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I periodically mock the New York Times when editors, reporters, and columnists engage in sloppy and biased analysis.

But all these instances of intentional and unintentional bias are trivial compared to our next example.

The New York Times has gone above and beyond conventional media bias with a video entitled, “How Capitalism Ruined China’s Health Care System.”

Here’s the part that caused my jaw to drop.

After the sad opening story about the guy with the sick mother, there’s a section from 1:33-2:27 that makes two observations that basically show the premise of the video is totally wrong.

  • First, it points out (from 1:33-1:42) that there is a universal, government-run health system that ostensibly covers the guy’s mother, so her unfortunate status is yet another example that coverage in a government-run healthcare system is not the same as treatment.
  • Second, it points out (from 2:05-2:27) that life expectancy soared once the communist party relaxed its grip on the economy and allowed some liberalization, which would seem to be powerful evidence that capitalism leads to better health outcomes.

These are astounding mistakes.

But it gets worse. Sarah Lilly, who lives in China, debunked the rest of the video in a column for FEE.

The New York Times…attempts to blame capitalism for the many problems in China’s health care system. …As a resident of China and a recipient of outstanding private health care here, I was confused as to why the Times would show us the horrors of a capitalist system without actually visiting a private health care facility. …All of the horrors depicted in the high-quality video—the long lines, the scalping, and the hospital fights—occurred at government-run health care facilities. …At the very least, failing to feature a single private medical facility while blaming capitalism for the dysfunction of China’s public health system is intellectually dishonest.

She points out that the big-picture analysis in the video is wrong.

In the video, the Times praises Chairman Mao’s introduction of “free” health care and claims that when capitalism was introduced into the country, the state retreated and care was no longer free. Neither statement is true. First, health care was never free; it was paid for by tax revenues. Second, the state never retreated; rather, its regulatory apparatus became vaster and even more invasive. Out of sheer necessity, China allowed for the creation of private hospitals to ease the burden of the country’s heavily bureaucratic and deteriorating health care system.

And she also explains that the details of the video are wrong.

The Times video depicts the ungodly long line most Chinese face to see a physician. …It’s an appalling scene. …There’s just one problem. The Shanghai Cancer Center is a public hospital, not a private one. The long lines, scalpers, bribes, and physical fights with hospital staff—all of these exclusively happen in the public, communist, government-run hospitals. …In an egregious bit of sleight-of-hand, the Grey Lady asserts that capitalism is ruining Chinese health care while presenting us with a hospital where capitalism is not practiced.

To be fair, we get the same type of mistake when journalists look at the flaws in the American health system. They blame capitalism when the problems of ever-higher prices and uneven coverage are the consequences of government intervention.

P.S. My columns about sloppy bias at the New York Times don’t include Paul Krugman’s writings. Debunking those mistakes requires several different collections.

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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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I’ve been in China this week, giving lectures about economic policy at Northeastern University in Shenyang.

I’ve explained that China has enjoyed reasonably impressive growth in recent decades thanks to pro-market reforms. But I’ve also pointed out that further economic liberalization is needed if China wants to avoid the middle-income trap.

That won’t be easy. Simply stated, I don’t think it’s possible to become a rich nation without free markets and small government.

The good news is that China’s economic freedom score has increased dramatically since reforms began, rising from 3.64 in 1980 to 6.40 in the latest edition of Economic Freedom of the World. And there’s been a dramatic increase in prosperity and a dramatic reduction in poverty.

The bad news is that a score of 6.40 means that China is only ranked #112 in the world. That’s way too low. The country needs a new burst of pro-market reform (especially since it also faces serious demographic challenges in the not-too-distant future).

In other words, China should strive to be more like #1 Hong Kong, which has a score of 8.97, or #4 Switzerland, with a score of 8.44.

Or even the #11 United States, which has a score of 7.94, or also #19 Netherlands, with a score of 7.74.

The bottom line is that China won’t become a rich nation so long as it has a score of 6.40 and a ranking of #112.

Fortunately, there is a pre-existing recipe for growth and prosperity. China needs to change the various policies that undermine competitiveness.

Since I’m a public finance economist, I told the students how China’s fiscal score (“size of government”) could be improved.

I recommended a spending cap, of course, but I also said the tax system needed reform to enable more prosperity.

Part of tax reform is low marginal tax rates on productive behavior.

Chinese academic experts agree. As reported by the South China Morning Post, they’re urging the government to significantly reduce the top rate of the personal income tax.

China needs to slash its highest tax levy on the nation’s top income earners in its upcoming individual tax code review, or risk seeing an unprecedented talent exodus, argued eight academics… They called for authorities to scrap the top two tax brackets of 35 per cent and 45 per cent in the current seven brackets progressive tax system on individuals, granting high income earners more leeway with a five tax brackets system that will be capped at 30 per cent.

The scholars pointed out that high tax rates are especially harmful in a world where high-skilled people have considerable labor mobility.

The academics from esteemed mainland universities called for further revision of the code, as the current draft failed…high income earners, a group that is often highly skilled professionals China wants to attract and retain in the global fight for talent. …For the “highly intelligent groups”, remunerations and royalties were likely to surpass the monthly salary, meaning that the combination can add up to a higher taxable income base and “seriously restrain them from” pursuing innovation, the academics argued. “In a global environment [when tax cuts become mainstream], if China maintains its high individual income tax rates … it will push the high-income, high-intelligent group overseas,” they said.

Needless to say, I’ll be very curious to see what happens. I’ve now been to China several times and I think the country has huge potential.

But achieving that potential requires reforms that will reduce the size and scope of government.

Here’s a chart I shared with the students, which shows that Taiwan has much more economic freedom and is much richer (basically an updated version of some numbers I put together in 2014).

The bottom line is that the country can become a genuine “Chinese Tiger” rather than a “paper tiger” with the right policies.

P.S. Some people actually think China should become more statist. Both the Organization for Economic Cooperation and Development and the International Monetary Fund have urged staggering tax increases in China.

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President Trump is a protectionist. He doesn’t understand the principle of “comparative advantage.” And he’s wrong about the implications of a “trade deficit.”

But that doesn’t mean everything he says about trade is wrong.

He frequently accuses other nations of “unfair” treatment of American products and China is one of his favorite targets.

Well, there’s some truth behind Trump’s bluster.

Here’s the World Trade Organization’s data on tariff rates imposed by the United States and China. As you can see, the United States has lower taxes on trade, which should be viewed as a net plus for the American economy (though we should be at 0.0, like Hong Kong).

Now let’s look at the trade data from the Fraser Institute’s Economic Freedom of the World.

As you can see, China moved substantially in the right direction in order to qualify for WTO membership in the early 2000s. And the American score has declined slightly since the 1980s.

Nonetheless, the United States still ranks higher.

So Trump is right, at least on the narrow issue of China being more protectionist.

But bad policy by China doesn’t justify bad policy by the United States. Especially when the main victims of Trump’s tariffs will include American consumers, workers, manufacturers, taxpayers, and exporters.

Instead, I explained in March that the United States should use the World Trade Organization to push China in the right direction.

The Tax Foundation has a similar perspective.

There is wide agreement that these concerns should be addressed, but the administration’s broad application of tariffs is not likely to change Chinese government policy, and will cause significant harm to the U.S. economy. The World Trade Organization’s Dispute Settlement Process is an alternative way to address trade disputes, rather than imposing unilateral actions, like tariffs, that damage economic growth and invite retaliation. …If an offending nation does not conform with the decision, the nation being harmed can request authorization for suspension of concession, meaning approval to increase its own tariffs, but only enough to make up for the damages caused. This avoids unilateral punishments and retaliations… The World Trade Organization’s Dispute Settlement Process should not be overlooked as an effective tool against harmful foreign trade practices. …The U.S. has allies in the IP dispute against China, and even some anti-dumping duties can be defended under WTO rules. But instead, the administration is pursuing a path of broad tariffs that invite retaliation, cause economic uncertainty, and damage economic growth.

Christine McDaniel of the Mercatus Center has a column in the Hill also explaining that the WTO option is far superior to unilateral tariffs.

…tariffs do self-inflicted harm. Imagine being in a gunfight in an old wooden ship, with every shot fired at your enemy putting a hole in your own hull. Eventually, you start to sink. …as for taking our complaints to the WTO, this is a decent bet. We have won most of the cases we have brought, including those against China, which does eventually oblige.

But Ms. McDaniel wants to be even bolder. She’s urging market-oriented nations to create a broad free-trade agreement that goes above and beyond the WTO. China would then feel significant pressure to fix its bad policies to be part of this new club.

…best option is to…Team up with our allies, who are just as frustrated with China as we are. Form a pact in which signatories commit to open trade and investment regimes, sufficiently strong intellectual property rights and enforcement, and legal recourse mechanisms. Most importantly, signatories commit to not engage in trade or investment with state-owned enterprises or those with close ties to state-owned enterprises. This would effectively leave China the odd man out. …China should implement reforms…: a more open trade and investment regime, phasing out state-owned enterprises, stronger patent rights, and legal recourse mechanisms. These policy shifts — a shift in thinking, really — would help put China on a more sustainable path to economic growth.

She’s right that China would benefit. But such a free-trade agreement also would put other participating nations on a better growth trajectory.

The United States is far from perfect on trade, after all, and the same is true of most of our allies.

So if we all formed a free-trade pact to encourage better policy in China, an indirect benefit would be better policy in America and other nations.

That kind of win-win scenario would be great news for the global economy. And it would be much better than a potentially dangerous tit-for-tat trade war, which seems to be where we’re heading now.

P.S. The United States also is more free-trade oriented than the European Union.

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I explained last month that the World Trade Organization’s dispute-resolution mechanism is the best way of discouraging China from short-sighted mercantilist and cronyist trade policies.

The Trump Administration, though, thinks that the best response to bad Chinese trade policy is to adopt bad American trade policy.

In this interview, I fret that tit-for-tax protectionism is bad, and might even lead to a 1930s-style trade war.

The Wall Street Journal also is concerned, opining this morning about Trump’s self-destructive protectionism.

Stocks have given up their earlier gains since the President unveiled his protectionist trade agenda…the main policy concern is the new uncertainty from rising trade tension. China slapped punitive tariffs on 128 categories of American goods on Monday in retaliation for the Trump Administration’s national-security levies on steel (25%) and aluminum (10%) imports last month. …it sends a pointed message that a larger trade war would hurt American businesses, farmers in particular. …China’s retaliation is best understood as an economic and political demonstration, hitting a small number of products to signal where future blows could fall if the Trump Administration imposes punitive tariffs on $60 billion in Chinese goods to punish the theft of intellectual property. It’s notable that both Republican-leaning and Democratic states were hit. Tariffs on America’s biggest exports to China, such as soybeans and Boeing aircraft, were held in reserve. But don’t be surprised if they’re on the list if the President imposes Section 301 tariffs as he has vowed to do. …there will be significant collateral damage to innocent business bystanders, American consumers, and the overall U.S. economy. Mr. Trump risks undermining the policy gains from tax reform and deregulation that have teed up the economy for faster growth.

Amen, especially that last sentence.

As I warned in the interview, Trump is sabotaging the progress he made on tax policy and regulation.

Not a smart move since he likes to use the stock market as a report card on his performance. Live by the Dow Jones, die by the Dow Jones. Though, in this case, his protectionism means he wants to commit suicide by the Dow Jones.

Speaking of report cards, here’s a mock report card I created for the President. It’s not as amusing as the mock college transcript from Obama’s time at Columbia, but it highlights how bad policy – on spending as well as trade – is offsetting good policy.

It’s a bit different from the grades I gave on the one-year anniversary of Trump’s inauguration, but more time has passed.

P.S. In the section for “teacher comments,” I suggested that the President needs extra tutoring to understand that a capital surplus (the flip side of a trade deficit) is generally a very positive indicator.

P.P.S. Let’s not forget that Trump is also threatening to deep-six NAFTA, so there are multiple threats to open global trade.

P.P.P.S. Makes me miss the Gipper even more. Heck, makes me miss Clinton, since he was in office and played a positive role when NAFTA and the WTO were ratified.

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At the risk of stating the obvious, I’m not a fan of international bureaucracies. The International Monetary Fund and the Organization for Economic Cooperation and Development are the worst multilateral institutions because of their promotion of bad policy, but I’ve also gone after the United Nations and World Bank for their periodic efforts to advance statism.

But this doesn’t mean I’m reflexively against international organizations. My criticisms of the IMF, OECD, UN, and WB are solely a function of their work to empower governments at the expense of people.

And this is why I generally like the World Trade Organization. The WTO is a Geneva-based international bureaucracy, but its mission is to empower people at the expense of governments by reducing import taxes and other trade barriers.

Which explains why I think President Trump will be making a mistake if he imposes unilateral tariffs on China. Yes, there seems to be strong evidence that China’s government is misbehaving, but I think that a positive outcome is far more likely if the U.S. government takes the issue before the WTO. Which is what I said in this short interview with Neil Cavuto.

And I’m not alone.

Bloomberg editorialized recently about this issue.

President Donald Trump…is…addressing a legitimate trade dispute: China’s alleged theft of intellectual property and forced technology transfers. …the U.S. alleges — with reason — that China has been stealing U.S. trade secrets, forcing American companies to hand over proprietary technology as a condition of doing business on the mainland, and providing state support for Chinese firms to acquire critical technology abroad. …Yet unilateral blanket tariffs of the sort the administration is considering are the wrong answer. In the first instance, they’d hurt U.S. consumers and producers even if they didn’t provoke retaliation (which they probably would). They’d undermine the World Trade Organization’s dispute-resolution system, perhaps fatally.

And the editorial points out that the WTO is a better place to settle the dispute.

…one can question the WTO’s effectiveness in resolving disputes of this kind: The process moves slowly. On the other hand, it works. The U.S. has won the great majority of the cases it’s taken there. The complaint against China’s practices would be stronger if it was coordinated with other governments. Japan and the European Union share U.S. concerns and would be willing to cooperate. As recently as last month, this seemed to be the strategy. …the U.S. needs to take the lead, once more, in global economic statecraft. Champion the rules-based order that has served the country and the world so well. Strengthen the WTO, don’t subvert it.

And the Wall Street Journal opined today on this topic.

…there’s no denying that Beijing’s mercantilism has fueled the political backlash against free trade. China’s increasingly predatory behavior, especially intellectual-property theft, poses a particular problem to a sustainable trading system. The question is how to respond in a way that encourages better Chinese behavior without harming the global economy and American companies and workers. …the danger is a tariff tit-for-tat that harms everyone. …Beijing is more likely to respond in kind at such a broad public assault on its goods.

The WSJ notes that China’s behavior has left something to be desired.

Beijing has turned to mercantilism over the last decade. …The government gives subsidies in several forms, including loans from state-owned banks on easy terms and low interest rates. …Along with subsidies and government help in acquiring foreign companies, the policy explicitly requires foreign companies to transfer intellectual property in return for access to the Chinese market. …Beijing has also stepped up its use of regulations to discriminate against foreign companies. …All of these policies violate WTO agreements. …The China problem now is the predatory use of government power to punish foreign competitors to benefit Chinese companies.

The WSJ doesn’t necessarily think the WTO is the right vehicle to respond, but it definitely supports a plurilateral approach.

…remedies should be based on the principle of reciprocity. If Beijing pressures multinational car companies to build electric cars in China, the U.S., EU and Japan could impose a tariff on Chinese-made vehicles and restrict the transfer of related technology. This would avoid the Trump Administration’s approach of tariffs on a wide variety of goods, a policy that alienates allies and raises the risk of a wider trade war. A targeted approach…could even strengthen the WTO as China would have an interest in modernizing and using the organization’s courts to resolve the disputes.

I’m a fiscal wonk rather than a trade wonk, so I’m open to the notion that perhaps a plurilateral approach is better than the WTO’s dispute resolution mechanism.

Though it’s worth noting that the United States has a very high batting average when bringing cases to the WTO.

Dan Ikenson, director of Cato’s Herbert A. Stiefel Center for Trade Policy Studies, reviewed WTO trade disputes involving the U.S. from 1995 to March of this year. He found that the U.S. prevailed in 91 percent of cases that it brought against other countries. “When the United States has been a complainant (as it has in 114 of 522 WTO disputes over 22 years — more than any other WTO member) it has prevailed on 91 percent of adjudicated issues,” he wrote.

I’ll close by noting that China’s bad policies don’t make it an enemy. The European Union is a semi-protectionist bloc and it isn’t our enemy either.

My goal is to simply point out that China’s approach to trade can be improved and should be improved. And since the country has moved in the right direction on overall economic policy (with very positive effects for the Chinese people), my hope is that coordinated opposition to Chinese mercantilism will have a positive effect.

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Happy New Year!

We listed yesterday the good and bad policy developments of 2017, so now let’s speculate about potential victories and defeats in 2018.

Here are two things I hope will happen this year.

  • Welfare reform – If my friends and contacts on Capitol Hill are feeding my accurate information, we may see a bigger and better version of the 1996 welfare reform in 2018. The core concept would be to abolish the dozens of means-tested programs (i.e., redistribution programs targeted at low-income people) in Washington and replace them with a “block grant.” This could be good news for federal taxpayers if the annual block grant is designed to grow slowly. And it could be good news for poor people since state government would then have the ability and flexibility to design policies that help liberate recipients from government dependency.
  • Collapse of Venezuela – Given the disastrous deterioration of the Venezuelan economy, it’s difficult to envision how the Maduro dictatorship can survive the year. Yes, I know the regime is willing to use the military to suppress any uprising, but I suspect hungry and desperate people are more likely to take chances. My fingers are crossed that the corrupt government is overthrown and Venezuela becomes another Chile (hopefully without a transition period of military rule).

Here are two things I fear may happen in 2018.

  • Pulling out of NAFTA – America dodged a bullet in 2017. Given Trump’s protectionist instincts, I worried he would do something very dangerous on trade. But pain deferred is not the same thing as pain avoided. The President has made some very worrisome noises about NAFTA and it’s possible he may use executive authority to scrap a deal that has been good for the United States.
  • A bad version of Brexit – Given the statist mindset in Brussels and the continent’s awful demographics, voting to leave the European Union was the right decision for our British friends. Simply stated, it makes no sense to stay on a sinking ship, even if it sinking slowly. But the net benefits of Brexit depend on whether the United Kingdom seizes the moment and adopts pro-growth policies such as tax cuts and free-trade pacts. Sadly, those good reforms don’t appear likely and it appears instead that the feckless Tory leadership will choose to become a satellite member of the EU, which means living under the thumb of Brussels and paying for harmonization, bureaucratization, and centralization. The worst possible outcome in the short run, though at least the U.K. is better positioned to fully extricate itself in the future.

I’m adding a new feature to my hopes-and-fears column this year.

These are issues where I think it’s likely that something consequential may occur, but I can’t figure out whether I should be optimistic or pessimistic. I sort of did this last year, listing Obamacare reform and Italian fiscal crisis as both hopes and fears.

It turns out I was right to be afraid about what would happen with Obamacare and I was wrong (or too early) to think something would happen with Italy.

Here are three things that could be consequential in 2018, but I can’t figure out whether to be hopeful or fearful.

  • Infrastructure reform or boondoggle – I put an “infrastructure boondoggle” as one of my fears last year, but the President and Congress postponed dealing with the issue. But it will be addressed this year. I’m still afraid the result may be a traditional pile of pork-barrel spending, but it’s also possible that legislation could be a vehicle for market-based reform.
  • Normalization of monetary policy – I try to stay clear of monetary policy, but I also recognize that it’s a very important issue. Indeed, if I was to pick the greatest risk to the economy, it’s that easy-money policies (such as artificially low interest rates) have created a bubble. And bursting bubbles can be very messy, as we learned (or should have learned) in 2008. The Federal Reserve supposedly is in the process of “normalizing” monetary policy. I very much hope they can move in the right direction without rattling markets and/or bursting bubbles.
  • A China bubble – Speaking of macroeconomic risks, I’m very glad that China has partially liberalized and I’m ecstatic that reform has dramatically reduced severe poverty, but I also worry that the government plays far too large a role in the banking sector and interferes far too much in the allocation of capital. I’m guessing this eventually leads to some sort of hiccup (or worse) for the Chinese economy, and all I can do is cross my fingers and hope that the government responds with additional liberalization rather than the bad policies being advocated by the OECD and IMF.

By the way, I fully expect the Democrats to sweep the 2018 elections. And since the Party is now much farther to the left than it used to be, that could lead to very bad news in 2019 – particularly if Trump unleashes his inner Nixon.

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