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Socialism is an economic failure. International socialism didn’t work in the Soviet Union. National socialism didn’t work in Germany. And democratic socialism, while avoiding the horrors of its communist and Nazi cousins, also has been a flop.

Socialism fails because it attempts to replace market-determined prices with various forms of central planning based on government-dictated prices.

Moreover, socialism channels self interest in a destructive direction. In a free market, people get income and improve their lot in life by satisfying and fulfilling the needs of other people. In a socialist system, by contrast, people squabble over the re-slicing of a shrinking pie.

There’s a famous Winston Churchill quote that basically says that the ostensible problem with capitalism is that people aren’t equally rich, whereas the supposed attractiveness of socialism is that people get to be equally poor.

The Princess of the Levant sent me a visual version of Churchill’s quote, and it’s definitely worth sharing.

Both the Churchill quote and the above image are very entertaining. And they effectively make the point that statism is very bad for ordinary people.

That being said, they’re not actually accurate.

Sure, the masses are equally impoverished by socialist systems, but a handful of people escape this fate. You probably won’t be surprised to learn that the government elites have very comfortable lives. And that may be the understatement of the century, as indicated by this report in the U.K.-based Daily Mail. Here are some very relevant passages.

The daughter of Hugo Chavez, the former president who once declared ‘being rich is bad,’ may be the wealthiest woman in Venezuela, according to evidence reportedly in the hands of Venezuelan media outlets. Maria Gabriela Chavez, 35,…holds assets in American and Andorran banks totaling almost $4.2billion… Others close to Chavez managed to build up great personal wealth that was kept outside the petrostate. Alejandro Andrade, who served as Venezuela’s treasury minister from 2007 to 2010 and was reportedly a close associate of Chavez, was discovered to have $11.2billion in his name… During his lifetime, Hugo Chavez denounced wealthy individuals, once railing against the rich for being ‘lazy.’ ‘The rich don’t work, they’re lazy,’ he railed in a speech in 2010. ‘Every day they go drinking whiskey – almost every day – and drugs, cocaine, they travel.’

What a bunch of hypocrites. They denounce successful people who presumably earn money honestly, yet they amass huge fortunes by pilfering their nation.

And what’s been happening in Venezuela is no different, I’m sure, than what happened in the past in Nazi Germany, the Soviet Union, and other socialist regimes.

And I’m sure it’s still happening today in other socialist hell holes such as North Korea and Cuba. The elite enjoy undeserved and unearned wealth while ordinary people live wretched lives of deprivation.

Everyone’s equal, but some are more equal than others.

Let’s close by citing some wise words about the impact of socialism on ordinary people from Kevin Williamson of National Review.

The United Socialist party’s disastrous economic policies have led to acute shortages of everything: rice, beans, flour, oil, eggs, soap, even toilet paper. Venezuela is full of state-run stores that are there to provide the poor with life’s necessities at subsidized prices, but the shelves are empty. …While Venezuela has endured food riots for years, the capital recently has been the scene of protests related to medical care. Venezuela has free universal health care — and a constitutional guarantee of access to it. That means exactly nothing in a country without enough doctors, medicine, or facilities. Chemotherapy is available in only three cities, with patients often traveling hours from the hinterlands to receive treatment. But the treatment has stopped.

Now ask yourself whether you think the party bosses are suffering like other citizens because of a lack of food and health care (or toilet paper!).

And that giant gap between the treatment of the elite vs. the peasantry tells you everything you need to know about socialism, whether it’s the brutal kind practiced in places such as Venezuela or the kinder, gentler (but equally hypocritical) versions found elsewhere.

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At the risk of stereotyping, the Chinese people are remarkably productive when given the chance. Hong Kong and Singapore are dominated by ethnic Chinese, and those jurisdictions routinely rank among the world’s top economies.

Taiwan is another high-performing economy with an ethnic Chinese population.

Ironically, the only place where Chinese people don’t enjoy high average incomes is China. And that’s because there’s too much statism. If you peruse the indispensable Economic Freedom of the World from Canada’s Fraser Institute, you’ll see that China is ranked #115 out of 152 jurisdictions, which is even below nations such as Greece, Haiti, and Vietnam.

As I explain in this interview, China’s politicians are undermining prosperity with a system based on cronyism rather than capitalism.

China’s in the news, of course, because of recent instability in its financial markets. And I’ve taken advantage of the opportunity to give my two cents on this issue (see here and here).

But I was making the same criticisms even when China’s economy was perceived as a big success. I wrote in 2010 that America didn’t need to fear the supposed Chinese economic tiger. I pointed out in 2011 that China was way behind the United States.

And I was at least somewhat prescient when I warned about a bubble in the Chinese economy in this 2011 debate.

Though plenty of folks on the left actually argued that China’s state-controlled economy was something to mimic. Writing for Reason, Ronald Bailey cites some of their silly statements.

As the world watches China’s Communist Party leaders try to order markets around, my mind turned to those pundits who earnestly recommended that the United States emulate the brilliant beneficient Chinese planners in running our economy. The most fulsome China booster was New York Times columnist Tom Friedman. …So enamored of China’s industrial policy was Friedman that in 2010 he likened Chinese economic planning boldness to making “moon-shots.” …And then there is the inevitable Robert Reich. Reich, who is a former Clinton Secretary of Labor, has never been right about anything when it comes to economic policy prescriptions. For example, Reich was convinced in the 1980s the Japan would bury the United States due to the planning acumen of that country’s savvy bureaucrats. …Just shy of 30 years later Reich sang the same stale tune in 2011, only instead of Japanese planners, he was praising the wonders of Chinese industrial planning… As late as 2012, Richard D’Aveni, a Professor of Strategy at Tuck School of Business at Dartmouth College, declared in The Atlantic that “The U.S. Must Learn From China’s State Capitalism to Beat It.”

Actually, Professor D’Aveni is right for the wrong reason. We can learn a lot from statist economies. But we should learn what to avoid, not what to copy.

To conclude, this post shouldn’t be perceived as being anti-China. I want there to be more prosperity in that country, which is why I defended China from an absurd attack by the IMF.

Moreover, I commend China for reforms that move policy in the right direction. And as I pointed out in the interview embedded above, China’s reforms in the 1980s and 1990s may have been limited, but they did help lift hundreds of millions of people out of abject poverty.

Since I mentioned the interview, one of the quirky parts of the discussion was whether politicians should be held criminally responsible for economic mismanagement. Here’s what I wrote a few years ago about an example of that happening in Iceland.

P.S. You probably didn’t realize that it was possible to see dark humor in communist oppression.

P.P.S. But at least some communists in China seem to understand that the welfare state is a very bad idea.

P.P.P.S. Some business leaders say China is now more business-friendly than the United States. That’s probably not good news for America, but my goal is to have a market-friendly nation, not a business-friendly nation.

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Why are many developed nations facing long-run fiscal crisis according to long-run estimates from the IMF, BIS, and OECD?

Poorly designed entitlement programs are a big part of the answer, with the United States being an unfortunate example of how fiscal systems become unstable when politicians buy votes by putting burdens on future taxpayers.

But changing demographics is an equally important part of the answer.

Simply stated, birth rates are falling and lifespans are increasing all over the world. Those aren’t bad things. Indeed, longer lifespans are a very good thing.

But it means there won’t be enough workers to finance the modern welfare state. And when there are too many people riding in the wagon and too few people pulling the wagon, that is a recipe for Greek-style fiscal chaos.

When I explain this to audiences, I get the feeling that some folks think I’m exaggerating.

Indeed, some people openly accuse me of exaggerating demographic changes as part of a “scare campaign.”

They’re partially correct. My warnings about the need for reform could be considered a “scare campaign.” But that’s because I am scared. And I’m definitely not exaggerating.

Check out this very sobering image of how America’s population pyramid is turning into a population cylinder. Heck, our population profile will be somewhat akin to an upside-down pyramid by the middle of the century!

I have two thoughts when looking at this data.

The first – and most obvious – reaction is that we better implement genuine entitlement reform if we want to avoid a big mess. And the sooner, the better.

My second reaction is to express some sympathy and understanding (thought not approval) for the politicians who created America’s entitlement crisis.

Social Security was created in the mid-1930s and Medicare and Medicaid were adopted in the mid-1960s. And if you pay close attention to the above image, you’ll see that America had a “population pyramid” during those periods, meaning that there were comparatively few old people, plenty of workers, and then even larger generations of children (i.e., future workers and taxpayers).

With that type of population profile, tax-and-transfer entitlement systems appeared to be financially sustainable. That didn’t mean those programs were a good idea, of course, but it did mean that politicians could plausibly argue that it was okay to create entitlement programs that resembled Ponzi schemes.

The bottom line is that FDR and LBJ were very misguided, but their mistakes look far worse today than they did at the time.

So now the question is whether today’s politicians will show some actual foresight and fix the problems. There are reasons for optimism, but also reasons for pessimism.

P.S. Demography is not destiny. As I wrote earlier this year, “there are jurisdictions, such as Singapore and Hong Kong that are in reasonably good shape even though their populations rank among the nations with the lowest levels of fertility and longest life expectancies. …Mandatory pension savings is a key reason why some jurisdictions have mitigated a demographic death squeeze.

P.P.S. My 11th-most viewed post of all time (and the most-viewed item in the past three months) used two cows to explain economic and political theories.

Here’s an addendum to that post.

For more Greek-related humor, this cartoon is quite  good, but this this one is my favorite. And the final cartoon in this post also has a Greek theme.

We also have a couple of videos. The first one features a video about…well, I’m not sure, but we’ll call it a European romantic comedy and the second one features a Greek comic pontificating about Germany.

Last but not least, here are some rather un-PC maps of how various peoples – including the Greeks – view different European nations.

 

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This century has not been good news for economic liberty in the United States.

According to Economic Freedom of the World, America has dropped from being the 3rd-freest economy of the world in 2001 to the 12th-freest economy in the most recent rankings.

Perhaps more important, our aggregate score has fallen from 8.20 to 7.81 over the same period.

So why has the U.S. score dropped? Was it Bush’s spending binge? Obama’s stimulus boondoggle? All the spending and taxes in Obamacare? The fiscal cliff tax hike?

I certainly think all those policies were mistaken, but if you dig into the annual data, America’s score on “size of government” only fell from 7.1 to 7.0 between 2001 and 2012.

Which means economic freedom in the United States mostly declined for reasons other than fiscal policy. In other words, our score dropped because of what happened to our scores for trade policy, monetary policy, regulatory policy, and property rights and rule of law.

That triggered my curiosity. If America is #12 in the overall rankings, how would we rank if fiscal policy was removed from the equation?

Here are the results, showing the top 25 jurisdictions based on the four non-fiscal policy factors. As you can see, the United States drops from #12 to #24, which means we trail 14 European nations in these important measures of economic freedom.

If you look in the second column, you’ll notice how many of those European nations have double-digit increases when you look at their non-fiscal rankings compared to their overall rankings.

This is for two reasons.

First, their fiscal scores are terrible because of high tax rates and a stifling burden of government spending.

Second, these same nations are hyper-free market on issues such as trade, regulation, money, rule of law and property rights.

In other words, the data back up points I’ve made about policy in nations such as Denmark and Sweden.

In an ideal world, countries should have free markets and small government. In Northern Europe, they manage to get the first part right. Which is important since non-fiscal factors account for 80 percent of a nation’s overall grade.

Now let’s return to the issue of America’s decline.

Here are the non-fiscal rankings from 2001. As you can see, the United States was #5 at the time, scoring higher than even Singapore and Hong Kong. And the U.S. was behind only three European nations back in 2001.

For what it’s worth, America’s score has fallen primarily because of a significant drop in the trade category (from 8.7 to 7.7) and a huge drop for rule of law and property rights (from 8.7 to 7.0).

In other words, it’s not good for prosperity when a nation begins to have problems such as protectionism and politicized courts.

P.S. The erosion of America’s score for non-fiscal factors is particularly disappointing since improvements in those factors have played a big role in protecting the world from the negative economic consequences of more spending and taxes.

P.P.S. I think this is an example of correlation rather than causation, but the above rankings for non-fiscal economic liberty seem somewhat similar to the rankings I shared last week looking at overall societal freedom.

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What’s the biggest economic fallacy on the left? What’s the defining mistake for our statist friends?

One obvious answer is that many of them hold the anti-empirical belief that the economy is  a fixed pie and that one person can’t climb the economic ladder unless another person falls a few rungs.

There’s no doubt that the fixed-pie myth is an obstacle to sound thinking, but I’m wondering whether an even bigger problem is the pervasive belief on the left that there are easy shortcuts to prosperity.

Keynesian fiscal policy, for instance, is based on the notion that more growth is just a simple question of having the government spend more money.

And Keynesian monetary policy is based on a similarly simplistic assumption that more growth is generated by having central banks create more money.

To be sure, both policies may seem to work in the short run since people suddenly perceive that they have more money. But perceptions and reality may be different, particularly if the short-run boost in the economy is an illusory bubble.

And that’s why I’m not a big fan of QE-type policies designed to “stimulate” growth with artificially low interest rates.

As I explain in this brief FBN interview, any short-run gain is offset by long-run pain.

And I’m not the only one who has a jaundiced view.

The Wall Street Journal also is not happy with the Federal Reserve, opining that the real economy has stagnated as financial assets have been propped up by easy money.

…the Fed has only itself to blame for its economic and political predicament. …One lesson here is that the Fed’s great monetary experiment since the recession ended in 2009 looks increasingly like a failure. Recall the Fed’s theory that quantitative easing (bond buying) and near-zero interest rates would lift financial assets, which in turn would lift the real economy. …But while stocks have soared, as have speculative assets like junk bonds and commercial real estate, the real economy hasn’t. This remains the worst economic recovery by far since World War II…the economic expectations of Fed Chairs Ben Bernanke and Janet Yellen have been consistently wrong. …the Fed now finds itself caught between a slowing global economy and its promise to begin normalizing rates this year. …One result has been to increase economic uncertainty and market volatility.

Another result is that easy-money policies give politicians an excuse to avoid the real reforms that would boost long-run growth.

I definitely think that’s been a problem in Europe. Politicians keep waiting for magical results from the European Central Bank when the real obstacle to prosperity is a stifling burden of taxation, spending, and regulation.

The bottom line is that politicians all over the world are exacerbating bad fiscal and regulatory policy with bad monetary policy.

To augment this analysis, here’s a video from the Fraser Institute about the insight of Friedrich Hayek, who warned that government intervention, particularly via monetary policy, caused booms and busts by distorting market signals.

Needless to say, last decade’s financial crisis is a case study showing the accuracy of Hayek’s Austrian-school analysis.

But politicians never seem to learn. Or maybe they just don’t care. They focus on the short run (i.e., the next election) and it always feels good when the bubble is expanding.

And when the government-created bubble bursts, they can simply blame greed, or rich people, or find some other scapegoat (and then repeat the same mistakes as soon as the dust settles).

P.S. For a more detailed look at Austrian economics, check out this lecture. And Austrian-school scholars also have the best analysis of the Great Depression.

P.P.S. And for a more conventional critique of easy-money policies, here are some highlights from a speech by a member of the Bank of England’s Monetary Policy Committee.

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I’m a huge fan of the Fraser Institute’s Economic Freedom of the World.

I always share the annual rankings when they’re released and I routinely cite EFW measures when writing about individual countries.

But even a wonky economist like me realizes that there is more to life than economic liberty. So I was very excited to see that Ian Vásquez of the Cato Institute and Tanja Porčnik of the Visio Institute have put together The Human Freedom Index.

Here’s their description of the Index and some of the key findings.

The Human Freedom Index… presents a broad measure of human freedom, understood as the absence of coercive constraint. It uses 76 distinct indicators of personal and economic freedom… The HFI covers 152 countries for 2012, the most recent year for which sufficient data is available. …The United States is ranked in 20th place. Other countries rank as follows: Germany (12), Chile (18), Japan (28), France (33), Singapore (43), South Africa (70), India (75), Brazil (82), Russia (111), China (132), Nigeria (139), Saudi Arabia (141), Venezuela (144), Zimbabwe (149), and Iran (152).

Hong Kong and Switzerland are the top jurisdictions.

Here’s the Freedom Index‘s top 20, including scores on both personal freedom and economic freedom.

The United States barely cracks the top 20. We rank #12 for economic freedom but only #31 for personal freedom.

It’s worth noting that overall freedom is strongly correlated with prosperity.

Countries in the top quartile of freedom enjoy a significantly higher per capita income ($30,006) than those in other quartiles; the per capita income in the least-free quartile is $2,615. The HFI finds a strong correlation between human freedom and democracy. Hong Kong is an outlier in this regard. The findings in the HFI suggest that freedom plays an important role in human well-being

And here are some notes on methodology.

The authors give equal weighting to both personal freedom and economic freedom.

One of the biggest challenges in constructing any index is the organization and weighting of the variables. Our guiding principle is that the structure should be simple and transparent. …The economic freedom index receives half the weight in the overall index, while safety and security and other personal freedoms that make up our personal freedom index receive the remaining weight.

Speaking of which, here are the top-20 nations based on personal freedom. You can also see how they scored for economic freedom and overall freedom.

To be succinct, Northern European nations dominate these rankings, with some Anglosphere jurisdictions also getting good scores.

It shouldn’t be a surprise to learn that nations with economic freedom also tend to have personal freedom, but there are interesting exceptions.

Consider Singapore, with ranks second for economic freedom. That makes the country economically dynamic, but Singapore only ranks #75 for personal freedom.

Another anomaly is Slovenia, which is in the top 20 for personal freedom, but has a dismal ranking of #105 for economic freedom.

By the way, the only two nations in the top 10 for both economic freedom and personal freedom are Switzerland and Finland.

I’ve already explained why Switzerland is one of the world’s best (and most rational) nations. Given Finland’s high ranking, I may have to augment the nice things I write about that country, even though I’m sure it’s too cold for my reptilian temperature preferences.

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The United States has what is arguably the worst business tax system of any nation.

That’s bad for the shareholders who own companies, and it’s also bad for workers and consumers.

And it creates such a competitive disadvantage that many U.S.-domiciled companies are better off if they engage in an “inversion” and shift their corporate charter to a jurisdiction with better tax policy.

Unsurprisingly, the Obama White House doesn’t like inversions (with some suspicious exceptions) because the main effect is to reduce tax revenue.  But the Administration’s efforts to thwart them haven’t been very successful.

The U.K.-based Economist has just published an article on American companies re-domiciling in jurisdictions with better tax law.

A “tax inversion” is a manoeuvre in which a (usually American) firm acquires or merges with a foreign rival, then shifts its domicile abroad to reap tax benefits. A spate of such deals last year led Barack Obama to brand inversions as “unpatriotic”. …The boardroom case for inversions stems from America’s tax exceptionalism.

But this isn’t the good kind of exceptionalism.

The internal revenue code is uniquely anti-competitive.

It levies a higher corporate-tax rate than any other rich country—a combined federal-and-state rate of 39%, against an OECD average of 25%. And it spreads its tentacles worldwide, so that profits earned abroad are also subject to American taxes when they are repatriated.

And that worldwide tax system is extremely pernicious, particularly when combined with America’s punitive corporate tax rate.

Given these facts, the Economist isn’t impressed by the Obama Administration’s regulatory efforts to block inversions.

Making it hard for American firms to invert does precisely nothing to alter the comparative tax advantages of changing domicile; it just makes it more likely that foreign firms will acquire American ones. That, indeed, is precisely what is happening.

So what’s the answer?

If American policymakers really worry about losing out to lower-tax environments, they should get rid of the loopholes that infest their tax rules, drop the corporate-income tax rate and move to a territorial system. …jobs would be less likely to flow abroad.

In a companion article, the Economist lists some of the firms that are escaping from the IRS.

…companies have continued to tiptoe out of America to places where the taxman is kinder and has shorter arms. On August 6th CF Industries, a fertiliser manufacturer, and Coca-Cola Enterprises, a drinks bottler, both said they would move their domiciles to Britain after mergers with non-American firms. Five days later Terex, which makes cranes, announced a merger in which it will move to Finland. For many firms, staying in America is just too costly. Take Burger King, a fast-food chain, which last year shifted domicile to Canada after merging with Tim Horton’s, a coffee-shop operator there.

I’ve previously shared lists of inverting companies, as well as a map of where they go, and this table from the article is a good addition.

So how should Washington react to this exodus? The Economist explains once again the sensible policy response.

The logical way to stem the tide would be to bring America’s tax laws in line with international norms. Britain, Germany and Japan all have lower corporate rates and are among the majority of countries that tax firms only on profits earned on their territory.

But the Obama Administration’s response is predictably unhelpful. And may even accelerate the flight of firms.

…the US Treasury has been trying to make it harder for them to leave. …Despite such speed bumps, inversions still make enormous sense for companies with large overseas operations. If anything, the rule changes have led to more companies looking to get out before it is too late.

The Wall Street Journal opined on this issue earlier this month and reached a similar conclusion.

…a mountain of evidence that an un-competitive tax system has made the U.S. an undesirable location for corporate headquarters and investment. …high tax rates matter a great deal in determining where a company is based and where it grows.

The WSJ also pointed out that taxpayers have a right and an obligation to legally protect themselves from bad tax policy.

Shareholders deserve nothing less from management than the Warren Buffett approach of paying the lowest possible legal tax rate.

But since the White House isn’t very interested in helpful reform, expect more inversions.

Which is one more piece of evidence that punitive corporate taxation isn’t good news for workers.

…absent American tax reform will end up pushing more U.S. companies into foreign hands. …The ultimate losers in all of this aren’t so much the owners as American workers, who often lose their jobs when a company moves abroad. …It’s well past time for our government to stop creating advantages for foreign competitors.

In looking at this issue, it’s easy to be discouraged since the Obama Administration is unwilling to even consider pro-growth policy responses.

As such, the problem will fester until at least 2017.

But it’s possible that there could be pro-reform legislation once a new President takes office.

Particularly since the Senate’s Permanent Subcommittee on Investigations (which used to be chaired by the clownish Sen. Levin, infamous for the FATCA disaster) has produced a very persuasive report on how bad U.S. tax policy is causing inversions.

Here are some excerpts from the executive summary.

The United States has the highest corporate tax rate in the industrialized world, and (alone among its peers) has retained a worldwide system that taxes American companies for the privilege of repatriating their overseas earnings. Meanwhile, most other nations with advanced economies have adopted competitive tax rates and territorial-type tax systems. As a result, U.S. firms too often have a significant incentive to relocate their headquarters overseas. Corporate inversions may be the most dramatic manifestation of that incentive… The lesson policymakers should draw from our findings is straightforward: The high U.S. corporate tax rate and worldwide system of taxation are competitive disadvantages that make it easier for foreign firms to acquire American companies. Those policies also strongly incentivize cross-border merging firms, when choosing where to locate their new headquarters, not to choose the United States. The long term costs of these incentives can be measured in a loss of jobs, corporate headquarters, and revenue to the Treasury.

Those are refreshing and intelligent comments, particularly since politicians were in charge of putting out this report rather than economists.

So maybe there’s some hope for the future.

For more information on inversions and corporate tax policy, here’s a short speech I gave to an audience on Capitol Hill.

P.S. Let’s close with some political satire.

I’ve written about Bernie Sanders being a conventional statist rather than a real socialist.

But that wasn’t meant to be praise. He’s still clueless about economics, as illustrated by this amusing Venn diagram.

Though I’m sure many other politicians would occupy that same space.

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