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Archive for July, 2019

The invaluable John Stossel has an entertaining and informative video that estimates how many handouts are being promised by Joe Biden, Pete Buttigieg, Kamala Harris, Bernie Sanders, Donald Trump, and Elizabeth Warren.

Wow, how depressing.

When I wrote about about the “dangerous seduction of free” a month ago, I apparently underestimated the problem. We have politicians completely divorced from fiscal reality (the “Green New Deal” being a frightening example).

But the key question is whether the American people are actually getting seduced.

It’s not looking good on the Democratic side. Joe Biden is presumably part of the Democratic Party’s anti-socialist wing, which is encouraging. But all the other leading candidates are hard-core big spenders.

And it’s not looking good on the Republican side, either. Trump may not have crazy proposals for new spending, but in practice he’s been profligate. Indeed, I’m guessing he will wind up with a worse record on spending than Obama.

The bottom line is that the public sector already is too large in the United States. Yet we have politicians who want it to become an even bigger burden. In some cases, much bigger.

That has very serious economic consequences. Especially if it coincides with an erosion of societal capital.

For instance, I think some European countries have already reached a “tipping point” because of a dependency mindset.

Historically, the United States has been insulated from that problem because of a belief in personal responsibility. But ever-growing levels of dependency suggest that this advantage is dissipating.

I’ll close with a final observation about the candidates – Sanders, Warren, and Harris – who were identified in the video as advocating trillions of dollars of new spending.

How do they plan to finance this orgy?

  • Sanders has a plethora of new taxes, including class-warfare tax increase and middle-class tax increases, so he definitely wants to put our money where his mouth is. In terms of fiscal policy, think of him as Sweden.
  • Warren supports a bunch of new taxes, mostly on the rich, most notably a huge wealth tax, which surely would backfire but theoretically is a big source of money. In terms of fiscal policy, think of her as France.
  • Harris has some class-warfare tax hikes but is mostly promising a free lunch since there’s a huge mismatch between what she wants to spend and the new taxes she has embraced. In terms of fiscal policy, think of her as Greece.

For what it’s worth, I’m waiting for the Hong Kong candidate.

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I point out in this interview that the 2011 Budget Control Act (BCA) was the only big victory for taxpayers this century. It imposed spending caps on discretionary spending and led to a sequester in early 2013, which was Barack Obama’s biggest defeat.

The bad news is that the BCA is merely legislation. That means politicians can conspire to bust the spending caps – which is what they did at the end of 2013, as well as in 2015, 2018, and again this year.

This most recent deal may be the worst of the worst. The Committee for a Responsible Federal Budget (CRFB) shows that it brings discretionary spending almost up to the level we reached during Obama’s pork-filled stimulus.

By the way, the chart also shows that Bush was a big spender and that we actually had a bit of spending restraint after the Tea Party-themed 2010 mid-term elections.

But let’s focus on today.

Here’s one more chart from CRFB. It shows that Trump is doing a good job of impersonating Obama with huge, across-the-board spending increases.

These charts show why I’m so depressed. And let’s not forget that they are only measures of discretionary spending. The outlook for entitlement spending is even worse!

In other words, we’re on the path to fiscal crisis. Is there a solution?

Yes, we could adopt constitutional restraints on the growth of government. I mentioned Colorado’s Taxpayer Bill of Rights in the interview, as well as the “debt brake” in Switzerland.

But there’s zero chance that today’s crop of politicians will enact this kind of sensible reform. We’ll probably have to wait until a crisis occurs. At which point it may be too late.

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Earlier this month, I commented on a Wall Street Journal report that expressed puzzlement about some sub-par economic numbers in America even though politicians were spending a lot more money.

I used the opportunity to explain that this shouldn’t be a mystery. Keynesian economics never worked in the past, so it shouldn’t be a surprise that it’s not working today.

This is true in the United States, and it’s true in other nations.

Speaking of which, here are some excerpts from a story in the Wall Street Journal about China’s sagging economy.

A strategy by Chinese policy makers to stimulate the economy…hasn’t stopped growth from slowing, stoking expectations that Beijing will roll out more incentives such as easier credit conditions to get businesses and consumers spending. …The breakdown of second-quarter figures shows how roughly 2 trillion yuan ($291 billion) of stimulus, introduced by Premier Li Keqiang in March, is failing to make business owners less risk-averse. …While Beijing has repeatedly said it wouldn’t resort to flooding the economy with credit, economists say it is growing more likely that policy makers will use broad-based measures to ensure economic stability. That would include fiscal and monetary stimulus that risks inflating debt levels. Policy makers could lower interest rates, relax borrowing restrictions on local governments and ease limits on home purchases in big cities, economists say. Measures they could use to stimulate consumption include subsidies to boost purchases of cars, home appliances and other big-ticket items.

This is very worrisome.

China doesn’t need more so-called stimulus policies. Whether it’s Keynesian fiscal policy or Keynesian monetary policy, trying to artificially goose consumption is a dead-end approach.

At best, temporary over-consumption produces a very transitory blip in the economic data.

But it leaves a permanent pile of debt.

This is why, as I wrote just a couple of days ago, China instead needs free-market reforms to liberalize the economy.

A period of reform beginning in the late 1970s produced great results. Another burst of liberalization today would be similarly beneficial.

P.S. Free-market reforms in China also would help cool trade tensions. That’s because a richer China would buy more from America, thus appeasing folks like Trump who mistakenly fixate on the trade deficit. More important, economic liberalization presumably would mean less central planning and cronyism, thus mitigating the concern that Chinese companies are using subsidies to gain an unfair advantage.

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Back in 2016, I wrote “The Economic Case for Brexit.”

My argument was based on the fact the European Union was a slowly sinking ship, both because of grim demographics and bad public policy.

Getting in a lifeboat can be unnerving, but Brexit was – and still is – better than the alternative of continued E.U. membership.

But not everyone shared my perspective.

The BBC reported that year that Brexit would produce terrible consequences according to the International Monetary Fund.

Christine Lagarde said she had “not seen anything that’s positive” about Brexit and warned that it could “lead to a technical recession”. …The IMF said in a report on the UK economy that a leave vote could have a “negative and substantial effect”. It has previously said that such an outcome could lead to “severe regional and global damage”. The Fund said a Brexit vote would result in a “protracted period of heightened uncertainty” and could result in a sharp rise in interest rates, cause volatility on financial markets and damage London’s status as a global financial centre.

Yet none of these bad predictions were accurate.

Not right away and not in the three years since U.K. voters opted for independence.

Not that we should be surprised. The IMF has a very bad track record on economic forecasting. And the forecasts are probably especially inaccurate when the bureaucrats, given the organization’s statist bias, are trying to influence the outcome (the IMF was part of “Project Fear”).

But a history of bias and inaccuracy hasn’t stopped the IMF from continuing to interfere with British politics. Here are some excerpts from a story earlier this week.

Boris Johnson has been warned that a No Deal Brexit is one of the biggest risks facing the global economy. In a broadside against the new Prime Minister’s ‘do or die’ pledge to leave the European Union at the end of October with or without a deal, the International Monetary Fund said a chaotic departure could cause havoc across the world. …No Deal is one of the gravest threats to international economic performance, the IMF said. …Eurosceptics have long criticised the IMF for anti-Brexit rhetoric and it has been one of the loudest opponents of No Deal, saying in April that it could trigger a lengthy UK recession.

I was both disgusted and upset when I read this story.

I don’t like when the IMF subsidizes bad policy with bailouts, and I also don’t like when it promotes bad policy with analysis.

Fortunately, I don’t need to do any substantive number crunching because Professor Steve Hanke of Johns Hopkins University has a superb Forbes column on this exact issue.

No sooner than Boris Johnson put his foot over the threshold of 10 Downing Street, the International Monetary Fund (IMF) offered its unsolicited advice… In a preemptive strike, the Philosopher Kings threw cold water on the idea of a no deal, asserting that it would be a disaster. …such meddling is nothing new for the IMF. Indeed, a bipartisan Congressional commission (The International Financial Advisory Commission, known as the Meltzer Commission) concluded in 2000 that the IMF interferes too much in the domestic politics of member countries.

Professor Hanke is perplexed that anyone would listen to IMF bureaucrats given their awful track record.

…the IMF’s ability to…thrive…is quite remarkable in light of the IMF’s performance. As Harvard University’s Robert Barro put it, the IMF reminds him of Ray Bradbury’s Fahrenheit 451 “in which the fire department’s mission is to start fires.” Barro’s basis for that conclusion is his own extensive research.  His damning evidence finds that: A higher IMF loan participation rate reduces economic growth. IMF lending lowers investment. A greater involvement in IMF programs lowers the level of the rule of law and democracy. And if that’s not bad enough, countries that participate in IMF programs tend to be recidivists. In short, IMF programs don’t provide cures, but create addicts.

This is why I’ve referred to the IMF as the “dumpster fire” of the world economy and also called the bureaucracy the “Dr. Kevorkian” of international economic policy.

By the way, here’s Professor Hanke’s table of the IMF’s main addicts.

I wrote just two weeks ago about the IMF’s multiple bailouts of Pakistan, the net effect of what have been to subsidize bigger government.

Let’s close with more of Professor Hanke’s analysis.

The original reason for its creation has completely vanished.

The IMF, which was born in 1944, was designed to provide short-term assistance on the cheap to countries whose currencies were pegged to the U.S. dollar via the Bretton Woods Agreement. …But, in 1971, when President Richard Nixon closed the gold window, the Bretton Woods exchange-rate system collapsed. And, with that, the IMF’s original purpose was swept into the dustbin. However, since then, the IMF has used every rationale under the sun to reinvent itself and expand its scope and scale. …And, in the process of acquiring more power, it has become more political.

Sadly, he is not optimistic about shutting down this destructive – and cossetted – bureaucracy.

The IMF should have been mothballed and put in a museum long ago. After all, its original function was buried in 1971, and its performance in its new endeavors has been less than stellar. But, a museum for the IMF is not in the cards. …About all we can do is realize that the IMF is a political hydra with an agenda to serve the wishes of the political elites who allow it to grow new heads.

P.S. Here’s my explanation of how the U.K. can prosper in a post-Brexit world.

P.P.S. Here’s some academic research explaining how E.U. membership has undermined prosperity for member nations.

P.P.P.S. If you want Brexit-related humor, click here and here.

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As I explained last year, Trump is right and wrong about China and trade. He’s correct that China doesn’t play fair, but he mistakenly fixates on the trade deficit rather than going after China’s subsidies and cronyism.

And, as I note in this brief interview from yesterday, he’s making a mistake by not using the World Trade Organization to curtail China’s anti-market policies.

For further information, I wrote a column about the five things everyone should understand about the US-China trade squabble.

But I also think there are two points from the interview that deserve elaboration.

  • First, I should not have said the WTO was a “threat” to China. Yes, the Geneva-based organization almost surely would rule against many of China’s policies, but getting rid of subsidies and cronyism would be very beneficial for the Chinese economy. In other words, China would enjoy more growth and prosperity if it had to fix its bad policies in response to adverse WTO rulings. And, of course, the United States and other countries also would benefit as well.
  • Second, I want to explain what I meant in my closing point about whether China could “trick Trump.” The best outcome of negotiations is genuine free trade between the US and China, with no subsidies and cronyism to tilt the playing field. But since Trump wrongly fixates on trade balances, I worry that China might seek to preserve its bad policies and instead mollify the president by agreeing to something gimmicky (like purchasing X tons of soybeans or importing Y number of cars).

I’ll close by addressing a common complaint that the WTO would not be an effective vehicle for liberalization.

Given how trade taxes have dropped since the WTO was created, I think this is a very bizarre assertion.

Unlike other international organizations, which have dismal track records, the WTO has actually helped increase economic freedom around the world.

And that’s good news for America. And the rest of the world as well.

The WTO also is willing to stand up to China when it’s wrong. Here are some excerpts from a recent report by Reuters.

China has halted a dispute at the World Trade Organization over its claim to be a market economy, a panel of three WTO adjudicators said on Monday… One trade official close to the case said so much of the ruling had gone against Beijing that it had opted to pull the plug before the result became official. “They lost so much that they didn’t even want the world to see the panel’s reasoning,” the official said. …China had insisted that they treat it as a “market economy”, countering their view that the price of Chinese exports could not be taken at face value due to state interference in the economy. …the United States and the EU…said Chinese goods — especially commodities such as steel and aluminum — were still heavily underpriced because of subsidies and state-backed oversupply.

Last but not least, here’s a chart from the Peterson Institute showing how the United States has been the most active participant in the WTO’s process for dispute resolution.

The bottom line is that both China and the United States will benefit if there’s more economic freedom and less government intervention.

But Trump doesn’t understand trade and China’s leaders don’t want to give up their grip on the allocation of capital. So I’m not holding my breath waiting for a good outcome.

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Cuba has a very sad history.

It traded a regular dictatorship for a communist dictatorship six decades ago, and the results have been predictably awful.

Oppression, persecution, rationing, spying, deprivation, and suffering are facts of life in that socialist hellhole.

For a while, it was subsidized by the Soviet Union, but that communist system eventually collapsed. More recently, it’s been subsidized by Venezuela, but now that socialist system also is collapsing.

And this means extra hardship for the people of Cuba.

Jose Nino explains one of the grim consequences of Cuba’s central planning.

Cuba is now implementing a rationing program to combat its very own shortages of basic goods. A CBC report indicates this program would cover basic items such as chicken, eggs, rice, beans, and soap. …When Fidel Castro took control of Cuba in 1959, the Cuban state maintained an iron grip on the economy. For decades, the country has been a communist garrison state with very little respect for property rights… Because of the economic dislocations caused by state control of many industries, the government has had to provide citizens with Libretas de Abastecimiento (supply booklets) to ration out basic goods like rice, sugar, and matches. …Cuba’s recent political behavior indicates that the country’s leadership still does not get basic economics. …After more than 50 years of embracing socialist governance, Cuba will have to learn that it needs to stick to the basic economic principles if it wants to break free from its long-standing cycle of poverty.

Bizarrely, there are still some proponents of the Cuban dictatorship.

Writing for CapX, Kristian Niemietz ponders this lingering semi-support for Cuba on the left.

…socialist experiments usually go through three stages, in terms of their reception by Western intellectuals. The first is a honeymoon period, during which they are widely held up as a glorious example of “real” socialism in action. The second is a period of angry defensiveness, during which some of the system’s failures are acknowledged, but blamed on external constraints. The third stage is the stage of retroactive disowning: intellectuals now claim that the country in question was never socialist, and that it is a cheap strawman to even mention it. The Western reception of the Soviet Union, Maoist China, Vietnam and, more recently, Venezuela followed this pattern to a tee. Cuba, in contrast, is a bit of an outlier, in that the country seems to be permanently stuck somewhere between stages two and three. It may no longer attract widespread enthusiasm, but Cuban socialism has never completely gone the way of Soviet, Maoist, Vietnamese or North Korean socialism.

Robert Lawson and Benjamin Powell have a book about statism and socialism that’s very informative. But also very entertaining.

Here are some excerpts from their chapter about a visit to Cuba.

In government-directed economies, a disproportionate amount of money is spent on what political leaders desire—typically, great Olympic sports teams, and a few showcase hotels and restaurants to impress foreigners. In Cuba’s case, this included the opulent Hotel Nacional… But we were on a mission to see what life was like inside Cuba’s socialist system. We couldn’t experience that by drinking Cuba libres at a fancy resort… Before the revolution, Cuba had a thriving urban middle class, along with widespread rural poverty. Twentieth-century socialists claimed socialism would deliver greater equality and out-produce capitalism by ending wasteful competition, business cycles, and predatory monopolies. Socialism hasn’t delivered the goods it promised in Cuba or anywhere else. Today, Cuba is a poor country made poorer by socialism. Socialism also gives tremendous power to government officials and bureaucrats who are the system’s planners—and with that power comes corruption, abuse, and tyranny. It is no accident that the worst democides of the twentieth century occurred in socialist countries like the Soviet Union, Communist China, and Nazi (National Socialist) Germany.

The book is basically a travelogue, mixed with economic insights that oscillate between amusing and horrifying.

The hotels are no good.

The Hotel Tritón’s decaying edifice was a crumbling tribute to Cuba’s central-planning problems. Cuba had the resources to make large capital investments in state-run enterprises when it received aid from the Soviet Union. But many of these hotels can’t generate enough revenue to sustain the initial investment. Cuban government planners then had to pick which hotels to subsidize to prevent decay. The Hotel Tritón didn’t make the cut. It was rotting, inside and out. And nobody cared because nobody owned it. …In a capitalist economy, entrepreneurs create businesses to make profits, which they earn by pleasing their customers. But in a socialist system, a bureaucrat decides which businesses can open, where they can operate, and what they can sell, and he really doesn’t care what the customer thinks. Adopting a socialist system is like turning your whole economy into a giant Department of Motor Vehicles.

The shopping is no good.

In Central Havana, the lack of commerce unrelated to tobacco, alcohol, or sex was striking. Habaneros lived in these neighborhoods. So where did they shop? …We found one store that was a large open room with high ceilings and cement support columns. …behind a counter, there were shelves with bottles of rum, cases of the local cola, a few canned goods, cartons of eggs, and large sacks of rice next to a scale. A line of Cubans shopped their way down the counter. The place was an odd mix, somewhere between the worst imaginable version of a grade school cafeteria and a grocery in which 95 percent of the stock is depleted.

The dining is no good.

… we decided on our last evening on the island to try a state-owned “Italian” restaurant on the main boulevard between the shitty Hotel Caribbean and the Capitol. We were disappointed to see that Italian meant nothing more than a few basic pizzas and a couple types of pasta, along with the same chicken, pork, seafood, and beef dishes we found everywhere else. We ordered two beers and “mozzarella from the oven” as an appetizer. To say that it was the equivalent of Taco Bell queso with tomato chunks in it would be insulting to Taco Bell. In fact, it was a steaming pot of greasy white goo. … most Cubans can’t afford to eat at the places we ate, and Cuba’s socialist economic system can’t even deliver variety to rich tourists. We were tired of the food after a week. But we could leave; Cubans are stuck with lousy food (outside the private restaurants), limited ingredients, and little variety for as long as they’re stuck with socialism.

And Che is no good.

Unfortunately for Cubans, Che wasn’t nearly as good at planning production as capitalists have been at plastering his image on merchandise. During Che’s stints as head of the National Bank of Cuba, minister of finance, and minister of industry, Cuba not only failed to industrialize (as promised), but its sugar production collapsed and severe rationing was introduced.

But Cubans are very good, at least when they’re out from under the tyranny of socialism.

We were in Little Havana, in Miami. The economic contrast between Little Havana and the real thing began before we even stepped out of our Uber. The half-hour car ride cost us only $13.72 instead of the absurd taxi costs in Cuba. …Unlike stores in Cuba, this store had hundreds of different items for sale. …we headed off to a Cuban restaurant for dinner. The six-page menu contained more options than we had seen from all of the restaurants in Cuba combined. …Cuban cuisine is excellent—just not when it’s served in Cuba. It’s not the Cubans’ fault. It’s the fact that socialism sucks. Cubans under a socialist system remain poor and eat bland food. Ninety miles away, Cubans who live in Miami become relatively rich and make wonderful food. Same people, two different economic systems, two drastically different economic— and gastronomic—outcomes.

By the way, I recommend the book.

There are also chapters about Sweden, Venezuela, North Korea, China, Georgia, and Russia/Ukraine.

My contribution today is this chart showing per-capita economic output in various Latin nations, derived from the Maddison database. At the time of the revolution, Cuba (orange line) was one of the richest nations. Now it has fallen far behind.

It’s always useful to look at decades of data because short-run blips aren’t a factor. Instead, you really learn a lot about which nations are enjoying good growth and which ones are stagnating.

What we’ve learned today is that the people of Cuba are poor because of awful economic policy. Other nations (most of which started in worse shape) have become much richer.

Perfect policy would be great, but even decent policy creates enough “breathing room” for more prosperity. Unfortunately, even that’s not allowed in Cuba.

P.S. For some unintentional Cuban-related humor, see here and here.

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I’ve applauded China’s economic progress.

It’s economic liberty score jumped from 3.64 in 1980 to 6.46 in the most recent edition of Economic Freedom of the World.

That shift toward markets (which started in a village) helped to dramatically reduce poverty and turn China into a middle-income nation.

That’s the good news.

The bad news is that most of China’s economic liberalization (from 3.64 to 6.15) occurred between 1980 and 2003.

Since that time, China’s score has improved at a glacial pace. Moreover, because other nations have been more aggressive about reducing the burden of government, China’s relative ranking has actually dropped (from #88 to #107) since 2003.

Which is why I’ve warned that China needs another burst of pro-market reform if it wants to become a rich country.

Regarding this issue, the Wall Street Journal has a very interesting report about how China is under-performing.

The country’s state-led growth model is running out of gas. A recession or crisis may not be imminent, but the long-run implications are just as serious. Absent a change in direction, China may never become rich. …First, official statistics probably paint too flattering a picture. Per-capita income may be a quarter lower than reported, based on a study of nighttime light co-authored by Yingyao Hu of Johns Hopkins University. …Second, it doesn’t measure up to the economies China seeks to emulate. Taiwan, South Korea and Japan all opened their economies to global trade and investment, enjoyed superfast growth for several decades… In fact, China seems to be slowing sooner than the others.

Why is China underperforming?

Too much statism. Simply stated, the government has too much control over the allocation of labor and capital.

For 30 years the Communist Party opened ever more of the economy to private enterprise, trade, foreign investment and market forces. Yet it never relinquished its commitment to socialism and Mr. Brandt says that since the mid-2000s the government has tightened control over sectors… An inefficient state sector matters less if the private sector grows fast enough. But in recent years, private firms in China have faced multiple headwinds. State-controlled banks prefer to lend to state-owned enterprises… The domestic private sector’s share of total sales has dropped about 5 percentage points since 2016, according to Goldman, while the state sector’s share has risen roughly as much.

By the way, many observers (from the American Enterprise Institute, Peterson Institute for International Economics, the New York Times, the New York Post, and Investor’s Business Daily) echo the concern about China becoming more statist in recent years.

I’ll make a more restrained point.

I’ll start by sharing this very interesting chart from the WSJ story. It shows how China’s growth, while impressive, has not been as rapid as the growth enjoyed by other Asian economies.

If you look below, you’ll see I’ve now augmented the chart to explain why China has under-performed.

On the right side, I’ve added the historical rankings from Economic Freedom of the World. As you can see (and just as theory and evidence teaches us), the other nations on the chart enjoyed more growth because they had more economic freedom.

These numbers reinforce my argument that China needs more pro-market reform. Though I should add the caveat that EFW has added more nations over time, so this comparison overstates the degree to which China is lagging.

But it is lagging. The bottom line is that China needs to copy Hong Kong and Singapore if it wants to become a rich nation. Or even Taiwan, which is an under-appreciated success story.

P.S. Keep in mind that China also faces demographic decline, which makes good policy even more necessary and important.

P.P.S. Amazingly, both the OECD and IMF are trying to sabotage China’s economy.

P.P.P.S. The WSJ story is an example of good reporting. If you want an example of bad reporting about China, check out this bizarre story from the New York Times.

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