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Archive for the ‘OECD’ Category

The great thing about the Economic Freedom of the World is that it’s like the Swiss Army Knife of global policy. No matter where you are or what issue you’re dealing with, EFW will offer insight about how to generate more prosperity.

Since today’s focus is Central America, let’s look at the EFW data.

As you can see, it’s a mixed bag. Some nations are in the top quartile, such as Costa Rica, Guatemala, and Panama, though none of them get high absolute scores. Mexico, by contrast, has a lot of statism and is ranked only #88, which means it is in the third quartile. And Belize is a miserable #122 and stuck in the bottom quartile (where Cuba also would be if that backwards country would be ranked if it produced adequate statistics).

One of the great challenges for development in central America (as well as other parts of the developing world) is figuring out how to get poor and middle-income nations to make the jump to the next level.

Mary Anastasia O’Grady of the Wall Street Journal has a column on how to get more growth in Central America. She focuses on Guatemala, but what she writes is applicable for all neighboring countries.

…faster economic growth is part of what’s needed for the region… To succeed, it will have to break with the State Department’s conventional wisdom that underdevelopment is caused by a paucity of taxes and regulation. It will also have to climb down from its view that trade is a zero-sum game. Policy makers might start by reading a new report on micro, small and medium-sized businesses in Guatemala by the Kirzner Center for Entrepreneurship at Francisco Marroquin University in Guatemala City. It measures—by way of household surveys in 179 municipalities and interviews with industry experts—“attitudes, activities and aspirations of the entrepreneur.” …the GEM study ranks Guatemala No. 1 for its positive view of entrepreneurship as a career choice. Guatemala also ranks high (No. 9) for the percentage of the population engaged in new businesses, defined as less than 3½ years old. And it ranks 12th in terms of the percentage of the population who “are latent entrepreneurs and who intend to start a business within three years.”

She explains that Guatemalan entrepreneurship is hampered by excessive taxation and regulation.

Yet Guatemalan eagerness to run a business has not translated into prosperity for the nation… The country ranks a lowly 59th in entrepreneurs’ expectations that they will create six or more jobs in five years. It also sinks to near the bottom of the pack (62nd) in creating business-service companies. …The World Bank’s 2017 “Doing Business” survey provides many clues about why the informal economy is so large. Guatemala ranks 88th out of 190 countries world-wide for ease of running an enterprise, but in key categories that make up the index it performs much worse. The survey finds that it takes 256 hours to comply with the tax code. The total tax take is 35.2% of profits. It takes almost 20 days to start a legal enterprise and costs 24% of per capita income. To enforce a contract it takes more than 1,400 days and costs more than 26% of the claim.

The good news is that we know the answers that will generate prosperity. The bad news is that Guatemala gets a lot of bad advice.

The obvious solution is an overhaul of the tax, regulatory and legal systems in order to increase economic freedom. A lower tax rate and a simpler code would give companies an incentive to operate legally, thereby broadening the base and improving access to credit. Instead the Guatemalan authorities—encouraged by the State Department and the International Monetary Fund—spend their resources trying to impose a complex, costly system in an economy of mostly informal businesses with a much-smaller number of legal, productive entrepreneurs. Recently the United Nations International Commission against Impunity in Guatemala recommended a new tax to fight “impunity.” This is no way to attract capital or raise revenue.

Speaking of bad advice, let’s now contrast the sensible recommendations of Ms. O’Grady to the knee-jerk statism of the Organization for Economic Cooperation and Development. In a new report on Costa Rica’s tax system, the OECD urged ever-higher fiscal burdens for the country. Including destructive class warfare.

Costa Rica’s tax revenues are…insufficient to finance the country’s current spending needs. …In addition to raising more tax revenue…, Costa Rica needs to…enhance the redistributive role of its tax system. …the role of the personal income tax (PIT) should be strengthened as it currently raises little revenue and does not contribute to reducing inequality. …Collecting greater revenues from the PIT, by lowering the income threshold above which PIT has to be paid as well as by introducing additional PIT brackets and gradually raising the top PIT rate, could contribute to reducing income inequality.

But the OECD doesn’t merely want to hurt successful taxpayers.

The bureaucracy is proposing other taxes that target everyone in the country. Including a pernicious value-added tax.

Costa Rica does not have a modern VAT system in place. …Costa Rica’s priority should be to introduce a well-designed and broad-based VAT system…to be able to generate additional revenues… There is scope to improve the environmental effectiveness of tax policy while also increasing revenue.

So why is the OECD so dogmatically in favor of higher taxes in Costa Rica?

Are revenues less than 5 percent of GDP, indicating that the country is unable to finance genuine public goods such as rule of law?

Is the government so starved of revenue that Costa Rico can’t replicate the formula – a public sector consuming about 10 percent of economic output – that enabled the western world to become rich?

Of course not. The report openly acknowledges that the Costa Rican tax system already consumes more than 23 percent of GDP.

The obvious conclusion if that the burden of government in Costa Rica should be downsized. And that’s true whether you think that the growth-maximizing size of government, based on the experience of the western world, is 5 percent-10 percent of GDP. Or whether you limit yourself to modern data and think the growth-maximizing size of government, based on Hong Kong and Singapore, is 15 percent-20 percent of economic output.

Here’s another amazing part of the report, as in amazingly bad and clueless.

The OECD actually admits that rising levels of government debt are the result of spending increases.

…significant increases in expenditures have not been matched by increases in tax revenues. …Between 2008 and 2013, overall government spending increased as a result of higher public sector remuneration as well as higher government transfers to finance public sector social programmes.

What’s particularly discouraging, as you just read, is that the higher spending wasn’t even in areas, such as infrastructure, where there might arguably be a potential for some long-run economic benefit.

Instead, the government has been squandering money on bureaucrat compensation and the welfare state.

Here’s another remarkable admission in the OECD report.

The high tax burden is a key driver of the informal economy in Costa Rica. The IMF estimated the size of the informal economy in Costa Rica at approximately 42% of GDP in the early 2000s… Past work from the IMF showed that rigidities in the labor market and the high tax burden were the most important drivers of informality.

Yet does the OECD reach the logical conclusion that Costa Rica needs deregulation and lower tax rates? Of course not.

The Paris-based bureaucrats instead want measures to somehow force workers into the tax net.

Bringing more taxpayers within the formal economy should be a key priority. …the tax burden in Costa Rica is borne by a small number of taxpayers. This puts a limit on the amount of tax revenue that can be raised…and puts a limit to the impact of the tax system in reducing inequality.

Ironically, the OECD report actually includes a table showing why the IMF is right in this instance. As you can see, social insurance taxes create an enormous wedge between what it costs to employ a worker and how much after-tax income a worker receives.

In other words, the large size of the underground economy is a predictable consequence of high tax rates.

Let’s conclude with the sad observation that the OECD’s bad advice for Costa Rica is not an anomaly. International bureaucracies are routinely urging higher tax burdens.

Indeed, I joked a few years ago in El Salvador that the nation’s air force should shoot down any planes with IMF bureaucrats in order to protect the country from bad economic advice.

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If I was Captain Ahab in a Herman Melville novel, my Moby Dick would be the Organization for Economic Cooperation and Development. I have spent more than 15 years fighting that Paris-based bureaucracy. Even to the point that the OECD threatened to throw me in a Mexican jail.

So when I had a chance earlier today to comment on the OECD’s statist agenda, I could barely contain myself

Notwithstanding the glitch at the beginning (the perils of a producer talking in my ear), I greatly enjoyed the opportunity to castigate the OECD.

Indeed, returning to my Moby Dick analogy, I’m increasingly hopeful that the harpoons I keep throwing at the OECD may finally draw some blood.

In his budget, President Trump has proposed to cut overall spending for international organizations. And we’re talking about a real budget cut, not the phony kind of cut where spending merely grows at a slightly slower rate.

The budget doesn’t specify funding levels for the various bureaucracies, but various Administration officials have told me that their goal is to completely defund the Paris-based bureaucracy.

To quote Chris Matthews, this definitely sends a thrill up my leg.

But I’m trying not to get too excited. It’s still up to Congress to decide OECD funding, and the bureaucrats in Paris have been very clever about currying favor with the members of the subcommittee that doles out cash for international organizations.

Though as I mentioned in the interview, the OECD didn’t do itself any favors by openly trashing Trump last year. Even if they have their doubts about Trump, I suspect most GOPers in Congress aren’t happy that the bureaucrats in Paris were trying to tilt the election for Hillary Clinton.

Here are some examples.

The OECD’s number-two bureaucrat, Doug Frantz, actually equated America’s president with the former head of Germany’s National Socialist Workers Party.

The Deputy Secretary General of the OECD has described…Donald Trump as a “lunatic” whose political rise mirrors that of Hitler and Mussolini. …Speaking on RTÉ’s This Week, Doug Frantz said…“if you look at the basis ‘us and them’ that Donald Trump sets up, that Hitler set up, that Mussolini set up, then you can begin to at least be concerned and I’m concerned: I think any right-minded person should be concerned…The person who sits in the White House is the most powerful person in the world and if that person is someone who follows every whim and appeals to the most base instincts of a population, then we’re all under real threat”.

And another news report caught the OECD’s Secretary General, Angel Gurria, basically asserting that Trump is racist.

Angel Gurria, secretary general of the Organisation for Economic Cooperation and Development  and former Mexican foreign minister, says the word “racist” can be applied to Donald Trump. …Gurria tells UpFront’s Mehdi Hasan: “I would tend to agree with those who say that this is not only misinformed, but yes, I think the word racist can be applied. I think that because the American public is wise, it will then act in consequence,” Gurria adds.

By the way, I’m making sure to share these partisan statements with lots of people in Congress and the Administration.

In an ideal world, lawmakers would defund the OECD because it is an egregious waste of money. But if they defund the bureaucracy because its top two officials tried to interfere with the US election, I’ll still be happy with the final outcome.

I’ll close by recycling the video on the OECD that I narrated for the Center for Freedom and Prosperity.

P.S. In the interest of fairness, I’ll acknowledge that the OECD occasionally produces good work. I’ve even favorably cited research from the bureaucracy on issues such as government spending, tax policy, and expenditure limits.

But even if the bureaucracy ended its statist advocacy agenda and gave staff economists carte blanche to produce good papers, that still wouldn’t change my view that American tax dollars should not be funding the OECD. Though I confess it would be a much less attractive target if it returned to its original mission of collecting statistics and publishing studies.

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If there was a ranking of international bureaucracies, the World Bank would be my favorite (or, to be more accurate, least unfavorite). Yes, it sometimes produces bad studies, but it also is the source of good research on topics such as government spending, Social Security reform, tax complexity, financial regulation, and economic liberty. And the rankings in Doing Business are a very helpful way of measuring and comparing regulatory burdens (which is why leftists are so hostile to the project). Moreover, it’s hard to dislike an organization that has a mission of fighting poverty (even if it sometimes thinks redistribution is the right strategy).

The United Nations would be next on the list. The good news is that it has many well-meaning people. The bad news is that is has some very misguided projects. But since it isn’t very effective, I confess that it doesn’t command much of my attention.

At the bottom would be either the International Monetary Fund (IMF) or the Organization for Economic Cooperation and Development (OECD).

The IMF is notorious for supporting bailouts and advocating tax increases. Depending on my mood, it’s either the “Dr. Kevorkian of economic policy” or the “dumpster fire of the global economy.” Yes, I try to be fair and will acknowledge occasional good research (on taxation, government spending, financial regulation, spending caps, etc), but there’s no question that the net impact of the IMF is negative.

The OECD also is on the wrong side when looking at the big picture. Once again, I’ll admit that there are occasional good studies (on spending caps, tax policy, government spending, etc). But those glimmers of good news are overwhelmed by a statist agenda on a wide range of policies. Most recently, the Paris-based bureaucracy proposed more taxes and more spending for the American economy. And if you’re interested in other examples, I’ve attached a list of examples at the bottom of this column.

But the main purpose of this column is to review a new publication from the OECD. As part of its so-called “Bridging the Gap” project, the bureaucrats in Paris just issued a new report that reads as if it was taken from the campaign speeches of Bernie Sanders and Jeremy Corbyn.

Here are some of the lowlights, starting with a misguided fixation on inequality.

Fiscal redistribution through taxes and transfers plays a crucial role in containing the impact of market income inequality on disposable income… Policies aimed at promoting growth should consider how growth will have an impact on many other outcomes, and how to ensure that those policies avoid the “grow first, distribute later” assumption that has characterised the economic paradigm until recently. It is now clear that growth strategies need to consider from the outset the way in which their benefits will be distributed to different income groups. … Inequalities tear at the fabric of our societies. Inequality of incomes translates seamlessly into inequality of opportunities for children, including education, health and jobs, and lower future prospects to flourish individually and collectively. …inequalities are reaching a tipping point

I’m tempted to joke that the bureaucrats want a “distribute first, grow never” approach, but let’s focus on the fact that the real goal should be reducing poverty rather than reducing inequality.

If I’m poor, I want an opportunity to increase my income. And if there’s a policy that will help give me that opportunity, it doesn’t matter if that policy enables Bill Gates to increase his income at a faster rate.

That’s why there’s no substitute for economic growth if you really want to help the less fortunate.

But the not-so-subtle message of the OECD report is that poor people are poor because rich people are rich. The bureaucrats are concerned with how to re-slice the pie rather than how to expand the size of the pie.

The really troubling material is in the final chapter, but I can’t resist commenting on a few items that appeared earlier in the report.

Such as the fact that the bureaucrats were not happy when unemployment benefits in the United States were curtailed.

…redistribution helped cushion increases in market income inequality, but its role has since tended to fall in a majority of OECD countries in the most recent years…it reflects the phasing out of fiscal stimulus, as in the United States, where the extension of unemployment benefit duration carried out in 2008-09 was rolled back in 2011.

Too bad nobody told the authors that the job market improved in America when subsidies for joblessness were cut back.

But that kind of mistake is predictable since the OECD puts such a high value on coercive redistribution.

I’m also not surprised that the bureaucrats are upset that tax competition has resulted in lower tax rates.

Globalisation has increased the difficulty for governments in taxing mobile capital income. Increased levels of capital mobility have led to certain reductions in statutory income tax rates…, which has reduced the progressivity of tax systems… The distributional effects of these reductions in statutory tax rates, especially the reduction in top personal income tax rates, has been a contributing factor to the rise in inequalities.

And the OECD even regurgitated its bizarre hypothesis that inequality reduces growth.

Widespread increases in income inequality are a source of concern…for their potential impact on economic performance. …recent OECD work estimates that rising inequality between 1985 and 2005 might have contributed to knocking more than 4 percentage points off growth between 1990-2010.

The final chapter, though, is where the OECD unveils its Bernie Sanders/Jeremy Corbyn agenda. I guess young people might say that the bureaucrats were “letting their statism freak flag fly.”

Governments have a vital role to play…targeted social investment, redistributive fiscal policy and comprehensive labour market support…fiscal policy is the key mechanism for redistributing market incomes and it is important that it is set up to prioritise support for vulnerable population groups at all points in the economic cycle.

And what are some of these policies?

The OECD wants to expand the welfare state, even though such policies already have caused fiscal crises in many nations.

The size of means-tested programmes is relatively small in many countries and there is room for expansion, by either making those programmes more generous or by extending their coverage.

The bureaucrats also want more double taxation on income that is saved and invested.

…enhancing tax progressivity via savings tax reform. Income from savings is taxed progressively, though at lower rates than labour and with a lot of variation in taxation across asset types. …There is therefore scope to increase the fairness and the neutrality of the taxation of capital income…removing tax expenditures…strengthening progressivity of tax bases. …tax expenditures such as tax deductions for private pension contributions…are regressive since higher income taxpayers tend to save… Removing such tax expenditures could simultaneously reduce inequality and make the tax system more efficient.

There’s also an embrace of punitive property taxes.

Increased taxation of residential property could increase both growth and strengthen progressivity. …if designed well can fall mostly on high-wealth, high-income households.

Amazingly, the OECD even wants more onerous death taxes, even though such policies have a very negative impact on capital formation.

Strengthening inheritance and gift taxes can support inclusive growth. … Inheritance taxes can…help achieve intergenerational equity goals. …In order to be effective, inheritance taxes must also be combined with taxes on gifts and wealth transfers during the taxpayers’ lifetime, as well as with measures to address avoidance and evasion.

The bureaucrats want more subsidies for joblessness.

Sufficiently generous unemployment benefits and social-assistance systems with a wide coverage are also a key.

And they even endorse an idea that is so economically absurd that it was rejected by President Obama’s main economic adviser.

Promoting gender equality in access to employment and job quality is a key component of inclusive growth. …gender pay gaps remaining at about 15% across the OECD, on average, with little change in recent years.

Here’s another passage urging a bigger welfare state.

Compensatory policies that redistribute income also have a role to play in…lowering post-redistribution inequality. …strong and well-designed social safety nets programmes are all the more needed.

And here’s a specific policy for more housing subsidies.

Access to affordable housing is a challenge for inclusion, and solutions include not only better housing policies but also better urban planning and governance of land use. …Explicit policies to support access to housing include housing allowances, social housing arrangements and different kinds of financial support towards homeownership.

As you can see, that’s an impressive collection of statist policies, even for the OECD.

P.S. I wrote last year that some folks on the left enjoy very lavish incomes while crusading about inequality. The same is true of the OECD, where bureaucrats not only are lavishly compensated (a general rule for international organizations), but they also enjoy tax-free incomes while urging higher taxes on the rest of us.

P.P.S. Here are additional examples of very dodgy research from the OECD.

P.P.P.S. Don’t forget that the OECD’s statist agenda is financed by your tax dollars.

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I wrote yesterday about how the Organization for Economic Cooperation and Development (OECD) is pushing for bigger government in China. That’s a remarkable bit of economic malpractice by the Paris-based international bureaucracy, especially since China is only ranked #113 in the latest scorecard from Economic Freedom of the World. The country very much needs smaller government to become rich, yet the OECD is preaching more statism.

But nobody should be surprised. The OECD, perhaps because its membership is dominated by European welfare states, has a dismal track record of reflexive support for bigger government.

It supports higher taxes and bigger government in Asia, in Latin America, and…yes, you guessed correctly…the United States.

And here’s the latest example. In a new publication, OECD bureaucrats recommend policy changes that ostensibly will produce more growth for the United States. Basically, America should become more like France.

Income inequality has continued to widen… Public infrastructure is not keeping pace… Promote mass transit… Implement usage fees based on distance travelled…to help fund transportation… Expand federal programmes designed to improve access to fixed broadband. …Expand funding for reskilling… Require paid parental leave… Expand the Earned Income Tax Credit and raise the minimum wage.

To be fair, not every recommendation involves bigger government.

Adopt legislation that cuts the statutory marginal corporate income tax rate…

But even that single concession to good policy is matched by proposals to squeeze more money from the private sector.

…and broaden the tax base. …Continue with measures to prevent base erosion and profit shifting.

By the way, even though European nations dominate the OECD’s membership, American taxpayers provide the largest share of funding for the OECD.

In other words, we’re paying more taxes to have a bunch of international bureaucrats urge that we get hit with even higher taxes. And to add insult to injury, OECD bureaucrats are exempt from paying taxes!

Maybe that’s why they’re so blind to the harmful impact of bad tax policy.

It’s especially discouraging that the bureaucrats are even advocating greater levels of discriminatory taxation of saving and investment. Here are some blurbs from a report in the Wall Street Journal.

The Paris-based think tank has just junked the conventional economic wisdom on tax it had been promoting for years. …“For the past 30 years we’ve been saying don’t try to tax capital more because you’ll lose it, you’ll lose investment. Well this argument is dead…,” Pascal Saint-Amans, the OECD’s tax chief, said in an interview. …Since the 1970s economists had argued capital income should be taxed relatively lightly because it was more mobile across countries and attracting investment would boost economic growth, ultimately benefiting everyone.

Actually, the argument on not over-taxing capital income is based on the merits of a neutral tax system that doesn’t undermine growth by punishing saving and investment.

The fact that capital is “mobile across countries” was something that constrained politicians from imposing bad tax policy. In other words, tax competition promoted better (or less worse) policy.

But now that tax havens and tax competition have been weakened, politicians are pushing tax rates higher. And the OECD is cheering this destructive development.

Here are some passages from the OECD report on this topic.

…there have been calls to move away from a narrow focus on economic growth towards a greater emphasis on inclusiveness. …Inclusive economic growth…implies that the benefits of increased prosperity and productivity are shared more evenly between people… More specifically with regard to tax policy, inclusive economic growth is related to managing tradeoffs between equity and efficiency. Growth-enhancing tax reforms might come at certain costs in terms of meeting equity goals so tax design for inclusive growth requires taking into account the distributional implications of tax policies.

In other words, the OECD wants to shift away from policies that lead to a growing economic pie and instead fixate on how to re-slice and redistribute a stagnant pie.

And here’s a flowchart from the OECD report. Keep in mind that “inclusive growth” actually means less growth. I’ve helpfully put red stars next to the items that involve more transfers of money from the productive sector of the economy to the government.

That flowchart shows what the OECD wants.

But if you want a real-world example, just look at Greece, France, and Italy.

Which brings me to my final point. To be blunt, it’s crazy that American taxpayers are subsidizing a left-wing overseas bureaucracy like the OECD.

If Republicans have any brains and integrity (I realize that’s asking a lot), they should immediately pull the plug on subsidies for the Paris-based bureaucracy. Sure, it’s only about $100 million per year, but – on a per-dollar spent basis – it’s probably the most destructive spending in the entire budget.

P.S. The OECD even wants a type of World Tax Organization.

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I wrote a rather favorable column a few days ago about a new study from economists at the Organization for Economic Cooperation and Development. Their research showed how larger levels of government spending are associated with weaker economic performance, and the results were worth sharing even though the study’s methodology almost certainly led to numbers that understated the case against big government.

Regardless, saying anything positive about research from the OECD was an unusual experience since I’m normally writing critical articles about the statist agenda of the international bureaucracy’s political appointees.

That being said, I feel on more familiar ground today since I’m going to write something negative about the antics of the Paris-based bureaucracy.

The OECD just published Revenue Statistics in Asian Countries, which covers Indonesia, Singapore, Malaysia, South Korea, Japan, and the Philippines for the 1990-2014 period. Much of the data is useful and interesting, but some of the analysis is utterly bizarre and preposterous, starting with the completely unsubstantiated assertion that there’s a need for more tax revenue in the region.

…the need to mobilise government revenue in developing countries to fund public goods and services is increasing. …In the Philippines and Indonesia, the governments are endeavoring to strengthen their tax revenues and have established tax-to-GDP targets. The Philippines aims to increase their tax-to-GDP ratio to 17% (excluding Social Security contributions) by 2016…and Indonesia aims to reach the same level by 2019.

Needless to say, there’s not even an iota of evidence in the report to justify the assertion that there’s a need for more tax revenue. Not a shred of data to suggest that higher taxes would lead to more economic development or more public goods. The OECD simply makes a claim and offers no backup or support.

But here’s the most amazing part. The OECD report argues that a nation isn’t developed unless taxes consume at least 25 percent of GDP.

These targets will contribute to increasing financial capacity toward the minimum tax-to-GDP ratio of 25% deemed essential to become a developed country.

This is a jaw-dropping assertion in part because most of the world’s rich nations became prosperous back in the 1800s and early 1900s when government spending consumed only about 10 percent of economic output.

And not only were taxes a concomitantly minor burden during that period, but many nations didn’t have any income taxes at all.

At this point, you may be thinking the OECD bureaucrats are merely guilty of not knowing history.

That certainly would be a charitable explanation of their gross oversight/mistake.

But there’s something else in the study that makes this benign interpretation implausible. The study explicitly notes that Singapore is a super-prosperous developed nation with a very low tax burden – way below the supposed minimum requirement identified by the OECD.

Singapore has the highest GDP per-capita of the six countries and one of the lowest tax-to-GDP ratios. …The low tax-to-GDP ratio is explained by lower income tax rates (particularly on corporate income) and VAT rates, compared to other Asian countries. …The tax-to-GDP ratio in Singapore is lower in 2014 relative to 2000, driven by the decrease of individual income tax rates and corporate income tax rates.

Here’s a chart from the report showing that taxes consume less than 14 percent of economic output in Singapore.

Needless to say, there’s nothing in the report to square the circle and justify the claim about the supposed link between higher taxes and economic development. Nothing to explain why Singapore manages to be so rich with such a small burden of government. It’s as if the bureaucrats hoped that nobody would notice that numbers in the study undermined their ideologically driven claim that tax burdens should climb in Asia.

Indeed, I wonder if Hong Kong was omitted from the study simply because that would have further undermined the OECD’s preposterous assertion that higher taxes are a route to economic development.

P.S. Having low taxes and a modest burden of government certainly is part of what can make a nation rich and successful, but the real goal should be to have a good mix of free markets and small government. Singapore does that, ranking #2 in Economic Freedom of the World.

Other Asian nations, by contrast, may have modest fiscal burdens, but the potential economic benefit is undermined by statist policies in areas such as trade, regulation, monetary policy, and property rights. This certainly helps to explain why countries such as Indonesia (#79), Malaysia (#62), and the Philippines (#80) have much lower scores for overall economic liberty.

P.P.S. I’m not sure why the OECD would produce such sloppy research. If they simply wanted to create a false narrative, why didn’t the bureaucrats omit Singapore and simply hope nobody knew the numbers from that country (or the historical numbers for North America and Western Europe)? My suspicion is that the senior political types at the OECD wanted to produce a study that would be helpful for certain politicians  in the region (i.e., allow them to justify higher tax burdens) and they figured a lot of people would only pay attention to the press release.

P.P.P.S. The OECD certainly has a track record of dishonest research.

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At the risk of understatement, I’m not a fan of the Organization for Economic Cooperation and Development. Perhaps reflecting the mindset of the European governments that dominate its membership, the Paris-based international bureaucracy has morphed into a cheerleader for statist policies.

All of which was just fine from the perspective of the Obama Administration, which doubtlessly appreciated the OECD’s partisan work to promote class warfare and pimp for wasteful Keynesian spending.

What is particularly irksome to me is the way the OECD often uses dishonest methodology to advance the cause of big government.

But my disdain for the leftist political appointees who run the OECD doesn’t prevent me from acknowledging that the professional economists who work for the institution occasionally generate good statistics and analysis.

For instance, I’ve cited two  examples (here and here) of OECD research showing that spending caps are only effective fiscal rule. And I praised another OECD study that admitted the beneficial impact of tax competition. I even listed several good example of OECD research on tax policy as part of a column that ripped the bureaucracy for some very shoddy work in favor of Obama’s redistribution agenda.

And now we have some more good research to add to that limited list. A new working paper by two economists at the OECD contains some remarkable findings about the negative impact of government spending on economic performance. If you’re pressed for time, here’s the key takeaway from their research.

Governments in the OECD spend on average about 40% of GDP on the provision of public goods, services and transfers. The sheer size of the public sector has prompted a large amount of research on the link between the size of government and economic growth. …This paper investigates empirically the effect of the size and the composition of public spending on long-term growth… The main findings that emerge from the analysis are…Larger governments are associated with lower long-term growth. Larger governments also slowdown the catch-up to the productivity frontier.

For those who want more information, the working paper is filled with useful information and analysis.

Here’s one of the charts from the study, showing how government spending is allocated in OECD nations.

The report also acknowledges that there’s a lot of preexisting research showing that government spending hinders economic growth.

There is a vast empirical literature investigating the relationship between the size of the government and economic growth (see Slemrod, 1995; Myles 2009; Bergh and Henrekson, 2011 for overviews). A review by Bergh and Henrekson (2011), based on papers published in peer reviewed journals after 2000, suggested a negative relationship in OECD countries. Likewise, a recent OECD study confirmed a negative relationship between the size of government and GDP growth (Fall and Fournier, 2015). …the link between the size of government and growth may vary with the income level and could be hump-shaped (Armey, 1995). A few studies have found support for the existence of a non-linear relationship between the size of government and growth (e.g. Vedder and Gallaway, 1998; Pevcin, 2004; Chen and Lee, 2005).

By the way, the reference to “hump-shaped” means that the OECD is even aware of the Rahn Curve.

The methodology in the paper is not ideal from my perspective. For all intents and purposes, the economists compare economic performance of the OECD’s big-government nations with the growth numbers from the OECD’s not-quite-as-big-government nations. But even with that limitation, the study generates some powerful results.

…the simulation assumes that in countries where the size of government is above the average level of countries in the bottom half of the sample, the government size will gradually converge to this level (36% of GDP). Similar to the spending mix reforms, this reform is phased in over 10 years. Such a reduction in the size of the government could increase long-term GDP by about 10%, with much larger effects in some countries with currently large or ineffective governments. …a reduction of the size of government has a positive, but moderate, effect on the income of the poor. The average disposable income also rises. However, the rich gain relatively more. Finally, in countries where the government is less effective (such as Italy) the growth effect dominates and a moderate reduction of the size of government would have a large growth effect, so that it would lift all boats.

And here’s a chart showing how much more growth would be possible if the countries with really-big government downsized their public sectors to the somewhat-big level.

Even with the methodology limitations I described, these results are astounding. Potential GDP gains of more than 30 percent for Greece and Italy. Gains of more than 20 percent for Slovenia, France, and Hungary. And more than 10 percent for Belgium, Czech Republic, Portugal, and Poland.

The working paper also looks at the composition of government spending. In other words, just as not all taxes are equally damaging, the same is true for spending programs.

The results from the estimation of the size of the government and the public spending mix illustrate that public spending matters for long-term growth…pension and subsidy spending [are] the two items with a significantly negative effect on growth. As each regression includes the size of government and one spending share, the estimates provide the effect of increasing this type of spending while decreasing spending on other items to keep the spending to GDP ratio unchanged… larger governments are in several specifications significantly and negatively associated with long-term growth. This is consistent with the literature… Larger governments can impede convergence (Table 8, columns 1 and 3), because they are associated with higher taxation that can discourage business investment including foreign investment and households to supply labour.

Pensions and subsidies seem to cause the most economic harm.

Reducing the share of pension spending in primary spending yields sizeable growth gains with no significant adverse effect on disposable income inequality. This reduction could be achieved by an increase in the effective retirement age or by cutting the replacement rate. …Cutting public subsidies boosts growth, as public subsidies…can distort the allocation of resources and undermine competition. …Education outcomes depend not only on education spending but also on the effectiveness of education policies, and the literature suggest the latter can be more important. Since the seminal work of Coleman (1966), a broad literature suggests that there is no clear link between education spending and education outcomes. …policies aimed at increasing education spending effectiveness can be more appropriate than an across-the-board rise of education spending. …It may be that, beyond a certain point, additional spending on investment has adverse effects, if poorly managed.

For those of you with statistical/econometric knowledge, here’s some relevant data from the study.

And you can match the numbers in Table 6 with these excerpts.

…pension spending reduces growth (Table 6, columns 2, 5, 7 and 10). Increasing the share of pension spending in primary spending by one percentage point (offset by a reduction in other spending) would decrease potential GDP by about 2%. …Public spending on subsidies also reduces growth (Table 6, columns 3, 5, 8 and 10). …increasing the share of public subsidies in primary spending by one percentage point would decrease potential GDP by about 7%.

If you’re not a stats wonk, these two charts may be more helpful and easy to understand.

What jumped out at me is how the normally sensible nation of Switzerland is very bad about subsidies. That’s a policy they obviously need to fix (along with the fact that they also have a wealth tax, which is very uncharacteristic for that country).

But I’m digressing.

Let’s return to the study. One of the interesting things about the working paper is that it notes that bad fiscal policy can be somewhat mitigated by having market-oriented policies in other areas, which is a point I always make when writing about Scandinavian nations.

…countries with a high level of public spending may also be characterised by features that partly offset the adverse growth effect of government size. …in Sweden the mix of growth-friendly structural policies…may have offset the adverse growth effect of a large government sector.

In other words, the moral of the story is that smaller government is good and free markets are good. Mix the two together and you have best of all worlds.

P.S. Even if the OECD published dozens of quality studies like this one, I would still argue that American taxpayers should no longer be forced to subsidize the Paris-based bureaucracy. And even if the OECD’s political types stopped pushing statist policies, I would still have the same view about ending handouts from American taxpayers. This has nothing to do with the fact that the bureaucrats once threatened to have me arrested and thrown in a Mexican jail. I simply don’t think taxpayers should fund international bureaucracies.

P.P.S. Other international bureaucracies, including the World Bank and European Central Bank, also have published good research about the negative effect of excessive government spending.

P.P.P.S. My general disdain for the OECD (notwithstanding my qualified praise today for their new study on spending) may be exceeded by my hostility for the International Monetary Fund. I’ve referred to the IMF as both “the Dumpster Fire of the Global Economy” and “the Dr. Kevorkian of Global Economic Policy.”

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Earlier this year, I criticized the Organization for Economic Cooperation and Development for endorsing an orgy of Keynesian spending.

Did my criticism have an effect? Well, the bureaucrats in Paris just issued a new report that bluntly suggests a reorientation of fiscal policy to achieve more growth.

…the global economy remains in a low-growth trap with weak investment, trade, productivity and wage growth and rising inequality in some countries. …a stronger fiscal policy response is needed to boost near-term growth and strengthen long-term prospects for inclusive growth.

Sounds good to me. I welcome sinners who want to repent. Is the OECD now recommending corporate tax rate reductions? A flat tax? Entitlement reform? Elimination of wasteful departments, agencies, and programs? A spending cap?

Don’t be silly. This is the OECD. Some of the professional economists are sensible and competent, but major policy initiatives almost always are determined by the high-level hacks who crank out proposals designed to give cover to politicians that want ever-more taxes and spending.

So when the bureaucrats in Paris suggest “a stronger fiscal policy response,” they’re actually advocating for more government. Which is exactly what they did back in February. And what they’ve been repetitively doing all during the Obama Administration. I’m not joking. Here are some further excerpts.

…this chapter emphasises the need for a fiscal initiative…to foster productivity in the medium to long term. Measures should be chosen depending on each country’s most pressing needs and could include not only raising soft and hard infrastructure or education spending… In many countries, such a package could be deficit-financed for a few years, before turning budget-neutral.

The OECD says that “stimulus” would be a good idea because nations now have more “fiscal space,” which is bureaucrat-speak for an estimate of how much additional red ink is supposedly feasible feasible given interest rates, existing debt levels, and other variables.

I’m more worried, for what it’s worth, about the level of spending. And on that basis, there’s less fiscal space. Here’s a comparison (based on the OECD’s own dataset) of the burden of spending before the great recession/global financial crisis and today. As you can see, government outlays are consuming almost 2-percentage points more of economic output.

Needless to say, there’s hasn’t been much “austerity” over the past decade (other than higher income taxes and higher VAT taxes, which means taxpayers have taken a hit but not bureaucrats and interest groups).

In any event, the OECD ignores all this evidence and thinks today is the perfect time for another spending binge. Here are additional details from the report.

OECD governments could finance a ½ percentage point of GDP productivity-enhancing fiscal initiative, for three to four years on average in OECD countries without raising the debt-to-GDP ratio in the medium term, provided the selected activities and projects are sound. Such an initiative could encompass high-quality spending on education, health and research and development as well as green infrastructure that all bring significant output gains in the long run. …the average output gains for the large advanced economies of such a fiscal initiative amount to 0.4-0.6% in the first year.

It’s laughable that the bureaucrats project more growth as a result of Keynesian “stimulus” even though we just suffered through the failure of Obama’s 2009 program (not to mention the repeated failure of Keynesian economics in Japan and elsewhere).

The only good news, if we grade on a curve, is that the bureaucrats apparently don’t think Keynesian “stimulus” would be that helpful for the American economy.

Though I’m worried this Table, buried four pages from the end of the report, won’t get much attention (just as other decent portions of the report, such as commentary about the damage caused by bad tax policy, also will get ignored).

If you think I’m being paranoid, check out these passages from a news report in the Wall Street Journal. The main takeaway from the OECD’s new publication, according to the reporter, is that politicians around the world have a green light for more wasteful spending.

Adding detail to earlier calls for a switch to budget stimulus from exhausted monetary policies, the Paris-based think tank said most governments have room to boost spending by half a percentage point of economic output over a period of three to four years without risking an increase in their already high debts. …The think tank calculates that an increase in spending on the scale it recommends would lift economic growth in the countries involved by between 0.4 and 0.6 of a percentage point, with an additional 0.2 percentage point boost if the effort were to be coordinated internationally. …If governments were to follow the OECD’s advice, it would mark a further turn away from the policies of austerity that were an immediate response to surging government debts in the aftermath of the 2008 financial crisis. …A slow shift toward a greater reliance on fiscal policy has been under way since last year, when Canada embarked on a fiscal stimulus, while the OECD noted that increases in spending are also under way in Germany, Italy and China. …“There is quite a bit more receptivity to the notion of using fiscal policy more actively,” said Ms. Mann.

And I’m worried that this kind of bad advice may influence President-Elect Trump, who already has made worrisome comments about spending for infrastructure and entitlements.

P.S. But I’m semi-hopeful that Trump won’t be a fan of the OECD in general, if for no other reason than the head bureaucrat in Paris called him a racist and was remarkably open about favoring Hillary Clinton’s election.

Gurria tells UpFront’s Mehdi Hasan: “I would tend to agree with those who say that this is not only misinformed, but yes, I think the word racist can be applied. “I think that because the American public is wise, it will then act in consequence,” Gurria adds.

I’ve previously argued that ending American subsidies for the OECD (and its leftist agenda) is an IQ test for Republicans. In prior years, GOPers on Capitol Hill have failed this test. Maybe Trump, if for no other reason than Secretary General Gurria’s harsh attack, will finally end the gravy train for this parasitical bureaucracy.

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