Hungary and Pro-Natalist Policy

My original intent today was to write about Hungary’s economic policy, presumably focusing on the country’s sometimes good and sometimes bad tax policies.

Why Hungary? Because I’m in Budapest for the next stop on the Free Market Road Show.

But I’ve decided to change topics because of this advertisement that I saw as I got off the plane this morning.

This is not just an example of random national boosterism.

There is a demographic problem in Europe, and it’s particularly acute in Eastern Europe.

Simply stated, people are living longer and having fewer kids. And this has very negative implications for modern welfare states.

So Hungarian politicians decided that the best solution was to spend a lot of money to encourage more children.

Has this effort to create a “Family Friendly Hungary” been successful?

In an article for the Catholic Herald, Professor C.C. Pecknold of Catholic University is a fan of the government’s policies.

…one country has seen marriage rates increase by a whopping 43 per cent… Unsurprisingly, with the increase in marriage, …the national birth rate is currently at its highest in 20 years. The country is Hungary. …Hungary’s Minister for the Family, Katalin Novak, explains… “After we won the election in 2010 with a two-thirds majority, we decided to build a family-friendly country and to strengthen families raising children. …a comprehensive family-support system, a family-friendly tax system, a housing program…” The new law…has a new set of pro-family incentives such as a 3,000 euro mortgage reduction for a second child, and a 12,000 euro reduction for a third. Effective in 2020, mothers with 4 or more children will enjoy a lifetime personal tax exemption.

Robert VerBruggen of the Manhattan Institute says these policies are working.

Here are excerpts from his article published by Law & Liberty.

The experience of Hungary is…instructive… Pronatal policy works, but you have to go big. …the country was spending 5 percent of its GDP on family support, including massive housing subsidies for families with three kids. …Its more recent efforts include loans of up to $33,000 to married couples that are partly forgiven if they have two kids and fully forgiven if they have three, subsidized fertility treatments, and total exemption from income taxes for women with four kids. Hungary is strongly advancing the message that fertility is a good thing and spending lots of money to encourage it, to an extent that would probably be hard to match in the U.S. The much-heralded result has been a “total fertility rate” of about 1.6 children per woman in 2021, a number not seen since the 1990s and an increase of more than a fifth since the 2000s, when the rate fluctuated around 1.3. …Hungary’s income-tax exemption for women with four kids and subsidies restricted to married couples

Lyman Stone of the Institute for Family Studies, writing for National Review, has a mixed view of the Hungarian government’s approach.

Hungary’s overt effort to boost birth rates…is an extraordinary experiment in demographic policy, and one with enormous political ramifications. …it is vital to understand what Hungary’s population policies actually are, and what effects they are having on Hungarian society. …First, in 2015, came CSOK, a program that subsidized credit for home loans for couples having three kids. Then came related programs subsidizing education, minivans, home renovations, and other expenses. Then there was an income-tax program: Women who had four or more children would be exempt from income taxes. Most recently, there’s a “baby loan,” worth over $30,000, which couples can apply for after getting married, and which is forgiven in tranches as they have children. Unfortunately, however, fertility in Hungary has barely budged. …since the financial incentives for a second child were over four times as generous as those for a first child, and for three or more children they were another four times more, Orbán’s government expected a big increase in third or subsequent births. But that isn’t what happened. …in Hungary big families got rarer. …CSOK was a flop. Hungarian fertility rates performed no better than, indeed somewhat worse than, the fertility rates of nearby countries.

As you read these numbers, don’t forget that Hungarians are much poorer than Americans (notwithstanding nonsensical analysis from the OECD).

In other words, $30,000 is a very significant amount of money.

And since economics teaches us you get more of things that are subsidized, Stone points out that fertility is increasing.

But there is some good news: The latest addition to Hun­gary’s suite of baby policies actually seems to be working. Beginning in 2019, Hungarian newlyweds under a certain age and without prior children could apply for a loan with an extremely heavily subsidized interest rate and with payments deferred. As the couple had children, chunks of the loan would be forgiven, so that if they had three children within ten years, they would have gotten a $35,000 cash grant with no strings attached (beyond, of course, having babies). Births in Hungary jumped upwards nine months after this program rolled out… it is similar in principle to the generous baby bonuses that existed at various times in Australia and Quebec, which are widely known to have increased birth rates.

By the way, there’s a critical difference between what is happening in Hungary and the per-child handouts that Biden is proposing in the United States.

Financial support for married childbearing may have actually improved family stability. Notably, the share of children born to unmarried mothers fell from 48 percent in 2015 to just 30 percent in 2020, an extraordinary decline.

So what’s the bottom line?

I’m not a fan of government subsidies for child-bearing, jut as I’m not a fan of onerous fiscal policies that discourage families from having kids.

For what it’s worth, nations generally have not been successful in boosting fertility. But, then again, I doubt any country has been as aggressive as Hungary.

I’ll close with one semi-dour observation.

Let’s assume that Hungary’s pro-natalist policies deserve credit for boosting the fertility rate from 1.3 to 1.6. That seems impressive, but it’s still well short of the replacement rate of 2.1 children per woman.

As such, there’s still a desperate need for genuine entitlement reform (including in the United States) regardless of whether a government tries to subsidize bigger families.

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Should Advocates of Economic Liberty Prefer Hungary or Denmark?

I’m a big believer in focusing on results rather than reputation or rhetoric. For instance, many Republican politicians talk a good game about spending restraint. But when you crunch the numbers, it turns out that they often increase spending even faster than Democrats.

What’s true about politicians (the gap between reputation and reality) can also be true about countries.

Folks on the left seem to think Denmark is a big-government paradise, while many people on the right now think Hungary is a beacon of freedom.

But if you look at the data from the latest edition of Economic Freedom of the World, it turns out the Denmark (#11) ranks much higher for economic liberty than Hungary (#53).

Veronique de Rugy of the Mercatus Center wrote an interesting article for Reason about the strange way that some Americans have decided to embrace the two nations.

Yet she explains Denmark is hardly a socialist role model.

Sen. Bernie Sanders (I–Vt.) on the left and Fox News host Tucker Carlson on the right…have recently pointed to pet foreign countries as exemplars of what America should strive to be. Yet Sanders and Carlson are each misled by a superficial understanding of what these countries are really about. …Let’s look more closely at Denmark: Yes, the country has some big government policies… That said, not only is Denmark more economically free than it is socialist, but the country has also spent the last 30 years running away from the socialism that Sanders wants the United States to run toward.

And she notes that Hungary is hardly a hotbed of laissez-faire policy.

Orban…has created a patronage economy where licenses and aid are handed to businesses that are friendly to his administration. He even passed a law that gives the state considerable control over churches and other religious institutions. …these policies…could backfire spectacularly on these conservatives. Once the limits on state power are gone, if the progressive left truly gets into power, it will have a much easier time implementing the very agenda that these conservatives fear the most. …I wonder what we are to make of these conservatives who have become the biggest cheerleaders for many progressive spending programs.

Since Veronique mentioned government spending, I decided to peruse the IMF’s World Economic Outlook Database to see whether Hungary’s right-leaning government has adopted right-leaning spending policies during Viktor Orban’s time in power.

Compared to Denmark, the answer is no. As you can see from the chart, nominal spending has increased four times faster in Hungary.

By the way, inflation was higher in Hungary during the period, but a comparison based on inflation-adjusted numbers would make Denmark’s performance look even better since there was almost no “real” growth in the burden of spending last decade (yes, Denmark has followed my Golden Rule).

For what it’s worth, the goal of today’s column is not to denigrate Hungary, which has some very attractive policies (such as a 9 percent corporate tax rate).

And I also like that Hungary resists the pro-centralization, pro-harmonization ideology of the European Union (I especially hope that Hungary will block the EU from embracing Biden’s awful proposal for a global corporate minimum tax).

That being said, I’m not going to laud Hungary as a role model when it should be (and could be) doing a much better job of limiting the size and scope of government.

Let’s close by also seeing how Denmark compares to Hungary in the latest edition of the Heritage Foundation’s Index of Economic Freedom. As you can see, Denmark (#10) does much better than Hungary (#55).

P.S. Supporters can argue, with some merit, that it’s not completely fair to compare Denmark and Hungary because the latter is still hamstrung by having to overcome decades of communist tyranny. But it’s worth noting that other nations that emerged from Soviet enslavement, such as Georgia and the Baltic countries, have managed to achieve much higher levels of economic freedom.

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