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Archive for the ‘Free Markets’ Category

In my four-part series on inequality (here, here, here, and here), I argue that that it is more important to instead focus on reducing poverty – especially since we know the policies needed to achieve that latter goal.

In this discussion, I contemplate why some folks don’t understand that message.

One reason is that some of them don’t care.

As explained by the Eighth Theorem of Government, they are motivated first and foremost by a desire for bigger government.

And it doesn’t matter whether they are driven by ideology or “public choice.” The bottom line is that helping people climb the economic ladder is – at best – a secondary concern.

But what about the well-meaning folks on the left? Is there a way of convincing them to channel their compassion in a better direction?

As mentioned in the interview, these are the people who generally believe that the economy is a fixed pie. As such when someone like Jeff Bezos is rich, they think it means other people are poor.

So it should be simple to show them that this isn’t true. There is a wealth of data showing how good (or even just decent) policies create more prosperity.

Looking specifically at the United States, we’re much richer today than we were in the past. And that’s true whether you go back 200 years or if you simply compared today’s economy with where America was after World War II.

And the same pattern exists in other market-based nations.

But here’s what frustrates me. When I share this data with my left-leaning friends, they seem to have some sort of mental block that prevents them from reaching the obvious conclusion.

A few of them will pivot, acknowledge that broad-based growth happens, but then argue that growth is unaffected by policy.

In other words, nations can become more prosperous whether government is big or government is small.

Needless to say, there’s also a wealth of data showing that this isn’t true.

At which point the honest and intelligent folks on the left will explicitly or implicitly embrace Arthur Okun’s argument that it’s okay to have less growth if there’s more equality.

That’s when I point out that even small differences in growth make a big difference to income levels over just a few decades. Which means poor people ultimately will be richer if there’s more economic liberty.

So if they really care about the well-being of the less fortunate, they should be the biggest advocates of free markets and limited government.

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Last year, I weighed in on the debate about whether companies should be operated for the benefit of owners (shareholders) or for the broader community (stakeholders).

Unsurprisingly, I sided with Milton Friedman and argued that businesses have a responsibility to maximize profits – assuming, of course, ethical behavior.

Moreover, I cited research showing how this is the approach that actually produces the maximum benefits for the rest of us (i.e., stakeholders).

But some people are not convinced by these insights.

David Gelles of the New York Times has a glowing profile of a former CEO, Hubert Joly, largely because of his apparent hostility to free markets.

Hubert Joly took over Best Buy in 2012… Since stepping down as chief executive in 2019, Mr. Joly has taken up a post teaching at Harvard Business School… In his book, on the speaking circuit and in meetings with other executives, Mr. Joly has taken up a campaign against the capitalist st atus quo. “…on the top of my F.B.I. most wanted list…is Milton Friedman, with his shareholder primacy — the excessive, obsessive focus on profits as the key thing that matters.”

Mr. Joly’s overt disdain for Friedman’s position seems noteworthy.

But it also seems hypocritical.

Why?

Because Joly did exactly what Friedman recommended. He is viewed as a successful CEO because he made changes that had the effect of making shareholders richer.

…the electronics retailer was struggling… Sales and profits were sagging, and the stock price had cratered. …Eschewing the conventional wisdom — that Best Buy should slash wages and cut costs in a bid to jack up profitability — Mr. Joly began investing in the company. He gave workers better perks… The strategy worked, and Best Buy shares soared during his tenure.

So why, then, is Mr. Joly so hostile to Friedman when he followed his approach?

Beats me, but I’m guessing he somehow thinks Friedman’s maxim means that a CEO should “slash wages” and close stores. And that sounds mean and heartless.

But Joly showed that Friedman’s maxim could be fulfilled in a different way. He figured out how to please consumers so that it was possible to expand the business and make workers better off.

Which is actually what capitalism – oops, I mean free enterprise – is all about. People getting richer over time as competition and liberty combine to raise living standards.

Sometimes that happens because a poorly run company contracts (the seemingly heartless process of creative destruction) and sometimes that happens because a well-run company expands.

P.S. There’s one more quote from Mr. Joly that I want to address. As part of his interview with the NYT, he seemingly played the role of a guilt-ridden rich guy.

“I’m on the record saying that the more taxes I pay, the happier I am.”

To be fair, he didn’t actually say that he supported tax increases, either on himself or anyone else. It’s possible that he was really saying that he likes earning more money, which then results in a higher tax bill.

But just in case he was doing some left-wing virtue signalling in favor of tax increases, I’m glad to inform him that there is a website at the Treasury Department that allows him to voluntary turn more money over to the crowd in Washington.

Somehow, I suspect he’ll be like other hypocrites on the left and fail to take advantage of that opportunity.

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I like capitalism, both because it’s moral and it delivers superior results compared to any alternative.

I even have a 2-part series (here and here) on “defending capitalism” and a 5-part series on the “case for capitalism.”

Perhaps most important, it’s a system that delivers great results if the goal is lifting people out of poverty.

Is it possible, though, that “capitalism” is a tarnished word?

That may be the case, according to new polling data from the United Kingdom.

Edward Malnick recently wrote about Frank Luntz’s research, which is finding knee-jerk hostility to the “C” word.

Dr Frank Luntz is testing public opinion in Britain to find an alternative to “capitalism”, after 170 years of use, because he fears it is becoming a “bad word”. …Capitalism itself is already a “bad word” in the US and is fast becoming so in the UK too, he says, adding: “It’s one of the key things I’m trying to figure out … does this country need an alternative to the word capitalism? I think it does. We’re about to find out.” Questions on capitalism, and voters’ approach to it, form part of a giant survey Dr Luntz has put together as part of a project for the Centre for Policy Studies (CPS) think tank, at which he has based himself for the summer.

Nick King of the Centre for Policy Studies suggests we use something other than “capitalism” when describing an agenda of limited government.

…language matters. Capitalism is unpopular. But to many of capitalism’s advocates, terms like free enterprise and open markets can be used interchangeably with it and other polling suggests these concepts are more favourably received. If a phrase is more appealing than capitalism to those who reject it as a concept, then it makes sense for those who believe in the benefits of this system to adopt the language which people more readily accept.

I’m perfectly happy to talk about “free enterprise” rather than “capitalism.”

I even wrote about making that verbal shift back in 2016, though I obviously still frequently use “capitalism” when talking about economic liberty.

But perhaps I need to be more disciplined. Especially if I want my message to be heard by young people.

Kristian Niemietz of London’s Institute of Economic Affairs has a very depressing assessment of what millennials are thinking.

Surveys show that there is a lot of truth in the cliché of the ‘woke socialist Millennial’. Younger people really do quite consistently express hostility to capitalism, and positive views of socialist alternatives of some sort. For example, around 40 per cent of Millennials claim to have a favourable opinion of socialism and a similar proportion agree with the statement that ‘communism could have worked if it had been better executed’. …67 per cent of younger people say they would like to live in a socialist economic system. Young people associate ‘socialism’ predominantly with positive terms, such as ‘workers’, ‘public’, ‘equal’ and ‘fair’. Very few associate it with ‘failure’ and virtually nobody associates it with Venezuela, the erstwhile showcase of ‘21st Century Socialism’. Capitalism, meanwhile, is predominantly associated with terms such as ‘exploitative’, ‘unfair’, ‘the rich’ and ‘corporations’. …When presented with an anti-capitalist statement, the vast majority of young people agree with it… However, when presented with a diametrically opposed pro-capitalist statement, we often find net approval for that statement too. This suggests that when young people embrace a socialist argument, this is often not a deeply-held conviction.

None of this is a surprise. I’ve written a couple of times about the foolish views of young people.

Heck, I was writing about this problem way back in 2013.

I’m tempted to conclude that young people are simply stupid and we shouldn’t allow them to vote.

But I realize that’s not a constructive sentiment. So perhaps instead we should send them to live for a year in Greece, Argentina, or Italy. And if that doesn’t sober them up, they can spend a second year in Venezuela, North Korea, or Cuba.

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Last week, I shared Part I of my discussion with John Stossel about “capitalism myths.” Here’s Part II.

In the first video, we discussed three myths about free enterprise.

  • Myth #1 – Capitalists get rich by ‘taking’ money from others.
  • Myth #2 – The rich getting richer, and the poor getting poorer.
  • Myth #3 – Monopolies destroyed the free market.

Here are the final four myths.

Myth #4: Free markets create unsafe workplaces.

Proponents of government intervention often claim that greedy capitalists will skimp on safety in order to get more profits. To support their argument, they cite data on how workplace deaths have declined since the Occupational Safety and Health Administration was created.

That data is accurate, bu what they fail to mention is that workplace deaths were falling at exactly the same rate before OSHA.

This is because wealthier societies, created by capitalism, have both the capacity and desire to invest more in safety.

Myth #5: Capitalism created evil Robber Barons.

During the 1800s, the United States experienced an “industrial revolution,” and many people became enormously wealthy (though only by the standards of that era).

The anti-capitalist crowd asserted that these people were “robber barons” who profited at the expense of ordinary people.

Yet this was the era when the nation evolved from agricultural poverty to middle-class prosperity, as shown by Oxford University’s Our World in Data.

Notice how per-capita economic output grew especially fast in the last half of the 1800s when the industrial revolution was in full swing.

Myth #6: Capitalism just isn’t good for us.

This myth is based on the stereotype that capitalism is a soulless and materialistic system.

And there certainly are some people who are so myopically fixated on their personal wealth that they don’t properly enjoy the intangible benefits of family, community, and leisure.

But that’s a failing of human nature, not of markets. There surely are plenty of materialistic and soulless people, after all, who use socialism to get wealthy.

The key difference, as the great Walter Williams noted, is that you have to serve other people to get wealthy in a capitalist society, whereas you use government coercion to get rich when government controls the economy.

Myth #7: Capitalism will eliminate our jobs.

It’s certainly true that jobs are destroyed by capitalism. As noted in the video, the personal computer destroyed typewriter jobs.

This is the process of “creative destruction” and we should all recognize that it can be very bad news for people who have careers that are upended by technological change (such as candle makers when the electric light bulb was invented).

What’s special about capitalism, though, is that this process is what makes all of us richer over time.

Even the children and grandchildren of people who lost their jobs.

The bottom line, as I said to conclude the video, is that, “No other system, anywhere in the world, has ever come close to capitalism’s ability to generate mass prosperity.”

 

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I was a big fan of (and occasional guest on) John Stossel’s TV show, and I’m now a big fan of his videos (see here, here, here, here, here, here, and here).

So it was an honor to appear in his latest video about “Capitalism Myths.”

It’s a two-part series. In this first video, we discussed three myths about free enterprise.

Myth #1 – Capitalists get rich by ‘taking’ money from others.

Since voluntary exchange, by definition, is mutually beneficial, this is a truly absurd argument. Indeed, only the most vapid politicians and pundits suggest otherwise.

The most definitive research in this area came from Professor William Nordhaus of Yale, who estimated that, “innovators are able to capture about 2.2 percent of the total social surplus from innovation.”

Translated from economic jargon, that means the rest of society gets nearly 98 percent of the value created by rich entrepreneurs.

Myth #2 – The rich getting richer, and the poor getting poorer.

This is an issue I’ve repeatedly addressed, showing how poverty was the natural state of humanity until capitalism appeared a few hundred years ago.

Now we are incomprehensibly rich by comparison. At least in market-oriented nations.

Focusing on more-recent data, I’ve shown that living standards have dramatically increased in the post-World War II era.

In the video, John and I also discussed the Census Bureau’s data showing that the middle class is shrinking, but only because more people are becoming rich.

Myth #3 – Monopolies destroyed the free market.

Supporters of government intervention commonly argue that capitalism produces monopolies, meaning big producers capture the market and exploit consumers.

This is a rather puzzling argument since monopolies almost always are the result of government favoritism.

Even if we go back to the days of the so-called Robber Barons, we find that the consumers were only exploited when politicians decided to prohibit competition.

P.S. Next week, the second video will look at four other myths about capitalism.

P.P.S. On a related note, I have a five-part series (Part IPart IIPart III, and Part IV, and Part V) on “The Case for Capitalism.”

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When I debate public policy with leftists, I frequently stump them by asking for an example of a country where their ideas have worked.

They get flummoxed for the simple reason that no nation has ever become rich with big government.

There are some rich nations that have big governments, to be sure, but they all became rich in the 1800s and early 1900s, back when government was a tiny burden (and there often were no income taxes).

That’s true for the United States. And it’s true for Western Europe.

It’s also worth noting that places that have become rich in the modern era, such as Hong Kong and Singapore, have small governments and low tax burdens.

I’m making these points because Jim Tankersley of the New York Times has a thorough article on the Biden Administration’s budgetary philosophy.

And that philosophy is based on a completely different perspective. Indeed, the headline and subtitle are a very good summary of the entire article.

Here are some passages that further capture the Biden approach.

President Biden’s $6 trillion budget bets on the power of government to propel workers, families and businesses to new heights of prosperity…by redistributing income and wealth from high earners and corporations to grow the middle class. …it sets the nation on a new and higher spending path, with total federal outlays rising to $8.2 trillion by 2031… That spending represents an attempt to expand the size and scope of federal engagement in Americans’ daily lives… Mr. Biden also seeks to expand the government safety net in an effort to help Americans — particularly women of all races and men of color — work and earn more, rather than relying on corporate America to funnel higher wages to workers. …Mr. Biden is pushing what amounts to a permanent increase in the size of the federal footprint on the U.S. economy. Since 1980, annual federal spending has been, on average, about one-fifth the size of the nation’s economic output; under Mr. Biden’s plans, that would grow to close to one-fourth.

The article is definitely correct about one thing. As I wrote yesterday, Biden wants a big expansion of government spending.

But is he correct about the consequences? Will bigger government “help Americans” and allow more of them to “enjoy prosperity”?

If the evidence from Europe is any indication, adopting bigger welfare states is not a recipe for more prosperity.

For instance, OECD data on “actual individual consumption” show that people in the United States enjoy much higher living standards than their counterparts on the other side of the Atlantic Ocean.

There’s also very powerful data showing that poor Americans (those at the 20th percentile) have higher living standards than most middle-class Europeans.

There’s even data showing that very poor Americans (those at the 10th percentile) have living standards equal to most middle-class Europeans.

The bottom line is that Biden wants higher taxes and more redistribution, but that’s been a big failure in the part of the world that has tried that approach.

Not that we should be surprised. Both theory and evidence tell us that bigger government is bad for prosperity.

P.S. There’s a very sobering example of what happens when a rich nation decides to dramatically curtail economic liberty.

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Why do folks on the left support punitive policies such as high tax rates and a bigger burden of government?

Some of them are motivated by resentment against those who have achieved success. These are the people who support the hate-and-envy message of politicians such as Bernie Sanders and Elizabeth Warren.

Others folks on the left, by contrast, are motivated by sympathy for the less fortunate.

That’s a noble sentiment. Where they go wrong is in thinking that the economy is a fixed pie. This leads them to the mistaken conclusion that some people are poor because other people are rich.

Maybe I’m overly optimistic, but I think these people can be convinced to support good policy if they learn the facts about how free markets and limited government are a proven recipe for prosperity.

This is why I shared data earlier this year showing how per-capita economic output jumped dramatically once capitalism was allowed starting a couple of hundred years ago.

Today, let’s look at how poor people have been the biggest winners. Professor Max Roser of Oxford University recently shared a profoundly important tweet about the dramatic reduction in global poverty. We see not only that poverty rates have plummeted, but also that falling poverty rates are correlated with increases in per-capita GDP.

In other words, everyone is getting richer. There’s no fixed pie.

As you might expect, regions that are friendlier to capitalism have enjoyed bigger increases in prosperity and bigger reductions in poverty.

The bottom line is that people who care about the poor should be the biggest advocates of free enterprise.

P.S. It’s worth noting that, according to both U.S. data and global data, the big reduction in poverty occurred before welfare states were created.

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If nothing else, Biden’s big-government agenda is triggering a debate about fundamental issues, such as whether it’s a good idea to make America’s economy more like Singapore or more like Italy.

In making the case for the Italian approach of higher taxes and bigger government during his speech to Congress, President Biden exclaimed that “trickle-down economics has never worked.”

But we need to realize that Biden is using a straw-man definition. In his mind, “trickle-down economics” is giving a tax cut to rich people under the assumption that some of that cash eventually will wind up in other people’s pockets.

However, if you actually ask proponents of pro-growth tax policy what they support, they will explain that they want lower tax rates for everyone in order to reduce penalties on productive behaviors such as work, saving, investment, and entrepreneurship.

And they will be especially interested in getting rid of the tax code’s bias against saving and investment.

Why? Because every economic theory – even socialism, even Marxism – agrees that saving and investment are a key to long-run growth and rising living standards.

Which is why there’s such a strong relationship in the data between the amount of capital and workers’ wages.

Indeed, it’s almost a tautology to say that this form of “trickle-down taxation” leads to higher productivity, which leads to higher wages for workers.

As Stanford Professor John Shoven observed several decades ago:

The mechanism of raising real wages by stimulating investment is sometimes derisively referred to as “trickle-down” economics. But regardless of the label used, no one doubts that the primary mechanism for raising the return to work is providing each worker with better and more numerous tools. One can wonder about the length of time it takes for such a policy of increasing saving and investments to have a pronounced effect on wages, but I know of no one who doubts the correctness of the underlying mechanism. In fact, most economists would state the only way to increase real wages in the long run is through extra investments per worker.

In other words, everyone agrees with the “trickle-down economics” as a concept, but people disagree on other things.

So I guess it depends on how the term is defined. If it simply means tax cuts while ignoring other policies (or making those other policies worse, like we saw during the Bush years or Trump years), then you can make an argument that trickle-down economics has a mediocre track record.

But if the term is simply shorthand for a broader agenda of encouraging more saving and investment with an agenda of small government and free markets, then trickle-down economics has a great track record.

For instance, here’s a chart from the most-recent edition of Economic Freedom of the World. Nations with market-oriented economies are far more prosperous than countries with state-controlled economies.

By the way, Biden is not an honest redistributionist.

Instead of admitting that higher taxes and bigger government will lead to less economic output (and justifying that outcome by saying incomes will be more equal), Biden actually wants people to believe that bigger government somehow will lead to more prosperity.

To be fair, he’s not the only one to make this argument. Bureaucracies such as the International Monetary Fund, the United Nations, and the Organization for Economic Cooperation and Development also have claimed that there will be more prosperity if governments get more control over the economy.

I call this the “magic beans” theory of economic development.

Which is why I always ask people making this argument to cite a single example – anywhere in the world, at any point in history – of a nation that has prospered by expanding the burden of government.

In other words, I want a response to my never-answered question.

The response is always deafening silence.

To be sure, I don’t expect Joe Biden to answer the question. Or to understand economics. Heck, I don’t even expect him to care. He’s just trying to buy votes, using other people’s money.

But there are plenty of smart folks on the left, and none of them have a response to the never-answered question, either. Heck, none of them have ever given me a good reason why we should copy Europe when incomes are so much lower on that side of the Atlantic Ocean.

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I’ve authored a five-part series about coronavirus and the failure of big government (hereherehere, here, and here), as well as columns specifically highlighting the failures of the FDA, CDC, and WHO bureaucracies.

Today, let’s look at how free enterprise came to the rescue when government barriers were reduced. Starting with this video.

To elaborate on this message, millions of lives are now being saved because pharmaceutical companies have produced multiple vaccines.

I even got my first shot yesterday before leaving town for a softball tournament.

Will this save my life? I like to think I’m reasonably healthy and would have survived if I caught the virus, but I’m very happy to now put that possibility in the rear-view mirror.

So I’m feeling very happy that I live in a nation where private companies, in their pursuit of profits, have had a big incentive to produce vaccines.

Yes, I realize the government dumped a bunch of taxpayer money into vaccine production, so I don’t want to pretend Uncle Sam played no role. But I also have great faith that the profit motive would have led to vaccines being developed regardless.

And we would have had the vaccines even sooner if the FDA was even better about getting out of the way.

Allysia Finley celebrated capitalism’s key role in a recent column for the Wall Street Journal. Here’s some of what she wrote about the decades of research and investment that enabled pharmaceutical companies to deliver miracles for humanity.

Large corporations are political villains, derided on the left and right. Yet the main, and perhaps only, reason the Covid-19 scourge is easing is vaccines developed by Big Pharma. …There are…lessons for those who think capitalism is merely about rapacious profit. “We would never be in the position where we are today if we had not invested billions of dollars over decades so that we could respond,” Mr. Gorsky, 60, says in an interview… J&J’s vaccine is the third to obtain FDA approval, but preliminary results from trials on AstraZeneca and Novavax suggest they are also highly effective. All these Covid-19 vaccines use innovative technologies that have been developed and tested over decades on other diseases. …The Pfizer-BioNTech and Moderna vaccines inject the virus’s genetic code via mRNA… It seems like an incredible stroke of luck and science that we have so many Covid-19 vaccines so soon. But it’s more than that. Credit years of research and investment by drug makers… “I think this is a golden moment, not only for Johnson & Johnson, but the biopharmaceutical industry,” he says. “We fundamentally believe that having a market-based, innovation-based, biopharmaceutical as well as a medical-technology environment, is critical long term to produce the best overall outcomes for healthcare.”

There are a couple of big lessons for today.

The first lesson, as shown in the video, is that we can save lives by permanently reducing bureaucratic red tape at bureaucracies such as the Food and Drug Administration.

The second lesson is that we should celebrate the profit motive. The desire to make a buck is what drives companies to produce goods and services that make our lives better.

And one takeaway of that second lesson is that we should reject short-sighted policies such as European-style price controls on drug companies. Such an approach would undermine our ability to deal with future pandemics and also reduce the likelihood of new and improved treatments for things such as cancer, dementia, and heart disease.

P.S. I like pharmaceutical companies when they are being honest participants in a free market. I don’t like them when they get in bed with big government.

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The 2021 edition of the Index of Economic Freedom was released today (as I’ve repeatedly stated, it’s my favorite annual publication from the Heritage Foundation).

There are five things that merit attention

1. Hong Kong is no longer in first place. Indeed, it’s no longer even part of the rankings because the authors have determined that Hong Kong no longer has real sovereignty.

So that means Singapore is now the world’s most laissez-faire jurisdiction, followed by New Zealand, Australia, and Switzerland.

Here are the top 30 nations.

I assume nobody will be surprised to learn that Cuba, Venezuela, and North Korea are the three most economically repressive regimes.

2. Most Nordic nations rank above the United States. I highlighted Denmark’s better economic policy when writing about last year’s Index, but Iceland and Finland also rank ahead of America. And Sweden is just one spot behind the USA. Only Norway, cushioned by oil wealth, trails by a meaningful margin.

The United States has better fiscal policy than these countries, but that variable gets too much attention. In areas such as trade and red tape, the Nordic nations are generally more market oriented.

3. More economic freedom means more national prosperity. I’ve repeatedly made this point, but some people never seem to learn. Nonetheless, I’ll share this graph in hopes that data eventually triumphs over ideology.

4. I’m impressed by Taiwan and surprised by Spain. It’s obviously easy for a nation to improve when it starts with a low score. But it’s not easy to make a big jump if a country starts with a high score. So Taiwan’s appearance on the below list is an additional reason to be impressed by that nation’s pro-market orientation.

And, given my recent criticism of Spain, I’m surprised to see that nation made a big jump. I dug into the details and the improvements are in areas other than fiscal policy.

It’s good news, but not overly impressive, to see improvements by nations that start with very low scores.

5. Donald Trump did not deliver more economic liberty. When I point out Trump’s mixed performance, some people accuse me of being a curmudgeonly libertarian who unrealistically demands perfection.

Well, I am curmudgeonly and I am a libertarian, but I’m not alone in noticing Trump’s shortcomings. As you can see from the Heritage Foundation’s data for the United States, we have less economic liberty now than when Trump took office.

The bottom line is that Trump was no Ronald Reagan. On economic issues, he wasn’t even a Bill Clinton.

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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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In an ad during last year’s campaign, Kamala Harris asserted that “equitable treatment means we all end up at the same place.” In other words, lots of class-warfare taxation to finance lots of means-tested redistribution.

Here’s an oft-used meme illustrating this argument that fairness is only possible with “equality of outcomes.”

I admit this is a clever image, but only in theory.

If you look at the societies that actually have followed Marx’s dictum of “From each according to his ability, to each according to his needs,” you find misery and destitution (nations such as Cuba, North Korea, and Venezuela today, and countries such as Maoist China and the Soviet Union in the past).

Sort of like this modified meme.

But the above meme only tells part of the story.

Because here’s a look at what capitalism actually delivers.

In other words, there may be inequality in capitalism, but only in the sense that some people get richer faster than other people get richer.

If we mixed the final two memes, we would get something akin to the right side of this image, which shows equal misery under socialism and unequal prosperity under capitalism (hat tip to Winston Churchill).

The bottom line is that if we care about the well being of the less fortunate, the policy goal should be free markets and limited government.

Which was the entire point of my three-part series (here, here, and here) on poverty and inequality.

P.S. Here’s a story from Sweden about what happens when the ideology of equality produces bizarre choices.

 

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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’ve written a couple of times about a disturbingly large share of young people support statist economic policies.

A good example can be seen in this polling data from the Pew Research Center (relevant data circled in red).

Christopher Ingraham wrote about this survey in the Washington Post.

According to the Pew Research Center, 39 percent of adults younger than 30 support the view that people whose personal fortunes exceed $1 billion “is a bad thing,” while 16 percent say billionaires are good for society. …These attitudes were likely sharpened by the Democratic presidential campaign, which at one point pitted a multibillionaire (Mike Bloomberg) against a socialist senator who says that billionaires shouldn’t exist (Bernie Sanders)…the Pew data…suggest that young Americans are concluding that billionaires have amassed their wealth “through their rigging of the tax code, through legal political bribery, through their tax avoidance in shelters like the Cayman Islands, and through lobbying for public policy that benefits them privately.” …“The billionaire class is ‘up there’ because they are standing on our backs pinning us down,” Giridharadas said. …Among respondents 50 and older, just 15 percent say billionaires are a bad thing.

This is depressing data, just like the views of America’s young people in the GIEM survey I wrote about recently.

Some of them don’t like capitalism and wealth even when they’re beneficiaries.

The New York Times has a report on “socialist-minded millennial heirs” who want to use the money they inherited to undermine free enterprise.

“The wealth millennials are inheriting came from a mammoth redistribution away from the working masses, creating a super-rich tiny minority at the expense of a fleeting American dream that is now out of reach to most people,” said Richard D. Wolff, a Marxist and an emeritus economics professor at University of Massachusetts Amherst…he has been professionally arguing against capitalism’s selling points since his teaching career began, in 1967, but that his millennial students “are more open to hearing that message than their parents ever were.” …an individual act of wealth redistribution does not, on its own, change a system. But these heirs see themselves as part of a bigger shift, and are dedicated to funding its momentum. …In short, this means using their money to support more equitable economic infrastructures. This includes investing in or donating to credit unions, worker-owned businesses, community land trusts, and nonprofits aiming to maximize quality of life through democratic decision making, instead of maximizing profits through competition.

Here are three examples from the story.

Sam Jacobs has been…trying to gain access to more of his $30 million trust fund. At 25, he…wants to give it all away. “I want to build a world where someone like me, a young person who controls tens of millions of dollars, is impossible,” he said. A socialist since college, Mr. Jacobs sees his family’s “extreme, plutocratic wealth” as both a moral and economic failure. He wants to put his inheritance toward ending capitalism.

Rachel Gelman, a 30-year-old in Oakland, Calif., who describes her politics as “anticapitalist, anti-imperialist and abolitionist.” …“My money is mostly stocks, which means it comes from underpaying and undervaluing working-class people, and that’s impossible to disconnect from the economic legacies of Indigenous genocide and slavery,” Ms. Gelman said.

Pierce Delahunt, a 32-year-old “socialist, anarchist, Marxist, communist or all of the above,” has a trust fund that was financed by their former stepfather’s outlet mall empire. (Mx. Delahunt takes nongendered pronouns.) “…I think about intersectional oppression,” Mx. Delahunt said. There’s the originally Indigenous land each mall was built on, plus the low wages paid to retail and food service workers, who are disproportionately people of color, and the carbon emissions of manufacturing and transporting the goods. With that on their mind, Mx. Delahunt gives away $10,000 a month, divided between 50 small organizations, most of which have an anticapitalist mission.

There’s certainly nothing wrong with giving away one’s inheritance.

Since I’ve (sadly) never inherited any money, I haven’t had any reason to ponder the issue, but one of my dreams would be to use a windfall of money to help finance school choice so poor kids could escape failing government schools.

Needless to say, I wouldn’t finance anti-capitalist groups, like the folks described above.

But I’m digressing. Let’s return to the issue of misguided young people.

In a column for Law & Liberty, Professor John McGinnis offers suggestions about how to rescue them from statism.

…young voters are America’s future, and even if a few years in the workforce brings some greater political wisdom, many people still stick with their youthful paradigms unless some political shock disrupts them. For those who would try to change the mind of this generation (and the following one), it is important to understand how our education, occupational licensing, and entitlement policies are driving them to socialist views which break sharply with America’s political traditions of liberty. …It is not surprising that this structure prompts some young people to demand that the government pony up money for them… More generally, why not vote for radicals in the hope of shaking up the system on the assumption that it can’t get worse for them than it is now? …The classical liberal alternative is clear: reduce the transfers from the young to the old and eliminate those unnecessary barriers to career entry that privilege incumbents.

Here are the reforms that Prof. McGinnis believes would make young people more favorable to liberty.

Reform of the universities thus must be a priority. But it is very difficult. …they are getting worse by the decade if not by the year. Alternative institutions are probably the only answer. …Online education will allow for new challengers to rise, ones who are not as likely to be wedded to political correctness as the incumbents.

…our entitlement structure is currently designed to take from the younger generation and give to the elderly. Social security is a pay-as-you-go system. And given that social security is not actuarially sound, most of the current elderly will get more than they pay in. It is the payment of the young that makes up the difference. Medicare too is a government program from which the elderly benefit at the expense of the young.

The costs of occupational licensing also fall disproportionately on the young. Of course, that burden occurs in part because their elders already have their licenses. But more importantly, the barriers to entering many occupations have grown more expensive over the years.

Since I’ve written about the failures of higher education, the need for entitlement reform, and the downsides of licensing, I obviously have no reason to disagree with any of his suggestions.

But there’s something else that’s needed, especially when you contemplate the Pew data cited at the start of today’s column.

Supporters of free enterprise need to go after cronyism. And not just because the economy will perform better, but also because it’s morally offensive for people to line their pockets thanks to government coercion.

Indeed, half of the main message to young people (and everyone else) should be that honestly earned wealth is great, because that means (as Walter Williams sagely observed) someone accumulated lots of money by serving the needs of others.

And the other half of the main message is that it’s bad to have rich people who obtain loot with subsidies, handouts, protectionism, and other forms of cronyism.

P.S. Before giving up and wondering if young people are simply too stupid to vote, watch this video showing that young people reject socialism when they understand the implications.

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Previous editions of the case for capitalism (Part I, Part II, and Part III) have focused on big-picture analyses of markets vs statism. Today, let’s look at a specific product that free enterprise has delivered.

Younger readers may take smartphones for granted, but I was born during the Eisenhower Administration and grew up with no Internet, no cell phones, and clunky government-sanctioned telephone monopolies.

So I’m still sometimes amazed at how quickly smartphones have evolved. As shown by this image, dozens of bulky products now exist in the a device not much bigger than a checkbook (younger readers may not even be familiar with those!).

In an article for the American Enterprise Institute, Bret Swanson explains what has happened.

“What would an iPhone have cost in 1991?” The purpose is to measure — at least in a rough way — the progress of technology by looking at the components and features integrated in smartphones owned by billions of people. In past years we’ve focused on the three most basic (and easily measurable) components: computation, digital storage, and communications bandwidth. This time, we will also look at another revolutionary facet of smartphones: their cameras. …The iPhone 12, unveiled last month, has three 12-megapixel cameras, which is 36 times the number of pixels of the original DCS 100. At $15,000 per megapixel, circa 1991, that’s $540,000 worth of photographic power in every smartphone. Of course, this most basic measure doesn’t begin to account for the radical improvements in image quality and a hundred other features that make today’s smartphone cameras far superior in many ways to the very best cameras of the past. …Building today’s iPhone in 1991 would thus have cost at least $51 million, with $540,000 worth of cameras thrown in for free.

Maybe I’m too much of a cheerleader for free enterprise, but it seems very impressive that people can now buy, for less than $1,000, something that would have cost $51 million less than 30 years ago.

Not to mention that you don’t need to hire someone to carry around dozens of pieces of equipment.

If you want to peruse the details, here’s Swanson’s chart.

And here’s a timeline showing the prices of phones starting in the 1980s.

Keep in mind, by the way, that a smartphone today is far, far superior to a cell phone in the past.

Now think about sectors of our economy run by the government (Postal Service, air traffic control, etc) or heavily regulated and controlled by government (health care, agriculture, etc).

Call me crazy, but I’ll pick capitalism. It’s an ethical system that delivers prosperity and reduces poverty,

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China is a success if you consider how economic freedom increased after Mao’s death and hundreds of millions of people were lifted out of unimaginable poverty. But I explain in this interview that China is also a failure because the reforms were too limited and the country may now be drifting in the wrong direction.

All you really need to know is that China only ranks #124 in the Fraser Institute’s Economic Freedom of the World. To be sure its score is much higher than it was back in the 1970s, but it’s still way behind even nations such as Greece.

And China is paying a price for excessive government. This chart shows data on economic freedom and economic prosperity for Taiwan, South Korea, Japan, and China – and you can see how China’s growth isn’t so impressive when compared to the more market-oriented nations of East Asia.

I wrote way back in 2010 that Americans don’t need to fear the “Chinese Tiger, and it seems I’m not the only one to peruse the data and express skepticism about China’s economic outlook.

In an article for the Atlantic, Michael Schuman explains that China is unlikely to catch the United States.

Can China do better? Sure, it will almost certainly continue to gain wealth and influence. But to become No. 1, Beijing must overcome hurdles…the U.S. has retained a host of advantages that are often overlooked or underappreciated. …The total output of the U.S. economy was $20.5 trillion in 2018, significantly larger than China’s $13.6 trillion. Calculated on a per-person basis, the gap is even more glaring. …a much better comparison is of national wealth… By this metric, Americans remain significantly richer than the Chinese. In one estimate, U.S. household wealth was $106 trillion in mid-2019…compared with an estimated $64 trillion for China. …China is vulnerable to falling into the “middle-income trap.” That’s where many high-growth, emerging economies tend to end up: After reaching a comfortable level of income, they stall and struggle to leap into the ranks of the world’s most advanced economies… Only a small handful of developing nations, including South Korea and Singapore, have managed that jump in recent times. …China could get stuck in this snare. The heavy hand of the state in China’s economy—a source of envy for many U.S. policy makers—may be dragging it down. Bureaucrats direct bank loans, subsidies, and other resources to notoriously bloated and inefficient state-owned enterprises, loss-making “zombie” companies, and useless infrastructure projects, amassing a potentially destabilizing mountain of debt and killing off much-needed productivity gains.

In a column for the Wall Street Journal, former Secretary of State George Shultz opines on China’s challenges.

People are justifiably worried about China. It is wrecking Hong Kong… Xi Jinping’s statist economic strategy has returned to the Maoist model, putting private enterprise under the thumb of the Communist Party… China’s next 20 years are unlikely to repeat its past 20. Take the labor force. Growth in gross domestic product is a factor of a country’s labor-force and productivity growth. …But the labor force of Mr. Xi’s China is now declining… local governments and businesses are now swamped in contingent debts, often off-book. An example is high-speed rail. State-owned China Railway took on nearly $1 trillion in debt… we should recall…Ronald Reagan and Margaret Thatcher’s calls for markets and personal freedom as engines of human prosperity… Mr. Xi’s campaign to stamp out intellectual discourse in China has threatened…the country’s economic prospects.

In another piece for the Wall Street Journal‘s editorial page, Kevin Rudd (former Prime Minister of Australia) and Daniel Rosen also paint a less-than-optimistic picture of what’s happening in China.

Despite repeated commitments from Chinese authorities to open up and address the country’s overreliance on debt, the China Dashboard has observed delayed attempts and even backtracking on reforms. …An honest look at the forces behind China’s growth this year shows a doubling down on state-managed solutions, not real reform. State-owned entities, or SOEs, drove China’s investment-led recovery. In the first half of 2020, according to China’s National Bureau of Statistics, fixed-asset investment grew by 2.1% among SOEs and decreased by 7.3% in the private sector. …Perhaps the most significant demonstration of mistrust in markets is the “internal circulation” program first floated by President Xi Jinping in May. …expect more subsidies to producers and other government interventions, rather than measures that empower buyers. Dictating to markets and decreeing that consumption will rise aren’t the hallmarks of an advanced economy. …For years, the world has watched and waited for China to become more like a free-market economy…the multiple gauges of reform we have been monitoring through the China Dashboard point in the opposite direction. China’s economic norms are diverging from, rather than converging with, the West’s. …Though Beijing talks about “market allocation” efficiency, it isn’t guided by what mainstream economists would call market principles. The Chinese economy is instead a system of state capitalism in which the arbiter is an uncontestable political authority.

The most impressive evidence comes from an article in the Journal of Applied Corporate Finance.

Authored by Professor Michael Beckley from Tufts University, it’s a comprehensive explanation of why China is lagging.

China’s economy is big but inefficient. It produces vast output but at enormous expense. Chinese businesses suffer from chronically high production costs… The United States, by contrast, is big and efficient. American businesses are among the most productive in the world… China’s economy is barely keeping pace as the burden of propping up loss-making companies and feeding, policing, protecting, and cleaning up after one-fifth of humanity erodes China’s stocks of wealth. …To become an economic superpower, a country needs to amass a large stock of wealth—and to do that it must be big and efficient. It must not only mobilize vast inputs, but also produce significant output per unit of input. …How productive is China’s economy? Remarkably, nearly all of China’s economic growth since 2007 can be attributed to inputs: hiring workers and spending money. China’s productivity growth has not only been unspectacular; it has been virtually nonexistent.5 By contrast, productivity improvements have accounted for roughly 20% of U.S. economic growth over the past decade, as it has for most of the past 100 years.

Here’s some additional data on problems with China’s state-driven economic system.

China’s private sector is relatively efficient, but it is shackled to a bloated state sector that destroys nearly as much value as it creates. Private firms generate roughly two-thirds of China’s wealth and an estimated 80% of its innovations, but the Chinese government prioritizes political control over economic efficiency and thus funnels 80% of loans and subsidies to state-owned enterprises. As a result, state zombie firms are propped up while private companies are starved of capital. All told, more than one-third of China’s industrial capacity goes to waste and nearly two-thirds of China’s infrastructure projects cost more to build than they will ever generate in economic returns. Total losses from this waste are difficult to calculate, but the Chinese government estimates that it blew nearly $7 trillion on “ineffective investment” between 2009 and 2014. …At $40 trillion and counting, China’s debt is not only the largest ever recorded by a developing country, it has risen faster than any country’s, nearly quintupling in absolute size between 2007 and 2019. …the U.S. stock of human capital is several times greater than China’s. China has four times the population of the United States, but the average American worker generates seven times the output of the average Chinese worker. …China also loses 400,000 of its most highly educated workers every year to foreign countries in net terms, including thousands of scientists, engineers, and “inventors” (people that have registered at least one patent). The United States, by contrast, nets one million workers annually from all foreign countries, including roughly 20,000 inventors and 15,000 scientists and engineers, 5,000 of whom come from China. …The United States generates roughly 40% more wealth per unit of energy than China.

We’ll close with this chart from Professor Beckley’s article.

The bottom line is that China is not close to the United States. It’s not even catching up.

P.S. I want China to liberalize and prosper. That would be good for the people of China and it would be good for the world. I’m simply pointing out we won’t get that happy outcome if China persists is following bad ideas such as central planning and industrial policy.

P.P.S. Sadly, China will move further in the wrong direction if it takes awful fiscal advice from the International Monetary Fund or Organization for Economic Cooperation and Development.

P.P.P.S. If you want an example of sloppy and/or malignant media bias, check out how the New York Times tried to blame free markets for the failure of China’s government-run health system.

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While I generally don’t think recycling is economically sensible, I am going to reuse this 2013 BBC interview because it’s time (again) to criticize the economic illiteracy of Pope Francis.

As I’ve previously explained, it’s good to care for the less fortunate. Indeed, as I explain in the interview, it’s part of being a good person.

It’s misguided, however, to think that higher taxes and bigger government are an effective way of lifting people out of poverty.

Indeed, we have centuries of evidence demonstrating that only capitalism produces mass prosperity.

Sadly, Pope Francis has a Peronist mindset on economic matters. So when he issues his thoughts on economic matters, we get erroneous cliches rather than helpful analysis.

A story from the Associated Press summarizes the Pope’s new attack on economic liberty.

Pope Francis says…the “magic theories” of market capitalism have failed and that the world needs a new type of politics that promotes dialogue and solidarity… The document draws its inspiration from…the pope’s previous preaching on the injustices of the global economy. “…not everything can be resolved by market freedom,” he wrote. …As an outgrowth of that, Francis rejected the concept of an absolute right to property for individuals… He repeated his criticism of the “perverse” global economic system, which he said consistently keeps the poor on the margins while enriching the few… Francis also rejected “trickle-down” economic theory… “Neo-liberalism simply reproduces itself by resorting to magic theories of ‘spillover’ or ‘trickle’ — without using the name — as the only solution to societal problems,” he wrote. “There is little appreciation of the fact that the alleged ‘spillover’ does not resolve the inequality.

And here’s how NPR reported the Pope’s anti-market message.

The document..is a scathing description of laissez faire capitalism… Once the pandemic passes, the pope writes, “our worst response would be to plunge even more deeply into feverish consumerism and new forms of egotistic self-preservation.” …Francis says the marketplace cannot resolve every problem, and he denounces what he describes as “this dogma of neoliberal faith” that “resort[s] to the magic theories of ‘spillover’ or ‘trickle.’ ” A good economic policy, he says, creates jobs — it doesn’t eliminate them.

The Pope is right that good policy creates jobs, by the way, but he’s wildly wrong to think that there’s a better alternative than capitalism.

For what it’s worth, I’m guessing that he doesn’t like the fact that capitalism means “creative destruction,” which does result in millions of jobs being eliminated every year. But, barring a recession, that same process also leads to the creation of an even greater number of new jobs.

Equally important, this is the process that results in higher productivity, higher wages, and higher living standards.

The bottom line is that a statist economic agenda – at best – offers the poor a life of dependency (especially when you consider the very high implicit marginal tax rates created by redistribution programs).

Capitalism, by contrast, gives the poor opportunity and upward mobility (as I noted a few years ago, it would be much better to be a poor person in Hong Kong than in France).

P.S. I strongly recommend what Thomas Sowell and George Will wrote about the Pope’s anti-market ideology.

P.P.S. Mauritius is a powerful example of why the Pope is very fallible on economic matters.

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Earlier this month, as part of my ongoing series about convergence and divergence, I wrote about why South Korea has grown so much faster than Brazil.

My main conclusion is that nations need decent policy to prosper, and Johan Norberg shares a similar perspective in this video.

Let’s see what academic researchers have to say about this topic.

In an article for the Journal of Economic Literature, Paul Johnson and Chris Papageorgiou have a somewhat pessimistic assessment about the outlook for lower-income countries.

In its simplest form, convergence suggests that poor countries have the propensity to grow faster than the rich, so to eventually catch up to them. …there is a broad consensus of no evidence supporting absolute convergence in cross-country per capita incomes—that is poor countries do not seem to be unconditionally catching up to rich ones. …Our reading of the evidence…is that recent optimism in favor of rapid and sustainable convergence is unfounded. …with the exception of a few countries in Asia that exhibited transformational growth, most of the economic achievements in developing economies have been the result of removing inefficiencies, especially in governance and in political institutions. But as is now well known, these are merely one-off level effects.

Here’s a table from their study.

As you can see, high-income countries (HIC) generally grew faster last century, which is evidence for divergence.

But in the 2000s, there was better performance by middle-income countries (MIC) and low-income countries (LIC).

That seems to be evidence that the “Washington Consensus” for pro-market policies generated good results.

Indeed, maybe I’m just trying to be hopeful, but I like to think that the last several decades have provided a roadmap for convergence. Simply stated, nations have to shift toward capitalism.

For another point of view, Dev Patel, Justin Sandefur and Arvind Subramanian have a somewhat upbeat article published by the Center for Global Development.

…the basic facts about economic growth around the world turned completely upside down a quarter century ago—and the literature doesn’t seem to have noticed. …While unconditional convergence was singularly absent in the past, there has been unconditional convergence, beginning (weakly) around 1990 and emphatically for the last two decades. …Looking at the 43 countries the World Bank classified as “low income” in 1990, 65 percent have grown faster than the high-income average since 1990. The same is true for 82 percent of the 62 middle-income countries circa 1990. …It’s not “just” China and India, home to a third of the world’s population on their own: developing countries on average are outpacing the developed world.

Here’s a pair of graphs from the article. On the left, we see nations of all income levels grew at roughly the same rate between 1960 and today.

But if we look on the right at the data from 2000 until the present, low-income and middle-income countries are enjoying faster growth.

That article, however, doesn’t include much discussion of why there’s been some convergence.

So let’s cite one more study.

In a report for the European Central Bank, Juan Luis Diaz del Hoyo, Ettore Dorrucci, Frigyes Ferdinand Heinz, and Sona Muzikarova look for lessons from European Union nations.

…sound policymaking plays a key role in the attainment of real convergence, primarily via adequate measures and reforms at national level. …for a given euro area Member State to achieve economic convergence it needs to improve its institutional quality, i.e. that of those institutions and governance standards that facilitate growth… some euro area countries have not met expectations in terms of delivery of sustainable convergence… in the period 1999-2016 income convergence towards the EU average occurred and was significant in some of the late euro adopters (the Baltics and Slovakia), but not in the south of Europe. …Several low-income euro area members have, in fact, only just maintained (Slovenia and Spain) or even increased (Greece, Cyprus and Portugal) their income gaps in respect of the EU average.

Let’s close with two charts from the ECB study.

First, look at this chart tracking the relative performances of Italy, Spain, Portugal, Greece, and Ireland compared to the average of Western European nations.

What stands out is that Ireland went from being a relatively poor nation to a relatively rich nation.

Needless to say, I would argue that Ireland’s dramatic improvement is closely correlated with a shift toward free markets that began in the 1980s.

Indeed, Ireland currently has the 10th-highest level of economic freedom for all countries.

Next, here’s a chart reviewing how various European nations have performed since 1999.

Ireland grew the fastest, given where it started. But notice how Slovakia and the Baltic nations also have been star performers.

So the nations that have adopted free-market reforms have grown faster than one might expect based on convergence theory.

And you won’t be surprised to see that the nations that have lagged – Greece and Italy – are infamous for statist policies and an unwillingness to reform.

The bottom line – assuming you want to improve the lives of people in poor nation – is that the world needs more capitalism and less government.

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Back in 2017, I shared this video explaining why capitalism is unquestionably the best way to help poor people.

I’m recycling the video today because it’s a great introduction for a discussion about how best to help poor people.

As part of my Eighth Theorem of Government, I made the point that it’s wrong to fixate on inequality. Instead, the goal should be poverty reduction.

And the best way to help the poor, as I noted when criticizing Pope Francis’ support for statism in a BBC interview, is free markets and limited government.

Now we have additional evidence for this approach thanks to a new study from the Hoover Institution.

Authored by Ed Lazear, former Chairman of the Council of Economic Advisors, it uses hard data from Economic Freedom of the World and the Index of Economic Freedom to see how poor people do in capitalist nations compared to socialist nations.

If you’re pressed for time, here are the key passages from the introduction.

This study analyzes income data from 162 countries over multiple decades, coupled with measures of economic freedom, size of government, and transfers to determine how various parts of society fare under capitalism and socialism. The main conclusion is that the poor, defined as having income in the lowest 10 percent of a country’s income distribution, do significantly better in economies with free markets, competition, and low state ownership. More impressive is that moving from a heavy emphasis on government to a free market enhances the income of the poor substantially. …Changing freedom from the Mexico level to the Singapore level is predicted to raise the income of the poor by about 40 percent. All income groups benefit from the change, but the change typically helps the poor more than other income groups.

For those interested, let’s now dig into the details.

The study specifically looks at the degree to which state ownership (i.e., textbook socialism) has an impact on income.

As one might suspect, more state ownership means lower income.

A number of measures of free-market capitalism and socialism have been suggested. The analysis starts by examining the metric that most closely matches the dictionary definition of socialism, namely, the amount of state ownership of capital… The basic approach in this section is to examine the relation of income of three groups to state ownership. …All coefficients on the state ownership index are positive, strong, and statistically significant. For example, using the coefficient in column 4, a one standard deviation increase in private ownership increases median income by about 19 percent of the mean value of the log of median income. Also interesting is that the lowest income groups benefit as much or more from private ownership as the highest income groups. …The cross-country correlation between private ownership and income ten years in the future is positive and strong. It is also true that median income seems to rise over time within a country as the country moves toward more private ownership and less state ownership.

The study highlights several interesting examples.

For instance, it shows that poor people immensely benefited from China’s partial shift to capitalism, even though inequality increased (something I pointed out a few years ago).

Here’s the data on Chile, which shows both rich and poor benefited from that nation’s shift to capitalism.

By the way, I have several columns (here, here, here, and here) documenting how poor people have been the big winners from Chile’s pro-market reforms.

Next we have the example of South Korea.

That data is especially powerful, by the way, when you compare South Korea and North Korea.

Last (and, in this case, least), we have the data from the unfortunate nation of Venezuela.

Chavez’s family personally gained from socialism, but this chart shows how the rest of the nation has stagnated.

So what’s the bottom line?

Lazear summarizes his results.

…there is no evidence that, as a general matter, high-income groups benefit more from a move toward capitalism than low-income groups. The effect of changing state ownership and economic freedom on income is not larger for the rich than for the poor. Second, income growth is positively correlated across deciles. The situation is closer to a rising tide lifting all boats than to the fat man becoming fat by making the thin man thin. Finally, there is no consistent evidence across the large number of countries and time periods examined of any strong and widespread link between income growth and inequality. There are examples, like China, where income growth was coupled with large increases in inequality, but others like Chile, where strong income growth came about without much change in inequality, and South Korea, where inequality declined slightly as economic freedom and income grew over time.

Amen. This analysis underscores my oft-made argument that inequality is irrelevant and that policy makers instead should have a laser-like focus on economic growth.

Assuming, of course, that they want poor people to climb the economic ladder to prosperity.

P.S. The Lazear study points out that Scandinavian nations are definitely not socialist based on measures of state ownership.

Some might define socialist economies as merely being those that have high levels of redistribution, meaning high taxes and transfers. …It is certainly true that the Scandinavian countries have higher taxes and transfers than non-Scandinavian countries… Scandinavian countries all have low state ownership index values…and high values of the economic freedom index. The values for Scandinavia look much more like those for the United States than they do for pre-1985 China or post-2000 Venezuela. …Perhaps a more accurate description of Scandinavia is that the countries rely primarily on private ownership and markets but have chosen to have a large government transfer program, which implies not only high transfers but also high taxes.

I’ll simply add that the high transfers and high taxes have negative consequences for Scandinavian nations, but those countries at least have very pro-market policies in other areas to compensate for the damage caused by bad fiscal policy.

P.P.S. For my friends on the left who may suspect that Lazear cherry-picked his examples. I’ll simply challenge them to show a contrary example.

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Traditional economics, specifically convergence theory, tells us that poor nations should grow faster than rich nations.

I’m more interested, however, in why convergence often doesn’t happen, or only partially happens.

And I’m extremely interested in why we often see divergence, which occurs when two countries are at a similar level of development, but then one grows much faster than the other.

Let’s consider the example of Brazil vs, South Korea.  has an interesting article, published by the Center for Macroeconomics and Development, that looks at how the two countries have diverged over the past 50 years.

Here’s the chart that depicts the dramatic difference.

The author analyzes many of the reasons that South Korea has enjoyed faster growth.

It’s especially worth noting that Brazil’s protectionism has been self-defeating.

The “middle-income trap” has captured many developing countries: they succeeded in evolving from low per capita income levels, but then appeared to stall, losing momentum along the route toward the higher income levels… Such a trap may well characterize the experience of Brazil and most of Latin America since the 1980s. Conversely, South Korea maintained its pace of evolution, reaching a high-income status… The path from low- to middle- and then to high-income per capita corresponds to increasing the shares of population moved from subsistence activities to simple modern tasks and then to sophisticated ones. …South Korea relied extensively on international trade to accelerate their labor transfer by inserting themselves into the labor-intensive segments of global value chains… with the “helping winners and saving losers” of Brazil’s industrial policies…, the temptation to use surpluses to accumulate wealth in ways to maximize frontiers of interaction with the public sector prevails… Brazil’s long-standing high levels of trade protection and closure also favored such an option… The Brazilian economy pays a price in terms of productivity foregone because of its lack of trade openness.

As a big fan of trade, I obviously agree with this analysis.

But I also think that’s not the full story.

If you compare the scores the two countries get from the most-recent edition of Economic Freedom of the World, you’ll find that South Korea scores better on trade.

But you’ll also notice that there are much bigger gaps when looking at scores for size of government, legal system and property rights, and regulation (and the gaps for the latter two indices have existed for decades).

The bottom line is that there are many policy reasons why Brazil lags behind South Korea.

So if Brazil wants to break out of the “middle-income trap,” it needs to follow the tried-and-true recipe for growth and prosperity (what used to be known as the “Washington Consensus“).

P.S. And that means ignoring poisonous advice from the International Monetary Fund and Organization for Economic Cooperation and Development.

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Part I of this series featured Dan Hannan explaining how the emergence of capitalism led to mass prosperity, while Part II featured Madeline Grant explaining how competition and cooperation make markets so successful.

Today, in Part III, Andy Puzder compares capitalism with socialism.

The core theoretical argument in the video is that capitalism is based on serving the needs of consumers.

As captured by one of my favorite quotes from Professor Walter Williams, you only make yourself better off in a free market system by serving others.

In a socialist system, by contrast, the only people who get rich are the government elites who plunder the people.

I also like that the video explains that Nordic nations are not socialist. As I’ve also pointed out, there’s no government ownershipcentral planning, and price controls in nations such as Sweden and Denmark.

Those countries do have higher tax burdens and more costly welfare states, which is the main reason they generally rank below the United States in measures of national economic liberty.

More important, the larger fiscal burden in Scandinavia help to explain why Americans enjoy higher living standards.

Indeed, my one complaint about the above video is that it didn’t show any of the data about relative levels of prosperity.

Yes, I want people to understand that Nordic nations have market-based economies, but I also want them to understand that those countries could be significantly more prosperous with less-onerous fiscal policy.

The most powerful data in that regards comes from a Swedish researcher who put together data showing that Americans of Scandinavian descent are much richer than their counterparts who are still in Scandinavia.

So the moral of the story is not only that capitalism is better than socialism, but also that capitalist nations with medium-sized governments do better than capitalist nations with large-sized governments.

P.S. Needless to say, capitalist jurisdictions with small-sized government do best of all.

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Yesterday, in Part I of this series, we enjoyed a video from the U.K.-based Centre for Economic Education, about how capitalism lifted the world from deprivation and oppression (also see videos by Don Boudreaux and Deirdre McCloskey).

Today, in Part II of the Case for Capitalism, here’s a video from CEE that explains how markets provide you a cup of coffee.

An obvious takeaway from the video is that consumers benefit from global markets, which hopefully helps to explain why free trade is desirable.

But there are four other messages that are even more widely applicable.

  1. Capitalism is based on competition, but also should be understood as a system of cooperation.
  2. Voluntary exchange means that both buyers and sellers expect to benefit from a transaction.
  3. Prices should be set by unfettered markets rather than politicians, regulators, or bureaucrats.
  4. Our prosperity is a result of the invisible hand (spontaneous order) rather than central planning.

In other words, the growth-producing concept of classical liberalism (as opposed to the statist version of liberalism that now exists in the United States).

All of which reminds me of this observation by Joseph Schumpeter, an influential economist from the Austrian School.

This quote isn’t as famous as what he said about creative destruction, but it deserves to be highlighted since it succinctly explains how capitalism is the system that delivers big benefits for ordinary people.

P.S. The degree to which nations enjoy convergence (or divergence) is generally a consequence of whether they allow free markets and limited government.

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This video from Dan Hannan crams 10,000 years of human history into 5 minutes. We learn about the “stationary bandit” of government and find out how our ancestors endured pervasive oppression and misery.

But there’s a happy ending to the story. It’s called capitalism.

There are many useful insights in this video.

We learn why it was important to replace arbitrary government with the “rule of law” so that property rights could be protected and so that people wanting to buy and sell no longer had to get permission from the state.

And once capitalism was unleashed beginning a few hundred years ago, living standards dramatically improved (these videos by Don Boudreaux and Deirdre McCloskey have lots of evidence).

Hannan makes the all-important point that capitalism is the opposite of exploitation. It enriches people, but also liberates them.

And, as indicated by one of my favorite quotes from Walter Williams, it means we help ourselves by helping others.

As Hannan concludes, “the free market is the fairest and justest model yet devised.”

P.S. Not everyone has the same definition of fair and just, so I’ll simply observe that market-oriented nations always and easily out-perform state-controlled economies.

For what it’s worth, nobody on the left has ever come up with a response to my never-answered question.

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I periodically share tweets that have some sort of remarkable feature, either good or bad.

Clever counter-tweets are especially appreciated. I even started giving recognition to the most brutally effective response each year.

But I may have been too quick to assign a winner for this year.

That’s because a Twitter account called @architecturpic published this tweet yesterday.

While it’s accurate to point out that highway exits don’t produce scenic architecture, is this an indictment of capitalism?

Not if you compare it to the slums of socialism, which is the message in this devastating response from @BrentCochran1.

Ouch. As the announcers might say at a tennis tournament, “game, set, and match for Brent Cochran.”

Suffice to say that there will have to be co-winners for the best counter-tweet of 2020.

By the way, it’s normally quite easy to find both nice and ugly architecture in any nation.

So to add a bit of hard data to today’s column, I’ll simply note that the average poor American has more spacious housing than the average middle-class person in Europe.

That doesn’t mean the housing will be architecturally significant, but it does indicate that people are better off in countries with smaller government and more economic liberty (indeed, it’s also worth noting that the average poor American enjoys higher overall living standards than middle-class folks in most other industrialized nations).

Which is why any tweet comparing socialism and capitalism has a foregone conclusion.

P.S. At some point, I’ll probably set up a special page for “Remarkable Tweets.” But since that hasn’t yet happened, here are the other tweets that I found to be noteworthy.

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I don’t know whether I’ll live 3 more years or 30 more years.

But I’m increasingly convinced that my “Never-Answered Question” will still be unanswered when I kick the bucket.

One of the reasons for my confidence is that folks on the left have remarkably shoddy arguments on economic issues.

For instance, in a column for the New York Times, Mehrsa Baradaran condemns the “neoliberal” revolution in the United States.

A law professor from the University of California, Irvine, Ms. Baradaran is unhappy that this modern version of classical liberalism resulted in more economic freedom.

…an ideological coup quietly transformed our society over the last 50 years… The roots of this intellectual takeover can be traced to a backlash against socialism… Austrian School economist Friedrich A. Hayek was perhaps the most influential leader of that movement, decrying governments who chased “the mirage of social justice.” Only free markets can allocate resources fairly and reward individuals based on what they deserve, reasoned Hayek. The ideology — known as neoliberalism — …leapt from economics departments into American politics in the 1960s, where it fused with conservative anti-communist ideas and then quickly spread throughout universities, law schools, legislatures and courts. By the 1980s, neoliberalism was triumphant in policy, leading to tax cuts, deregulation and privatization.

Since I’m a big fan of Prof. Hayek, I like this part of Professor Baradaran’s column.

And it is true that the United States became more “neoliberal” during the Reagan and Clinton years (though it’s definitely a huge exaggeration to think that pro-market ideas were dominant in “universities, law schools, legislatures and courts”).

Indeed, the entire world moved in the direction of free markets during the last two decades of the 20th century, thanks is part to the “Washington Consensus” for more economic liberty.

Ms. Baradaran, however, does not approve of these developments.

And she specifically doesn’t like some of the folks on Wall Street.

The private equity industry embodies the neoliberal movement’s values, while exposing its inherent logic. Private equity firms use money provided by institutional investors like pension funds and university endowments to take over and restructure companies or industries. …In the last decade, private equity management has led to approximately 1.3 million job losses due to retail bankruptcies and liquidation.

I have no idea whether there’s any validity to the specific estimate of 1.3 million job losses as a result of private equity investors over the past 10 years (an average of 130,000 jobs per year).

But it certainly is true that lots of jobs are lost every year as a result of “creative destruction.” Indeed, 130,000 jobs are just a tiny fraction of the total losses.

Here’s a chart taken directly from the Bureau of Labor Statistics showing that more than 10 million jobs are lost – on average – every single year.

That’s the bad news.

The good news is that average job gains have been even higher over the past decade, averaging more than 12 million per year.

Call me crazy, but this seems like a ringing endorsement of “neoliberalism.” Especially when you consider that Americans enjoy much higher living standards than their counterparts in European nations with bigger burdens of government.

There are two additional excerpts from her column that merit some attention.

First, she regurgitates the myth that the 2008 financial crisis was caused by free markets and deregulation.

An examination of the recent history of private equity disproves the neoliberal myth that profit incentives produce the best outcomes for society. …Faith in market magic was so entrenched that even the 2008 financial crisis did not fully expose the myth: We witnessed the federal government pick up all the risks that markets could not manage and Congress and the Federal Reserve save the banking sector ostensibly on behalf of the people. Neoliberal deregulation was premised on the theory that the invisible hand of the market would discipline risky banks without the need for government oversight.

At the risk of understatement, the Federal Reserve, along with Fannie Mae and Freddie Mac, deserve the lion’s share of the blame.

Also, she closes her column by embracing genuine socialism (i.e., government owning and operating parts of the economy).

Federal or state agencies can provide essential services like banking, health care, internet access, transportation and housing at cost through a public option. …we can move beyond the myths of neoliberalism…we should choose flourishing communities over profits.

At the risk of understatement, I don’t want more of our economy to be like the Post Office or DMV. I prefer private businesses, which face pressure to please consumers, rather than government-run businesses, which care mostly about pleasing politicians.

And I also think Ms. Baradaran needs a lesson from Walter Williams so she learns that profits make flourishing communities possible.

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When writing yesterday’s column about new competitiveness rankings from the IMD business school in Switzerland, I noticed that I have not yet written about this year’s edition of the Index of Economic Freedom.

Time to rectify that oversight.

We’ll start with a look at the nations with the most economic freedom. Interestingly, Singapore has now displaced Hong Kong as the world’s most market-friendly jurisdiction (because Hong Kong’s score declined, not because Singapore’s score increased), with New Zealand, Australia, and Switzerland rounding out the top 5.

The United States, meanwhile, isn’t even in the top 10. Instead, America dropped from #12 last year to #17 this year.

The decline is partly due to a lower score (with Trump’s protectionist policies deserving the biggest share of the blame), but mostly caused by better scores from nations such as Chile, Georgia, Estonia, and Lithuania.

What may shock people, though, is that even supposedly socialist Denmark (score of 78.3) ranks above the United States (score of 76.6). Here’s a look at U.S. and Danish scores from 1995-present.

Regular readers already know that Denmark is not a socialist nation. Indeed, it’s never been socialist. By world standards, there’s basically no history of government ownershipcentral planning, or price controls.

The most accurate way of describing Denmark is that it combines laissez-faire economics with tax-and-spend redistributionism.

Since this is a common approach among nations in that part of the world, some people even refer to this set of economic policies as the Nordic model.

So how does this approach compare to policy in the United States? The short answer, as illustrated by this table, is that America generally does better on fiscal policy, but gets lower scores when looking at almost every other type of policy.

The great irony of all this is that Bernie Sanders wants the U.S. to be more like Denmark, but he only says that because he doesn’t realize it would mean reducing the negative impact of government.

P.S. While Denmark has some awful fiscal policies (the tax burden is terrible), there are some bright spots. It has done a good job in recent years of restraining the growth of government, and it also has a partially private retirement system.

P.P.S. Not that any of these will be a surprise, but the three lowest-ranked nations in the Index of Economic Freedom are Cuba (26.9), Venezuela (25.2), and North Korea (4.2).

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I have applauded the incredible economic success of Hong Kong, which has long been ranked as the world’s most economically free jurisdiction.

Well, given China’s recent decision to impose more controls on Hong Kong, I want to share this interview I did last October.

At the risk of patting myself on the back, I think everything I said still applies.

Especially when compared to what some others are saying. Writing for Bloomberg last October, Shirley Zhao and Bruce Einhorn seemingly want readers to think that low tax rates somehow are the cause of Hong Kong’s challenges.

Hong Kong has remained the world’s freest economy, thanks partly to low taxes and the rule of law. But widening inequality has also fueled the worst unrest the city has seen since the former British colony returned to China in 1997. …The combined net worth of the territory’s 20 richest people…is pegged at $210 billion… the city’s income inequality, as expressed in Gini coefficient, was the most for any developed economy in 2016… About 1 in 5 residents lives below the poverty line. …Lam is under pressure to soothe tensions and find ways to ease the housing crisis in the least-affordable market without rocking a tax regime that made Hong Kong Asia’s financial hub.

I disagree with much of their analysis.

As I noted in the interview, the problem with housing is caused by government ownership of land.

Moreover, I can’t resist pointing out that the assertion about 20 percent of the population living in poverty has been shown to be utter nonsense. That figure comes from “poverty hucksters” who deliberately conflate inequality with poverty (an example of the “Eighth Theorem of Government“).

And, speaking of inequality, Hong Kong historically has been a great place to be poor for the simple reason that it’s a great place to climb out of poverty.

Or, to be more precise, it’s been a great place to climb out of poverty. Whether that will still be true in the future depends on China.

I have no idea what Beijing will do, but I explained in the interview that it would be good for everyone if China took a hands-off approach to Hong Kong.

Why? This chart, based on the Maddison database, shows that Hong Kong’s rapid growth rate has slowed ever since Hong Kong was transferred from British rule to Chinese rule. Since China has wisely not interfered with Hong Kong’s pro-growth economic policy, the most logical explanation for the slowdown is that entrepreneurs and investors are worried about what may happen in the future.

Needless to say, the best way to rejuvenate rapid growth is for Beijing to somehow display a commitment to economic liberty in Hong Kong (consistent with the one-country-two-systems approach).

P.S. As I warned in the interview, the United States should not goad China into any sort of crackdown, either political or economic.

P.P.S. The best-case scenario is a Singapore-style evolution in China, meaning sweeping economic liberalization and gradual political liberalization.

P.P.P.S. The worst-case scenario is backsliding by China on previous economic liberalization, combined with unfriendly relations with the western world.

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The current crisis teaches us that excessive regulation and bureaucratic sloth can have deadly consequences.

Here’s John Stossel’s video with another lesson, explaining that we need more capitalism rather than more government.

This seems like a no-brainer, especially given the wretched economic performance of countries where the government owns or controls the means of production.

But not everyone agrees. The appropriately named Paris Marx wants government to have more power, making the case for nationalization of Amazon in an article for Jacobin.

The government needs to…respond to the needs of people across the country as the pandemic situation deteriorates. The response should be to nationalize Amazon and integrate it with the USPS. …Nationalizing the company would also allow Amazon workers to get covered by the same union as postal workers… Amazon isn’t just an online e-commerce marketplace. …Amazon Web Services (AWS) is a cloud computing platform…the cloud should be placed under public ownership. Taking control of AWS would allow the government to…ensure the cloud platform is serving the public good… We have a rare opportunity to fundamentally alter the economy to serve the needs of people instead of private profit, and it’s time to seize it.

Call me crazy, but if the government takes over Amazon and merges it with the Postal Service, I’m guessing that what emerges will have the inefficiency of the latter rather than the nimbleness of the former.

Just imagine a giant Department of Motor Vehicles (or, on a related note, the government’s track record on teaching kids to drive).

Which is why the U.K.-based Economist warned back in 2017 about the dangers of government-run companies.

Expanded state ownership is a poor way to cure economic ailments. For much of the 20th century, economists were open to a bit of dirigisme. …But in the 1970s economists came to see state ownership as a costly fix to such problems. Owners of private firms benefit directly when innovation reduces costs and boosts profits; bureaucrats usually lack such a clear financial incentive to improve performance. Firms with the backing of the state are less vulnerable to competition; as they lumber on they hoard resources that could be better used elsewhere. …economists saw in the productivity slowdown of the 1970s evidence that an overreaching state was throttling economic dynamism. …State-owned firms pose risks beyond that to dynamism. Government-run companies may prioritise swollen payrolls over customer satisfaction. More worryingly, state firms can become vehicles for corruption, used to dole out the largesse of the state to favoured backers or to funnel social wealth into the pockets of the powerful. As state control over the economy grows, political connections become a surer route to business success than entrepreneurialism.

The good news is that very few politicians are supporting explicit nationalization.

The bad news is that there’s plenty of support for intermediate steps involving cronyism, industrial policy, and various types of direct and indirect subsidies.

Including in the legislation recently approved in Washington (not that anyone should be surprised).

Professor Amit Seru from Stanford and Professor Luigi Zingales from the University of Chicago warn, in a column for the Wall Street Journal, that the U.S. has take a dangerous step on the road to central planning.

The need to help individuals and small firms has provided cover to the largest corporate subsidy program in U.S. history. Under intense pressure from lobbyists, the Cares Act allocates $510 billion to support loans for large businesses. A small chunk of this money ($56 billion) will be used directly by the Treasury to grant loans to airlines and other “strategic” firms (read: Boeing). The Treasury will then confer the rest ($454 billion) to the Federal Reserve to absorb losses the Fed might incur in lending to firms in the private sector. The expectation is that the central bank will leverage this money… This is the largest step toward a centrally planned economy the U.S. has ever taken. And it socializes only losses. Profits, when they come, remain private. …The urgency of the moment facilitated a giveaway to vested interests. Now that the Cares Act is law, policy makers need to find ways to impose restrictions on how the money is deployed. It isn’t only a question of fiscal prudence; the nature of American capitalism is at stake.

In other words, the U.S. is moving in the wrong direction on my “Industrial Policy Spectrum.”

The key unanswered question is whether the government’s new powers will be temporary or permanent.

There’s a legitimate argument for some form of intervention while the crisis in ongoing. But what happens once things go back to normal? Will politicians allow the “creative destruction” of capitalism, or will they use their expanded power to permanently interfere with market forces?

If they choose the latter, there will be less long-run prosperity.

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Five days ago, I wrote “Coronavirus and Big Government” to highlight how sloth-like bureaucracy and stifling red tape deserve much of the blame for America’s slow response to the crisis.

And I started that column by sharing four points from a previous column on “Government, Coronavirus, and Libertarianism.” I’ll start today’s column by repeating the final observation.

4. The federal government has hindered an effective response to the coronavirus.

Here’s a video from John Stossel documenting the federal government’s clumsy incompetence.

And here are a bunch of stories and tweets that provide additional elaboration.

Feel free to click on the underlying stories if you want to get even angrier about the deadly impact of big government.

The silver lining to all the bad news is that politicians and bureaucrats have been relaxing regulatory barriers.

But will they learn the right lesson and permanently repeal government-created barriers that hinder the provision of health care?

Is it true, as Robert Tracinski wrote for the Bulwark, that “We’re All Libertarians now”?

This talking point has since been taken up by others in a more technically accurate form: there are no libertarians in a pandemic. The idea is that when a crisis hits, everyone suddenly realizes how much they need Big Government. This is a bizarre argument to make about a virus that got a foothold partly because of the corrupt and tyrannical policies of a communist government in China. The outbreak is currently at its worst in Italy, where socialized medicine has not turned out to be a panacea. And it was allowed to get out of control in America because the feds imposed an incompetent government monopoly on COVID-19 testing, blocking the use of better and faster tests developed by private companies. …There has been a surge of emergency deregulation to lift artificial barriers that prevent people from solving problems. …the loosening of federal controls on the private development of diagnostic testing, after the disastrous attempt to centralize it all at the CDC. We’re also seeing the suspension of restrictive licensing requirements on doctors and nurses to allow them to work across state lines, so they can go where the shortages are worst. There has also been a whole series of waivers on restrictions on the transportation and serving of food and beverages in order to help restaurants stay in business and feed their customers by offering curb-side service.

Needless to say, I hope Tracinski is right.

But I worry that the net result of this crisis is that we’ll have more red tape and the CDC and FDA will have bigger budgets.

If you think I’m being too pessimistic, just remember that the Department of Veterans Affairs was rewarded with more money after letting veterans die on secret waiting lists, the IRS was rewarded with more money after persecuting Tea Party groups to help Obama’s political prospects, and the education monopoly endlessly gets rewarded with more money even though student outcomes stagnate or deteriorate.

All as predicted by the First Theorem of Government.

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