Archive for the ‘Rankings’ Category

The great contribution of western civilization is the notion that the power of government must be constrained by laws.

This doesn’t mean that all laws (or even most laws) are good. But, as explained in this video, if the choice is between the “rule of man” (the arbitrary and capricious exercise of power) and the “rule of law,” there’s no contest.

This is why issues related to the rule of law account for 20 percent of a nation’s grade in the rankings from Economic Freedom of the World.

And it’s why some people get very upset when, for instance, the Obama Administration chooses to unilaterally change – or simply chooses to not enforce – certain laws that are inconvenient to the President’s agenda.

But while the rule of law has been eroding in the United States, the good news is that we still rank in the top 20 in a new ranking from the World Justice Project.

Here’s how the WJP describes the importance of the rule of law.

Effective rule of law reduces corruption, combats poverty and disease, and protects people from injustices large and small. It is the foundation for communities of peace, opportunity, and equity – underpinning development, accountable government, and respect for fundamental rights. …The Index is the world’s most comprehensive data set of its kind and the only to rely solely on primary data, measuring a nation’s adherence to the rule of law from the perspective of how ordinary people experience it. These features make the Index a powerful tool that can help identify strengths and weaknesses in each country, and help to inform policy debates, both within and across countries, that advance the rule of law

And here’s a map showing the 113 nations that are included in the rankings.

All you need to know is that it’s good to be light-colored and bad to be dark-colored (though the map is a bit confusing since nations that aren’t ranked – much of Africa, for instance – also appear as light-colored).

One of the obvious conclusions is that the western world (Europe, North America, some nations in the Pacific Rim) does the best on protecting, observing, and maintaining the rule of law.

Simply stated, western civilization is superior.

But what can we learn by specifically examining the rule of law in developed nations?

What’s immediately apparent, if you look at the ranking of high-income nations, is that Nordic nations score very well. This is one of the reasons, I’ve explained, that they have a higher ability to tolerate and endure a large welfare state.

Germanic and Anglo-Saxon nations win the proverbial silver and bronze medals.

Looking at the rest of the world, I’m also not surprised to see strong scores for free-market success stories such as Singapore, Estonia, Hong Kong, and Chile.

Let’s close by taking a closer look at the data for the United States.

Among high-income nations, America gets a decent score, but it’s nothing to celebrate. Indeed, we actually do poorly when compared to other Anglo-Saxon jurisdictions.

In the above excerpt, I included the list of eight categories that are used to rank nations. Now let’s look at how America scores in those areas.

At the risk of oversimplifying, we do well in two areas. There are reasonably strong constraints on government powers and a reasonable degree of openness and transparency.

On the other hand, we don’t do very well (particularly when compared to other high-income nations)  for areas related to the judicial system.

Though I shudder to contemplate the scores America will receive after four or eight years of Hillary Clinton.

P.S. Is anybody surprised that Venezuela is in last place? Though I suppose I should repeat my caveat from earlier in the month that hellholes such as Cuba and North Korea would probably rank lower if they were included in the rankings.

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A couple of days ago, I wrote about the new rankings from the World Economic Forum’s Global Competitiveness Report and noted that America’s private sector is considered world class but that our public sector ranks poorly compared to many other developed nations.

To elaborate on the depressing part of that observation, let’s now look at the Tax Foundation’s recently released International Tax Competitiveness Index.

Lots of data and lots of countries. Estonia gets the top score, and deservedly so. It has a flat tax and many other good policies. It’s also no surprise to see New Zealand and Switzerland near the top.

If you’re curious about America’s score, you’ll have to scroll way down because the United States ranks #31, below even Belgium, Spain, and Mexico.

If you look at how the U.S. ranks in the various categories, we have uniformly poor numbers for everything other than “Consumption Taxes.” So let’s be very thankful that the United States doesn’t have a value-added tax (VAT). If we did, even France would probably beat us in the rankings (I hope Rand Paul and Ted Cruz are paying attention to this point).

And if you wonder why some nations with higher top tax rates rank above the U.S. in the “Individual Taxes” category, keep in mind that there are lots of variables for each category. And the U.S. does poorly in many of them, such as the extent to which there is double taxation of dividends and capital gains.

By the way, there is some “good” news. Compared to the 2014 ranking, the United States is doing “better.” Back then, there were only two nations with lower scores, Portugal and France. In the new rankings, the U.S. still beats those two nations, and also gets a better score than Greece and Italy.

But we’re only “winning” this contest of weaklings because the scores for those nations are falling faster than America’s score.

Here’s the 2014-2016 data for the United States. As you can see, we’ve dropped from 54.6 to 53.7.

P.S. The Tax Foundation’s International Tax Competitiveness Index is superb, but I hope they make it even better in the future by adding more jurisdictions. As of now, it only includes nations that are members of the OECD. That’s probably because there’s very good and comparable data for those countries (the OECD pushes very bad policy, but also happens to collect very detailed numbers for its member nations). Nonetheless, it would be great to somehow include places such as Hong Kong, Singapore, Bermuda, and the Cayman Islands (all of which punch way above their weight in the international economy). It also would be desirable if the Tax Foundation added an explicit size-of-government variable. Call me crazy, but Sweden probably shouldn’t be ranked #5 when the nation’s tax system consumes 50.4 percent of the economy’s output (this size-of-government issue is also why I asserted South Dakota should rank above Wyoming in the Tax Foundation’s State Business Tax Climate Index).

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Most folks in Washington are still digesting last night’s debate between Tweedledee and Tweedledum. If that’s what you care about, you can see my Twitter commentary, though I was so busy addressing specific issues that I failed to mention the most disturbing part of that event, which was the total absence of any discussion about the importance of liberty, freedom, and the Constitution.

But let’s set aside the distasteful world of politics and contemplate U.S. competitiveness. Specifically, let’s examine America’s position in the latest edition of the World Economic Forum’s Global Competitiveness Report. This Report is partly a measure of policy (sort of like Economic Freedom of the World) and partly a measure of business efficiency and acumen.

The bad news is that we used to be ranked #1 and now we’re #3.

The good news is that being #3 is still pretty good, and it’s hard to beat Switzerland and Singapore because they have such good free-market policies. And that’s where America falls short.

Indeed, if you look at the top-10 nations and the three major measurements, you’ll notice that the United States ranks extremely high in “efficiency enhancers” and “innovation and sophistication factors,” both of which have a lot to do with the private sector’s competitiveness. But we have a mediocre (at least for developed nations) score for “basic requirements,” the area where government policy plays a big role.

Moreover, if you look at the the biggest obstacles to economic activity in the United States, the top 4 deal with bad government policy.

The tax treatment of companies is easily the main problem, as you might expect since we rank #94 out of 100 nations in a study of business tax policy.

Let’s now look at the indices where the United States scored especially low out of the 138 nations that were ranked.

America’s lowest scores were for exports (#130) and imports (#134), though I take issue with the Report‘s methodology, which is based on trade flows as a share of GDP. The problem with that approach is that the United States has a huge internal market, equal to about 22 percent of the world’s economic output. That’s why our trade flows aren’t very large relative to GDP. Being surrounded by two major oceans also probably has some dampening effect on cross-border trade flows. Yes, America is guilty of some protectionism, but I think our ranking for trade tariffs (#33) is the more appropriate and accurate measure of the degree to which there is a problem.

America also got a very bad score (#128) for government debt, though at least we beat Italy (#135), Greece (#137), and Japan (#138). In case you’re wondering, Hong Kong was #1, as you might expect from a well-run jurisdiction with small government and a flat tax.  Though I must say that it is rather disappointing that the Report doesn’t include rankings for the overall burden of government spending. After all, government debt is basically a symptom of an underlying problem of a bloated public sector.

And there also was a very low score for the business cost of terrorism (#104), which is probably an unavoidable consequence of being the world’s leading superpower (and therefore a target for crazies). That being said, I imagine America’s score could be improved if we weren’t engaging in needless intervention – and thus generating needless animosity – in places such as Syria and Libya.

Here are two indices that deserve special attention. As you can see the United States gets a poor score for wasteful spending and a terrible score for the punitive taxation of profits.

With this information in mind, let’s now remind ourselves about last night’s debate. Did either candidate propose to control spending and reduce pork-barrel programs? Nope.

Did either candidate put forth a realistic plan to lower the corporate tax rate? Hillary’s plan certainly doesn’t qualify since she wants a bunch of class-warfare tax hikes. And while Trump’s plan includes a lower corporate rate, it’s not a serious proposal since he is too timid to put forth a plan to restrain government outlays.

And since neither candidate intends to address America’s looming fiscal crisis, it will probably be just a matter of time before America drops in the rankings.

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One (hopefully endearing) trait of being a policy wonk is that I have a weakness for jurisdictional rankings. At least if they’re methodologically sound.

This is why I was so happy a couple of weeks ago when I got to peruse and analyze the 2016 version of Economic Freedom of the World (even if the results for America were rather depressing).

Heck, sometimes I even can’t resist commenting on methodologically unsound rankings, such as the profoundly stupid “Happy Planet Index” that puts despotic hellholes such as Cuba and Venezuela above the United States.

Given my interest in rankings, you can appreciate how excited I am that my colleague at Cato, Chris Edwards, just unveiled the 2016 version of his Fiscal Policy Report Card on America’s Governors and that the Tax Foundation just released its annual State Business Tax Climate Index. It’s sort of like Christmastime for me.

Here’s the big news from Chris’ Report Card. As a Virginia resident, I’m not terribly happy the Governor McAuliffe scores a D (not that his GOP predecessor was any good). It’s also perhaps somewhat newsworthy that Governor Pence earned an A (so he seems committed to smaller government even if the guy he’s paired with doesn’t share the same philosophy).

And here’s the Tax Foundation’s map showing each state’s ranking, with top-10 states in blue and bottom-10 states in light orange.

If you pay close attention, you’ll notice that zero-income-tax states are disproportionately represented among the states with the best scores.

All this is quite interesting (at least to me), but it occurred to me that it might be even more illuminating to somehow meld these two rankings together.

After all, Chris’s Report Card is a measure of whether a state is moving in the right direction or wrong direction while the Tax Foundation is more of a comparative measure of how a state ranks at a given point in time compared to other states.

So I created the following matrix that looks only at the states that received A or F in the Cato Report Card and also were either in the top 10 or bottom 10 of the Tax Foundation Index.

As you might guess, the best place to be is in the top-left portion of the matrix since that shows a state that is both moving in the right direction while also having a very competitive tax system. So kudos to Florida and Indiana (with honorable mention for North Carolina, which received an A in the Cato Report Card but just missed cracking the top 10 in the Tax Foundation Index).

The bad news, if you look at the bottom-left quadrant, is that there are three states with good tax systems but bad governors. South Dakota, Oregon, and Nevada are in strong shape today, but it’s hard to be optimistic about those states preserving their lofty rankings since policy is moving in the wrong direction.

And the worst place to be is the bottom-right quadrant, which means that a state has both a bad tax system and a bad policy environment.

Last but not least, the sad news is that the top-right quadrant is empty, which means there aren’t any bad states moving aggressively in the right direction.

So the bottom line is that American citizens should think about moving to Florida and Indiana. Especially if they live in Vermont, California, or Connecticut.

P.S. It would be even better to move to Monaco, Hong Kong, or the Cayman Islands, but those presumably aren’t very practical options for most of us.

P.P.S. Actually, the best place for an American taxpayer to live is Puerto Rico since it’s a legal tax haven.

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When Economic Freedom of the World is released every September, it’s like an early Christmas present. This comprehensive yearly publication is a great summary of whether nations have policies that allow people economic liberty.

I eagerly peruse this annual survey every year (here’s what I wrote in 2015 and 2014 if you’re curious about a couple of recent examples). And this year is no different.

Let’s start with the table that gets the most attention. Here’s a look at the top nations, led (as is almost always the case) by Hong Kong and Singapore. Switzerland also deserves some recognition since it has always been in the top 5.

The United States used to be a regular member of the top-5 club, but we have fallen to 16th in the rankings.

Which is just barely ahead of the supposedly socialist countries of Finland and Denmark (which actually are very market-oriented nations in every area other than fiscal policy).

I don’t show the nations in the bottom half of the rankings, but I assume nobody will be surprised to learn that Venezuela is in last place (though, to be fair, the communist hellholes of North Korea and Cuba aren’t in the rankings because of inadequate data).

One of the other great features of Economic Freedom of the World is that you can look not just how nations rank today, but also how the have changed over time.

I selected some nations of interest from Exhibit 1.4 in Chapter 1. Keep in mind, as you review this data, that you’re seeing scores every fifth year from 1970-2005 and then the annual scores beginning in 2005.

A few observations on these numbers.

  • Chile’s improvement has been dramatic, even though the nation has slipped a bit since 2007.
  • Australia’s jump from 1975-today also is remarkable, as is China’s improvement since it entered the rankings in 1980.
  • Hong Kong has been consistently superb, though it’s troubling that its score has weakened slightly since 2008. Singapore also has a modest trend in the wrong direction.
  • I didn’t know Israel was so bad back in 1980, or that New Zealand scored so low back in 1975, so kudos to both nations for big reforms in the right direction.
  • I tend to give Estonia a lot of love, all of which is deserved, but it’s worth noting that its Baltic neighbors of Latvia and Lithuania also are big success stories.
  • Speaking of overlooked success stories, Peru’s upward climb deserves a lot of praise.
  • Switzerland isn’t overlooked (at least by me), but the praise it gets is very well deserved since it manages to be sensible while all its neighbors make mistakes.
  • Last but not least, scores for the United States and Venezuela have both been falling, though thankfully we started much higher and have fallen at a much slower rate.

Now let’s take a closer look at America. The good news is that we’re in the top 20 for economic freedom. The bad news is that we used to be in the top 5.

I’ve been grousing for years that the Bush-Obama policies have eroded America’s competitiveness and undermined economic liberty.

This year, EFW has a special chapter on the United States and it confirms my analysis. Here’s a chart from that chapter showing how America’s score has declined in recent years.

And if you want some additional details, America’s score is declining first and foremost because the rule of law is eroding and property rights are less secure.

Which is a point I made last year, but EFW‘s chart is much better than my homemade version.

You can also see that protectionism has increased since 2000. And one shudders to think what will happen in this area over the next few years given the protectionist utterances of Donald Trump and Hillary Clinton (though I hope Hillary is lying and trade is an issue where she’s actually on the right side).

Heck, I’m worried about the next four years for reasons that go well beyond trade. I hope I’m wrong, but it seems that America faces a choice of a statist Tweedledee or a statist Tweedledum.

It’s almost as if the two major-party candidates have read the recipe for growth and prosperity and have decided to use it as a road map of what not to do. Sigh.

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Proponents of liberty generally are big fans of federalism. In part, this is simply an issue of “good governance” since both voters and lawmakers at the state and local level are more likely to actually understand the real issues in communities and be able to develop policies that are more sensible.

But we also like federalism because it’s relatively easy for people to move across state and local borders and this means governments have to compete with each other, both in terms of not driving away productive people and also in terms of not attracting those who want to mooch off the government.

The obvious implication is that if we can dramatically shrink the federal government so that it only handles the few (enumerated) powers envisioned by the Founding Fathers, that would give states far more authority to determine tax burdens and the degree of redistribution, and they would presumably do a better job because they would compete with each other for jobs and investment.

This is why I’m always interested when organizations produce rankings that show the degree to which states seem inclined to adopt good policy. For instance, I routinely highlight the findings of the Tax Foundation’s State Business Tax Climate Index so I can see which states have acceptable tax policy. And the Mercatus Center’s Ranking the States by Fiscal Condition is a must-read publication to see which states follow sensible budget policy.

The latest addition to this group is the Cato Institute’s Freedom in the 50 States. It’s a comprehensive publication with lots of data and number-crunching, so wonks will have a field day digging into the details.

But if you simply want the highlights, I first looked to see which states have the best fiscal policy. Here’s the relevant table from the document and I’ve modified it to show which states have no income tax (blue stars), which ones have flat taxes (red stars), and which ones have no sales tax (black stars).

The obvious implication is that having no state income tax is probably the single most important way of controlling the fiscal burden of government.

But fiscal policy is just one variable of economic freedom. And while states obviously don’t have any leeway on monetary policy and trade policy, they have considerable powers over issues related to regulation.

And when you add these factors to the mix, you can get a measure of overall economic freedom.

If you compare these first two tables, there are some predictable similarities (New York and California score poorly while South Dakota, Tennessee, and New Hampshire do well).

But you also get some odd results. Pennsylvania, for instance, is 13th for fiscal policy, but drops to 30th for overall economic policy. I guess this means they are regulatory maniacs.

By contrast, Indiana is ranked a mediocre 26th for fiscal policy, but jumps to 11th place for overall economic policy, which presumably means a very laissez-faire approach to red tape.

Now let’s add personal freedom issues to the equation (issues such as guns, gambling, sex, education, booze, and even fireworks).

The bottom line, if you value overall liberty, is that you better be tolerant of cold weather since New Hampshire and Alaska are atop the rankings. New York is in last place by a comfortable margin.

Interestingly, if you compare the fiscal ranking with the above table for overall freedom, you’ll notice that there’s a lot of overlap. New Hampshire is first in both and New York is last, for instance.

But there are some odd anomalies. Iowa, for example is 9th for overall freedom but only 30th for fiscal freedom, a gap of 21 spots. There’s also a big difference for Kansas, which is 33rd in fiscal freedom but 16th for overall freedom.

Conversely, Texas is 10th for fiscal freedom, but drops to 28th place for overall freedom. And Alabama also has a split personality, ranking 6th for fiscal policy but 23rd for overall freedom.

Why are some states bad on fiscal policy but good on regulation and personal freedom, like Iowa and Kansas? Or, in the case of states like Alabama and Texas, the other way around?

Beats me. Maybe some southern states like controlling people’s lives so long as it doesn’t involve the power of the purse (sort of like Singapore). And maybe some farm states exploit the power of the purse, both otherwise leave people alone (sort of like the Nordic nations).

Here’s something easier to understand, a measure of which states have improved the most and deteriorated the most in the 21st century.

The bad news is that only nine states have moved in the right direction, with Oklahoma easily winning the prize for pro-liberty reforms. Honorable mention to Alaska, Maine, and Idaho.

By the way, is anybody surprised that Illinois is in last place? The dropping scores for Hawaii, New Jersey, and Connecticut also aren’t surprising.

But why have Kentucky, Nebraska, and Tennessee fallen so much?

P.S. Since we’re ranking states, here’s one final bit of information.

I wrote recently to debunk the left’s claim that California is an economic success story. My main point was to share per-capita income data from the BEA to who that California has been losing ground over the medium-term and long-term to states such as Kansas and Texas. And even in the short-term as well if you look at Census Bureau data on median household income.

But some leftists pushed back by arguing that the numbers nonetheless showed higher income levels in California. That’s certainly what we see in both the BEA and Census data, though I would argue that’s actually not relevant unless one (incorrectly) claims that California became a rich state because of big government. As i wrote in that column, “we’re focusing on changes in per-capita income (i.e., which state is enjoying the most growth, regardless of starting point or how much money can buy in that state).”

Speaking of “how much money can buy,” let’s look at some great work from the Tax Foundation on that topic. If you have $100 of income, where will you be able to buy the best basket of goods and services. As you can see, you’re far better off in Texas or (especially) Kansas than in California.

The bottom line is that living standards in Texas and Kansas would be higher than those in California if BEA and Census numbers were adjusted for purchasing power parity (as happens when comparing living standards across nations).

Some people may want to live in California (or some other high-tax state) because of the climate or scenery. They just have to accept lower living standards caused by bigger government. Just like there are certain benefits of living in nations such as France and Italy, but you have to accept bloated government and economic stagnation as part of the package

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At the risk of oversimplifying, libertarians want to minimize the level of government coercion is society. That’s why we favor both economic liberty and personal liberty. Simply stated, you should have the right to control your own life and make your own decisions so long as you’re not harming others or interfering with their rights.

That’s a philosophical or moral argument.

There’s also the utilitarian argument for liberty, and that largely revolves around the fact societies with more freedom tend to be considerably more prosperous than societies with lots of government.

I’ve repeatedly made this argument by comparing the economic performance of market-oriented jurisdictions and statist ones.

Let’s look at some new evidence. Based in Lausanne, Switzerland, the Institute for Management Development is a highly regarded educational institution that publishes an annual World Competitiveness Yearbook that basically measures whether a nation is a good place to do business.

So it’s not a measure of economic liberty, at least not directly. And the quality of governance matters for the IMD rankings (presumably based on something akin to the European Central Bank’s measure of “public sector efficiency“).

But you’ll notice a clear link between economic liberty and competitiveness.

Here are the top-10 nations. (you can look at the rankings for all nations by clicking here).

As you might suspect, there’s a strong correlation between the nations that are competitive and those that have smaller governments and free markets.

Indeed, three out of the top four jurisdictions (Hong Kong, Singapore, and Switzerland) rank in the top four for economic liberty according to Economic Freedom of the World.

And I’m happy to see that the United States also scores very highly, even if we only rank 17 out of 157 for economic freedom.

Indeed, every country in IMD’s top 10 other than Sweden is ranked in the top quartile of EFW.

You also probably won’t be surprised by the countries getting the worst scores from IMD.

Congratulations to Venezuela for being the world’s least competitive nation. Though that might be an overstatement since IMD only ranks 61 jurisdictions. If all the world’s countries were included, Venezuela presumably would beat out North Korea. And maybe a couple of other squalid outposts of statism, such as Cuba.

It’s also worth noting that Greece gets consistently bad scores. And I’m not surprised that Argentina is near the bottom as well (though it has improved since last year, so hopefully the new government will continue to move in the right direction).

By the way, it’s worth noting that economic freedom is a necessary but not sufficient condition for competitiveness. Jordan, for instance, ranks in the top 10 for economic freedom but gets a low score from IMD, presumably because the advantages of good policy don’t compensate for exogenous factors such as geopolitical risk and access to markets.

The moral of the story, though, is that free markets and small government are the recipe for more prosperity. And those policies are probably even more important for nations that face exogenous challenges.

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