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Archive for the ‘Europe’ Category

The Department of Agriculture should be abolished. Yesterday, if possible.

It’s basically a welfare scam for politically connected farmers and it undermines the efficiency of America’s agriculture sector.

Some of the specific handouts – such as those for milk, corn, sugar, and even cranberries – are unbelievably wasteful.

But the European Union’s system of subsidies may be even worse. As reported by the New York Times, it is a toxic brew of waste, fraud, sleaze, and corruption.

…children toil for new overlords, a group of oligarchs and political patrons…a feudal system…financed and emboldened by the European Union. Every year, the 28-country bloc pays out $65 billion in farm subsidies… But across…much of Central and Eastern Europe, the bulk goes to a connected and powerful few. The prime minister of the Czech Republic collected tens of millions of dollars in subsidies just last year. Subsidies have underwritten Mafia-style land grabs in Slovakia and Bulgaria. …a subsidy system that is deliberately opaque, grossly undermines the European Union’s environmental goals and is warped by corruption and self-dealing. …The program is the biggest item in the European Union’s central budget, accounting for 40 percent of expenditures. It’s one of the largest subsidy programs in the world. …The European Union spends three times as much as the United States on farm subsidies each year, but as the system has expanded, accountability has not kept up. …Even as the European Union champions the subsidy program as an essential safety net for hardworking farmers, studies have repeatedly shown that 80 percent of the money goes to the biggest 20 percent of recipients. …It is a type of modern feudalism, where small farmers live in the shadows of huge, politically powerful interests — and European Union subsidies help finance it.

Is anyone surprised that big government leads to big corruption?

By the way, the article focused on the sleaze in Eastern Europe.

The problem, however, is not regional. Here’s a nice visual showing how there’s also plenty of graft lining pockets in Western Europe.

P.S. I imagine British politicians will concoct their own system of foolish subsidies, but the CAP handouts are another reason why voters were smart to vote for Brexit.

P.P.S. The CAP subsidies are one of many reasons why the European Union has been a net negative for national economies.

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I was interviewed yesterday about the economy. That meant talking about new jobs numbers, as well as speculating on what’s happening with the Federal Reserve.

For today’s column, though, I want to share the part of the interview that focused on the United Kingdom’s vote to leave the European Union.

If “Brexit” actually happens, there will be diminished trade between the United Kingdom and the European Union. That will be bad for both sides.

That being said, I pointed out that the United Kingdom is better positioned to prosper after Brexit. That’s definitely the case in the long run, but I think it could be true even in the short run.

By the way, at the end of this clip, I should have stated that the European Union doesn’t want to strike a mutually beneficial deal.

The crowd in Brussels was more than happy with the Brexit-in-Name-Only pact they imposed on the hapless Theresa May.

But the bureaucrats are so upset with Brexit that they won’t agree to a free trade agreement that would be good for both parties.

Since we’re on the topic of Brexit, here’s a radio interview I did with KABC, one of the big stations in Los Angeles. I had much more time to explore nuances, including the fact that the opposition parties don’t want an election since they fear it will produce a strong majority in favor of a Clean Brexit.

There are three things about the interview worth highlighting.

  • First, as I explain starting about 3:15, Brexit is like refinancing a mortgage. It might cost a bit in the short run, but it makes sense because of the long-run savings. Indeed, that was my main argument when I wrote “The Economic Case for Brexit” back in 2016, before the referendum.
  • Second, as I explain starting about 6:15, the same people who oppose Brexit were also the ones who wanted the U.K. to be part of the euro (the European Union’s common currency). Given what’s happened since, including bailouts, joining the euro would have been a big mistake.
  • Third, starting about 11:50, I put forth an analogy – involving a hypothetical referendum to repeal the income tax in the United States – to illustrate why the issue is arousing so much passion. This is basically the last chance Britons have to reclaim self-government.

By the way, returning to the second point, the anti-Brexit crowd were the ones who tried to scare voters (“Project Fear”) by claiming a vote for Brexit would tip the U.K. into recession.

They were wrong on the euro, they were wrong on the economic response to the Brexit vote, and they’re wrong about actual Brexit.

In America, we say three strikes and you’re out.

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

P.P.S. There’s academic evidence that E.U. membership undermines prosperity.

P.P.P.S. The International Monetary Fund has consistently put out sloppy and biased research in hopes of deterring Brexit.

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My primary job is dealing with misguided public policy in the United States.

I spend much of my time either trying to undo bad policies with good reform (flat tax, spending restraint, regulatory easing, trade liberalization) or fighting off additional bad interventions (Green New Deal, protectionism, Medicare for All, class warfare taxes).

Seems like there is a lot to criticize, right?

Yes, but sometimes the key to success is being “less worse” than your competitors. So while I’m critical of many bad policies in the United States, it’s worth noting that America nonetheless ranks #6 for overall economic liberty according to the Fraser Institute.

As such, it’s not surprising that America has higher living standards than most other developed nations according to the “actual individual consumption” data from the Organization for Economic Cooperation and Development.

And America’s advantage isn’t trivial. We’re more than 46 percent higher than the average for OECD member nations.

The gap is so large that I’ve wondered how lower-income people in the United States would rank compared to average people in other countries.

Well, the folks at Just Facts have investigated precisely this issue using World Bank data and found some remarkable results.

…after accounting for all income, charity, and non-cash welfare benefits like subsidized housing and Food Stamps—the poorest 20% of Americans consume more goods and services than the national averages for all people in most affluent countries. …In other words, if the U.S. “poor” were a nation, it would be one of the world’s richest. …The World Bank publishes a comprehensive dataset on consumption that isn’t dependent on the accuracy of household surveys and includes all goods and services, but it only provides the average consumption per person in each nation—not the poorest people in each nation. However, the U.S. Bureau of Economic Analysis published a study that provides exactly that for 2010. Combined with World Bank data for the same year, these datasets show that the poorest 20% of U.S. households have higher average consumption per person than the averages for all people in most nations of the OECD and Europe… The high consumption of America’s “poor” doesn’t mean they live better than average people in the nations they outpace, like Spain, Denmark, Japan, Greece, and New Zealand. …Nonetheless, the fact remains that the privilege of living in the U.S. affords poor people with more material resources than the averages for most of the world’s richest nations.

There are some challenges in putting together this type of comparison, so the folks at Just Facts are very clear in showing their methodology.

They’ve certainly come up with results that make sense, particularly when compared their results with the OECD AIC numbers.

Here’s one of the charts from the report.

You can see that the bottom 20 percent of Americans do quite well compared to the average persons in other developed nations.

By the way, the report from Just Facts also criticizes the New York Times for dishonest analysis of poverty. Since I’ve felt compelled to do the same thing, I can definitely sympathize.

The bottom line is that free markets and limited government are the best way to help lower-income people enjoy more prosperity.

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I’ve written over and over again about how European-sized welfare states require big tax burdens on poor and middle-income taxpayers.

Simply stated, there aren’t enough rich people to finance big government. Especially since they generally have the ability to avoid confiscatory tax burdens.

As a general rule, this means ordinary European taxpayers are suffocated with high payroll tax burdens, onerous value-added taxes on consumption, and income taxes that impose high rates on modest incomes.

But let’s also not forget that politicians in Europe also pillage motorists.

The Tax Foundation recently released a survey showing gas taxes in various European nations.

…the European Union requires EU countries to levy a minimum excise duty of €0.36 per liter (US $1.61 per gallon) on gas. …The Netherlands has the highest gas tax in the European Union, at €0.79 per liter ($3.53 per gallon). …All EU countries also levy a value-added tax (VAT) on gas and diesel.

Wow, this is like the perfect storm of bad European policy, with tax harmonization (minimum-tax requirement) and a version of double taxation (motorist pay both VAT and gas tax when they fill up).

No wonder French motorists launched a yellow vest protest after Macron proposed another tax hike.

Here’s the map, which should have shown the prices in dollars. Just keep in mind that the average European pays almost $2.50 in tax on every gallon of gas.

I’ll close by noting that Europeans don’t get better roads for all that money.

For all the sturm and drang about supposed problems with infrastructure in the United States, it’s worth noting that our gas taxes are much lower and we consistently get above-average scores in various infrastructure rankings.

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I’ve argued for many years that a Clean Brexit is the right step for the United Kingdom for the simple reason that the European Union is a slowly sinking ship.

Part of the problem is demographics. Europe’s welfare states are already very expensive and the relative costs will increase dramatically in coming years because of rising longevity and falling birthrates. So I expect more Greek-style fiscal crises.

The other part of the problem is attitudinal. I’m not talking about European-wide attitudes (though that also is something to worry about, given the erosion of societal capital), but rather the views of the European elites.

The notion of “ever closer union” is not just empty rhetoric in European treaties. It’s the ideological preference of senior European leaders, including in many nations and definitely in Brussels (home of the European Commission and the European Parliament).

In practical terms, this means a relentless effort for more centralization.

All policies that will accelerate Europe’s decline.

What’s happening with the taxation of air travel is a good example. Here are some excerpts from a story in U.S. News & World Report.

The Netherlands and France are trying to convince fellow European nations at a conference in The Hague to end tax exemptions on jet fuel and plane tickets… In the first major initiative on air travel tax in years, the conference on Thursday and Friday – which will be attended by about 29 countries – will discuss ticket taxes, kerosene levies and value-added tax (VAT) on air travel. …The conference will be attended by European Union economics commissioner Pierre Moscovici and finance and environment ministers. …The conference organizers hope that higher taxes will lead to changes in consumer behavior, with fewer people flying

The politicians, bureaucrats, and environmental activists are unhappy that European consumers are enjoying lightly taxed travel inside Europe.

Oh, the horror!

A combination of low aviation taxes, a proliferation of budget airlines and the rise of Airbnb have led to a boom in intra-European city-trips. …Research has shown that if the price of air travel goes up by one percent, demand will likely fall by about one percent, according to IMF tax policy division head Ruud De Mooij. He said that in a typical tank of gas for a car, over half the cost is tax…”Airline travel is nearly entirely exempt from all tax… Ending its undertaxation would level the playing field versus other modes of transport,” he said. …Environmental NGOs such as Transport and Environment (T&E) have long criticized the EU for being a “kerosene tax haven”.”Europe is a sorry story. Even the U.S., Australia and Brazil, where climate change deniers are in charge, all tax aviation more than Europe does,” T&E’s Bill Hemmings said. …The EU report shows that just six out of 28 EU member states levy ticket taxes on international flights, with Britain’s rates by far the highest at about 14 euros for short-haul economy flights and up to 499 euros for long-haul business class. …Friends of the Earth says there are no easy answers and that the only way to reduce airline CO2 emissions is by constraining aviation trough taxation, frequent flyer levies and limiting the number of flights at airports.

The only semi-compelling argument in the story is that air travel is taxed at preferential rates compared to other modes of transportation.

Assuming that’s true, it would be morally and economically appropriate to remove that distortion.

But not as part of a money-grab by European politicians who want more money and more centralization.

As you can see from this chart, the tax burden in eurozone nations is almost 50 percent higher than it is in the United States (46.2 percent of GDP compared to 32.7 percent of GDP according to OECD data for 2018).

And it’s lower-income and middle-class taxpayers who are paying the difference.

So here’s a fair trade. European nations (not Brussels) can impose additional taxes on air travel if they are willing to lower other taxes by a greater amount. Maybe €3 of tax cuts for every €1 of additional taxes on air travel?

Needless to say, nobody in Brussels – or in national capitals – is contemplating such a swap. The discussion is entirely focused on extracting more tax revenue.

P.S. There’s some compelling academic evidence that the European Union has undermined the continent’s economic performance. Which is sad since the EU started as a noble idea of a free trade area and instead has become a vehicle for statism.

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I don’t think either Senator Bernie Sanders or Representative Alexandria Ocasio-Cortez actually understand that socialism is an economic system based on government ownership of the means of production, augmented by central planning, and price controls.

For what it’s worth, I think Crazy Bernie and AOC are just knee-jerk statists. They reflexively support more taxes, more spending, more regulation, and more intervention.

But since they both describe themselves as socialists, maybe it would be a good idea if they examined how the system works in the real world.

And I won’t even use a hellhole like Venezuela as an example.

Instead, let’s look at some recent research from the International Monetary Fund.

The bureaucrats looked at the legacy of socialism in Eastern Europe, specifically the extent to which governments still own and run businesses. Here are some of their findings.

…the former socialist countries of Central, Eastern, and Southeastern Europe (CESEE) have made tremendous progress in becoming full-fledged market economies and raising income levels. …Although the state’s role in the economy has diminished dramatically in the region, state ownership still remains significant in many countries and sectors. …there is now growing interest in whether an enhanced role for state-owned enterprises and banks (SOEs and SOBs) could be an important source of growth, or whether they would just impose a further drag on the economy. …in a new study, prepared in collaboration with the European Bank for Reconstruction and Development, the IMF examines the current footprint of state-owned enterprises and state-owned banks in the region, how they are performing… State companies now account for between 2 percent and 15 percent of total employment in the CESEE countries… They are especially prevalent in sectors such as mining, energy, and transport.

Here’s a look at the extent of government ownership in various nations of Eastern Europe.

Darker blue means more legacy socialism.

Kudos to the Baltic nations and Romania for largely getting the government out of the business of running businesses.

But other countries are laggards. And what can we say about the economic impact of their government-run companies?

The results are not good.

Our analysis finds that state-owned enterprises systematically underperform relative to private sector counterparts in nearly all countries. They tend to hoard labor, pay more generously, and generate less revenue per employee than private sector peers. Unsurprisingly, they turn out to be less productive and less profitable. Potentially large output gains would be achieved if productivity of state-owned enterprises could be raised to private sector levels. A similar picture emerges for state-owned banks, which in most countries make less-sound lending decisions than private counterparts and have lower profitability, often associated with higher shares of problem loans. …the analysis finds little evidence that the inefficiencies arising from state ownership can be justified by noneconomic objectives. The study does, however, point to significant shortcomings in governance and oversight of state companies.

Here’s a chart showing that government-run firms earn lower profits.

Because politicians are a de facto part of management, it’s no surprise that there’s also above-market pay at government-run firms.

And here are some specific numbers for the banking sector.

Once again, thanks to a combination of political interference and lack of a profit motive, we see inferior results.

So what does the IMF suggest?

Unlike fiscal policy, where the IMF has a very poor track record, the bureaucracy has the right instincts on private ownership vs government ownership.

…countries should take a fresh look at the rationale for existing state ownership, taking into account the costs, benefits, and risks of state ownership… Privatization (or bankruptcy) will sometimes be appropriate choices… At a time when growth-enhancing policies can be hard to identify, improving the performance of existing state-owned entities, or exiting in favor of the private sector where appropriate, could provide much-needed support for the economy.

I’ll close by elaborating on why government-run companies undermine prosperity.

Simply stated, it means that politicians are misallocating labor and capital in ways that reduce overall economic output.

Yes, a few insiders benefit (such as the workers who get above-market wages and the managers appointed by the government to run the firms), but the vast majority of citizens are net losers.

So why do governments in Eastern Europe maintain such self-destructive policies?

For the same “public choice” reason that we maintain policies – such as agriculture subsidies the Export-Import Bank, and occupational licensing – that reward narrow interest groups in the United States.

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I periodically explain that a European-sized welfare state can only be financed by huge taxes on lower-income and middle-class taxpayers.

Simply stated, there aren’t enough rich people to prop up big government. Moreover, at the risk of mixing my animal metaphors, those golden geese also have a tendency to fly away if they’re being treated like fatted calves.

I have some additional evidence to share on this issue, thanks to a new report from the Tax Foundation. The research specifically looks at the tax burden on the average worker in developed nations

The tax burden on labor is referred to as a “tax wedge,” which simply refers to the difference between an employer’s cost of an employee and the employee’s net disposable income. …The OECD calculates the tax burden by adding together the income tax payment, employee-side payroll tax payment, and employer-side payroll tax payment of a worker earning the average wage in a country. …Although payroll taxes are typically split between workers and their employers, economists generally agree that both sides of the payroll tax ultimately fall on workers.

The bad news for workers (and the good news for politicians) is that average workers in the advanced world loses more than one-third of their income to government.

In some cases, such as the unfortunate Spanish household I wrote about back in February, the government steals two-thirds of a worker’s income.

So which country is best for workers and which is worst?

Here’s a look at a map showing the tax burden for selected European nations.

Suffice to say, it’s not good to be dark red.

But that map doesn’t provide a complete answer.

To really determine the best and worst countries, the Tax Foundation made an important correction to the OECD data by including the burden of the value-added tax. Here’s why it matters.

The tax burden on labor is broader than personal income taxes and payroll taxes. In many countries individuals also pay a value-added tax (VAT) on their consumption. Because a VAT diminishes the purchasing power of individual earnings, a more complete picture of the tax burden should include the VAT. Although the United States does not have a VAT, state sales taxes also work to diminish the purchasing power of earnings. Accounting for VAT rates and bases in OECD countries increased the tax burden on labor by 5 percentage-points on average in 2018.

And with that important fix, we can confidently state that the worst country for ordinary workers is Belgium, followed by Germany, Austria, France, and Italy.

The best country, assuming we’re limiting the conversation to rich countries, is Switzerland, followed by New Zealand, South Korea, Israel, and the United States.

By the way, this report just looks at the tax burden on average workers. We would also need estimates of the tax burden on things such as investment, business, and entrepreneurship to judge the overall merit (or lack thereof) of various tax regimes.

Let’s close by looking at the nations that have moved the most in the right direction and wrong direction this century.

Congratulations to Hungary, Israel, and Sweden.

I’m not surprised to see Mexico galloping in the wrong direction, though I’m disappointed that South Korea and Iceland are also deteriorating.

P.S. The bottom line is that global evidence confirms that ordinary people will be the ones paying the tab if Crazy Bernie and AOC succeed in expanding the burden of government spending in America. Though they’re not honest enough to admit it.

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