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Archive for the ‘Economics’ Category

The class-warfare crowd and tax lawyers don’t have a lot in common, but both groups oppose the flat tax. An even stranger unholy alliance involves the War on Drugs, which has the support of both the activists who despise drugs and the criminals who get rich selling drugs in the black market.

Professor Bruce Yandle explains this “bootleggers and baptists” phenomenon.

Professor Yandle, who is at Clemson University, even has a book on this topic, co-authored with Professor Adam Smith of Johnson & Wales University (no relation to has namesake, the author of The Wealth of Nations, at least to my knowledge).

One message of the book is that politicians often have noble-sounding reasons for the things they do, but closer investigation usually reveals that interest groups are the real beneficiaries.

In other words, the phenomenon of bootleggers and baptists is run-of-the-mill government corruption, an example of “public choice” in action.

What’s motivated me to write about this issue is a story from Petaluma, California. As reported by Axios, the city wants to ban new gas stations for the supposed purpose of fighting climate change.

Petaluma, California, has voted to outlaw new gas stations, the first of what climate activists hope will be numerous cities and counties to do so. …Expect more such ordinances, particularly in liberal towns. Grassroots groups are popping up with the mission of spreading this type of ban… “This is not a ban on the existing gas stations, which are providing all the gas currently needed,” Matt Krogh, U.S. oil and gas campaign director for the environmental group Stand.earth, tells Axios. …The city councilor who introduced the measure, D’Lynda Fischer, is quoted as saying: “The goal here is to move away from fossil fuels…” A Seattle-based group called Coltura, which aims to phase out gasoline altogether, is working on the issue locally and nationally. …In the 2020s, this is not the time to be expanding fossil fuel infrastructure,” Woody Hastings, co-coordinator of CONGAS, tells Axios. …He says his group has succeeded in blocking three applications to build new stations in Sonoma.

Given my views of climate activists, I don’t want to say this effort is noble. But I’m sure the average person might say this is a well-meaning crusade.

But let’s take a jaundiced look at what’s really happening. At the risk of being the skunk at a garden party, I’ll state that what’s happening, either in the town of Petaluma or in Sonoma County, will have zero impact on the climate.

But it could have a big impact on the owners of existing gas stations. They now have no reason to worry about new competitors. Which makes their gas stations more valuable and gives them greater leeway to raise prices.

Mr. Hastings, the climate activist quoted in the above excerpt, even acknowledged in the story that a ban would help existing stations.

“The problem with allowing new gas stations is we don’t really need them and they’re putting existing gas stations out of business.”

The bottom line is that consumers will lose because the government is limiting competition.

Which is good news for the bootleggers (the owners of gas stations that already exist) and the baptists (the green activists who feel good because they think they’re saving the planet).

P.S. There are countless examples of bootleggers and baptists working together in Washington.

The moral of the story is that it’s almost always insiders who benefit when politicians do something.

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I repeatedly write about the importance of economic growth, usually citing data about gross domestic product (GDP), which is defined as “a monetary measure of the market value of all the final goods and services produced in a specific time period.”

And I frequently use that GDP data when comparing long-run performance for various nations in order to demonstrates that you get more economic output with free markets and limited government.

Critics sometimes respond by arguing that GDP is an abstract measure that doesn’t necessarily capture the actual well-being of people.

I’ve addressed this concern in the past by pointing out that you find the same relationship between prosperity and economic liberty when looking at the OECD’s data on “actual individual consumption.”

But Max Roser of Oxford University recently shared some data (from Our World in Data) that may be even more useful because it shows that GDP is strongly correlated with median daily expenditure.

There are a couple of obvious takeaways from this data, most notably that nations in the top-right portion of the chart have much higher levels of economic liberty that countries in the bottom-left portion.

We also see that the United States does very well compared to most other developed nations, though we shouldn’t be surprised to see that Switzerland does even better.

And I assume the dot in the top-right corner is hyper-free market Singapore.

The moral of the story is that there’s a tried-and-true recipe for growth and prosperity based on free markets and limited government.

For those who doubt that assertion, please identify a country – from anywhere in the world and from any period of history – that became rich with statist policies?

I won’t be holding my breath waiting for an answer.

P.S. One important thing to understand is that the vertical axis in the above chart is based on “median” daily expenditure, which means the spending of the hypothetical person in each nation who is better off than 50 percent of the population and worse off than 50 percent of the population.

The “mean” average, by contrast, is calculated by dividing total expenditure by population.

Both median and mean are legitimate ways of figuring out an average, but median is often viewed as a better way of showing the person in the middle while mean is viewed as a better way of capturing aggregate conditions.

For what it’s worth, the U.S. bubble in the above chart presumably would be even higher if the vertical axis was based on mean rather than median daily expenditure. That’s because of a large number of very successful people with very high expenditure levels in America.

P.P.S. By the way, I should point out that Our World in Data is not a libertarian site or conservative site. Indeed, I suspect the academics who run it lean to the left.

Just consider this bit of editorializing in the site’s discussion about economic growth: “While in the US, for example, most of the income gains went to the richest members of society this is not true of other countries where economic growth was widely shared among all.”

It’s certainly true the rich have enjoyed large income gains in the United States, so there’s nothing technically inaccurate about that gratuitous bit of class warfare.

But people who work closely with economic data surely understand that you don’t just want to focus on how the pie is sliced. You also want to know the size of the pie.

When you look at both types of data, you learn that ordinary Americans are much better off than ordinary people in other nations – which is the opposite of what is implied by the quote.

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I’ve written many times about the spectacularly positive impact of pro-market reforms in Chile.

The shift toward free markets, which began in the mid-1970s, was especially beneficial for the less fortunate (see here, here, and here).

But it’s quite common for critics to assert that Chile is a bad example because many of the reforms were enacted by General Augusto Pinochet, a dictator who seized power in 1973. And some of those critics also attack Milton Friedman for urging Pinochet to liberalize the economy and reduce the burden of government.

Are these critics right?

To answer that question, I very much recommend the following cartoon strip by Peter Bagge. Published by Reason, it accurately depicts the efforts of reformers to get good reforms from a bad government.

It starts in 1973, with a group of Chilean economists, known as the “Chicago Boys,” who wanted free markets.

In 1975, they invited Milton Friedman to help make the case for economic reform.

This 1982 strip shows some of the controversies that materialized.

But by the time we got to the 21st century, everything Friedman said turned out to be true.

Chile had become an “improbable success.”

This cartoon strip is great for two reasons.

  • First, I’ll be able to share it with people who want to delegitimize Chile’s transition to a market-oriented democracy (ranked #14 according to the most-recent edition of Economic Freedom of the World). Simply stated, it was bad that Chile had a dictatorship, but it was good that the dictatorship allowed pro-market reforms (particularly when compared to the alternative of a dictatorship with no reforms). And it was great that Chile became a democracy (a process presumably aided by mass prosperity).
  • Second, we should encourage engagement with distasteful governments. I certainly don’t endorse China’s government or Russia’s government, but I’ve advised government officials from both nations. Heck, I would even give advice to Cuba’s government or North Korea’s government (not that I’m expecting to be asked). My goal is to promote more liberty and it would make me very happy if I could have just a tiny fraction of Friedman’s influence in pursuing that goal.

P.S. Here’s Milton Friedman discussing his role in Chile.

P.P.S. While I disagree, it’s easy to understand why some people try to delegitimize Chile’s reforms by linking them to Pinochet. What baffles me are the folks who try to argue that the reforms were a failure. See, for instance, Prof. Dani Rodrik and the New York Times.

P.P.P.S. Critics also tried to smear Prof. James Buchanan for supporting economic liberalization in Chile.

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While it’s true that every penny in the budget requires money to be diverted from the economy’s productive sector, not all government spending is created equal when considering the impact on growth.

Some types of spending, such as redistribution programs, are doubly harmful to prosperity. The economy is first hurt by the taxes needed to finance the programs, and then the economy is hurt because the programs give people incentives to rely on the government rather than work.

Other types of spending, however, require a cost-benefit analysis.

Consider the case of education. There are costs when politicians take money out of the private sector to finance education, but there are benefits from having an educated population.

That doesn’t tell us how much to spend, of course, and it also overlooks equally important questions such as whether the money will generate better results if used to finance a government monopoly or a choice-based system. But I’m simply making the point that there are costs and benefits.

Now let’s apply this analysis to government-financed research and development, which involves everything from the National Science Foundation to NASA, and from global warming grants to weapons development for the Pentagon.

Proponents argue that these are “public goods,” meaning that they produce economy-wide benefits and can only be handled by government.

But that view seems to be based in large part on faith rather than evidence.

Matt Ridley, the former science editor for the Economist, wrote about this topic for the Wall Street Journal back in 2015. If you only have time to read one article, this might be the best choice.

He starts by explaining that most breakthroughs come from private initiative.

Most technological breakthroughs come from technologists tinkering, not from researchers chasing hypotheses. Heretical as it may sound, “basic science” isn’t nearly as productive of new inventions as we tend to think. …Politicians believe that innovation can be turned on and off like a tap: You start with pure scientific insights, which then get translated into applied science, which in turn become useful technology. So what you must do, as a patriotic legislator, is to ensure that there is a ready supply of money to scientists on the top floor of their ivory towers, and lo and behold, technology will come clanking out of the pipe at the bottom of the tower. …this story…so prevalent in the world of science and politics—that science drives innovation, which drives commerce—is mostly wrong. It misunderstands where innovation comes from. Indeed, it generally gets it backward. …It is no accident that astronomy blossomed in the wake of the age of exploration. The steam engine owed almost nothing to the science of thermodynamics, but the science of thermodynamics owed almost everything to the steam engine. …Technological advances are driven by practical men who tinkered until they had better machines; abstract scientific rumination is the last thing they do.

Government funding, by contrast, does not have a good track record.

It follows that there is less need for government to fund science: Industry will do this itself. Having made innovations, it will then pay for research into the principles behind them. Having invented the steam engine, it will pay for thermodynamics. …For more than a half century, it has been an article of faith that science would not get funded if government did not do it, and economic growth would not happen if science did not get funded by the taxpayer. …there is still no empirical demonstration of the need for public funding of research and that the historical record suggests the opposite. After all, in the late 19th and early 20th centuries, the U.S. and Britain made huge contributions to science with negligible public funding, while Germany and France, with hefty public funding, achieved no greater results either in science or in economics. …public funding of research almost certainly crowds out private funding. That is to say, if the government spends money on the wrong kind of science, it tends to stop researchers from working on the right kind of science.

Ridley doesn’t claim there are no benefits. Instead, he makes the more practical point that government R&D has high costs with relatively low benefits.

…the argument for public funding of science rests on a list of the discoveries made with public funds, from the Internet (defense science in the U.S.) to the Higgs boson (particle physics at CERN in Switzerland). But that is highly misleading. Given that government has funded science munificently from its huge tax take, it would be odd if it had not found out something. This tells us nothing about what would have been discovered by alternative funding arrangements. And we can never know what discoveries were not made because government funding crowded out philanthropic and commercial funding.

Ridley’s analysis is backed up by scholarly research.

Here are some excerpts from a study by the Bureau of Labor Statistics.

This paper reviews the literature on R&D to provide guidelines for recent efforts to include R&D in the national income accounts. …The overall rate of return to R&D is very large, perhaps 25 percent as a private return and a total of 65 percent for social returns. However, these returns apply only to privately financed R&D in industry. Returns to many forms of publicly financed R&D are near zero. …On the basis of the evidence considered, privately financed R&D in industry should be treated as an investment and included in the relevant R&D stock. Returns to R&D are very high, but these high returns accrue only to privately financed R&D. Many elements of university and government research have very low returns, overwhelmingly contribute to economic growth only indirectly, if at all, and do not belong in investment.

And here are some passages from a 2003 report by the Organization for Economic Cooperation and Development.

…the pace of accumulation of physical and human capital plays a major role in the growth process. Most notably, the estimated impact of increases in human capital (as measured by average years in education) on output suggests high returns to investment in education. The results also point to a marked positive effect of business-sector R&D, while the analysis could find no clear-cut relationship between public R&D activities and growth …there are significant differences in the returns of R&D expenditure across sectors, and the private sector may be better able to channel resources towards high return R&D activities …regressions including separate variables for business-performed R&D and that performed by other institutions (mainly public research institutes) suggest that it is the former that drives the positive association between total R&D intensity and output growth. …The negative results for public R&D are surprising…they suggest publicly-performed R&D crowds out resources that could be alternatively used by the private sector, including private R&D. There is some evidence of this effect in studies.

Terence Kealey’s 2017 testimony to the Senate’s Homeland Security and Governmental Affairs Committee also is worth perusing.

…the British Industrial Revolution of the 19th century, like the British Agricultural Revolution of the 18th century, was laissez faire… The US was laissez faire in science between 1776 and 1940, yet by 1890 it had overtaken the UK to become the richest industrialized country in the world. Meanwhile those European countries – including France and the German states – whose governments invested most in science failed to converge on the UK or the US, let alone overtake them. …as shown by the successes of the Wright brothers, Thomas Edison and Nikola Tesla, to say nothing of the great industries of Pittsburgh and Detroit – US science, technology and industry flourished. …since 1830 the long-term rates of GDP per capita and TFP (total factor productivity) growth in the US have been steady (with GDP per capita, for example, growing at just under 2% per annum) and the inauguration of the federal funding for science had the following effect on long-term rates of GDP per capita and TFP growth: none.

The good news, relatively speaking, is that the private sector now plays a very dominant role in R&D expenditures.

This was not always the case. This chart, from Iain Murray’s research, shows that government played the dominant role in the 1950s, 1960s, and 1970s.

Let’s close with two real-world examples of how private R&D drives progress.

First, here are some excerpts from a 2017 column in the Wall Street Journal by Tom Stossel.

He explains that progress in curing and treating diseases comes from the private sector rather than the National Institutes of Health.

The assumption seems to be that the root of all medical innovation is university research, primarily funded by federal grants. This is mistaken. The private economy, not the government, actually discovers and develops most of the insights and products that advance health. The history of medical progress supports this conclusion. …innovation came from physicians in universities and research institutes that were supported by philanthropy. Private industry provided chemicals used in the studies and then manufactured therapies on a mass scale. …Practical innovation requires incremental efforts. But the reviewers of grant applications for medical research are obsessed with theory-based science and novelty for novelty’s sake. …Academic administrators, operating under the delusion that government largess would grow forever, have become entitled. …By contrast, private investment in medicine has kept pace with the aging population and is the principal engine for advancement. More than 80% of new drug approvals originate from work solely performed in private companies. …Great advances in health care have been made, but there are still important challenges, from obesity to dementia. One step toward addressing them would be for Washington to adopt the right approach to medical innovation—and to stop simply throwing money at the current inefficient system.

Second, here’s more of Terence Kealey’s work, in this case some commentary from last year that focuses on space exploration.

…all powered flight started in the private sector, for the Wright brothers were not government‐​funded researchers. …A team of full‐​time government‐​funded researchers, operating out of the Smithsonian Institution, were then also trying to launch heavier‐​than‐​air machines. Even though the Smithsonian team enjoyed a budget that was a hundred times larger than that of the Wrights, its prototypes always crashed. Airplanes are but one of the many gifts that private research and development has bestowed on humanity. As are space rockets. The great space‐​rocket pioneer was Robert “Moonie” Goddard (1882–1945), a professor at Clark College in Massachusetts. Funded with $100,000 from the Guggenheims and $10,000 from the Hodgkins Fund, the projects that resulted in his achievements were extraordinary: By 1925 he had created the first liquid‐​fueled rocket. By 1932 he had developed a gyro stabilizer… Elon Musk’s company, SpaceX,…doing something — namely, putting humans into orbit — that previously had been achieved only by governments. NASA could now be seen as only a temporary interruption of a process that had started in the private sector. …If there is a science that proves the resilience of the private sector, it is space science, including, of course, astronomy. Time again, what at the time was the largest optical telescope in the world was privately funded… Radio astronomy, moreover, was actually born in the private sector, when Karl Jansky of Bell Labs discovered in 1931 that stars emitted radio waves. Grote Reber, a radio engineer, built the first radio telescope, a parabolic dish reflector in his backyard in Chicago in 1937.

The purpose of this column isn’t to argue that there shouldn’t be any government-funded research.

Indeed, because there’s at least some hope of that such spending generates benefits, I prefer R&D spending over almost all other types of spending (it’s better than redistribution outlays, and also better than money that goes for the Department of Agriculture, Department of Education, Department of Housing and Urban Development, etc).

But “better than” other types of government spending is not the same as “better than” leaving the money in the economy’s productive sector.

The bottom line is that there simply isn’t any evidence that government-financed R&D generally passes the cost-benefit test described at the start of the column.

Which means that we should be very skeptical when politicians and interest groups plead for more funding (needless to say, evidence tells us we should be skeptical of any requests for bigger government, not just those for more R&D spending).

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I have mixed feelings about China’s economic policies.

During the 1950s, 1960s, and 1970s, China was horrifically impoverished because of socialist policies. According to the Maddison database, the country was actually poorer under communism than it was 1,000 years ago.

But there was then a bit of economic liberalization starting in 1979. As a result, there’s been a significant increase in living standards and a huge reduction in poverty.

That’s the good news. And I sometimes use China’s post-1979 growth as an example of how even a modest bit of pro-market reform can generate positive results.

The bad news, though, is that China is still a relatively poor nation. Living standards are not only far below American levels, but per-capita economic output is also much lower than the levels in other East Asian nations.

Why hasn’t China caught up?

In part, it takes time for poorer nations to economically converge with richer nations.

But the bigger problem is that convergence is not going to happen unless China engages in a lot more economic reform.

According to the most-recent edition of the Fraser Institute’s Economic Freedom of the World, China is in the bottom quartile, ranked #124 out of 162 nations.

If you look at the the details of China’s score, you’ll notice that it does poorly in all areas. But the nation’s lowest score is for fiscal policy (“size of government”).

So if the goal is to help China converge, the obvious place to start is by shrinking the size and scope of government.

But not according to the bureaucrats at the International Monetary Fund.

In a recent report, the IMF actually advised China to move fiscal policy even further to the left.

I’m not joking. Here are the relevant excerpts.

A combination of a permanent strengthening of the social safety net with reforms to broaden the tax base and increase progressivity would provide effective household support. This would include: Expanding significantly the coverage of unemployment insurance… These efforts would be more effective if complemented with hiring subsidies and programs. …there remains ample scope to further increase transfers… Tax reforms could help improve the progressivity of the tax system as well as meet additional financing needs to permanently expand the social safety net.

This is so misguided, I’m at a loss for words.

But fortunately, I don’t need to be locquacious because Mihai Macovei already wrote an excellent article, critiquing the IMF’s statist approach, for the Mises Institute.

The IMF argues…that a “reliable and effective social safety system” and a “reduction of the high household savings rate” would rebalance and make “resilient” China’s growth model. But why would high saving and low consumption impede sustainable growth? Both sound economic theory and historic experience refute the mainstream’s claim that China needs a big welfare state like those of modern Western economies in order to get richer. …China’s social safety nets are much less generous than in advanced economies, in particular in terms of unemployment benefits and pension income… The fact that China has not built a highly redistributive welfare system like in most advanced economies is illustrated primarily by the very limited role played by the personal income tax (PIT) in income redistribution. …Only people in the top income quintile are effectively paying an income tax… As a result, the Chinese budget collects only 1.2 percent of GDP from PIT, compared to more than 10 percent of GDP in the US. …All this prompts the IMF…to call China’s taxation system “regressive” and to call for more progressive income taxation and redistribution. …In reality, China’s lighter taxation system reduces less people’s incentives to work and save compared to other economies. At the same time, less welfare redistribution ensures higher workforce participation and less waste relative to the oversized and increasingly unsustainable social safety nets in modern advanced economies. …the mainstream criticism of China’s high savings propensity, lean welfare system, and reduced progressivity of taxation seems utterly misplaced.

Mihai is obviously very polite. I would use all sorts of bad words to describe the IMF’s recommendations, but he simply observes that the bureaucracy’s approach is “utterly misplaced.”

To be fair, not everything in the report is nonsense. The IMF is correctly skeptical of China’s industrial policy, and the bureaucrats also understand that protectionism is economically foolish.

But they have a blind spot on fiscal policy, perhaps because IMF bureaucrats get lavish, tax-free salaries and thus have no way of understanding the real-world impact of punitive laws.

Though at least you can give the IMF credit for consistency. The bureaucrats also pushed for higher taxes and bigger government in China in 2015 and 2018.

As you might expect, I take the opposite approach and always urge pro-market reforms for the country.

P.S. Since we’re discussing China, here’s an amazing example of media bias.

P.P.S. The Organization for Economic Cooperation and Development is another international bureaucracy advocating for bad fiscal policy in China.

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When I did my final assessment of Trump’s economic record, I gave him credit for cutting red tape in some areas, but also noted that he increased government intervention in other areas.

…there were some very positive moves on regulation, but they were partly offset by areas where Trump increased intervention (coal subsidies, property rights, Fannie/Freddie, and international tax rules, for instance).

I did give him credit, on net, for moving regulatory policy in the right direction. In other words, the good things he did regarding red tape outweighed the bad things.

But that’s a judgement call, in part because it’s rather difficult to measure the myriad forms of regulation from dozens of different bureaucracies, but also because there’s no agreement on how to measure success (is it a victory, for instance, to reduce the rate of increase in red tape?).

To see how this is challenging, let’s see what various experts wrote about Trump’s regulatory track record.

A new study, authored by Professors Cary Coglianese, Natasha Sarin, and Stuart Shapiro, pours cold water on Trump’s claim that he successfully reduced economic intervention.

Both the extent and impact of the Administration’s efforts to eliminate regulation are considerably less substantial than President Trump and his supporters have claimed. …We recognize that the Trump Administration has repealed or modified a series of agency regulations adopted under the Obama Administration, and even that the Administration has adopted a smaller number of new regulations deemed significant than other recent administrations. Yet overall the reality of regulatory elimination is rather unremarkable… The Administration has accomplished markedly little compared to what it has claimed. … in measuring levels of regulatory activity,researchers rely on a variety of sources of data, including overall pages in the Federal Register and the CFR,the incidence of new rules published in the Federal Register,and the number of actions listed in the semi-annual regulatory agenda. …The Code of Federal Regulations (CFR) is the authoritative source of all existing regulatory requirements on the books. …Growth continued in the Obama Administration to 185,053 pages in 2016. If President Trump’s claim to have eliminated 25,000 pages were correct, we would expect to see no more than160,000 pages in the CFR by now. But, quite to the contrary, the count as of the end of 2019 was185,984 pages—actually a somewhat greater number of pages, not fewer.

Here’s Figure 1 from the paper, which does confirm that there was not a 25,000-page reduction in red tape.

Though if you focus on the last couple of years, it is obvious that the rate of increase slowed significantly. Depending on one’s perspective, that is either a victory or a smaller defeat.

The authors do acknowledge that the number of pages isn’t even the right way to measure regulatory burden.

So they then examine the claim that the Trump Administration had more initiatives to reduce rather than increase red tape.

A count of pages in the CFR is only an indirect proxy for regulatory obligations. …Another way to look at what the Trump Administration has done by way of deregulation would be to look not at pages but at the number of actual rules. …Although the President and his supporters have claimed various levels of deregulatory activity—from 7 to 22 rules removed for every new rule added—these claims are false or misleading. …The lists overcount deregulatory actions by including withdrawals of proposals that were never finalized, delays in effective dates which do not eliminate regulations, non-regulatory actions such as the repeal of guidance documents, and even proposed deregulatory actions rather than completed ones. In addition, when comparing deregulatory actions to regulatory ones, the White House only counts new regulations designated as “significant,” while they count deregulatory actions of any magnitude or level of significance… rather than there being more deregulatory actions than other actions, as the Trump Administration’s claims have implied, there was, in fact, just the opposite. Overall about three completed actions in the regulatory agenda appear for every action designated as deregulatory.

The bottom line, based on their assessment, is that Trump didn’t accomplish much, particularly when compared to what happened under Carter and Clinton.

…in terms of“dramatic regulatory relief,” nothing the Trump Administration has done compares to the deregulation of the airlines, rail, and truck transportation that was executed by the Carter Administration in the late 1970s. Prior to that time, these major sectors of the economy—along with others, such as natural gas and telecommunications—were subject to regulations of prices and outputs—an inefficient form of regulation that advantaged incumbent firms but at the expense of consumers. President Carter championed major deregulatory initiatives that loosened the government restrictions on the air, rail, and transport sectors.Retrospective analysis indicates that the deregulation of these industries resulted in $70 billion in annual consumer benefits. …the evidence does not support the Trump Administration’s claims to have engaged in a dramatic scaling back of government regulation. More pages were removed from the CFR in the Clinton Administration than the Trump Administration. A more substantial unleashing of market forces occurred from the deregulatory changes made in the Carter Administration. And the Trump Administration has done at least as much regulating as it has deregulating.

For what it’s worth, Clinton was much more market oriented than most people realize. And Carter, while misguided in some areas, did a very good job on regulation.

So it’s not necessarily a knock on Trump to say he fell short of those two presidents.

Now let’s look at a pro-Trump perspective.

Professor Casey Mulligan of the University of Chicago early last year offered an upbeat assessment of the former president’s performance in tackling regulations.

In just three years the administration has reversed hundreds of regulations, many of which drone on for hundreds of pages. …Many of the regulations reversed had been written and implemented at the behest of special interests, including large banks, trial lawyers, major health insurance companies, big tech companies, labor unions, and foreign drug manufacturers. …the Council of Economic Advisers (CEA)…dedicated a great deal of manpower preparing a comprehensive and rigorous assessment of deregulation since 2017. That report, released in June, concluded that the past three years of deregulation is comparable to, and probably exceeds, any deregulatory episode in modern U.S. history. …the CEA report estimates that over the next five to 10 years, the deregulatory efforts of the Trump administration will increase annual real incomes in the United States by $3,100 per household.

I wrote about the above-mentioned report from the CEA in the summer of 2019. The CEA’s goal was to present Trump’s policies favorably, so I certainly don’t object to some skepticism from outsiders, but I also noted that, “the underlying assumptions aren’t overly aggressive” and “even modest improvements in growth lead to meaningful income gains over time.”

In a column for the Hill, James Broughel of the Mercatus Center analyzed Trump’s track record and concluded that some good things happened.

…the president issued Executive Order 13,771 soon after taking office. Its “2 for 1” requirement received the most attention: Two regulations must be identified for elimination each time a new one is put forward. However, perhaps more important is the “regulatory budget” it set up, which essentially set a cap on new regulatory costs executive branch agencies can impose. …A look at the data suggests the cap is largely working. On Jan. 20, 2017 — Trump’s inauguration day — there were 1,079,601 regulatory restrictions on the books. By Dec. 6, 2019, that number stood at 1,077,822. While the code has not declined substantially by this measure — and the administration should acknowledge that aggregate cuts to-date have been modest — it’s rare to see a code fail to grow across an entire presidential term.

Incidentally, the Mercatus measure of “regulatory restrictions” almost certainly is better than other measures of red tape, so it’s disappointing that Coglianese, Sarin, and Shapiro failed to include it in their analysis.

But if we’re simply looking at the volume of “significant rules,” here’s a tweet from James Pethokoukis showing that the increase in red tape dramatically slowed once Trump took over.

Philip Wallach of the R Street Institute examined Trump’s track record on red tape in an article for National Review in late 2019 and he thought the glass was half empty rather than half full.

Regulation became one area where conservatives wary of Trump allowed themselves high hopes. Trump’s experiences as a developer left him with a bone-deep skepticism of regulations. …There have been some real bright spots for deregulators. Many of the Obama administration’s aggressive and legally dubious environmental rules have been stalled or rolled back, including the Waters of the United States rule, Corporate Average Fuel Economy standards for tailpipe emissions, and the Clean Power Plan, which regulated greenhouse-gas emissions from existing power plants. The Endangered Species Act will be interpreted so as to make it less burdensome. Promises to scrap Obamacare may have gone unfulfilled, but the administration has quietly and constructively made the program more flexible for states and individuals. …the Trump administration…to an unprecedented degree…has…issu[ed] far fewer new regulations than any of its predecessors.

As you can see, it’s important to define success. Is it a victory to have “far fewer new regulations”?

Or, as you can see in the following excerpt from Wallach’s article, is it a victory to cut red tape by less than Obama increased it?

These triumphs notwithstanding, three years in, hopes of a thoroughgoing overhaul have been dashed. …hitting the pause button, however unusual, does not a revolution make. The hoped-for transformation of the administrative state is nowhere to be found. …In 2018, the administration sought to show its relative merit by noting that, through its first two years, the Obama administration had imposed $245 billion in regulatory costs. The Trump administration’s negative $33 billion in costs imposed at that point certainly was a lot less than $245 billion. But the comparison cuts harder in the other direction: The administration is admitting that it is coming nowhere close to reversing the costs imposed even by the Obama administration — let alone the decades of regulatory burdens built up previously. …the administration’s math allows it to take credit for deregulatory policies as soon as they are promulgated, without paying any attention to whether they are carried through. …the administrative state has been more discomfited than deconstructed by the Trump administration.

Last but not least, former Obama official Cass Sunstein opined for Bloomberg back in 2018 that Trump’s main achievement was to slow the tide of new regulations.

Is President Donald Trump dismantling the regulatory state? Not close. …let’s take a broader perspective. Under George W. Bush, the Office of Information and Regulatory Affairs approved about 2,500 final regulations. Under Barack Obama, it approved about 2,100 final regulations. …By comparison, the Trump administration has repealed … dozens of finalized regulations. …about 2 percent of the number of regulations finalized over the past 16 years. …Much more fundamentally, he’s substantially slowed the flow of new ones. …From Bush’s inauguration to Sept. 1, 2002, the Office of Information and Regulatory Affairs approved about 400 proposed regulations and about 500 final regulations. From Obama’s inauguration to Sept. 1, 2010, the Office of Information and Regulatory Affairs approved about 270 proposed regulations and about 470 final regulations. …the Bush and Obama administrations look pretty similar… The Trump administration is a big outlier. From Trump’s inauguration to the present, the Office of Information and Regulatory Affairs approved about 170 proposed regulations and about 160 final regulations. That’s a major reduction.

So what’s my two cents?

The obvious conclusion is that the Trump Administration did some good things to ease the nation’s regulatory burden, but there was no major paradigm shift.

The United States had a lot of red tape when Trump took office and it had a lot of red tape when Trump left office, though he definitely slowed the rate of increase.

But a slower rate of increase is still not good news, as illustrated by the fact that the Fraser Institute calculates that America’s score on red tape has declined slightly since 2016.

Indeed, the overall score for economic liberty in the United States has declined slightly since Obama left office, which is evidence for my argument that Trump delivered an incoherent mix of good policies (taxes, for instance) and bad policies (trade, for instance).

P.S. Trump’s Jekyll-Hyde record on economic policy is one of the reasons why I prefer Reaganism over Trumpism. The establishment doesn’t like either of those options, but I very much prefer the one that unambiguously reduces the size and scope of government.

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Two years ago, I explained that socialism is an economic failure, regardless of how it is defined.

In today’s follow-up column, let’s start with an excellent video from John Stossel.

Before addressing the three myths mentioned in the video, it’s worth noting that there’s a technical definition of socialism based on policies such as government ownershipcentral planning, and price controls, and a casual definition of socialism based on policies such as punitive tax rateswelfare state, and intervention.

I don’t like any of those policies, but they are not identical.

That’s why I came up with this flowchart to help illustrate the different strains of leftism (just as, on the other side of the spectrum, Trumpism is not the same as Reaganism is not the same as libertarianism).

Now that we’ve covered definitions, let’s dig into Stossel’s video. He makes three main points.

  1. Socialist policies don’t work any better if imposed by governments that are democratically elected. Simply stated, big government doesn’t magically have good consequences simply because a politician received 51 percent of the vote in an election.
  2. Scandinavian nations are not socialist. I’ve addressed this issue several times and noted that countries such as Sweden and Denmark have costly welfare states, but they are based on private property and rely on private markets to allocate resources.
  3. Socialism has a lot in common with fascism. Stossel could have pointed out that Hitler was the head of the National Socialist Workers Party, but he focused on the less inflammatory argument that socialism and fascism both rely on government control of the economy.

By the way, Stossel also narrated an earlier video on this same topic that addressed two other topics.

First, he countered the argument that we can’t learn anything from the failure of nations such as the Soviet Union and Cuba because they did not have not “real socialism.” My two cents on that topic is to challenge socialists (or anyone else on the left) to answer this question.

Second, he addressed the specific argument that Venezuela can’t teach us anything because its collapse has nothing to do with socialism. The New York Times may want people to think Venezuela’s failure is due to factors such as low oil prices, but the real reason is that economic liberty has been extinguished.

The bottom line is that socialism doesn’t work. Regardless of how it’s defined, it’s both immoral and a recipe for economic decline.

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I repeatedly write about inequality, largely in hopes of helping people, especially my left-leaning friends, understand that we should instead focus on other issues, such as economic opportunity and poverty reduction. In other words, let’s try to help the less fortunate rather than tear down successful people

I specifically try to convince them that they shouldn’t be bothered if someone gets rich (assuming wealth is being earned rather than the result of handouts, bailouts, and subsidies from politicians). What matters is “growing the pie” so all of us have a chance to enjoy more prosperity.

But what if someone gets rich because of good luck? In other words, instead of becoming wealthy because of hard work, intelligence, or entrepreneurship, what if someone is simply the beneficiary of being attractive? Or being tall?

As captured by this tweet from Rob Henderson, this is not mere speculation.

I actually referenced Prof. Mankiw’s work when writing about this issue back in 2010.

And I periodically come across new research on the economic advantages enjoyed by attractive folks.

Highly attractive women’s salaries are one-tenth higher than the average even at similar education and competence levels, a low attractivity means a loss of 4 percent, according to a study presented by sociologist Petra Anyzova at a workshop based on a job market research project today. …Anyzova said that the results are similar to the findings of other studies and the trend suggests that men are disadvantaged if they display more feminine traits and women are disadvantages if they display more masculine traits.In the case of men, the impact of physical attractiveness on being able to secure a higher socio-economic status is significant.

And here’s another study Henderson tweeted about.

So what are the policy implications of this research? And the other research that I cited back in 2018 and 2019?

As far as I’m concerned, there aren’t any.

Yes, some people are very lucky because of their looks or their height and they wind up with extra income because of those random characteristics, but that shouldn’t be a reason for government-coerced redistribution.

The same thing is true for those fortunate enough to be born into the right families.

As I wrote two years ago.

…taller people and better-looking people earn more money and have better lives. That’s genuine unfairness, just like having better parents is a source of genuine unfairness. Yet not even Bernie Sanders or AOC have proposed taxes to equalize those sources of real unfairness.

Yes, the research suggests that life isn’t fair.

But government intervention isn’t the answer, as I explained back in 2011.

The real issue is whether this discrimination is real and whether it justifies government intervention. …I don’t doubt that “lookism” exists. …But does that mean we should have some sort of government bureaucracy with the power to sue, fine, arrest, or otherwise harass based on whether people claim they didn’t get promotions because of their appearance?

Just imagine, for instance, if government tried to redistribute sexual opportunities, as suggested by this example of Elizabeth Warren satire?

I’ll conclude with the observation that if we don’t try to address inequalities caused by random luck, such as looks and height, then why would we want politicians to impose taxes and redistribution to deal with inequalities that are the result of attributes over which we have considerable control, such as diligence, productivity, responsibility, and effort?

P.S. For what it’s worth, research suggests conservatives generally are viewed as more attractive and stronger than folks on the left (though that research also suggests that libertarians generally are perceived as being dorks).

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Back in 2014, I shared two videos, one narrated by Prof. Don Boudreaux and the other narrated by Prof. Deirdre McCloskey, making the point that grinding poverty and material deprivation were the norm for most of human history. It wasn’t until capitalism emerged a few hundred years ago that we made the jump from agricultural poverty to industrial prosperity.

I know at least one person who didn’t watch those videos.

Congresswoman Ayanna Pressley isn’t as well known as other members the “The Squad,” especially Alexandria Ocasio-Cortez and Ilhan Omar (jointly featured in this bit of satire), but she deserves some sort of recognition for being totally clueless about economics and history. Indeed, she may even deserve some sort of prize for uttering the year’s most economically illiterate sentence.

The two aforementioned videos illustrate why her statement is nonsensical, but let’s share some updated numbers to illustrate why she is profoundly wrong.

The Our World in Data site, maintained by Max Roser at Oxford University, is a great resource for researchers. If you go to the section on economic growth, you’ll find lots of information and many charts examining what has happened to living standards over long periods of time.

For instance, here’s a look at gross domestic product (GDP) over the past 2000 years. As you can see, per-capita economic output was very low (and very flat) until capitalism emerged in the 1700s and 1800s.

Thanks to capitalism’s emergence (along with the rule of law), we are vastly better off today than our ancestors.

Here’s another look at the data, but let’s focus on just the past 200 years. Yes, the 1800s was the era of the “industrial revolution” and so-called sweatshops, but that was a building block to our current prosperity.

To be fair to Congresswoman Pressley, it’s only the first part of her statement (“poverty is not naturally occurring”) that is grossly inaccurate and economically illiterate.

She then added that poverty “is a policy choice,” presumably because she wants people to believe that more redistribution can make it go away. That part of her statement also is wrong, according to both U.S. data and global data, but not quite as ludicrously erroneous.

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There’s a recipe for growth and prosperity. It’s called capitalism.

As Dan Hannan explains in this video, it’s the way to help all groups in a society become richer.

This is a great video about how free enterprise delivers prosperity for the masses.

And because wealthy societies have lots of financial resources, capitalism also is correlated with good outcomes such as reduced pollution and increased literacy.

Hannan makes three key points in his video.

Indeed, the only possible shortcoming in the video is that it truncates Schumpeter’s quote.

As you can see below, it’s not just that free enterprise makes goods available for those at the bottom, it does so in a way that is increasingly affordable over time.

P.S. Here are Part I, Part II, Part III, and Part IV of the series.

P.P.S. As always, I ask my left-leaning friends to shown me an example, either today or at some point in history, where a society became rich with big government rather than capitalism? I call this my never-answered question.

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While I freely self-identify as a libertarian, I don’t think of myself as a philosophical ideologue.

Instead, I’m someone who likes digging into data to determine the impact of government policy. And because I’ve repeatedly noticed that more government almost always leads to worse outcomes, I’ve become a practical ideologue.

In other words, when looking at at an issue, I now have a default assumption that government is going to be the problem, not the solution.

I think more people will share my viewpoint if they peruse this chart from Mark Perry.

It shows changes in prices for selected goods and services over the past 21 years, and the inescapable conclusion (as I noted when writing about the 2014 version of his chart) is that we get higher relative prices in sectors where there’s the most government intervention.

Especially healthcare and higher education.

By contrast, we see falling relative prices (and sometimes falling absolute prices!) in sectors where there is little or no government intervention.

Here’s some of Mark’s description of what we can learn from his chart.

I’ve updated the chart above with price changes through the end of last year. During the most recent 21-year period from January 2000 to December 2020, the CPI for All Items increased by 54.6% and the chart displays the relative price increases over that time period for 14 selected consumer goods and services, and for average hourly wages. …Various observations that have been made about the huge divergence in price patterns over the last several decades… The greater (lower) the degree of government involvement in the provision of a good or service the greater (lower) the price increases (decreases) over time, e.g., hospital and medical costs, college tuition, childcare with both large degrees of government funding/regulation and large price increases vs. software, electronics, toys, cars and clothing with both relatively less government funding/regulation and falling prices.

By the way, I can’t resist also calling attention to Mark’s data on what’s happened over time to prices for various health care services and procedures.

We find that prices have skyrocketed in areas of the healthcare sector where government plays a big role, especially hospital care.

By contrast, prices have been steady (or even falling!) in areas of the healthcare sector where competitive markets are allowed to operate, most notably for cosmetic procedures.

It’s almost as if it makes sense to have a default assumption that government is the problem rather than the solution.

P.S. While the data in Mark’s chart tell a depressing story about the harmful effect of government intervention, he shares one bit of good news in his article.

The annual increase in college tuition and fees of only 1.4% last year was the smallest annual increase in the history of the CPI for college tuition and fees going back to 1978, and the only annual increase ever below 2%. That increase is far below the average annual increase in college tuition of nearly 7% over the last 42 years. So perhaps the “higher education bubble” is finally starting to show signs of deflating?

I hope he’s right, but worry he’s wrong.

P.P.S. Sadly (but predictably), some people seem to think government-caused price increases are a reason to support more government intervention.

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I rarely write about media bias, but I sometimes come across stories that cry out for correction because of blatant inaccuracies.

We’re going to add to the list today.

In a story for the Washington Post, Tracy Jan (aided by Seung Min Kim and Emily Guskin) argue that the Trump’s policies were bad news for African Americans.

Black voters overwhelmingly chose Biden, with 87 percent casting their ballots for him… Trump presided over the most unequal recession in modern American history because of his mismanagement of the coronavirus pandemic. …Economists say that rather than champion economic policies targeting average Black Americans, who are more likely to work low-wage jobs without health and retirement benefits, Trump’s annual budgets proposed eviscerating the social safety net, with cuts to housing, food stamps and health care.

I have two minor comments and one major comment.

The first minor comment is that Trump never proposed to eviscerate the so-called social safety net. Indeed, he increased domestic spending faster than Obama.

The second minor comment is that the recession was caused by the coronavirus, not by Trump’s policies.

The major comment is that Ms. Jan and her two colleagues wrote a lengthy story (more than 2,000 words) and never once mentioned or acknowledged that the black poverty rate fell to a record low during the Trump years.

Or that median household income for blacks rose to a record high.

This is a shocking level of journalistic malpractice. Sort of like writing about the Cold War without ever mentioning the Soviet Union.

By the way, I’m not saying that a pro-Trump spin was needed. They could have written about the poverty and income data and offered alternative explanations for why there were good numbers.

Heck, that’s what I did.

To be fair, the article does acknowledge that unemployment rate for African Americans fell to a record low during the Trump years.

…the Black unemployment rate’s record low average of 6.1 percent over 2019 — a steady improvement that had begun during the Obama administration — remained double that of Whites.

Though the obvious implication is that Trump doesn’t deserve any credit for a trend that started under Obama.

Which is certainly a legitimate argument, though honest journalists would have cited some people making the counter argument that his policies did make a difference (for what it’s worth, I think it’s a combination of both).

P.S. I’ll add another minor comment. The story quotes several people (all on the left side of the political spectrum) on how African Americans ostensibly will benefit if there is a bigger welfare state and more redistribution.

It’s certainly appropriate to write about that perspective, but why didn’t the three journalists bother to cite at least one person who could have pointed out the inverse relationship between social-welfare spending and the poverty rate?

Or cite at least one person who could have pointed out that low-income people in the United States enjoy higher living standards than middle class people in nations with bigger welfare states?

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Since both political parties have sent good and bad people to the White House, I don’t think it makes much sense to compare all Democratic presidents vs all Republican presidents.

But we can learn a lot by looking at the track record of specific presidents. I’ve done that with several past chief executives (Wilson, Hoover, FDR, Nixon, Reagan, Bush I, Clinton, Bush II, and Obama), and today we’re going to assess Trump’s performance.

The bottom line, as you can see from the chart, is that he did really well in some areas and really poorly in other areas, so his overall record was flat. Or perhaps slightly negative.

The bottom line is that Trump was good on taxes and bad on spending and trade.

And there were some very positive moves on regulation, but they were partly offset by areas where Trump increased intervention (coal subsidies, property rights, Fannie/Freddie, and international tax rules, for instance).

By the way, I’d like to give Trump a negative grade for his failure to address entitlements, but, in the interest of fairness, I only include actual policy changes.

Having given my big-picture assessment, here are some columns and articles that offer interesting insights.

We’ll start with some pro-Trump analysis. Professor Casey Mulligan opined in the Wall Street Journal that he restored growth (until the coronavirus, of course).

The Obama administration promulgated hundreds of new federal regulations that protected certain special interests from market competition. The beneficiaries included large banks, trial lawyers, big tech, major health-insurance companies, labor unions and foreign drug manufacturers. President Trump promised to undo all that, and in many cases succeeded, sometimes with the help of a Republican Congress. …Mr. Trump also helped remove government obstacles to innovation and competition in health care. Democrats will tell you that the first calendar-year drop in retail prescription drug prices in 46 years was mere coincidence, not the result of deregulation. …The Fed and the Obama economic team overpredicted growth almost every year from 2010-16. When growth failed to meet their rosy predictions, Mr. Obama’s advisers blamed the poor economic performance on America itself. …No one in Washington predicted that small business optimism would skyrocket to record levels when Mr. Trump was elected, that real wages would grow again (especially for blue-collar workers), that business formation would hit 20th-century highs, or that poverty and unemployment rates would quickly fall to record lows for Hispanics and African-Americans.  …Although Mr. Trump’s economic policy was imperfect, it was preferable by a long shot to Mr. Obama’s, which punished work, hiring and success rather than rewarding them. 

And here’s a chart that definitely makes Trump look good compared to Obama.

Those numbers will look much worse once 2020 numbers are included, but I won’t blame Trump for coronavirus-caused economic havoc (though I also don’t give him full credit for the good data in 2019).

Now let’s look at some less-than-flattering analysis.

Jeffrey Tucker of the American Institute for Economic Research lists some of Trump’s statist policies.

From 2015, even from his first public speeches following his presidential run, it was clear that Donald Trump was not a conservative in the Reagan tradition… This is not an American ideal. It’s not about freedom, rights, the rule of law, much less the limits on government. …Trump’s first year began with a more traditional Republican agenda of tax cuts, deregulation, and non-progressive court appointments. …That all changed on January 22, 2018. …This was the beginning of the trade war that would expand to Europe, Canada, Mexico, most of Asia, and ultimately the entire world. …What he ended up seeking was nothing short of trade autarky. …In addition to this calamity, US government spending soared 47% while the money supply registered record increases as measured by M1. The effects of this debt and money printing will be felt through next year.

Rick Newman wrote for Yahoo that Trump’s fiscal performance makes him an honorary Democrat.

Trump’s last-second objection to the $900 billion coronavirus relief bill Congress approved after eight months of negotiation is an unexpected Christmas gift for Democrats. Trump says the $600 direct payment to most Americans contained in the bill is too small. He wants $2,000. Trump could have insisted on this while Congress was drafting the bill… Democrats are gleeful. They’d happily accept a supersized stimulus payment, and even better, they now get to watch Republicans battle each other as they try to figure out what to do about Trump. Some Congressional Republicans think $2,000 is too generous, and there’s no chance of that getting into the bill unless other provisions come out. 

Newman was focusing on Trump’s spending proclivities during the pandemic, but the assertion that “maybe Trump’s a Democrat” applies to his fiscal record during his first three years as well.

P.S. I didn’t rank Trump on monetary policy for the same reason I didn’t rank Obama on that issue. Simply stated, I think both of them pursued a misguided Keynesian approach of easy money and artificially low interest rates, but we don’t have firm evidence (yet) of negative consequences.

P.P.S. I also didn’t give Trump a grade, positive or negative, regarding coronavirus. The federal government failed, but those failures largely were independent of the White House.

P.P.P.S. I generally approved of Trump’s judicial appointments, but don’t includes judges in my assessments of economic policy (though I may have to change my mind if they restore the Constitution’s protections of economic liberty and limits on the power of Washington).

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I have repeatedly warned that nations get in fiscal trouble when government is too big and growing too fast.

In such countries, it’s very common to find high levels of government debt as one of the symptoms of excessive spending.

This can create the conditions for a fiscal crisis, particularly during an economic downturn. Simply stated, investors (the people who buy government bonds) begin to worry that governments may renege on their promises (i.e., default).

There’s a must-read story on this issue in today’s Washington Post suggesting that the economic fallout from coronavirus has created conditions for new fiscal crises in nations across the globe.

Authored by Alexander VillegasAnthony Faiola Lesley Wroughton, the report explains that the downturn has produced record levels of debt.

Around the globe, the pandemic is racking up a mind-blowing bill: trillions of dollars in lost tax revenue, ramped-up spending and new borrowing set to burden the next generation with record levels of debt. In the direst cases — low- and middle-income countries, mostly in Africa and Latin America, that are already saddled with backbreaking debt — covering the rising costs is transforming into a high-stakes test of national solvency. …By the end of 2020, total government debt worldwide was projected to soar by $9 trillion and top 103 percent of global GDP, according to the Institute of International Finance — a historic jump of more than 10 percentage points in just one year. Countries have maxed out their figurative credit cards.

Keep in mind, by the way, that spending burdens were climbing in most nations, leading to more red ink, even before the pandemic.

That was true in developed nations (the U.S., Europe, Japan), but also in developing nations.

And, the story explains that developed nations are far more vulnerable to fiscal crisis.

The pandemic is hurtling heavily leveraged nations into an economic danger zone, threatening to bankrupt the worst-affected. Costa Rica, a country known for zip-lining tourists and American retirees, is scrambling to stave off a full-blown debt crisis, imposing emergency cuts and proposing harsher measures that touched off rare violent protests last fall. …Angola, in contrast, effectively shut out of global markets, is racing to strike a deal with the Chinese, but even that might not be enough to prevent a painful debt crisis. Sri Lanka, locked in recession, needs to make $4 billion in debt payments this year with only $6 billion in the bank. Brazil’s debt, worsened by a yawning budget deficit, has surged to a crippling 95 percent of GDP — raising alarm over the medium-term ability of the Latin American giant to stay afloat. …Zambia, once a shining example of Africa’s economic renaissance, is now the Ghost of Crises Future for debt-burdened countries slammed by the pandemic. The sub-Saharan nation fell into default in November.

Here’s a visual from the report.

To simplify, it’s good to be in a lighter-colored nation and bad to be in a darker-colored country. At least in terms of national debt burdens.

All this grim data understandably raises the very important question of what choices governments should now make.

Sadly, some self-styled experts are actually urging even more spending, mostly because of a dogmatic belief in the supposed elixir of Keynesian economics. In other words, they want governments to dig a deeper hole.

Analysts argue that the need for stimulus to keep economies running during this historically challenging period still outweighs the need to balance budgets. …the IMF…is telling countries that now is not the time to scrimp, lest they jeopardize still-fragile economic recoveries.

Politicians will want to follow that advice because it tells them that their vice (buying votes with other people’s money) is a virtue (more spending magically can boost growth).

In the real world, there are two big lessons we should learn.

  • First, it’s profoundly reckless to further increase tax and spending burdens when nations are already in trouble because of previous bouts of fiscal profligacy.
  • Second, countries should focus on spending restraint in both the short run and long run, ideally by enacting caps to limit annual spending increases.

For what it’s worth, the U.S. would be in great shape today if, back in 2000, lawmakers had adopted a Swiss-style spending cap.

P.S. One reason that spending caps work so well is that there’s built-in flexibility when dealing with economic volatility.

P.P.S. Financing government with the printing press won’t work any better than financing it with taxes and debt.

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For supporters of sensible policy, 2008 was not a good year. The economy suffered a big drop thanks to bad government policies (easy-money from the Federal Reserve and corrupt housing subsidies from Fannie Mae and Freddie Mac).

So what did politicians do?

Sadly, they gave us another tragic example of Mitchell’s Law. In response the damage caused by one set of bad policies, they adopted another set of bad government policies (in this case, the TARP bailout and Keynesian “stimulus” schemes).

Quite predictably, bailouts and bigger government didn’t work. Either in the United States or elsewhere in the world.

But proponents of Keynesian economics never learn from their mistakes. They simply assert that their policies somehow would have worked if the government spent even more money and maintained profligacy over a longer period of time.

You may think I’m joking, but here’s another example of this phenomenon. According to a recent news report, a senior bureaucrat at the Organization for Economic Cooperation and Development says we can have more prosperity if politicians make government bigger – both today and tomorrow.

The chief economist of the OECD has urged governments not to rush to cut public spending deficits… Laurence Boone – who runs the Organisation for Economic Cooperation and Development’s Economics Department – also said that political leaders should use fiscal policy to revive their economies… Boone said that governments had been correct to invest in stimulus packages during 2009: “The mistake came later in 2010, 2011 and so on, and that was true on both sides of the Atlantic,” she commented.

Needless to say, her analysis is wrong. If the answer is lots of spending over a long period of time, then why did the U.S. economy languish for an entire decade under the Keynesian policies of Hoover and FDR? And why has the Japanese economy languished for several decades when politicians on that side of the Pacific Ocean have imposed Keynesian policies?

Before pushing for another orgy of government spending, shouldn’t advocates of Keynesian economics be required to show us at least one success story for their approach, in any country and at any point in history?

Don’t hold your breath waiting for an answer.

By the way, before getting her sinecure at the OECD, Ms. Boone was an economic advisor to French President Francois Hollande.

That should have been a black mark. Hollande was the socialist who imposed confiscatory tax rates (resulting in effective tax rates above 100 percent for thousands of people) and drove entrepreneurs to flee the nation. Also, I can’t resist noting that Hollande copied Biden with the absurd assertion that higher taxes are “patriotic.”

Though, to be fair, Hollande eventually decided to be merciful and limit any taxpayer’s overall burden to 80 percent. How merciful!

Anyhow, you would think anyone associated with Hollande’s disastrous tenure would have a hard time getting another job.

But to the statists in charge of hiring at the OECD, Boone’s association with failed socialists policies apparently made her the most attractive candidate.

P.S. Returning to the article cited above, Ms. Boone did make one sensible observation, noting that Keynesian easy-money policies push up asset prices, which mostly benefits the rich.

…governments propped up growth with monetary policy – slashing interest rates and pumping liquidity into the banking system. But Boone argued that monetary policy “has distributional impacts” – it can for example drive up asset prices, favouring the wealthy.

Very true.

It’s great when people become rich by providing goods and services to the rest of us. It’s nauseating when people become rich because of bad government policy.

P.P.S. If governments follow Ms. Boone’s and expand the burden of government spending, it will be just a matter of time before they also impose higher taxes. But Ms. Boone won’t have to worry about that since OECD bureaucrats (like their counterparts at other international bureaucracies) get tax-free salaries.

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A “capital gain” occurs when you buy something and later sell it for a higher price. A capital gains tax is when politicians decide they get to grab a slice of that additional wealth.

I’ve repeatedly explained that it is economically foolish to have such a tax because it punishes saving, investment, risk taking, and entrepreneurship.

Simply stated, the capital gains tax is “double taxation,” which is what happens when there are additional layers of tax on income that is saved and invested.

I’m motivated to address this issue again because of a recent column in the Washington Post by Charles Lane.

He wants us to believe that singer-songwriter Bob Dylan has been rewarded by the capital gains tax.

Bob Dylan…just sold the rights to “Blowin’ in the Wind” and 600 other songs to Universal Music Publishing Group for a reported $300 million. …This is a tribute to his genius and, on the whole, to a political and economic system that rewards artists… Nevertheless, some socially conscious musician could write a song protesting the Dylan deal, because of what it reveals about that engine of irrationality and inequality known as the U.S. tax system. A cardinal defect of the system is highly favorable treatment of capital gains relative to ordinary income. The top rate on the former stands at 20 percent; on the latter, it is 37 percent. …the obscure 2006 law known as the Songwriters Capital Gains Tax Equity Act, which permits songwriters — but not painters, video game makers or novelists — to treat the proceeds from selling their copyrights as capital gains, too. …The capital gains break, for him and for others similarly situated, is basically a windfall. …President-elect Joe Biden supports equalizing capital gains and ordinary income rates, at least for households earning more than $1 million. If kept, Biden’s promise would restore a measure of equity and efficiency to the tax system.

At the risk of understatement, I disagree.

What Mr. Lane doesn’t appreciate or understand is that the Universal Music Publishing Group purchased the rights to Dylan’s music for $300 million because they expect his songs to generate more than $300 million of income in the future.

And that future income will be taxed when (and if) it actually materializes.

In other words, a capital gains tax is – for all intents and purposes – an added layer of tax on the expectation of future income. Double taxation in every possible sense.

This is why I’ve pointed out that Biden’s plan will make the tax code more punitive, not more equitable and efficient as Lane asserted.

Since we’re on the topic of capital gains taxation, I’ll also cite some relatively new research from the San Francisco Federal Reserve.

Here are the key findings in the working paper from Sungki Hong and Terry Moon.

This paper quantifies the aggregate effects of reducing capital gains taxes in the long run. We build a dynamic general equilibrium model with heterogeneous firms facing discrete capital gains tax rates based on firm size. We calibrate our model by targeting relevant micro moments and the difference-in-differences estimate of the capital elasticity based on the institutional setting in Korea. We find that the reform that reduced the capital gains tax rates from 24 percent to 10 percent for the firms affected by the new regulations increased aggregate investment by 2.6 percent and 1.7 percent in the short run and in the steady state, respectively. Moreover, a counterfactual analysis where we set a uniformly low tax rate of 10 percent shows that aggregate investment rose by 6.8 percent in the long run. …Our findings suggest that reducing capital gains tax rates would substantially increase investment in the short run, and accounting for dynamic and general equilibrium responses is important for understanding the aggregate effects of capital gains taxes.

And here are two of the key charts from the study.

And here’s the part of the study that explains the above charts.

Panel A in Figure 2…shows the parallel trend in investment between the affected and unaffected firms…positive and statistically significant coefficients after the year 2014 indicate that lower tax rates induced the affected firms to increase investment. Panel B in Figure 2…shows the parallel trend in investment between the affected and unaffected firms…positive and statistically significant coefficients after the year 2014 indicate that lower tax rates induced the affected firms to increase the size of tangible assets.

The bottom line is that is that you get higher wages with more productivity…and you get more productivity with more investment…and you get more investment if you don’t impose harsh tax policies on people who invest.

Which is why the correct capital gains tax rate is zero, whether you’re looking at theory or evidence.

Which is the core message in my video on capital gains taxation.

P.S. There’s also a video explaining why it’s especially wrong to impose the capital gains tax on “gains” that are solely the result of inflation.

P.P.S. And somebody needs to do a video on why it’s an awful idea for the government to tax capital gains that only exist in theory.

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Trump was a big spender before coronavirus and he became an even-bigger spender once the pandemic began.

But the White House generally didn’t add insult to injury by citing Keynesian economic theory to justify the president’s profligacy .

Prior to the pandemic, the excuse was that more money was needed for defense and that required (from a political perspective) more money for domestic programs.

And once the coronavirus hit, the excuse was that people and businesses needed to be compensated because of government-mandated lockdowns.

I thought the pre-pandemic excuse was pathetic and I’ve been skeptical of the post-pandemic excuse (why, for instance, are bureaucrats getting checks when their comfy jobs aren’t at risk?).

Well, Trump in on the way out and Biden is on the way in, which means one big spender is being replaced by another.

But there will be one difference, at least stylistically.  Biden will copy Obama by citing Keynesian theory to justify his spending binges.

Which means heartburn from me because I’ve been trying for years to drive a stake through the heart of this free-lunch concept.

But I obviously need to address the issue again.

To begin, Andy Kessler opines about so-called stimulus in his Wall Street Journal column.

…get ready for the “multipliers.” You know, the idea that a government dollar spent magically turns into multiple dollars in the economy. …Expect more multiplier mumbo jumbo as the Biden administration begins its tax-and-spend fiesta. …during the early days of the Obama administration. The financial crisis team…were “carrying around this list of multipliers”… Every dollar spent extending unemployment insurance benefits would, the fairy tale went, boost the economy by $1.64. …every dollar spent on food stamps would spur a $1.73 increase in gross domestic product. …“bang for the buck”—the proverbial free lunch. It’s more like “dud for the dollar” because it didn’t work. It never does. Multipliers are a canard, a Keynesian conceit. …The theory of multipliers is based on the Keynesian view that poorer consumers tend to spend a large amount of increased income, and the rich less so. But multipliers are half a story. Someone has to put up the original money that allegedly gets multiplied, taking it away from the private sector and negating whatever dwindling chain of transactions are hypothesized.

Amen.

Kessler is making many of the same points I made in my 2008 video about Keynesian economics, so I obviously agree.

Since Kessler’s column poked holes in the theory, now let’s look at some new evidence.

Former Senator Phil Gramm has a column on this topic in today’s WSJ, co-authored by Mike Solon.

The main takeaway is that Obama did a Keynesian “stimulus” and the economy suffered a weaker-than-normal recovery.

Between the start of the subprime mortgage crisis and the end of the recession in mid-2009, net new spending of $1.6 trillion was enacted. In 2009, federal spending as a share of gross domestic product surged by an unprecedented 4.2 percentage points to reach 24.4%, the highest level since World War II. Spending was 23.3% of GDP in 2010. …what happened after 2010? …some six months into the Obama administration, the Office of Management and Budget and the Congressional Budget Office both confidently predicted an economic boom, with real GDP growing an average of 3.6% from 2010-13. …Yet…growth from 2010-13 averaged less than 2.1%, half the 4.2% average growth rates in the four-year periods following the previous 10 postwar recessions. The Obama recovery didn’t falter for lack of sustained stimulus; it was shackled from the beginning by his economic program.

I think it’s especially instructive to compare the economy’s weak performance under Obama with the strong recovery we enjoyed under Reagan.

By the way, I think it’s possible to artificially and temporarily boost consumption with so-called stimulus spending, but increasing consumer spending with borrowed money is not the same as boosting national income.

Anyhow, what’s the moral of this story?

Because Mr. Biden’s proposed program is little more than Mr. Obama’s tax, spend and regulate agenda on steroids, and because his appointees are merely grayer retreads of the Obama administration, it is excessively optimistic to believe that his stimulus will do any more good for the economy than Mr. Obama’s did. …How does it end? …it isn’t a question of if government is going to run out of other people’s money, but when.

For what it’s worth, I think the United States could be profligate for decades before we reach some sort of fiscal crisis.

But Gramm and Solon are correct to cite Thatcher’s warning that statists eventually run out of other people’s money.

P.S. My fingers are crossed that Biden is more like Bill Clinton rather than Barack Obama, but I’m not overly hopeful.

P.P.S. We have a very recent example of Paul Krugman being wrong about Keynesian economics.

P.P.P.S. Even though it’s no longer the right time of year, here’s the satirical commercial for Keynesian Christmas carols.

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In an interview with Fox Business last week, I touched on three policies (easy money from the Fed, Biden’s class-warfare tax agenda, and the ever-increasing burden of federal spending) that create risks for the economy in 2021.

I didn’t have a chance to elaborate in the interview, but it’s worth noting that Biden will inherit two of the aforementioned problems.

Trump has been profligate with our money, and he was that way even before the coronavirus became an excuse to open the budgetary spigot. Moreover, he was just like Obama in pressuring the Federal Reserve for Keynesian-style monetary policy.

Unfortunately, there’s no reason to think Biden will try to reverse those mistakes.

Indeed, he wants expand the burden of federal spending. And, regarding monetary policy, appointing Janet Yellen as Secretary of Treasury certainly suggests he is comfortable with the current approach.

And to make matters worse, he definitely wants a more punitive tax system. We will shortly learn whether Democrats take control of the Senate, which presumably would give Biden more leeway to enact his class-warfare tax agenda.

As I said in the interview, that would create economic headwinds.

P.S. I mentioned in the interview that we have “three Americas” with regards to coronavirus. I’m not sure I was completely clear, so here’s what I was trying to get across.

  1. Tourism-reliant states – They are going to be in bad shape until coronavirus is in the rear-view mirror and people feel comfortable with traveling and socializing.
  2. Lock-down states – They have higher unemployment rates because more businesses are shut down.
  3. Laissez-faire states – These are the states that generally allow businesses to remain open and have lower unemployment rates.

For what it’s worth, I think it’s best to let businesses stay open and to allow them and their customers to assess safety risks. It will be interesting to see whether any link is discovered between state policy and coronavirus rates.

P.P.S. At the risk of over-simplification, bad fiscal policy erodes the economy’s long-run growth rate. Bad monetary policy, by contrast, is what causes economic volatility and downturns.

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Back on December 28, I shared four charts for the explicit reason that I wanted everyone to understand that average living standards in the western world have skyrocketed over the past few centuries.

I could have used that data to clear up myths about “robber barons” or “sweatshops,” but I had a more modest goal. I simply wanted to show that it’s possible for all of us to become much richer if we give the economy enough breathing room.

And that means policy makers should focus on growth rather than inequality (especially since the policies to reduce inequality generally lead to less prosperity).

Some pundits don’t grasp that essential point. Christopher Ingraham of the Washington Post groused in a recent column that Jeff Bezos and Elon Musk became much wealthier in 2020.

Billionaires as a class have added about $1 trillion to their total net worth since the pandemic began. And roughly one-fifth of that haul flowed into the pockets of just two men: Jeff Bezos, chief executive of Amazon (and owner of The Washington Post), and Elon Musk of Tesla and SpaceX fame. …the two men increased their net worth by a staggering $200 billion last year, a sum greater than the gross domestic products of 139 countries. …two men amassed enough wealth this year to end all hunger in America (with a price tag of $25 billion, according to one estimate) eight times over… The evident difficulty of getting billionaire wealth to trickle down to everyone else is a challenge for policymakers in our new gilded era.

Notice, specifically, that Mr. Ingraham ponders the “difficulty of getting billionaire wealth to trickle down to everyone else.”

What he apparently does not understand is that the rest of us don’t lose money when people like Bezos and Musk become richer.

Indeed, it’s far more accurate to say that they actually created wealth for the rest of us.

If you don’t believe me, perhaps you’ll be convinced by Professor William Nordhaus of Yale, who authored a seminal study back in 2004 that estimated producers only capture a tiny slice of the wealth they create for society.

The present study examines the importance of Schumpeterian profits in the United States economy. …We first show the underlying equations for Schumpeterian profits. We then estimate the value of these profits for the non-farm business economy. We conclude that only a miniscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers. …Using data from the U.S. nonfarm business section, I estimate that innovators are able to capture about 2.2 percent of the total social surplus from innovation. This number results from a low rate of initial appropriability (estimated to be around 7 percent) along with a high rate of depreciation of Schumpeterian profits (judged to be around 20 percent per year).

By the way, Professor Nordhaus won the Nobel Prize for his work on climate change, is affiliated with the Brookings Institution, and he supports a carbon tax. So he’s not some fire-breathing libertarian with a mission of defending capitalism.

He simply crunched the data and found innovators produce far more wealth for society than they do for themselves.

In a 2018 article for the American Institute for Economic Research, Professor Don Boudreaux of George Mason University elaborated on the implications of the Nordhaus research.

…each innovator would surely like to capture a much larger share than 2.2 percent, the robust forces of market competition oblige even the most successful of innovators to give the bulk of the benefits of their innovations to strangers in the form of price cuts, expanded outputs, and improved quality. …That’s quite a bargain for humanity! …Bezos alone is responsible for making his fellow human beings nearly $6.5 trillion dollars better off as a group. …Similar calculations can in principle be made for every entrepreneur who has ever succeeded in the modern market economy, from legendary titans such as Bezos and the late Steve Jobs to the far more numerous yet unknown – but as a group no less important – entrepreneurs who innovate in much smaller ways. …It’s as if strangers routinely approach us and, asking nothing in return, hand to each of us a stash of cash. …capitalism works magnificently.

Amen to the final three words.

Back in 2014, I explained that we should be thankful for rich entrepreneurs.

They made the rest of us richer as they became rich themselves. That’s a win-win situation.

I’ll close by citing the words of Joseph Schumpeter. He’s not nearly as famous as other economists such as Milton Friedman or Adam Smith, but I don’t know anybody who was more succinct and more accurate in describing the real-world benefit of capitalism.

P.S. Needless to say, the above analysis gets much weaker if companies such as Tesla and Amazon are benefiting from government cronyism.

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My recent three-part series (here, here, and here) explained why policy makers should seek to reduce poverty rather than inequality.

I want to expand on that point today by showing why growing the pie is more important than how it is sliced.

I’ve previously opined on why economic growth is important, showing that the United States today would be almost as poor as Mexico if our rate of economic growth since 1895 was just one-percentage point less than it actually was.

Moreover, I also showed in that 2017 column how much smaller increments of additional growth over time can mean thousands of dollars of additional income for an average household.

And, the previous year, I shared two excellent videos from Marginal Revolution University while writing about Hong Kong’s remarkable jump from poverty to prosperity.

For today’s column, I want to expand on this point using the economic growth page from Max Roser’s great site, Our World in Data. We’ll start with this chart showing how per-capita economic output dramatically increased a few hundred years ago.

This kind of data won’t be news to regular readers. I’ve already shared great videos from Deirdre McCloskey and Don Boudreaux that make the same point about the explosion of prosperity in the modern era.

And if anyone somehow thinks this growth doesn’t matter, Roser’s page shows that there are countless ways of graphing the relationship between economic output and good outcomes, such as how long we live, child mortality, access to electricity, hunger, and literacy.

The bottom line is that we are unimaginably rich compared to prior generations, largely thanks to the rule of law, expanded trade, and limited government.

That recipe for growth and prosperity works anywhere and everywhere it is tried. Here’s another chart showing how other parts of the world are being to prosper thanks to economic liberalization.

I want to cite two additional charts from Roser’s page.

First, here’s a chart showing productivity rates in selected nations. Why is this important? Because economic prosperity is basically driven by how much we work and how productive we are.

There are all sorts of interesting things embedded in the above chart.

Our final chart shows the importance of convergence.

Once again, there are some important observations embedded in the above chart.

  • Very poor nations such as Botwsana and China can enjoy meaningful gains with partial economic liberalization.
  • Western nations can enjoy more prosperity over time, but they won’t catch the United States so long as they are burdened with too much government.
  • Singapore shows that full convergence is not only possible, but also that laissez-faire countries can even surpass the United States.

P.S. I can’t resist recycling my “never-answered question” in hopes of getting any of my left-leaning friends to cite a single example of their policies producing mass prosperity.

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I don’t like higher taxes, whether looking at levies on income, capital gains, payroll, death, or consumption. But if asked to identify the worst way of hiking taxes, the wealth tax might lead the list because of the economic damage caused per dollar collected.

If you don’t want to spend two minutes watching the video, which is excerpted from an online debate organized by my left-leaning friends at TaxCOOP, everything I said can be boiled down to the following four points.

  1. A wealth tax might reduce inequality, but only because the rich would suffer even greater losses than the poor.
  2. Punishing saving and investing is a bad idea since all economic theories agree capital formation is key to long-run prosperity.
  3. A wealth tax is a huge tax increase on saving and investment, perhaps equal to a 50 percent or 100 percent marginal tax rate.
  4. A wealth tax would be an administrative nightmare, requiring a bigger IRS, since many assets are difficult to measure.

I first addressed the issue back in 2012 and 2014, but I’m now writing more often about the wealth tax because it’s evolved from being a bad idea to being a real threat.

Joe Biden didn’t include a wealth tax in his class-warfare campaign manifesto, but Bernie Sanders and Elizabeth Warren both pushed for the idea. And there are plenty of other Democrats in Congress who also support this punitive levy.

So let’s add to our arguments.

In a report for the Manhattan Institute, Allison Schrager and Beth Akers summarize why a wealth tax is misguided.

Wealth taxes are inefficient and ineffective because wealth is inherently more difficult to measure. Privately held companies, for example, are not traded in public markets, which means that there are no stock prices by which one can objectively gauge their value. Also, financial assets can be hidden or moved abroad with the click of a mouse or converted into other assets that are hard to value. A dozen European countries had a wealth tax in 1990, but most abandoned them because they were ineffective and expensive to administer. In part, the taxes failed to raise much revenue because wealthy individuals easily moved their assets across borders to avoid taxation. …Wealth taxes distort behavior in a way that is harmful to economic growth and national prosperity. By taking a fraction of people’s wealth each year, the tax reduces the return to investing and discourages saving. This can reduce growth because investing and capital accumulation are critical to innovation. …think of it as a tax on capital income. And when you put the tax in income terms, 2% can be enormous. For example, if your assets return 4%, a 2% wealth tax is equivalent to a 50% tax on capital income! 

Writing for National Review, Philip Cross highlights why a wealth tax is economic malpractice.

The temptation to adopt a wealth tax will grow in the aftermath of record budget deficits resulting from the pandemic-induced recession. …However, the case for a wealth tax rests on questionable or unfounded assumptions. …Proponents argue that wealth taxes generate substantial net revenues… However, Europe’s experiment with wealth taxes yielded little revenue. …wealth taxes raised only 1.0 percent of GDP in Spain and Switzerland, 0.4 percent in Norway, and 0.2 percent in France in 2017, not enough to significantly affect either government finances or wealth distribution. As a result, most European nations abandoned wealth taxes years ago. …A wealth tax is rife with administrative problems because it creates the incentive to minimize reported wealth. …Besides, taxpayers can easily circumvent a wealth tax. Canada’s former Prime Minister Jean Chretien warned that “there is nothing more nervous than a million dollars — it moves very fast, and it doesn’t speak any language.” …Compounding the mobility of capital is the willingness of people to move to avoid or minimize taxes. One study of estate taxes found that 21.4 percent of the 400 richest Americans moved from states levying an estate tax to a state without one, while only 1.2 percent did the reverse. …A wealth tax also distorts economic incentives, encouraging consumption while penalizing the savings and investments that foster higher long-term growth. This is especially true when wealth taxes are layered on top of taxes on the capital income that wealth generates.

Even folks who might otherwise be sympathetic are throwing cold water on the idea of a wealth tax.

In a column for Bloomberg, Ferdinando Giugliano points out that it would be foolish to impose big taxes on coronavirus-weakened economies.

A growing number of economists are recommending a one-off wealth tax… In its latest World Economic Outlook, the International Monetary Fund has…recommended higher taxes on richer individuals — including taxing high-end property, capital gains and wealth — to reduce public debt. …I can see why a government would want to introduce a one-off levy on the rich after an extraordinary shock such as a pandemic or a war. …The main problem right now is that it’s too soon to be talking about a wealth tax. …A wealth tax would simply depress spending at a time of shrinking economic output. …There will be a time for redistribution. But…governments must focus on…growth now — and come back to that wealth tax later.

Mr. Giugliano is wrong, of course, to imply or think that there’s ever a good time for a wealth tax.

And he’s also wrong to make the Keynesian argument (that a wealth tax would depress spending), when the correct argument is that it would depress savings and investment, which then leads to foregone wages and lower living standards.

But I wanted to cite his column largely to give me an excuse to criticize the International Monetary Fund.

It galls me that a bunch of bureaucrats recommend tax increases on the rest of us – particularly since they are not only lavishly compensated, but also because they get tax-free salaries.

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Ethical people, regardless of ideology, should be motivated by an empathetic desire to help the poor rather than a spiteful thirst to punish the rich.

That was the message in Part I and Part II of this series. That’s also today’s message, and we’ll start with this video.

There’s a lot of information in this video, broken down into five thematic points.

  1. Profit (earned through voluntary exchange) is good, while plunder (obtained through government coercion) is bad.
  2. Because people are different, it is important to distinguish between equality of opportunity and equality of outcomes.
  3. People don’t understand inequality, and that leads many of them to overlook the important problem of poverty.
  4. We are getting richer over time, meaning that the middle class is only disappearing because some are becoming rich.
  5. Thanks to the spread of pro-market policies, the entire world is becoming more prosperous with better life outcomes.

For today’s column, let’s focus on item #3 and I want to specifically take this opportunity to explain why we should be aware of how a type of data known as the “Gini coefficient” is used (and sometimes misused).

By way of background, the Gini coefficient measures the distribution of income in a society. As seen in this illustration from Wikipedia, a high coefficient means some people have a lot more income than others and a low coefficient means most people have similar levels of income.

I’ve never been a big fan of the Gini coefficient for three reasons.

First, it’s often used by folks on the left who want higher taxes and more redistribution. Though that’s actually an indictment of how the coefficient is misused.

Second, it doesn’t tell us whether inequality is the result of something good (some people getting rich by providing especially valuable goods and services) or the result of something bad (some people grabbing undeserved loot thanks because of bailouts, subsidies, protectionism, industrial policy, and cronyism).

Third, it does not tell us whether a society is poor or prosperous.

Regarding that final point, Professor Davies pointed out in the video that the most equal nations in the world are Sweden and Afghanistan.

But having similar Gini coefficients is utterly meaningless because it turns out that the similar scores are for radically different reasons – i.e., people in Afghanistan are equally impoverished and people in Sweden are equally prosperous.

And I can’t resist pointing out that Sweden’s superior results are surely correlated with the fact that Swedes enjoy far higher levels of economic liberty (Sweden is #22 and Afghanistan is #136 according to the Heritage Foundation’s Index of Economic Freedom).

You could also do a comparison between nations with very different Gini coefficients.

The United States, for instance, is much more “unequal” than Afghanistan. But I can’t imagine anyone in America wanting to trade places. After all, almost everyone in the U.S. is far richer than almost everyone in Afghanistan.

Or, if you prefer comparing developed nations, I’ve previously noted that poor people in the United States have the same amount of income as middle-class people in nations with lower levels of inequality.

I’ll close with one final bit of data that shows why Gini coefficients should be viewed with caution. Here’s another visual from the Wikipedia page, this one showing how world inequality increased substantially between 1820 and 2002.

Was that increase in inequality a bad outcome?

Of course not. It was simply a result of the Western world becoming rich because of limited government and the rule of law.

And now that developing nations are finally shifting to market-oriented policies, their incomes also are increasing (which, as a side effect, means global inequality is decreasing).

In other words, we should pay attention to the recipe for growth and prosperity, not the Gini coefficient.

P.S. While I’m not a fan of the Gini coefficient, the so-called trade deficit will always be my least favorite statistic.

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I began yesterday’s column with a short clip of me explaining why we should focus on reducing poverty, not reducing inequality.

Here’s a more thorough discussion of the same topic.

The video makes three central points, all of which are very sound.

  1. The economy is not a fixed pie, the rest of us don’t become poor when someone else becomes rich.
  2. In a free society, there will be unequal outcomes because we have all make different choices in life.
  3. Fixating on the irrelevant issue of inequality distracts from addressing the real problem of poverty.

I want to focus on #3 because it’s very distressing that some folks on the left are more interested in hurting the rich rather than helping the poor.

Indeed, some of them are so motivated by spite that they even advocate for policies that will hurt poor people so long as rich people are hurt even more.

I normally try to avoid sounding judgemental, but that’s morally reprehensible.

The decent thing to do is figure out the policies that will help people climb the economic ladder.

With that in mind, here are some highlights from a recent FEE column by Gonzalo Schwarz. He begins with the common-sense observation that it’s best to focus on upward mobility.

…economic mobility, poverty, and income inequality…are not the same, and the policy responses to address them vary. …the income inequality narrative has come to dominate our current public policy discourse, especially in the United States. …The rich are getting richer, but the poor are getting richer too… Policies that aim to remove the barriers faced by people looking to climb the income ladder should be rigorously discussed and pursued.

He then points out that policies to reduce inequality often backfire.

Schwarz cites the minimum wage as an obvious example since it is a recipe for joblessness when politicians mandate pay levels that exceed the value of many low-skill workers.

But my interest in public finance leads me to share this excerpt.

Policy solutions aimed at reducing income inequality will not necessarily positively impact those looking to escape poverty… Quite often, these goals can come into conflict. …A…popular public policy “solution” to address income inequality is to raise the corporate income tax (CIT) and use the proceeds to fund government programs… A recent Harvard Business School working paper…find that a reduction in state corporate income taxes increases real investment, a key driver of economic growth. This is consistent with data from the Organisation for Economic Cooperation and Development (OECD), which published a wide-ranging 2008 paper that found that taxes on income tend to hamper economic growth significantly more than other tax instruments.

Schwarz’s conclusion is spot on.

Pursuing an agenda focused on boosting upward social mobility is more conducive to the discovery of the barriers in the way of human flourishing and wealth creation. Breaking down these barriers, both artificial and natural, is the best way to ensure that each and every person has the opportunity to achieve their American Dream. Certainly, we don’t need more income inequality to achieve broader prosperity but chasing the inequality red herring puts that goal at risk.

I’ll add my two cents to this discussion by noting that President John F. Kennedy was right to observe that a rising tide lifts all boats.

Data from the Census Bureau shows that all income groups tend to rise and fall together.

In other words, if you’re hurting the rich, you’re probably hurting the poor as well. And vice-versa.

And if you’re enacting policies that help the rich, then incomes for everyone else are probably rising as well.

P.S. Regular readers already know this, but I’ll make the should-be obvious point for any new readers that there are some types of government policy (bailouts, subsidies, protectionism, industrial policy, cronyism, etc) that produce unjust forms of inequality.

In other words, it’s good when people become rich by providing the rest of us with goods and services we value, but it’s not good for them to get rich by climbing into bed with politicians.

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I have a couple of cameos in a new left-leaning documentary film, Race to the Bottom. I shared a clip two day ago with my views on corporate tax and the Laffer Curve.

Today, here’s what I said about the left’s mistaken views on inequality.

The fundamental problem is that I think some of our friends on the left are primarily motivated by disdain for the rich.

Indeed, their envy and resentment is so strong that they’re happy to support policies that hurt the poor, so long as the rich suffer a disproportionate amount of harm.

Consider this sarcastic visual.

I hope this visual greatly exaggerates the problem, but I’ve previously shared substantive research suggesting that the folks on the left are fixated on punishing success.

That agenda does not produce good results.

In a thorough article for Reason, David Henderson of the Hoover Institution explores the issues of poverty and inequality.

Most of what is framed as a problem of inequality is better conceived as either a problem of poverty or a problem of unjustly acquired wealth. …It’s important to distinguish the concepts of inequality and poverty. …Many people who worry about income inequality want to tax higher-income people more. Given what economists know about the harmful effects from raising already high marginal tax rates even higher, tax increases could certainly reduce measured inequality—because they would cause higher-income people to reduce their taxable income by working less, by taking more pay in the form of untaxed fringe benefits, or by investing more in municipal bonds, whose interest is not taxable by the feds. Of course, none of this would make lower-income people better off. Indeed, to the extent that higher taxes discourage capital accumulation, they slow the growth of worker productivity. One of the main ways to increase worker productivity is to increase the amount of capital per worker. With a slower growth rate of capital, worker productivity will grow more slowly—and so will real wages. This makes lower-income people worse off than they would have been.

Henderson uses Lydon Johnson as an example of how some people use government favoritism to line their pockets.

But he wisely notes that any inequality that arises from “unjustly acquired wealth” is a symptom of the real problem of cronyism.

Great wealth, meanwhile, is a problem only to the extent that it is unjustly extracted. Government favoritism to politically powerful people may increase income and wealth inequality, as it did in the case of Lyndon Johnson and his wife. But it is the government favoritism, not inequality per se, that is the true problem.

As a quick aside, Lyndon Johnson almost certainly ranks as one of America’s worst presidents (along with failures such as Hoover, Roosevelt, Nixon, and Wilson).

And, having read Henderson’s article, I now have an additional reason to despise LBJ.

I’ll close by recycling my Eighth Theorem of Government, which is simply another way of expressing my oft-made point that we should try to improve life for the poor rather than worsen life for the rich.

Indeed, I sometimes think this theorem is a good way of discerning who is a good person and who is a bad person.

Regarding the latter, we should recognize that some people are simply misguided. These are the folks who actually think that there’s a fixed amount of income and wealth, so they mistakenly believe that if someone like Bill Gates gets rich, the rest of us somehow lose.

Smart folks on the left know that’s not true, so I give them credit for that, but I also think they are reprehensible for being motivated by a desire to hurt the rich, even when that means the rest of us suffer as well.

The bottom line is that market-driven growth is good for everyone, especially the poor.

P.S. The most accurate political analysis of inequality came from Margaret Thatcher.

P.P.S. Here’s the world’s best-ever tweet about inequality.

P.P.P.S. For more wonky readers, I suggest this data and this data about China and this data about the world.

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Regulatory policy is one of the five ingredients in the recipe for growth and prosperity.

Ideally, there should be a minimal amount of red tape, and it should be governed by sensible cost-benefit analysis (i.e., so it deals with genuine externalities such as pollution).

Unfortunately, politicians rarely favor this light-touch approach, in part because of unseemly “public choice” incentives and in part because they focus only on the benefit side of the cost-benefit equation.

But the cost is very real.

And that means that there are substantial benefits when governments reduce the regulatory burden.

Let’s look at some research published by Italy’s central bank. Sauro Mocetti, Emanuela Ciapanna, and Alessandro Notarpietro investigated the impact of liberalization last decade. Here’s what they looked at.

…the importance of structural reforms, aimed at promoting sustainable and balanced growth, has been at the center of the economic debate, in Italy… Structural reforms are measures designed for modifying the very structure of an economy; they typically act on the supply side,i.e. by removing obstacles to an efficient (and equitable) production of goods and services, and by increasing productivity, so as to improve a country’s capacity to increase its growth potential… The aim of this paper is to assess the macroeconomic impact of three major structural reforms carried out in Italy over the last decade. They include (i)liberalization of services, (ii) incentives to “business innovation” (included in the so-called “Industry 4.0” Plan) and (iii) several measures in the civil justice system aimed at increasing the courts efficiency.

And here are their results.

Our results indicate that the three reforms, introduced in different years and with different timing, starting in 2011 and up to 2017, have already begun to produce their effects on the main macroeconomic variables and on Italy’s potential output. In particular, and taking into account the uncertainty surrounding our micro-econometric estimates, by 2019 GDP was between 3 and 6% higher than it would otherwise have been in the absence of these reforms, with the largest contribution being attributable to the liberalizations in the service sector. A further increase of about 2 percentage points would be reached in the next decade, due to the unfolding of the effects of all the reforms considered here. Therefore, the long-run increase in Italy’s potential output would lie in between 4% and 8%. We also detect non-negligible effects on the labor market: employment would increase in the long term by about 0.4%, while the unemployment rate would be reduced by about 0.3 percentage points.

More output and more jobs. Hard to argue with that outcome.

Here are some charts from the study. Figure 7 shows the impact on some macroeconomic aggregates.

And Figure 8 shows the estimated improvement in the labor market.

These results are good news, but Italy still has a long way to go. It’s only ranked #51 according to Economic Freedom of the World, and it’s score for regulation has only improved by a slight margin over the past decade.

P.S. I shared some research earlier this year about the positive impact of another type of deregulation in Italy.

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According to the Fraser Institute’s Economic Freedom of North America, the most economically free jurisdiction in North America used to be the Canadian province of Alberta.

But Alberta then slipped and New Hampshire claimed the top position. And, according to the the 2020 edition of Economic Freedom of North America, the Granite State is still the best place to live.

But since most of my readers are from the United States, let’s focus just on American states, and specifically look at how they rank based on the policies they control.

On this basis, you can see that New Hampshire is in first place, followed by Florida, Virginia, Texas, and Tennessee (if you’re looking for a common thread, four of the five have no state income tax).

Here are some highlights from the Fraser Institute’s summary.

Economic Freedom of North America 2020…measures the extent to which…individual provinces and states were supportive of economic freedom… There are two indices: one that examines provincial/state and municipal/local governments only and another that includes federal governments as well. …The all-government index includes data from Economic Freedom of the World… The top jurisdiction is New Hampshire at 8.16, followed by Florida and Idaho at 8.10 , then Wyoming (8.09) and Utah (8.08). Alberta is the highest ranking Canadian province, tied for 9th place with a score of 8.06. The next highest Canadian province is British Columbia in 27th at 7.98. …The highest-ranked Mexican state is Jalisco with 6.70… The lowest-ranked states in the United States are Delaware at 7.72 in 56th place, following Rhode Island (7.76 in 54th) and New York (7.77 in 53rd).

As I noted above, I think it’s especially instructive to see how jurisdictions compare when looking at the policies they control.

Here’s what the study says about the subnational index.

For the subnational index, Economic Freedom of North America employs 10 variables for the 92 provincial/state governments in Canada, the United States, and Mexico in three areas: 1. Government Spending; 2. Taxes; and 3. Labor Market Freedom. …There is a separate subnational index for each country. In Canada, the most economically free province in 2018 was again Alberta with 6.61, followed by British Columbia with 5.98… The least free by far was Quebec at 2.84… In the United States, the most economically free state was New Hampshire at 7.84, followed by Florida at 7.73. …(Note that since the indexes were calculated separately for each country, the numeric scores on the subnational indices are not directly comparable across countries.) The least-free state was New York at 4.25… In Mexico, the most economically free state was Jalisco at 6.57.

One obvious takeaway is to avoid Quebec and New York.

And almost all of Mexico as well.

One of the many great things about the Fraser Institute is that they are very good at sharing their data.

And, because I was curious to know what states are moving in the right direction and wrong direction, I downloaded the excel file so I could make the relevant calculations.

Here are the numbers, showing the both the overall shift since 1981 as well as the data for 1981-2000 and 2000-2018.

The good news is that every single state has more economic freedom today that it had in 1981. Michigan and Massachusetts enjoyed the biggest increases over the past four decades, though both of them still plenty of room for upward improvement.

Looking at the 1981-2000 and 2000-2018 periods, there was much more reform at the end of last century than there has been at the beginning of this century. So maybe the “Washington Consensus” influenced American states as well as foreign nations.

I realize I’m a dork about such things, but I was especially interested to see that some states (Delaware, Illinois, Maryland, New Jersey, New York, and Colorado) were very good performers in 1981-2000, but fell to the bottom group in 2000-2018.

By contrast, other states (Montana, North Dakota, Washington, and New Mexico) jumped from the bottom 10 to the top 10.

P.S. Texas ranked #1 in 1981, and by a comfortable margin, so even though it was among the bottom-10 performers for 1981-2018, it still ranks #4 overall for good economic policy.

P.P.S. Colorado dropped from #8 in 1981 to #23 in 2018, which may be a sign that the pro-growth impact of TABOR is more than offset the anti-growth impact of all the Californians that have moved to the state.

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In my humble opinion, Ronald Reagan was the only president in my lifetime who deserves praise for both believing in liberty and delivering good results.

His sound policies help to explain why the economy boomed after his policies were implemented, which is in stark contrast to the economy’s anemic performance during the Obama years.

There’s really no comparison between the two.

But not everyone appreciates Reagan’s accomplishments.

In his recent newsletter, Paul Krugman of the New York Times asserts that the Gipper’s economic record doesn’t merit praise.

…the legend of the Reagan economy…plays an outsized role in conservative economic doctrine to this day. …the core of modern conservative economic doctrine is the assertion that cutting taxes, especially on the wealthy, does wonderful things for the economy. And they hold up Reagan’s economic record as proof of that doctrine’s truth. …The truth is that Reagan doesn’t deserve blame for the 1981-2 recession — but he doesn’t deserve credit for the subsequent recovery, either. Instead, it was all about the Federal Reserve. …tax-cutting conservatives have been falsely claiming credit for that growth ever since.

I give Krugman credit for realizing that it would be preposterous to blame Reagan for the 1981-82 recession (I don’t know if Krugman understands that the downturn was baked into the cake by the Carter-era inflation, but he probably knows that it began before Reagan’s tax cut was even enacted, much less implemented).

But he then makes two mistakes, neither of which is trivial.

First, Krugman overlooks all of Reagan’s other accomplishments. Not only the impact of the tax cuts and tax reform, but also the spending restraint and deregulation.

Second, he wants to give all the credit to the Federal Reserve, yet central banks, while ostensibly independent, don’t operate in a vacuum. One of Reagan’s great accomplishments – as recognized by unbiased establishment types – was to support the temporarily painful shift to a non-inflationary monetary policy.

Krugman raises several additional points in his newsletter.

Since 1990 claims that tax cuts will generate huge booms — and that tax hikes will lead to disaster — have belly-flopped again and again. President Bill Clinton’s tax increases in 1993 didn’t cause the recession just about everyone on the right predicted; President George W. Bush’s tax cuts didn’t produce a “Bush boom.” The Trump tax cut didn’t deliver anything like the promised results. In 2011 Gov. Sam Brownback of Kansas cut taxes sharply, promising that this would lead to a surge in growth. It didn’t. At the same time, California raised taxes; conservatives declared that this would be “economic suicide.” It wasn’t.

I’ll begin by (sort of) agreeing with Krugman that folks on the right can be guilty of acting as if all that matters is tax policy (in other words, the notion that all tax cuts are a guaranteed elixir for growth and that all tax increases lead to economic collapse).

That’s obviously not true. Indeed, fiscal policy only accounts for about 20 percent of a nation’s score in Economic Freedom of the World. And since fiscal policy also includes the burden of government spending, that means tax policy may only explain about 10 percent of economic performance.

And when you understand that, it’s easy to see that Krugman is attacking a straw man.

For instance, nobody should be surprised that the economy didn’t do well under Bush because his one good policy (the 2003 tax cut) was more than offset by all of his bad policies (more spending, more regulation, entitlement expansion, education centralization, TARP, etc).

Likewise, nobody should be surprised that the economy prospered under Clinton because his one bad policy (the 1993 tax hike) was more than offset by all the good policies adopted in the 1990s (spending restraint, welfare reform, deregulation, etc).

The bottom line is that good tax policy is important, but you also have to pay attention to all the other policies that also impact economic performance.

And when you do, Reagan’s performance looks even more impressive.

P.S. Reagan did engage in some protectionism, unfortunately, which is why America’s score on trade declined during the 1980s. In his defense, I’ll point out that Reagan believed in free trade and he was the one who started the negotiations that led to both NAFTA and the WTO. So I would argue that, in the long run, his tenure was a net plus for trade.

P.P.S. When I write about Reagan’s policies, I can’t resist pointing out that his policies resulted in big increases in tax revenue from upper-income taxpayers (in other words, powerful evidence of the Laffer Curve).

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I’m not a fan of the European Union, which has morphed from something good (a free-trade pact) to something bad (a pro-centralization,wannabe United States of Europe that exacerbates the continent’s tax-and-spend mentality).

Indeed, that’s why I’m a huge fan of Brexit. The United Kingdom is wise to escape the sinking ship.

But notwithstanding all my critiques of the E.U., I’ve never blamed or condemned the euro currency.

Why? Because many of the nations that joined that common currency did a lousy job when they had national currencies. Italy and Greece, for instance, routinely used their central banks as printing presses to help finance bloated budgets.

And that inflation exacerbated all the other economic problems that existed.

The bottom line is that many nations would benefit if they took monetary policy away from their politicians and instead adopted the currency of a nation with a better track record.

That happened in Europe when the euro was adopted since it means – for all intents and purposes – that Mediterranean nations use a currency that is controlled by Germany.

This lesson should be applied elsewhere in the world, which is why “dollarization” can be a good idea.

Professor Steve Hanke of Johns Hopkins University wrote a good description of this concept for National Review.

Before the rise in central banking (monetary nationalism), the world was dominated by unified currency areas, or blocs, the largest of which was the sterling bloc. As early as 1937, the great Austrian economist and Nobel winner Friedrich von Hayek warned that the central banking fad, if it continued, would lead to currency chaos and the spread of banking crises. …Indeed, for most emerging‐​market countries with central banks, hot money flows are frequent and so are exchange‐​rate and domestic banking crises. What to do? The obvious answer is for vulnerable emerging‐​market countries to do away with their central banks and domestic currencies, replacing them with a sound foreign currency.  Today, 32 countries are “dollarized” and rely on a foreign currency as legal tender. …Panama, which was dollarized in 1903, illustrates the important features of a dollarized economy. …The results of Panama’s dollarized money system and internationally integrated banking system have been excellent when compared with other emerging-market countries… Emerging-market countries should follow Panama’s lead and “dollarize.” Most central banks in emerging countries produce junk currencies, banking crises, instability, and economic misery. These central banks should have been mothballed and put in museums long ago.

And there are many nations that would benefit if they used the U.S. dollar.

Back in 2018, Mary Anastasia O’Grady opined in the Wall Street Journal that Argentina should dollarize.

Another currency crisis is roiling Argentina… The question that seems to be on everyone’s lips: Why is this happening again… The answer: Because Argentina still has a central bank. To fix the problem once and for all, it should dollarize. …an IMF package can’t cure what ails the peso. This is a long-term political problem that has manifested itself in repeated economic crises since the mid-20th century. The government lives beyond its means while taxes and regulations, particularly on labor, make many businesses uncompetitive. The net effect is always the same: ballooning debt and a lethargic economy followed by devaluation or default or both. …The fastest way to restore confidence would be to put an end to the misery caused by the peso and to adopt the dollar. Argentines could then get on with the business of saving and investing in their beautiful country.

The Wall Street Journal has editorialized in favor of dollarization in Argentina.

Dollarizers face resistance from the Peronist party, which relies on the inflation tax to fund its populism when revenues run low. Yet demand for dollars suggests…popular backing for adopting the greenback as the national currency. …Panama has used the dollar as legal tender since 1904, and El Salvador and Ecuador dollarized in 2000. Ecuador did it to resolve a banking crisis and El Salvador did it to bring down interest rates. El Salvador and Panama now have the lowest domestic borrowing rates in Latin America and the longest maturities. Ecuador has price stability not seen in at least a half century.

Here’s the real shocker. As reported by Reuters, Venezuela is on the verge of dollarizing.

Venezuelan President Nicolás Maduro embraced the currency of his bitter rival the United States on Sunday, calling it an “escape valve” that can help the country weather its economic crisis… The official currency, the bolivar, has depreciated more than 90% this year, while hyperinflation in the first nine months of the year clocked in at 4,680%… “I don’t see it as a bad thing … this process that they call ‘dollarization,’” Maduro said in an interview broadcast on the television channel Televen. “It can help the recovery of the country, the spread of productive forces in the country, and the economy … Thank God it exists,” the socialist leader said.

Writing for National Review, Professor Steve Hanke explains that Maduro has no choice but to move in the right direction.

Maduro, in a rare display of good judgment, is taking a necessary step toward what I have been advocating for many years: official dollarization in Venezuela. …Venezuela’s bolivar is worthless, and its annual inflation rate is the world’s highest…2,156 percent per year. Not surprisingly, Venezuelans get rid of their bolivars like hot potatoes and replace them with U.S. dollars. So, Venezuela is, to a large extent, unofficially dollarized. Official “dollarization” is a proven elixir. I know because I operated as a state counselor in Montenegro when it dumped the worthless Yugoslav dinar in 1999 and replaced it with the Deutsche mark. I also watched the successful dollarization of Ecuador in 2001… Countries that are officially dollarized produce lower, less variable inflation rates and higher, more stable economic growth rates than comparable countries with central banks that issue domestic currencies. There is a tried-and-true way to stabilize the economy…since more than 80 percent of transactions in Venezuela take place in U.S. dollars, it doesn’t seem unreasonable to think that the approval rating would now exceed 80 percent. So, it’s not surprising that Maduro has embraced the dollarization idea. After all, the public already does.

In another column for National Review, Steve Hanke and Craig Richardson cite what’s been happening in Zimbabwe.

They begin by pointing out that part of that nation has avoided problems by using the dollar.

Zimbabwe’s economy has gone through the wringer. In just 20 short years, it has witnessed two episodes of hyperinflation. And, if that wasn’t bad enough, Zimbabwe’s real GDP per capita has plunged by 21 percent over that same period. …But,…when you enter the town of Victoria Falls, it’s as if you have walked into an alternative African economic universe. Victoria Falls is an island of stability in Zimbabwe, a country that has descended into monetary and fiscal chaos. How could this be? …Victoria Falls…has long operated under very different monetary rules. …the glue that holds Victoria Falls together is the U.S. dollar. It’s the coin of the realm in Victoria Falls. Yes, Victoria Falls is officially dollarized. It only accepts U.S. dollars for payment of property taxes and keeps its books in U.S. dollars as well.

But they also note that the entire nation enjoyed the benefits of dollarization, at least until venal politicians opted out because they wanted the power to finance more spending by printing money.

…in February 2009, a unity government was formed. …In one of its first acts, the unity government scrapped the Zimbabwe dollar and officially dollarized the country. In so doing, the printing presses were shut down; the U.S. dollar became legal tender, taxes were required to be paid in dollars, and government accounts were kept in dollars. With the imposition of a hard budget constraint, the fiscal deficit disappeared, and the economy boomed. That rebound persisted during the term of the national unity government, which lasted until July 2013. Indeed, during this period, real GDP per capita surged at an average annual rate of 11.2 percent. Zimbabwe’s period of stability was short lived, however. With the collapse of the unity government and the return of Mugabe’s ZANU-PF party, government spending and fiscal deficits surged, resulting in economic instability. To finance its deficits, the government created a “New Zim dollar,” and Zimbabwe de-dollarized. …The money supply exploded, as did inflation.

This column has focused on dollarization, but there are other currencies that are serve the same role. And there are currency boards/pegs as well.

This map from Wikipedia provides a helpful summary.

P.S. Some people will point out that the dollar doesn’t have a great track record and the the Federal Reserve has behaved imprudently. I certainly won’t argue against those observations. But if I’m a Venezuelan or Argentinian, I’d still prefer the dollar over a currency controlled by my politicians.

P.P.S. It’s probably in the interests of the United States to have more nations dollarize, which is an argument against extraterritorial policies that discourage use of the dollar.

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At the risk of oversimplification and exaggeration, these six principles tell you everything you need to know about fiscal policy.

For purposes of today’s column, let’s focus on Principle #3, which is that “Deficits and debt are symptoms of the underlying problem” of excessive spending.

I’ve been making that point over and over and over and over and over again, but I feel motivated to address the issue again after reading two columns about government debt.

First, here’s some of what Paul Krugman wrote on the topic for his column in the New York Times.

…we’ve learned a lot about the economics of government debt over the past few years — enough so that Olivier Blanchard, the eminent former chief economist of the International Monetary Fund, is talking about a “shift in fiscal paradigm.” And the new paradigm suggests both that public debt isn’t a major problem and that government borrowing for the right purposes is actually the responsible thing to do. …It made some sense, nine or 10 years ago, to worry that the financial crisis in Greece was a harbinger of potential debt crises in other countries. …What briefly seemed like a spread of Greek-style problems across southern Europe turned out to be a temporary investor panic, quickly ended by a promise from the European Central Bank that it would lend money to cash-short governments if necessary. …We weren’t and aren’t anywhere close to that kind of crisis, and probably never will be. …But what about the longer term? …The important point for current discussion is that government borrowing costs are now very low and likely to stay low for a long time. …given what we’ve learned and where we are, it’s clear that the U.S. government should be investing heavily in the nation’s future, and that it’s OK, indeed desirable, to borrow the money we need to make those investments.

Second, Brian Riedl of the Manhattan Institute provides a different perspective in a column for today’s Washington Post, .

The election of Joe Biden to the presidency has prompted liberal calls to set aside pesky budget deficit concerns and go deeper into debt to finance large new spending initiatives… All these writers share the view that the persistence of low interest rates — currently about 1 percent for a 10-year Treasury bill — means the rules of the fiscal game have fundamentally changed. …But…deficit advocates must face two fundamental realities: First, the debt is already set to soar in the absence of any new spending. And second, these bloated debt levels will mean that any future rise in interest rates could bring a full-scale debt crisis. …Deficit doves are essentially gambling the future of the U.S. economy on the expectation that interest rates never again exceed 4 percent or 5 percent. …they are wrong to assume that state of affairs will continue. …Exceeding the projections by two or three points would mean annual interest costs consuming all projected tax revenue, leaving no taxes to finance normal federal programs. These debt spirals become nearly impossible to escape, as rising interest costs necessitate more borrowing, which in turn brings higher interest costs… Deficit doves would gamble America’s economic future on the hope that interest rates will never again top 4 or 5 percent. Are you feeling lucky?

At the risk of sounding like a muddle-headed, finger-in-the-wind moderate, I’m going to disagree with both of them (I’m like Goldilocks, who doesn’t want the porridge too hot or too cold).

I have a fundamental disagreement with Krugman because he’s overtly arguing for a bigger burden of government. Based on his past writings, he is willing to use higher taxes to finance some additional spending.

But the aforementioned column confirms that he’s in favor of a big amount of additional debt-financed spending as well.

He presumably wants to move the country into the lower-right quadrant of this 2×2 matrix, but doesn’t mind getting there by detouring through the lower-left quadrant.

My disagreement with Brian is probably more a matter of rhetoric. Based on his past writings, I think he wants to be in the upper-left quadrant, but he has an unfortunate tendency to fixate on the symptom of debt and deficits when he should be focusing on the underlying disease of excessive government spending.

My bottom line if that bigger government is a bad idea when it’s financed by debt, but it’s an equally bad idea if it’s financed by taxes.

Moreover, I worry when well-meaning people grouse about red ink because that creates an opening for not-so-well-meaning people to say, “I agree with you, so let’s raise taxes.”

P.S. In the real world of Washington (as opposed to blackboard theorizing), higher taxes lead to higher deficits and more debt.

P.P.S. Assuming they’re both sincere and guided by empiricism, people who care about red ink should support a spending cap.

P.P.P.S. Maintained for a sufficient period of time, spending restraint can even eliminate huge debt burdens.

 

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One of America’s leading public intellectuals, Walter Williams, has passed away.

In 2014, I shared a teaser for Suffer No Fools, a video biography of his life. To commemorate the life of this great man, here’s the full video.

I first got to know Walter when I was a Ph.D. student at George Mason University in the 1980s, where my then-wife was his research assistant, but I was fortunate to become a friend later in life when I got to become a member of the “Politically Incorrect Boys Club”  with Walter, Ed Crane, and Richard Rahn. This meant lots of fun dinners featuring everything from juvenile humor to grousing about the foolishness of ever-expanding government.

I had an opportunity to reminisce about Walter for WMAL this morning, and you can hear my remarks by clicking here.

But there’s so much more to say. When I learned yesterday of Walter’s death, I wondered what sort of tribute I should write, especially since so many thoughtful essays already have been published (Don Boudreaux, Thomas Sowell, Veronique de Rugy, Alex Tabarrok, Mark Perry, and Nick Gillespie, to list just a few).

Then I recalled a left-leaning friend once telling me that Walter must be some sort of “Uncle Tom” because he opposed racial preferences and the welfare state.

This statement struck me as ludicrous because Walter was a take-no-prisoners troublemaker who got in trouble as a young man (everything from arrests to a court martial) because he refused to tolerate racism.

Here are some excerpts from his must-read autobiography, Up from the Projects, staring with this passage about his time at Fort Stewart after getting drafted.

Numerous forms of troublemaking made me unpopular with many of the soldiers, including black ones. Some warned that was going to get into a lot of trouble, to which I’d flippantly reply, “What kind of trouble? Is somebody going to paint me black and send me to Georgia?”

And here’s some of what he wrote about his assignment to South Korea.

We had been told to fill out forms that contained vital personal information such as blood type, race, religion, next of kin, etc. …I had checked off “Caucasian.” A warrant officer told me I had made a mistake. …He wanted to know why I would say Caucasian when I was actually a Negro. “I’m not stupid,” I replied. “If I checked off ‘Negro,’ I’d get the worst job over here.

Here’s a passage from his time as a Ph.D. student at UCLA.

My fellow students were in awe of someone who’d challenge Professors Alchian and Hirschleifer as I did. One notable challenge occurred when Professor Alchian  said to me in class, “Williams, I bet you’re against discrimination.” I replied that no, I favored discrimination. Smiling, he asked whether that included racial discrimination. “Yes,” I said. “I practiced it a lot when I was dating.”

I should point out that while he believed in freedom of association (including the right to discriminate), Walter also noted that capitalism was the best way of punishing bad types of discrimination.

He appreciated that his professors didn’t relax their standards because of his race.

Flunking economic theory the first time around, I later realized, did have a benefit. It convinced me that UCLA professors didn’t care anything about my race. …The university’s economics professors weren’t practicing affirmative action with me. …Sometimes I sarcastically, perhaps cynically, say that I’m glad I received virtually all of my education before it became fashionable for white people like black people. …I encountered back then a more honest assessment of my strengths and weaknesses.

Walter also had the self-confidence to deal with white mistakes, such as this anecdote from when he lived in a rich suburb of D.C.

Being among the very few blacks in Chevy Chase taught me a lesson about racial relationships. Living in a corner house…prompted a Saturday chore of picking up trash that people discarded from passing cars. One Saturday, while doing that, an elderly white neighbor approached me to ask me whether, when I completed my tasks, I would be interested in working that afternoon in his yard. I told him very nicely that I would be spending that afternoon putting the final touches on my Ph.D. dissertation. The man’s face turned red with embarrassment and he apologized profusely. Some blacks might have been insulted and charged the man with racism. But I realized that the man was a Bayesian…, meaning that if a black person was spotted in Chevy Chase, picking up trash, the overwhelming probability was that he was a worker as opposed to a homeowner. Playing racial odds doesn’t make one a racist.

Many years later, he wrote a very insightful column on racial and sexual profiling.

Here’s a final excerpt showing how he enjoyed shocking people.

At the leftist reception, …the questioner asked, “How do you feel about the enslavement of your ancestors?” They were all shocked by my response… I started off by saying that slavery is one of the most despicable abuses of human rights. …But I went further to tell them that I, Walter E. Williams, have benefited enormously from the horrible suffering of my ancestors. …my wealth and personal liberties are greater having been born in the United States than in any African country.

Indeed, Walter relished the opportunity to tease his white friends and colleagues, often granting them a pardon for their skin color.

The bottom line is that Walter was a man, not a victim. He fought and achieved.

Since I’ve cited so many of his columns over the years, it would be impractical to list everything. But I definitely recommend the moral arguments he made in videos on capitalism and profits.

P.S. I also can’t resist suggesting that you watch Walter’s conversation with his Nobel Prize-winning colleague, Jim Buchanan.

 

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