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Archive for August, 2018

Stocks just set a new record for the longest “bull market” in history. If you’re an optimist, this is a reason to celebrate the relatively high level of economic freedom in the United States.

If you’re a pessimist, you might appreciate that there’s more economic liberty in America than most other places, but you still worry whether easy-money policies from the Fed have created a bubble in financial markets.

And if you’re fair, you admit that some of Trump’s policies are helping the economy and some are hurting the economy. Which was my message in this recent interview.

Simply stated, I like what Trump is doing on taxes and regulation, but I’m not a fan of what he’s doing on spending and trade.

Because he’s all over the map, it’s not easy to assign an overall grade to Trump’s economic policy (especially since it’s an open question whether Trump is trying to liberalize trade or restrict it).

Regardless, this discussion got me thinking of how best to explain the importance of various economic policies. Regular readers know I’m a huge fan of both the Fraser Institute’s Economic Freedom of the World and the Heritage Foundation’s Index of Economic Freedom.

At the risk of oversimplifying, both publications measure economic freedom by looking at a combination of fiscal policy, regulatory policy, trade policy, monetary policy, and quality of governance (encompassing factors such as the legal system and property rights).

Generally speaking, the various policies are equally weighted. Which, based on a lot of research, is correct. But I wonder if the various policies are equal in different ways. I sometimes use a simple analogy in speeches, equating economic policy with the soundness of a house.

  • The quality of governance is akin to the foundation, because just as a very nice house won’t last long if built on a shaky foundation, good policies won’t generate much prosperity if the legal system is corrupt and property rights aren’t protected.
  • Monetary policy is akin to the framework of the house because it is also systemically important. Most recessions (and the false booms that precede downturns) are caused by misguided central bank tinkering.
  • Finally, as shown in my amateur drawing, trade policy, regulatory policy, and fiscal policy are the floors of the house. They determine the livability of the house, whereas monetary policy and quality of governance determine the structural soundness of the house.

To elaborate on this analogy, consider what I wrote a few days ago about Denmark. That house has a strong foundation and a solid framework, but the floor for fiscal policy is a total mess. Since I focus mostly on public finance, I get very agitated about that floor of the house. But as an economist, I nonetheless admit it’s still a nice place to live.

Conversely, Lebanon has one the best floors for fiscal policy, but the foundation is quicksand and the regulatory floor is a wreck. So that may not be an ideal place to live (notwithstanding compensating factors).

Anyhow, I’m looking for feedback. When I first proposed my Golden Rule, it was wordy and clunky. I got some great suggestions and eventually produced a much better version. I’d like to do the same for overall economic policy.

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Donald Trump wants to make protectionism great again. Bernie Sanders wants to make socialism great again.

And if we continue with sarcastic headlines, Elizabeth Warren wants to make cronyism great again.

She has a plan, which she explained in a column for the Wall Street Journal and also in this press release on her Senate website, that would give politicians and bureaucrats sweeping powers over large companies.

There’s a technical term for this system of private ownership/government control. It’s called fascism, though I prefer referring to it as corporatism or dirigisme to distinguish what Warren is doing from the racist and militaristic version of that ideology.

Or we can just call it crazy. Kevin Williamson summarizes this dangerous proposal for National Review.

Senator Elizabeth Warren of Massachusetts has one-upped socialists Bernie Sanders and Alexandria Ocasio-Cortez: She proposes to nationalize every major business in the United States of America. If successful, it would constitute the largest seizure of private property in human history. …Senator Warren’s proposal entails the wholesale expropriation of private enterprise in the United States, and nothing less. It is unconstitutional, unethical, immoral, irresponsible, and — not to put too fine a point on it — utterly bonkers. …To propose such a thing for sincere reasons would be ghastly stupidity. …Politicians such as Senator Warren lack the courage to go to the American electorate and say: “We wish to provide these benefits, and they will cost an extra $3 trillion a year, which we will pay for by doubling taxes.” …It treats the productive capacity of the United States as a herd of dairy cows to be milked by Senator Warren et al. at their convenience. And, of course, Senator Warren and her colleagues get to decide how the milk gets distributed, too. …Recep Tayyip Erdogan, Hugo Chávez, Huey Long: The rogues’ gallery of those who sought to fortify their political power by bullying businesses is long, and it is sickening. Senator Warren now nominates herself to that list

Professor Don Boudreaux of George Mason University exposes Warren’s economic illiteracy.

Sen. Elizabeth Warren (D-MA)…outlined her new bill that “would require corporations to answer to employees and other stakeholders as well.” …If this mandate is ever enacted, it would radically restructure corporate law, governance, and finance, which is especially frightening because seldom have I encountered so many fallacies…no company in a market economy can force anyone to buy its outputs or to supply it with labor and other inputs, every company, to survive, must continually make attractive offers to consumers, workers, and suppliers. The ability of consumers, workers, and suppliers to say no combines with the law of contract — which requires parties to honor whatever commitments they voluntarily make to each other — to guarantee that companies are fully accountable to everyone with whom they exchange. Companies therefore are fully accountable to their customers and to their workers… the senator offers absolutely no evidence — not even a single anecdote — that companies are unaccountable to consumers.

Not that we needed more evidence that she doesn’t understand economics.

Walter Olson points out that Warren’s legislation would expropriate wealth, presumably in violation of the Constitution’s taking clause.

Elizabeth Warren of Massachusetts has introduced legislation that would radically overhaul corporate governance in America, requiring that the largest (over $1 billion) companies obtain revocable charters from the federal government to do business, instituting rules reminiscent of German-style co-determination… Sen. Warren’s proposal would pull down three main pillars of U.S. corporate governance: shareholder primacy, director independence, and charter federalism. …Warren-style rules…would in effect confiscate at a stroke a large share of stockholder value, transferring it to some combination of worker and “community” interests. …This gigantic expropriation, of course, might be a Pyrrhic victory for many workers and retirees whose 401(k) values would take a huge hit… some early enthusiasts for the Warren plan are treating the collapse of shareholder value as a feature rather than a bug, arguing that it would reduce wealth inequality. …it would test the restraints the U.S. Constitution places on the taking of property without compensation.

Wow, it belies belief that some leftists support policies that will hurt everyone so long as rich people suffer the most. The ghost of Jonathan Swift is smiling.

Samuel Hammond of the Niskanen Center explains why Warren’s scheme would be devastating to fast-growing innovative companies.

The United States is home to 64 percent of the world’s billion-dollar privately held companies and a plurality of the world’s billion-dollar startups. Known in the industry as “unicorns,” they cover industries ranging from aerospace to biotechnology, and they are the reason America remains the engine of innovation for the entire world. Unless Elizabeth Warren gets her way. In a bill unveiled this week, the Massachusetts senator has put forward a proposal that threatens to force America’s unicorns into a corral and domesticate the American economy indefinitely. …the Accountable Capitalism Act is in many ways the most radical proposal advanced by a mainstream Democratic lawmaker to date. …Warren’s proposal is to fundamentally upend the way the most productive companies in the American economy work from the top down.

Writing for CapX, Oliver Wiseman wisely warns that Warren’s power-grab will undermine productivity.

…her federal charter system would make large firms accountable to politicians – not the people. And that, given the current occupant of the White House, it is surprising that someone from the left of the Democratic party cannot see how this isn’t just deeply illiberal but really rather dangerous. …much beyond the imposition of costly and inefficient box-ticking exercises. Firms will hold meetings with communities, conduct internal reviews and, in all likelihood, reach the same decision they would have reached anyway. Only more slowly and at greater expense. …If you are worried about stagnating wages, you should be preoccupied by one thing above all else: how to boost productivity. Warren’s vision for “accountable capitalism” not only has nothing to say on the issue, it would chip at way at the dynamism that has been the engine of America’s economic success. …The proposals in the Accountable Capitalism Act are drawn up by someone interested in how the pie is sliced up, not the size of the pie. …According to the economist William Nordhaus, innovators keep just 2 per cent of the social value of their innovations. The rest of us enjoy 98 per cent of the upside.

Amen. When there’s less innovation, investment, and productivity, that means lower wages for the rest of us.

Ryan Bourne highlights for the Weekly Standard how political meddling would create uncertainty and will harm both workers and shareholders.

While she might want businesses to notionally be private entities, the “Accountable Capitalism Act” she unveiled last week represents pure, unadulterated European corporatism… Warren’s proposal would establish in the Commerce Department an Office of United States Corporations to review and grant charters… This office is an almighty and arbitrary Damocles sword, with the politicians that control it able to hold companies in breach of charter for anything and everything they are thought not to have considered. …To say the Act would muddy the waters and create perverse incentives is an understatement. … A 1995-96 meta-analysis of 46 studies on worker participation by economist Chris Doucouliagos found that…co-determination laws were a drag. This all means lower wages for employed workers and huge losses for pension funds and other shareholders.

Last but not least, Barry Brownstein, in an article for FEE, is concerned about politicians holding the whip hand over the economy.

Senator Elizabeth Warren… Her ignorance is bold. …Under her proposed law, Warren and others in government will pretend to know much about that which they know nothing—running every large business in America. …In a few years, under a democratic socialist president—I almost wrote national socialist president—Warren’s dystopia could become a reality. …Imagine a major bear market and the resulting spike in fear. Then, it is not so hard to imagine a future president, with a mindset like that of Senator Warren, barnstorming the country dispensing field guidance. Is not President Trump managing trade via “bold ignorance” paving the way for more politicians like Senator Warren?

These seven articles do a great job of documenting the myriad flaws with Warren’s scheme.

So the only thing I’ll add is that we also need to realize that this plan, if ever enacted, would be a potent recipe for corruption.

We already have many examples of oleaginous interactions between big business and big government. Turbo-charging cronyism is hardly a step in the right direction.

Let’s wrap up. I used to have a schizophrenic view of Elizabeth Warren. Was she a laughable crank with a side order of sleazy ambition? Or was she a typical politician (i.e., a hypocrite and cronyist)?

Now I worry she’s something worse. Sort of a Kamala Harris on steroids.

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A key insight of international economics is that there should be “convergence” between rich countries and poor countries, which is just another way of saying that low-income nations – all other things being equal – should grow faster than high-income nations and eventually attain the same level of prosperity.

The theory is sound, but it’s very important to focus on the caveat about “all other things being equal.” As I explain in this interview from my last trip to Australia, countries with bad policy will grow slower than nations that follow the right policies.

When I discuss convergence, I often share the data on Hong Kong and Singapore because those jurisdictions have caught up to the United States. But I make sure to explain that the convergence was only possible because of good policy.

I also share the data showing that Europe was catching up to the United States after World War II, just as predicted by the theory, but then convergence ground to a halt once those nations imposed some bad policy – such as costly welfare states.

In other words, convergence is a choice, not destiny.

Countries with small government and laissez-faire markets are the ones that grow and converge. The nations with statist policy languish and suffer. Or even de-converge (with Argentina and Venezuela being depressing examples).

Let’s see what academics have to say about this issue.

We’ll start by looking at some research at VoxEU by Professor Linda Yueh. She wants to understand the characteristics that determine national prosperity.

It’s a long-standing economic question as to why more countries are not prosperous. …The World Bank estimates that of the 101 middle-income economies in 1960, just a dozen or so had become prosperous by 2008… But, hundreds of millions of people have joined the middle classes. …How has this been achieved? Possessing good institutions is what economists have come to focus on and the spread of such institutions seems to have been key…the father of New Institutional Economics…Douglass North…stressed that there was no reason why countries could not learn from more successful economies to better their own institutions. That finally happened in the 1990s.

I’m a fan of Douglass North since he – along with many other winners of the Nobel Prize – has endorsed tax competition.

In his case, the goal was for nations to face pressure to adopt good institutions.

And Professor Yueh explains that this means rule of law and free markets.

China, India, and Eastern Europe changed course. China and India re-oriented their economies outward to integrate with the world economy, while Eastern Europe shed the old communist institutions and adopted market economies. In other words, having tried central planning (in China and the former Soviet Union) and import substitution industrialisation (in India), these economies abandoned their old approaches and adopted as well as adapted the economic policies of more successful economies. For instance, China, which has accounted for the bulk of poverty reduction since 1990, undertook an ‘open door’ policy that sought to integrate into global production chains which increased competition into its economy that had been dominated by state-owned enterprises. India likewise abandoned its previous protectionist policies…in Central and Eastern Europe. Communism gave way to capitalism, with these nations adopting entirely new institutions that re-geared their economies toward the market.

All of this is good news, but not great news. Simply stated, partial liberalization can lift people out of poverty.

But it takes comprehensive liberalization for a nation to become genuinely rich.

As many of these economies, especially China, have become middle-income countries, their economic growth is slowing down. And they may slow down so far that they never become rich. But, their collective growth has lifted a billion people of out of extreme poverty.

Let’s now see what other scholars say about convergence.

Some new research from the St. Louis Federal Reserve examines this topic. Here’s the mystery they want to address.

Over the past half-century, world income disparities have widened. The gap in real gross domestic product (GDP) per capita relative to the United States between advanced and poor countries has increased. For example, the ratio of average real GDP per capita among the top 10 percent of countries to the bottom 10 percent has increased from less than 20 in 1960 to more than 40 in 1990, and to more than 50 since the turn of the new millennium… The main point to be addressed in this article is why the income disparities between fast-growing economies and development laggards have widened.

In other words, they want to understand why some nations converge and some don’t.

We select a set of 10 fast-growing economies. This set includes Asian countries and African economies that are perceived as better performing. In contrast, we select a set of 10 development laggards. Beyond the typical candidates of countries mired in the poverty trap, this set includes countries with similar or even better initial states than some of the fast-growing countries, but with divergent paths of development leading to worse macroeconomic outcomes. That is, among development laggards, we choose two subgroups, one consisting of trapped economies and another of lag-behind countries. …Using cross-country analysis, we find that a key factor for fast-growing countries to grow faster than the United States and for trapped economies to grow slower than the United States is the relative TFP… Overall, we find that institutional barriers have played the most important role, accounting for more than half the economic growth in fast-growing and trapped economies and for more than 100 percent of the economic growth in the lag-behind countries.

Here are their case studies, showing income relative to the United States (a 1.0 means the same degree of prosperity as America).

As you can see, some nations catch up and some fall further behind, while others have periods of convergence and de-convergence.

And what causes these changes?

The degree to which nations have good policy.

…we identify that unnecessary protectionism, government misallocation, corruption, and financial instability have been key institutional barriers causing countries to either fall into the poverty trap or lag behind without a sustainable growth engine. Such barriers have created frictions or distortions to capital markets, trade, and industrialization, subsequently preventing these countries from advancing. …By reviewing the previous country-specific details, one can see that the 10 fast-growing countries have all adopted an open policy… Their governments have undertaken serious reforms, particularly in both labor and financial markets. …Thus, the establishment of correct institutions and individual incentives for better access to capital markets, international trade, and industrialization can be viewed as crucial for a country to advance with sustained economic growth

Here’s a table from the report showing the policies that help and the policies that hurt. Needless to say, it would be good if the White House understood that protectionism is one of the factors that undermine growth.

Interestingly, the study from the St. Louis Federal Reserve includes some country-specific analysis.

Here’s what it said about India, which suffered during an era of statism but has enjoyed decent growth more recently thanks to partial liberalization.

During 1950-90, India’s per capita income grew at an average annual rate of only about 2 percent, a result due to the Indian government’s implementation of restrictive trade, financial, and industrial policies. The Indian state took control of major heavy industries, by including additional licensing requirements, capacity restrictions, and limits on the regulatory framework. …In the late 1970s, the Indian government opened the economy by liberalizing both international trade and the capital market, leading to rapid growth in the early 1990s. As argued by Rodrik and Subramanian (2005), the trigger for India’s economic growth was an attitudinal shift on the part of the national government in 1980 in favor of private businesses. …The final trigger of the major economic reform of Manmohan Singh in the 1990s was due to the well-known 1991 balance-of-payment crisis….This reform ended the protectionist policies followed by previous Indian governments and started the liberalization of the economy toward a free-market system. This event led to an average annual growth rate that exceeded 6 percent in per capita terms during 1990-2005.

For what it’s worth, I am semi-pessimistic about India. Simply stated, there’s hasn’t been enough reform.

We also have some discussion regarding Argentina, which is mostly a sad story of ever-expanding government.

Argentina is the third-largest economy in Latin America and was one of the richest countries in the world in the early twentieth century. However, after the Great Depression, import substitution generated a cost-push effect of high wages on inflation. During 1975-90, growing government spending, large wage increases, and inefficient production created chronic inflation that increased until the 1980s, and real per capita income fell by more than 20 percent. …In 1991, the government attempted to control inflation by pegging the peso to the U.S. dollar. In addition, it began to privatize state-run enterprises on a broader basis and stop the run of government debt. Unfortunately, lacking a full commitment, the economy continued to crumble slowly and eventually collapsed in 2001 when the Argentine government defaulted on its debt. Its GDP declined by nearly 20 percent in four years, unemployment reached 25 percent, and the peso depreciated by 70 percent after being devalued and floated.

But if we go to the other side of the Andes Mountains, we find some good news in Chile.

From the Second World War to 1970, real GDP per capita of Chile increased at an average annual rate of 1.6 percent, and its economic performance was behind those of Latin America’s large and medium-sized countries. Chile pursued an import-substitution strategy, which resulted in an acute overvaluation of its currency that intensified inflation. …Although most Latin American countries have practiced strong government intervention in the markets since the mid-1970s, Chile pursued free market reform. …The outcomes are as follows: Exports grew rapidly, per capita income took off, inflation declined to single digits, wages increased substantially, and the incidence of poverty plummeted (compare with Edwards and Edwards, 1991). Since the democratic administration of Patricio Aylwin in 1990, the economic reform has been accelerated and Chile has become one of the healthiest economies in Latin America.

Not only has Chile become the richest nation in Latin America, it also has enjoyed significant convergence with the United States. About 40 years ago, according to the Maddison database, per-capita GDP in Chile was only about 20 percent of U.S. levels. Now it is 40 percent.

I’ll close with a chart, based on the Maddison numbers, showing how Hong Kong, Singapore, and Switzerland have converged with the United States. These are the only nations that have ranked in the top-10 for economic freedom ever since the rankings began. As you can see, their reward is prosperity.

The bottom line is that there is a recipe for growth and prosperity. That’s the good news.

The bad news is that very few nations follow the recipe since economic liberty means restricting the power of special interests and the political elite.

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The good news about China is that economic liberalization has produced impressive growth in recent decades, which has helped bring hundreds of millions of people out of poverty.

The bad news is that China started from such a low position that per-capita income is still quite low compared to rich nations.

So what does the economic future hold? Will China continue its upward trajectory?

That’s certainly possible, but it depends on the Chinese government. Will there be additional liberalization, giving the economy more “breathing room” to grow?

Not if the government listens to the bureaucrats at the International Monetary Fund. I wrote three years ago about an IMF study that recommended huge tax increases in China.

And now there’s another IMF report pushing for big tax hikes. Only instead of arguing that higher taxes somehow will produce more growth by financing a bigger burden of government (which – no joke – was the core argument in the 2105 study), this new report claims higher taxes will produce more growth by reducing inequality.

Here’s the basic premise of the paper.

…economic growth has not benefited all segments of the population equally or at the same pace, causing income disparities to grow, resulting in a large increase in income inequality… This is especially of concern as the recent literature has found that elevated levels of inequality are harmful for the pace and sustainability of growth… The paper discusses what additional policies can be deployed to improve equity in opportunities and outcomes, with particular focus on the role for fiscal policy.

But a key part of the premise – the blanket assertion that inequality undermines growth – is junk.

As I noted in 2015 when debunking a different IMF study, “..they never differentiate between bad Greek-style inequality that is caused by cronyism and good Hong Kong-style inequality that is caused by some people getting richer faster than other people getting richer in a free market.”

Let’s dig into the details of this new IMF study.

Here’s the problem, at least according to the bureaucrats.

Income inequality in China today, as measured by the Gini coefficient, is among the highest in the world. …Furthermore, the Gini coefficient has rapidly increased over the last two decades, by a total of about 15 Gini points since 1990.

And here’s the chart that supposedly should cause angst. It shows that inequality began to rise as China shifted toward capitalism.

But why is this inequality a bad thing, assuming rich people earned their money honestly?

When markets are allowed to function, people become rich by providing value to the rest of us. In other words, it’s not a zero-sum game.

Ironically, the IMF study actually makes my point.

…much of China’s population has experienced rising real incomes. …even for the bottom 10 percent incomes rose by as much as 63 percent between 1980 and 2015… This has implied that China reduced the share of people living in poverty immensely. Measured by the headcount ratio, the population in poverty decreased by 86 percentage points from 1980 to 2013 (see figure 6), the most rapid reduction in history.

And here’s the aforementioned Figure 6, which is the data worth celebrating.

Any normal person will look at this chart and conclude that China should do more liberalization.

But not the bureaucrats at the IMF. With their zero-sum mentality, they fixate on the inequality chart.

Which leads them to make horrifyingly bad recommendations.

…several reforms could be envisaged to make fiscal policy more inclusive, both on the tax and expenditure side. …revenues from PIT contribute only around 5 percent of total revenues, a much lower share than the OECD average of 25 percent. Increasing the reliance on PIT, which more easily accommodates a progressive structure, could allow China to improve redistribution through the tax system. …While the PIT in China already embeds a progressive schedule with marginal rates increasing with income from 3 to 45 percent, …redesigning the tax brackets would ensure that middle and high income households with higher ability to pay contribute more to financing the national budget… Property and wealth taxes remain limited in China. Such taxes are broadly viewed as progressive, because high-income households usually tend also to have more property and wealth. …Consideration should therefore be given to adopt a recurrent market-value based property tax.

And why do IMF bureaucrats want all these additional growth-stifling taxes?

To finance a larger burden of government spending.

China still lags other emerging economies and OECD countries in public spending on education, health and social assistance. …social expenditure will need to be boosted.

In other words, the IMF is suggesting that China should copy welfare states such as Italy and France.

Except those nations at least enjoyed a lengthy period before World War II when government was very small. That’s when they became relatively rich.

The IMF wants China to adopt big government today, which is a recipe to short-circuit prosperity.

P.S. I don’t think the IMF is motivated by animus towards China. The bureaucrats are equal-opportunity dispensers of bad advice.

P.P.S. The OECD also is trying to undermine growth in China.

P.P.P.S. There are some senior-level Chinese officials who understand the downsides of a welfare state.

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Paul Krugman has butchered numbers when writing about fiscal policy in nations such as France, Estonia, Germany, and the United Kingdom.

Today, we’re going to peruse his writings on Denmark.

Here’s some of what he wrote earlier this month.

Denmark can teach us…about the possibilities of creating a decent society. …Denmark, where tax receipts are 46 percent of GDP compared with 26 percent in the U.S., is arguably the most social-democratic country in the world. According to conservative doctrine, the combination of high taxes and aid to “takers” must really destroy incentives both to create jobs and to take them in any case. …what Denmark shows is that you can run a welfare state far more generous than we do – beyond the wildest dreams of U.S. progressives – and still have a highly successful economy. Indeed, while GDP per capita in Denmark is lower than in the U.S. – basically because of shorter work hours.

And here’s what he wrote a couple of days ago.

American politics has been dominated by a crusade against big government; Denmark has embraced an expansive government role, with public spending more than half of G.D.P. American politicians fear talk about redistribution of income from the rich to the less well-off; Denmark engages in such redistribution on a scale unimaginable here. …Conservative ideology says that Denmark’s policy choices should be disastrous, that grass should be growing in the streets of Copenhagen. …But if Denmark is a hellhole, it’s doing a very good job of hiding that fact: I was just there, and it looks awfully prosperous. …The simple fact is that life is better for most Danes than it is for their U.S. counterparts.

Interestingly, Krugman acknowledges that Denmark isn’t really socialist. Instead, it simply has a big welfare state.

But is Denmark socialist? …Denmark doesn’t at all fit the classic definition of socialism, which involves government ownership of the means of production. It is, instead, social-democratic: a market economy where the downsides of capitalism are mitigated by government action, including a very strong social safety net. …The simple fact is that there is far more misery in America than there needs to be. Every other advanced country has universal health care and a much stronger social safety net than we do.

He thinks that is a good thing, of course, and was making the same argument (using the same headline) in 2015.

…the Danes get a lot of things right, and in so doing refute just about everything U.S. conservatives say about economics. …Denmark maintains a welfare state — a set of government programs designed to provide economic security — that is beyond the wildest dreams of American liberals. …working-age families receive more than three times as much aid, as a share of G.D.P., as their U.S. counterparts. To pay for these programs, Denmark collects a lot of taxes. …Overall, Denmark’s tax take is almost half of national income, compared with 25 percent in the United States. …It’s hard to imagine a better refutation of anti-tax, anti-government economic doctrine, which insists that a system like Denmark’s would be completely unworkable.

As far as I can tell, all his numbers about Denmark are accurate, but his analysis is wrong.

He wants readers to believe that the lesson from Denmark is that there are no adverse economic consequences when nations impose a big welfare state and high taxes.

But that’s not what Danish economic history tells us. As with other Nordic nations, Denmark became a rich nation when government was relatively small and taxes were modest.

And we know from historical data that economic performance significantly weakened after the fiscal burden of government was increased.

Moreover, lawmakers are now trying to restrain government spending.

The first thing to realize is that Denmark, as are the other Nordic countries, quite free markets, apart from their welfare state transfers and high government consumption. They tend to get rather high rankings on measures of the most free economies in the World. …Protection of property rights and the integrity of the legal system are very high by international standards, as is the soundness of the monetary system… Denmark has a long tradition for free trade… Credit markets are among the less regulated internationally. During the recent financial crisis, tax payers did not have to subsidize banks, and some banks were allowed to fail. The Danish labor market is very flexible: There is no legislated minimum wage, and there are few restrictions on hiring and firing.

Here’s the part that is a must-read.

Denmark did not become a rich country recently. …Danish per capita GDP relative to other countries reached a maximum 40-60 years ago… Denmark caught up to and overtook “old Europe” in the fifties, while it narrowed its gap to the US and other Western offsprings until the early 1970s, when the process of catching up came to a hold. …At the time Denmark became rich relative to the rest of the World, it was not a welfare state. In fact, Denmark has historically been a low tax country by international standards. Until the 1960s, the Danish tax revenue to GDP ratio was at the same level as the US, and lower than the British.

Unfortunately, policy veered in the wrong direction in the late 1960s, with very adverse consequences.

The sharp divergence in the Danish tax level really occurred in the second half of the 1960s, when first a left wing coalition government and then a right wing one increased the tax to GDP ratio by some ten percentage points. …government spending was to a large extent driven by increases in tax revenue stemming from the introduction of VAT and withholding taxes on wage income. …the welfare state attracted new clients and new programs were added, the economic crisis lead to increasing unemployment… By the early 1980s the economy was in very bad shape, with high unemployment, an inflationary deflation spiral, a huge and widening government deficit.

I can’t help but call your attention to Otto’s observation about how the VAT enabled a far larger burden of government.

But let’s not get sidetracked.

This chart shows how the tax burden in Denmark diverged from the United States.

So what’s the bottom line?

Denmark first became rich, and then introduced the programs, which make up the welfare state. The huge increase in government spending has been accompanied by deep structural problems, which has made it necessary to reform the Danish economy and welfare state ever since. It can hardly be claimed that introducing the welfare state made Denmark rich; rather it was the other way around. Denmark first became rich, and then authorities began to redistribute some of the wealth.

Amen. I made the same point back in 2011.

Writing for PJ Media, Tyler O’Neil reviews the good and bad in Denmark and also echoes Otto’s analysis.

A deeper look at the history and current affairs of Denmark and the surrounding countries tells a different story, however. These countries’ benefits arguably spring from their free-market pasts, not their brief dalliance with big government. …During the early 1900s and following the Great Depression, Scandinavia’s small government and free markets fostered a culture of hard work that paid huge dividends in terms of prosperity.

Unfortunately, starting about 50 years ago, Denmark (like many other nations in the region) adopted an expensive welfare state. With bad results.

…the 1960s – 1990s expansion of welfare states actually held the Nordic countries back. After their experiment with socialistic welfare states, “Nordic citizens now have unusually high levels of sickness absence (despite being healthy societies), high youth unemployment and a poor record for integrating migrants into the labour force,” Sanandaji explains. Big government has weakened the strong culture which enabled welfare states in the first place… In 2013, roughly 240,000 people — nine percent of the potential work force — were receiving disability checks, and about 33,500 of them were under 40.

I fully agree. Denmark’s welfare state has created a problem. Simply stated, there are too many people who depend on government compared to the number of taxpayers who finance government.

I sometimes use the example of how many people are pulling the wagon compared to the number of people riding in the wagon. The Danish version uses Viking ships.

Fortunately, now there’s an effort to move back in the right direction.

Denmark now outranks even the United States as a good place to do business. …In 2013, it reduced early-retirement plans, and cut the term for unemployment benefits from four years to two. …In recent years, all the Nordic countries have decreased their corporate tax rates — each one is lower than in the United States. They also support free trade, unlike American Socialists.

Let’s look at some specific examples of how Denmark is trying to undo the damage of excessive government.

Bloomberg reported last year about the ongoing effort to reduce the nation’s fiscal burden.

When a European government raises the pension age and makes cuts to welfare programs, it’s usually because of dire finances. In Denmark’s case, it’s because of ideology. …Driving the new government’s push is a desire to finance a major round of income tax cuts. “We want to promote a society in which it is easier to support yourself and your family before you hand over a large share of your income to fund the costs of society,” the government of Prime Minister Lars Lokke Rasmussen wrote in its manifesto. It’s all part of a Danish drift toward the political right… Reforms introduced by successive governments over the years have already ensured that Denmark’s expensive welfare state is sustainable for years to come, says Torben M. Andersen, a professor of economics at the University of Aarhus and a former government adviser. These include raising the retirement age to 67 years from 65 years by 2025.

Denmark is also cutting back on college subsidies.

As one of a handful of countries that offers free tuition to college students, Denmark grants students enormous freedom… But some Danes, especially older citizens already in the labor force, say the extra freedom can eliminate a crucial sense of urgency for 20-somethings to become adults. The country now deals with “eternity students” — people who stick around at college for six years or more without any plans of graduating, solely because they don’t have any financial incentive to leave. …The country has made some headway to counter eternity students. In 2015, the Danish government proposed and passed an amendment to the Study Progress Reform… Jakobsen said the amendment has definitely reduced the trend of eternity students.

Now let’s get to my contribution to this discussion.

A few years ago, I created a “statism spectrum” to show how countries differ when looking at total economic freedom (fiscal policy, trade policy, regulatory policy, monetary policy, and quality of governance).

And I pointed out that nations with onerous fiscal burdens can still rank relatively high if they have a very pro-market approach in other areas.

But I have to confess that my spectrum was a back-of-the-envelope exercise. I simply drew a line and then added six countries.

Time for some rigor. I downloaded the latest scores from the Fraser Institute’s Economic Freedom of the World and created this chart showing the relative ranking of all the countries (divided by category). As you can see, the United States and Denmark are both in the top category and they both have very similar levels of overall economic liberty.

And to put those numbers in context, here’s the same chart, but also showing France, Greece, and Venezuela.

In other words, there’s a lot to admire about Denmark. Yes, taxes are onerous and the burden of spending is still too high, but it’s nonetheless one of the most market-oriented countries in the world because of laissez-faire policies in other areas.

My bottom line is that Paul Krugman is right to praise Denmark.

My only gripe is that he likes the one thing that they’re doing wrong and overlooks all the things that make the country a relative success.

Moreover, he ignores all the recent efforts to reduce the fiscal burden of government, probably because that would require him to acknowledge that large public sectors are bad for growth.

P.S. Denmark is way ahead of the United States in its market-friendly, savings-based approach to retirement.

P.P.S. Denmark also ranks above America in protecting the right of private property.

P.P.P.S. But the United States does rank above Denmark when all policies are part of the equation, which presumably helps to explain why Americans are richer. And that also is probably why Danes in America earn a lot more than Danes in Denmark.

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A few days ago, I posted an interview about the supposed resurgence of socialism and pointed out that Bernie Sanders isn’t really a socialist. At least if we use the technical definition of that unsavory form of statism.

Based on reader reaction, though, what people most liked about that column were the links at the end to various examples of anti-socialism humor.

I’m happy to cater to those preferences since I like mocking statist ideologies, so let’s enjoy a new edition of socialism humor.

I’ve previously posted a column that summarizes socialism in three pictures. Well, here’s the four-picture version.

By the way, left-wing friends have nit-picked by arguing that some of these photos don’t depict actual socialism.

I tell them that they’re being too literal. That’s not how humor works. Moreover, if they want to have a debate on the real-world consequences of socialism, I’m happy to do that.

I’m not even sure this next item, from libertarian Reddit, makes sense. But I confess I laughed when I first saw it.

Maybe it’s just because both only math-challenged people are drawn to Bernienomics and this “special.”

This next cartoon, also from libertarian Reddit, is self-explanatory.

Very similar to the last cartoon in this collection.

Let’s shift from images to an article. I’m not a conspiracy-minded guy, but I’ve sometimes wondered whether all the feature articles in the establishment press about ant colonies and bee hives is a subliminal effort to promote socialism. With that in mind, this satire from Babylon Bee is spot on.

It was a socialist paradise. Everyone working together in harmony and equally sharing in the labor. But then disaster struck. Disaster in the form of seven-year-old Timmy Gunderson. …he shook his older sister’s ant farm as if trying to reset an Etch A Sketch. Until then, the ant farm had been a model of true socialism. No markets. No capitalists growing rich off the labor of others. Just everyone sharing in the noble work of digging tunnels and harvesting the seeds and sugar water provided daily by eleven-year-old Molly Gunderson. …“The right might seize on the collapse of yet another socialist society,” said professor Clinton Morris. “But it’s important to note that what happened was not a failure of socialism. What caused its failure were outside forces, namely little Timmy.” …measures have been taken to prevent the same disaster from happening again, namely placing the ant farm high up on a bookshelf. Perhaps this time socialism’s promise of a perfect society will be fulfilled.

But maybe socialist society won’t be so perfect for Fido and Rover.

I’ll close with another item that showed up in my inbox.

Given what’s happening in Venezuela, we probably shouldn’t laugh.

P.S. To make my life simpler (adding a long collection of hyperlinks is a pain in the butt), I’ve created a special page for all of my socialism and communism humor.

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America’s healthcare system is a mess, largely because government intervention (Medicare, Medicaid, Obamacare, and the tax code’s healthcare exclusion) have produced a system where consumers almost never directly pay for their medical services.

This “third-party payer” system basically means market forces are absent. Consumers have very little reason to focus on cost, after all, if taxpayers or insurance companies are picking up the tab for nearly 90 percent of expenses.

As a result, we get ever-higher prices.

But we also get a lot of featherbedding and inefficiency because providers want to take advantage of this system.

Athenahealth offered some sobering analysis on the system last year.

The number of physicians in the United States grew 150 percent between 1975 and 2010, roughly in keeping with population growth, while the number of healthcare administrators increased 3,200 percent for the same time period. Yes, that’s 3,200 percent in 35 years…the growing number of administrators is…driven by…ever-more-complex regulations. (To cite just a few industry-disrupting regulations, consider the Prospective Payment System of 1983; the Health Insurance Portability & Accountability Act of 1996; and the Health Information Technology for Economic and Clinical Act of 2009.) Critics say the army of administrators does little to relieve the documentation burden on clinicians, while creating layers of high-salaried bureaucratic bloat in healthcare organizations.

And here’s the chart that succinctly captures so much of what is wrong with America’s government-distorted healthcare regime.

By the way, the chart implies that the rising number of administrators is driven by additional regulations from Washington. I certainly won’t disagree with the notion that more red tape is counterproductive, but I suspect that third-party payer is the primary cause of the problem.

Third-party payer is what causes prices to climb, and then the government and insurance companies respond with various cost-control measures that require lots of paperwork and monitoring. Hence, more administrators.

In other words, third-party payer is the problem and regulations and administrators are both symptoms.

I’ll close by noting that I shared a version of this chart last year and warned that the numbers might be exaggerated. But there’s no question about the trend of more bureaucracy, red tape, and inefficiency.

P.S. Because it’s so important to fix the third-party payer problem, I’ve actually defended one small provision of Obamacare.

P.P.S. Here’s how genuine free markets result in lower costs for healthcare.

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