Archive for the ‘Free Markets’ Category

By every possible measure, Chile is the most successful country in Latin America.

Income has soared and poverty has plummeted thanks to market-based reforms.

It’s not perfect, of course. The nation’s economic freedom score – 7.89 on a 0-10 scale – is good enough for a #13 ranking, but there’s still room for improvement.

But there’s also plenty of room for economic decline, and that might be the unfortunate outcome if politicians respond in a misguided way to recent protests.

Especially if they take advice from the wrong sources. For instance, the New York Times opined yesterday about the supposed shortcomings of the Chilean model.

Chile is often praised as a capitalist oasis, a prospering and stable nation on a continent where both prosperity and stability have been in short supply. But that prosperity has accumulated mostly in the hands of a lucky few. As a result, Chile has one of the highest levels of economic inequality in the developed world. …Chileans live in a society of extraordinary economic disparities. …What makes Chile an outlier among those 36 nations is that the government does less than nearly any other developed nation to reduce economic inequality through taxes and transfers. As a result, Chile has the highest level of post-tax income inequality among O.E.C.D. members. …Even after increases in recent years, the Chilean government still spends a smaller share of total economic output than every other nation in the O.E.C.D. The obvious path for Chile is for the government to spend more money.

As is sometimes the case with the New York Times, parts of the editorial are downright false. Income in Chile has jumped significantly for all quintiles, not just a “lucky few.”

And even the parts that are technically accurate are very misleading.

Notice, for instance, what the NYT is doing with inequality numbers. It is comparing Chile with rich nations, mostly from Europe.

But what happens if Chile is compared to other countries from Latin America.

That tells an entirely different story, as you can see from this poverty map (dark red is bad, light yellow is good) produced by the Center for Distributive, Labor, and Social Studies in Argentina.

All of a sudden, Chile looks very good.

Even if you use U.N. numbers that rely on the left’s misleading definition of poverty (i.e., based on relative income), Chile is a success story compared to other nations in the region.

It’s especially important to understand that Chile is getting good results for the right reason.

Poverty is falling because of the private economy rather than coercive redistribution. Here are some excerpts from a recent U.N. release.

In an analysis of the countries with the greatest reductions in poverty in the 2012-2017 period, in Chile, El Salvador and the Dominican Republic, the increase in income from wages in lower-income households was the source that contributed the most to that reduction, while in Costa Rica, Panama and Uruguay, the main factor was pensions and transfers received by lower-income households.

Sadly, some people in Chile don’t have the fortitude to build on the market reforms that have boosted national prosperity.

Indeed, it appears there will be backsliding according to the aforementioned New York Times editorial

Sebastián Piñera, the billionaire elected president in 2017, …proposed a slate of reforms, including an increase in the top income tax rate, an increase in retirement benefits, and a guaranteed minimum monthly income. …Andrónico Luksic Craig, chairman of Quiñenco, a financial and industrial conglomerate, wrote on Saturday on Twitter that he was ready to pay higher taxes.

I’m disappointed but never surprised when politicians unravel progress.

But it’s always discouraging when guilt-ridden rich people embrace statist policies (sounds familiar, huh?).

For the sake of the Chilean people, let’s hope this is empty rhetoric.

P.S. Since we’re on the topic of Chile, here are some excerpts from the abstract of a study in the Journal of Development Economics that estimated the heavy economic cost of the nation’s detour to socialism in the 1970s.

…we look at share prices in the Santiago exchange during the tumultuous political events that characterized Chile in the early 1970s. …deploying previously unused daily data and exploiting two largely unexpected shocks which involved substantial variation in policies and institutions, providing a rare natural experiment. Allende’s election and subsequent socialist experiment decreased share values, while the military coup and dictatorship that replaced him boosted them, in both cases by magnitudes unprecedented in the literature. The most parsimonious interpretation of these share price changes is that they reflected, respectively, the perceived threat to private ownership of the means of production under a socialist government, and its subsequent reversal.

By the way, this in no way should be interpreted as support for the Pinochet dictatorship.

But what it does say is that dictatorships that allow economic freedom produce much better results than dictatorships impose totalitarian economic policies in addition to totalitarian political policies.

Which is basically the point Milton Friedman made when asked about his connection to Chile.

For what it’s worth, Pinochet eventually allowed a transition to democracy, which somewhat atones for his sins.

P.S. To be fair, the NYT editorial was merely misguided, which is better than the wild inaccuracy that has characterized some analyses.

P.P.S. If you want to learn about Chile’s reforms, here are columns about the private social security system and the national school choice system. And this World Bank comparison of Chile and Venezuela is very instructive as well.

Read Full Post »

John Papola has done it again. His video showing a Keynes v. Hayek rap contest was superb, and was followed by an equally enjoyable sequel featuring a boxing match between Keynes and Hayek.

Now he has a rap contest about capitalism and socialism featuring Ludwig von Mises and Karl Marx.

The video touches on three economic topics.

The obvious focus is the track record of capitalism vs. socialism. Given the wealth of evidence, that’s a slam-dunk victory for free markets.

But there are also two wonky issues referenced in the video.

  • The socialist calculation debate – As I’ve repeatedly noted, genuine socialism involves government ownershipcentral planning, and price controls. Economists from the Austrian school, such as Mises, were the ones who explained that governments were incapable of having either the information or knowledge to make such a system work.
  • The labor theory of value – Marxism is based on the strange notion that the value of a product is a function of the hours it took to produce. This overlooks the role of capital and entrepreneurship. Moreover, as explained in the video, value is subjective, determined by the preferences of consumers.

Let’s close with a nice compare-and-contrast image a reader sent to me.

P.S. John Papola also did a great satirical commercial for left-wing toys.

P.P.S. Even though it’s not the right time of year, here’s his satirical commercial for Keynesian Christmas carols.

P.P.P.S. If you want to learn about the Austrian macroeconomics, click here and here.

Read Full Post »

Last century, I remember reading about the “Washington Consensus,” which was a term that was used to describe the kind of policy advice in those days provided to (or imposed upon) the developing world by the IMF, World Bank, and U.S. Treasury.

I never studied the topic since I was focused at the time on domestic issues such as tax reform, Social Security reform, and the economic effect of government spending.

But I recall thinking that the Washington Consensus was pro-market, but nonetheless a bit timid because it did not include a plank to limit the size of government.

Wikipedia helpfully lists the 10 policies that defined this consensus.

  1. Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;
  2. Redirection of public spending from subsidies (“especially indiscriminate subsidies”) toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
  3. Tax reform, broadening the tax base and adopting moderate marginal tax rates;
  4. Interest rates that are market determined and positive (but moderate) in real terms;
  5. Competitive exchange rates;
  6. Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
  7. Liberalization of inward foreign direct investment;
  8. Privatization of state enterprises;
  9. Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;
  10. Legal security for property rights.

With the benefit of hindsight, I now want to praise the Washington Consensus.

Yes, it would be nice if there had been some focus on the size of government, but all of the advice on trade, regulation, monetary policy, and quality of governance was very sound. And those policies account for 80 percent of a nation’s grade according to Economic Freedom of the World.

Moreover, the planks on fiscal policy were good, even if they didn’t go far enough.

Additionally, it was good to have multilateral institutions such as the International Monetary Fund and World Bank using their leverage to push for pro-market reforms (unlike today, when international bureaucracies often push a statist agenda).

So what was the effect of – to use the terms of opponents – this emphasis on “neoliberalism” or “market fundamentalism”?

Well, it seems to have made a difference. Here the data from the Fraser Institute on economic freedom for all nations. As you can see, economic liberty around the world increased significantly between 1980-2000, the years when the Washington Consensus was most influential.

But did that period of pro-market reform lead to better outcomes?

The answer is a resounding yes, at least in my humble opinion.

Here’s the most persuasive evidence, showing the dramatic decline in extreme poverty.

Let’s also look at some new research from Professor William Easterly, who worked for many years as an economist at the World Bank.

He notes that many people think the Washington Consensus was a failure. So he took a fresh look at the data.

Many authors…have proclaimed the failure of a package of market-oriented reforms proposed in the 1980s and 1990s — variously known as the Washington Consensus, …globalization, or neoliberalism. This paper seeks to update the stylized facts on policies and growth that influenced this verdict. …The earlier stylized facts featured the zero or low per capita growth in the regions that were the focus of reform: Africa and Latin America. …these stylized facts have not been updated in the literature, as much more data have become available with the passage of time. …This paper will report new stylized facts. First, there has been additional and quite remarkable progress on reform outcomes since the late 1990s — this is a principal finding of this paper. Earlier judgments on the reforms often happened before the reform process was complete and/or had enough post-reform growth data to evaluate reforms. …The second stylized fact is that there is a strong correlation between improvements in policy outcomes and changes in growth outcomes. The third stylized fact is that growth has recovered in Africa and Latin America in the new millennium, and the regression of growth on policy outcomes explains a substantial part of the growth recovery. …This paper will extend the method of analyzing extremely bad and moderately bad policy outcomes to other policies, specifically — in addition to inflation — the black market premium on foreign exchange, overvaluation of the domestic currency, negative real interest rates on bank savings deposits, and abnormally low trade shares to GDP. Updating the data on these outcomes is not trivial and constitutes one of the main contributions of this paper.

And what did Prof. Easterly discover?

It turns out that the prevalence of bad outcomes has declined.

Figure 6 shows a summary measure of share of countries with any bad policy. Any bad policy is defined as having any of the moderate or extreme policy dummies set to one, with a minimum of 4 policy observations available for that country-year. The summary measure shows a downward trend in bad policy outcomes worldwide, in Latin America, and in Sub-Saharan Africa. The sharpest break is around the mid-1990s, somewhat after the formulation of the Washington Consensus and the first negative reactions it received.

Here’s the aforementioned Figure 6.

And he also looks at the prevalence of extremely bad poliicy.

Figure 7 shows a similar graph to Figure 6, but now limited to extremely bad policy outcomes. It shows if any of the extremely bad policy dummies is set to one, for the sample with a minimum of at least two out of five policy outcomes available. The decline in the prevalence of any extreme policy is even more dramatic beginning in the early 1990s, going from surprisingly common (above 35 percent of countries up to the early 1990s) to almost non-existent for the world. The same pattern is even more striking for Africa and for Latin America.

Here’s Figure 7.

Most important, these better outcomes also are associated with stronger growth.

This paper showed these changes in policy outcomes – especially away from extreme policies — were accompanied by growth increases. It documented that the policy reforms can explain the growth increases in the regions most emphasized earlier – Africa and Latin America. We have seen that the old data available through 1998 was indeed consistent with the reform pessimism, partly because of weaker results on growth payoffs associated with reform outcomes and partly because less reform had happened.

Prof. Easterly acknowledges that there are still many issues to investigate and that his research is just one slice at a big pie.

But the bottom line is that we now have some good evidence that the Washington Consensus led to better results. Simply stated, capitalism produces more growth and less poverty. Too bad the IMF and other international bureaucracies have forgotten this lesson.

Read Full Post »

The folks at the Fraser Institute in Canada have just released a new version of Economic Freedom of the World.

As has been the case for many years, Hong Kong is #1 and Singapore is #2, followed by New Zealand (#3) and Switzerland (#4).

Interestingly, the United States improved one spot, climbing to #5.

Here’s the data for the top two quartiles.

The new version includes 2017, so fans of Trump will be able to claim vindication.

But not much.

As you can see, the EFW data shows that America’s score rose only slightly, from 8.17 to 8.19.

My view, for what it’s worth, is that Trump’s economic policy is somewhat incoherent.

He’s been good on taxes and red tape, but bad on spending and trade. So I’m not surprised we’re mostly treading water.

Now let’s look at the bottom half of the ranking.

In last place, unsurprisingly, we find Venezuela.

Let’s close with two final visuals.

Here’s a chart showing that poor people in the nations with the most economic liberty have much higher incomes that poor people in countries with less economic liberty.

The moral of the story, needless to say, is that people who genuinely want to help the poor should support free markets and limited government.

Last but not least, here are two tables I prepared.

The one on the left shows the nations with the biggest positive and negative changes since 2010, while the one on the right shows the biggest changes since 2000.

In some cases, such as Zimbabwe, a nation improved because it was in such terrible shape that it would have been difficult to do worse.

Though Venezuela seems determined to show that a terrible score can drop even farther.

For what it’s worth, Egypt’s slide toward statism is being subsidized by massive amounts of aid from American taxpayers.

And speaking of America, I’m embarrassed to acknowledge that the United States has suffered the 10-largest drop when looking at changes since 2000. That’s a legacy of the bad policies we got from George W. Bush and Barack Obama. Thanks for nothing, guys!

Read Full Post »

I first opined about Pope Francis in 2013, when I told a BBC audience why the Pope was wrong on economic policy.

The following year, I expanded on that point, explaining that statist policies are bad for the poor. And I revisited the issue again last year.

I’m not the only one making these arguments. In a column for Reason, Stephanie Slade explained why Pope Francis is deeply misguided.

I’ve had some harsh words to describe Pope Francis. …the pontiff’s ignorance of basic economics has led him to a bad conclusion about which public policies are best able to reduce the crushing yoke of poverty in the world. …as a matter of empirical fact, markets are the single greatest engine for growth and enrichment that humanity has yet stumbled upon. …He seems to be arguing that an outlook that places the individual above “the common good” is morally suspect. …his statements betray a shallowness in his understanding of the philosophy he’s impugning. If he took the time to really engage with our ideas, he might be surprised by what he learned. …what Pope Francis calls an “antisocial” paradigm…is better known by another name: the liberty movement, a cooperative and sometimes even rather social endeavor among people who cherish peaceful, voluntary human interactions.

Sadly, there’s zero evidence that Pope Francis has learned any economics since taking up residence in the Vatican.

For instance, he just visited Mauritius, a small island nation to the east of Madagascar.

His economic advice, as reported by Yahoo, was extremely primitive.

Pope Francis on Monday urged Mauritius, a prosperous magnet for tourists and a global tax haven, to shun an “idolatrous economic model” that excludes the youth and the poor… While the island is a beacon of stability and relative prosperity, Pope Francis honed in on the struggles of the youth… “It is a hard thing to say, but, despite the economic growth your country has known in recent decades, it is the young who are suffering the most. They suffer from unemployment, which not only creates uncertainty about the future, but also prevents them from believing that they play a significant part in your shared history,” said the pope. …Since independence in 1968, Mauritius has developed from a poor, agriculture-based economy, to one of Africa’s wealthiest nations and financial services hub. …General unemployment is low compared to the rest of the continent at 6.9 percent in 2018 according to the World Bank…

I’m glad the article acknowledges that Mauritius has been economically successful.

Though I’m frustrated by the failure to explain why.

So I’ll redress that error of omission by showing that Mauritius dramatically expanded economic liberty in the 1980s and 1990s. The nation’s absolute score jumped from 5.11 in 1980 to 8.07 in the most-recent estimates from Economic Freedom of the World.

It’s done such a good job that Mauritius is now ranked as the world’s 9th-freest economy.

So what has greater economic liberty produced?

More national prosperity.

A lot more. Based on the Maddison data, you can see that living standards (as measured by per-capita GDP) have tripled over the past three-plus decades.

I confess that I’ve never been to Mauritius.

So maybe it’s possible that the country is filled with “idolotrous” folks who think of nothing but money.

But I’m guessing that people in Mauritius are just like the rest of us. But with one key difference in that they’ve been following the recipe for growth and prosperity.

Too bad Pope Francis instead believes in the Peronist model that has wreaked so much havoc in Argentina.

P.S. The Pope should read Stephanie Slade’s column. Walter Williams and Thomas Sowell also should be on his list.

P.P.S. Methinks Pope Francis should have a conversation with Libertarian Jesus. He could start herehere, and here.

Read Full Post »

I’ve periodically explained that capital formation (more machines, technology, etc) is necessary if we want higher wages.

Simply stated, workers get paid on the basis of what they produce and the most effective way of boosting productivity is to have more saving and investment.

This is (one of the reasons) why I have so much disdain for politicians who try to foment discord and division between workers and capitalists.

To be sure, there will always be a tug of war between investors and employees over which group gets bigger or smaller slices. But so long as we have the right policies, they’ll be bickering over how to divide an ever-growing pie.

That’s a nice problem to have. Especially compared to what happens when politicians intervene – for the ostensible purpose of helping workers – and adopt policies that create economic stagnation.

Think Greece or Venezuela.

Larry Reed of the Foundation for Economic Education wrote with great insight about the link between labor and capital a few years ago. He starts with some basic economics.

…as complementary factors of production, labor and capital are not only indispensable but hugely dependent upon each other as well. Capital without labor means machines with no operators, or financial resources without the manpower to invest in. Labor without capital looks like Haiti or North Korea: plenty of people working but doing it with sticks instead of bulldozers, or starting a small enterprise with pocket change instead of a bank loan. …There may be no place in the world where there’s a shortage of labor but every inch of the planet is short of capital. There is no worker who couldn’t become more productive and better himself and society in the process if he had a more powerful labor-saving machine or a little more venture funding behind him. It ought to be abundantly clear that the vast improvement in standards of living over the past century is not explained by physical labor (we actually do less of that), but rather to the application of capital.

He concludes that we should be celebrating Labor Day and Capital Day.

I’m not “taking sides” between labor and capital. I don’t see them as natural antagonists in spite of some people’s attempts to make them so. Don’t think of capital as something possessed and deployed only by bankers, the college-educated, the rich, or the elite. We workers of all income levels are “capital-ists” too—every time we save and invest, buy a share of stock, fix a machine, or start a business. …I’ve traditionally celebrated labor on Labor Day weekend—not organized labor or compulsory labor unions, mind you, but the noble act of physical labor to produce the things we want and need. …on Labor Day weekend, I’ll also be thinking about the remarkable achievements of inventors of labor-saving devices, the risk-taking venture capitalists who put their own money (not your tax money) on the line and the fact that nobody in America has to dig a ditch with a spoon or cut his lawn with a knife. …Labor Day and Capital Day. I know of no good reason why we should have just one and not the other.

Courtesy of Mark Perry at the American Enterprise Institute, here’s a nice depiction of how labor and capital are interdependent.

P.S. When economists write about the relationship between capital and labor (savings => investment => productivity => wages), some critics assert this is nothing other than “trickle-down economics.”

Yet this is the mechanism for growth under every economic theory – even Marxism and socialism. The only thing that changes under those approaches is that politicians and bureaucrats control investment decisions. And we know that doesn’t work very well.

Read Full Post »

Having been inspired by Ronald Reagan’s libertarian-ish message (and track record), I’ve always been suspicious of alternative forms of conservatism for the simple reason that they always seem to mean bigger government.

To be fair, proponents of all these approaches always paid homage to the role of markets, so we’re not talking about Bernie Sanders-type nuttiness.

But I don’t want to travel in the wrong direction, even if only at 10 miles-per-hour rather than 90 miles-per-hour.

Now there’s a new alternative to Reaganism called “national conservatism.” It’s loosely defined, as you can see by reports from both left-leaning outlets (New York, New Republic) and right-leaning outlets (Townhall, Daily Signal).

There are parts of this new movement that are appealing, at least if I’m reading them correctly. Proponents are appropriately skeptical of global governance, though maybe not for the reasons that arouse my antipathy. But the enemy of my enemy is my friend in this battle.

They also don’t seem very fond of nation building, which also pleases me. And I also am somewhat sympathetic to their arguments about national unity – assuming it’s based on the proper definition of patriotism.

But their economic views, at best, are worrisome. And, as George Will opines, they’re sometimes awful.

…“national conservatives”…advocate unprecedented expansion of government to purge America of excessive respect for market forces and to affirm robust confidence in government as a social engineer allocating wealth and opportunity. …The Manhattan Institute’s Oren Cass advocates “industrial policy” — what other socialists call “economic planning”… He especially means subsidizing manufacturing..he admits that as government, i.e., politics, permeates the economy on manufacturing’s behalf, “regulatory capture,” other forms of corruption and “market distortions will emerge.” Emerge? Using government to create market distortions is national conservatism’s agenda. …Their agenda is much more ambitious than President Richard M. Nixon’s 1971 imposition of wage and price controls, which were temporary fiascos. Their agenda is even more ambitious than the New Deal’s cartelization of industries, which had the temporary (and unachieved) purpose of curing unemployment. What national conservatives propose is government fine-tuning the economy’s composition and making sure resources are “well” distributed, as the government (i.e., the political class) decides, forever. …Although the national conservatives’ anti-capitalism purports to be populist, it would further empower the administrative state’s faux aristocracy of administrators who would decide which communities and economic sectors should receive “well”-allocated resources. Furthermore, national conservatism is paternalistic populism. This might seem oxymoronic, but so did “Elizabeth Warren conservatives” until national conservatives emerged as such.

Since Nixon and FDR were two of America’s worst presidents, Will is drawing a very harsh comparison.

To give the other side, here are excerpts from a New York Times column by Oren Cass.

…a labor market in which workers can support strong families and communities is the central determinant of long-term prosperity and should be the central focus of public policy. Genuine prosperity depends upon people working as productive contributors to their society, through which they can achieve self-sufficiency, support their families, participate in their communities, and raise children prepared to do the same.

None of this sounds bad.

Heck, it sounds good. I’m in favor of strong families and strong communities.

But what does this rhetoric mean? Here’s where I start to worry.

Crucially, while a labor market left alone will seek an efficient equilibrium, economic theory never promises that the equilibrium will be a socially desirable, inclusive one. A genuine conservatism values markets as powerful mechanisms that foster choice, promote competition and deliver growth, but always in service to the larger end of a cohesive society in which people can thrive. …In some cases, …conservatives will head in new directions or even reverse course. …an insistence that workers throughout the labor market share in productivity growth……longstanding hostility toward organized labor will give way to an emphasis on reform. …new forms of organizing through which workers can support one another, engage with management and contribute to civil society should be a conservative priority.

And my worry turns to unfettered angst when I read some of the specific ideas that Cass mentions.

…a wage subsidy delivered directly into each low-wage paycheck…skepticism of unfettered international trade…legislation that would require the Federal Reserve to close the trade deficit by taxing foreign purchases of American assets.

To put it mildly, more redistribution, more protectionism, and taxes on investment is not a Reaganite agenda.

I’ll close with a political observation. Defenders of national conservatism have told me that the Reagan message is old and stale. It supposedly doesn’t apply to new problems in a new era.

Yet non-conservative Republicans lost twice to Obama while a hypothetical poll in 2013 showed Reagan would trounce Obama.

Some national conservatives point to Trump’s victory as an alternative, but I think that had more to do with Hillary Clinton. In any event, I very much doubt Trumpism is a long-term model for political success. Or economic success.

Maybe the real lesson is that good policy is good politics?

Read Full Post »

« Newer Posts - Older Posts »

%d bloggers like this: