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Archive for 2019

Earlier this year, I reviewed new fiscal projections from the Congressional Budget Office (CBO) and showed that balancing the budget would be relatively easy if politicians simply limited spending so that it didn’t grow faster than inflation.

Though I made sure to point out that the primary goal should be to limit the burden of spending. That’s because government spending, regardless of whether it’s financed by taxes or financed by borrowing, undermines prosperity by diverting resources from the productive sector of the economy.

We now have some new numbers from CBO. The number-crunching bureaucrats have put together their estimates of the latest Trump budget and that’s generated some predictable squabbling between Republicans and Democrats.

Most of the finger-pointing has focused on the (relatively trivial) fiscal impact of the Trump tax cuts.

The Wall Street Journal wisely put the focus instead on the growth of government.

You wouldn’t know it from the press coverage, but there’s some modest good news about the federal budget. The deficit is rising, but not as much as feared because tax revenues are increasing due to faster economic growth. …So why has the federal deficit increased by $145 billion this fiscal year to $531 billion? Because federal spending continued to rise rapidly—7% in the first seven months to $2.571 trillion. That’s $178 billion more than in the same period a year ago. …The media blame deficits on tax reform, but the facts show the main culprit is spending. No one in the political class wants to talk about entitlements but that’s where the money is.

The WSJ’s editorial focused on short-run data.

I want to augment that analysis by looking at medium-run and long-run numbers.

We’ll start with this chart looking at what will happen over the next 10 years. As you can see, Washington is violating my Golden Rule by allowing spending to grow faster than the private economy.

As a result, the burden of federal spending, measured as a share of gross domestic product, is projected to climb over the next decade.

That’s not good news.

(For what it’s worth, since tax revenues will be growing at the same pace as spending, there won’t be any meaningful change in the deficit as a share of GDP.)

Now let’s look at the most-recent long-run data from CBO. These numbers are even more depressing because the spending burden continues to grow faster than the private sector. A lot faster.

Which is why the burden of federal spending is projected to increase from less than 21 percent of GDP today to nearly 29 percent of GDP by 2049.

That’s terrible news.

And if you include spending by state and local governments (which currently consumes more than 11 percent of economic output and also is projected to increase), the terrible news gets even worse.

Moreover, the tax burden is projected to climb as well, and that doesn’t even include any estimate of what will happen if politicians manage to impose a value-added tax, an energy tax, a wealth tax, a financial transactions tax, or any of the other revenue-raising schemes under consideration in Washington.

In other words, the U.S. is on track to become just like GreeceFrance, and Italy.

P.S. There is an alternative to this dismal future. But can we convince politicians to adopt a spending cap and then make it work with genuine entitlement reform? I’m not holding my breath for any of that to happen.

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Just last month, I wrote about Argentina’s grim economic outlook and criticized the supposed right-of-center President, Mauricio Macri, for failing to deliver any meaningful economic liberalization.

And reform is desperately needed.

According to Economic Freedom of the World, Argentina is one of the most statist nations on the planet (the only nations that do worse are Libya and Venezuela).

For all intents and purposes, Argentina is suffering from decades of bad policy.

Argentina is a sobering example of how statist policies can turn a rich nation into a poor nation. …After World War II, Argentina was one of the world’s 10-richest nations. But then Juan Peron took power and initiated Argentina’s slide toward big government, which eroded the nation’s competitiveness and hampered growth.

To put it mildly, the country is an economic tragedy and it should be a lesson for all countries about the importance of good policy.

Yet why am I writing again about Argentina after last month’s analysis?

Because a story in the New York Times discusses the nation’s upcoming presidential election and manages to paint a grotesquely inaccurate picture of what’s been happening in the country. We’re supposed to believe that Macri has been a hard-charging free-market fundamentalist.

Since taking office more than three years ago, President Mauricio Macri has broken with the budget-busting populism that has dominated Argentina for much of the past century, embracing the grim arithmetic of economic orthodoxy. Mr. Macri has slashed subsidies… “It’s a neoliberal government…It’s a government that does not favor the people.” …tribulations playing out under the disintegrating roofs of the poor are a predictable dimension of Mr. Macri’s turn away from left-wing populism. He vowed to shrink Argentina’s monumental deficits by diminishing the largess of the state. …Mr. Macri’s…presidency was supposed to offer an escape from the wreckage of profligate spending.

And we’re also supposed to believe that his failed free-market policies are paving the way for a return to left-wing populism.

As the October election approaches, Mr. Macri is contending with the growing prospect of a challenge from the president he succeeded, Cristina Fernández de Kirchner… Her return would resonate as a rebuke of his market-oriented reforms while potentially yanking Argentina back to its accustomed preserve: left-wing populism.

For what it’s worth, I suspect that Kirchner will win the next election. So that part of the article is correct.

But the part about free-market reforms is laughably inaccurate.

You don’t have to believe me. Let’s look at the Argentinian data from Economic Freedom of the World. Maybe I’m being dogmatic, but I hardly think a tiny improvement in 2015 followed by backsliding in 2016 qualifies as “diminishing the largess of the state.”

The bottom line is that Macri should have been bold and made sweeping changes once he was in charge. Like Chile after Allende’s Marxist regime was deposed.

Those reforms doubtlessly would have triggered protests. But if they became law, they would have produced tangible results.

Instead, Macri chose a timid approach and the economy has remained stagnant. Yet because many voters think he adopted reforms, they blame him and they blame free markets.

The net result is that they will probably vote for Kirchner, which presumably will mean even more statism for the long-suffering people of Argentina.

P.S. What’s happening in Argentina is not an isolated example. It’s very common for supposed right-wing politicians to choose bad policies, which then paves the way for left-wing election victories. Look at how Bush’s statist policies created the conditions for an Obama victory. Or how Sarkozy set the stage for Hollande in France. Or how Theresa May’s fecklessness in the United Kingdom may lead to a win for Jeremy Corbyn.

P.P.S. I’m tempted to also warn that Trump’s risky protectionism may lead to a victory for Crazy Bernie or some other Democrat in 2020. But Trump does have some good policies as well, so it’s hard to know whether the economy will be a net plus or net minus in the election.

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By refusing to implement a Clean Brexit and instead pursuing a Brexit-in-Name-Only, Prime Minister Theresa May has dramatically reduced support for the Conservative Party in the United Kingdom.

The poll numbers are now so bad that it is conceivable to imagine that Jeremy Corbyn could win the next election.

That would be horrible news. The leader of the Labour Party is an unreconstructed hard-core socialist. A real socialist who would move the country toward government ownership, central planning and price controls.

In other words, like Crazy Bernie, only crazier.

Theodore Dalrymple aptly summarizes for City Journal what a Labour government would mean for the U.K.

Thanks to the current imbroglio over Brexit, Britain could soon be Venezuela without the oil or the warm weather. The stunning incompetence of the last two Tory prime ministers, David Cameron and Theresa May, might result in a Labour government, one led by Jeremy Corbyn, a man who has long admired Hugo Chavez… Corbyn’s second in command, John McDonnell, would, as Chancellor of the Exchequer, be in charge of the economy. Only five years ago, he said that the historical figures he most admired were Marx, Lenin, and Trotsky… he argued for the nationalization of land. He also favors nationalizing railways and public utilities, which can be done only through rates of taxation so high that they would amount to the nationalization of everything—with a resultant economic collapse—or by outright confiscation… The arrival in power of such men will produce an immediate crisis, which they will blame on capitalism, the world economic system, the Rothschilds, and so forth. They will use the crisis to justify further drastic measures. …None of this is inevitable, but thanks to the bungling of Brexit, it is considerably closer.

This video tells you everything you need to know.

Let’s look at a couple of specific topics.

Writing for CapX, Eamonn Ives explains what’s wrong with the Labour Party’s agenda for more government spending.

…what Jeremy Corbyn and John McDonnell are arguing for is a long way from Keynesian doctrine. They propose a massive injection of government spending in the economy, despite the UK experiencing unprecedented levels of employment and (admittedly rather anaemic) growth. Keynes, by contrast, argued for counter-cyclical fiscal policy. …Of course, the money would have to be found from somewhere: either in existing budgets, or levying new or higher taxes, or through quantitative easing, or additional borrowing. …this model only makes sense if governments are more strategic in deploying resources than private firms and individuals. And, as failed socialist experiment after failed social experiment has shown, there is no evidence to suggest that is the case. …It’s often remarked that if something’s too good to be true, then it probably is. Labour’s voodoo economics are no exception to this. If they really want to stimulate the economy, they should be celebrating, not denigrating the real way to foster genuine economic growth: tax cuts and other supply-side reforms.

Andrew Lilco opines for CapX on an Elizabeth Warren-type scheme that’s been proposed by John McDonnell, the guy would be Chancellor of the Exchequer (what Americans would call a Treasury Secretary) in a Labour government.

John McDonnell…proposed that businesses should be required to share profits with workers either in the form of bonuses or share distributions. He said he wants to “transform the economy”… Indeed, he says the “overthrow of Capitalism” is now his “job”. …What would be the economic effects? Many firms already pay bonuses to staff if the they make higher-than-expected profits, and other firms offer key staff bonuses in the form of shares. …But problems arise if one mandates that all firms should be run that way or attempts to cap returns at some state-set “fair” level. …The essential definitive feature of capitalism is that it is a system of opportunity for those without money to have their projects funded. …If we…cap their rates of return to a “fair” level, that will…mean that only certain sorts of investment occur. In particular, it means an end to high risk investment, where very high rates of return when a project is successful make up for all the losses in other less successful ventures when projects are not successful. …That would have fairly clear implications for the sort of economy the UK would have. …New technologies and new products would come in gradually, but only from abroad and only later than other countries had them. …That in turn will, over time, drag the state into a wider and wider role in the economy.

Speaking of McDonnell, what sort of politician is willing to be part of an event that celebrates brutal communist dictators?

This guy may be even worse than Corbyn.

Let’s wrap up with a look at how Labour Party bigwigs have been infatuated with the thuggish dictatorship in Venezuela.

Just as bad as Michael Moore, Joseph Stiglitz, and Bernie Sanders.

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Because they wrongly assume the economy is a fixed pie, some of my friends on the left think it’s bad for there to be rich people. They actually think that must mean the rest of us have less income.

But that’s not true. At least it’s not accurate if we start with the assumption that wealth is earned honestly and not accumulated thanks to subsidies, bailouts, protectionism, and other forms of cronyism.

So if it’s good to have more honest rich people, what’s the recipe to make that happen?

Frans Rautenbach, author of South Africa Can Work, recently crunched numbers and wrote about economic policy and the prevalence of billionaires.

Here is some of Frans’ accompanying analysis.

I calculated the relative number of billionaires by dividing the population of a country by the number of billionaires, to calculate the number of people per billionaire. So, the lower the number the greater the percentage of billionaires. …What is immediately clear, is that the three top performers in the table are Hong Kong, Switzerland and Singapore, all countries with exceptionally free markets and very low tax burdens. What that makes clear is, if a country is really serious about nurturing billionaires, free markets and low taxes are the way to go.

By the way, Frans focused on major countries.

If he included every jurisdiction, I very much suspect Monaco would be at the top of the list.

Followed by some of my other favorite places, such as Bermuda, Liechtenstein, and the Cayman Islands.

But it’s true that the numbers for those small place would distort the rankings, so it makes sense to remove them.

In his analysis, Frans also addresses the fact that Nordic nations do reasonably well and correctly attributes their success to the fact that they are very laissez-faire in areas other than fiscal policy.

What we also see, is that not all the Nordic countries are world-beaters in the billionaire stakes. The social democracy system (high taxes and spending on welfare benefits) has not worked to make Finland and Denmark top performers. …a fair question: Why do Sweden and Norway beat the US in the super-rich game? We now know that the high-equality welfare state of social democracy is not the reason. If that were so, it would have been fair to expect Finland and Denmark to beat the US too. And we would have expected all four these countries to have dynamic, high-growth economies – which they don’t. Having said that, it remains true that both Sweden and Norway are free markets in their own right. …The only criterion that identifies them as statist is size of government (tax, government spending, and so on). According to the other four criteria (trade policy, monetary policy, regulatory policy, and property rights and rule of law), these countries are very free. …What is more, until about 1950, Sweden and Norway had smaller governments than the UK, the US, Japan, Germany and France.

Now that we’ve looked at the policies associated with having more rich people, let’s look at the policies that are needed to retain them.

Bloomberg has a very interesting story on the migration of millionaires around the world.

The world’s wealthy are increasingly on the move. About 108,000 millionaires migrated across borders last year, a 14 percent increase from the prior year, and more than double the level in 2013, according to Johannesburg-based New World Wealth. Australia, U.S. and Canada are the top destinations, according to the research firm, while China and Russia are the biggest losers. …Wealth migration figures…can also be a key future indicator, said Andrew Amoils, head of research at New World Wealth. “It can be a sign of bad things to come as high-net-worth individuals are often the first people to leave — they have the means to leave unlike middle-class citizens,” he said. …Australia tops most “wish lists” for immigrants because of its perceived safety, no inheritance tax and strong business ties to China, Japan and South Korea.

Here’s an accompanying chart.

I’ll simply note that if the numbers were adjusted for population, the United States would not rank nearly so high (I’m guessing America’s unfair death tax is a major reason why some rich people choose other countries).

What can we say about the nations losing rich people?

If you peruse the data from Economic Freedom of the World, you’ll notice that they don’t rank very high.

China’s tightening grip on capital outflows in recent years has placed many of the country’s wealthier citizens in the crosshairs of the taxman, leading to a shift of assets and people. …Turkey losing 4,000 millionaires last year, the third straight year that many have left. About 7,000 millionaires left Russia last year.

My two cents is that rich people aren’t fully confident about stability in come countries (think Russia) and they’re quite worried about government greed in other nations (think France).

Another issue is that successful entrepreneurs and investors don’t feel comfortable having their private financial data being promiscuously shared, and one way to minimize government snooping is to move to move.

The desire for privacy is also prompting rich individuals to reconsider their place of residence. Under the Common Reporting Standard, launched by the Organisation for Economic Co-operation & Development in 2017, banks and other financial institutions are disclosing data on foreign account holders to their local tax authority. …”Many wealthy people are looking for opportunities to reduce risks associated with spreading information about their accounts,” said Polina Kuleshova of Henley & Partners. …Citizenship and residency by investment programs are big business: currently, the industry is worth an estimated $2 billion annually… The Organisation for Economic Co-operation & Development is scrutinizing…these schemes. In October 2018, it released a blacklist of 21 jurisdictions, including Malta and Cyprus, that it believes are undermining international efforts to combat tax evasion.

Since I’m a critic of the OECD’s efforts to create a global tax cartel, I’m glad people still have some options to protect themselves. Including the CBI programs.

P.S. This analysis of cross-border migration between nations also applies to cross-border migration between states. Unsurprisingly, successful people move from high-tax hellholes (places such as New Jersey, Illinois, and California) to zero-income-tax jurisdictions (places such as Texas, Florida, and Tennessee).

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If Congresswoman Alexandria Ocasio-Cortez didn’t exist, I might have to invent her since she helps to make socialism such an easy target for mockery.

Though I actually admire the fact that she doesn’t try to disguise her agenda. Like “Crazy Bernie,” she openly and boldly pushes for an ideological agenda that would put the United States somewhere between Greece and Venezuela in the global rankings for economic liberty.

And while that would be a horrible outcome, it does generate the satire for today’s column.

We’ll start with a clever cartoon I saw on Facebook. It appears that Ms. AOC slept through a critical class.

Indeed, even though it should be difficult to overlook 100 million deaths caused by socialism, she may have slept through all her classes according to the satirists at Babylon Bee.

The problem has become so acute that her economics degree from Boston University has been revoked.

…an independent degree quality control board issued an emergency recall on her economics degree. Basic Economic Understanding Bureau officials burst into the congresswoman’s office and confiscated her economics degree early Tuesday morning “for the safety of the nation.” They found it hanging on the wall next to a hammer & sickle flag. They tore it down and returned it to Boston University for safekeeping. …one BEUB official said. “We pulled up Representative Ocasio-Cortez’s Twitter account, and sure enough, she compared the price of a croissant with the price of an hour of human labor. She seemed to have no understanding of the underlying facts.” …While officials were not allowed to detain Ocasio-Cortez herself for a recall and were forced to release her after questioning, they recommended she read Basic Economics by Thomas Sowell or Economics in One Lesson by Henry Hazlitt to aid her in her recovery.

I can’t resist making two serious points.

  • First, there are plenty of leftist economists in the academic world, So she could have been paying close attention in all her classes and simply learned garbage.
  • Second, while it would be nice if AOC read Thomas Sowell, I doubt it would help. My experiences with dedicated leftists suggest that they are impervious to understanding tradeoffs.

But since I’ve written over and over again about the foolishness of socialism, let’s bring another voice to the discussion. In an article for Quillette, Jonathan Church summarizes the economic blindness of AOC.

With over 3.5 million followers on Twitter…and an audacious personality, she has become a vociferous presence in the contemporary social discourse…she is alarmingly prone, not simply to making mistakes that arise from climbing the learning curve on complex policy issues, but to making reckless intellectual mistakes that should easily be avoided by someone who has gloated about having an economics degree. Rarely does an AOC remark on economic issues go by, in fact, in which she does not demonstrate an ideological impulsiveness that compromises any presumed adherence to sound economic reasoning, prompting doubts about how much she learned when she studied economics at Boston University. …AOC repeatedly demonstrates a glaring lack of command not only of facts, but of basic economic principles. 

And what are these mistakes?

The article has many examples, but my favorites deal with the so-called Green New Deal and her misunderstanding of employment data.

…her Green New Deal…appears to be inspired by the highly-risky, nonsensical ideas of Modern Monetary Theory… Instead of focusing on entitlement reform and addressing the demographics and rising health care costs which lie at the root of America’s looming debt crisis, the Green New Deal would “spend the U.S. into oblivion,”… ione high-profile PBS interview last year, she claimed that unemployment in America “is low because everyone has two jobs” and “people are working 60, 70, 80 hours a week.” She was subsequently chastened by Politifact.

But I’m digressing. Let’s enjoy some more humor.

Here’s a satirical video that’s received a lot of attention. It features an 8-year old Mini-AOC.

Also, you’ve probably seen information about how to detect if someone is using illicit substances.

Well, here’s how to tell if someone is buzzed on things they shouldn’t be using.

Here’s some more clever satire from Babylon Bee. It appears Ms. AOC is not cut out for success on some game shows.

Alexandria Ocasio-Cortez was pumped to attend a taping of The Price Is Right in Hollywood this week. The special guest introduced herself as a U.S. representative and rising star of the Democratic Party. Things got interesting when the game began and every time it was her turn to estimate the price of an item her answer was “free.” …She went on to guess that diamond earrings, a set of jet skis, and even a giant pile of cash were all free. Carey unveiled a package containing world-class healthcare and she said, “Definitely free.” …Cortez was never able to advance to the game proper, and as the credits rolled she appeared visibly upset. A hot mic picked up comments she made in frustration, claiming that the game was rigged by capitalism and that “everybody knows giant piles of money are free, that’s like basic economics 101”.

Last but not least, I assume everyone has seen Jack Nicholson in The Shining.

The remake is even more terrifying!

As always, feel free to peruse the entire collection of socialism-themed humor.

And if you want more info on the evil of socialism, just read more about the real-world consequences of bad policy.

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I spend much of my time analyzing the foolish and counterproductive policies imposed by Washington. Often accompanied by some mockery of politicians and their silly laws.

And I also employ the same approach when reviewing the bone-headed policies often pursued by state governments and local governments.

And since this is “International Liberty,” I obviously like to pay attention to what happens in other nations as well. I guess you could call it the global version of misery-loves-company.

So today we’re going to add to our collection of “Great Moments in Foreign Government.”

We’ll start in Egypt, where we got a version of alchemy. Except instead of turning a base metal into gold, a donkey was turned into a zebra.

A zoo in Egypt has denied painting black stripes on a donkey to make it look like a zebra after a photo of the animal appeared online. Student Mahmoud Sarhan put the images on Facebook after visiting Cairo’s International Garden municipal park. Aside from its small size and pointy ears, there were also black smudges on its face. …the enclosure contained two animals and that both had been painted. When contacted by local radio station Nogoum FM, zoo director Mohamed Sultan insisted the animal was not a fake.

The most amusing part of the report, though, was learning that zoos routinely try to mislead customers.

This is not the first time that a zoo has been accused of trying to fool its audience. Unable to find a way around the Israeli blockade, a zoo in Gaza painted two donkeys to look like zebras in 2009. Another Gaza zoo put stuffed animals on display in 2012 because of the shortages of animals. In 2013, a Chinese zoo in Henan province tried to pass off a Tibetan mastiff dog as an African lion, and in 2017 a zoo in Guangxi province disappointed visitors by exhibiting blow-up plastic penguins. Weeks later, another Guangxi zoo drew condemnation for displaying plastic butterflies. …Papua New Guinea is one of the poorest countries in Apec, with 40% of the population living on less than $1 a day according to the UN.

I have to confess, though, that I don’t know if any of these zoos were private. So maybe we have a problem that isn’t just limited to government.

Our next story is from India.

It seems that the military doesn’t understand that submarines are supposed to be watertight.

…it’s a good idea to, like, close the hatches before you dive. Call it a lesson learned for the Indian navy, which managed to put the country’s first nuclear-missile submarine, the $2.9 billion INS Arihant, out of commission in the most boneheaded way possible. The Hindu reported yesterday that the Arihant has been out of commission since suffering “major damage” some 10 months ago, due to what a navy source characterized as a “human error” — to wit: allowing water to flood to sub’s propulsion compartment after failing to secure one of the vessel’s external hatches. …It’s hard to articulate how major a foul-up this is… Indian authorities ordered the pipe replacement because they “likely felt that pipes exposed to corrosive seawater couldn’t be trusted again, particularly pipes that carry pressurized water coolant to and from the ship’s 83 megawatt nuclear reactor.”

Sounds like India’s navy would have been better off if the person in charge of the hatch had been one of the country’s famous no-show bureaucrats.

Now let’s turn our attention to Papau New Guinea, where the roads are so poor that it makes no sense to have fancy, high-speed cars.

Yet that didn’t stop the government from using a summit as an excuse to buy 40 Maseratis

Papua New Guinea’s government is under scrutiny for importing 40 luxury Maserati cars from Italy for the…Asia-Pacific Economic Cooperation (Apec) summit. The Quattroporte sedans, which cost more than $100,000 each (£75,000), will be used by foreign leaders. Media and activists have questioned if the poor Pacific country has wasted millions. …Apec Minister Justin Tkatchenko said the cars, which can reach speeds of 240 km/h (149 mph), would “provide the level of carriage for leaders that is the standard for vehicles used at Apec summits”. …Some of the Pacific country’s main roads are poorly maintained, with vehicle speeds limited to 80 km/h (50 mph). Other roads wind through mountainous terrain and often require a four-wheel-drive vehicle to navigate.

Incidentally, the government claimed that the Maseratis would be resold to private buyers, meaning no net cost to taxpayers. Highly unlikely, to be sure.

Moreover, if there was a follow-up story, I wouldn’t be surprised to learn that they magically wound up in the hands of politicians and their family members.

The bottom line is that governments manage to combine malicious venality with staggering incompetence. Quite a feat.

P.S. For what it’s worth, America’s political elite prefers to rely on taxpayer-financed limousines.

P.S.S. I’ve noticed on my trips to Cayman that there are lots of fancy, high-performance cars. In some sense this isn’t surprising. After all, zero-tax Cayman is a wealthy place. Yet I’ve always wondered why people buy such cars on a small island where high-speed travel is both difficult and unnecessary. But at least those are people spending their own money (though the government there certainly is capable of over-spending in other ways).

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When I want to feel optimistic about China, I look at data from Economic Freedom of the World to confirm that there was a lot of economic liberalization (triggered in part by some civil disobedience) between 1980 and the early 2000s.

Then I look at how that period of capitalist reform dramatically improved living standards and reduced poverty.

But I also look at the same data if I want to feel pessimistic about China. That’s because there hasn’t been any additional liberalization in the past 15 years. China is basically treading water, and that means it is actually losing ground as other nations reform.

Indeed, it is now ranked #107 after being ranked as high as #87.

Which is why I’ve arguedrepeatedly – that China needs a new period of free-market reform.

And that includes adopting better trade policy.

Which raises an interesting question: Is Trump’s saber rattling on China trade helping or hurting?

Here’s some of what I wrote for Inside Sources on this issue.

President Donald Trump has launched a new attack in his trade war with China… Is it possible…that his bluster will produce a good long-run deal to offset short-run costs? Let’s hope so, but it’s unclear…we all have a stake in the outcome of these trade negotiations. So here are five things to understand as discussions continue.

Starting with two reasons why there’s a trade deficit and why it doesn’t matter.

First:

Americans are much richer than their counterparts in China. …per-capita economic output in the United States is six times larger than it is in China ($60,000 compared to $10,000). This means Americans can afford to buy a lot more, including more goods and services from around the world. As such, a bilateral trade deficit with China is neither surprising nor worrisome.

And second:

The United States enjoys a far higher level of economic freedom than China. …the United States is ranked No. 6 while China is a lowly No. 107. This helps to explain why Chinese entrepreneurs who earn dollars by selling to American consumers often decide to invest those dollars in the American economy (the United States is the world’s top destination for global investment). This means the trade deficit is matched by a capital surplus.

I then explain China is guilty of protectionism and it would be good for both nations if these barriers were eliminated.

China has more protectionist barriers than America. …average Chinese tariffs are nearly three times higher than America tariffs. And China is also guiltier of using subsidies to help domestic companies. …people of both nations are the main victims of these bad policies, but it would be good for all of us if those trade barriers were reduced.

But what’s the best approach to encourage better policy from China?

I don’t think Trump’s unilateral protectionism will be successful.

Bullying and tit-for-tax retaliation is not an effective strategy. …tariffs hurt China, but they also hurt the United States by raising the price of consumer and intermediate goods. Taxes on Chinese goods also reduce incentives for America companies to become more efficient and better producers. Perhaps most important, there is little reason to think these taxes will have the desired effect of altering Chinese behavior.

I’d be much more hopeful if Trump used the World Trade Organization to push for good policy.

The WTO is an underused tool for trade liberalization. It has a dispute resolution process that has been successfully used to cajole and pressure nations into reducing trade barrier. The president has publicly criticized the WTO, but he probably doesn’t realize that the United States wins about nine out of every 10 cases when it challenges other nations’ trade barriers. …many other nations would have supported the United States if we had used the WTO as a vehicle to achieve more liberalization.

The bottom line, for what it’s worth, is that I’m not terribly hopeful.

It’s not too late for the president to select that strategy, of course, but that won’t be likely as long as he mistakenly sees trade as a zero-sum proposition.

Let’s close by looking at relevant excerpts from three other articles.

First, a columnist for National Review explains how cronyism infects the Chinese economy.

…just because China has many private companies, allows Communist-Party member Jack Ma to become a billionaire as head of Alibaba Group, and translates capitalist classics into Mandarin doesn’t mean it’s capitalist. The fact that few describe the Chinese economic system without putting a modifier in front of the term “capitalism” — “authoritarian,” “state,” “predatory,” “Communist,” etc. — should tell us something. …China has more than 150,000 state-owned enterprises, accounting for 40 percent of industrial assets. However, Chinese state capitalism is not just, or even principally, about the number and size of such enterprises; it’s about the central role the Chinese Communist Party (CCP) plays in virtually all aspects of economic life. …Chinese state capitalism is a system in which the purpose of firms — private and public — is to fulfill the goals of the Communist Party. …capitalism is…a system in which…property owners have considerable…freedom to pursue their goals without influence from the state. By this standard, China’s is far from a capitalist economy.

Second, here are some excerpts from an Atlantic column about why it is difficult to alter China’s misguided approach.

…the trade dispute is about far more than tariffs and deficits. It is a contest of two very different national ideologies. Though the Trump administration has deviated from this somewhat, the United States believes that openness—political, economic, and social—creates prosperity, resolves disagreements within society, and promotes the diversity that spawns innovation and progress. China—or, more accurately, its leadership—sees government control as critical to developing the economy, achieving social peace, and forwarding the best interests of the nation overall. Americans tend to think open, free markets that are operating in a fair regulatory environment produce the best economic results. Beijing, on the other hand, doesn’t trust market forces and instead wants the state to play a more direct role in achieving the economic outcomes it determines are necessary for the country. …As a result, what Trump is demanding is extremely difficult to achieve: a “level playing field” for American firms. In fact, nothing of the sort actually exists in China, even for Chinese companies. The state has a nasty tendency to favor its own, with government-controlled businesses enjoying a smorgasbord of official assistance, including tax credits, low-interest loans from state banks, and other subsidies that give them an undue edge in local competition. That leaves private Chinese companies and entrepreneurs often facing the same kinds of hurdles to doing business that foreign ones face.

Third, Professor Deirdre McCloskey has a more optimistic assessment, arguing that it is foolish for the U.S. government to fixate on China’s distortionary policies.

The White House is pursuing two stupid policies, trying to reduce the United States’ “balance of payments” with China and trying to protect “intellectual property” from China’s thievery. These policies are leading to a crash in the Chinese economy, which has been grossly ill-managed under President Xi Jinping. …when did you last feel the U.S. balance of trade? You feel only the idiotic policies advocated in reaction to it by Peter Navarro, a White House economist who never learned economics. (His Ph.D. is from Harvard. I’m thinking of turning mine back in.) It would be better if the government did not calculate and announce the balance of payments at all. It’s meaningless and an occasion for sin. What about China stealing intellectual property? Intellectual property sounds nice. …Patents and copyrights make things that are free in nature artificially scarce in order to cream off profit for the influentials. They are comparable to hack medallions, recently threatened by monopoly breakers Uber and Lyft. …Economists would be satisfied with a rough-and-ready rule of, say, a 10-year monopoly. But asserting an expansive right to intellectual property, which Congress then regularly extends in order to preserve the privileges of drug companies and the Walt Disney Corporation, is no solution.

I’ll add one final point.

We should support Chinese economic reform because it is good for the United States and good for China.

Here’s a chart showing 2017 World Bank data and 2019 IMF data on per-capita economic output in both nations.

In other words, notwithstanding all the growth China has enjoyed, it is still well behind the United States.

That’s the price the country is paying for insufficient reform.

Beijing should copy Hong Kong and Singapore if it wants to converge with America.

P.S. The last thing China should do is listen to the OECD or IMF.

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