s continue with some more analysis. The Foundation for Economic Education has a column by Ted Ellis on the program.

…for taxpayers, …sweetness doesn’t come cheap. For decades, domestic sugar producers have been protected from fair competition. In recent years, their influential lobby has ensured producers’ inflated profits through $260 million worth of federal subsidies and restrictions on fairly priced imported sugar. …these handouts rarely accrue to anyone but the industry’s largest and most well-connected players. …The National Confectioners’ Association, a trade group, agrees…that “the benefits of sugar subsidies and protections go directly to just 14 sugar beet and sugarcane producers in a few states.” …inflated prices disrupt domestic supply chains, threatening thousands of well-paying American manufacturing jobs, all while nibbling away at American taxpayers’ wallets. …the sugar program costs American businesses and consumers more than $3 billion every year. …the cost of special-interest lobbying in the sugar industry is felt most heavily by US workers laid off by companies that have been forced to move abroad, where sugar prices are cheaper. A 2006 report by the US International Trade Administration found that as many as 10,000 American jobs were lost as confectioners such as Hershey Co. and Lifesavers were forced by government-inflated domestic sugar prices to move plants out of the US. The same report found that the many jobs lost on account of federal intervention in sugar production far outweigh the few jobs saved for growers. In fact, it found that “for each one sugar growing and harvesting job saved through high US sugar prices, nearly three confectionery manufacturing jobs are lost.”

If you’re tired of reading about the senselessness of sugar subsidies, here’s a video on the topic from Reason. It has a Halloween theme instead of a Valentine’s Day theme, but that doesn’t change anything.

Let’s conclude with some hard-hitting analysis by Jim Bovard, who explains the tangled web of cronyism for CapX.

…the federal government has maintained an array of sugar import quotas and/or tariffs for most of the last 200 years. The regulatory regime has provided windfalls for generations of politicians and jobs for legions of bureaucrats while destroying more than a hundred thousand private, productive jobs. …The sugar program illustrates why politicians cannot be trusted to competently manage anything more complex than a lemonade stand. In 1816, Congress imposed high tariffs on sugar imports in part to prop up the value of slaves in Louisiana. In 1832, a committee of Boston’s leaders issued a pamphlet denouncing sugar tariffs as a scam on millions of low-paid American workers to benefit fewer than 500 plantation owners. …Despite perpetual aid, the number of sugar growers has declined by almost 50% in recent decades to fewer than 6,000. Federal policy failed to countervail the fact that the climate in the mainland U.S. is relatively poorly suited for sugarcane production. …Federal sugar policy costs consumers $3 billion a year and is America’s least efficient welfare program. In the 1980s, sugar import restrictions cost consumers $10 for each dollar of sugar growers’ income. …producing candy and many other food products is far more expensive here than abroad. Since 1997, sugar policy has zapped more than 120,000 jobs in food manufacturing… More than 10 jobs have been lost in manufacturing for every remaining sugar grower in the U.S. …The sugar lobby showers Congress with money, including almost $50 million in campaign contributions and lobbying between 2008 and 2013. In return, members of Congress license sugar growers to pilfer consumers at grocery checkouts and rob hardworking Americans of their jobs.

That last segment is the key. Sugar subsidies are a class case of “public choice,” with special interests and politicians both benefiting while ordinary people pay the price.

There are many reasons to shut down the Department of Agriculture. But it’s hard to imagine a bigger reason than getting rid of handouts for Big Sugar. Maybe ultra-corrupt ethanol handouts are even worse, but that’s a judgement call.

P.S. Since today is Valentine’s Day, here’s a very topical explanation of why unfettered prices are desirable.

P.P.S. And here’s a Libertarian Valentine’s Day. Or, for my statist readers, here’s Obama’s vision of Valentine’s Day.

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The Incomprehensible Horror of Venezuelan Socialism

It’s now a pattern. I’ll come across a soul-sapping story about terrible suffering caused by statism in Venezuela and I think the country has hit rock bottom. Such as back in September, when I read about people literally starving.

But then I will read another report about incredible misery and realize that the socialist regime is even worse than I thought. Such as back in December, when I read about economic deprivation ruining sex for the women of the country.

And then I find another horrifying example of how big government destroys lives and I’m forced to reconsider the definition of failure. Such as last month, when I read about criminal gangs using food to recruit children.

Despite this pattern, I’m going out on a limb and asserting that nothing possibly could be worse than this Washington Post story of Venezuelan parents giving up their children because they can’t afford to feed them.

In September, her mother left her at a subway station with a bag of clothes and a note begging someone to feed the child.  Poverty and hunger rates are soaring as Venezuela’s economic crisis leaves store shelves empty of food, medicine, diapers and baby formula. Some parents can no longer bear it. They are doing the unthinkable.  Giving up their children. …it was a challenge to actually meet the tiniest victims of this broken nation. My requests to enter orphanages run by the socialist government had gone unanswered. One child-protection official — warning of devastating conditions, including a lack of diapers — confided that such a visit would be “impossible.” …A child-welfare official in El Libertador — one of the capital’s poorest areas — called the situation at public orphanages and temporary-care centers “catastrophic.”  “We have grave problems here,” said the official, who spoke on the condition of anonymity out of fear of reprisals from the authoritarian government.

Fortunately, there are still some private facilities that help families.

But even though such institutions are run more efficiently and compassionately, it’s still a tragedy that they have to exist. And the stories the reporter uncovered are heartbreaking.

“I didn’t know what else to do,” said Angélica Pérez, a 32-year-old mother of three, near tears. …she showed up at Fundana with her 3-year-old son and her two daughters, ages 5 and 14. She lost her job… Her plan: leave the children at the center, where she knew they would be fed, so she could travel to neighboring Colombia to find work. She hoped she would eventually be able to take them back. Typically, children are allowed to stay at Fundana for six months to a year before being placed in foster care or put up for adoption. “You don’t know what it’s like to see your children go hungry,” Pérez told me. “You have no idea. I feel like I’m responsible, like I’ve failed them. But I’ve tried everything. There is no work, and they just keep getting thinner.

Here’s another incomprehensibly sad example.

For many Venezuelan families, hunger presents an excruciating choice.  I met Dayana Silgado, 28, as she entered Fundana’s new food center for parents in economic crisis. Silgado seemed drained. The shoulder blades on her thin frame protruded from her tank top. In November, she surrendered her two youngest children to Fundana after losing her job… At the center, she knew, they would get three meals a day. Fundana’s home for children did not accept older kids, so Silgado was still trying to feed her two eldest — ages 8 and 11 — at home. …After eating dinner, Silgado said, her children tell her, “Mom, I want more.” “But I don’t have more to give,” she said.

What a terrifying awful country.

Shame on Bernie Sanders. Shame on Joe Stiglitz. Shame on every leftist who offered support for the evil government of Venezuela.

Since we’re on the topic of that despotic regime, here are a few additional stories that are worth a mention.

We’ll start with a lesson about inflation.

Street vendors in Venezuela are weaving baskets from banknotes after 13,000 per cent inflation rendered them practically worthless. …Cash is worth so little there bank notes are often seen littered on the streets. …street seller Wilmer Rojas has found a use for them. …The 25-year-old is selling origami-style handbags, purses, hats and baskets – all made out of money. …Mr Rojas, a father-of-three, said: ‘People throw them away because they are no good to buy anything. …These things are no good for buying anything. At least I am putting them to good use rather than throwing them away.’ …Jose Leon, a 26-year-old designer, draws the faces of Star Wars characters over the image of Simon Bolivar and other famous Venezuelans pictured on the notes. Foreign customers pay him up to £14 ($20) for each piece of ‘money art’, which he said increases the note’s value by nearly 5,000 per cent.

Wow. I periodically gripe about the Federal Reserve, but I guess I should consider myself lucky.

Now let’s look at our next story. Rather than weave money, some Venezuelans have turned to crime.

When he set off at sunset from the town of La Grita in western Venezuela on his 900-km (560-mile) journey, Aguilar knew he was taking his life in his hands. With hunger widespread amid a fifth year of painful economic implosion under President Nicolas Maduro, Venezuela has seen a frightening surge in attacks on increasingly lawless roads. Just a few days earlier, Aguilar said he sat terrified when hundreds of looters swarmed a stationary convoy, overwhelming drivers by sheer numbers. They carted off milk, rice and sugar from other trucks but left his less-prized vegetables alone. “Every time I say goodbye to my family, I entrust myself to God and the Virgin,” said the 36-year-old trucker. …looting of cargoes on roads has soared in Venezuela in recent times and appears…directly linked to growing hunger and desperation among the population of 30 million. …“The hunger and despair are far worse than people realize, what we are seeing on the roads is just another manifestation of that. We’ve also been seeing people stealing and butchering animals in fields, attacking shops and blocking roads to protest their lack of food. It’s become extremely serious,” said ORC director Oswaldo Ramirez. …The dystopian attacks in a country with one of the world’s highest murder rates are pushing up transport and food costs in an already hyperinflationary environment, as well as stifling movement of goods in the crisis-hit OPEC nation.

Given these horrifying condition, is it any surprise that people are doing whatever they can to escape the socialist hellhole of Venezuela?

Thousands of desperate Venezuelans are trying to enter Colombia in a bid to escape the hunger and soaring crime rate caused by the spiralling economic crisis. Incredible pictures show the mass exodus of refugees crossing the Simon Bolivar international bridge trying to flee the political crisis threatening to engulf Venezuela. Colombia – along with its neighbour Brazil – has sent extra soldiers to patrol their porous border with the country after officially taking in more than half a million migrants over the last six months of 2017. …In a visit to a border city at the epicenter of Colombia’s mounting migration crisis, President Juan Manuel Santos on Thursday announced new measures that could make it more difficult for Venezuelan migrants to cross into the country illegally or remain there without any official status. ‘Colombia has never lived a situation like the one we are encountering today,’ Santos said. Migration into Colombia has surged as Venezuelan President Nicolas Maduro has moved to consolidate his rule and the nation’s economy plummets. Colombia migration authorities say there are an estimated 600,000 Venezuelans currently in Colombia – double the number six months ago.

I also know from my visits to Panama that the Venezuelan population has exploded there as well. And I wouldn’t be surprised if the same is true for other nations in Latin America as well.

In other words, this image may be humorous, but it’s also true.

P.S. To be fair, while Venezuela has an awful government, it does allow citizens to escape. So it’s not as bad as the despotic dictatorships of Cuba and North Korea. At least not yet.

P.P.S. Some leftists are disowning Venezuela. But only because it isn’t sufficiently socialist!

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Deconstructing Oxfam

Writing a column every day is a recipe for making an occasional mistake.

Sometimes the errors are minor, such as when I put Tucson in New Mexico rather than Arizona.

And sometimes they are less trivial, such as when I mischaracterized subsidies for the Postal Service or when I incorrectly criticized the Committee for a Responsible Federal Budget.

In an event, I always try to acknowledge and fix my mistakes.

And that’s why I want to write today about Oxfam. Early last year, I wrote a column criticizing the group’s statist orientation, asserting in my title that the group was a leftist joke instead of a real charity.

Time to correct the record. But I want to begin by noting that my title was only partly wrong. Oxfam is very much a left-wing organization. In prior columns, I’ve shared critiques of the group’s statist ideology from Tim Carney, Marian Tupy, and Tony Travers.

And before I get to the part about fixing my mistake, I want to augment this list by sharing the views of two more experts. We’ll start with some excerpts from a column in the Wall Street Journal by David Henderson.

Oxfam recently published a 76-page report, “Reward Work, Not Wealth,” that advocates taxing the rich to reduce inequality and help the poor. …There are two ways to close the gap. The first is to concentrate on making the poor better off. Mostly that has happened, thanks to liberalized international trade and reduced costs for shipping goods. Just as Walmart and Amazon have cut costs for Americans, the introduction of container shipping crushed transportation costs for the world. The second way to reduce inequality is to make the rich worse off.

Needless to say, Oxfam prefer the approach that gives more power and money to government.

Any guess which method Oxfam’s report emphasizes? “Governments should use regulation and taxation to radically reduce levels of extreme wealth,” the authors conclude. …The document’s title, “Reward Work, Not Wealth,” is strange: Wealth is one of the main rewards for productive work. High taxes on wealth and the wealthy reduce the incentive to produce.

And Oxfam, to its credit, understands that confiscatory taxes will require a global tax cartel.

…the report…effectively advocates…the creation of a tax cartel. Since capital is extremely mobile and will go where it is lightly taxed—witness the corporate “inversions” of American companies—the report suggests “a new generation of international tax reforms.” Negotiating tax rates would take place under the aegis of “a new global tax body that ensures all countries participate on an equal footing.”

Reading Henderson’s column, we have additional confirmation that Oxfam is a run-of-the-mill statist organization that myopically believes in class warfare.

So you might think the group is no different that other leftists groups such as the United Nations or the Organization for Economic Cooperation and Development. Or no different than politicians such as Barack Obama or Hillary Clinton.

But Oxfam also has a reputation for beclowning itself with shoddy analysis.

Johan Norberg mocked the group’s ideology-over-results approach when he noted that Oxfam is distressed about an era of “neoliberalism” in the world (meaning, in this case, the European definition of pro-market classical liberalism), yet that’s also the period of time when the poor enjoyed huge gains.

For what it’s worth, I wrote a study 17 years ago debunking some of Oxfam’s sloppy work.

And here’s some of what Tim Worstall just wrote for the U.K.’s Adam Smith Institute.

Buried in Oxfam’s latest report about how disastrously unequal the world is we’ve got an assumption which is so breathtakingly foolish as to kill off any belief in the sense or sensibility of the organisation’s mindset. They’re trying to insist that the minimum wage in a place should be very much higher than GDP per capita in that same place. …the garment trade in Bangladesh…minimum wage there is…5,000 taka a month, or £50. …Yes, a low sum and most assuredly we’d all like it to be much higher. But Oxfam’s claim is that this should be a living wage of more like £250 a month (perhaps $250). Something which simply cannot happen. GDP per capita in Bangladesh is some $1,500 a year or so. We cannot have a minimum wage twice that. This would be the same claim as insisting that the UK minimum wage should be $80,000 a year (say, £60,000). …It’s a demand based upon the most aggressively stupid misunderstanding of what ails Bangladesh, isn’t it? ……to get this so wrong seriously calls into doubt Oxfam’s right to anything more than a contemptuous sneer. …Sorry folks, but Oxfam is deluded.

Tim concludes with some very wise words.

Bangladesh’s problem is not global inequality, the thing Oxfam is whining about, it’s Bangladesh’s poverty. …The cure for poverty is economic growth, the very thing which has reduced that global absolute poverty from 40% of all humans to under 10% in just these past three decades of that very neoliberal globalisation.

Now it’s finally time for my correction. When I wrote last year that Oxfam was “not a real charity,” I was merely implying that the group was a bad charity since it advocated policies that hurt poor people.

But thanks to new revelations about Oxfam’s involvement in horrific sex-crimes scandals, I’ve learned it doesn’t deserved to be called a charity of any kind. Check out these excerpts from a CNN report.

Oxfam’s deputy chief executive has resigned amid a growing sex crimes scandal involving the organization’s aid workers in Haiti and Chad. …Oxfam announced the resignation after a meeting with UK government officials Monday, at which it had fought to keep millions of pounds in public funding. …Oxfam received about £32 million (about $44 million) from the government last financial year, according to public records.

And the money from British taxpayers is just the tip of the iceberg.

Here’s a shocking bit of information from the conclusion of  David Henderson’s column.

Oxfam’s annual budget exceeds $1 billion, and it gets almost half of that from governments and the United Nations. So maybe it’s time for a new name. Oxgov.

Almost half of its budget from taxpayers?!? At best, that makes them a government contractor rather than a charity.

I’ll conclude with two points.

• First, I think Oxfam should lose public funding. But not because some of its employees engaged in sexual predation. Yes, that’s bad, but I certainly don’t think sex abuse was ever part of the organization’s mission. Instead, it should lose funding because taxpayer money should not go to leftist organizations that advocate for bigger government (the same argument I use, by the way, when urging an end to OECD handouts).
• Second, instead of telling people that “Oxfam is a letist joke rather than a real charity,” I’ll have to changes the second part of the sentence. Maybe “Oxfam is a leftist joke and it mooches from taxpayers.” I’m not sure that rolls off the tongue gracefully, so I’m open to other suggestions.

P.S. You probably won’t be surprised to learn that the International Monetary Fund partners with Oxfam. I guess the old saying is right that birds of feather flock together.

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From the British Isles, Great Moments in Foreign Government

One of the great insights of “public choice” is that politicians engage in self-serving behavior just like everyone else.

But there’s a profound difference between them and us. In the private economy, we can only make ourselves better off by providing value to others. In government, by contrast, politicians oftentimes make themselves better off by providing unearned benefits to various interest groups.

This elementary insight is a good starting point for those who want to understand how Washington (mal)functions.

And these behavioral insights don’t change when you cross national borders, which is why I periodically share examples of bizarre boondoggles as part of my series on “Great Moments in Foreign Government”. Here are some examples of prior editions.

• Paid sex breaks for bureaucrats in Sweden.
• The German spy agency employing a terrorist.
• Welfare payments for illegal polygamous marriages in the United Kingdom.
• Stopping kids from selling worms in Canada.
• Buying trains that are too wide for railway stations in France.
• Taxpayer-financed friends for mass killers in Norway.

Today, we have a special version of this series from the British Isles.

We’ll start with a story, from the U.K.-based Sunday Times, about a voluntary tax scheme in a rich part of London.

Westminster city council said it would be writing to 15,000 of its wealthiest homeowners asking them to make a voluntary donation on top of their council tax. The initiative comes amid warnings that a crisis in local government funding is likely to drive five councils into insolvency within the next 12 months, with 10 running out of money within two years. …The begging letters scheme, dubbed the “Westminster community contribution”, will see letters sent to all 15,000 band H properties, worth about £1m and above. Nickie Aiken, leader of Westminster council, said she had decided to tap the wealthy for donations because “they have asked me, ‘Why can’t we pay more council tax?’ We are giving people the option. It is an opportunity to invest in their neighbourhood.” …A total of 904 people replied.

My immediate reaction is that there are 904 nitwits in Westminster.

But, to be fair, it doesn’t say they responded by sending extra money to the local council. Maybe they scrawled obscenities on the notice and returned it, which would have been my preferred response.

But I’m guessing many of them did cough up some cash, which makes them more foolish than the taxpayers of Norway. And even more foolish than hypocritical leftists in the United States.

It’s also frustrating that there’s no data in the story on why local councils are feeling a budget pinch. I’m guessing that they’re in trouble because spending has climbed much faster than inflation (similar to what happened where I live in Fairfax County, Virginia). So why reward that overspending with additional payments?

Now let’s head across the Irish Sea.

The Irish Times has a story about how a program that supposedly was designed to help homeless people actually is lining the pockets of well-to-do property owners.

The Government’s homeless family hub solution is not only a short-term fix for a long-term crisis, it’s a shocking deal for taxpayers that benefits private operators. …doesn’t “hub” have a cosy ring to it? There will be a total of 18 family accommodation hubs in Dublin, nine of which include hotels and B&Bs already in use being “adapted”. …Let’s take the former Mater Dei site as a prime example. Dublin City Council (DCC) earmarked €4.5 million to refurbish the former college complex to house 50 families… Sources say the project is likely to substantially overrun due to “many extras”… The problem is, after ploughing millions into a magnificent revamp, the council must hand the property back to the archdiocese in less than three years. …This is mirrored in every one of the family hubs, the longest lease being just five years. It starts to look like an incredible deal for the private owners. They get back a terrifically refurbished, furnished and equipped building, paid for by taxpayers, that can be rented out for profit. Everything goes back to the owner… On top of the deal of a lifetime, DCC is paying rent on the site, a figure it described as “nominal” but not nominal enough to make public.

Cronies getting rich(er) thanks to programs that supposedly were designed to help the poor? As Inspector Renault said in Casablanca, “I’m shocked, shocked”!

Probably as shocked as he was to learn that Obamacare cost estimates were wrong and that childcare subsidies led to higher costs in the U.K.

Sadly, insiders always figure out how to line their pockets as government gets bigger. It’s a feature, not a bug.

Last but not least, let’s travel to Scotland.

In the U.K.-based Times, we learn that the government is so incompetent that it has a hard time ripping off European taxpayers for farm subsidies.

Scottish ministers have appealed to Europe for help in heading off a looming crisis in farm subsidy payments for the second year running. Discussions have taken place with the European Commission to set up “contingency plans” in case Scottish farmers once again missed out on their payouts. An extension to the end-of-the-month deadline for processing payments is vital if the Scottish government is to avoid being hit with millions of pounds in fines. …The first minister is likely to be asked what her government is doing to make sure farmers get their payments on time. Scottish ministers came in for extensive criticism last year after an IT failure delayed European agriculture subsidy payments to thousands of farmers.

What makes this story extra depressing is that the supposed Conservative opposition doesn’t question the wisdom of handouts.

…the Scottish government had asked for a deadline extension earlier this week, prompting anger from opposition politicians. Ruth Davidson, the Scottish Conservative leader,…added: “It’s a disgrace that so many farmers are still waiting for payments, and it looks like, for the second year running, the SNP is going to have to go cap-in-hand to Europe and ask for special treatment.”

And it goes without saying that the welfare recipients…oops, I mean farmers…are anxious to know when their handouts will arrive.

Scott Walker, the chief executive of the National Farmers’ Union in Scotland, said: “Everyone who is due a payment simply wants to know when it will arrive and that is a reasonable demand.”

Sigh.

One of the reasons I was sympathetic to Scottish independence is that the entitlement mindset in the country may have been disrupted if they lost subsidies from the central government in London. Redistribution isn’t as fun when you’re taking money from your own pockets.

However, that wouldn’t have put an end to handouts from the statists in Brussels, assuming that Scotland would have been part of the European Union. So I’ll never be without things to write about. That’s good for me, bad for Europe.

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The Case for Jury Nullification, Part III

In my first column on jury nullification, I applauded ordinary citizens for producing a not-guilty verdict when the federal government tried to impose bad U.S. tax law on a Swiss banker who lived in Switzerland and obeyed Swiss law. Simply stated, borders should limit the power of a government.

In my second column on jury nullification, I approvingly wrote about how citizens on another jury rebelled against the government’s persecution of western ranchers (while also noting that dramatically reducing government land ownership would be the solution to the underlying controversy).

To be sure, I don’t think jury nullification is the ideal way of dealing with over-criminalization and abusive law enforcement. It would be much better to repeal bad laws and get rid of the bad people working for government. But until those things happen, I’m glad nullification exists as a last line of defense.

Now let’s look at a third example. Except it’s probably more accurate to say it’s an example of pre-jury nullification.

Here are some excerpts from a heartwarming story from New Mexico (oops, I mean Arizona…I blame Chuck Asay!).

You may have heard that saying: If prosecutors want to, they could get a grand jury to indict a ham sandwich. It’s a knock on how much control prosecutors hold over the grand juries to whom they give evidence for possible indictments. The 269th Pima County Grand Jury could not be controlled like that. …this one was led by a criminal-defense attorney and populated by freethinkers who took to heart their role as “conscience of the community.” They went so far as to decline to indict people even though there was enough evidence to show probable cause, foreman Natman Schaye and others told me. That, in essence, is grand-jury nullification — not carrying out the law because, in the jury’s opinion, it is unjust.

This grand jury, which was labeled as “The Notorious 269th” by the press, decided that justice was more important than obeying the government.

Rick Myers, a well-known Tucsonan who is a member of the Arizona Board of Regents, also was on the Notorious 269th. What bothered him was the many cases of small quantities of drugs that were charged as Class 4 felonies, as state law dictates. He said he began making a distinction between what’s actually a “crime” and what’s “breaking the law.” The reason, another grand juror, Jodi Kautz, said was: They were presented with possession cases involving drug amounts as tiny as 2/100th of a gram, a trace amount. …Myers said. “There’s a whole lot of people getting charged for things that are not hurting other people.”

Here’s some background info on the role of the grand jury.

Grand juries have their roots in 12th-century England, but in early America took on more of a judicial role — that of a body of citizens standing between the government and a person accused of a crime. The grand jury eventually came to stand as a check, ensuring the government had enough evidence to pursue a criminal case. …Prosecutors run the grand-jury sessions… They bring proposed indictments to the jurors and call police officers as witnesses, without a defendant or a defense attorney present. The grand jurors, though, make the ultimate decision as to whether to indict, and on what charges.

Unsurprisingly, government officials don’t approve of grand jurors exercising independent thought.

As to the grand jurors’ decision to reject some cases with adequate evidence, Acosta said that really isn’t their place. They take an oath to follow the law before taking their seats, she said. “If somebody has a particular agenda, I suppose they can go to the Legislature and say, ‘We don’t like this law, maybe you should change it.’ But the grand jury isn’t the place for that kind of activity,” she said.

Sorry, Ms. Acosta, that’s not right.

The grand jury (or regular jury) may not be the ideal place to protect against injustice, but it’s better than nothing when governments have bad laws and/or government officials abuse citizens.

If you don’t believe me, just ask Andy Johnson, Anthony Smelley, the Hammond family, Charlie Engle, Tammy Cooper, Nancy Black, Russ Caswell, Jacques Wajsfelner, Jeff Councelller, Eric Garner, Martha Boneta, Corey Statham, James Slatic, Carole Hinders, Salvatore Culosi, and James Lieto, as well as the Sierra Pacific Company and the entire Meitev family.

There’s a philosophical principle involved. In many cases, nullification is appropriate because governments have criminalized actions that have no victims. Which is why the movement’s motto, as noted in this Ron Swanson meme, is that there is no crime when there’s no victim.

I’ll close on a personal note. I’ve lived in Fairfax County for almost three decades and I’ve only received one summons for jury duty. When that happened, I immediately fantasized about being a hero and using nullification to block an unjust gun prosecution or unjust drug prosecution. But it turned out that the case was a lawsuit between a contractor and consumer, so I was happy they wound up finding enough people before my name was called.

But maybe my nullification fantasy eventually will become a reality. Though I’ve noted that my fantasies (at least the ones involving public policy) never seem to happen.

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New Budget Deal Is a Victory for Washington over Taxpayers

The biggest victory for taxpayers during the Obama years was the Budget Control Act in 2011, which imposed sequester-enforced caps on discretionary spending.

Indeed, that legislation was then followed by a sequester in early 2013, which was a stinging defeat for Obama (he tried to forestall the sequester with hysterical predictions of doom).

But politicians don’t like fiscal restraint. Spending caps limit their ability to buy votes with other people’s money. So they evaded the spending caps in late 2013. Then they did the same thing in late 2015.

And now it’s happened again. The budget caps have been busted again as part of a new agreement. To be blunt, the swamp has triumphed over taxpayers. The politicians who promised to clean up the mess in Washington have decided that the cesspool is actually a hot tub.

Most critics of the deal are focusing on how it means more red ink. But that’s a secondary problem. The real mistake is that government is getting bigger, and that means private sector activity is being displaced.

Here’s everything you need to know about what’s happening to overall discretionary spending, captured in a chart from the Committee for a Responsible Federal Budget.

The blue bars in the above chart show what happened in the real world (technically, they show annual “budget authority,” which is sort of like the money that gets deposited in a checking account and “outlays” are when checks are written). The green line shows the spending-on-autopilot forecast from early 2011. The red line shows the discretionary spending allowed by the Budget Control Act. And the yellow line shows what spending should have been if the sequester was left unchanged.

The bottom line is that the spending levels for 2018 and 2019 mean that the victory of the Budget Control Act has been almost entirely undone.

Now let’s look at the numbers for non-defense discretionary spending, based on data from the Congressional Research Service and the Office of Management and Budget.

Once again, we see the same pattern of good promises and bad results. And this happened with Republicans in partial control or (now) complete control of the process.

Needless to say, I tried to convince GOPers to do the right thing. But I failed.

Republicans claim, for what it’s worth, that the deal was necessary to get higher defense spending. I question that goal (we already spend enormous amounts of money compared to any potential adversaries, and I also think we shouldn’t squander blood and treasure on  overseas nation building). But even if one believes in more defense spending, why add huge increases in domestic spending?

Why not copy Franklin Roosevelt and Harry Truman, both of whom reduced the burden of domestic spending when increasing defense outlays?

My pro-GOP friends in Washington respond by stating that Republicans didn’t have 60 votes to overcome a filibuster in the Senate. That’s a legitimate point, but I respond by asking why they didn’t force Democrats to conduct a real filibuster (hold the floor for 24 hours a day, 7 days a week)?

They then tell me that a filibuster (assuming Democrats didn’t get tired of holding the floor) would mean stalemate and eventually could result in a shutdown. Another fair point, but I then point out that left-wing constituencies are the ones that will feel the pinch if non-essential parts of the government cease operating.

At this point, the truth usually comes out and they tell me that Republican leaders can’t play hardball because too many of their members actually like big government.

By the way, I put a greater share of the blame on the Trump Administration. If the White House drew a line in the sand and told Congress it would block any spending above the caps, lawmakers would have been forced to prioritize. But since Trump doesn’t seem to have any interest in fiscal restraint, we’re getting a repeat of the profligate Bush years – with congressional Republicans figuring they may as well take part in the feeding frenzy.

I’ll close by noting that this isn’t the end of the world. Yes, we have far too much discretionary spending, and the additional spending in this agreement is bad news. That being said, the extra outlays are relatively trivial compared to the gigantic problem of ever-expanding entitlement spending.

But the fact that Republicans aren’t willing to enforce any discipline on discretionary outlays certainly does not bode well for the presumably more-difficult battle for genuine entitlement reform.

P.S. I’ll make a prediction right now (and I’ll even make a wager with any interested parties) that inflation-adjusted domestic spending will climb faster under Trump than it did under Obama.

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The Case for Tax Reform, Part II

I strongly applauded the tax reform plan that was enacted in December, especially the lower corporate tax rate and the limit on the deduction for state and local taxes.

But I’m not satisfied. Our long-run goal should be fundamental tax reform. And that means replacing the current system with a simple and fair flat tax.

And the recent tax plan only took a small step in that direction. How small? Well, the Tax Foundation just calculated that it only improved the United States from #30 to #25 in their International Tax Competitiveness Ranking. In other words, we have a long way to go before we catch up to Estonia.

 

It’s possible, of course, to apply different weights and come up with a different list. I think the Tax Foundation’s numbers could be improved, for instance, by including a measure of the aggregate tax burden. And that presumably would boost the U.S. score.

But the fact would remain that the U.S. score would be depressingly low. In other words, the internal revenue code is still a self-imposed wound and huge improvements are still necessary.

That’s why we need another round of tax reform, based on the three core principles of good tax policy.

1. Lower tax rates
2. Less double taxation
3. Fewer loopholes

But how is tax reform possible in a fiscal environment of big government and rising deficits?

This is a challenge. In an ideal world, there would be accompanying budget reforms to save money, thus creating leeway for tax reform to be a net tax cut.

But even in the current fiscal environment, tax reform is possible if policy makers finance pro-growth reforms by closing undesirable loopholes.

Indeed, that’s basically what happened in the recent tax plan. The lower corporate rate was financed by restricting the state and local tax deduction and a few other changes. The budget rules did allow for a modest short-run tax cut, but the overall package was revenue neutral in the long run (i.e., starting in 2027).

It’s now time to repeat this exercise.

The Congressional Budget Office periodically issues a report on Budget Options, which lists all sort of spending reforms and tax increases, along with numbers showing what those changes would mean to the budget over the next 10 years.

I’ve never been a huge fan of this report because it is too limited on the spending side. You won’t find fleshed-out options to shut down departments, for instance, which is unfortunate given the target-rich environment (including Transportation, Housing and Urban Development, Education, Energy, and Agriculture).

And on the tax side, it has a lengthy list of tax hikes, generally presented as ways to finance an ever-expanding burden of government spending. The list must be akin to porn for statists like Bernie Sanders.

It includes new taxes.

• Energy taxes
• Financial taxes
• Value-added taxes

And it includes increases in existing taxes.

• Higher gas taxes
• More onerous depreciation rules
• Busting the cap on taxable earnings for Social Security
• Expanded death tax
• Higher capital gains taxes on “carried interest“
• Higher capital gains taxes on everything else
• More double taxation of investment
• More double taxation of savings
• Increasing top tax rates

But the CBO report also includes some tax preferences that could be used to finance good tax reforms.

Here are four provisions of the tax code that should be the “pay-fors” in a new tax reform plan.

We’ll start with two that are described in the CBO document.

Further reductions in itemized deductions – The limit on the state and local tax deduction should be the first step. The entire deduction could be repealed as part of a second wave of tax reform. And the same is true for the home mortgage interest deduction and the charitable contributions deduction.

Green-energy pork – The House version of tax reform gutted many of the corrupt tax preferences for green energy. Unfortunately, those changes were not included in the final bill. But the silver lining to that bad decision is that those provisions can be used to finance good reforms in a new bill.

Surprisingly, the CBO report overlooks or only gives cursory treatment to a couple of major tax preferences that each could finance $1 trillion or more of pro-growth changes over the next 10 years.

Municipal bond interest – Under current law, there is no federal tax on the interest paid to owners of bonds issued by state and local governments. This “muni-bond” loophole is very bad tax policy since it creates an incentive that diverts capital from private business investment to subsidizing the profligacy of cities like Chicago and states like California.

Healthcare exclusion – Current law also allows a giant tax break for fringe benefits. When companies purchase health insurance plans for employees, that compensation escapes both payroll taxes and income taxes. Repealing – or at least capping – this exclusion could raise a lot of money for pro-growth reforms (and it would be good healthcare policy as well).

What’s potentially interesting about the four loopholes listed above is that they all disproportionately benefit rich people. This means that if they are curtailed or repealed and the money as part of tax reform, the left won’t be able to argue that upper-income taxpayers are getting unfair benefits.

Actually, they’ll probably still make their usual class-warfare arguments, but they will be laughably wrong.

The bottom line is that we should have smaller government and less taxation. But even if that’s not immediately possible, we can at least figure out revenue-neutral reforms that will produce a tax system that does less damage to growth, jobs, and competitiveness.

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Will Trump Sabotage America’s Economy by Wrecking NAFTA?

On the one-year anniversary of his inauguration, I graded Trump’s overall record on economic policy and specifically observed that his trade rhetoric was worse than his trade policy. But I added a caveat about the North American Free Trade Agreement.

…he’s been doing a lot of saber-rattling, but fortunately not drawing too much blood. That being said, he is threatening to pull the United States out of NAFTA, which would be a very big mistake.

Unfortunately, this is not an idle threat. So let’s look at what some experts have said about the value of NAFTA to the American economy.

We’ll start with a column from today’s Washington Post by the CEO of Union Pacific. He worries that the good news on taxes will be offset by bad news on trade.

Freight railroads are the bloodstream of U.S. business, supporting the livelihoods of employees in nearly every sector of the economy. …From my vantage point, it is clear that the recently adopted tax-reform law will provide meaningful stimulus for the U.S. economy. …our economy is on the rise, and tax reform will help generate even more momentum. But America’s potential exit from the North American Free Trade Agreement threatens to undo much of that progress. …About 60 percent of U.S. imports are intermediate goods for U.S. production, so raising costs through what will be functionally higher taxes on production would make U.S. businesses less competitive — thwarting tax reform’s goal of allowing people and businesses to invest their money as they see fit. …executives who are excited about the economic benefits of the tax cuts are facing equal, if not greater, economic losses if NAFTA is eliminated. …At Union Pacific, …nearly 40 percent of our shipments now have an international component — coming from or headed to Canada, Mexico, Asia, Europe and beyond. …it will be critical for the United States to strengthen its most important trade partnerships, not abandon them. …the recent tax legislation is clearly a strong tail wind for future growth and expansion. Let’s not ruin the momentum by abandoning NAFTA.

I fully agree. It’s worth noting that trade policy is just as important as fiscal policy according to Economic Freedom of the World.

Which is why it makes no sense for Trump to undermine his achievement on tax reform.

Here are some excerpts from a study by a Dartmouth professor. He starts by outlining some of the benefits that have been produced by NAFTA.

U.S. trade in goods and services with Canada and Mexico has nearly quadrupled under NAFTA—from $337 billion in 1994 to about $1.4 trillion in 2016. …NAFTA partners have become the largest destination for U.S. small-business exporters. In 2014, more than 125,000 small and medium-sized businesses (SME) exported to Canada and/or Mexico: this was over 95 percent of all U.S. exporters into the NAFTA market. For these small U.S. exporters that year, Canada and Mexico were the top two export destinations. The total value of these 2014 exports was $136 billion, fully 25 percent of all U.S. SME exports. Under NAFTA, cross-border investment among the three member countries has surged as well: from $126.8 billion in 1993 to $731.3 billion in 2016. …A reasonable conclusion from…studies is that NAFTA in its entirety has elevated U.S. GDP by somewhere between 0.2 percent and 0.3 percent of GDP. …boosting U.S. GDP by between 0.2 percent and 0.3 percent means U.S. output and income is somewhere between about $40 billion to nearly $60 billion higher than it would be without NAFTA. …representative studies calculated that NAFTA raised average U.S. wages by somewhere between 0.2 and 0.3 percent–a boost to workers’ wages that, like the boost to national GDP, recurs every year.

Needless to say, wrecking NAFTA would unwind all these benefits.

…studies that have carefully modeled the United States withdrawing from NAFTA share a central estimate of withdrawal damages of about 0.3 percent of GDP. In 2017, a loss of national output approaching 0.3 percent of GDP would have been a loss of about $50 billion. …Withdrawing would reduce trade, lower national output and income, and destroy U.S. jobs and lower average U.S. real wages. In an increasingly competitive global economy, many U.S. companies and their workers would suffer, not win.

Another study had a similarly grim assessment.

…termination of the North American Free Trade Agreement (NAFTA) would have significant net negative impacts on the U.S. economy and U.S. employment, particularly over the immediate years after termination. Termination would re-impose high costs of tariffs on U.S. exports and imports, which would reduce the competitiveness of U.S. businesses both domestically and abroad. U.S. exports would drop, both to Canada and Mexico and globally, as U.S. output becomes more expensive and therefore U.S. businesses would be less competitive in these markets. Foreign purchasers would shift away from U.S. goods and services in favor of lower-cost goods and services made in other international markets, particularly those made in Asia.

This study calculated the economic damage in each state, including estimated job losses.

Mark Perry of the American Enterprise Institute put that data into a map.

Let’s close with Veronique de Rugy of the Mercatus Center, who echoes the observation that Trump may be about to sabotage the benefits of tax reform by throwing sand in the gears of international trade.

…for the first time in decades. U.S.-based businesses can now compete against their foreign counterparts without starting from an immediate disadvantage… The change should result in faster growth, higher wages and more jobs. Unfortunately, those gains may be undone this year with a wrong step on trade. …NAFTA has benefited American business. …But ramping up economic protectionism would undermine these gains and harm the economy. Many U.S. manufacturers have global supply chains, meaning they import materials and other inputs, even if the final product might then be exported. Raising the prices of these goods with tariffs makes it harder for U.S.-based businesses to compete. …Canada and Mexico are our top trading partners. If they were to increase foreign tariffs on U.S.-manufactured goods — absent a free trade pact or as retaliation for new tariffs imposed by Trump — that would significantly harm U.S. exporters.

So why is Trump threatening to do something so foolish?

Based on his public statements, he simply doesn’t understand trade. He thinks it is a contest between countries and whichever one has a trade surplus is the winner. And to fix this supposed problem, he wants to wreck NAFTA unless politicians and bureaucrats somehow have the power to dictate equal levels of trade (sort of like the way class-warfare advocates want to dictate equal levels of income).

This is wrong on many levels.

• There is zero evidence that a trade deficit is an indication of economic weakness. Indeed, since wealthier people can afford to buy more goods and services than poor people, a trade deficit oftentimes is a sign that a nation has a prosperous economy.
• Moreover, the flip side of a trade deficit is a capital surplus. In other words, foreigners who earn dollars by selling to consumers in the United States sometimes decide that investing in America is the best use of those dollars. That’s a positive indicator.
• Last but not least, it’s worth noting that countries don’t trade. Instead, trade is between consumers and businesses and those transaction are – by definition – mutually beneficial. Interfering with those transactions is pernicious government intervention.

The bottom line is that I’m still waiting for someone to successfully answer my eight questions for protectionists.

P.S. Unlike the current president, Reagan had the right approach.

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The United States Is a Tax Haven for Global Investors…and that’s Good for America

According to bureaucrats at the Paris-based Organization for Economic Cooperation and Development, so-called tax havens are terrible and should be shut down. Their position is grossly hypocritical since they get tax-free salaries while pushing for higher taxes on everyone else, but not very surprising since the OECD’s membership is dominated by increasingly uncompetitive European welfare states.

Many economists, by contrast, view tax havens favorably since they discourage politicians from over-taxing and over-spending (thus protecting nations from “goldfish government“).

I agree with this economic argument for tax havens, but I also think there’s a very strong moral argument for these jurisdictions since there are so many evil and incompetent governments in the world.

But I don’t want to rehash the argument about the desirability of tax havens in this column. Instead, we’re going to focus on a nation that is becoming the world’s premier “offshore” center.

But it’s not a Caribbean island or a micro-state in Europe.

Instead, as noted in a recent Bloomberg editorial, the United States is now the magnet for global investment.

…the U.S. is becoming one of the world’s best places to hide money from the tax collector. …Congress rejected the Obama administration’s repeated requests to make the necessary changes to the tax code. As a result, the Treasury cannot compel U.S. banks to reveal information such as account balances and names of beneficial owners. The U.S. has also failed to adopt the so-called Common Reporting Standard, a global agreement under which more than 100 countries will automatically provide each other with even more data than FATCA requires. …the U.S. is rapidly becoming the new Switzerland. Financial institutions catering to the global elite, such as Rothschild & Co. and Trident Trust Co., have moved accounts from offshore havens to Nevada, Wyoming and South Dakota. New York lawyers are actively marketing the country as a place to park assets. …From a certain perspective, all this might look pretty smart: Shut down foreign tax havens and then steal their business.

The Economist also identified the U.S. as a haven.

America seems not to feel bound by the global rules being crafted as a result of its own war on tax-dodging. It is also failing to tackle the anonymous shell companies often used to hide money. …All this adds up to “another example of how the US has elevated exceptionalism to a constitutional principle,” says Richard Hay of Stikeman Elliott, a law firm. …America sees no need to join the CRS. …reciprocation is patchy. It passes on names and interest earned, but not account balances; it does not look through the corporate structures that own many bank accounts to reveal the true “beneficial” owner; and data are only shared with countries that meet a host of privacy and technical standards. That excludes many non-European countries. …The Treasury wants more data-swapping and corporate transparency, and has made several proposals to bring America up to the level of the CRS. But most need congressional approval, and politicians are in no rush to enact them. …Meanwhile business lobbyists and states with lots of registered firms, led by Delaware, have long stymied proposed federal legislation that would require more openness in corporate ownership. (Incorporation is a state matter, not a federal one.) …America is much safer for legally earned wealth that is evading taxes… It has shown little appetite for helping enforce foreign tax laws.

And here are some passages from a recent column in Forbes.

…foreign financial institutions are required to report the identities and assets of United States taxpayers to the IRS. Meanwhile, U.S. financial institutions cannot be compelled to reveal the same information to foreign countries. Additionally, the United States has not adopted the Common Reporting Standard. …So, the United States government obtains tax and wealth information from other countries, but fails to share information about what occurs in the U.S. with those other counties. …the U.S. is among the top five best countries for setting up anonymous shell companies. Tax havens deliver a set of benefits including secrecy, potential tax minimization, and the ability of the wealthy to access their monies from anywhere in the world. For a substantial percentage of the global super-rich, the United States is regularly unmatched.

Here’s some of what was reported by the U.K.-based Financial Times.

South Dakota is best known for its vast stretches of flat land and the Mount Rushmore monument… Yet despite its small town feel, Sioux Falls has become a magnet for the ultra-wealthy who set up trusts to protect their fortunes from taxes… Assets held in South Dakotan trusts have grown from $32.8bn in 2006 to more than $226bn in 2014, according to the state’s division of banking. The number of trust companies has jumped from 20 in 2006 to 86 this year. The state’s role as a prairie tax haven has gained unwanted attention… The Boston Consulting Group estimates that there is $800bn of offshore wealth in the US, nearly half of which comes from Latin America. …Bruce Zagaris, a Washington-based lawyer at Berliner, Corcoran & Rowe, says the US offshore industry is even bigger than people realise. “I think the US is already the world’s largest offshore centre. It has done a real good job disabling competition from Swiss banks.”

If this sounds like the United States is hypocritical, that’s a very fair accusation.

Indeed, it was the topic of an entire panel at an Offshore Alert conference. If you have a lot of interest in this topic, here’s the video.

This is an odd issue where I agree with statists (though only with regard to which jurisdictions are “havens”). For instance, the hard-left Tax Justice Network has calculated that the United States is not the biggest offshore jurisdiction. But America is close to the top.

In the TJN’s most-recent Financial Secrecy Index, the United States ranks #2. They think that’s a bad thing (indeed, one of their top people actually asserted that all income belongs to the government), but I’m happy we’ve risen in the rankings.

TJN also has specific details about U.S. law and I think they’ve put together a reasonably accurate summary.

The bottom line is that America is a haven, though it’s probably worth noting that we’ve risen in the rankings mostly because other nations have been coerced into weakening their human rights laws on financial privacy, not because the United States has improved.

At the risk of pointing out the obvious, TJN and I part ways on whether it’s good for the United States to be a tax haven.

I already explained at the start of this column why I like tax havens and tax competition. Simply stated, it’s good for taxpayers and the global economy when governments are forced to compete.

But there’s also a good-for-America argument. Here’s the data from the Commerce Department’s Bureau of Economic Analysis on indirect investment in the U.S. economy. As you can see, cross-border flows of passive investment have skyrocketed. It’s unknown how much of this increase is due to overall globalization and how much is the result of America’s favorable tax and privacy rules for foreigners.

But there’s no question the U.S. economy benefits enormously from foreigners choosing to invest in America.

All of which helps to explain why it would be a big mistake for the United States to ratify the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

Unless, of course, one thinks it would be good to undermine American competitiveness by creating a global tax cartel to enable bigger government.

P.S. The OECD doesn’t like me, but I don’t like them either.

P.P.S. The TJN folks and OECD bureaucrats claim that their goal is to reduce tax evasion. My response is that a global tax cartel is a destructive way of achieving that goal. There’s a much better option available.

P.P.P.S. Rand Paul is one of the few heroes on this issue.

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Great Moments in State Government

States such as Illinois, California, New York, Connecticut, and New Jersey have very serious structural problems because of high tax burdens and unsustainable spending levels (often associated with excessive pay and benefits for bureaucrats).

I frequently write about those big issues, but I also like to periodically share examples of other bone-headed policies at the state level. These are not the types of policies that threaten bankruptcy, but they illustrate why it’s not a good idea to give power to politicians and bureaucrats.

• A threat of prison time in Indiana for rescuing a baby deer.
• An armed raid of an okra farm in Georgia.
• Spending more on bureaucracy than grants in Illinois.
• Corrupt insider dealing by a law firm in New York.

Here are some new examples.

We have a column in Forbes about the dangerous plague of unlicensed and unregulated (gasp!) cakes in New Jersey.

At first, she sold her baked goods to support her son’s school fundraisers. …Soon Heather started receiving requests from family, friends, sports fundraisers, and even a wedding venue. …With this business, Heather hoped she could pay for her son’s college education and one day open her own brick-and-mortar cake pop shop. Unfortunately, her dreams were dashed thanks to a law that exists only in New Jersey. Unlike 49 other states, selling baked goods made at home is illegal in the Garden State. Baking and selling just one cake, cookie or muffin risks fines as high as $1,000. When Heather learned she had to shut down her cake pop sideline, the news was “crushing,” she said.

As is so often the case when governments are suppressing liberty, “health and safety” is the excuse.

New Jersey’s main justification for the ban is to protect the public’s health and safety—a claim that’s belied by the fact that nearly every other state has a “cottage food” law on the books, which legalizes the sale of homemade cakes, cookies, jams and other food deemed “not potentially hazardous.” …In order to sell cake pops, cookies or other shelf-stable treats in New Jersey, Heather must either build a licensed “retail food establishment” separate from her home kitchen or she can rent a commercial kitchen, which can easily cost $35 an hour.

Fortunately, the Institute for Justice is fighting to overturn the law.

Heather and two other home bakers joined with the Institute for Justice and filed a lawsuit against the state earlier this month. …A similar IJ lawsuit has already defeated a pastry prohibition in Wisconsin. Over the summer, a Wisconsin judge struck down the state’s ban on selling home-baked goods because there was “no real or substantial connection” between the law and public safety. …In his ruling, Lafayette Circuit Court Judge Duane Jorgenson noted that the ban protected established businesses from greater competition, which is why groups like the Wisconsin Bakers Association heavily backed the law. …Those rulings followed a 2015 IJ court victory on behalf of home bakers in Minnesota, which galvanized the state to expand its cottage food laws. Now the state boasts over 3,000 cottage food producers.

Notice, by the way, that protecting an established interest group was the real purpose of the law. In other words, the law was basically similar to schemes for occupational licensing.

This next item is so strange that I wonder whether it is somehow fake. But I also suspect it’s too bizarre to be fake. In any event, I wonder about the reason for this government-mandated notice?!? And if you find a (gasp!) vending machine without the notice, what purpose is served by calling the number? And do the bureaucrats expect people to memorize the number in case they stumble upon a rogue vending machine?!?

Oh, and how long before some people figure out how to remove the notice and then call the government in hopes of getting the “cash reward”?

If anybody knows the answer to any of these questions, feel free to share your thoughts. In the meantime, I’ll simply assume that the notice presumably isn’t as pointless and stupid at this pedestrian sign and definitely not as creepy and malevolent as this “public service” notice.

Next, we have a story from ABC News about taxpayer-funded generosity to pets in Michigan.

A dog in western Michigan has been approved for unemployment benefits — and he’d be bringing in a cool $360 a week. Michael Haddock, of Saugatuck, Michigan, says he received a letter on Saturday from the State of Michigan Unemployment Insurance Agency (UIA) addressed to Michael Ryder, according to Grand Rapids ABC affiliate WZZM. Michael is his name. Ryder is his dog’s name. …Haddock says the employer listed on the letter was a restaurant chain in Metro Detroit. After receiving the letter, Haddock contacted the restaurant chain and the state unemployment office. …The Michigan UIA announced Tuesday it was creating a special investigative unit to handle the recent increase in fake unemployment claims. The agency attributes many of the claims to recent data breaches. Haddock isn’t sure how scammers got his dog’s name.

I’m clearly behind the times. I have some cats that need to sign up for handouts!

On a more serious note, I confess that I’m not aware of the degree to which unemployment benefits are fraudulent. Hopefully it’s not as bad as the EITC, though I’m confident that problem is bigger than politicians and bureaucrats would ever admit.

And why would folks in the government even care? After all, it’s our money they’re squandering rather than their own. And Milton Friedman educated us on what that means.

From the perspective of good public policy, though, the real problem with such benefits (as personalized here and here) is that they lure people into extended periods of joblessness.

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Right Wing and Left Wing in a World Driven by Values, Class, and Culture

I realize that such exercises are probably “click-bait,” but I generally can’t resist taking tests/quizzes designed to identify my philosophical/political orientation.

Here are some previous examples, all of which made sense.

• The Definitive Political Orientation test (I’m a “right libertarian”).
• The Circle test (I’m a “minarchist”).
• The Libertarian Purity test (I’m a “hard-core libertarian”).
• The 8 Values test (I’m a “libertarian capitalist”).
• The world’s smallest political quiz (I’m a “100-percent libertarian”).

But there was also a political quiz that pegged me as a “moderate,” which might be reasonable conclusion since libertarians have some right-wing views and some left-wing views. But that quiz also concluded that I had “few strong opinions,” which is a nonsensical result.

But maybe I really am a moderate because there’s a new 20-question quiz from IDRlabs and – as you can see – I’m exactly in the middle.

What makes this quiz interesting (or bizarre, depending on your outlook) is that none of the questions are about issues. Instead, you’re asked about lifestyle. Such as:

• Are you orderly or messy?
• Do you prefer country music or classical music?
• Do you want your home on a busy street or quiet street?
• Are philosophical discussions fun, boring, or pointless?
• Do you like arugula?

At the risk of over-simplifying, if you give answers suggesting you prefer a quiet and conventional life, you’ll get a right-wing score. And you’ll get a left-wing score if your answers suggest you have a more eclectic approach to life (and, if you’re like me, you don’t know whether you like arugula, so you have a hard time answering certain questions).

For what it’s worth, I think the quiz does capture something important. There is research indicating that people’s policy views are largely determined by underlying values.

And these values are more important than economics. Coming from a leftist perspective, Thomas Frank wrote What’s the Matter with Kansas last decade to address the supposed paradox of people with modest incomes voting for conservative politicians. And Thomas Edsall, also coming from the left, observed in the New York Times that wealthy people have become Democrats.

So much for Marx’s theory of economic determinism!

This is outside of my area of expertise, but I’m interested in this type of analysis because it’s my job to proselytize in favor of freedom. So I often try to convince right wingers to have a more laissez-faire approach to social and international matters and I often try to convince left wingers to have a more laissez-faire approach to economic issues.

But how do you convince people about issues if their views are dependent on an underlying value system?

And it gets more complicated because of what’s happening in society.

I’ll share a couple of items that struck me as important. First, here’s some of what Peggy Noonan wrote in the Wall Street Journal.

There are the protected and the unprotected. The protected make public policy. The unprotected live in it. …The protected are the accomplished, the secure, the successful—those who have power or access to it. They are protected from much of the roughness of the world. …They are figures in government, politics and media. They live in nice neighborhoods, safe ones. Their families function, their kids go to good schools, they’ve got some money. All of these things tend to isolate them, or provide buffers. …They’re insulated from many of the effects of their own decisions. …This is a terrible feature of our age—that we are governed by protected people who don’t seem to care that much about their unprotected fellow citizens.

And here’s a video featuring David Goodhart of London’s Policy Exchange, who says that the split is now between the “anywheres” who are cosmopolitan and the “somewheres” who are traditional.

In some sense, it seems that politics is being determined by class.  The “protected” and the “anywheres” are increasingly on the left (the “rational left” rather than the Bernie variety). And the “unprotected” and the “somewheres” are voting blocs for the right.

Incidentally, this worries me because elites have a disproportionate influence on public policy, And there’s now cultural pressure for such people to adopt left-wing views (a good example is the condescending tone of this Washington Post column). Simply stated, most educated people want to be seen as urbane and cosmopolitan, characteristics that are now associated with the left.

And it goes without saying that Trump is probably accelerating this process – which is doubly frustrating to me because his occasional support for good policy doesn’t change the fact that he’s not a supporter of free markets and limited government. Yet because he is now an avatar for the right, many educated people will now decide they should support statist policies and candidates.

The bottom line is that being an advocate for liberty is becoming an even bigger challenge!

P.S. Returning to the original topic of online tests, Reason’s political candidate quiz produced a logical conclusion.

P.P.S. By contrast, I thought the quiz on supposed libertarian hypocrisy was largely a straw-man exercise.

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Adding to the Collection of Gun Control Humor

My all-time favorite example of serious gun-control satire features some of the world’s worst people.

But that’s just the tip of a big iceberg of amusing material on the topic. Today, let’s add to the collection.

Here’s some clever humor from the Reddit libertarian page.

For what it’s worth, I’m not overly worried about America succumbing to a fascist dictatorship.

My paranoid concern – as expressed on this NRA TV interview – is that we’ll eventually have a societal breakdown because of a Greek-style fiscal crisis.

Regardless, I certainly agree that it’s very unwise to let politicians – whether they’re evil or merely feckless – to be the only ones owning guns.

Next we have a video that brings back pleasant memories of Obama’s failed efforts to exploit gun shootings.

You can find a collection of Hitler-parody videos here, but since today’s topic gun-control humor, here are some related satirical videos.

• A revealing look at how leftists think about gun control.
• A heartwarming adoption story.
• An amusing cartoon conversation between an anti-gun ideologue and a supporter of the Constitution.
• Joe Biden’s self-defense advice.
• Debunking leftist comics on the “Black NRA.”
• Gun control from the burglar’s perspective.
• The impact of gun-free zones.

The next item, also from the libertarian page on Reddit, definitely belongs in the too-good-to-check category. All I know is that I hope it’s real.

For what it’s worth, I strongly suspect that gun-buyback programs do nothing to take weapons out of the hands of bad people.

I’ll close by sharing some regional gun-control humor featuring Texas, California, Europe, and Chicago.

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The Overwhelming Case for Chile’s Private Social Security System

The United States and other western nations became rich during the 1800s thanks to a combination of rule of law and very small government.

Sadly, very few nations – most notably East Asian tiger economies – have become rich in the modern era. Yes, some other countries have grown, but they are not on a path to converge with rich nations.

Chile, however, may be an exception to that unfortunate pattern. It has enjoyed amazing levels of growth since a shift to free-market policies starting about 40 years ago. It is now the richest country in Latin America and if its “improbable success” continues, it will soon be comfortably part of what used to be called the first world.

The flagship reform in Chile was the creation of a funded retirement system based on personal accounts. Basically universal IRAs.

Writing for the Weekly Standard, Fred Barnes shared what he learned about the nation’s private retirement system.

The rags-to-riches Chile story lives on as a model of what a poor country can achieve if it spurns socialism and adopts free markets and democracy. Peru is now copying Chile. More may follow. …Chile was once a Third World country headed downhill economically after Salvador Allende was elected president in 1970…bent on creating a Marxist state. In 1973, the military led by General Augusto Pinochet staged a coup. …When he took over, Chile had one of the highest rates of poverty in South America. It was a basket case. Now it has the continent’s strongest economy. Without Pinochet’s having heeded the advice of economist Milton Friedman, imposed capitalism, and hired a team of free market economists, many trained at the University of Chicago, the rise to First World status wouldn’t have happened. One of the economists was José Piñera, brother of the new president and Harvard-educated. He created a stable, fully-funded pension program that has become a monument to the success of private markets. …Piñera released a study in January that found “72 percent of the capital accumulated in the personal retirement account of the average Chilean worker, after 36 years in the private pension system, comes from the return on the investments done with their contributions.” That’s a long way of saying the plan is a dazzling success.

Though there are opponents, mostly those inspired by the communist regime in Cuba and a Pope who thinks we should worship the state.

But obstacles remain. …Even with Fidel Castro gone, Cuba exports communism as aggressively as it once did sugar. …socialists have an ally in Pope Francis, who spent three days in Chile in mid-January. …there’s a disconnect between how people here feel about capitalism—as a concept anyway—and the economic success they are experiencing. Pinochet is partly to blame, I suspect. He’s a hard man to credit, given his bloody takeover.

Barnes’ final point is also important.

I’ve had many people tell me that personal accounts are bad because they were implemented during Pinochet’s reign. But that’s a silly argument, sort of like deciding to be against free trade because the dictatorial Chinese government opened up to the global economy.

As far as I’m concerned, tyrannical leaders are awful and should be condemned, but if they happen to grant citizens a slice of economic liberty, that’s a silver lining to an otherwise dark cloud.

Back to our main topic, Monica Showalter, in a column for the American Thinker, explained what makes Chile’s system a role model for the United States.

…the Chilean Model…shows some spectacular new results for ordinary citizens… the Chilean Model is working, big time.  Basically, you skip Social Security taxes for starters, which leaves you a lot more money to play around with.  You then put 10% of your income into a government-certified private pension account (and you have many choices among them)… This is mass-scale wealth creation, and it benefits workers most of all. …Chile has no pension crisis as most of the rest of the developed world does – no worries about a “trust fund” and no Social Security “cuts” to speak of.  This is why.  Thirty nations have adopted the same plan… the left hates this stuff.  It keeps workers out of the clutches of unions and un-dependent on government handouts.  Of course leftists want it gone.  They tried hard in Chile to turn workers against this pension idea.

And here’s a chart that was linked in her article showing how investment returns have played a big role in helping ordinary Chileans build nest eggs for their old age.

Let’s look at some additional research.

In a monograph published by the U.K.-based Institute of Economic Affairs, Kristian Niemietz takes an in-depth look at Chiles’s approach.

Taken together, the value of the assets accumulated by Chilean pension funds is equivalent to about two thirds of the country’s GDP (Figure 1). This places Chile in the same league as countries which have had private pensions for over a century, and miles ahead of countries with traditional Bismarckian systems… The poverty rate among the elderly is lower than that of the population as a whole – 3.9 per cent vs. 10.3 per cent, or 8.4 per cent vs. 14.4 per cent, depending on the poverty measure used… Chile’s 1981 pension reform has given rise to a number of positive economic spillover effects: the prefunded system has been an active ingredient in the accelerated economic development that the country has been experiencing since the mid-1980s. …It has increased employment, especially in the formal sector… It has boosted the development and sophistication of Chile’s capital markets, and thus raised Total Factor Productivity… Despite the current backlash against it, Chile’s pension system is a success story. The system has achieved consistently high rates of return. It offers excellent value for money and solid pensions for those who contribute regularly. … The official retirement age is not as important in Chile as it is in countries with state-run systems. By and large, in that system, people retire when they have accumulated enough savings, not when politicians think they should retire.

Here’s the chart Kristian mentioned in the text. By this important metric, Chile is firmly ensconced in the upper tier of developed countries.

Now let’s address some of the critics.

Under the previous leftist government, there were protests against the country’s famous private social security system and attempts to undermine the model. Indeed, I wrote about that battle back in 2014. And I also noted that even some academics agreed that it would be foolish to undermine a successful approach.

Let’s see what’s happened since then. The Economist reported about the complaints about a year ago.

…tens of thousands of Chileans in Santiago…protest against the country’s privatised pension system. Organisers—a mix of unions, pensioners’ associations and consumer-advocacy groups—say that… Pensions are too small…benefits have not measured up to people’s unrealistic expectations. The scheme’s founders told workers that if they contributed continuously throughout their careers they would receive a generous 70% of their final salaries upon retirement. …But most workers contributed far less. Women took time off to raise children (and retire earlier than men). Many Chileans spent time in informal jobs or unemployed. On average, they contribute for only 40% of their prime working years. …The system has generated high returns for pensioners, averaging 8.6% a year between 1981 and 2013. But…high fees have bitten a huge chunk out of those returns, reducing them to 3-5.4%.

Though the article also noted all the benefits of personal accounts.

Rather than saddle the government with an unaffordable pay-as-you-go system, in which today’s taxpayers support today’s pensioners even as the population ages, Chile created one in which workers save for their own retirement by paying 10% of their earnings into individual accounts. These are managed by private administrators (AFPs). …the system worked. Contributions to the AFPs flowed into capital markets, which boosted growth. Annual GDP growth from 1981 to 2001 was 0.5 percentage points higher than it would have been without the investment, according to one study. This helped lift millions of people out of poverty.

The last couple of sentences of the above passage are worth highlighting. As I’ve noted, even small differences in economic growth – if they are sustained for a long period – make a huge difference in terms of national prosperity. And 0.5 percent more growth every year is actually a big boost when looking at the impact of just one policy.

Last but not least, here’s Ian Vasquez’s response to the attacks on the Chilean system.

Critics in Chile assert that the average pension provided by the private pension fund companies is around $340 per month, which is not better than the public pension system. But as the Chile-based Liberty and Development institute (LyD) has shown, that is like comparing apples to oranges. To calculate the private system’s figures, all those affiliated with it are taken into account, even if they have only contributed to their accounts once in their lifetime. The corresponding figure for the public pension system, however, only takes into account the pensions of those who have contributed for a minimum of 10 to 15 years, something that leaves out half of the people affiliated with that system. In addition, pensions under the private system are obtained through contributions that amount to 10 percent of wages, while in the public system the contribution is 20 percent. Correcting for those distortions shows that the value of the pensions the AFPs provide is three times higher than that of the public system. …it’s true that many Chileans do not contribute regularly to their retirement accounts because too many work outside the formal sector and getting work is still too precarious for many, that is a problem that affects any pension system, whether public or private, and can only be solved with labor reforms. …Chile’s private pension system can certainly be improved, but the reality is that it has been extremely successful. …old-age pensions no longer represent a burden on the treasury. Pension savings have reached $168 billion, about 70 percent of GDP, which has stimulated high growth and domestic investment, and has put Chile on the verge of becoming a developed country—a remarkable achievement.

Amen. Chile’s system isn’t perfect, but it’s far better, by several orders of magnitude, than the debt-ridden, pay-as-you-go models that are wreaking havoc with the public finances of other countries.

And Chile is prospering in a way unimaginable in other Latin nations.

It would be very nice to have a similar system of personal retirement accounts in the United States. And here’s the cartoon version of the argument.

P.S. Chile also has nationwide school choice.

P.P.S. Bill Clinton supported good Social Security reform and was prepared to work with congressional Republicans (and some Democrats) on good legislation for personal accounts, but that effort was sidetracked by the partisan impeachment fight. A genuine tragedy.

P.P.P.S. I’ve written before about overseas bathroom adventures and I now have another episode to add to the mix from my recent trip to India. I like modern facilities, including ones that have energy-saving features. But building engineers should realize that motion-activated lights may not make sense in bathrooms. At least not when people may be locked in stalls with no good options when the lights go out. Enough said.

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Feckless Tories Should Realize They Hold a Very Strong Hand in Brexit Negotiations

If I was a citizen of the United Kingdom, I would have voted to leave the European Union for the simple reason that even a rickety lifeboat is better than a slowly sinking ship.

More specifically, demographic changes and statist policies are a crippling combination for continental Europe, almost surely guaranteeing a grim future, and British voters wisely decided to escape. Indeed, I listed Brexit as one of the best things that happened in 2016.

This doesn’t mean the U.K. has ideal policies, but Brexit was a good idea precisely because politicians in London will now have more leeway and incentive to liberalize their economy.

Though I wonder whether Prime Minister May and the bumbling Tories will take advantage of the situation.

The Financial Times has a report that captures the real issue driving Brexit discussions. Simply stated, the European Union is scared that an independent U.K. will become more market-friendly and thus put competitive pressure on E.U. welfare states.

The EU is threatening sanctions to stop Britain undercutting the continent’s economy after Brexit…the bloc wants unprecedented safeguards after the UK leaves to preserve a “level playing field” and counter the “clear risks” of Britain slashing taxes or relaxing regulation. Brussels…wants…to enforce restrictions on taxation…and employment rights. …the EU negotiators highlight the risk of Britain ‘undermining Europe as an area of high social protection’…the UK is “likely to use tax to gain competitiveness” and note it is already a low-tax economy with a “large number of offshore entities”. …On employment and environmental standards, the EU negotiators highlight the risk of Britain “undermining Europe as an area of high social protection”.

In case you don’t have a handy statism-to-English dictionary handy, you need to realize that “level playing field” means harmonizing taxes and regulations at very high level.

Moreover, “employment rights” means regulations that discourage hiring by making it very difficult for companies to get rid of workers.

And “high social protection” basically means a pervasive and suffocating welfare state.

To plagiarize from the story’s headline, these are all policies that belong in a bonfire.

And the prospect of that happening explains why the politicians and bureaucrats in continental Europe are very worried.

…senior EU diplomats, however, worry that the political expectations go beyond what it is possible to enforce or agree. “This is our big weakness,” said one. Theresa May, the British prime minister, last year warned the EU against a “punitive” Brexit deal, saying Britain would fight back by setting “the competitive tax rates and the policies that would attract the world’s best companies and biggest investors”.

Sadly, Theresa May doesn’t seem very serious about taking advantage of Brexit. Instead, she’s negotiating like she has the weak hand.

Instead, she has the ultimate trump card of a “hard Brexit.” Here are four reasons why she’s in a very strong position.

First, the U.K. has a more vibrant economy. In the latest estimates from the Fraser Institute’s Economic Freedom of the World, the United Kingdom is #6.

And how does that compare to the other major economies of Europe?

Well, Germany is #23, Spain is #36, France is #52, and Italy is #54.

So it’s easy to understand why the European Union is extremely agitated about the United Kingdom becoming even more market oriented.

Indeed, the only area where the U.K. is weak is “size of government.” So if Brexit led the Tories to lower tax rates and shrink the burden of government spending, it would put enormous pressure on the uncompetitive welfare states on the other side of the English Channel.

Second, the European Union is horrified about the prospect of losing membership funds from the United Kingdom. That’s why there’s been so much talk (the so-called divorce settlement) of ongoing payments from the U.K. to subsidize the army of bureaucrats in Brussels. A “hard Brexit” worries British multinational companies, but it worries European bureaucrats even more.

Third, the European Union has very few options to punitively respond because existing trade rules (under the World Trade Organization) are the fallback option if there’s no deal. In other words, any protectionist schemes (the “sanctions” discussed in the FT article) from Brussels surely would get rejected.

Fourth, European politicians may hate the idea of an independent, market-oriented United Kingdom, but the business community in the various nations of continental Europe will use its lobbying power to fight against self-destructive protectionist policies and other punitive measures being considered by the spiteful political class.

P.S. Here’s a Brexit version of the Bayeux Tapestry that probably won’t be funny unless one is familiar with the ins and outs of British politics.

P.P.S. Here are some easier-to-understand versions of Brexit humor.

P.P.P.S. And here’s some mockery of senior politicians of the European Commission.

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