The obvious lesson to be learned from this example of “anti-convergence” is that market-oriented economies out-perform state-controlled economies.
I want to revisit this topic because I recently dealt with someone who claimed that government spending via the Marshall Plan deserves the credit for West Germany’s post-war economic renaissance.
What does the evidence say? Was foreign aid from the United States after World War II a key driver (for Keynesian or socialist reasons) of the West German economy.
The answer is no.
Professor David Henderson explained the role of the Marshall Plan for Econlib.
After World War II the German economy lay in shambles. …less than ten years after the war people already were talking about the German economic miracle. What caused the so-called miracle? The two main factors were currency reform and the elimination of price controls, both of which happened over a period of weeks in 1948. A further factor was the reduction of marginal tax rates later in 1948 and in 1949. …Marshall Plan aid to West Germany was not that large. Cumulative aid from the Marshall Plan and other aid programs totaled only $2 billion through October 1954. Even in 1948 and 1949, when aid was at its peak, Marshall Plan aid was less than 5 percent of German national income. Other countries that received substantial Marshall Plan aid exhibited lower growth than Germany.
Moreover, the money that was dumped into Germany as part of the Marshall plan was offset by money that was taken out of the country.
…while West Germany was receiving aid, it was also making reparations and restitution payments well in excess of $1 billion. Finally, and most important, the Allies charged the Germans DM7.2 billion annually ($2.4 billion) for their costs of occupying Germany.
Inconvenient facts like this make the socialism or Keynesian argument very difficult to maintain.
In a 1990 study on whether there should be something similar to the Marshall Plan for Eastern Europe, Melanie Tammen summarized some of the research on how the original plan for Western Europe was a flop.
…those that received relatively large amounts of aid per capita, such as Greece and Austria, did not recover economically until U.S. assistance was winding down. Germany, France, and Italy, on the other hand, began their recovery before receiving Marshall Plan funds. As for Belgium, it embarked on a radical monetary reform program in October 1944, only one month after liberation. Belgium’s economic stabilization and recovery were well under way by 1946, fully two years before the arrival of U.S. aid. Great Britain, conversely, received more Marshall Plan aid than any other nation but had the lowest postwar economic growth rate of any European country. The critical problem facing Europe was…simply bad economic policy.
Kai Weiss of the Austrian Economic Center in Vienna also addressed this issue. Here’s some of what he wrote for the Foundation for Economic Education.
Common knowledge says that the United States’ Marshall Plan was responsible for the rapid economic growth, rebuilding the country by throwing a lot of money at it. But that’s a mistaken view. …why was there a “Wirtschaftswunder”? …two main reasons: a monetary reform and the freeing of the economy by abolishing price controls and cutting taxes. All of this was implemented thanks to one man: Ludwig Erhard. …What Erhard did was unthinkable in a hostile environment. The Allied forces, still heavily controlling Germany, left the Nazi price controls and rationing intact. But when Erhard became Secretary of the Economy in West Germany, he quickly ended all price controls and stopped rationing — to the dismay of the US advisors. …He, not a Keynesian Project like the Marshall Plan, enabled the miracle.
Speaking of Ludwig Erhard, here’s a video clip on what he did to trigger West Germany’s prosperity.
I have one minor disagreement with that video.
It states that Germany combined “free markets with a strong welfare state.”
But the main takeaway from today’s column is that it’s even more absurd to claim that Germany’s post-war growth was because of big government.
P.S. Regarding Eastern Europe, western nations ultimately decided to create a cronyist institution, the European Bank for Reconstruction and Development, in hopes of boosting post-Soviet economies. Needless to say, that was a mistake. Many nations have enjoyed good growth after escaping communist tyranny, but the cause was good policy rather than handouts.
P.P.S. The Erhard video is an excerpt from The Commanding Heights, a must-watch video that basically tells the economic history of the 20th century).
This is because such data, especially over decades, teaches us very important lessons about the policies that are most likely to generate prosperity.
I’m revisiting these issues today because John Cochrane, a Senior Fellow at the Hoover Institution and a former professor of economics at the University of Chicago, recently wrote a column that contains a must-see chart showing how some of the major European nations have been losing ground to the United States over the past several decades.
The main thing to understand is that European nations were catching up to the United States after World War II, which is what one would expect.
But that trend came to a halt about 40 years ago and now these nations are suffering divergence instead of enjoying convergence.
Here’s some of Cochrane’s analysis.
…the US is 54% better off than the UK.. France…50% less than US. …the US is 96% better off than Italy. …And it’s been getting steadily worse. France got almost to the US level in 1980. And then slowly slipped behind. The UK seems to be doing ok, but in fact has lost 5 percentage points since the early 2000s peak. And Italy… Once noticeably better off than the UK, and contending with France, Italy’s GDP per capita is now lower than it was in 2000. GDP per capita is income per capita. The average European is about a third or more worse off than the average American, and it’s getting worse.
What’s most remarkable, as I wrote about back in 2014, is that the gap between the United States and Europe is “getting worse.”
Cochrane wonders if this is evidence against the European Union’s free-trade rules.
This should be profoundly unsettling for economists. Everyone thinks free trade is a good thing. The European union, one big integrated market, was supposed to ignite growth. It did not. The grand failure of the world’s biggest free trade zone really is a striking fact to gnaw on. Sure, other things are not held constant. Perhaps what should have been the world’s biggest free trade zone became the world’s biggest regulatory-stagnation, high-tax, welfare-state disincentive zone. Still, “it would have been even worse” is a hard argument to make.
For what it’s worth, I don’t think it’s “a hard argument to make”. I’ve pointed out – over and over again – that Europe’s reasonably good policies in some areas are more than offset by really bad fiscal policy.
Think of the different types of economic policy as classes for a student. If a kid flunks one class, that’s going to produce a sub-par grade point average even if there was good marks in all the other classes.
Besides, I suspect some of the benefits of free trade inside the European Union are offset by the damage of the E.U.’s protectionist barriers against trade with the rest of the world.
P.S. Some people may wonder why Germany was not included in Cochrane’s chart. I assume that’s because the reunification of West Germany and East Germany about 30 years ago creates a massive discontinuity in the data. For those interested, Germany is slightly better off than France and the U.K., according to the Maddison data, but still lagging well behind the United States.
P.P.P.S. I don’t think it’s a coincidence that America started out-performing Europe after Reaganomics was implemented.
P.P.P.P.S One obvious takeaway from Cochrane’s data (though not obvious to President Biden) is that the United States should not be copying Europe. Unless, of course, one wants ordinary Americans to be much poorer.
In my lifetime, perhaps the greatest moment for human liberty took place 31 years ago when the corrupt socialist dictatorship of East Germany lost the will and ability to maintain the Berlin Wall.
Almost overnight, there was hope for the long-suffering people of the so-called German Democratic Republic.
In a spontaneous celebration that still brings tears to my eyes, they joined together with the free people of West Germany to tear down the ugly symbol of Marxist tyranny and oppression.
But not everybody is happy that the communism wound up on the ash heap of history. In a column for Jacobin, Loren Balhorn wistfully remembers East Germany’s Stalinst regime.
On October 3, 1990, the German Democratic Republic (GDR), formerly one of the most enthusiastic members of the Warsaw Pact, …ceased to exist…the uprisings of 1989–1990 across Eastern Europe saw the consolidation of a neoliberal order as the supposed price to pay for basic civil liberties and nominal freedom of movement. Communist parties that had ruled for decades fell into disarray, hastily rebranding themselves as social democrats or dissolving entirely. The fall of the Soviet bloc also demoralized large sections of the Left on the other side of the Iron Curtain, prompting the collapse of the international communist movement. …The specter of dictatorship and economic stagnation that is used to (one-sidedly) characterize life in the Eastern Bloc continues to be cited as incontrovertible “proof” that capitalism is the only workable — and indeed desirable — socioeconomic system. Moreover, socialism’s collapse in 1989 demonstrated that, when presented with the choice, most workers opt for the material abundance of capitalism and liberal democracy over whatever a socialist system has to offer. …whatever gains workers had made under socialism evidently were not enough to retain their loyalty when the moment of decision came. …But did it have to be this way?
After posing the rhetorical question whether it had “to be this way?”, Balhorn provides a very twisted answer
For many who survived fascism and wanted a new, better Germany, the GDR appeared as the natural choice. A number of prominent leftist intellectuals and artists, like renowned playwright Bertolt Brecht, composer Hanns Eisler, philosopher Ernst Bloch, and legal theorist Wolfgang Abendroth, opted to move East and lend their services to the cause. …Beyond these famous examples, it should not be forgotten that over five hundred thousand Germans chose to migrate not West but East in the first decade of the GDR’s existence. …The Wall…gave the GDR the chance to build a society that was broadly characterized by modest prosperity and social equality between classes and genders. Workers were guaranteed employment, housing, and all-day childcare, while basic foodstuffs and other goods were heavily subsidized. Though wages were only half of what they were in the West, adjusted for prices in relation to earnings, GDR workers’ actual purchasing power was more or less the same. …class distinctions in the GDR were in fact dramatically reduced, both in material as well as cultural terms.
In other words, Balhorn wants readers to believe that equal levels of misery and deprivation in former communist nations are something to celebrate.
I can’t resist pointing out that his assertion about levels of purchasing power being “more of less the same” in West Germany and East Germany is utter nonsense.
Here’s one final excerpt which must set a record for romanticizing a Marxist dictatorship.
…the women and men who lived and worked in the GDR spent four decades building a society they understood as such and registered a number of remarkable achievements. …we can look to many of its achievements in education, housing, childcare, and labor relations as evidence that society does not have to be organized around the interests of the wealthy and that the free market is not the only way to organize an economy. It is possible to ensure that everyone has a place to live, health care, enough food to eat, and access to education — something that no capitalist society can claim today.
This is – at best – moral blindness.
I noted back in 2017 that there were some economists who used to write about the supposed superior performance of communist nations. But there were merely guilty of naively believing data from communist nations (and also guilty of not actually understanding economics).
I don’t think any of them would be dumb enough to praise East Germany today.
P.S. You won’t be surprised to learn that the nations with the most pro-market reforms are the ones that have most prospered since the collapse of communism.
Near the beginning of the croronavirus crisis, I observed that “government-run health systems have not done a good job” of dealing with the pandemic.
And I’ve repeatedlynoted the failure of government bureaucracies to respond effectively in the United States.
Is there, perhaps, a lesson to be learned about what happens when politicians get more control of the health sector?
Let’s consider the different experiences of two European nations.
Kai Wess of the Austrian Economics Center in Vienna has a column for CapX on the performance of the German system.
…the responses of national governments to the crisis have been starkly different. …Germany’s approach is particularly interesting. …the death rate of Germany has been hovering around 0.2% to 0.5% for the entirety of March, only rising to the current 1.1% in the last days after deaths spiked in the first days of April. And yet, 1.1% is still light years away from Spain’s 8.7% Italy’s 11.7%, Britain’s 7.11%, and France’s 6.8%. …Germany’s lockdown has also been somewhat more lenient than in other European countries. …So why is Germany doing comparatively well? For one thing, mass testing has taken place for weeks… The second key factor is the good condition of Germany’s health sector. The number of critical care beds in Germany previously stood at 29.2 per 100,000 inhabitants – the highest of the countries most affected by Covid-19 other than the US (34.7). …why does Germany have these testing capacities? And why is the health sector so well-equipped? One of the main answers is that, at least relatively speaking, Germany’s health sector is more decentralised and leaves more room for competition… Germany does not have an NHS-style one-size-fits-all approach, but an insurance-based system. Everyone has to have health care and the government bears the cost for poorer patients. …there is competition between different insurance plans and individuals can pick their preferred plan. The health sector’s revenue comes from the premiums paid by patients as well as their employer – not through state funding. …The testing system has also been very decentralised, with a mixture of government agencies, private enterprise, and research organisations working on expanding testing capabilities – indeed, the January test was made possible by a private biotech entrepreneur. …when it comes to testing, Germany does not have a centralised diagnostic system, but a network of local authorities. As Christian Drosten explain, “Germany does not have a public health laboratory that would restrict other labs from doing the tests.”
Writing for the Telegraph, Charles Moore opines on its less-than-impressive track record.
The Government’s policy of lockdown is in significant part dictated by the demands not of patients, but of the NHS, and by its lack of adaptability and readiness. …A significant reason for the slow development, arrival and use of the antigen tests (“Have I got it?”) and the antibody tests (“Have I had it?”) seems to be the reluctance of the health service, and of Public Health England, to look outside their own spheres for help. In a culture almost proudly hostile to the private sector and mistrustful of independent academic work, the NHS’s first instinct is to defend bureaucratic territory. …the NHS belatedly admitted within government that it had failed to get enough ventilators. …University College Hospital, Formula I and Mercedes Benz got together to produce the CPAP… Next week, the repurposed Mercedes Benz F1 factory in Brixworth expects to produce 1,000 CPAPs a day. …the amazing 4,000-bed capacity Nightingale field hospital at the ExCeL centre in east London, opened yesterday… For two weeks after it was proposed, NHS top brass opposed it. When they finally admitted they needed it, the Army and the private contractors were the ones who made it happen in nine days. …Ten days ago, government contacts found the only company in Britain with expertise in making reagent for antigen swab tests. The firm was put on to the NHS, but at the time of writing, the health service had still not had a conversation with it. …That system is the problem. …The defects are baked into our system of national bureaucratic command. People have noticed that Germany has been more successful in managing the virus spread through testing. This is not a coincidence. Germany does not have our lumbering central diagnostic system, because it does not have, in our sense, a national health service.
These two columns are very instructive, not only because they show the adverse consequences of too much government, but also because they show that there are big differences in European health systems.
Many people have the (very!) inaccurate belief that the United States has a market-based system. And many of them also share the mistaken belief that all European nations have systems where everything is financed and provided by government.
In reality, there’s a wide divergence of policies across the globe.
Back in 2013, I created a back-of-the-envelope “Freedom Meter” to illustrate how Obamacare was best viewed as in incremental step on a long (and well-traveled) road to a government-dominated health care system.
Simply stated, we already greatly reduced the role of markets thanks to a range of programs and policies (Medicare, Medicaid, the tax code’s healthcare exclusion, etc).
Obamacare simply added another layer of taxes, spending, and regulation.
I actually suspect many nations that supposedly have “government-run healthcare” actually would be closer to the free-market side of the Freedom Meter than the United States.
Sort of like what I’m depicting in this revised, worldwide version.
Though I admit I’m just guessing that Germany and Switzerland might be better than the United States.
Only instead of a fiscal ranking based on factors such as income taxes, business taxes, property taxes, and consumption taxes, we’d have a health ranking based on factors such as third-party payer, degree of centralization, consumer choice, regulatory burden, financing mechanisms, and extent of direct government provision.
If anybody’s aware of anything like this, please share.
One of the videos was this excerpt of his famous tear-down-this-wall speech at Brandenburg Gate.
In a column for the Washington Examiner, Quin Hillyer explains why this was a momentous event.
The greatest climactic event of the 20th century occurred 30 years ago Saturday, as thousands of Germans pushed through, climbed over, and began tearing down the Berlin Wall. Human freedom overcame human evil. Human potential was unleashed. Exuberantly but peaceably, the good guys won. The story needs to be told again and again, because those too young to have lived through the Cold War have trouble feeling viscerally the stakes, the danger, and the drama. …the late William F. Buckley said in his last-ever public speech that The Lives of Others, about life in East Germany under communist domination, should be required viewing in every American high school. The film reminds us that not just in gulags where perceived “troublemakers” were sent but in everyday life: The repression was severe; the fear was palpable; the attempted destruction of the human psyche was pervasive. And there stood the Berlin Wall. Both the real presence of brutality and the era’s most chilling symbol of mass enslavement, the wall was the physical, concrete portion of the figurative Iron Curtain. Also featuring extended barriers of metal-mesh fences, trenches, and 259 vicious-dog runs, and guarded by 186 observation towers manned by machine-gun-toting soldiers, the wall was a monstrosity. The joy that greeted the wall’s fall, not just on-site but around the world, remains almost indescribable.
By the way, I echo Quin’s endorsement of The Lives of Others. It really does capture the day-to-day horror of statism, and has a really nice twist at the end.
Returning to the issue of the Wall and communism, Reagan deserves considerable credit for this victory over evil.
Part of Reagan’s genius is that he attacked the moral foundations of communism. Or the lack of any moral foundation, to be more precise.
Here are some observations about his speech at Moscow State University in 1988.
Ronald Reagan, in the last year of his presidency, delivered one of his most magnificent speeches. …It was the last day of his fourth and final summit with Mikhail Gorbachev. …Reagan never regarded his meetings with Mr. Gorbachev as pertaining solely to arms control. Arms control was merely the pretext for a more fundamental challenge. …If the theme is diplomacy, the underlying purpose is liberty. …He did…understand that victory would belong in the end not to one nation over another, but to one political-moral idea over another. Freedom must triumph over totalitarianism. Reagan had always abominated communism. …Reagan’s ultimate aim was to plant the seed of freedom in the newly receptive furrows of a cracking totalitarianism. “Mr. Gorbachev, tear down this wall,” he cried at the Brandenburg Gate in 1987. “Isn’t it strange,” he mused to reporters, “that there’s only one part of the world and one philosophy where they have to build walls to keep their people in.” …Reagan delivered his Moscow speech standing before a gigantic scowling bust of Lenin and a mural of the Russian Revolution. He incorporated them as props in his address. “Standing here before a mural of your revolution,” he said, “I want to talk about a very different revolution,”… “The key,” Reagan said, “is freedom—freedom of thought, freedom of information, freedom of communication.”
And, yes, Reagan’s military buildup helped weaken the Soviet Union’s resolve.
I’m convinced, though, that Reagan’s attack on the core evil of communism made a key difference. Aided and abetted by his relentless mockery of communism’s many failures.
Let’s not forget that history also is the result of random events.
David Frum last year wrote about a bureaucratic snafu that helped hasten the downfall of East Germany’s evil regime.
At an evening news conference on November 9, 1989, a spokesman for the East German Communist government made a history-altering mistake. The spokesman had been authorized to say that travel restrictions on East German citizens would be lifted the next day, November 10. Instead, he said that the restrictions were lifted effective immediately. Within minutes, hundreds of thousands of East Berliners rushed to the checkpoints of the Berlin Wall. Since the erection of the wall in 1961, border guards had killed more than 750 people seeking to escape East Germany. That night, the border guards had heard the same news as everyone else. Their license to kill had been withdrawn. They stood aside. The long-imprisoned citizens of East Berlin rushed out into West Berlin that night, in what became the greatest and best street party in the history of the world. Soon, Berliners east and west began to attack the hated wall, smash it, rip it apart.
Here’s a video that describes the same event.
By the way, we can’t write about the Berlin Wall without taking the opportunity to reflect on the failure of socialism.
Writing for the U.K.-based Spectator, Kristian Niemietz points out that big government failed in East Germany, just like it fails everywhere.
Thirty years on from the fall of the Berlin Wall, socialism is back in fashion. The anniversary is a good occasion to reflect on some of the lessons that we have collectively un-learned, or perhaps never learned properly in the first place from the fall of Communism. The division of Germany into a broadly capitalist West, and a broadly socialist East, representeda natural experiment, and did so in two ways. It was, first of all, a gigantic economic experiment about the viability of socialism, and it produced conclusive results. Around the time of Reunification, West Germany’s GDP per capita was about three times that of East Germany’s. There was also around a three-year-gap in average life expectancy.
Amen.
I invite people to compare the numbers on East German vs. West German economic performance.
Last but not least, let’s close by adding an item to our collection of socialism/communism humor.
To be sure, this is dark humor. Hundreds of people were killed trying to escape into West Berlin. That may seem like an asterisk compared to communism’s horrendous death toll, but every needless death is a tragedy.
According to a report by Car and Driver, the German Parliament voted – by an overwhelming margin – against a proposal by the Green Party to impose speed limits on the autobahn.
Auto enthusiasts in Germany scored a major victory yesterday as the country’s federal parliament, the Bundestag, overwhelmingly voted to to defy a motion by the Green Party that would have asked the government to install a speed limit on the famous autobahn. The 80-mph limit suggested by the Greens would have effectively closed down one of the last roads where drivers can freely select their preferred speed. The autobahn is a defining factor in the perception of Germany abroad, but the topic is highly contested and politically charged at home. …The vote was 126 for a speed limit, 498 against, with seven abstentions.
The vote basically reflected a right-left split, though the Social Democrats tried to have their cake and eat it too.
…Green Party big shot Cem Özdemir claimed that roads would be safer with a speed limit, and he asked for German’s “special way” to be ended. …The post-communist Left Party volunteered that “electric mobility” should mean more “trains and trams,” while the Social Democrats, who are in a ruling coalition with the Christian Democrats, argued that they would support a speed limit were it not for their obligations to the coalition. The centrist CDU, the center-liberal FDP, and the conservative AfD all argued against a speed limit.
For what it’s worth, the autobahn is actually quite safe.
The autobahn road system, situated in one of the most traveled places on earth, is extremely safe. Accident rates have fallen dramatically over the past few decades, and many of the remaining deaths can be attributed to factors other than speed. Today, the fatality rate is one of the lowest in the world. Those opposed to a speed limit argue that this could be due to the fact that due to the differences in velocity, drivers are alert, generally stay to the right when not passing, and tend to stay aware of their surroundings.
Having driven many times in Europe, I can state with confidence that they are better (and more polite) drivers.
Slow cars don’t loiter in the left lane on highways, and that’s true in France and Italy as well as Germany.
I’ll close with some good news.
…speed limits have gradually eased all over the globe. Austria’s limit has been provisionally raised to 87 mph on select stretches; Abu Dhabi allows 100 mph on sections of the road system, and many U.S. states are raising limits as well.
I’m old enough to remember the horror of a nationwide 55-mph speed limit (one of the many awful policies adopted during the Nixon years).
The limit was increased in 1987 and then – in a rare moment of federalism – the nationwide speed limit was repealed in the mid-1990s (among the many good policies of the Reagan and Clinton years).
Let’s hope Germany holds firm so they don’t ever have to worry about repealing bad policy.
P.S. The article also noted that, “It has been reported that in the summer of 1995, Germany chancellor Angela Merkel, then minister for environmental affairs, broke out in tears over Helmut Kohl’s refusal to mandate a speed limit on the autobahn.” Given Merkel’s statism, I’m not surprised.
P.P.S. Enviro-zealots want onerous speed limits because of their quasi-religious opposition to energy consumption. Politicians, by contrast, view speed limits as a tool for generating tax revenue (which is why I’ve applauded civil disobedience in Washington, DC, and Arizona).
We’ll start in China, where a local government proved that incentives mattered.
In March, a man in Zhejiang, China…divorced his wife. He then married his sister-in-law. Shortly after, he divorced her too, in order to marry another sister-in-law. Several other members of the Pan family started to do the same with other relatives and eventually, 11 members of the brood married and divorced each other 23 times over a two-week period. Their motivation? To cash in on a compensation scheme… As part of an urban village renovation project, those living in the area are given a minimum compensation of one 40-square meter apartment, even though they didn’t own property. This was provided to any family whose hukou (household registration) was filed by April 10. But the Pan family learned that they could game the process by getting married, registering as residents of the village, and divorcing to do it again… By doing so, each family member would get their own household registration, which means more compensation. …The 11 family members involved have been arrested… Upon interrogation, one suspect said they didn’t think there was anything illegal with what they were doing.
I wonder if the Chinese government will learn anything about incentives from this episode.
Maybe, just maybe, it will then apply those lessons to tax policy (at the very least, by ignoring poisonous advice from the IMF and OECD).
In Spain, we re-confirm that governments are just as capable of wasting money on defense spending as they do on domestic programs.
A new, Spanish-designed submarine has a weighty problem: The vessel is more than 70 tons too heavy, and officials fear if it goes out to sea, it will not be able to surface. And a former Spanish official says the problem can be traced to a miscalculation — someone apparently put a decimal point in the wrong place. “It was a fatal mistake,” said Rafael Bardaji, who until recently was director of the Office of Strategic Assessment at Spain’s Defence Ministry. The Isaac Peral, the first in a new class of diesel-electric submarines, was nearly completed when engineers discovered the problem. …The Isaac Peral, named for a 19th century Spanish submarine designer, is one of four vessels in the class that are in various stages of construction. The country has invested about $2.7 billion in the program. The first was scheduled to be delivered in 2015 but the Spanish state-owned shipbuilder, Navantia, has said the weight problems could cause delays of up to two years.
Last but not least, we travel to Germany, where the government is trying to outdo New York City for the prize of most over-budget infrastructure boondoggle.
As a structure, it looks impressive enough. Until you pause, look around you, and absorb the silence. This is Berlin Brandenburg…, the new, state-of-the-art international airport… It is a bold new structure, costing billions, and was supposed to be completed in 2012. But it has never opened. BER has become for Germany not a new source of pride but a symbol of engineering catastrophe. …a “national trauma” and an ideal way “to learn how not to do things”. No passengers have ever emerged from the railway station, which is currently running only one “ghost train” a day, to keep the air moving. No-one has stayed at the smart airport hotel, which has a skeleton staff forlornly dusting rooms and turning on taps to keep the water supply moving. …Huge luggage carousels are being given their daily rotation to stop them from seizing up. …The company running the airport promises it will finally open next year, which would make it at least eight years late as well as billions over budget. …So what on Earth has happened…? politicians…set up a company to build an ambitious new airport. “The supervisory board was full of politicians who had no idea how to supervise the project,” says Prof Genia Kostka, of the Free University of Berlin. “They were in charge of key decisions.” …the politicians supervising the airport…insisted new departure gates were added to accommodate giant Airbus A380 aircraft, whose production has ended before the airport can open. …the overall cost of the project will be 6bn euros (£5.3bn) – if it opens as planned next year – up from an original projection of about 2bn euros. The final sum will be paid mostly by German taxpayers.
Of course taxpayers will get stuck with the tab. That’s the ongoing scam we call government.
But there is another question to ponder: How can a nation that is so aggressive (not to mention dogmatic and inventive) about collecting taxes be so incompetent at spending money?
The bottom line is that waste seems to be an inevitable part of government, regardless of the nation or the continent.
The moral of these stories, both from America and around the world, it that government is not the answer.
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.
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.
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.
It gets a decent ranking (#20) for overall economic freedom, but mostly because a bad score for fiscal policy is offset by reasonably good scores in other policy areas.
Taking a closer look at fiscal policy, there’s a heavy burden of government spending (not as bad as France, for what it’s worth) and taxes consume a big chunk of household income.
And the Germans are big believers in enforcing onerous tax laws. Sometimes in remarkable ways.
Using parking meters to levy taxes on the services of prostitutes.
Losing 30€ for every 1€ collected by taxing online sales of coffee.
Levying a fine on a one-armed man for having a one-handled bicycle.
To be fair, the last example is a penalty rather than a tax, but it’s included because it captures Germany’s über-zealous approach to enforcement.
Today, we’re going to add to this list by looking at what happens to taxpayers when they can’t afford their country’s onerous tax burden.
One of the consequences, as reported by the BBC, is that you can lose the family pooch.
A town in Germany has made headlines for seizing a family’s dog over unpaid taxes – and then selling it on eBay. German media report that officials in Ahlen initially wanted to seize the wheelchair of a disabled resident as the most valuable item on the premises. Instead, they settled on a pedigree pug bitch named Edda. One of the officials then listed the dog on eBay at an apparent bargain price of €750 – half of what its new owner expected to pay. …Edda’s new owner was Michaela Jordan, a police officer, who told the newspaper she was initially suspicious of the low price. Upon calling the number listed in the advert, she spoke to an employee of Ahlen’s administration, who explained that the dog had been seized because the owner owed the city money – including for unpaid dog tax. …the former owner said…her three children miss the dog.
And I guess we should all be happy that the tax police didn’t seize the wheelchair (maybe they were inspired by Francois the Merciful?).
In any event, I also noticed that the dog’s new owner is a bureaucrat – i.e., a net tax consumer rather than a net tax payer. There’s probably a lesson there as well.
Though even bureaucrats should be careful when dealing with government.
Edda had medical problems that were not disclosed. Since changing owners in December, she has needed four operations due to eye problems, including an emergency operation over Christmas. …totalling about €1,800.
The bottom line is that Germans are over-taxed and they have tax collectors that go above and beyond the call of duty.
Ideally, the nation’s taxpayers will get angry, have their version of the Tea Party, and elect some better politicians. Until that happens, I recommend they copy the clever tax-avoidance tactics of their French, Spanish, Irish, and Austrian neighbors.
P.S. You won’t be surprised to learn that Germany’s surtax to finance reunification is still being imposed even though East Germany was aborbed almost three decades ago (though it took more than 100 years for Washington to repeal the “temporary” telephone tax to finance the Spanish-American War).
I’ll write about that issue in the near future, but today’s topic is based on a presentation from Michael Jäger of the Barvarian Taxpayers Association. He shared some depressing data on how the German government imposed a surtax for the ostensibly limited purpose of helping the finance the reunification of West Germany and East Germany.
But limited apparently means forever.
You’ll notice two things in the chart he shared..
First, the German government has been the big winner from this new levy, collecting €214 billion euros over the past 15 years and spending less than €157 billion euros. In other words, the politicians now have a lot of extra loot to spend elsewhere.
Second, revenues continue to rise even though the ostensible purpose of the tax is disappearing. Herr Jäger is pressuring the German government to eliminate the tax, but Frau Merkel apparently has little interest in reducing the nation’s tax burden.
To save non-German speakers from having to translate, the dark blue bars are “federal allocations to new states” and the light blue bars are “revenues from the solidarity surcharge.”
The big lesson to learn from this data is that temporary taxes are like temporary programs. They will last forever unless politicians somehow can br pressured to reduce their grip on the economy.
And that’s not easy, though I told some participants in the conference that it could be done. The United States government actually repealed a temporary telephone tax that was imposed to help finance the Spanish-American War.
That’s the good news.
The bad news is that the tax wasn’t repealed until last decade, more than 100 years after that war ended. I’m not joking.
Another painful lesson is that taxes on the rich often wind up penalizing other people. The Spanish-American War telephone tax was supposed to hit rich people since they were the ones who first utilized telephone technology.
But then the rest of us eventually got telephones as well, and we also had to pay the tax.
According to leftists like Bernie Sanders, European nations have wonderfully generous welfare states financed by high tax rates on the rich.
They’re partly right. There are very large welfare states in Europe (though I wouldn’t use “wonderfully” and “generous” to describe systems that have caused economic stagnation and high levels of unemployment).
But they’re wrong about how those welfare states are financed. Yes, tax rates on the rich are onerous, but not that much higher than in the United States. Instead, the big difference between America and Europe is that ordinary people pay much higher taxes on the other side of the Atlantic.
Indeed, I’ve previously cited Tax Foundation data showing that the United States arguably has the most “progressive” tax system in the developed world. Not because we tax the rich more, but simply because we impose comparatively modest burdens on everyone else.
And now we have some new evidence making the same point. Joseph Sternberg of the Wall Street Journal has some very sobering data on how the German tax system imposes a heavy weight on poor and middle-income taxpayers.
Europeans believe their tax codes are highly progressive, giving lower earners a break while levying significant proportions of the income of higher earners and corporations to fund generous social benefits. But that progressivity holds true only for direct taxes on personal and corporate income. Indirect taxes, such as the value-added tax on consumption and social-security taxes (disguised as “contributions”), are a different matter. The VAT disproportionately affects lower earners, who spend a higher proportion of their incomes. And social taxes tend to kick in at lower income levels than income taxes, and extract a higher and more uniform proportion of income. …if you look at the proportion of gross household income paid in all forms of tax, the rate varies by only 25 points. The lowest-earning 5% of households pay roughly 27% of their income in various taxes—mainly VAT—while a household in the 85th income percentile pays total taxes of around 52%, mostly in social-security taxes that amount to nearly double the income-tax bill.
Here’s a chart the WSJ included with the editorial.
As you can see, high payroll taxes and the value-added tax are a very costly combination.
And the rest of Europe is similar to Germany.
…Germany is not unique. The way German total revenues are split among income taxes, social taxes and the consumption tax is in line with the rest of Western Europe, as are its tax rates, according to OECD data. If other countries are more progressive than Germany, it’s only because Germany applies its second-highest marginal income-tax rate of 42% at a lower level of income than most.
Speaking of the OECD, here’s the bureaucracy’s data on the burden of government spending.
Germany is in the middle of the pack, with the public sector consuming 44 percent of economic output (Finland edges out France and Greece for the dubious honor of having the most expensive government).
The overall burden of the public sector is far too high in the United States, but we’re actually on the “low” side by OECD standards.
According to the data, total government spending “only” consumes 37.7 percent of America’s GDP. Only Ireland, Switzerland, and Latvia have better numbers (though my friend Constantin Gurdgiev explains we should be cautious about Irish economic data).
But I’m digressing. The point I want to emphasize is that punitive taxes on poor and middle-income taxpayers are unavoidable once politicians decide to impose a large welfare state.
Which is why I’m so inflexibly hostile to any tax increase, especially a value-added tax (or anything close to a VAT, such as the BAT) that would vacuum up huge amounts of money from the general population. Simply stated, politicians in Washington will have a hard time financing a bigger burden of government if they can only target the rich.
Sternberg makes the same point in his column.
Tax cuts have emerged as an issue ahead of Germany’s national election next month, with both major parties promising various timid tinkers… Not gonna happen. The VAT and social taxes are too important to the modern welfare state. The great lie is that there are a) enough “rich people,” b) who are rich enough, that c) taxing their incomes heavily enough can pay for generous health benefits and an old-age pension at 65. None of those propositions are true, and the third is especially wrong in an era of globally mobile capital and labor. That leaves the lower and middle classes, and taxes concealed in price tags or dolled up as “insurance contributions” to obscure exactly how much voters are paying for the privilege of their welfare states. …reform of the indirect taxes that impose such a drag on European economies awaits a more serious discussion about the proper role of the state overall.
Exactly.
There’s no feasible way to ease the burden on ordinary German taxpayers (or regular people in other European nations) unless there are sweeping reforms to reduce the welfare state.
And the moral of the story for Americans is that we better enact genuine entitlement reform if we don’t want to suffer the same fate.
P.S. If you don’t like German data, for whatever reason, I wrote last year about Belgium and made the same point about how a big welfare state necessarily means a bad tax system.
P.P.S. By the way, even the OECD admitted that European nations would grow faster if the burden of government was reduced.
I periodically share data showing that living standards are higher in the United States than in Europe.
My goal isn’t to be jingoistic. Instead, I’m warning readers that we won’t be as prosperous if we copy out tax-and-spend friends on the other side of the Atlantic (just like I try to draw certain conclusions when showing how many low-tax jurisdictions have higher levels of economic output than the United States).
I’m sometimes asked, though, how America can be doing better than Europe when we have more poverty.
And when I ask them why they thinks that’s the case, they will point to sources such as this study from the German-based Institute of Labor Economics. Here’s some attention-grabbing data from the report.
The United States has the highest poverty rate both overall and among households with an employed person, but it stands farther away from the other countries on its in-work poverty rate than its overall poverty rate. The contrast between the US and three other English-speaking countries — Australia, Ireland, and the United Kingdom — is particularly striking. Compared to those three nations, the United States has an overall poverty rate only a little higher but an in-work poverty rate that is much higher.
And here’s the main chart from the study, with the United States as the bottom. It appears that there twice as much poverty in the USA as there is in a stagnant economy like France.
There even appears to be more poverty in America than there is in Spain and Italy, both of which are so economically shaky that they required bailouts during the recent fiscal/financial crisis.
Sounds horrible, right?
Yes, it does sound really bad. However, it’s total nonsense. Because what you read in the excerpt and see in the graph has nothing to do with poverty.
Instead, it’s a measure of income distribution.
And, if you read carefully, the study actually admits there’s a bait-and-switch.
The…approach to measuring poverty is a “relative” one, with the poverty line set at 60 or 50 percent of the median income.
Think about what this means. A country where everyone is impoverished will have zero or close-to-zero poverty because everyone is at the median income. But as I’ve explained before, a very wealthy society can have lots of “poverty” if some people are a lot richer than others.
And since the United States is much richer than other nations, this means an American household with $35,000 of income can be poor, even though they wouldn’t count as poor if they earned that much elsewhere.
This is like grading on a rigged curve. And if you read the fine print of the IZA study, you’ll see that the “poverty” threshold for a four-person household magically jumps by $16,260.
For a household of four (two adults, two children) the difference between the official US threshold and the 60-percent-of-median threshold amounts to more than $16,000 ($24,000 versus $40,260). This means that the size of the working poor population in America according to the official poverty measure is significantly lower than the size obtained in studies using a relative threshold.
In other words, you can calculate a much higher poverty rate if you include people who aren’t poor.
By the way, since the IZA report acknowledges this bait-and-switch approach, I guess one would have to say that the study technically is honest.
But it’s still misleading because most people aren’t going to read the fine print. Instead, they’ll see the main chart showing higher “poverty” and assume that there is a much higher percentage of actual poor people in the United States.
Moreover, some people may understand that there’s a bait-and-switch and simply want to help fool additional people.
And I’m guessing that this is exactly what the authors and the IZA staff expected and wanted. And if that’s the case, then the study is deliberately misleading, even if not technically dishonest.
I’ll close by stating that I don’t mind if folks on the left want to argue that market-based societies are somehow unfair because some people are richer than others. And it’s also fine for them to argue that we should be willing sacrifice some of our national prosperity to achieve more after-the-fact equality of income.
But I’d like for them to be upfront about their agenda and not hide behind dodgy data manipulation.
P.S.When you do apples-to-apples comparisons of the United States with the best-performing economies of Europe, you find that the poor tend to be at the same level, but every other group is better off in America.
P.P.P.S. The problem with our statist friends, as Margaret Thatcher explained, is that some of them are so upset about inequality that they’re willing to make everyone poorer if that’s what it takes to reduce income differences.
P.P.P.P.S. Indeed, this “Swiftian” column about reducing inequality is satire, but one wonders whether statists would actually accept such an outcome.
P.P.P.P.P.S. Data from China demonstrates why our attention should be on poverty reduction rather than inequality.
Now I have a new example, though I’m not sure whether to call it dishonest or clueless.
The EU Observer has a brief report that poverty has reached record levels in Germany.
Despite a booming economy, 12.9 million people in Germany were living below the poverty line in 2015, the Equal Welfare Association reported on Thursday. Based on figures from the Federal Statistical Office the alliance found a record high poverty rate of 15.7 percent in 2015.
By the way, I can’t resist pointing out that there is no “booming economy” in Germany. Growth in 2016 was only 1.9 percent.
But I’m digressing. Let’s get back to the main point of today’s column.
As you can see from the story’s headline, the implication is that lots of people are left behind and mired in deprivation even though the economy is moving forward.
But there’s a problem with both the story and the headline.
If you read carefully, it turns out that both the story (and the study that triggered the story) have nothing to do with poverty.
No link at all. None. Zero. Nada. Zilch.
I’m not joking. There’s no estimate of the number of people below some measure of a German poverty line. There’s no calculation of any sort about living standards. Instead, this story (and the underlying report) are about the distribution of income.
…people [are] defined as poor when living on an income less than 60 percent of that of the median German household.
One might be tempted at this point to dismiss this as a bit of journalistic sloppiness. Indeed, one might even conclude that this is a story about nothing.
After all, noting that some people are below 60 percent of the median income level is about as newsworthy as a report saying that half of people are above average and half are below average.
But there actually is a story here. Though it’s not about poverty. Instead, it’s about an ongoing statist campaign to redefine poverty to mean unequal distribution of income.
I’m not joking. For instance, the bureaucrats at the Paris-based Organization for Economic Cooperation and Development actually put out a study claiming that there was more poverty in the United States than in nations such as Greece, Portugal, and Turkey.
How could they make such a preposterous claim? Easy, the OECD bureaucrats didn’t measure poverty. Instead, they concocted a measure of the degree to which various countries are close to the left-wing dream of equal incomes.
And the Obama Administration also tried to manipulate poverty statistics in the United States in hopes of pushing this statist agenda of coerced equality.
Robert Rector of the Heritage Foundation wrote about what Obama tried to do.
…the Obama administration…measure, which has little or nothing to do with actual poverty, will serve as the propaganda tool in Obama’s endless quest to “spread the wealth.” …The current poverty measure counts absolute purchasing power — how much steak and potatoes you can buy. The new measure will count comparative purchasing power — how much steak and potatoes you can buy relative to other people. …In other words, Obama will employ a statistical trick to ensure that “the poor will always be with you,” no matter how much better off they get in absolute terms. …The weird new poverty measure will produce very odd results. For example, if the real income of every single American were to magically triple over night, the new poverty measure would show there had been no drop in “poverty,” because the poverty income threshold would also triple. …Another paradox of the new poverty measure is that countries such as Bangladesh and Albania will have lower poverty rates than the United States, even though the actual living conditions in those countries are extremely bad.
Even moderates such as Robert Samuelson recognized that Obama’s agenda was absurd. Here is some of what he wrote.
…the new definition has strange consequences. Suppose that all Americans doubled their incomes tomorrow, and suppose that their spending on food, clothing, housing and utilities also doubled. That would seem to signify less poverty — but not by the new poverty measure. It wouldn’t decline, because the poverty threshold would go up as spending went up. Many Americans would find this weird: People get richer but “poverty” stays stuck.
To put this all in context, the left isn’t merely motivated by a desire to exaggerate and misstate poverty. That simply the means to an end.
What they want is more redistribution and higher tax rates. The OECD openly admitted that was the goal in another report. Much as all the fixation about inequality in America is simply a tool to advocate bigger government.
Since I’m always reading and writing about government policies, both in America and around the world, I’m frequently reminded of H.L. Mencken’s famous observation about the shortcomings of “tolerable” government.
If you take a close look at the world’s freest economies, you quickly learn that they are highly ranked mostly because of the even-worse governments elsewhere.
But there’s a silver lining to this dark cloud. The incompetence, mendacity, and cronyism that exists all over the world means that I’ll never run out of things to write about.
So let’s enjoy a new edition of Great Moments in Foreign Government.
The government must stop ‘nannying’ British parents and do away with universal free childcare, a new report has urged. Families most in need of help are not getting it because Government subsidies are poorly targeted, the Institute of Economic Affairs publication said. Many families on average earnings are spending more than a third of their net income on childcare, the report claimed, saying too much regulation in the sector has hiked prices. …One study has estimated that keeping parents in work costs £65,000 per job, the report claimed, describing current policy as ‘costly and inefficient’. …home-based childminders are priced out of the sector, it said. Co-author of the report Len Shackleton, an editorial research fellow at the Institute of Economic Affairs, said: ‘Government interventions in the childcare sector have resulted in both British families and taxpayers bearing a heavy burden of expensive provision.
Gee, a sector of the economy gets more expensive and inefficient once government gets involved.
I’m totally shocked, just like Inspector Renault in Casablanca.
Sentient human beings, of course, are not surprised. After all, just look at what government intervention has done for healthcare and higher education.
I’m still waiting for an example of a government “solution” that makes a problem better rather than worse.
But apparently the incompetence goes well beyond architecture. Another German intelligence division, the BfV, had an Islamic terrorist on staff. Here are some excerpts from a report in the Washington Post.
German intelligence agents noticed an unusual user in a chat room known as a digital hideout for Islamic militants. The man claimed to be one of them — and said he was a German spy. He was offering to help Islamists infiltrate his agency’s defenses to stage a strike. Agents lured him into a private chat, and he gave away so many details about the spy agency — and his own directives within it to thwart Islamists — that they quickly identified him, arresting the 51-year-old the next day. Only then would the extent of his double life become clear. The German citizen of Spanish descent confessed to secretly converting to Islam in 2014. From there, his story took a stranger turn. Officials ran a check on the online alias he assumed in radical chat rooms.
And they found out that the terrorist had a rather colorful past.
The married father of four had used it before — as recently as 2011 — as his stage name for acting in gay pornographic films. …which could cast a fresh light on the judgment and vetting of the German intelligence agency at a critical time.
These revelations have generated some concern, as one might expect.
News of the case sparked a storm of outrage in Germany, even as critics said it raised serious questions about the country’s bureaucratically named domestic spy agency, known as the Federal Office for the Protection of the Constitution (BfV). …“It’s not only a rather bizarre, but also a quite scary, story that an agency, whose central role it is to engage in counterespionage, hired an Islamist who potentially had access to classified information, who might have even tried to spread Islamist propaganda and to recruit others to let themselves be hired by and possibly launch an attack” against the domestic intelligence agency, said Hans-Christian Ströbele, a member of the Parliamentary Control Committee that oversees the work of the German intelligence services.
You won’t be surprised to learn that the German government is not alone. The U.K. government also has hired terrorists to work in anti-terrorism divisions.
In the United States, by contrast, we import them and give them welfare. I’m not sure which approach is more insane.
Let’s close with a trip to Canada. Our friends to the north generally are a sensible bunch, but you can find plenty of senseless policies, particularly in the French-speaking areas.
And I’m not sure whether to laugh or cry about this example of bureaucratic extortion.
A Camrose man is ticked about his ticket — a $465 traffic violation issued by Edmonton police — for having a cracked driver’s licence. Dave Balay admits he’s guilty of having a small crack in his licence. But he doesn’t think the penalty fits the crime. He was returning home from visiting a friend Wednesday evening when he was pulled over on Anthony Henday Drive. …He gave the officer his driver’s licence, registration and insurance card. …”He came back, and the younger policeman said he was going to give me a ticket for my driver’s licence being mutilated,” said Balay. “I said, ‘Mutilated? I didn’t even know there was such a thing.’ Then he gave me a ticket for $465.” The mutilation referred to was a crack in the top left corner of Balay’s licence. “Maybe not even quite an inch long,” said Balay, adding the crack doesn’t obstruct any pertinent information. …”I think I outright laughed, and said, ‘Seriously? Four-hundred-and-sixty-five bucks for this crack?’ [The officer] said, ‘It’s a mutilated licence.’ …”Had I scratched out my eyes or drawn a mustache on my face, or scratched out the licence number or something, then, yeah, give me a ticket for that. That should be an offence.”
But the local government says Mr. Balay should be grateful that he was treated with such kindness.
Edmonton police released a statement Friday suggesting the officer actually gave Balay a break. According to the statement, the officer had grounds to lay a careless driving charge, which carries a fine of $543 and six demerit points. But because Balay was co-operative, the officer issued a lesser fine for a cracked driver’s licence.
Though Mr. Balay doesn’t think he’s been given a break.
Balay said he won’t pay the fine, even if that means serving jail time or community service. “I don’t have $465,” he said. “…I do some part-time substitute teaching, supply teacher. It’s a week’s wage.”
Good for Mr. Balay. Hopefully the publicity that he’s getting will force the revenue-hungry bureaucrats in Edmonton to back down.
Mancur Olson (1932-1998) was a great economist who came up with a very useful analogy to help explain the behavior of many governments. He pointed out that a “roving bandit” has an incentive to maximize short-run plunder by stealing everything from victims (i.e. a 100 percent tax rate), whereas a “stationary bandit” has an incentive to maximize long-run plunder by stealing just a portion of what victims produce every year (i.e., the revenue-maximizing tax rate).
Tyler Cowen of George Mason University elaborates on this theory in this very helpful video.
As you can see, Olson’s theory mostly is used to analyze and explain the behavior of autocratic governments. Now let’s apply these lessons to political behavior in modern democracies.
I wrote last year about a field of economic theory called “public choice” to help explain how and why the democratic process often generates bad results. Simply stated, politicians and special interests have powerful incentives to use government coercion to enrich themselves while ordinary taxpayers and consumers have a much smaller incentive to fight against that kind of plunder.
But what’s the best way to think about these politicians and interest groups? Are they roving bandits or stationary bandits?
The answer is both. To the extent that they think their power is temporary, they’ll behave like roving bandits, extracting as much money from taxpayers and consumers as possible.
Though if you think of democracies as duopolies, with two parties and rotating control of government, then each party will also behave like a stationary bandit, understanding that it’s not a good idea to strangle the goose that lays the golden eggs.
And this is one of the reasons why I’m a big fan of “tax competition.” Simply stated, politicians and special interests constrain their greed when they know that potential victims have the ability to escape.
Here’s a report from the Wall Street Journal that is a perfect example of my argument.
Germany could reduce its corporate tax rate in the wake of similar moves in the U.K. and the U.S., German Finance Minister Wolfgang Schäuble said. Europe’s largest economy should simplify its complex tax system for companies in order to…remain competitive internationally, Mr. Schäuble told The Wall Street Journal in an interview. He also said that while Germany opposed beggar-thy-neighbor tax competition between mature industrial nations, Berlin would also consider cutting tax rates if necessary.
And such steps may be necessary. In other words, Germany may reduce tax rates, not because politicians want to do the right thing, but rather because they fear they’ll lose jobs and investment (i.e., sources of tax revenue) to other jurisdictions.
U.S. President-elect Donald Trump has said he would like to cut the corporate tax rate from 35% to 15% as part of a broader tax overhaul. In November, U.K. Prime Minister Theresa May said the main corporate rate there should fall from 20% to 17% by 2020. These followed announcements about corporate tax-rate cuts by Japan, Canada, Italy and France.
Let’s look at another example.
I made the economic case for Brexit in large part because the European Union is controlled by anti-tax competition bureaucrats and politicians in Brussels.
Well, it appears that the British vote for independence is already paying dividends as seen by comments from the U.K.’s Chancellor of the Exchequer.
Philip Hammond warned yesterday that the Government will come out fighting with tax cuts if the EU tries to wound Britain by refusing a trade deal. …Yesterday, Mr Hammond was asked by a German newspaper if the UK could become a tax haven by further lowering corporation tax in order to attract businesses if Brussels denies a deal. In his strongest language yet on Brexit, the Chancellor said he was optimistic a reciprocal deal on market access could be struck… But he added: …‘In this case, we could be forced to change our economic model and we will have to change our model to regain competitiveness. And you can be sure we will do whatever we have to do. …We will change our model, and we will come back, and we will be competitively engaged.’ …Earlier this year Mrs May committed Britain to having the lowest corporation tax of the world’s 20 biggest economies. The intention is a rate of 17 per cent by 2020.
In other words, yet another case of politicians doing the right thing because of tax competition.
The stationary bandits described by Olson are being forced to adopt better tax policy.
So it’s very appropriate to close with some wise counsel from a Wall Street Journaleditorial.
The EU needs more tax competition from government vying to stimulate business investment. …The real tax-policy scandal is that so few European governments understand there’s a cause-and-effect relationship between oppressive tax rates and low economic growth.
P.S. Since we’re looking at tax competition, Europe, and bandits, keep in mind there’s considerable academic work showing that Europe became a rich continent precisely because there were many small nations that competed with each other. Those jurisdictions felt pressure to adopt good policy because the various leaders wanted lots of economic activity to tax. All of which helps to explain why modern statists are so hostile to decentralization and federalism.
Even though it has the largest economy in Europe, I routinely ignore Germany. This isn’t because of deliberate malice or neglect, but rather because the country has boring economic policy.
Unlike Estonia and Switzerland, it doesn’t have any really good policies that are worth applauding.
Not does it have really bad policies that deserve to be mocked, so it doesn’t get the negative attention that I shower upon nations such as France, Italy, and Greece.
Let’s try to atone for this oversight by giving some attention to the peculiar German tendency to be a bit over-zealous about generating money for the government.
The Germans, after all, came up with an odd scheme to make streetwalkers pay a nightly tax via parking meters.
The Germans also imposed a tax on online coffee beans that cost €30 to enforce for every €1 collected.
We have another example of über-intense tax enforcement to add to our list.
The BBCreports that homeowners on a German street are having to pay for a road that was built by the Nazis.
Homeowners on a street in Germany have been told they must foot the bill for their road’s construction – even though it’s been there for nearly 80 years. …The bills included a conversion from the Nazi-era Reichsmark currency into euros for the original road surface, first laid in 1937… The figures were also adjusted for inflation. …a court has now confirmed that they must cough up the cash. It determined that while construction began in the 1930s, the road was only officially completed in 2009 when pavements were added. For the intervening period it was considered to be under development. …Auf’m Rott’s current residents will be shelling out for the “Hitler asphalt”, streetlamps dating back to 1956, a sewer from the 1970s, and pavements and greenery added in 2009.
How stereotypically German. Not only is there an unusual tax, but they even have the records from the 1930s and went though all the trouble of adjusting the numbers for inflation.
By the way, I suspect the German homeowners also think their country isn’t very considerate. The homeowners aren’t getting hit with some annoying-yet-trivial €100 euro charge.They really are “shelling out.”
…city authorities told them pay an average of 10,000 euros ($11,000; £8,400) per household
I guess I’m lucky that Fairfax County in Virginia, which just re-paved my local street, didn’t send me a similar bill!
Though in the interest of fairness, let’s contemplate the German system, which apparently is vaguely based on a user-pays principle.
In Germany, residents have to pay a “development contribution” to the local authority for things like new roads, cycle paths and street lighting.
Part of me actually likes this approach. It’s better to have local communities pay for local infrastructure rather than having some convoluted and wasteful nationwide program (like we have to some degree in the United States) that is susceptible to waste and cronyism.
On the other hand, surely there must be something wrong with doing some routine maintenance on a street and then using that as an excuse to send homeowners a giant bill for expenses that mostly occurred during the Hitler era.
P.S. I haven’t totally ignored Germany. Over the years, I’ve bemoaned the fact that the ostensibly conservative Christian Democrats aren’t conservative and complained that the supposedly classical liberal Free Democrats aren’t classical liberals.
P.P.P.P.S. By the way, it’s not just the German politicians who are in love with the idea of taxation. There are even some German taxpayers who protest because they want to be saddled with higher tax burdens (though I wonder if they’d be as hypocritical as their American counterparts if they faced a put-up-of-shut-up challenge).
If you want to pinpoint the leading source of bad economic policy proposals, I would understand if someone suggested the Obama Administration.
But looking to Europe might be even more accurate.
For instance, I’d be hard pressed to identify a policy more misguided than continent-wide eurobonds, which I suggested would be akin to “co-signing a loan for your unemployed alcoholic cousin who has a gambling addiction.”
And now there’s another really foolish idea percolating on the other side of the Atlantic Ocean.
The U.K.-based Financial Times has a story about calls for greater European centralization from Italy.
Italy’s finance minister has called for deeper eurozone integration in the aftermath of the Greek crisis, saying a move “straight towards political union” is the only way to ensure the survival of the common currency. …Italy and France have traditionally been among the most forceful backers of deeper European integration but other countries are sceptical about supporting a greater degree of political convergence. …Italy is calling for a wide set of measures — including the swift completion of banking union, the establishment of a common eurozone budget and the launch of a common unemployment insurance scheme — to reinforce the common currency. He said an elected eurozone parliament alongside the existing European Parliament and a European finance minister should also be considered. “To have a full-fledged economic and monetary union, you need a fiscal union and you need a fiscal policy,” Mr Padoan said.
This is nonsense.
The United States has a monetary union and an economic union, yet our fiscal policy was very decentralized for much of our nation’s history.
And Switzerland has a monetary and economic union, and its fiscal policy is still very decentralized.
There’s an ideological reason and a practical reason for this bias.
The ideological reason is that statists strongly prefer one-size-fits-all systems because government has more power and there’s no jurisdictional competition (which they view as a “race to the bottom“).
The practical reason is that politicians from the weaker European nations see a fiscal union as a way of getting more transfers and redistribution from nations such as Germany, Finland, and the Netherlands.
But the Italian political elite also has a statist ideological perspective. And the best evidence for that is the fact that Signore Padoan used to be a senior bureaucrat at the Paris-based OECD.
The Italian finance minister…served as former chief economist of the OECD.
You won’t be surprised to learn that French politicians also have been urging a supranational government for the eurozone. And presumably for the same reasons of ideology and self-interest.
But here’s the man-bites-dog part of the story.
The German government also seems open to the idea, as reported by the U.K.-based Independent.
France and Germany haveagreed a new plan for closer eurozone political union… The new Franco-German agreement would see closer cooperation between the 19 countries.
Wow, don’t the politicians in Berlin know that a fiscal union is just a scheme to extract more money from German taxpayers?!?
As I wrote three years ago, this approach “would involve putting German taxpayers at risk for the reckless fiscal policies in nations such as Greece, Italy, and Spain.“
But maybe the Germans aren’t completely insane. Writing for Bloomberg, Leonid Bershidsky explains that the current German position is to have a supranational authority with the power to reject national budgets.
The German perspective on a political and fiscal union is a little more cautious. Last year, German Finance Minister Wolfgang Schaeuble and a fellow high-ranking member of the CDU party, Karl Lamers, calledfor a euro zone parliament (not elected, but comprising European Parliament members from euro area countries) and a budget commissioner with the power to reject national budgets if they contravene a certain set of rules agreed by euro members.
And since the German approach is disliked by the Greeks, then it can’t be all bad.
Former Greek finance minister Yanis Varoufakis, Schaeuble’s most eloquent hater, pointed out in a recent article for Germany’s Die Zeit that, in the Schaeuble-Lamers plan, the budget commissioner is endowed only with “negative” powers, while a true federation — like Germany itself — elects a parliament and a government to formulate positive policies.
But “can’t be all bad” isn’t the same as good.
Simply stated, any sort of eurozone government almost surely will morph over time into a transfer union. And that means more handouts, more subsidies, more harmonization, more bailouts, more centralization, and more bureaucracy.
So you can see why Europe’s political elite may be even more foolish than their American counterparts.
Ever since then, I’ve tried to ignore the debacle, though I periodically succumb to temptation and highlight the wasteful stupidity of the Greek government.
Statism is so pervasive that Greece almost makes other European nations look like laissez-faire paradises by comparison.
But the most bizarre news of all is that the Greek government gets policy advice from people like Paul Krugman and Joseph Stiglitz.
Having shared all sorts of bad news, I now feel obliged to point out that the situation isn’t hopeless.
Just last year, I explained that the right reforms could rescue Greece. And just in case you think I’m laughably naive, others have the same view.
Writing for the U.K.-based Telegraph, Ivan Mikloš,and Dalibor Roháč explain how Greece can enjoy and economic renaissance.
Greekshave to stop seeing themselves as victims… True, Greece’s international partners need to bear their share of responsibility for the economic catastrophe that has been unfolding in the country. However, it is not its creditors that are holding Greece back – rather, it is the lack of domestic leadership and ownership of economic reforms.
And what gives Mikloš and Roháč the credibility to make this assertion?
Simple, they’re from Slovakia and that nation faced a bigger mess after the collapse of the Soviet Empire and the peaceful breakup of Czechoslovakia.
AsSlovaks, we have learned a fair bit about these matters. Once home to much of Czechoslovakia’s heavy industry – exporting arms and heavy machinery to the former Soviet bloc – Slovakia bore a disproportionate share of the costs incurred by the transition from communism in the early 1990s. …At the time of the country’s break-up, in 1992, the per capita income in Slovakia, expressed in purchasing power parity, was merely 62 per cent of that in the Czech Republic.The years that followed were not happy. The lingering sense of victimhood fostered nationalism and authoritarianism, as well as cronyism and corruption… By the time of the parliamentary election of 1998, Slovakia was on the brink of a financial meltdown.
But the election didn’t result in victory of crazed leftists, as we see with Syriza’s takeover in Greece.
Instead, the Slovak people elected reformers who decided to reduce the size and scope of the public sector.
The new government, formed by a coalition of pro-Western parties, restructured the banking sector, brought the public deficit under control… The parliamentary election of 2002 opened a unique window of opportunity. Slovakia’s novel tax reforms, spearheaded by domestic reformers under the auspices of Prime Minister Mikuláš Dzurinda, were seen by the IMF at the time as far too radical. However, the new, simpler, and leaner tax system, alongside other structural reforms, incentivized investment and turned Slovakia, nicknamed the “Tatra Tiger”, into the fastest-growing economy in the EU.
And a handful of other EU nations have followed the right path.
In 2008, instead of devaluing its currency – as recommended by the IMF – Latvia slashed public spending, cutting the salaries of civil servants by 26 per cent. The economy rebounded quickly to a growth rate of 5 per cent in 2011.
Here’s the bottom line.
Today, Slovakia’s per capita income rivals that of the Czech Republic. Together with Poland and the Baltic states, these countries have been catching up with their advanced Western European counterparts.
And the lesson for Greece should be clear, both politically and economically.
The purpose of economic reforms should not be to please the Troika, but to restore durable, shared prosperity. Deep, domestically led reforms need not be a form of political suicide, either. In 2006, after eight years of deep – and sometimes painful – reforms, Slovakia’s leading reformist party recorded its best electoral result in history. Similarly, many of the radical reformers in the Baltic states did well in subsequent elections. And a Greek leader who turns his country into a “Mediterranean Tiger” will most certainly not go down in infamy.
Unfortunately, the slim odds of good policy being adopted in Greece are partly the fault of the United States.
Or, to be more accurate, the Obama Administration is being very unhelpful by urging bailouts instead of reform.
Here’s some of what is being reported by the U.K.-based Guardian.
The Greek television channel, citing a senior German official, described the US treasury secretary, Jack Lew, imploring his German counterpart Wolfgang Schäuble to “support Greece” only to be told: “Give €50bn euro yourself to save Greece.” Mega’s Berlin-based correspondent told the station that the US official then said nothing “because, as is always the case according to German officials when it comes to the issue of money, the Americans never say anything”.
I’m not a big fan of Wolfgang Schäuble. The German Finance Minister is a strident opponent of tax competition, and some of his bad ideas are cited in the CF&P study that I wrote about yesterday.
And I’m also happy that Congress has done the right thing so that Obama and his team don’t have leeway to bail out Greece either directly or indirectly.
P.S. Since we ended on some good news, let’s also enjoy some Greek-related humor.
You won’t know whether to laugh or cry after perusing these stories that will be added to our “great moments in government” collection.
For instance, did you realize that American taxpayers were saddled with the responsibility to micro-manage agriculture in Afghanistan? You’re probably surprised the answer is yes.
But I bet you’re not surprised that the money was flushed down a toilet. Here are some excerpts from a report on how $34 million was wasted.
American agricultural experts who consider soybeans a superfood…have invested tens of millions of U.S. taxpayer dollars to try to change the way Afghans eat. The effort, aimed at making soy a dietary staple, has largely been a flop, marked by mismanagement, poor government oversight and financial waste, according to interviews and government audit documents obtained by the Center for Public Integrity. Warnings by agronomists that the effort was unwise were ignored. The country’s climate turns out to be inappropriate for soy cultivation and its farming culture is ill-prepared for large-scale soybean production. Soybeans are now no more a viable commercial crop in Afghanistan than they were in 2010, when the $34 million program got started… The ambitious effort also appears to have been undone by a simple fact, which might have been foreseen but was evidently ignored: Afghans don’t like the taste of the soy processed foods.
Sadly, this $34 million boondoggle is just the tip of the iceberg. It’s been said that Afghanistan is the graveyard of empires. Well, it’s also the graveyard of tax dollars.
…the project’s problems model the larger shortcomings of the estimated $120 billion U.S. reconstruction effort in Afghanistan, including what many experts depict as ignorance of Afghan traditions, mismanagement and poor spending controls. No one has calculated precisely how much the United States wasted or misspent in Afghanistan, but a…special auditor appointed by President Obama the following year said he discovered nearly $7 billion worth of Afghanistan-related waste in just his first year on the job.
I’m guessing that most of the $120 billion was squandered using traditional definitions of waste.
But using a libertarian definition of waste (i.e., money that the federal government should not spend), we can easily calculate that the entire $120 billion was squandered.
Let’s now discuss another example of American taxpayer money being wasted in other nations. I’ve written previously about the squalid corruption at the Export-Import Bank, but Veronique de Rugy of Mercatus is the go-to expert on this issue, and she has a new article at National Review about “a project in Brazil that, if it goes bust and the Brazilians can’t pay the American contractor, your tax dollars will end up paying for.”
And what is this project?
…an Export-Import Bank–backed deal to build the largest aquarium in South America…the taxpayer exposure is $150,000 per job “supported.” Some people in Brazil are rightly upset about this. The Ex-Im loan may have lower interest rates and better terms than a regular loan, but this is probably money the indebted and poor Brazilian government can’t afford. …a real problem with the Ex-Im Bank: On one hand, it gives cheap money to large companies who would have access to capital markets even in its absence. But on the other hand, it encourages middle-income or poor countries to take on debt that they probably can’t afford, whether the products purchased are “made in America” or not.
Gee, aren’t we happy that some bureaucrats and politicians have decided to put us on the hook for a Brazilian aquarium.
But let’s try to make the best of a bad situation. Here’s a depiction of what you’re subsidizing. Enjoy.
Subsidized by American taxpayers
I hope you got your money’s worth from the image.
Perhaps I’m being American-centric by focusing on examples of bad policies from the crowd in Washington.
So let’s look at an example of government foolishness from Germany. It doesn’t involve tax money being wasted (at least not directly), but I can’t resist sharing this story because it’s such a perfect illustration of government in action.
Check out these excerpts from a British news report on over-zealous enforcement by German cops.
A one-armed man in Germany has received a full apology and refund from the police after an overzealous officer fined him for cycling using only one arm. Bogdan Ionescu, a theatre box office worker from Cologne, gets around the usually cycle-friendly city using a modified bicycle that allows him to operate both brakes – one with his foot. But on 25 March he was pulled over by a police officer who, he says, told him he was breaking the law. Under German road safety rules, bicycles are required to have to have two handlebar brakes. After a long argument at the roadside, the officer insisted that Mr Ionescu’s bike was not roadworthy and issued him with a €25 (£20) fine.
At least this story had a happy ending, at least if you overlook the time and aggravation for Mr. Ionescu.
Our last (but certainly not least) example of foolish government comes from Nebraska, though the culprit is the federal government.
But maybe “disconcerting” would be a better word than “foolish.”
It seems that our friends on the left no longer think that “dissent is the highest form of patriotism.” In a very troubling display of thuggery, the Justice Department dispatched a bureaucrat to “investigate” a satirical parade float.
Here’s some of what was reported by the Washington Times.
TheU.S. Department of Justicehas sent a member of itsCommunity Relations Serviceteam to investigate a Nebraska parade float that criticized President Obama. A Fourth of July parade floatfeatured at the annual Independence Day paradein Norfolk sparked criticism when it depicted a zombie-like figure resembling Mr. Obama standing outside an outhouse, which was labeled the “Obama Presidential Library.” The Nebraska Democratic Party called the float one of the “worst shows of racism and disrespect for the office of the presidency that Nebraska has ever seen.” The Omaha World-Heraldreported Fridaythat theDepartment of Justicesent aCRSmember who handles discrimination disputes to a Thursday meeting about the issue. …The float’s creator, Dale Remmich, has said the mannequin depicted himself, not President Obama. He said he is upset with the president’s handling of the Veterans Affairs Department, the World-Herald reported. “Looking at the float, that message absolutely did not come through,” said NAACP chapter president Betty C. Andrews.
If you look at the picture (and other pictures that can be seen with an online search), I see plenty of disrespect for the current president, but why is that something that requires an investigation?
There was plenty of disrespect for the previous president. And there as also disrespect for the president before that. And before that. And before…well, you get the idea.
Disrespect for politicians is called political speech, and it’s (supposedly) protected by the First Amendment of the Constitution.
That’s even true if the float’s creator had unseemly motives such as racism. He would deserve scorn if that was the case, and parade organizers would (or at least should) have the right to exclude him on that basis.
But you don’t lose your general right to free speech just because you have unpopular and/or reprehensible opinions. And the federal government shouldn’t be doing anything that can be construed as suppressing or intimidating Americans who want to “disrespect” the political class.
P.S. Since we’re on the topic of politicized bureaucracy, we have an update to a recent column about sleazy behavior at the IRS.
According to the Daily Caller, there’s more and more evidence of a big fire behind all the smoke at the IRS.
Ex-IRS official Lois Lerner’s computer hard drive was “scratched” and the data on it was still recoverable. But the IRS did not try to recover the data from Lerner’s hard drive, despite recommendations from in-house IRS IT experts to outsource the recovery project. The hard drive was then “shredded,” according to a court filing the IRS made to House Ways and Means Committee investigators.
P.P.S. One last comment on the controversy surrounding the parade float. Racism is an evil example of collectivist thinking. But it is also reprehensible for folks on the left to make accusations of racism simply because they disagree with someone.
Today, we’re going to share more stories of feckless behavior by foreign politicians and bureaucrats.
From Canada, we learn that the government of Manitoba is micro-managing daycare lunches in such bizarre ways that a family was fined because “grains” weren’t included in their kids’ meals.
Kristin Barkiw of Rossburn, Manitoba, Canada brought two of her children home from Little Cub’s Den daycare when she saw that her kids were sent home with a note. …the message told the mom she had failed to provide a nutritionally balanced lunch for her children, 5-year-old Logan and 3-year-old Natalie. Not only that, Kristin was fined $10, $5 per child, for missing grains in their lunch of leftover roast beef, carrots, potatoes, an orange and milk. Further, the note said that the daycare staff gave Logan and Natalie Ritz crackers to fulfill the nutritional requirement of grains, which some see as a less than nutritious option. The nutritional regulation for daycare lunches is actually law in the province. The Manitoba government’s Early Learning and Child Care lunch regulations state that daycare programs must ensure children are given a lunch with a meat, a grain, a milk product and two servings of fruit and vegetables and any missing food groups must be supplemented by the care provider.
Heaven forbid that parents actually be in charge of what their kids eat!
You won’t be surprised to learn that France is on the list. It appears the government’s rail system is staffed by numbskulls.
France’s SNCF rail company has ordered 2,000 trains for an expanded regional network that are too wide for many station platforms, entailing costly repairs, the national rail operator said on Tuesday. A spokesman for the RFF national rail operator confirmed the error, first reported by satirical weekly Canard Enchaine in its Wednesday edition. …Construction work has already begun to displace equipment and widen hundreds of train platforms to accommodate the new trains, but hundreds more remain to be fixed, he added. …The RFF only gave the dimensions of platforms built less than 30 years ago, but most of France’s 1,200 platforms were built more than 50 years ago. Repair work has already cost 80 million euros ($110 million).
I guess I’m not surprised by that story since the French once built an aircraft carrier with a flight deck that was too small.
The Ice Hotel, which is rebuilt every year in northern Sweden out of enormous chunks of ice from the Torne River in Jukkasjärvi, Kiruna, will this year come equipped with fire alarms – and the irony isn’t lost on the staff. “We were a little surprised when we found out,” hotel spokeswoman Beatrice Karlsson told The Local. …While it might sound crazy that a building made of water needs to be equipped with fire alarms, the fact that the hotel is built from scratch every year means it needs to abide by the rules that apply to every new building, rules set by the National Housing Board (Boverket).
If I had to pick a prize from today’s list, this might win the prize. It’s a stunning display of government in action. Though probably not as bad as the time it took a local government in the U.S. two days to notice a dead body in a community swimming pool.
It was meant to cost £420m of European taxpayers’ money but the bill for the new headquarters of the European Central Bank (ECB) has more than doubled to £960m and could rise even further. The bank is the key enforcer of austerity measures in the troubled eurozone nations, but appears to be having trouble keeping its own finances in order. The 45-storey glass and steel building, made up of two joined towers, will be more than 600ft tall when it is finished. But it has already been under construction for a decade and is three years behind schedule.
Just in case anyone thinks I’m picking on foreigners, here’s a story that makes me ashamed to be American. Or, to be more precise, it makes me ashamed that we have some of the world’s most pathetic bureaucrats.
Honors Night at Cole Middle School is no more. Parents got an email from Principal Alexis Meyer over the weekend saying some members of the school community “have long expressed concerns related to the exclusive nature of Honors Night.” The email goes on to say students will be recognized in other ways. …Parents and students are not happy with the change. “How else are they suppose to learn coping skills, not just based on success, but relative failure, it might not be failure, but understand what it takes to achieve high levels,” said parent Joe Kosloski. …“That made me wanna work harder and a lot of other people work harder, so just the fact you can’t work towards it anymore then there is no goal,” said 8th grade student Kaitlyn Kosloski. Changes are also being made to the middle school’s sports awards.
You read correctly. They also won’t recognize athletic success.
The moral of these stories, both from America and around the world, it that government is not the answer. Unless, of course, you’ve asked a really strange question.
That’s even higher than it is in the United States, where politicians at the federal, state, and local levels divert about 39 percent of GDP into the public sector.
Germany also has too much red tape and government intervention, which helps to explain why it lags other European nations such as Denmark and Estonia in the Economic Freedom of the World rankings.
Today, though, I’m going to give Germany some unambiguous praise.
If you look at last decade’s fiscal data, you’ll see that our Teutonic friends actually followed my Golden Rule on fiscal policy for a four-year period.
Here’s a chart, based on IMF numbers, showing total government spending in Germany from 2003-2007. As you can see, German policy makers basically froze spending.
I realize that I’m a libertarian and that I shouldn’t be happy unless the burden of spending is being dramatically reduced, but we’re talking about the performance of European politicians, so I’m grading on a curve.
By that standard, limiting spending so it grows by an average of 0.18 percent is rather impressive. Interestingly, this period of fiscal discipline began when the Social Democrats were in power.
And because the economy’s productive sector was growing at a faster rate during this time, a bit more than 2 percent annually, the relative burden of government spending did fall.
The red line in this next chart shows that the public sector, measured as a share of economic output, fell from almost 49 percent of GDP to less than 44 percent of GDP.
It’s also worth noting that this four-year period of spending restraint also led to a balanced budget, as shown by the blue line.
The bad news is that the German government wasn’t willing to sustain this modest degree of fiscal discipline. The Christian Democrats, who took office in mid-2005, allowed faster spending growth beginning in 2008. As I noted above, the budget increases haven’t been huge, but there’s been enough additional spending that Germany no longer is complying with the Golden Rule and the burden of the public sector is stuck at about 44 percent of GDP.
The moral of the story is that Germany shows that good things happen when spending is restrained, but long-run good performance requires long-run spending discipline.
That’s why I’m a fan of Switzerland’s spending cap. It’s called the “debt brake,” but it basically requires politicians to limit spending so that the budget doesn’t grow much faster than inflation plus population.
At the beginning of the year, I was asked whether Europe’s fiscal crisis was over. Showing deep thought and characteristic maturity, my response was “HAHAHAHAHAHAHAHAHA, are you ;@($&^#’% kidding me?”
But I then shared specific reasons for pessimism, including the fact that many European nations had the wrong response to the fiscal crisis. With a few exceptions (such as the Baltic nations), European governments used the crisis to impose big tax hikes, including higher income tax rates and harsher VAT rates.
Combined with the fact that Europe’s demographic outlook is rather grim, you can understand why I’m not brimming with hope for the continent. And I’ve shared specific dismal data for nations such as Portugal, France, Greece, Italy, Poland, Spain, Ireland, and the United Kingdom.
But one thing I’ve largely overlooked is the degree to which the European Central Bank may be creating an unsustainable bubble in Europe’s financial markets. I warned about using bad monetary policy to subsidize bad fiscal policy, but only once in 2011 and once in 2012.
Check out this entertaining – but worrisome – video from David McWilliams and you’ll understand why this issue demands more attention.
I’ve openly argued that the euro is not the reason that many European nations got in trouble, but it appears that Europe’s political elite may be using the euro to make a bad situation even worse.
And to add insult to injury, the narrator is probably right that we’ll get the wrong outcome when this house of cards comes tumbling down. Instead of decentralization and smaller government, we’ll get an expanded layer of government at the European level.
P.S. Here’s a video on the five lessons America should learn from the European crisis.
P.P.S. On a lighter note, the mess in Europe has generated some amusing videos (here, here, and here), as well as a very funny set of maps.
P.P.P.S. If all this sounds familiar, that may be because the Federal Reserve in the United States could be making the same mistakes as the European Central Bank. I don’t pretend to know when and how the Fed’s easy-money policy will turn out, but I’m not overly optimistic about the final outcome. As Thomas Sowell has sagely observed, “We all make mistakes. But we don’t all have the enormous and growing power of the Federal Reserve System… In the hundred years before there was a Federal Reserve System, inflation was less than half of what it became in the hundred years after the Fed was founded.”
The government predicts that the renewable energy surcharge added to every consumer’s electricity bill will increase from 5.3 cents today to between 6.2 and 6.5 cents per kilowatt hour — a 20-percent price hike. German consumers already pay the highest electricity prices in Europe. But because the government is failing to get the costs of its new energy policy under control, rising prices are already on the horizon. Electricity is becoming a luxury good in Germany.
As is so often the case with government intervention, the promises from politicians about low costs were a mirage.
Even well-informed citizens can no longer keep track of all the additional costs being imposed on them. According to government sources, the surcharge to finance the power grids will increase by 0.2 to 0.4 cents per kilowatt hour next year. On top of that, consumers pay a host of taxes, surcharges and fees that would make any consumer’s head spin. Former Environment Minister Jürgen Tritten of the Green Party once claimed that switching Germany to renewable energy wasn’t going to cost citizens more than one scoop of ice cream. Today his successor Altmaier admits consumers are paying enough to “eat everything on the ice cream menu.”
Perhaps the most shocking part of the story is that Germans are being forced to pay $26 billion in subsidies to get less than $4 billion of green energy.
For society as a whole, the costs have reached levels comparable only to the euro-zone bailouts. This year, German consumers will be forced to pay €20 billion ($26 billion) for electricity from solar, wind and biogas plants — electricity with a market price of just over €3 billion. Even the figure of €20 billion is disputable if you include all the unintended costs and collateral damage associated with the project. …On Thursday, a government-sanctioned commission plans to submit a special report called “Competition in Times of the Energy Transition.” The report is sharply critical, arguing that Germany’s current system actually rewards the most inefficient plants, doesn’t contribute to protecting the climate, jeopardizes the energy supply and puts the poor at a disadvantage.
Here’s what it means for ordinary people.
In the near future, an average three-person household will spend about €90 a month for electricity. That’s about twice as much as in 2000. Two-thirds of the price increase is due to new government fees, surcharges and taxes. …Today, more than 300,000 households a year are seeing their power shut off because of unpaid bills. Caritas and other charity groups call it “energy poverty.”
Not surprisingly, politically well-connected interest groups are the ones reaping the benefits.
…the renewable energy subsidies redistribute money from the poor to the more affluent, like when someone living in small rental apartment subsidizes a homeowner’s roof-mounted solar panels through his electricity bill. The SPD, which sees itself as the party of the working class, long ignored this regressive aspect of the system. The Greens, the party of higher earners, continue to do so. Germany’s renewable energy policy is particularly unfair with respect to the economy. About 2,300 businesses have managed to largely exempt themselves from the green energy surcharge by claiming, often with little justification, that they face tough international competition. Companies with less lobbying power, however, are required to pay the surcharge.
Let’s conclude with an ominous excerpt from the article. Even though prices already are very high, energy will get even more expensive in the future.
If the government sticks to its plans, the price of electricity will literally explode in the coming years. According to a current study for the federal government, electricity will cost up to 40 cents a kilowatt-hour by 2020, a 40-percent increase over today’s prices.
And isn’t it nice to know that Obama is doing everything he can to impose these policies in the United States?
This cartoon from Michael Ramirez is a perfect summary of Obama’s policy.
P.S. I don’t like being the bearer of bad news, but green-energy subsidies are just one part of the statist/green agenda. The IMF, for instance, has recommended a huge carbon tax (about $5,500 per year for a family of four!) for the United States. A few gullible folks think this might not be a bad idea if the money gets used to lower other taxes, but they’re the same people who get suckered into buying oceanfront property in Kansas.
Countries that slashed health and social protection budgets, like Greece, Italy and Spain, have seen starkly worse health outcomes than nations like Germany, Iceland and Sweden, which maintained their social safety nets and opted for stimulus over austerity.
Greece, Italy, and Spain, by contrast, are among those that increased the size of the public sector. So the argument presented in the New York Times is completely wrong. Indeed, it’s 100 percent wrong because Iceland (which Professor Gurdgiev didn’t measure since it’s not in the European Union) also has smaller government today than it did in the pre-crisis period.
But that’s just part of the problem with the Stuckler-Basu column. They want us to believe that “slashed” budgets and inadequate spending have caused “worse health outcomes” in nations such as Greece, Italy, and Spain, particularly when compared to Germany, Iceland, and Spain.
But if government spending is the key to good health, how do they explain away this OECD data, which shows that government is actually bigger in the three supposed “austerity” nations than it is in the three so-called “stimulus” countries.
Once again, Stuckler and Basu got caught with their pants down, making an argument that is contrary to easily retrievable facts.
But I guess this is business-as-usual at the New York Times. After all, this is the newspaper that’s been caught over and over again engaging in sloppy and/or inaccurate journalism.
Well, Geithner’s successor apparently is equally oblivious. He’s badgering the Germans to adopt Keynesian policies to “stimulate” growth, even though the Germans are doing better than most other European nations – in part because they are one of the few nations that have reduced the burden of government spending in recent years!
US treasury secretary Jack Lew will repeat calls for Germany to stimulate demand in order to drag the eurozone out of recession, according to US government sources. …The US stance is likely to meet resistance from the German government, which is reluctant to increase wages and stimulate domestic spending, preferring instead to keep wages low to encourage manufacturing and exports. But Berlin is under pressure to reduce its 7 percent export surplus. In April, Lew used his first trip to Berlin as Treasury Secretary to urge counterpart Wolfgang Schaueble to put in place measures to stimulate consumer spending. For his part, Schaueble commented that neither the US or Germany should try to give “lessons” or “grades” to each other.
I’m actually in favor of giving “lessons” and “grades” to governments, but not if it’s a case of the blind leading the blind.
P.S. If you want some unintentional humor, the Washington Postreferred to Germany as being “fiscally conservative.”
P.P.S. As you can see here and here, there’s little reason to be optimistic about the intellectual climate in Germany.
P.P.P.S. But at least we have some amusing videos involving Germany, as you can see here, here, and here.
P.P.P.P.S. Geithner also should be remembered for pushing through an IRS regulation that forces American banks to put foreign tax law above U.S. tax law.
Two Belgian government ministers have complained…that..Belgian companies are facing unfair competition. The two Belgian cabinet ministers were in Hannover (Germany) on Monday. They decided on their visit after often hearing in Belgium that it was cheaper to get Belgian cattle processed in Germany than at home.
So what is the unfair competition from Germany? Are there special tariffs or trade barriers that are artificially raising costs on Belgian products?
Nope, the Belgians are complaining that Germany doesn’t have a minimum wage and that regulations are not sufficiently onerous. Oh, the horror.
The Belgian ministers say that the most striking thing is that this can happen legally because there is no general minimum wage in Germany: “The company is not violating any regulations, because there are no regulations and that must stop” Mr Vande Lanotte told the VRT. The Belgians insist Belgian companies are the subject of unfair competition. Economy Minister Vande Lanotte says that in principle everybody should be treated in the same way: “Belgian companies cannot compete with their German competitors and this has ramifications.”
Gasp, there “are no regulations.” What sort of vicious dog-eat-dog system are the Germans running?!?
The answer, of course, is that Germany has lots of red tape.
More statist than France?!?
But apparently not as much intervention as Belgium. And you’ll notice that the “principle” that “everybody should be treated the same way” is really a stalking horse for the argument that there should be regulatory harmonization.
But the harmonization always means that everyone has to impose more onerous rules. Belgium doesn’t harmonize with Germany’s comparatively market-oriented policy. Instead, Germany is supposed to harmonize with the more statist and interventionist model of the Belgians.
In an ideal world, the Germans would tell the Belgians to go jump in a lake.
But thanks to the never-ending pressure for regulation, harmonization, and centralization in Europe, it’s not that simple. The Brussels bureaucrats may decide to force Germany to adopt bad policy.
Mr Vande Lanotte intends to raise the issue of the absence of a minimum wage in many German sectors with the European Commission.
P.P.S. This story helps to explain why I want Belgium to split apart. If it became two nations, one Dutch and one French, I suspect we’d get better policy because they would then compete with each other instead of nagging Germany to become more statist.
Now we can add this video, showing the challenges of a transnational couple, to the list.
I would have preferred if the video had an ideological message, of course, but I guess one of the messages is that the Greek guy is a bum who has no intention of pulling his weight.
Like Sweden and Denmark, Germany is a semi-rational welfare state. It generally relies on a market-oriented approach in areas other than fiscal policy, and it avoided the Keynesian excesses that caused additional misery and red ink in America (though it is far from fiscally conservative, notwithstanding the sophomoric analysis of the Washington Post).
Nonetheless, it’s difficult to have much optimism for Europe’s future when the entire political establishment of Germany blindly thinks there should be more centralization, bureaucratization, and harmonization in Europe.
The EU Observer has a story about the agenda of the de facto statists in the Christian Democratic party who currently run Germany.
“Harmonization über alles!”
…what Merkel and her party are piecing together is a radical vision of the EU in a few years time – a deep fiscal and political union. The fiscal side involves tax harmonisation, a tightly policed Stability and Growth Pact with automatic sanctions for countries that breach debt and deficit rules, and the possibility of an EU Commissioner responsible for directly intervention to oversee budgetary policy in a crisis-hit country. …On the institutional side, the CDU backs a directly elected President of the European Commission as well as clearly establishing the European Parliament and Council of Ministers as a bi-cameral legislature with equal rights to initiate EU legislation with the Commission.
Keep in mind that the Christian Democrats are the main right-of-center party in Germany, yet the German political spectrum is so tilted to the left that they want tax harmonization (a spectacularly bad idea) and more centralization.
Not surprisingly, the de jure statists of Germany have the same basic agenda. Here’s some of what the article says about the agenda of the Social Democrat and Green parties.
…its commitments to establish joint liability eurobonds and a “common European fiscal policy to ensure fair, efficient and lasting receipts” would also involve a shift of economic powers to Brussels. While both sides have differing ideological positions on the political response to the eurozone crisis – they are talking about more Europe, not less.
Guido Westerwelle is supposed to be the German version of a libertarian. Currently serving as Foreign Minister, he was the chairman of the supposedly pro-market Free Democratic Party for 10 years and Wikipedia says he was known as a “proponent of an unlimited free market economy.”
That’s the optimistic spin, but now let’s look at the column Westerwelle wrote for the Washington Post yesterday. Entitled “A Growth Pact for Europe,” he called for six reforms. Unfortunately, four of the reforms mean more government and two were meaningless boilerplate. Let’s look at what he proposed.
First, the European Union’s budget should be consistently oriented toward growth… The E.U. must utilize its resources better than before without spending more. Money is available for future-oriented tasks; in recent months, E.U. officials have been negotiating a 1 trillion-euro budget for 2014 to 2020. We should concentrate on using this huge sum consistently to promote growth and employment, innovation and competitiveness.
I’m glad he says they shouldn’t spend even more than is currently in the EU budget, but he apparently believes that government can redistribute 1 trillion euro in a way that boosts the economy. Good luck with that.
Second, unused E.U. funds must be activated. Around 80 billion euros in the regional cohesion fund have not been allocated to any concrete projects. The European Commission and member states must invest these funds quickly and effectively in new growth through better competitiveness.
Third, access to capital must be improved. …companies are not in a position to make sensible investments that would stimulate growth. The European Investment Bank is an instrument we could use to a greater extent and in a more targeted fashion, not least to ensure that small and medium-size businesses have better access to loans.
I guess this is the European version of the bastard child of Fannie Mae and the Export-Import Bank. But if anybody thinks government-subsidized cronyism is a route to prosperity, they’ve been asleep for the past 40 years.
Fourth, infrastructure projects must be promoted. …Our roads, railways, and energy and telecommunication networks are among the European economy’s trump cards. …State-of-the-art infrastructure opens new prospects for growth by making private-sector investment more attractive. We need to mobilize private capital for the cross-border expansion of European infrastructure and look at innovative forms of public-private partnership.
Fifth, we must complete Europe’s internal market. In the 1980s and ’90s, realizing the “four freedoms” — the free flow of goods, capital, services and people within the E.U. — released tremendous forces for growth. Today, the expansion of the internal market to cover new spheres again offers great opportunities. That applies to the digitized economy, e-commerce and the energy sector, and it will strengthen small and medium-size companies by reducing red tape and ensuring better access to venture capital.
This boilerplate support for more free trade is fine, but I think all the big benefits of ending protectionism inside Europe already have been captured (and this is the one area where the European project has been a success).
Sixth, we want to strengthen free trade. Three-quarters of the world’s trade occurs outside the European Union. More than 80 percent of global growth is produced outside Europe. The E.U. must work toward making the Doha Round a success while also concluding more free-trade agreements with new and long-established centers of power.
Again, this a good sentiment, but I fear it is a throwaway passage. Almost every nation has empty rhetoric about completing the Doha round, but don’t hold your breath expecting it to happen anytime soon.
What’s notable about Westerwelle’s list is that there is nothing about the overall burden of spending, even though Europe is saddled with bloated welfare states. There is nothing about high tax rates, even though most nations have punitive systems that discourage work, saving, investment, and entrepreneurship. There is nothing about the overall burden of regulation and red tape, particularly the supposedly pro-labor rules that actually discourage hiring (the Germans did implement successful reforms last decade, so he would have been in a strong position to urge other nations to copy those changes).
The obvious lesson to be learned from this example of “anti-convergence” is that market-oriented economies out-perform state-controlled economies.both of which happened over a period of weeks in 1948. A further factor was the reduction of marginal tax rates later in 1948 and in 1949. …Marshall Plan aid to West Germany was not that large. Cumulative aid from the Marshall Plan and other aid programs totaled only $2 billion through October 1954. Even in 1948 and 1949, when aid was at its peak, Marshall Plan aid was less than 5 percent of German national income. Other countries that received substantial Marshall Plan aid exhibited lower growth than Germany.
before receiving Marshall Plan funds. As for Belgium, it embarked on a radical monetary reform program in October 1944, only one month after liberation. Belgium’s economic stabilization and recovery were well under way by 1946, fully two years before the arrival of U.S. aid. Great Britain, conversely, received more Marshall Plan aid than any other nation but had the lowest postwar economic growth rate of any European country. The critical problem facing Europe was…simply bad economic policy.
…two main reasons: a monetary reform and the freeing of the economy by abolishing price controls and cutting taxes. All of this was implemented thanks to one man: Ludwig Erhard. …What Erhard did was unthinkable in a hostile environment. The Allied forces, still heavily controlling Germany, left the Nazi price controls and rationing intact. But when Erhard became Secretary of the Economy in West Germany, he quickly ended all price controls and stopped rationing — to the dismay of the US advisors. …He, not a Keynesian Project like the Marshall Plan, enabled the miracle.
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