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Archive for the ‘Free Markets’ Category

Back in 2014, I shared two videos – one narrated by Deirdre McCloskey and the other narrated by Don Boudreaux – explaining how the world went from near-universal poverty to mass prosperity (at least in the nations that embraced free markets and the rule of law).

Here’s a video with a similar theme, narrated by Dan Hannan, a British member of the European Parliament (hopefully not for long).

I like this video because it goes back 10,000 years to the invention of agriculture.

Hannan explains how this led to the creation of governments, basically acting as “stationary bandits.”

And for thousands of years, a tiny elite of kings and nobles basically acted as dictators while 99 percent of people endured horrid lives of slavery, oppression, poverty, and misery.

But then, as Hannan discusses (and also explained in the McCloskey and Bourdreaux videos), arbitrary power eventually was replaced by the rule of law and government control was replaced by economic liberty.

Not completely, of course, but to a sufficient degree that there was enough “breathing room” for a private economy to develop. And, in some cases, to flourish.

The result? Massive, amazing, and unthinkable prosperity for ordinary people.

Which gives me a good excuse to share this quote from Joseph Schumpeter, one of the economists from the Austrian School.

Yes, capitalism does wonderful things…assuming politicians don’t get too greedy and saddle us with “goldfish government.”

At times, I’m not overly optimistic. Given the growth of dependency, the expansion of government, and demographic decline, I fear there may be 22nd-century videos discussing how the United States reached a “tipping point” and went downhill.

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I’ve applauded China’s economic progress.

It’s economic liberty score jumped from 3.64 in 1980 to 6.46 in the most recent edition of Economic Freedom of the World.

That shift toward markets (which started in a village) helped to dramatically reduce poverty and turn China into a middle-income nation.

That’s the good news.

The bad news is that most of China’s economic liberalization (from 3.64 to 6.15) occurred between 1980 and 2003.

Since that time, China’s score has improved at a glacial pace. Moreover, because other nations have been more aggressive about reducing the burden of government, China’s relative ranking has actually dropped (from #88 to #107) since 2003.

Which is why I’ve warned that China needs another burst of pro-market reform if it wants to become a rich country.

Regarding this issue, the Wall Street Journal has a very interesting report about how China is under-performing.

The country’s state-led growth model is running out of gas. A recession or crisis may not be imminent, but the long-run implications are just as serious. Absent a change in direction, China may never become rich. …First, official statistics probably paint too flattering a picture. Per-capita income may be a quarter lower than reported, based on a study of nighttime light co-authored by Yingyao Hu of Johns Hopkins University. …Second, it doesn’t measure up to the economies China seeks to emulate. Taiwan, South Korea and Japan all opened their economies to global trade and investment, enjoyed superfast growth for several decades… In fact, China seems to be slowing sooner than the others.

Why is China underperforming?

Too much statism. Simply stated, the government has too much control over the allocation of labor and capital.

For 30 years the Communist Party opened ever more of the economy to private enterprise, trade, foreign investment and market forces. Yet it never relinquished its commitment to socialism and Mr. Brandt says that since the mid-2000s the government has tightened control over sectors… An inefficient state sector matters less if the private sector grows fast enough. But in recent years, private firms in China have faced multiple headwinds. State-controlled banks prefer to lend to state-owned enterprises… The domestic private sector’s share of total sales has dropped about 5 percentage points since 2016, according to Goldman, while the state sector’s share has risen roughly as much.

By the way, many observers (from the American Enterprise Institute, Peterson Institute for International Economics, the New York Times, the New York Post, and Investor’s Business Daily) echo the concern about China becoming more statist in recent years.

I’ll make a more restrained point.

I’ll start by sharing this very interesting chart from the WSJ story. It shows how China’s growth, while impressive, has not been as rapid as the growth enjoyed by other Asian economies.

If you look below, you’ll see I’ve now augmented the chart to explain why China has under-performed.

On the right side, I’ve added the historical rankings from Economic Freedom of the World. As you can see (and just as theory and evidence teaches us), the other nations on the chart enjoyed more growth because they had more economic freedom.

These numbers reinforce my argument that China needs more pro-market reform. Though I should add the caveat that EFW has added more nations over time, so this comparison overstates the degree to which China is lagging.

But it is lagging. The bottom line is that China needs to copy Hong Kong and Singapore if it wants to become a rich nation. Or even Taiwan, which is an under-appreciated success story.

P.S. Keep in mind that China also faces demographic decline, which makes good policy even more necessary and important.

P.P.S. Amazingly, both the OECD and IMF are trying to sabotage China’s economy.

P.P.P.S. The WSJ story is an example of good reporting. If you want an example of bad reporting about China, check out this bizarre story from the New York Times.

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The candidates for the 2020 Democratic nomination are competing to offer the most statist agenda, with Crazy Bernie, Elizabeth Sanders, and Kamala Harris being obvious examples.

But let’s not overlook Mayor Pete Buttigieg. He has a moderate demeanor, but he’s been advocating hard-left policies.

And he justifies his class-warfare agenda by arguing against Reaganomics and claiming that incomes have been stagnant since the 1980s.

South Bend Mayor Pete Buttigieg, a 2020 Democratic presidential hopeful, said the governing philosophy of Republicans such as former President Ronald Reagan, who signed across-the-board tax rate cuts to grow the economy, should not be repeated in the future. “What we’ve seen is that the rising tide rose, right? GDP went up. Growth went up. Productivity went up — big numbers went up and most of our boats didn’t budge. For 90 percent of Americans, you start the clock right around the time I’m born. Income didn’t move at all — so lower to middle income, really, almost all of us,” Buttigieg said.

Is this true? Have Americans been on a treadmill?

We can easily answer that question because I was at “FEEcon” this past weekend, an annual conference organized by the Foundation for Economic Education.

There were plenty of great presentations (including, I hope, my remarks on the economics of protectionism).

I was most impressed, however, by Professor Antony Davies, who gave some upbeat remarks about living standards.

Here’s one of his slides, which shows some headlines that echo the pessimistic view of Mayor Pete.

But do those headlines reflect reality?

If we look at cash wages since 1979, it seems that there hasn’t been much growth.

But cash is only part of total compensation.

Professor Davies showed that total compensation is up by a significantly greater amount.

By the way, I don’t think this is unalloyed good news.

A big reason for the difference between cash income and total compensation is that we have an exclusion in the tax code that encourages the over-provision of fringe benefits (which, in turn, contributes to the third-party payer problem).

But I don’t want to digress too much. The key point is that workers have seen healthy increases in compensation, notwithstanding the fact that I wish it was more in the form of wages.

Now let’s look at some more headlines from Davies’ presentation.

According to many news sources, the middle class is in trouble.

Is that true?

Professor Davies goes back to 1970 and (after adjusting for inflation) shows the distribution of households in America by income.

And then he shares the same data for every five-year period since 1970 to show that the middle class has shrunk.

But it shrank because a greater share of the population became rich.

Let’s close with two more slides, both of which look at 100 years of data.

This chart shows take-home pay for three types of workers.

And, more importantly, here’s a chart showing how much those three workers could buy based on hours of work.

As you can see, even a minimum-wage worker is much better off today than an average worker 100 years ago (with the exception of movie tickets).

Since we just looked at long-run data, let’s close today’s column with some short-run numbers.

In a column for the U.K.-based Guardian, Michael Strain of the American Enterprise Institute explains that capitalism currently is delivering some very positive results for ordinary people.

This is a strange time to be debating whether capitalism is broken, at least in the United States. The economy has added jobs every month since October 2010 for a total of over 20m net new payroll jobs. The unemployment rate is below 4%, lower than it has been since 1969. Wage growth is finally accelerating, clocking in at a rate well above 3% a year for typical workers. The workforce participation rate for people ages 25 to 54 has increased by 1.6 percentage points since 2015, wiping out half a decade of decline. There are more job openings than unemployed workers in the US. …So much for a stagnant economy. …Since 2016, weekly earnings for the bottom 10% of full-time workers have grown more than 50% faster than for workers at the median. The unemployment rate for adults without a high school degree is further below its long-term average than the rate for college-educated workers.

By the way, I’m not trying to be a Pollyanna with rose-colored glasses.

We have numerous bad policies that are hindering prosperity. If we reduced the size and scope of Washington, we could enjoy even greater levels of prosperity.

But we shouldn’t make the perfect the enemy of the good. The United States is one of the world’s most market-oriented nations.

This tweet nicely captures the choice we face in the real world. We have “almost capitalism,” which has made the U.S. a rich nation.

Some politicians, such as Mayor Pete and Crazy Bernie, would prefer to move the nation toward “almost socialism.”

They don’t intend (I hope!) to go too far in that direction, but incremental moves in the wrong direction will cause incremental weakening of American prosperity.

And they’re dead wrong on the issue of income growth.

P.S. Many of the Democrats say we should copy the statist policies of various European nations. I wish a journalist would ask them why we should copy the policies of nations that have lower living standards.

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I wrote yesterday about the debate among leftists, which is partly a contest between Bernie Sanders-style socialists and Elizabeth Warren-style corporatists.

Now let’s look at the debate on the right.

There’s an ongoing argument over what it means to be conservative, especially when thinking about the role of the federal government.

You can view this debate – if you peruse this “political compass test” – as being a battle over whether it is best for conservatism to be represented by Friedrich Hayek or Angela Merkel? By Donald Trump or Gary Johnson?

As far as I’m concerned, it’s a debate between whether the right believes in the principles of small-state classical liberalism or whether it thinks government should have the power to steer society.

Representing the latter view, here’s some of what Henry Olsen wrote for the Washington Post.

…libertarian-minded opinion leaders have criticized Trump… For these people, Trump was…an apostate whose heresies had to be cast out of the conservative church. Trump’s overwhelming victory in the primaries should have shocked them out of their ideological slumber. …the market fundamentalists seem to see nothing— absolutely nothing — about today’s capitalism to dislike. …National Review’s founder, William F. Buckley, famously wrote that…the federal government’s proper peacetime duties are solely to “protect its citizens’ lives, liberty, and property.” With respect to its efforts to do anything else, “we are, without reservation, on the libertarian side.” But that dog don’t hunt politically. ..libertarian-conservatives remain oblivious or intentionally in denial… The New Deal’s intellectual core, that the federal government should vigorously act to correct market failures, remains at the center of what Americans expect from Washington. Trump’s nomination and election proved beyond a shadow of a doubt that even a majority of Republicans agree. Less doctrinaire conservative thinkers understand this. Ramesh Ponnuru noted in his National Review essay that…capitalism “require[s] invigoration” as a result. The American Enterprise Institute’s Yuval Levin goes further, noting that “sometimes our economic policy has to be determined by more than purely economic considerations.” Other factors, such as social order and family formation, are also worthy goals to which pure economic efficiency or growth must bend at times. …this debate is fundamental to the future of conservatism and perhaps of the United States itself.

And here’s the beginning of a history-filled article by Joshua Tait in the National Interest.

When FOX television host Tucker Carlson recently attacked conservative faith in free market economics, he probably surprised a number of his viewers. For too long, Carlson charged, libertarians and social conservatives have ignored the fundamental part economic structures play in undermining communities. Families are crushed beneath market forces. Disposable goods—fueled by consumer culture—provide little salve for drug addiction and suicide. Markets are a “tool,” Carlson said, not a “religion.” “You’d have to be a fool to worship” them. Carlson put a primetime spin on an argument that has been brewing for some time on the right. Just as the 2008 economic collapse and the national prominence of Bernie Sanders have begun to shift the Democratic Party’s stance toward socialism, so the long effects of the downturn and Trump’s election have caused a rethinking of conservative commitment to free markets.

Last but not least, Jonah Goldberg examines a slice of this divide in a column for National Review.

The idea holding together the conservative movement since the 1960s was called “fusionism.” The concept…was that freedom and virtue were inextricably linked. …Today, conservative forces concerned with freedom and virtue are pulling apart. The catalyst is a sprawling coalition of self-described nationalists, Catholic integralists, protectionists, economic planners, and others who are increasingly rallying around something called “post-liberal” conservativism. By “liberal,” they…mean classical liberalism, the Enlightenment worldview held by the Founding Fathers. What the post-liberals want is hard to summarize beyond generalities. They seek a federal government that cares more about pursuing the “highest good” than protecting the “libertarian” (their word) system of individual rights and free markets. …On the other side are…conservatives who…still rally to the banner of classical liberalism and its philosophy of natural rights and equality under the law. …this intellectual mudfight really is…about what conservatism will mean after Trump is gone from the scene. …the so-called post-liberals now want Washington to dictate how we should all pursue happiness, just so long as it’s from the right. …Where the post-liberals have a point is that humans are happiest in communities, families and institutions of faith. The solution to the culture wars is to allow more freedom for these “little platoons” of civil society… What America needs is less talk of national unity — from the left or the right — and more freedom to let people live the way they want to live, not just as individuals, but as members of local communities. We don’t need to move past liberalism, we need to return to it.

For what it’s worth, I prefer Jonah’s analysis.

But I’ll also make three additional points.

First, if we care about maximizing freedom and prosperity, there’s no substitute for classical liberalism.

In my lifetime, there have been various alternatives to free markets. There was pre-Reagan Rockefeller Republicanism, post-Reagan “kinder and gentler,” George W. Bush’s so-called compassionate conservatism, reform conservatism, and now various strains of Trumpism and populism.

It may very well be true that some of these alternatives are more politically palatable (though I’m skeptical given the GOP’s unparalleled electoral success with an anti-big government message in 1980, 1994, 2010, and 2014).

But even if some alternatives are more popular, the associated policies will hurt people in the long run. That’s a point I made when arguing for supply-side tax cuts over family-friendly tax cuts.

In other words, you demonstrate compassion by giving people opportunity to prosper, not by giving them other people’s money.

Second, there’s nothing about classical liberalism or capitalism that suggests people should be selfish and atomistic.

Indeed, I pointed out, starting at the 3:36 point of this interview, that a libertarian society is what allows family, neighborhood, and community to flourish.

And, as Jonah explained, the “platoons” of “civil society” are more likely to thrive in an environment where the central government is constrained.

My third and final point is that I’m pessimistic.

The debate on the left is basically about how to make government bigger and how fast that process should occur.

Unfortunately, there isn’t a similar debate on the right, featuring different theories of how to shrink the size and scope of government.

Instead, the Reaganite-oriented classical liberals are the only ones who want America to become more like Hong Kong, while all the competing approaches basically envision government getting bigger, albeit at a slower rate than preferred by folks on the left.

In other words, we’re in a political environment where everyone on the left is debating how quickly to become Mexico and many people on the right are debating how quickly to become France.

No wonder I’ve identified an escape option if America goes down the wrong path.

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I’m in Sydney, Australia, but not because I’m confirming that this country will be my escape option if (when?) the United States suffers a Greek-style fiscal collapse.

Instead, I’m Down Under for the annual Friedman Conference.

This gives me an excuse to write about Australia, especially since national elections just took place this past weekend. Interestingly, the incumbent, right-of-center government retained power in an upset, winning 77 or 78 seats (out of a possible 151).

Here’s the breakdown.

The folks at Slate lean to the left, so their article is understandably riddled with anguish.

Australia’s dysfunctional, unpopular, conservative government…held onto power for a third term in Saturday’s national election. This happened despite the fact that most analysts expected it to lose a large number of seats; despite being (seemingly) out of step with the nation’s emerging consensus on climate change.. A Labor Party win had been anticipated for three years, with the opposition winning every single poll of the last term. …Expected swings against the coalition in several regions of the country didn’t materialize, while there was a crucial 4 percent swing against Labor in the state of Queensland (alternately described as Australia’s Alabama or Florida). …Progressive Australians are—to understate things—“hurting,”…(only they’re threatening to move to New Zealand instead of Canada). …Labor’s environmental stance, while not actually all that bold, hurt it in coal-friendly Queensland and among voters worried about the costs of acting on climate change… Progressive Australians are reeling because any lingering illusions that we were a “fair” nation have been shattered. Whatever Labor’s political shortcomings, Australians in general voted against a detailed platform that aimed to seriously address climate change, raise wages, increase cancer funding, make child care free or significantly cheaper, close tax loopholes for corporations and the wealthy, fund the arts, fund the underfunded public broadcaster… Instead, they voted for … not much of anything (other than some tax cuts).

Since I’m a wonk, I’m much more interested in the policy implications rather than the political machinations.

The good news is that Labor’s defeat means Australia will be spared some costly tax increases and some expensive green intervention.

But it’s unclear whether there will be many pro-growth reforms.

The right-of-center Liberal-National Coalition has promised some tax relief, but I don’t know if it will be supply-side rate reductions or merely the distribution of favors using the tax code.

For what it’s worth, Australia needs to lower its top tax rate on households, which is nearly 50 percent. European-type tax rates are always a bad idea, and they are especially senseless for a country that has to compete with Hong Kong and Singapore.

It would also be nice if the newly reelected government chooses to fix some of the housing policies that have made Australian cities very unfriendly to families.

Joel Kotkin explains why this is a problem in an article for City Journal.

Few places on earth are better suited for middle-class prosperity than Australia. From early in its history, …the vast, resource-rich country has provided an ideal environment for upward mobility… Over the last decade, though, Australia’s luck has changed… Despite being highly dependent on resource sales to China—largely coal, gas, oil, and iron ore—Australia has embraced green domestic politics more associated with Manhattan liberals or Silicon Valley oligarchs than the prototypical unpretentious Aussie… Historically, the Australian Labor Party, like its counterpart in Britain, was a party of the working class. …These views seem almost quaint today, particularly for a Labor Party increasingly dominated by those operating outside the tangible economy, as part of the professional class—media, finance, public service—and concentrated in the largely family-free urban cores. …Australia’s commitment to renewable energy dwarfs that of even the most committed green-leaning countries. Per capita, Australia has installed roughly five times as many renewable-energy installations as the E.U., the U.S., or China, and even two-and-a-half times more than climate-obsessed Germany. …The most pernicious assault on Australia’s middle class comes from regulation of land and expenditures to promote urban density. …In Australia, only 0.3 percent of the country is urban. As in major cities in Great Britain, Australia, the U.S., and Canada, “smart growth” has helped turn Australia’s once-affordable cities into some of the world’s costliest. …Sydney’s planning regulations, according to a Reserve Bank study, add 55 percent to the price of a home. In Perth, Melbourne, and Brisbane, the impact exceeds $100,000 per house. Australian cities once filled with family-friendly neighborhoods are becoming dominated by dense apartments. …Today, many Australians face an uncharacteristically bleak future. Urged to settle where the planners and pundits prefer, they’re stuck in places both unaffordable and inhospitable, as part of a needless governmental drive to make life there more like that of the more congested, socially riven metropoles of Britain.

For all intents and purposes, I want Australian lawmakers to rekindle their reformist zeal.

If you look at the historical data from Economic Freedom of the World, you can see that Australia enjoyed a big jump in economic liberty between 1975-2000.

Basically climbing from 6 to 8 on a 0-10 scale.

Sadly, there hasn’t been much reform this century. That being said, Australia’s era of liberalization last century is still paying dividends. The country is routinely ranked in the top-10 for economic liberty.

Interestingly, many of the changes between 1975-2000 happened when the Labor Party was led by reformers such as Bob Hawke and Paul Keating.

Mr. Hawke, incidentally, just passed away. His obituary in the New York Times acknowledges that he liberalized the economy.

Bob Hawke, Australia’s hugely popular prime minister from 1983 to 1991, who presided over wrenching changes that integrated his nation into the global economy…, died on Thursday… Rising to power as a trade union leader, Mr. Hawke led his center-left Australian Labor Party to four consecutive election victories in a tenure of nearly nine years, in which Australia emerged dramatically from relative isolation… Confronting chronic strikes, soaring inflation, high unemployment and trade deficits, Mr. Hawke revolutionized the economy. He cut protective tariffs, privatized state-owned industries…reined in powerful unions… “We are now living in a tough, new competitive world in which we have got to make it on our own merits,” Mr. Hawke told The New York Times in 1985.

I’m irked, though, that the article doesn’t mention that Hawke (in power from 1983-91) began Australia’s system of personal retirement accounts.

That excellent reform, which was expanded by the Keating government (in power from 1991-96), is paying big dividends to Australia.

Indeed, let’s wrap up today’s column with some excerpts from a laudatory article in the Economist.

The last time Australia suffered a recession, the Soviet Union still existed and the worldwide web did not. …No other rich country has ever managed to grow so steadily for so long. …Public debt amounts to just 41% of GDP—one of the lowest levels in the rich world. That, in turn, is a function not just of Australia’s enviable record in terms of growth, but also of a history of shrewd policymaking. Nearly 30 years ago, the government of the day overhauled the pension system. Since then workers have been obliged to save for their retirement through private investment funds.

It’s noteworthy that the system of personal accounts, known as superannuation, manages to attract praise from unlikely quarters.

And it is one of the reasons for the country’s success. Here’s an accompanying chart showing that Australia has enjoyed more growth, higher wages, and less debt than other major nations.

Is Australian policy perfect? Of course not.

But does the data from Australia show that better policy leads to better results? Definitely.

P.S. The Aussies also reaped big benefits by unilaterally reducing trade barriers (it would be nice if a certain person residing at 1600 Pennsylvania Avenue learned from that experience).

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Just last month, I wrote about Argentina’s grim economic outlook and criticized the supposed right-of-center President, Mauricio Macri, for failing to deliver any meaningful economic liberalization.

And reform is desperately needed.

According to Economic Freedom of the World, Argentina is one of the most statist nations on the planet (the only nations that do worse are Libya and Venezuela).

For all intents and purposes, Argentina is suffering from decades of bad policy.

Argentina is a sobering example of how statist policies can turn a rich nation into a poor nation. …After World War II, Argentina was one of the world’s 10-richest nations. But then Juan Peron took power and initiated Argentina’s slide toward big government, which eroded the nation’s competitiveness and hampered growth.

To put it mildly, the country is an economic tragedy and it should be a lesson for all countries about the importance of good policy.

Yet why am I writing again about Argentina after last month’s analysis?

Because a story in the New York Times discusses the nation’s upcoming presidential election and manages to paint a grotesquely inaccurate picture of what’s been happening in the country. We’re supposed to believe that Macri has been a hard-charging free-market fundamentalist.

Since taking office more than three years ago, President Mauricio Macri has broken with the budget-busting populism that has dominated Argentina for much of the past century, embracing the grim arithmetic of economic orthodoxy. Mr. Macri has slashed subsidies… “It’s a neoliberal government…It’s a government that does not favor the people.” …tribulations playing out under the disintegrating roofs of the poor are a predictable dimension of Mr. Macri’s turn away from left-wing populism. He vowed to shrink Argentina’s monumental deficits by diminishing the largess of the state. …Mr. Macri’s…presidency was supposed to offer an escape from the wreckage of profligate spending.

And we’re also supposed to believe that his failed free-market policies are paving the way for a return to left-wing populism.

As the October election approaches, Mr. Macri is contending with the growing prospect of a challenge from the president he succeeded, Cristina Fernández de Kirchner… Her return would resonate as a rebuke of his market-oriented reforms while potentially yanking Argentina back to its accustomed preserve: left-wing populism.

For what it’s worth, I suspect that Kirchner will win the next election. So that part of the article is correct.

But the part about free-market reforms is laughably inaccurate.

You don’t have to believe me. Let’s look at the Argentinian data from Economic Freedom of the World. Maybe I’m being dogmatic, but I hardly think a tiny improvement in 2015 followed by backsliding in 2016 qualifies as “diminishing the largess of the state.”

The bottom line is that Macri should have been bold and made sweeping changes once he was in charge. Like Chile after Allende’s Marxist regime was deposed.

Those reforms doubtlessly would have triggered protests. But if they became law, they would have produced tangible results.

Instead, Macri chose a timid approach and the economy has remained stagnant. Yet because many voters think he adopted reforms, they blame him and they blame free markets.

The net result is that they will probably vote for Kirchner, which presumably will mean even more statism for the long-suffering people of Argentina.

P.S. What’s happening in Argentina is not an isolated example. It’s very common for supposed right-wing politicians to choose bad policies, which then paves the way for left-wing election victories. Look at how Bush’s statist policies created the conditions for an Obama victory. Or how Sarkozy set the stage for Hollande in France. Or how Theresa May’s fecklessness in the United Kingdom may lead to a win for Jeremy Corbyn.

P.P.S. I’m tempted to also warn that Trump’s risky protectionism may lead to a victory for Crazy Bernie or some other Democrat in 2020. But Trump does have some good policies as well, so it’s hard to know whether the economy will be a net plus or net minus in the election.

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Donald Trump is an incoherent mix of good policies and bad policies.

Some of his potential 2020 opponents, by contrast, are coherent but crazy.

And economic craziness exists in other nations as well.

In a column for the New York Times, Jochen Bittner writes about how a rising star of Germany’s Social Democrat Party wants the type of socialism that made the former East Germany an economic failure.

Socialism, the idea that workers’ needs are best met by the collectivization of the means of production… A system in which factories, banks and even housing were nationalized required a planned economy, as a substitute for capitalist competition. Central planning, however, proved unable to meet people’s individual demands… Eventually, the entire system collapsed; as it did everywhere else, socialism in Germany failed. Which is why it is strange, in 2019, to see socialism coming back into German mainstream politics.

But this real-world evidence doesn’t matter for some Germans.

Kevin Kühnert, the leader of the Social Democrats’ youth organization and one of his party’s most promising young talents, has made it his calling card. Forget the wannabe socialism of American Democrats like Bernie Sanders or Alexandria Ocasio-Cortez. The 29-year-old Mr. Kühnert is aiming for the real thing. Socialism, he says, means democratic control over the economy. He wants to replace capitalism… German neo-socialism is profoundly different from capitalism. …Mr. Kühnert took specific aim at the American dream as a model for individual achievement. …“Without collectivization of one form or another it is unthinkable to overcome capitalism,” he told us.

In other words, he wants real socialism (i.e., government ownership). And that presumably means he also supports central planning and price controls.

What makes Kühnert’s view so absurd is that he obviously knows nothing about his nation’s history.

Just in case he reads this, let’s look at the evidence.

Jaap Sleifer’s book, Planning Ahead and Falling Behind, points out that the eastern part of Germany was actually richer than the western part prior to World War II.

The entire country’s economy was then destroyed by the war.

What happened afterwards, though, shows the difference between socialism and free enterprise.

Before…the Third Reich the East German economy had…per capita national income…103 percent of West Germany, compared to a mere 31 percent in 1991. …Here is the case of an economy that was relatively wealthy, but lost out in a relatively short time… Based on the official statistics on national product the East German growth rates were very impressive. However, …the actual performance was not that impressive at all.

Sleifer has two tables that are worth sharing.

First, nobody should be surprised to discover that communist authorities released garbage numbers that ostensibly showed faster growth.

What’s really depressing is that there were more than a few gullible Americans – including some economists – who blindly believe this nonsensical data.

Second, I like this table because it confirms that Nazism and communism are very similar from an economic perspective.

Though I guess we should give Germans credit for doing a decent job on product quality under both strains of socialism.

For those who want to read further about East German economic performance, you can find other scholarly articles here, here, and here.

I want to call special attention, though, to a column by an economist from India. Written back in 1960, even before there was a Berlin Wall, he compared the two halves of the city.

Here’s the situation in the capitalist part.

The contrast between the two Berlins cannot miss the attention of a school child. West Berlin, though an island within East Germany, is an integral part of West German economy and shares the latter’s prosperity. Destruction through bombing was impartial to the two parts of the city. Rebuilding is virtually complete in West Berlin. …The main thoroughfares of West Berlin are near jammed with prosperous looking automobile traffic, the German make of cars, big and small, being much in evidence. …The departmental stores in West Berlin are cramming with wearing apparel, other personal effects and a multiplicity of household equipment, temptingly displayed.

Here’s what he saw in the communist part.

…In East Berlin a good part of the destruction still remains; twisted iron, broken walls and heaped up rubble are common enough sights. The new structures, especially the pre-fabricated workers’ tenements, look drab. …automobiles, generally old and small cars, are in much smaller numbers than in West Berlin. …shops in East Berlin exhibit cheap articles in indifferent wrappers or containers and the prices for comparable items, despite the poor quality, are noticeably higher than in West Berlin. …Visiting East Berlin gives the impression of visiting a prison camp.

The lessons, he explained, should be quite obvious.

…the contrast of the two Berlins…the main explanation lies in the divergent political systems. The people being the same, there is no difference in talent, technological skill and aspirations of the residents of the two parts of the city. In West Berlin efforts are spontaneous and self-directed by free men, under the urge to go ahead. In East Berlin effort is centrally directed by Communist planners… The contrast in prosperity is convincing proof of the superiority of the forces of freedom over centralised planning.

Back in 2011, I shared a video highlighting the role of Ludwig Erhard in freeing the West German economy. Given today’s topic here’s an encore presentation.

Samuel Gregg, writing for FEE, elaborates about the market-driven causes of the post-war German economic miracle.

It wasn’t just Ludwig Erhard.

Seventy years ago this month, a small group of economists and legal scholars helped bring about what’s now widely known as the Wirtschaftswunder, the “German economic miracle.” Even among many Germans, names like Walter Eucken, Wilhelm Röpke, and Franz Böhm are unfamiliar today. But it’s largely thanks to their relentless advocacy of market liberalization in 1948 that what was then West Germany escaped an economic abyss… It was a rare instance of free-market intellectuals’ playing a decisive role in liberating an economy from decades of interventionist and collectivist policies.

As was mentioned in the video, the American occupiers were not on the right side.

Indeed, they exacerbated West Germany’s economic problems.

…reform was going to be easy: in 1945, few Germans were amenable to the free market. The Social Democratic Party emerged from the catacombs wanting more top-down economic planning, not less. …Further complicating matters was the fact that the military authorities in the Western-occupied zones in Germany, with many Keynesians in their contingent, admired the economic policies of Clement Atlee’s Labour government in Britain. Indeed, between 1945 and 1947, the Allied administrators left largely in place the partly collectivized, state-oriented economy put in place by the defeated Nazis. This included price-controls, widespread rationing… The result was widespread food shortages and soaring malnutrition levels.

But at least there was a happy ending.

Erhard’s June 1948 reforms…abolition of price-controls and the replacement of the Nazi-era Reichsmark with much smaller quantities of a new currency: the Deutsche Mark. These measures effectively killed off…inflation… Within six months, industrial production had increased by an incredible 50 percent. Real incomes started growing.

And Germany never looked back. Even today, it’s a reasonably market-oriented nation.

I’ll close with my modest contribution to the debate. Based on data from the OECD and Wikipedia, here’s a look at comparative economic output in East Germany and West Germany.

You’ll notice that I added some dotted lines to illustrate that both nations presumably started at the same very low level after WWII ended.

I’ll also assert that the blue line probably exaggerates East German economic output. If you doubt that claim, check out this 1990 story from the New York Times.

The bottom line is that the economic conditions in West Germany and East Germany diverged dramatically because one had good policy (West Germany routinely scored in the top 10 for economic liberty between 1950 and 1975) and one suffered from socialism.

These numbers should be very compelling since traditional economic theory holds that incomes in countries should converge. In the real world, however, that only happens if governments don’t create too many obstacles to prosperity.

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I’ve repeatedly dealt with the argument over Denmark’s supposed socialism.

My core argument is that Denmark is very bad on fiscal policy, but very laissez-faire on other issues such as regulation. The net effect is that Danes have about the same amount of economic liberty as Americans.

The bottom line is that Denmark isn’t socialist. At least not if we use the technical definition. There’s plenty of bad policy, but no government ownership, no central planning, and no price controls.

Which is basically the message in this Prager University video by Otto Brøns-Petersen from the CEPOS think tank in Denmark.

This is a great video.

Basically everything you need to know about Danish economic policy.

To augment Otto’s video, let’s review a report from some of his CEPOS colleagues.

The entire report is worth reading, but I want to focus on one excerpt and some key visuals.

First, notice that Denmark and the United States have similar levels of economic freedom.

Since I’m a public finance economist, I was very interested in some observations in the report about fiscal policy.

This excerpt notes that Denmark has a much more onerous tax burden, and it points out that the value-added tax is the main reason for the gap.

…the tax burden (taxes to GDP) is the second-highest in the OECD and 70 percent higher than in the US (46 vs. 27 per cent of GDP). …The biggest difference between the Danish and the American tax systems is that consumption taxes are much higher in Denmark. VAT is 25 per cent in Denmark while the average sales tax is 6 per cent in the US. …Including the effect of consumption taxes, the top marginal tax rate on labor income is 67 per cent in Denmark. For low and middle-income workers, it is 55 per cent. This is significantly higher than in the USA. It’s important to include consumption taxes when you calculate the effective marginal tax rate. High consumption taxes means that you can buy fewer goods for one extra working hour.

My first takeaway is that this explains why blocking the VAT is absolutely necessary for advocates of limited government in the United States.

And the second takeaway is that big government means big burdens on lower-income and middle-class taxpayers, which is what we seen in this next chart.

Last but not least, here are two charts comparing taxes and labor supply in the United States and Denmark.

In the tax chart, you can see that the two countries were very similar from the 1930s to the 1960s. But then the tax burden in Denmark got much worse (coinciding with the imposition of the VAT).

Now take a look at hours worked in both nations.

We were very similar back in 1970. But as the Danish tax burden grew, people responded by working less and less.

In other words, more evidence to support the core insight of supply-side economics. The more you tax of something, the less you get of it.

The Philoso-raptor surely would agree.

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Singapore is routinely ranked as the world’s 2nd-freest economy, trailing only Hong Kong.

The nation’s laissez-faire approach has yielded big dividends. Singapore is now über prosperous, richer than both the United States and United Kingdom.

But there are problems in paradise.

Advocates of class-warfare policy (see here and here) are urging higher tax burdens. And even though there’s no reason to raise taxes (Singapore has a huge budget surplus), politicians have catered to this noisy clique in recent years (see here and here).

In a column for the Straits Times that I co-wrote with Donovan Choy of Singapore’s Adam Smith Centre, we explain why the government should slam the door on all tax hikes, especially proposals targeting entrepreneurs and investors.

Singapore has shown that conventional theories about economic growth need to be updated to reflect that growth doesn’t necessarily need to weaken once a nation becomes prosperous. Singaporeans should be thankful for the sensible governance that has made the nation a role model. Unfortunately, some people are willing to threaten the country’s prosperity by urging higher tax burdens on the wealthy. They risk national competitiveness by advocating additional layers of tax on income that is saved and invested. This “class warfare” approach is deeply misguided, especially in a globalised economy.

We list six specific guidelines for sensible policy.

Two of them are worth highlighting, starting with the fact that Singapore so far has avoided the trap of “Wagner’s Law.”

What makes Singapore special is that it avoided the mistakes other nations made when they became rich. Countries in North America and Western Europe created costly welfare states once they became relatively prosperous. This is known to academics as Wagner’s Law, and it has serious consequences since larger public sectors reduce competitiveness and lead to less growth.

We also explain that discriminatory taxes on saving and investment are the most destructive method of collecting revenue.

Proponents assert that dividend and capital gains taxes are needed so that upper-income people pay tax. But this line of thinking is misguided. Such income is already subject to 17 per cent corporate income taxation in Singapore. Imposing dividend and capital gains taxes would mean such income is subject to increasing layers of discriminatory taxation. The result is to discourage capital formation (savings and investment) – the very essence of entrepreneurship. And that approach is economically foolish, since all economic theories – even Marxism and socialism – agree that saving and investment are key to long-run growth and rising living standards.

Since today’s topic is Singapore, let’s look at some additional material.

We’ll start with two articles that Donovan wrote for the Foundation for Economic Education.

The first column explains a bit of the history.

The country’s first Prime Minister, Lee Kuan Yew, is often recognized as the father of Singapore. If that is so, then the grandfathers of Singapore would rightfully be three men: Sir Stamford Raffles, who founded the trade settlement, William Farquhar, whom Raffles put at the helm of Singapore in his periodic years of absences, and John Crawfurd, whom Raffles appointed to succeed Farquhar. …Raffles’s intentions were plain as he wrote in a letter in June 1819: “Our object is not territory but trade; a great commercial emporium…,” and to develop “the utmost possible freedom of trade and equal rights to all, with protection of property and person”. …Like Farquhar, Crawfurd shared Raffles’s strong free-market beliefs and pushed his laissez-faire policies even harder… The common denominator of the grandfathers of Singapore was their economic philosophies – capitalism and free enterprise were at the root of their beliefs. The first leaders of colonial Singapore were staunch classical liberals who professed strong beliefs in economic freedoms

You probably won’t be surprised to learn that this is somewhat similar to Hong Kong’s economic history.

Donovan’s next column looks at how Singapore has wisely limited redistribution.

The Singapore welfare system is considered one of the most successful by first-world standards. World Bank data shows that Singapore’s government health expenditure in 2015 is only 4.3 percent of GDP, a small fraction in comparison to other first-world countries…while achieving comparatively equal or better health outcomes… While most of Europe, Scandinavia, and North America spend 30-40 percent of GDP on social welfare programs, Singapore spends less than half as much… qualifying for welfare is notoriously difficult by the standards of most of the developed Western world. The Singapore government’s position on welfare handouts is undergirded by a staunch economic philosophy of self-reliance and self-responsibility where the first lines of welfare should be derived from one’s individual savings, the family unit, and local communities before turning to the government. …This philosophy of self-reliance and responsibility is prominent not only in social welfare but is also replicated in the Singapore government’s approach to retirement savings, health care, education, and housing. For instance, the state’s preferred policy of ensuring individuals have sufficient resources for a rainy day is via the Central Provident Fund, a government-mandated savings account.

Again, much like Hong Kong.

Singapore also has what is probably the most market-oriented healthcare system in the world.

Here are some excerpts from a story in the New York Times.

…it achieves some outcomes Americans would find remarkable. Life expectancy at birth is two to three years longer than in Britain or the United States. Its infant mortality rate is among the lowest in the world, about half that of the United States…about two-thirds of health care spending is private, and about one-third is public. It’s just about the opposite in the United States. …What also sets Singapore apart, and what makes it beloved among many conservative policy analysts, is its reliance on health savings accounts. All workers are mandated to put a decent percentage of their earnings into savings for the future. …why is Singapore so cheap? Some think that it’s the strong use of health savings accounts and cost-sharing. People who have to use their own money usually spend less.

The country is also remarkably free of crime, as noted by CNBC.

Singapore was recently ranked second on the Economist Intelligence Unit’s Safe Cities Index for 2017, coming in just behind Tokyo. In 2016, the island nation’s police reported 135 total days without any crimes including snatch-theft, house break-ins and robbery. That low crime rate means many small businesses enjoy little concern about shoplifting. …local businesses take few precautions when closing shop at night. For instance, in the ground floor lobby of a mixed-use building in the downtown business district, many shops don’t have windows, locks — or even doors.

Though it is not a total libertarian paradise.

A column in Bloomberg warns the Brexit crowd that there are statist components to Singapore’s regime.

Over 80 percent of the population lives in public housing… In industrial policy, the government oversees a plethora of schemes targeting mostly off-budget public funding to particular sectors such as biopharma and aerospace, as well as activities such as R&D and skills training. Government-linked companies, whose controlling shareholder is the sovereign wealth fund Temasek Holdings Pte. Ltd., are the dominant players in transport, communications, real estate and media.

Let’s close with a column Professor Steve Hanke authored for Forbes.

Singapore validates Adam Smith’s counsel on economic development: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice.” …Singapore, Hong Kong, and even the Cayman Islands exemplify commerce-oriented city-states. How can such a small player, like Singapore, achieve prominence on the world’s stage? …acting as a commercial republic and embracing a regime of entrepreneurial public finance. …the culture of an entrepreneurial inclined city-state – like Singapore – differs significantly from that of a parasitical state that feeds on tax extractions.

Here’s his comparison of a predatory government compared to a pro-market government.

Singapore is a successful example of the right column.

Sounds like a model the United States should follow.

Assuming, of course, Singapore retains good policy.

P.S. I’ve also had to explain why the Cayman Islands should retain good policy.

P.P.S. Regular readers won’t be surprised to learn that the OECD tries very hard to overlook the success of Singapore’s low-tax model.

P.P.P.S. Singapore is in first place in my “laissez-faire index.”

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International development experts often write about a “middle-income trap.”

According to this theory, it’s not that challenging for nations to climb out of poverty, but it’s difficult for them to take the next step and become rich countries.

The theory makes sense to many people because it describes much of what we see in the real world.

We even see the trap at higher levels of income. European nations were catching up with the United States after World War II, but then the convergence process stalled.

But I don’t think there’s actually a “middle-income trap.” Instead, nations don’t enjoy full convergence because they are hamstrung by bad policy.

And Hong Kong and Singapore are the best evidence for my hypothesis. These two jurisdictions have routinely ranked #1 and #2 for economic freedom.

And their solid track record of free markets and small government has paid big dividends. Here a chart, for Our World in Data, which shows how they have fully converged with the United States after starting way behind.

The performance of Hong Kong and Singapore is particularly impressive because the United States historically has been a top-10 nation for economic liberty (notwithstanding all my grousing about bad policy in America, we’ve been fairly good compared to the rest of the world).

So it takes extraordinarily good performance to catch up.

But it can happen.

P.S. By the way, one thing I noticed in the above chart is that Singapore has surpassed Hong Kong in the past couple of decades. This could just be a statistical blip, though I wonder if this is a result of the transfer of Hong Kong from British control to Chinese control. Yes, China has wisely chosen not to interfere with Hong Kong’s domestic policy, but perhaps investors and entrepreneurs don’t fully trust that this economic autonomy will continue.

P.P.S. Don’t forget that comparatively rich nations can de-converge if they adopt bad policy.

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Time for the final installment in my four-part video series on trade-related topics.

  • Part I focused on the irrelevance of trade balances.
  • Part II looked at specialization and comparative advantage.
  • Part III explained trade and creative destruction.

Here’s Part IV, which looks at the very positive role of the World Trade Organization.

My basic argument is that it is a good idea to get other nations to reduce trade barriers, but tit-for-tat protectionism is not the right approach.

As I explained when writing about Chinese mercantilism, the U.S. would have far more success by using the WTO.

Let’s look at what experts have said.

Writing for the Wall Street Journal, Greg Rushford explained why the WTO is good for the United States.

President Harry S. Truman and Secretary of State George Marshall successfully pressed America’s war allies to create the General Agreement on Tariffs and Trade more than 70 years ago. Leaders across the globe, mindful of how economic nationalism in the 1930s had contributed to the devastation of World War II, wanted to open the world up again. The agreement focused on slashing of tariffs and other barriers to trade—bringing unprecedented prosperity to hundreds of millions of people. The GATT, which evolved into the World Trade Organization in 1995, became the world’s most successful international economic experiment. …Despite Mr. Trump’s assertion that the WTO has been “a disaster” for the U.S., Washington has won 85% of the 117 WTO cases it has brought against foreign trading partners. Japan complained in 2003 that WTO jurists had stretched the law by determining that Japanese health officials used phony science to ban American apples. The real U.S. gripe is that foreign governments have won most of the 145 cases that they have brought against American protectionist policies. …Both political parties would be well-advised to consider the wisdom of Truman and Marshall. They understood that true national-security imperatives meant resisting protectionism.

And here’s some more background information from a column in the WSJ by James Bacchus, who served as both a Member of Congress and as a Chief Judge at the WTO.

…let’s say Mr. Trump managed to get his way and pull the U.S. out of the WTO. The consequences for the world and U.S. economies would be immense. Among them: diminished trade growth, costly market and supply-chain disruptions, and the destruction of jobs and profits, especially in import- and export-dependent U.S. industries. The resulting trade barriers would compel some American companies either to downsize or move offshore. The global economic spiral set in motion by Mr. Trump’s reckless trade actions on steel, aluminum, Canada, Mexico, China, and Europe would accelerate. …WTO membership provides goods and services produced in the U.S. with protection against discrimination in foreign markets. Nondiscrimination rules are the heart of the WTO trading system, which currently applies in 164 countries and to 98% of all global commerce. …Instead of waging war on the WTO, the U.S. should help modernize it by making it more effective in addressing digital trade, services, subsidies, sustainability and intellectual property. Internationally agreed rules for international trade—and a process for resolving disputes about those rules—are an indispensable pillar of national prosperity.

I agree with everything in both columns.

And I’ll add one very simple – and hopefully very powerful – point.

Here’s a chart from the WTO showing that the United States is one of the world’s most pro-trade nations, with average tariffs of only 3.48 percent. Not as good as Hong Kong (0.0 percent) or Singapore (0.1 percent), but definitely good compared to most other nations.

In other words, it would be good if we could convince other nations to lower their trade barriers to our level.

Yet that’s exactly what’s been happening thanks to the WTO (and GATT, the predecessor pact). Here’s a chart prepared by the Confederation of British Industry, which shows how trade barriers have been continuously dropping. And dropping most rapidly in other nations, which is something Trump should be happy about.

The bottom line is that the WTO unambiguously advances U.S. interests, as I noted in the conclusion of the video.

But it actually advances the interests of all nations by gradually reducing global barriers to trade.

Is it as good as unilateral free trade? No, but it is a big win-win for America and the rest of the world.

Which is why, despite my usual disdain for international bureaucracies, I’m a big fan of the WTO.

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I’m currently in Chile, enjoying the warm sun and doing research on the nation’s impressive economic performance.

I met yesterday with Jose Pinera, the former minister who created Chile’s incredibly successful system of personal retirement accounts (he’s also one of the people Gary Johnson should have mentioned when he was asked to identify an admirable foreign leader).

Back in 2013, I shared some of Jose’s data showing how the economy took off after Chile enacted pro-market reforms.

I was especially impressed by the stunning reduction in the poverty rate, which had dropped from 50 percent to 11 percent (it’s now down to 7.8 percent).

In other words, capitalism has been great news for poor Chileans. Simply stated, when given more freedom and opportunity, most of them escape poverty.

Interestingly, Reuters reports that even the IMF recognizes Chile’s superior performance.

The International Monetary Fund (IMF) hailed Chile’s strengthening economy in a report published on Friday while encouraging President Sebastian Pinera to push forward with promised structural reforms. In a statement following its annual consultation with Chile, the IMF praised Pinera’s proposed reform drive… Conservative billionaire Pinera took office in March with a strong mandate to make changes to the country’s pension system and labor laws and simplify the tax code. …The bank praised his early efforts, which it said were aimed at “re-invigorating investment and economic growth.”

Hmmm…, makes me wonder if the IMF (given its dismal track record) actually understands why Chile has become so prosperous.

Though the World Bank has praised the country’s pro-market reforms, so international bureaucracies sometimes stumble on the right answer.

But let’s not get distracted. Today, I want to share further evidence about how pro-market reforms produce big benefits for the less fortunate.

Here’s a chart from an article in the latest edition Economia y Sociedad. The article is in Spanish, but a translation of the relevant passage tells us that, “in Chile, the income of the poorest 20% of the population has risen at a rate (8.2% per year) that is 50% higher than that to which the income of the richest 20% has risen ( 5.3% per year).”

In other words, a rising tide lifts all boats (just as in the U.S.), but the bottom quintile is enjoying the biggest increases.

Sounds like great news. And it is great news. But some people put on blinders.

My left-leaning friends loudly assure me that they are motivated by a desire to help poor people. Yet if that’s true, why aren’t they falling over themselves to praise Chile? Why are they instead susceptible to waxing rhapsodic about the hellhole of Venezuela or bending over backwards to defend Cuba’s miserable regime?

And why do some anti-capitalist economists engage in absurd examples of cherry picking in failed efforts to discredit Chile’s accomplishments?

The bottom line is that Chile became the Latin Tiger thanks to economic liberty. That’s great news for the country, but especially good for the less fortunate.

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President Trump’s view of global trade is so bizarre, risky, uninformed, misguided, and self-destructive that I periodically try to maintain my sanity by reviewing the wisdom of one of America’s greatest presidents.

  • Ronald Reagan’s remarks in 1985 about the self-destructive impact of trade barriers.
  • Ronald Reagan’s remarks in 1988 about the economic benefits of trade liberalization.

Today, let’s travel back to 1982 for more wisdom from the Gipper.

What’s especially remarkable is that Reagan boldly defended free and open trade at the tail end of the 1980-82 double-dip recession that he inherited.

Many politicians, facing an unemployment rate above 10 percent, would have succumbed to the temptation for short-run barriers.

But just as Reagan did the right thing on inflation, even though it was temporarily painful, he also advocated good long-run policy on trade. He understood Bastiat’s wise insight about “seen” benefits vs “unseen” costs.

Trump, by contrast, has a very cramped and limited understanding of trade. Which is why almost all economists disagree with his approach.

…on Trump’s other point — that protectionism offers Americans the road to riches — most specialists in international trade would beg to differ. “Even by Washington standards, Trump’s tweet was profoundly wrong,” said Daniel J. Mitchell, a conservative economist. In a recent column criticizing Trump’s tweet, Mitchell wrote, “The last time the United States made a big push for protectionism was in the 1930s. At the risk of understatement, that was not an era of prosperity.” …said Lawrence White, a professor at New York University’s Stern School of Business…”tariffs, like any tax, generally introduce an inefficiency and makes the two sides of the trading relationship poorer — not richer.”

I appreciated the chance to be quoted in the story, and I also was happy that a link to one of my columns was included.

Though I gladly would have traded that bit of publicity if Politifact instead had shared my “edits” to Trump’s infamous “Tariff Man” tweet.

I’ll conclude by noting that Reagan’s record didn’t always live up to his rhetoric.

P.S. I winced when Reagan positively cited the International Monetary Fund in his remarks. Though maybe the IMF in the early 1980s wasn’t the pro-tax, anti-market, bailout-dispensing bureaucracy that it is today.

P.P.S. I noted that Reagan was one of America’s great presidents. I also include Calvin Coolidge and Grover Cleveland on that list.

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I wrote a column earlier this month about the “world’s most depressing tweet,” which came from the Census Bureau and noted that the suburbs of Washington, DC, are the richest parts of America.

To be sure, I was engaging in a bit of hyperbole since a tweet about famine, war, or genocide surely would be more depressing. Nonetheless, I think it is a very bad sign that so many undeserving people are making so much money thanks to a bloated and cronyist central government.

Today I want to share another tweet that deserves some sort of special accolade.

I thought about calling it the “world’s best-ever tweet,” but I’m going to be more restrained and simply assert that it is the best tweet about socialism and capitalism.

This is spot on.

I’ve dealt with countless leftists who claim that the failure of places such as Venezuela, Cuba, North Korea, Greece, Zimbabwe, and the Soviet Union don’t count because they weren’t “real socialism” or “real communism.”

Indeed, that’s even become a humorous theme (see here, here, and here from my collection of socialism/communism humor).

But shouldn’t we learn something from the fact that “almost socialism” invariably produces awful results?

Similarly, there has never been a society that is 100 percent capitalist. The world’s freest nations today, such as Hong Kong and Singapore, have state sectors that consume about 20 percent of economic output. Likewise, government consumed 10 percent of GDP during the height of the western world’s supposedly laissez-faire period in the 1800s.

That being said, shouldn’t we learn something from the fact that “almost capitalism” created the amazing hockey stick of human progress? Shouldn’t we learn something from the fact that “some capitalism” is capable of dramatically reducing global poverty?

P.S. If there was a prize for the most short-sighted, naive, and anti-empirical tweet, this example would win the prize.

P.P.S. And this tweet wins the prize for the best comeback. Consider it a case of tweet-on-tweet violence.

P.P.P.S. Last but not least, here’s a tweet that sums up the essential difference between libertarians and statists.

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I have a four-part video series on trade-related topics.

  • Part I focused on the irrelevance of trade balances.
  • Part II looked at specialization and comparative advantage.

Here’s Part III, which explains how trade (whether domestic or international) leads to creative destruction, which results in some painful short-run costs but also yields immense long-run benefits.

I recently argued that creative destruction is the best part and worst part of capitalism.

It’s bad if you’re a worker in a company that loses out (or if you’re an investor in that company). but it’s also what enables us to become more prosperous over time.

I’m not alone. Writing for CapX, Oliver Wiseman reviewed Capitalism in America, a new book by Alan Greenspan and Adrian Wooldridge. Here are some key observations.

…there was nothing predictable about America’s rise from colonial backwater to world-beating economy. …The fight for independence began a year before the publication of Adam Smith’s The Wealth of Nations; “the new country was conceived in a revolt against a mercantilist regime that believes a nation’s economic success was measured by the size of its stock of gold.” …The Constitution’s limits on the power of the majority set America apart from the rest of the world and “did far more than anything else to guarantee America’s future prosperity…” On top of this fortuitous start is the country’s “greatest comparative advantage”: its “talent for creative destruction”, the driving force of innovation, growth and prosperity that “disequilibriates every equilibrium and discombobulates every combobulation”. Americans realised that “destruction is more than an unfortunate side effect of creation. It is part and parcel of the same thing”. …The result is a system that has squeezed more productive energy out of its human capital than other countries, and generated unparalleled prosperity.

For those interested in economic history, Joseph Schumpeter gets most of the credit for developing the concept of creative destruction.

This Powerpoint slide is a nice summary of Schumpeter’s contribution.

And here’s a Tweet showing that Schumpeter was under no illusions about the folly of socialism.

The bottom line is that creative destruction is what gives us churning, and churning is what dethrones rich and powerful incumbents. My friends on the left should be cheering for it.

Instead, they push for regulations and taxes that hinder creative destruction. And that means less long-run prosperity for all of us.

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I periodically ask my left-leaning friends to identify a nation that became rich with statist policies.

They usually point to Sweden or Denmark, but I point out that Sweden and Denmark became rich in the 1800s and early 1900s, when government was very small.

At that point, they don’t really have any other response.

That’s because, as I pointed out in this clip from a recent debate at Pomona College in California, there is no example of a poor nation becoming rich with big-government policies (though we have tragic examples of rich nations becoming poor with statism).

So if statism isn’t the right approach to achieve prosperity, how can poor nations become rich nations.

I’ve offered my recipe for growth and prosperity, but let’s look at the wise words of Professor Deirdre McCloskey in the New York Times.

The Great Enrichment began in 17th-century Holland. By the 18th century, it had moved to England, Scotland and the American colonies, and now it has spread to much of the rest of the world. Economists and historians agree on its startling magnitude: By 2010, the average daily income in a wide range of countries, including Japan, the United States, Botswana and Brazil, had soared 1,000 to 3,000 percent over the levels of 1800. People moved from tents and mud huts to split-levels and city condominiums, from waterborne diseases to 80-year life spans, from ignorance to literacy. …50 years ago, four billion out of five billion people lived in…miserable conditions. In 1800, it was 95 percent of one billion.

Deirdre then explains that classical liberalism produced this economic miracle.

What…caused this Great Enrichment? Not exploitation of the poor, …but a mere idea, which the philosopher and economist Adam Smith called “the liberal plan of equality, liberty and justice.” In a word, it was liberalism, in the free-market European sense. Give masses of ordinary people equality before the law and equality of social dignity, and leave them alone, and it turns out that they become extraordinarily creative and energetic. …we eventually need capital and institutions to embody the ideas, such as a marble building with central heating and cooling to house the Supreme Court. But the intermediate and dependent causes like capital and institutions have not been the root cause. The root cause of enrichment was and is the liberal idea, spawning the university, the railway, the high-rise, the internet and, most important, our liberties.

In other words, the right ideas are the building blocks that enable the accumulation of capital and the development of institutions.

Deirdre’s analysis is critical. She reminds us that investment doesn’t merely depend on good tax policy and rule of law doesn’t magically materialize. You need a form of societal capital as the foundation.

Anyhow, to show how good ideas changed the world, this chart show how classical liberalism is the key that unlocked modern prosperity.

You may have already seen a chart that looks just like this. It was in a video Deirdre narrated. And Don Boudreaux shared a similar chart in one of his videos.

Circling back to the point I made at the start of this column, socialism (or any other form of statism) has never produced this type of economic miracle.

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I periodically explain that labor and capital are the two factors of production and that our prosperity depends on how efficiently they are allocated.

But I probably don’t spend enough time highlighting how they are complementary, meaning that workers and capitalists both benefit when the two factors are combined. Simply stated, workers become more productive and earn more when investors buy machines and improve technology.

In other words, the Marxists and socialists are wrong when they argue that workers and capitalists are enemies. Heck, look around the world and compare the prosperity of workers in market-oriented nations with the deprivation of workers in statist economies.

This becomes painfully clear when you read this Wall Street Journal story on the statist hellhole of Venezuela.

Irish packaging giant Smurfit Kappa recently joined other multinational companies abandoning Venezuela…President Nicolás Maduro’s socialist government. But this case comes with a twist. Hundreds of employees, who counted on the Irish company for transport, education, housing and food, continue to show up at work. They take turns protecting idled heavy machinery from looting that has become rampant as Venezuela plunges into hyperinflation and economic chaos. …“Help, we need a boss here. We’re desperate,” said Ramón Mendoza, a Smurfit forestry division worker for 17 years. “We’re so scared because we now know that all the government does is destroy everything, every business.” Their plight underscores the devastation that rural Venezuelan communities face as private companies pull out of a country that was once Latin America’s richest. The economy has shrunk by half over the past four years.

Wow, Mr. Mendoza hit the nail on the head when he explained that “all the government does in destroy everything.”

Maybe he can replace Obama as Libertarian Man of the year. Except he would get the award on merit rather than satire.

But let’s not digress. Here’s more bad news from the article.

Workers who live in the surrounding area had received interest-free loans from Smurfit for their houses. Residents said they no longer can count on the four ambulances that the company paid for to serve communities of tin-roofed shacks. At the Agricultural Technical School in the nearby town of Acarigua, which was entirely financed by Smurfit, nearly 200 children living in extreme poverty used to receive an education, lodging, as well as hot meals that have become a luxury as public schools collapse. Over two decades, many of its graduates had gone on to work for Smurfit. The academic year was supposed to start on Oct. 1. But with no money to feed and transport students, there’s silence in the halls… “It’s like poof,” Ms. Sequera said, snapping her fingers. “Our whole future was taken away.”

Needless to say, the thuggish government of Venezuela has no idea how to fix the mess it has caused.

In recent days, the cash-strapped Maduro administration said it had come up with a solution for the Smurfit plant: That the workers would run it themselves. The government said it wouldn’t nationalize it but named a temporary board to help restart operations. The Labor Ministry offered no details over how it would replace Smurfit’s distribution network through which the company supplied its own subsidiaries abroad. But the workers say they can’t run the plant on their own and insist they want bosses—just not from the government. “We know how to move the lumber from here to the plants. What do we know about finances and marketing?” said Mr. Mendoza.

My heart goes out to the former Smurfit workers.

They simply want to do honest work in exchange for honest pay. But the wretched policies of the Venezuelan socialists have made that impossible.

By the way, I’m not implying that employers are motivated by love for workers. Nor am I implying that workers are motivated to create profits for companies. The two sides are in a constant tug of war over how to slice the pie.

But the key thing to understand is that the pie grows when markets are allowed to function.

Which is why this old British political cartoon is a powerfully accurate depiction of real-world economics.

Indeed, I’ll have to add it to my collection of images that teach economics.

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My favorite publication every year is Economic Freedom of the World.

It’s filled with data on fiscal policy, regulatory policy, trade policy, monetary policy, and quality of governance for 162 jurisdictions, and it provides an unbiased way of gauging the degree to which they allow economic liberty.

It also allows readers to slice and dice data, which is very helpful for doing analysis.

For instance, as illustrated by this 2×2 matrix, I claimed in 2016 that nations with small fiscal burdens aren’t necessarily pro-free market (meaning they would belong in the top-right quadrant) and countries with large fiscal burdens aren’t necessarily in favor of intervention and planning (so they would belong in the lower-left quadrant).

But that matrix was speculative.

Which is why I downloaded the EFW dataset. I then removed the fiscal policy variable and created new rankings so I could see which nations relied most on unfettered markets.

As you can see, Singapore barely edges out Hong Kong for first place in this “Laissez-Faire Index,” with New Zealand in third place. In other words, the top three nations in the overall EFW rankings stay the same, though Hong Kong and Singapore trade places (in the far-right column, I compare each nation’s rank to its EFW score for overall economic liberty).

The most dramatic results are for some of the welfare states in Northern and Western Europe. Denmark jumps 12 spots to #4 and the Netherlands soars 18 spots to #5. Other nations with big increases include Finland (up 14 spots to #8), Luxembourg (the world’s freest economy as recently as 1985, moves up 14 spots to #11), Sweden (up 30 spots to #13), Norway (up 11 spots to #14), and Belgium (up 32 spots to #20).

Looking at this list, it’s easy to understand why the combination of big government and free markets is sometimes called the “Nordic Model” (defined by Wikipedia as “a comprehensive welfare state…on the economic foundations of free market capitalism”).

And Japan could be considered an honorary member since it jumps 22 spots in the Laissez-Faire Index, up to #19.

I’ve argued that such nations compensate for the damage of high taxes and big welfare states by being very market-oriented in other ways. And the EFW data supports that assertion.

Though it’s worth noting that their large fiscal burdens do have a negative impact.

P.S. Looking at other nations in the Laissez-Faire Index, Switzerland, the United Kingdom, Ireland and Canada all remain in the top 10, though the United States falls six spots to #12. Georgia, Mauritius, Taiwan, and Lithuania all drop by double-digit amounts.

P.P.S. I did a version of the Laissez-Faire Index in 2015.

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Over the years, I’ve felt compelled to “debunk” various articles, columns, and speeches that fundamentally misrepresented and/or misunderstood key economic issues.

A partial list includes Keynesian economics, the Laffer Curve, Obama tax propaganda, Elizabeth Warren’s class warfare, sequester hysteria, export subsidies, libertarianism, carried interest, government size, inequality, Scandinavia, and the value-added tax.

It’s time to add to that list. In a column for the Washington Post, Steven Pearlstein claims to have identified “Five myths about capitalism.” He’s not necessarily attacking free enterprise, but he does make several points that rub me the wrong way and/or should be addressed. Here’s his introduction.

Thirty years ago, in the face of a serious economic challenge from Japan and Europe, the United States embraced a form of free-market capitalism that was less regulated, less equal, more prone to booms and busts. Driving that shift was a set of useful myths about motivation, fairness and economic growth that helped restore American competitiveness. …Here are five of the most persistent ones.

Before we get to his myths, I can’t resist questioning his assertion that markets lead to “more booms and busts,” in part because we had very long and strong expansions during the market-oriented Reagan and Clinton years and in part because the big 2008 recession was largely a result of bad government policy.

But let’s set that aside and look at Pearlstein’s myths. Here’s his first assertion.

Adam Smith, the father of economics, first pointed out in his most famous work, “The Wealth of Nations ,” that in vigorously pursuing our own selfish interests in a market system, we are led “as if by an invisible hand” to promote the prosperity of others. …Smith, however, was never the prophet of greed that free-market cheerleaders have made him out to be. In other passages from “The Wealth of Nations,” and in his earlier work, “The Theory of Moral Sentiments,” Smith makes clear that for capitalism to succeed, selfishness must be tempered by an equally powerful inclination toward cooperation, empathy and trust — traits that are hard-wired into our nature and reinforced by our moral instincts. …An economy organized around the cynical presumption that everyone is greedy is likely to be no more successful than one organized around the utopian assumption that everyone will act out of altruism.

This isn’t really a myth as much as a misrepresentation. What “free-market cheerleaders” extol Smith as a “prophet of greed”?

I self-identify as one of those cheerleaders, and I simply point to Smith’s famous observation about how self-interest is what drives merchants to improve our lives.

Do some people go crazy with greed? Of course.

But that’s true in any system (look at how Chavez’s family members lined their pockets).

What makes capitalism a preferable system is that greedy people have to cater to consumers if they want more money.

Here’s Pearlstein’s second myth.

This is an almost universal belief among corporate executives and directors — that it is their principal mission and legal obligation to deliver the highest possible return to their shareholders. The economist Milton Friedman first declared in the 1970s that the “one social responsibility of business [is] . . . to increase its profits,” but the corporate raiders of the 1980s were the ones who forced that view on executives and directors, threatening to take their companies or fire them if they didn’t go along. …“maximizing shareholder value”…is now widely taught by business schools, ruthlessly demanded by Wall Street’s analysts and “activist” investors, and lavishly reinforced by executive pay packages tied to profits and share prices. In fact, corporations are free to balance the interests of shareholders with those of customers, workers or the public… Legally, corporations can be formed for any purpose. …The only time a corporation is obligated to maximize its share price is when it puts itself up for sale.

I’m not sure what point he’s making. Does he think companies shouldn’t try to make profits? Does he not understand the purpose of profits? Does he want to put corporate governance under the control of politicians, like Elizabeth Warren?

For what it’s worth, he’s correct that corporations can be set up for reasons other than profit, though I’m not sure that’s any sort of stunning revelation.

Here’s the third supposed myth.

The theory of “marginal productivity” holds that a worker’s wage or salary reflects the “amount of output the worker can produce,” according to Harvard’s Greg Mankiw, author of a best-selling economics textbook. This idea is useful in constructing economic models, but Mankiw and others have also relied on it to justify widening income inequality and to oppose proposals to redistribute income… In reality, however, the pay set by markets is also subjective, reflecting the laws and social norms under which markets operate. The incomes earned by workers who planted tobacco — and those who owned tobacco plantations — changed considerably after slavery was abolished, and again after laws protecting sharecroppers were enacted, and again when minimum-wage laws were passed… While it is probably better to rely on markets rather than government to set pay levels, that doesn’t mean that the way the markets set pay is a purely objective assessment of economic contribution or that redistribution is theft.

I’m glad he acknowledges that it is “probably better” for markets to set wages, but this section is largely incoherent.

He writes about slavery, but that has nothing to do with capitalism. After all, slavery was government-sanctioned and government-enforced involuntary labor, whereas a defining feature of capitalism is voluntary exchange.

Now for the fourth myth.

The reason Americans tolerate higher levels of income inequality is because of our faith that we all have a fair chance at achieving the American Dream or becoming the next Bill Gates. “In America we stand for equality,” writes Arthur Brooks of the American Enterprise Institute, a leading defender of the morality of capitalism. “But for the large majority of us, this means equality of opportunity, not equality of outcome.” …But while the United States has made great strides in removing legal barriers to equal opportunity, at least half the difference in income between any two people is determined by their parents, either through inherited traits like intelligence, good looks, ambition and reliability (nature), or through the quality and circumstances of their upbringing and education (nurture). …Unless we are prepared to engage in extensive genetic reengineering, or require that all children be brought up in state-run boarding schools, we must acknowledge that we can never achieve full equality of opportunity.

This section actually makes some sense. Some people do have better parents and better genes, and that does put them in a better position to succeed.

In any event, I very much hope that Pearlstein doesn’t think that government-imposed “genetic reengineering” and/or “state-run boarding schools” are good ideas.

Here’s the final myth, and also the one that got me most agitated.

Economists have long believed that there is an unavoidable trade-off between equality and growth — having more of one means having less of the other. Arthur Okun’s book about it, “Equality and Efficiency: The Big Tradeoff,” remains a classic. The implosion of communism and the decisions of socialist countries like Sweden to reduce taxes and welfare are widely seen as acknowledgments of the failure of overly egalitarian systems to produce adequate economic growth. But evidence suggests that there is also a point at which high levels of inequality begin to deliver less economic growth, not more — and that the United States has passed that point, according to research by the International Monetary Fund. …rising income inequality erodes the trust people have in one another and their willingness to cooperate.

I’m glad he cited Okun, and it’s also good that he cited Sweden’s turn in the right direction.

But it’s very disappointing that he called attention to the IMF’s incredibly shoddy research on inequality.

As I’ve repeatedly explained, inequality that results from voluntary exchange is fine and inequality that results from Cronyism is bad. Studies that fail to distinguish between the two are either deliberately dishonest or breathtakingly shoddy.

I’ll close by asking critics of capitalism to give just one accurate answer to my two-question challenge. Or, if that’s too difficult, create the left-wing version of this chart.

I won’t be holding my breath.

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Since I’ve been writing a column every day since 2010, you can imagine that there are some days where that’s a challenge.

But not today. The Fraser Institute has released a new edition of Economic Freedom of the World, which is like a bible for policy wonks. So just like last year, and the year before, and the year before, and so on (you may sense a pattern), I want to share the findings.

First, here’s what EFW measures.

The cornerstones of economic freedom are personal choice, voluntary exchange, open markets, and clearly defined and enforced property rights. …The EFW measure might be thought of as a measure of the degree to which scarce resources are allocated by personal choices coordinated by markets rather than centralized planning directed by the political process. It might also be thought of as an effort to identify how closely the institutions and policies of a country correspond with the ideal of a limited government, where the government protects property rights and arranges for the provision of a limited set of “public goods” such as national defense and access to money of sound value, but little beyond these core functions.

Now let’s get to the good stuff.

Unsurprisingly, Hong Kong is at the top of the rankings, followed closely by Singapore. Those jurisdictions have been #1 and #2 in the rankings every year this century.

The rest of the top 5 is the same as last year, featuring New Zealand, Switzerland, and Ireland.

The good news for Americans is that we’re back in the top 10, ranking #6.

Here’s what the report says about the United States.

…the United States returned to the top 10 in 2016 after an absence of several years. During the 2009–2016 term of President Obama, the US score initially continued to decline as it had under President Bush. From 2013 to 2016, however, the US rating increased from 7.74 to 8.03. This is still well below the high-water mark of 8.62 in 2000 at the end of the Clinton presidency.

It’s important to understand that the improvement in the U.S. score has nothing to do with Trump. The EFW ranking is based on America’s economic policies as of 2016 (there’s always a lag in getting hard data).

President Trump’s policies may increase America’s score (think taxes and regulation) or they may decrease America’s score (think trade and spending). But we won’t know for sure until we see future editions.

Here’s what’s happened to economic liberty in America between 1970 and 2016.

As you can see from the historical data, the U.S. enjoyed progress through the Reagan and Clinton years, followed by decline during the Bush years and early Obama years. But we’ve trending in the right direction since 2013.

Let’s look at other nations that get decent scores.

Here are the other nations that are in the top quartile.

Canada and Australia were tied for #10, so the rest of the rankings start with the under-appreciated success story of Taiwan at #12.

All the Baltic nations do well, especially Estonia and Lithuania. Chile also remains highly ranked, as is the supposedly socialist nation of Denmark.

Luxembourg, which was ranked #1 as recently as 1985, is now #25.

I also noticed that Rwanda (#40) has eased past Botswana (#44) to become the highest-ranked nation in Sub-Saharan Africa.

By the way, I’m not going to bother showing the bottom nations, but nobody should be surprised to learn that Venezuela is in last place.

Though that may simply be because there’s isn’t adequate data to include North Korea and Cuba.

Let’s close by including a chart that hopefully will show why economic liberty is important.

Simply stated, people enjoy much higher living standards in nations with free markets and small government. Conversely, people living under statist regimes suffer from poverty and deprivation.

The bottom line is that Economic Freedom of the World shows the recipe for growth and prosperity.

Sadly, very few nations follow the instructions because economic liberty is not in the interests of politicians.

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Some economic statistics are very important in the world of politics.

When President Obama’s so-called stimulus was in effect, critics (including me) kept pointing to higher-than-predicted unemployment rates. President Trump, meanwhile, mistakenly thinks America somehow is losing because of the trade deficit. And the GDP numbers are the subject of considerable discussion on all sides.

Another very important piece of data is wage growth, especially since Trump wants to claim his policies are generating big results. I take a jaundiced view on such claims, but the issue is very important, so let’s take a look at two interesting columns.

Michael Strain of the American Enterprise Institute, writing for Bloomberg, starts by noting that some folks on the left think workers are being screwed.

Are wages determined by market forces, or do businesses get to decide what pay they offer to workers? …Why has wage growth been so sluggish for so many years? …you might answer that employers have made the decision to boost profits at the expense of raising wages. …it is common to hear some prominent analysts and organizations on the left argue that the link between wages and productivity for most workers has effectively been severed.

Not so fast, he writes.

Businesses don’t pay employees less than the value of their productivity — the amount of revenue workers generate for their employer — because doing so would result in their workers taking another job where they would get paid what they’re worth. In this sense, employers don’t “decide” what wages they pay. Instead, wages are set in markets. …worker productivity remains the dominant force in setting wages. …Market forces are powerful. A recent paper by economists Anna M. Stansbury and Lawrence H. Summers of Harvard confirms this. They find that over the last four decades, a one-percentage-point increase in productivity growth is associated with a 0.73 percentage point increase in the growth rate of median compensation. That’s a strong link.

I have two thoughts on this. First, productivity is the key to our prosperity. I’m in full agreement with Paul Krugman’s observation that, “Productivity isn’t everything, but in the long run it is almost everything.”

Second, as illustrated by this chart, we get more productivity with greater levels of investment.

The problem is that government often undermines productivity growth.

Governments have thrown a wrench in the market machine through the absurd proliferation of occupational licenses, reducing wages for workers who can’t get a license and restricting the mobility of licensed workers. A recent study finds that the rate of migration across state lines for individuals in occupations with state-specific licensing requirements is over one-third lower than among individuals in occupations that don’t have such rules.

Amen.

And there are plenty of additional policies that have a negative effect as well.

In a column for the Wall Street Journal, David Henderson says the data on wage growth tell an incomplete story.

Standard wage data show that between the spring of 2017 and the spring of 2018, real wages in the U.S. increased only 0.1%. But there are three major problems with these data. First, they don’t account for fringe benefits, which are an increasing proportion of employee pay. Second, standard wage data use an index that overstates the inflation rate. Third, each year the composition of the workforce changes, as older, higher-paid workers retire and young, lower-paid workers enter the workforce.

He digs into some of the data that have been shared by the CEA.

…the White House Council of Economic Advisers addresses these three biases and concludes that real wages grew by 1% in 2017-18, not the measly 0.1% reported in the wage data. …including benefits would add 0.2 percentage point to the 2017-18 figure. …An alternate measure of inflation, the personal- consumption-expenditures price index, while also imperfect, is a better measure of inflation. Economists at the Federal Reserve prefer the PCEPI to the CPI. Using the PCEPI adds 0.5 percentage point to the 2017-18 growth of real wages. …The Census Bureau estimates that 3.57 million people turned 65 in 2017, compared with 2.68 million in 2010. Taking account of the decline in older, higher-paid workers and the increase in younger, lower-paid workers, the CEA estimates that this “composition factor” added 0.3 percentage point to real wage growth from 2017-18.

I have two thoughts about this data.

First, I don’t pretend to know the ideal measure to capture inflation, but I definitely know that we’d have lower prices in the absence of government intervention.

Second, the CEA definitely is right about fringe benefits being an ever-larger share of total compensation (mostly driven by government intervention).

And these observations apply, regardless of who’s in the White House.

This is not a partisan point. The same methodology would show that real wages grew more than was reported during much of President Obama’s time in office. …there is, in this context, one relevant difference between the Trump and Obama administrations: the 2017 tax cut. Real after-tax wages increased 1.4% between 2017 and 2018, according to the CEA study.

I obviously like the part about tax cuts being helpful, but I’ll reiterate my concern that this effect will evaporate if GOPers don’t get serious about spending restraint.

And I’ll close with the essential observation that there is no substitute for across-the-board pro-market policies if the goal is improving people’s lives.

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I periodically explain that pro-market policies are the best way of helping poor people.

The reason rich countries are rich is because they had lengthy periods of limited government, free markets, and the rule of law.

And the convergence literature shows that the same thing is true for developing nations.

Today, let’s look at some new research from the World Bank on how good policy plays a role in generating wealth from natural resources. The authors start by explaining the issue they want to investigate.

The literature on economic development often assumes that natural resource endowments are exogenous. …the resource economics literature has emphasized that the resource base is endogenous to investment in exploration and extraction. That literature has, however, overlooked the role that market orientation and institutions play in driving investments in the resource sector. Our aim is to bridge the gap between these two literatures and explore the effect of market orientation on the discovery of proven (known) natural resource wealth.

They cite the United States as an example of a country that benefited from the right policies.

The experience of the United States during the nineteenth and early twentieth century provides a historical account of the role of market orientation in driving natural wealth. Although the United States at the time of independence was considered to be a country of “abundance of land but virtually no mining potential” (O’Toole, 1977), by 1913 it was the world’s dominant producer of virtually every major industrial mineral (David and Wright, 1997). Rather than being driven by a comparative advantage in geological endowments, this resource-based development of the United States was driven among other things by an open market orientation and an accommodating legal environment with the government claiming no ultimate title to mineral rents

And they note that there is additional anecdotal evidence that liberalization produces good results.

Anecdotal evidence suggests that increased market orientation was followed by increased discoveries across continents and types of natural resources (see Table 1). The increase in discoveries after countries open up to the global economy appears to be quite stark. In Peru, for example, discoveries more than quadrupled, in Chile they tripled, and in Mexico they doubled. In Ghana, discoveries only started to occur after the opening of the economy.

Here’s a table showing the dramatic increase in discoveries after selected nations shift to a pro-market approach.

The authors want to see if such results are either random or policy-driven.

So they put together a detailed model and gathered lots of data.

…we put forward a simple two-region model of endogenous reserves based on Pindyck (1978) where multinational corporations are faced with an implicit tax which proxies for how closed market orientation is, and seek the lowest cost location. The model explores the interplay between market orientation and other channels such as the increase in the marginal cost of discoveries and (demand driven) natural resource price shocks. …For our empirical analysis we build a unique and hitherto unexploited dataset of the universe of world-wide major natural resource discoveries since 1950, covering 128 countries, 33 types of natural resources and over 60 years.

Here’s an example of the data they utilized.

And here are the results.

I’m not surprised to learn that good policy (i.e., free markets) generate a substantial increase in economic activity.

…our empirical analysis shows that market orientation causes a statistically and economically significant increase in natural resource discoveries. Our point estimates indicate that going from a closed to an open market orientation increases discoveries by 80-140 percent. …In a thought experiment whereby economies in Latin America and sub-Saharan Africa remained closed, they would have only achieved one quarter of the actual increase in discoveries they have experienced since the early 1990s.

The benefits are especially significant in developing nations, where market reforms appear to have produced a four-fold increase in the discovery of natural resources.

Here’s a look at the data for the entire study.

As you can see, there’s always an element of randomness and uncertainty in econometric research (“noise”), but the trend is readily apparent and the statistical tests provide a good amount of confidence about the strength of the relationship between more economic freedom and more economic activity.

I have two takeaways from this research.

First, we have the obvious result that property rights, rule of law, and other market-based policies are needed to help the poor.

Second, this is additional confirmation of my gut feeling that the World Bank is the best (least worst?) of the international bureaucracies. Yes, they waste money and are capable of producing bad research, but the organization’s culture seems to be focused on what changes are needed to help poor countries. And that often results in solid research (for other examples, see here, here, here, here, and here).

You can occasionally find good analysis from other international bureaucracies, such as the OECD and IMF, but it’s far more likely that those organizations will promote statist analysis because of a pro-government mindset.

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Whether I’m writing about a rich country or a poor country, my research starts with a visit to Economic Freedom of the World. Published by the Fraser Institute in Canada, EFW uses five major factors (fiscal, regulatory, monetary, trade, and quality of governance) to rank nations based on the overall amount of economic liberty.

The rankings go as far back as 1970, so you can see how a country has changed over time (and the good news is that scores have improved in most nations).

Today, let’s look at a history of the freest nations. We’ll start with the table from 1970.

Unsurprisingly, Hong Kong was at the very top. But who would have guessed that Luxembourg would be second? Canada ranked #3 and the United States was in 4th place, followed by Japan and four European nations.

Perhaps the most shocking bit of news is that Venezuela was ranked #10.

All the more reason that Venezuela’s last-place status in the most-recent edition is so depressing. That must be a record for the biggest-ever decline for a country.

If we look at the data for 1975, 1980, and 1985. Luxembourg continues to get very high scores, along with Hong Kong and the United States.

Panama and Guatemala ranked amazingly high in 1975, while the United Kingdom finally appears in 1985 (thanks to Margaret Thatcher’s reforms).

Here’s the data for 1990, 1995, and 2000. You’ll notice that New Zealand and Australia enter the top 10 while Luxembourg begins to drop (at least relatively speaking) and Singapore begins to climb.

Now let’s look at what has happened this century.

Hong Kong and Singapore have a lock on the top-two slots, with New Zealand and Switzerland controlling the third and fourth positions. Luxembourg, meanwhile, has vanished.

In 2010 and 2015, we see some nations appear from the developing world and the post-communist world. Most notably, Chile, Estonia, and Georgia.

For a policy wonk, these are fascinating numbers. I enjoy looking how relative rankings have changed, as well as what’s happening to absolute scores.

It’s such good source of data that I’ve always wished there were pre-1970 numbers as well.

Well, my wish has been granted. Ryan Murphy and Robert Lawson, two of the scholars who put together Economic Freedom or the World, have cranked out estimates for the entire post-World War II era.

Based on their retroactive assessment, they show that the United States had the world’s freest economy back in 1950.

Switzerland was in second place, followed by a bunch of European and Anglosphere nations.

If you want to understand why Luxembourg, Belgium, Norway, and Sweden are rich today, notice that they have a history of being among the world’s most pro-market nations.

Incidentally, due to inadequate data, Singapore wasn’t included in the retroactive data until 1960 and Hong Kong is complete absent from this historical dataset.

We don’t have top-10 lists for the other years, but the authors shared a table with all their numbers, so I created my own versions for 1955, 1960, and 1965.

As you can see, congratulations to Switzerland and Luxembourg (twice). The United States and Canada get very high marks. And Belgium and the Netherlands get good scores as well.

There are so many implications to this data, but I’ll close with three simple observations.

  • First, these numbers help to explain why Europe is a relatively rich continent. European nations traditionally have dominated the top-10 rankings. It’s not a good continent for fiscal policy, but those countries dominate the scores in other policy areas.
  • Second, you can fall behind by standing still. If you take a close look at data for Luxembourg, Belgium, and the Netherlands, you’ll notice their absolute scores haven’t really changed. But all of those nations have dropped out of the top 10 because other countries improved.
  • Third, global economic liberty is increasing. The top scores in the 1950s and 1960s wouldn’t get a country into the top 10 this century.

P.S. A Spanish academic also has produced some very interesting historical estimates for economic freedom, but his numbers are only averages for western nations.

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Stocks just set a new record for the longest “bull market” in history. If you’re an optimist, this is a reason to celebrate the relatively high level of economic freedom in the United States.

If you’re a pessimist, you might appreciate that there’s more economic liberty in America than most other places, but you still worry whether easy-money policies from the Fed have created a bubble in financial markets.

And if you’re fair, you admit that some of Trump’s policies are helping the economy and some are hurting the economy. Which was my message in this recent interview.

Simply stated, I like what Trump is doing on taxes and regulation, but I’m not a fan of what he’s doing on spending and trade.

Because he’s all over the map, it’s not easy to assign an overall grade to Trump’s economic policy (especially since it’s an open question whether Trump is trying to liberalize trade or restrict it).

Regardless, this discussion got me thinking of how best to explain the importance of various economic policies. Regular readers know I’m a huge fan of both the Fraser Institute’s Economic Freedom of the World and the Heritage Foundation’s Index of Economic Freedom.

At the risk of oversimplifying, both publications measure economic freedom by looking at a combination of fiscal policy, regulatory policy, trade policy, monetary policy, and quality of governance (encompassing factors such as the legal system and property rights).

Generally speaking, the various policies are equally weighted. Which, based on a lot of research, is correct. But I wonder if the various policies are equal in different ways. I sometimes use a simple analogy in speeches, equating economic policy with the soundness of a house.

  • The quality of governance is akin to the foundation, because just as a very nice house won’t last long if built on a shaky foundation, good policies won’t generate much prosperity if the legal system is corrupt and property rights aren’t protected.
  • Monetary policy is akin to the framework of the house because it is also systemically important. Most recessions (and the false booms that precede downturns) are caused by misguided central bank tinkering.
  • Finally, as shown in my amateur drawing, trade policy, regulatory policy, and fiscal policy are the floors of the house. They determine the livability of the house, whereas monetary policy and quality of governance determine the structural soundness of the house.

To elaborate on this analogy, consider what I wrote a few days ago about Denmark. That house has a strong foundation and a solid framework, but the floor for fiscal policy is a total mess. Since I focus mostly on public finance, I get very agitated about that floor of the house. But as an economist, I nonetheless admit it’s still a nice place to live.

Conversely, Lebanon has one the best floors for fiscal policy, but the foundation is quicksand and the regulatory floor is a wreck. So that may not be an ideal place to live (notwithstanding compensating factors).

Anyhow, I’m looking for feedback. When I first proposed my Golden Rule, it was wordy and clunky. I got some great suggestions and eventually produced a much better version. I’d like to do the same for overall economic policy.

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A key insight of international economics is that there should be “convergence” between rich countries and poor countries, which is just another way of saying that low-income nations – all other things being equal – should grow faster than high-income nations and eventually attain the same level of prosperity.

The theory is sound, but it’s very important to focus on the caveat about “all other things being equal.” As I explain in this interview from my last trip to Australia, countries with bad policy will grow slower than nations that follow the right policies.

When I discuss convergence, I often share the data on Hong Kong and Singapore because those jurisdictions have caught up to the United States. But I make sure to explain that the convergence was only possible because of good policy.

I also share the data showing that Europe was catching up to the United States after World War II, just as predicted by the theory, but then convergence ground to a halt once those nations imposed some bad policy – such as costly welfare states.

In other words, convergence is a choice, not destiny.

Countries with small government and laissez-faire markets are the ones that grow and converge. The nations with statist policy languish and suffer. Or even de-converge (with Argentina and Venezuela being depressing examples).

Let’s see what academics have to say about this issue.

We’ll start by looking at some research at VoxEU by Professor Linda Yueh. She wants to understand the characteristics that determine national prosperity.

It’s a long-standing economic question as to why more countries are not prosperous. …The World Bank estimates that of the 101 middle-income economies in 1960, just a dozen or so had become prosperous by 2008… But, hundreds of millions of people have joined the middle classes. …How has this been achieved? Possessing good institutions is what economists have come to focus on and the spread of such institutions seems to have been key…the father of New Institutional Economics…Douglass North…stressed that there was no reason why countries could not learn from more successful economies to better their own institutions. That finally happened in the 1990s.

I’m a fan of Douglass North since he – along with many other winners of the Nobel Prize – has endorsed tax competition.

In his case, the goal was for nations to face pressure to adopt good institutions.

And Professor Yueh explains that this means rule of law and free markets.

China, India, and Eastern Europe changed course. China and India re-oriented their economies outward to integrate with the world economy, while Eastern Europe shed the old communist institutions and adopted market economies. In other words, having tried central planning (in China and the former Soviet Union) and import substitution industrialisation (in India), these economies abandoned their old approaches and adopted as well as adapted the economic policies of more successful economies. For instance, China, which has accounted for the bulk of poverty reduction since 1990, undertook an ‘open door’ policy that sought to integrate into global production chains which increased competition into its economy that had been dominated by state-owned enterprises. India likewise abandoned its previous protectionist policies…in Central and Eastern Europe. Communism gave way to capitalism, with these nations adopting entirely new institutions that re-geared their economies toward the market.

All of this is good news, but not great news. Simply stated, partial liberalization can lift people out of poverty.

But it takes comprehensive liberalization for a nation to become genuinely rich.

As many of these economies, especially China, have become middle-income countries, their economic growth is slowing down. And they may slow down so far that they never become rich. But, their collective growth has lifted a billion people of out of extreme poverty.

Let’s now see what other scholars say about convergence.

Some new research from the St. Louis Federal Reserve examines this topic. Here’s the mystery they want to address.

Over the past half-century, world income disparities have widened. The gap in real gross domestic product (GDP) per capita relative to the United States between advanced and poor countries has increased. For example, the ratio of average real GDP per capita among the top 10 percent of countries to the bottom 10 percent has increased from less than 20 in 1960 to more than 40 in 1990, and to more than 50 since the turn of the new millennium… The main point to be addressed in this article is why the income disparities between fast-growing economies and development laggards have widened.

In other words, they want to understand why some nations converge and some don’t.

We select a set of 10 fast-growing economies. This set includes Asian countries and African economies that are perceived as better performing. In contrast, we select a set of 10 development laggards. Beyond the typical candidates of countries mired in the poverty trap, this set includes countries with similar or even better initial states than some of the fast-growing countries, but with divergent paths of development leading to worse macroeconomic outcomes. That is, among development laggards, we choose two subgroups, one consisting of trapped economies and another of lag-behind countries. …Using cross-country analysis, we find that a key factor for fast-growing countries to grow faster than the United States and for trapped economies to grow slower than the United States is the relative TFP… Overall, we find that institutional barriers have played the most important role, accounting for more than half the economic growth in fast-growing and trapped economies and for more than 100 percent of the economic growth in the lag-behind countries.

Here are their case studies, showing income relative to the United States (a 1.0 means the same degree of prosperity as America).

As you can see, some nations catch up and some fall further behind, while others have periods of convergence and de-convergence.

And what causes these changes?

The degree to which nations have good policy.

…we identify that unnecessary protectionism, government misallocation, corruption, and financial instability have been key institutional barriers causing countries to either fall into the poverty trap or lag behind without a sustainable growth engine. Such barriers have created frictions or distortions to capital markets, trade, and industrialization, subsequently preventing these countries from advancing. …By reviewing the previous country-specific details, one can see that the 10 fast-growing countries have all adopted an open policy… Their governments have undertaken serious reforms, particularly in both labor and financial markets. …Thus, the establishment of correct institutions and individual incentives for better access to capital markets, international trade, and industrialization can be viewed as crucial for a country to advance with sustained economic growth

Here’s a table from the report showing the policies that help and the policies that hurt. Needless to say, it would be good if the White House understood that protectionism is one of the factors that undermine growth.

Interestingly, the study from the St. Louis Federal Reserve includes some country-specific analysis.

Here’s what it said about India, which suffered during an era of statism but has enjoyed decent growth more recently thanks to partial liberalization.

During 1950-90, India’s per capita income grew at an average annual rate of only about 2 percent, a result due to the Indian government’s implementation of restrictive trade, financial, and industrial policies. The Indian state took control of major heavy industries, by including additional licensing requirements, capacity restrictions, and limits on the regulatory framework. …In the late 1970s, the Indian government opened the economy by liberalizing both international trade and the capital market, leading to rapid growth in the early 1990s. As argued by Rodrik and Subramanian (2005), the trigger for India’s economic growth was an attitudinal shift on the part of the national government in 1980 in favor of private businesses. …The final trigger of the major economic reform of Manmohan Singh in the 1990s was due to the well-known 1991 balance-of-payment crisis….This reform ended the protectionist policies followed by previous Indian governments and started the liberalization of the economy toward a free-market system. This event led to an average annual growth rate that exceeded 6 percent in per capita terms during 1990-2005.

For what it’s worth, I am semi-pessimistic about India. Simply stated, there’s hasn’t been enough reform.

We also have some discussion regarding Argentina, which is mostly a sad story of ever-expanding government.

Argentina is the third-largest economy in Latin America and was one of the richest countries in the world in the early twentieth century. However, after the Great Depression, import substitution generated a cost-push effect of high wages on inflation. During 1975-90, growing government spending, large wage increases, and inefficient production created chronic inflation that increased until the 1980s, and real per capita income fell by more than 20 percent. …In 1991, the government attempted to control inflation by pegging the peso to the U.S. dollar. In addition, it began to privatize state-run enterprises on a broader basis and stop the run of government debt. Unfortunately, lacking a full commitment, the economy continued to crumble slowly and eventually collapsed in 2001 when the Argentine government defaulted on its debt. Its GDP declined by nearly 20 percent in four years, unemployment reached 25 percent, and the peso depreciated by 70 percent after being devalued and floated.

But if we go to the other side of the Andes Mountains, we find some good news in Chile.

From the Second World War to 1970, real GDP per capita of Chile increased at an average annual rate of 1.6 percent, and its economic performance was behind those of Latin America’s large and medium-sized countries. Chile pursued an import-substitution strategy, which resulted in an acute overvaluation of its currency that intensified inflation. …Although most Latin American countries have practiced strong government intervention in the markets since the mid-1970s, Chile pursued free market reform. …The outcomes are as follows: Exports grew rapidly, per capita income took off, inflation declined to single digits, wages increased substantially, and the incidence of poverty plummeted (compare with Edwards and Edwards, 1991). Since the democratic administration of Patricio Aylwin in 1990, the economic reform has been accelerated and Chile has become one of the healthiest economies in Latin America.

Not only has Chile become the richest nation in Latin America, it also has enjoyed significant convergence with the United States. About 40 years ago, according to the Maddison database, per-capita GDP in Chile was only about 20 percent of U.S. levels. Now it is 40 percent.

I’ll close with a chart, based on the Maddison numbers, showing how Hong Kong, Singapore, and Switzerland have converged with the United States. These are the only nations that have ranked in the top-10 for economic freedom ever since the rankings began. As you can see, their reward is prosperity.

The bottom line is that there is a recipe for growth and prosperity. That’s the good news.

The bad news is that very few nations follow the recipe since economic liberty means restricting the power of special interests and the political elite.

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With the possible exception of a few extreme environmentalists, everyone agrees that robust long-run growth is a key to a better society.

An unprecedented jump in growth, for instance, is what enabled the western world to escape poverty, resulting in the famous “hockey stick” of modern prosperity.

Maintaining growth is an ongoing challenge for developed countries, to be sure, and it’s also vitally important to help developing nations grow and prosper.

Which is why policymakers should focus on the policies that generate good outcomes.

Libek, a think tank in Serbia, has released a study on this topic. They start by pointing out that we now have some good measures of economic liberty in various nations.

…the Economic Freedom in the World Index in 1996 by the Fraser Institute…was the first methodological tool that measured intrusion in functioning of the market process by government entities, either directly through government intervention or indirectly though regulation and market institutions. A similar index, Index of Economic Freedom, produced by the Wall Street Journal and the Heritage Foundation soon followed… Since this very successful tool was invented, it has been widely employed in empirical studies…, the most important were concerning the role of economic freedom in fostering economic growth. …empirical studies mostly concluded that there is a significant connection between economic freedom and economic growth.

Since I’m always citing the Fraser Index and the Heritage Index, I agree that these are very helpful sources of data.

And lots of academics also use those numbers.

So Libek took a close look at this wealth of empirical research.

Libek conducted a metastudy regarding economic freedom in December 2017, with the aim to reexamine the connection between economic freedom and economic growth in published empirical studies. …Using Google scholar mechanism…92 studies…consider the connection between economic freedom and economic growth. Out of these, a predominant majority of 86 studies (93.5%) finds a positive correlation or connection between them, while only 6 studies (6.5%) have less positive results. …This metastudy shows that empirical studies have predominantly found that economic freedom is associated with higher economic growth rates, while there is only one study claim otherwise and results of other 5 are less conclusive. This high rate of concurrence between economists is highly unusual, given the fact that economist tend to often disagree even among theoretically more accepted topics. Therefore, it is conclusively shown that higher level of economic freedom, ceteris paribus, leads to higher economic growth.

The folks at Libek have a big incentive to care about these issues because Serbia is a reform laggard.

Here’s a chart comparing economic freedom in Serbia with other European regions.

And here is why economic reform is so vitally important for the people of Serbia.

Serbia remains one of the poorest countries in Europe, measured by GDP, with just 5 000 euros per capita. These low growth rates do not provide a possibility for development and closing the gap with more advanced European economies. …A study estimated future economic gains through higher economic freedom (Gwartney and Lawson 2004) reporting that 1-point increase in economic freedom (measured on a 1 to 10 scale) would increase long term rate of economic growth for 1.24% of GDP. Therefore, if Serbia would increase its score from the current 6.75 to 7.75 points – the approximately current level of Austria or Germany, Serbian long-term growth rate would increase from the envisaged 2% in 2017 (and estimated by the IMF to stand at 3.5% in 2018 and 2019) to 5.25% in 2020 and afterwards. This growth rate would enable a fast income convergence with other European countries, with GDP level per capita doubling in 14 years.

Amen. Serbia has the capacity to “converge,” but that won’t happen without economic liberalization.

For non-Serbians, the parts of the Libek report that will be of greatest interest deal with examples of nations that are out-performing their neighbors.

The importance of economic freedom is well shown by the most important case studies from different continents: Chile (South America), Singapore and Korea (East Asia), and Botswana (Africa). In all these prominent cases, economic freedom propelled these societies to a high and sustainable economic growth which led them to prosperity, compared to their neighbors.

The report specifically looks at the long-run data for countries that have sharply diverged from regional competitors.

Let’s start by comparing Chile with the rest of South America. As you can see, Chile’s dramatic economic liberalization led to far higher levels of national prosperity.

Now let’s compare Botswana to the rest of Sub-Saharan Africa.

I did something similar back in 2015 and also earlier this year, so this remarkable data is impressive but not surprising.

Last but not least, let’s compare Singapore and South Korea to their neighbors.

Once again, we see a compelling link between economic liberty and economic outcomes.

This is dramatically evident when comparing South Korea and North Korea, but you also see remarkable numbers when comparing Singapore with the United States.

The lesson is not that nations need perfect policy (even Hong Kong has some statism). Instead, the message is that governments should strive to increase economic liberty – hopefully in big ways but even small reforms are helpful – so that there’s more “breathing room” for the economy’s productive sector.

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I’m in China this week, giving various lectures at Northeastern University in Shenyang. My topic today was “Real-World Examples,” which gave me an opportunity to share many of the charts I’ve developed showing how market-oriented nations enjoy much more long-run success.

One of the charts shows how Chile has enjoyed strong growth since it shifted to free markets, especially compared to Venezuela, which is burdened by a vicious form of statism.

But I noticed that I created that chart back in 2011 and it only shows data for the years between 1980 and 2008. And I thought that might lead students to think I was deliberately omitting recent years because the data somehow contradicts my message about free markets and small government.

So it’s time for me to update my comparison of Chile and Venezuela. And I’m going to have lots of evidence to share because the World Bank published a lengthy report on Puzzles of Economic Growth just a couple of years ago. And chapter 7 specifically compares the two countries we’re examining today.

Chile and República Bolivariana de Venezuela are South American countries of similar size and population. They…share a similar history, cultural heritage and comparable social structures. In 1971, they recorded a similar level of per capita income, that is, $6,603 (chained dollars with a base year of 20001) in Chile and $7,231 in República Bolivariana de Venezuela.

The report explains how neither country enjoyed much success in the 1970s, though oil-rich Venezuela at least benefited from rising energy prices.

What’s most relevant, at least for today’s discussion, is how Chile then jumped over Venezuela thanks to pro-market reforms,

In 2003, this value was nearly twice as high in Chile ($12,140) as in República Bolivariana de Venezuela ($6,253). …Chile became a stellar economic growth example in the region and has been outperforming República Bolivariana de Venezuela ever since. The ratio of GDP per capita in Chile and in República Bolivariana de Venezuela changed from 0.75 in 1983 to 1.94 in 2003.

Here’s a chart from the report, showing how Chile’s economy grew rapidly while Venezuela languished.

The report is filled with lots of data.

One item that caught my attention (in part because of Trump’s short-sighted policies in America) is how Chile dramatically reduced trade barriers while Venezuela was more protectionist.

From 1979, Chile’s economy was characterized by the lowest level of tariff restrictions in all of Latin America (10 percent) and a lack of nontariff barriers… República Bolivariana de Venezuela increased its trade restrictions to force consumers to purchase goods produced by the nationalized industries.

But Chile’s success goes well beyond trade policy.

Here’s a table looking quality of governance and red tape.

And here’s some data looking at obstacles to entrepreneurship. As you can see, it took almost four times longer to open a business in Venezuela in 1999.

I assume the numbers are even worse today. Assuming, of course, than anyone even wanted to open a business in that sad country.

Here are some excerpts from the conclusion of the World Bank report. This is a pretty good summary of how Chile reversed its descent to socialism while Venezuela doubled down on bad policy.

In 1971–2003, both Chile and República Bolivariana de Venezuela experienced periods of growing statism in their economic policy. In Chile, however, it was only a short episode (Allende’s socialist experiment in 1971–73), while in República Bolivariana de Venezuela this policy direction was maintained nearly for the entire period covered by the analysis (with its culmination being Chávez’s populist administration elected in 1998). During these periods, state-owned enterprises grew in both countries; market mechanisms were additionally disturbed by administrative price controls and restrictions imposed on freedom of entry into the market—and constrained business activity in many sectors of the economy… Furthermore, severe restrictions on foreign trade and capital flows were imposed. In Chile, the statist experiment was interrupted after three years—once it had driven the economy into a state of profound imbalance with a giant deficit and unchecked inflation. A radical program of economic stabilization and reforms broadening the scope of economic freedom was initiated. This dramatic change in economic orientation produced positive results. From the second half of the 1980s until the end of the analyzed period (2003), Chile was the fastest-growing country in South America.

Now it’s time for me to share an updated version of my chart (though I’m removing Argentina so we can focus just on Chile and Venezuela). As you can see, the updated numbers from the Maddison database tell the exact same story as my 2011 chart.

And why has Chile grown so much faster? As I told the students here in China, it’s because there’s more liberty to engage in voluntary exchange.

In the latest report from Economic Freedom of the World, Chile is ranked #15 while Venezuela is at the very bottom.

P.S. Some people have tried to portray Chile as a failure, but such assertions are easily debunked.

P.P.S. Kudos to the World Bank for publishing a very substantive report. For what it’s worth, it’s the international bureaucracy most likely to produce sensible publications.

P.P.P.S. The only bad World Bank study I’ve encountered equated high tax burdens with a good report card.

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The good news is that Donald Trump is not imitating all of Herbert Hoover’s statist policies.

The bad news, as I explain in this interview, is that his protectionist mistakes could trigger a repeat of Hoover’s beggar-thy-neighbor protectionism that wreaked havoc in the global economy during the 1930s.

George Santayana is famous for warning that “Those who cannot remember the past are condemned to repeat it.”

Well, this is why I’m so agitated about what Trump is doing. It’s true that the economy will not be wiped out by the trade taxes he’s imposing today. But what happens when other nations retaliate, and then Trump doubles down with additional taxes on global commerce?

That’s a potential recipe for a big reduction in worldwide liberty. Which is exactly what happened in the 1930s, as illustrated by this chart from an academic study.

At the risk of understatement, that would not be good for American prosperity. And blue-collar workers would be among the victims since protectionism always destroys more jobs than it saves.

So what can be done about this?

The Washington Post reports on some bipartisan legislation that would curtail Trump’s authority to unilaterally destabilize world trade.

Sen. Bob Corker (R-Tenn.) introduced a bipartisan bill Wednesday that would give Congress new authority to check the president’s trade moves… Corker’s bill would require congressional approval when the president enacts tariffs under the auspices of national security, as Trump did last week in imposing levies on aluminum and steel imports from Canada, Mexico and the European Union. The legislation, which Corker released with a total of nine Democratic and Republican co-sponsors, is the most forceful congressional response to date to Trump’s protectionist trade agenda. …The bill’s prospects are unclear. Corker acknowledged that some Republicans are unwilling to cross the president, and Majority Leader Mitch McConnell (R-Ky.) has ruled out bringing up the measure as a stand-alone bill. But Corker’s bill appeared to be gaining traction on and off Capitol Hill on Wednesday. The U.S. Chamber of Commerce announced its support, as did Koch Industries. …Corker’s legislation would require the president to submit to Congress any proposal to adjust imports in the interest of national security. The legislation would qualify for expedited consideration for a 60-day period. …The co-sponsors are Republican Sens. Patrick J. Toomey (Pa.), Lamar Alexander (Tenn.), Mike Lee (Utah), Ron Johnson (Wis.) and Jeff Flake (Ariz.), along with Democrats Heidi Heitkamp (N.D.), Mark R. Warner (Va.), Brian Schatz (Hawaii) and Chris Van Hollen (Md.).

I’m sympathetic to such legislation, not only to thwart Trump’s protectionism, but also because I don’t think any White House should have so much unilateral power. In other words, I’m philosophically consistent. I didn’t think it was right for Obama to have the authority to arbitrarily change provisions of Obamacare and I don’t think it is right for Trump to have the authority to arbitrarily change provisions of trade law.

But let’s stick to the trade issue. Lower taxes on global commerce are one of the great achievements of post-World War II era. Policy makers around the world have lowered barriers and allowed the free market more breathing room.

That’s been a very successful policy.

By the way, politicians from developing nations deserve special credit. They’ve been especially aggressive in lifting the burden of trade taxes. Here’s a chart prepared by the Confederation of British Industry.

I started today’s column by warning that Trump shouldn’t emulate Hoover. I’ll end the column by pointing out that Reagan is a better role model.

And if that doesn’t work, maybe we can educate the President on why it’s good to have a capital surplus, which is the flip side of having a trade deficit.

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Normally when I write about Georgia, it’s to wax poetic about the Glorious Bulldogs. But I’m currently in Tbilisi, the capital of the nation of Georgia, which is wedged between Russia, Turkey, Armenia, and Azerbaijan.

So allow me to take this opportunity to highlight the benefits of sweeping pro-market reform. Georgia is ranked #8 according to Economic Freedom of the World and it doesn’t get nearly enough attention considering that lofty score.

This chart from EFW shows Georgia’s score since the reform wave started in 2004.

The fact that Georgia’s score jumped by one full point over 11 years is impressive, but it’s even more impressive to see how the country’s relative ranking has increased from #56 to #8.

Here are the numbers for 2004 and 2015. As you can see, there were particularly dramatic improvements in trade, regulation, and quality of governance (legal system and property rights).

My friend from Georgia, Gia Jandieri, said one of the worst legacies of Soviet rule was corruption. He and his colleagues at the local pro-market think tank explained to policymakers that reducing the size and scope of government was a good strategy to address this problem.

And they were right.

Georgia was ranked near the bottom by Transparency International in 2004, scoring just a 2 (on a 1-10 scale) and tied for #133 out of 146 nations. Now Georgia’s score has jumped to 56 (on a 1-100 scale), which puts it #46 out of 180 nations.

And a big reason why corruption has plummeted is that you no longer need all sorts of permits when setting up a business. Indeed, Georgia ranks #9 in the World Bank’s Ease of Doing Business.

For what it’s worth, Georgia is only three spots behind the United States (the previous year, they were eight spots behind America).

And I definitely shouldn’t forget to mention that Georgia is part of the global flat tax revolution.

So what does all this mean? Well, according to both the IMF data and the Maddison database, per-capita GDP in Georgia has more than doubled since pro-market reforms were enacted.

In other words, ordinary people have been the winners, thanks to a shift to capitalism.

P.S. Since I just wrote about my visit to the anti-Nazi/anti-Marxist House of Terror Museum in Budapest, I should mention that the “lowlight” of my visit to Georgia was seeing Stalin’s boyhood home earlier today. I realize “thumbs down” is a grossly inadequate way of expressing disapproval for a tyrant who butchered millions of people, but I didn’t want to get arrested for urinating in public.

I wonder if Hitler’s boyhood home still exists? I could visit and then say I covered both ends of the socialist spectrum.

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This morning in Monaco, I moderated a panel for the Convention of Independent Financial Advisors on the implications of an “uber-ized” economy. In my introductory comments, I asserted that the best part of capitalism was “creative destruction.” Simply stated, we all benefit when entrepreneurs come up with products such as personal computers that make our lives better.

But I also pointed out that creative destruction was the most painful part of capitalism. Think, for example, about the people who used to work in the typewriter industry.

One of the speakers, Professor Philippe Silberzahn of the EMLYON Business School, cited another example. Kodak used to be one of the biggest and most profitable companies in America, but the digital camera (ironically, first invented by Kodak) set the firm into a death spiral. What was creative for the rest of us wound up causing destruction for the people who worked at Kodak and the investors who owned shares of Kodak.

It’s easy, as an armchair economist, to argue in favor of creative destruction. As explained in this video, this is why we are far richer than our ancestors. Even if our ancestors worked in the candle industry and were bankrupted and tossed out of work when the electric light bulb hit the market.

But armchair theorizing (even when accurate) doesn’t change the fact that change means temporary pain. And this is a political challenge. Especially since those who suffer are the “seen” and the beneficiaries often are “unseen.”

But none of that changes the fact that politicians should not intervene. Assuming, of course, the goal is long-run increases in living standards for everyone.

In a column for CapX, Tim Worstall elaborates on how we become richer when we produce more with less.

Warren Buffett tells us all that slashing jobs is just the capitalist way. …But Buffett is wrong. This isn’t the capitalist way at all. This is just the way that any and every economy should work. Whether communist, socialist, social democratic or capitalist, all economies will economise on inputs into a process. That is what actually makes us richer. Buffett’s subsequent point – that “people live better when there is more output per capita” – is right. But that’s not specific to capitalism. …as Paul Krugman has pointed out, productivity isn’t everything but in the long run it’s pretty much everything. …Today, instead of everyone working in the fields, just 2 per cent of us do so. The other 98 per cent of the population are busing trying to sate some other human desire or want. And thus, we have the labour to run a health service, libraries, ballet companies, vital cat picture websites, manufacturing, ketchup plants and the like. Being economical with labour is the very thing that makes civilisation itself possible. … William Nordhaus has pointed out…entrepreneurs – for devising a new process which uses different or fewer inputs is the very definition of entrepreneurship – end up with some 3 per cent or so of the value they create. The remaining 97 per cent flows to the rest of us in the form of consumer surplus.

By the way, I’m not surprised that Buffett is wrong. He’s goofed before when venturing into public policy.

Tim closes with a very important point.

Not enough people realise that using fewer resources to do something makes us richer. And yes, human labour is just such a scarce resource that we wish to economise upon using. Perhaps if people understood this, they’d stop arguing that solar power is better than nuclear because it produces more jobs for the same amount of electricity produced.

And since we’re on that topic, here’s an item from Libertarian Reddit revealing a leftist who genuinely seems to think that the goal should be to produce less per unit of labor.

Sounds like Ms. Kohn should spend some time with this video.

But I like to be even-handed in my disdain for bad economics. Trump is a protectionist who wants to preserve certain jobs in certain industries.

Well, I don’t know if this artist is a left-wing Trump critic or right-wing Trump critic, but he’s right about the foolishness of trying to stop progress.

But this brings me back to where I started. The VHS worker was a victim, just as the workers at Kodak were victims.

It’s the inevitable consequence of progress. But if we try to stop progress, we all lose in the long run. The best way to help workers and investors who suffer from creative destruction is to have pro-growth policies so that if you’re in a disrupted sector, you have plenty of opportunities to quickly rebound.

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