Pathetic Russia Analysis from Tucker Carlson

A few years ago, I explained why Tucker Carlson was wrong to cite Hungary a role model.

Today, let’s analyze why his (widely condemned) praise of Russia’s economy is utterly delusional.

We’ll start with the big-picture comparison based on data from the IMF, Maddison, the UN, and World Bank. As you can see, Americans are far richer than their Russian counterparts.

The IMF and Maddison data are based on purchasing power parity, so they adjust for the fact that some things are less expensive in Russia (and the Maddison data is based on 2011 dollars, so those numbers would look more like the IMF numbers if based on today’s dollars).

The bottom line is that Americans should not envy the Russian economy, regardless of which data source one prefers.

This does not mean, by the way, that the U.S. economy is perfect. Or that America should be immune from criticism. Most of my professional life has been devoted to trying fix bad U.S. policies. Or trying to prevent new mistakes from happening!

But I’m very grateful that I live in a nation where policy is inadequate rather than a country where policy is terrible.

And even though I’m an economist, I’m also very aware that the United States is also much better when comparing basic political and social freedoms.

Is the U.S. perfect in those areas? My Victims-of-Government page confirms that we have some problems. That being said, we are far better than Russia (where 47-year old political dissidents mysteriously die in Siberian prisons).

Before concluding, let’s return to economic comparisons. Here’s a tweet that captures the difference between a rich country and a struggling country.

And I’ll also cite a few sentences from a 2022 column in the Washington Post by AEI’s Nicholas Eberstadt.

Putin is flailing against the history of modern economic development. The wealth of modern nations is overwhelmingly generated by human beings and their capabilities. Natural resources (land, energy and all the rest) have accounted for a shrinking share of global output for the past two centuries, with no end in sight. …for all its vaunted oil and gas riches, Russia’s export earnings last year were actually lower than Belgium’s. Like other Western democracies, Belgium manages to augment and unlock the economic value residing in human beings. Putin’s petro-kleptocracy is woefully inept on both counts. …Since the invasion of Ukraine, some of Russia’s best talent has been voting with its feet, heading abroad any way it can. …the Russian system produces remarkably little private wealth. According to Credit Suisse, total private wealth in Russia in 2020 amounted to $3 trillion: one-ninth of Japan’s, one-sixth of Germany’s, and scarcely more than Sweden’s (a country with a population 14 times smaller).

The bottom line is that Russia is way behind the United States.

Anyone who says otherwise is ignorant or dishonest. Even those who assert equivalence are wildly wrong.

P.S. I did a similar column last year to show that China’s economy is still very backwards.

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The Economic Cost of Russian Statism

Russia’s government has been appropriately criticized for invading Ukraine, but let’s focus today on Putin’s economic mismanagement.

I’m motivated by this tweet from a professor at the University of Chicago. He points out that Russians were richer than other parts of the Soviet Empire when communism collapsed (thank you, Ronald Reagan).

But now they are poorer.

The professor notes that Putin “failed economic development.”

I want to build upon that observation with some data.

Just yesterday, I wrote about the latest issue of Economic Freedom of the World. So let’s now modify Professor Sonin’s chart by looking in that document to see the the economic liberty rankings for all the countries in the chart.

Here are those scores on the right.

As you can see, Russia has the least amount of economic freedom of all the nations in the chart. And by a big margin (red nations are in the top quartile, blue nations in the second quartile, and Russia is the only one in the third quartile).

So Russia can be added to our anti-convergence club.

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Gorbachev, Reagan, and the Much-Deserved End of the Soviet Union

The world is much freer today than when I was born, largely because the “Evil Empire” collapsed.

The Soviet Union was awful. It killed at least 20 million of its own people (some say as many as 60 million). It enslaved and impoverished its own citizens, as well as those who languished behind the “Iron Curtain.”

Ronald Reagan deserves the lion’s share of the credit for the collapse of communism – in part because he restored America’s economic vitality and built up the nation’s military, but also because he directly condemned the immorality of Marxism (often using humor).

But since the last dictator of the Soviet Union just died, let’s examine Mikhail Gorbachev’s role.

An editorial in today’s Wall Street Journal is worth reading because it explains that his biggest achievement was not using bloodshed to preserve communist rule.

Mikhail Gorbachev…rose through the Communist ranks but presided over the end of the regime. His greatest achievement was allowing the Cold War to end without a war or a worse conflagration that the world feared for decades. …He understood that the country he inherited in 1985 when he became general secretary of the Communist Party was losing the Cold War to a revitalized West. Its economy wasn’t the juggernaut of central-planning genius that the CIA had assessed at the time. …Ronald Reagan had reversed the U.S. malaise of the 1970s with a defense buildup and reforms that unleashed America’s private economy. …Gorbachev’s reforms were intended to revive the Soviet regime to be able to compete with Reagan’s America. …The countries of Eastern Europe, long enslaved as members of the Warsaw Pact, saw their moment to break free. Gorbachev refused to send in the tanks as his Soviet predecessors had done in Hungary and Czechoslovakia. …mutual trust between Gorbachev and Reagan…helped to bring the Cold War to an end with freedom as the victor.

George Will is also grateful that Gorbachev allowed Soviet communism to whither away without violence. Here’s some of what he wrote in his Washington Post column.

Failing upward into the world’s gratitude, Mikhail Gorbachev became a hero by precipitating the liquidation of the political system he had tried to preserve… Like Christopher Columbus, who accidentally discovered the New World, Gorbachev stumbled into greatness by misunderstanding where he was going. …Gorbachev’s most noble facet, his “extraordinary reluctance” to use violence to hold the Soviet system together. …President Ronald Reagan…described the Soviet Union as “the focus of evil in the modern world.” …he launched a high-tech challenge to a Soviet Union in which 30 percent of hospitals lacked indoor plumbing. …The Soviet Union’s brittle husk crumbled as Gorbachev struggled to preserve it. His reputation rests on the world’s amnesia about this.

Professor William Taubman of Amherst also opined in today’s Wall Street Journal.

He seems more sympathetic to Gorbachev than George Will, but also lauds him for opting against a bloody crackdown.

Mikhail Gorbachev…deserves to be celebrated… When he entered office in 1985, Gorbachev had almost unlimited power. He could have presided indefinitely over the status quo. Instead, he…acquiesced in the dismemberment of the Soviet empire without the violence that accompanied the collapse of most other empires. …he persuaded communist hard-liners to vote themselves out of office. …Gorbachev was happy to give up domination of Eastern Europe… Gorbachev tried to save the Soviet Union but ended up hastening its destruction. When it became clear in late 1991 that his great project was doomed, he could have lashed out, mobilizing the military to save him and what was left of the U.S.S.R., at the risk of civil war. Instead, he bowed out with dignity.

Matt Welch of Reason also weighs in, emphasizing that Gorbachev was not great, but that he allowed a great thing to happen.

f the late Mikhail Gorbachev had gotten his way, the world would look a lot different than it does now. Socialism would still be the dominant economic system from Leipzig to Yakutsk. The Warsaw Pact would still exist; a unified Germany would not, nor would the independent Baltic states. Above all, the planet would still be blighted by the wheezing and malevolent existence of what Ronald Reagan rightly described as “the evil empire”—the Union of Soviet Socialist Republics. …Yet we should not judge the eighth and final Soviet leader, who died Tuesday at the age of 91, by his base geopolitical desires but rather by the glorious human flourishing that his actions—and especially his inactions—allowed to take place. …November 9, 1989 became the most liberating day of the most liberating month of the most liberating year in human history.

Last but not least, David Satter shared some insights in a column late last year for the Wall Street Journal.

During its 70-year life, the Soviet regime killed at least 20 million of its citizens for political reasons. …however, the Soviet Union wasn’t indomitable. In 1988 the Soviet leader Mikhail Gorbachev allowed a space for free information in Soviet society, creating a contradiction between free speech and a system based on lies. When glasnost wasn’t repressed, it led to the collapse of the system. …President Reagan rejected the idea that the West had no alternative to accommodation. In the words of former Secretary of State Henry Kissinger, he took the offensive “ideologically and geostrategically.” …As for his strategy, Reagan said it was simple: “We win. They lose.” …the U.S. rearmament drive began to bear fruit. …Stunned by these developments, the Soviets eventually decided to take the risk of major reforms.

As you might expect, I like the emphasis on Reagan’s role. Yet another reason why he is the only great president of my lifetime.

The takeaway from today’s column is that Gorbachev mostly deserves praise for what he didn’t do. By opting against a crackdown, he allowed the Soviet Union to wind up on the “ash heap of history.”

And that’s a great result.

P.S. Here’s my collection of columns about the grim 100th anniversary of communism.

P.P.S. And here’s my collection of anti-collectivism humor, including many columns mocking communism.

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Russia’s Oppressive Economic Policy

Since I wrote yesterday about Ukraine’s terrible economic policy, fairness requires that I make the same points about Russia’s similarly dirigiste system.

We’ll start with Russia’s scores from the latest edition of Economic Freedom of the World.

Not exactly a good set of numbers, particularly with regards to “size of government.” And it’s safe to assume that Russia’s overall score will decline when a new version is released later this year.

But I want to make the point that Russia faced serious economic problems well before Putin decided to invade Ukraine.

Indeed, he may have attacked in part to distract from Russia’s ongoing economic problems.

To some degree, this is a story of weak demographics, as I observed last month.

But Putin is making a bad situation worse.

Consider what George Will wrote for the Washington Post back in 2020.

n Putin’s ramshackle Russia…as recently as 2018, almost a third of medical facilities lacked running water, 40 percent lacked central heating and more than half lacked hot water. …in Catherine Belton’s exhaustive new book…, “Putin’s People: How the KGB Took Back Russia and Then Took On the West…” says that “by 2012 more than 50 percent of Russia’s [gross domestic product] was under the direct control of the state and businessmen closely linked the Putin.” …state-directed capital allocation actually is crony socialism.

It’s sometimes not easy to measure crony socialism (which technically should be called fascism), but even the International Monetary Fund recognizes its downsides.

Here’s some research from the IMF, authored by Gabriel Di Bella, Oksana Dynnikova, and Slavi Slavov.

The size of the Russian State…economic footprint remains significant. Concretely, the state’s size increased from about 32 percent of GDP in 2012 to 33 percent in 2016, not far from the EBRD’s estimate of 35 percent for 2005-10. …a deep state footprint is reflected in a relatively high state share in formal sector activity (close to 40 percent) and formal sector employment (about 50 percent). The deep footprint is also reflected in market competition and efficiency. Although sectors in which the state is present are more concentrated, concentration is large even in sectors where the state’s share is low. …Finally, state-owned enterprises’ performance appears weaker than that of privately-owned firms, which may be subtracting from growth.

Last December, Jarret Decker analyzed Russia’s state-controlled economy in an article for Reason.

There’s a thorough discussion of how the oligarchs gained control of key sectors of the economy, as well as this discussion of other policy mistakes.

The 1990s in Russia and throughout most of the former Soviet Union were a time of dizzying change… As price controls were lifted and the money supply increased, inflation exploded. In 1992, Russian inflation was about 2,000 percent, with another 1,000 percent inflation the following year. Life savings disappeared almost overnight. …plummeting social indicators were all tied to the disastrous performance of the Russian economy, a chaotic mix of large enterprises still under state control, a central government heavily in debt…the “crown jewels” of the former Soviet economy—in sectors such as oil and gas, mining, and steel production—remained under state control. …in GDP per capita, Russia has fallen far behind its fellow former Soviet republics in the Baltic region, with output per person about half of Estonia’s and about 40 percent less than Lithuania’s and Latvia’s. Not coincidentally, the Baltic countries all rank in the top 30 in the world in the Heritage Foundation’s 2021 Index of Economic Freedom.

I’ll wrap up with a story that is particularly disappointing to me.

One of the few good policies Putin implemented was a flat tax.

But rather than build on that successful reform, he decided to reverse it and adopt a system with discriminatory rates. Here are some excerpts from a 2020 report in the Moscow Times.

Russian President Vladimir Putin on Monday signed a law on increasing income tax for high earners in the first move away from a flat tax system in place since 2001. Starting next year, the tax rate will rise from 13% to 15% on incomes over 5 million rubles (about $65,800/55,370 euros at the current exchange rate). …The reform is expected to give state coffers an additional 60 billion rubles, the president said… The current flat tax system was introduced in 2001 and was among the key reforms of Putin’s first presidential term.

The bottom line is that the yoke of communism has been removed but statism remains.

Which explains why Russia is not converging with the United States, as theory would predict. Here is a chart based on the Maddison database.

This is quite depressing, especially if the economy’s poor performance gave Putin an extra incentive to “wag the dog” with military aggression.

But let’s end on an optimistic note. It’s possible that Putin has miscalculated and his attack on Ukraine eventually will result in his ouster.

The best-case scenario is that he gets replaced with a free-market reformer. The Russian version of Mart Laar, perhaps. Then Russia could become a success story, which is exactly what we’ve seen in the Baltic nations.

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Can Economic Aid Help Ukraine?

Regarding Russia’s reprehensible attack on Ukraine, I’ve written three columns.

• Russian oligarchs don’t deserve much sympathy because they got their riches through cronyism rather than capitalism.
• Western nations should weaken Putin by opening their doors to young and educated Russians who wish to emigrate.
• Russia is being hit by sanctions because of the long-standing recognition that trade restrictions weaken a country’s economy.

Today, let’s address the topic of foreign aid for Ukraine, specifically whether American taxpayers should help restore that country’s economy once the conflict ends.

I’ll start by recycling an observation I made back in 2014, which is that Ukraine has been an economic laggard because of statist economic policies.

More specifically, I compared Poland (which has engaged in substantial liberalization) and Ukraine (which has not) and showed a growing gap between the two nations (another case study for the anti-convergence club).

Now let’s look at some updated data from the latest edition of Economic Freedom of the World.

As you can see, Ukraine is a cesspool of statism, ranking a miserable #129 out of 165 jurisdictions.

That’s lower than Russia, which is #100.

And the same is true if you look at the latest edition of the Index of Economic Freedom, which ranks Ukraine #130 and Russia #113.

At the risk of stating the obvious, giving economic aid to Ukraine would be flushing money down the toilet.

Unless, of course, western nations such as the United States somehow made aid contingent on sweeping economic liberalization.

We know what works. Don Boudreaux, Deirdre McCloskey, and Dan Hannan have all explained how Western Europe and North America became rich in the 1800s and early 1900s with the tried-and-true approach of free markets and limited government.

Even a curmudgeonly libertarian like me would relax my long-standing hostility to aid under those conditions.

The odds of that happening, however, are slim to none. And I would put my money on none, as explained by the “Foreign Aid Paradox.”

P.S. Some people incorrectly claim Western Europe recovered after World War II because of government aid (the “Marshall Plan”). The real credit belongs with people like Ludwig Erhard.

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A Secret Weapon to Deploy Against Russia

One can be against war with Russia, against Ukrainian membership in NATO, and even be skeptical about NATO’s continued existence, but still cheer for Ukraine as it defends itself from Putin’s aggression.

There are even some peaceful steps that the western nations can take to punish the Russian government.

I’ve already written about sanctions against Russia’s oligarchs.

Today, let’s consider how immigration policy can be used to penalize Russia.

We’ll start with the observation that Russia is demographically declining. This is true for many nations, but Russia is in especially bad shape.

As you can see, Russia’s population pyramid has turned into a population cylinder.

The combination of falling birthrates and increasing life expectancy is very damaging to any nation with a tax-and-transfer welfare state.

Working age population will be less than 60% of total population at year 2051. Total population reaches its peak in 1993 at 148,373,584. The elderly population will account for 25.24% of Russian Federation’s population in 2100, population aging is serious.

So how can the countries such as the United States take advantage of Russia’s grim Demographics?

Simple, just invite lots of young, educated Russians to emigrate.

To some extent, this already is happening, as Gian Volpicelli explained in an article for Wired.

Confronted with the likelihood of crippling sanctions, a plummeting ruble, and a country turning aggressively inwards, Aleks made it to the airport with his wife and hopped on a plane to Georgia, where he has some relatives. He was among the first Russian technology workers to make a run for neighboring countries at the outset of the Ukrainian war, but he soon realized he would by no means be the last. Over the past few weeks, throngs of fellow Russian techies have joined him… According to RAEK, a Russian technology trade group, between 50,000 and 70,000 tech workers have already fled Russia, and 70,000 to 100,000 more could leave in April.

As you might expect, the Russian government is trying to discourage emigration.

Here are excerpts from an article in the Washington Post by Joseph Menn.

Russian officials are trying to stem the brain drain, dropping the tax on tech company profit to zero, offering reduced-rate mortgages for their employees, and pledging that information workers will not be conscripted before age 27, according to Borenius, a Finnish law firm. That promise backfired among some workers who have grown so distrustful of government that they feared it meant they would be drafted, said a Russian-born principal at a global investment firm that extracted its few Moscow employees.

The United States easily can counter Russia’s efforts.

James Freeman of the Wall Street Journal wants to allow lots of Ukrainians into America, but also dissident Russians.

…the president and the vice president…are missing out on a huge opportunity to do good in the world and to do well for the United States. …the United States is still only willing to accept a tiny fraction of those fleeing the war zone. …With the region now in flames, not all of the potential new Americans are ready to come here. …Private firms in various countries are already on the hunt for talent. And the available talent eager to live in peace includes Russians… Wharton finance professor Nikolai Roussanov has been noting the brain drain from Vladimir Putin’s Russia.

Heck, we don’t need to limit the invitation to dissidents. We can open the door to economic refugees as well.

There presumably are millions of young and ambitious Russians who would eagerly grab the opportunity to escape Putin’s dirigiste economy.

After all,Russia ranks a lowly #100 in the most recent edition of Economic Freedom of the World. and does even worse (#113) in the most recent edition of the Index of Economic Freedom.

And every young person who leaves would exacerbate Russia’s demographic imbalance.

By the way, this isn’t merely an issue of foreign policy.

It’s quite likely that an influx of Russians would be good for America’s economy.

Russian-Americans are not included in this chart, but I would be very surprised if they were not among America’s high-earning immigrant communities.

I realize that immigration is a divisive issue in the United States. But I assume that opposition is much lower for populations that are likely to earn high incomes and create jobs rather than rely on government handouts.

So it would be a win-win situation. The emigrating Russians would have a chance to become wealth-creators in America (win #1) and the Russian government would lose productive members of its population (win #2).

Actually, it would be a win-win-win situation since America’s economy would benefit from a more vibrant private sector (win #3).

P.S. To ensure that win #3 actually happens, it would be nice to keep Russian immigrants from getting ensnared in America’s dependency-creating refugee system.

P.P.S. Ukraine also suffers from bad economic policy. If Russia ultimately succeeds in taking over the country, the U.S. should welcome escaping migrants, especially if they are young and educated. One would have to imagine that they would have an anti-socialist mindset, much like Cubans and Venezuelans who also have escaped to the United States.

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Very Little Sympathy for Russian Oligarchs

I enjoy defending rich people. In part, that’s because I appreciate how rich entrepreneurs make life better for me and everybody else.

But I also defend rich people because of my deep disdain for the policy agenda of empty-suit politicians and envy-wracked demagogues.

If we want outcomes that are better for society and the economy, I’m 100-percent confident that Jeff Bezos and Elon Musk can spend their wealth better than the hacks and clowns in Washington.

But what if rich people get money from government cronyism? What if they became wealthy because of special favors from politicians?

Greg Ip of the Wall Street Journal wrote about this issue a couple of years ago and included this chart showing that cronyism is a small problem in the United States but a big problem in Russia.

Here’s some of what Mr. Ip wrote about Russia’s cronyism.

How a billionaire earns his or her fortune matters, of course. Some are “rent seekers,” meaning they skim off the productive efforts of others via corruption, royal prerogative or control of some valuable market or resource. That’s why Russia is an outlier in Ms. Freund’s research: lots of oligarchs, with not much economic benefit to show for it.

Since he wrote that article well before Russia’s invasion of Ukraine, he wasn’t focused on the geopolitical considerations that are dominating the discussion today.

So now let’s look at a very recent report from the U.K.-based Economist. Here are some key excerpts.

…the sanctions levied at Russian oligarchs have intensified scrutiny on the origins of tycoons’ wealth. …Rent-seeking entrepreneurs tend to use their relationships with the state to maximise profits. …Our index uses 25 years of data from Forbes’s annual stock-take of the world’s billionaires. …We have classified the main source of each billionaire’s wealth into crony and non-crony sectors. …Russia’s crony economy sticks out like a blinged-up Muscovite… Some 70% of the 120 Russian billionaires, who together hold 80% of its billionaire wealth, fall within our crony-capitalist definition. Wealth equivalent to 28% of Russia’s gdp in 2021 came from crony sectors, up from 18% in 2016.

The bottom line is that Russia’s “oligarchs” are not like the self-made billionaires that we’re fortunate to have in the United States.

Here’s the accompanying chart from the article. Russia does stand out…in a very bad way. If the numbers are accurate, getting in bed with politicians is the way to get rich.

Now that we’ve established that Russian billionaires generally don’t earn their money, this leads us to the more challenging issue of whether nations such as the United States should freeze and/or expropriate the wealth of the oligarchs in response to Putin’s invasion of Ukraine?

Since I’m not a lawyer or an expert on foreign and defense issues, I don’t pretend to know the best approach. I want Putin and his cronies to suffer, but I also have some qualms about the current approach.

• Is the “rule of law” being overlooked and “due process” getting trampled in the rush to go after the assets of wealthy Russians, some of whom may have emigrated because of their opposition to Putin?
• Are people being targeted simply because of their Russian ethnicity, just as an awful president targeted Americans of Japanese descent during World War II?
• If getting rich through cronyism is a sufficient pretext to confiscate wealth, does that mean it’s okay to seize the assets of ethanol producers and stockholders of Fannie Mae and Freddie Mac?

P.S. For what it’s worth, my gut instinct is that cronyism is a much bigger problem in China’s economy that we see in the data from the WSJ and the Economist.

P.P.S. Click here to learn more about “rent seeking.”

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The Economics of War, Part II: Trade Restrictions Make a Nation Weaker

Way back in 2010, I explained that Paul Krugman was wrong to think that wars were good for the economy.

Indeed, he was more wrong than usual. The additional spending for the military isn’t “stimulus,” so his usual Keynesian argument was misguided.

Moreover, he didn’t seem to understand that wars also destroy existing wealth.

Today we are going to look at how war can teach us another economic lesson.

The United States and other major nations have responded to Russia’s assault on Ukraine by imposing trade restrictions with Russia.

If protectionists are correct, these steps (effectively imposing an extreme Russian version of Biden’s “buy America” policy) should strengthen Putin.

Yet that’s obviously not the purpose of the sanctions.

Instead, officials from western nations understand that these trade barriers will weaken Russia’s economy.

By the way, this isn’t the only example of nations using trade restrictions to hurt their enemies.

The U.S. trade embargo with Cuba is a prominent example, and there are also restrictions on trade with Venezuela.

Why? Because limiting trade is bad for a nation’s economy.

Moreover, during the Vietnam War, the United States mined North Vietnam’s harbors.

Why? Because limiting trade is bad for a nation’s economy.

And don’t forget the British navy’s blockade against France during the Napoleonic wars.

Why? Because limiting trade is bad for a nation’s economy.

So why, then, do politicians like Donald Trump and Joe Biden support imposing the same policies on the United States?

P.S. Imposing sanctions on Russia is not good for the U.S. economy (or the European economies, the Japanese economy, etc), but such policies are strategically sensible if the damage on the Russian economy is much greater.

P.P.S. There is now discussion about kicking Russia out of the World Trade Organization. Once again, the purpose would be to hurt Russia’s economy. Which should raise uncomfortable questions for people who think the United States would benefit by choosing to give up membership.

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A Great Day in History: The End of the Soviet Union

Yesterday, most of us celebrated Christmas.

Today, all of us should celebrate the dissolution of the Soviet Union, which officially happened on this date in 1991 (aided and abetted by a Texas grocery store).

A 2016 FEE column by Richard Ebeling documents the relentless evil of Soviet communism.

…the curtain was lowered on the 75-year experiment in “building socialism” in the country where it all began following the Bolshevik Revolution in Russia, led by Vladimir Lenin in November 1917. Some historians have estimated that as many as 200 million people worldwide may have died as part of the 20th century dream of creating a collectivist “paradise on earth.” The attempt to establish a comprehensive socialist system in many parts of the world over the last 100 years has been one of the cruelest and most brutal episodes in human history. …as many as 68 million innocent, unarmed men, women, and children may have been killed in Soviet Russia alone over those nearly 75 years of communist rule in the Soviet Union. …This murderous madness never ended. In the 1930s, during the time of the Great Purges instituted by Soviet dictator Josef Stalin to wipe out all “enemies of the revolution” through mass executions, millions were sent to the Gulag prisons that stretched across all of the Soviet Union to be worked to death as slave labor to “build socialism.” …Soviet central planning even had quotas for the number of such enemies of the people to be killed in each region of the Soviet Union, as well as the required numbers to be rounded up to be sent to work in the labor camps in the frigid wastelands of the Siberia and the Arctic Circle… The nightmare of the socialist experiment, however, did not end with Stalin’s death in 1953. Its form merely changed in later decades. As head of the KGB in the 1970s, Yuri Andropov (who later was General Secretary of the Communist Party of the Soviet Union after Leonid Brezhnev’s death in 1982), accepted a new theory in Soviet psychiatry which said opposition to the socialist regime was a sign of mental illness.

Based on the sheer number of victims, Stalin understandably has the worst reputation of all Soviet dictators.

But let’s not forget that Lenin was a horrible human being as well.

Lenin’s streak of cruelty began long before he came to power. By his early 20s, his zealous dedication to Marxism led him to believe that anything justified revolution. When a famine broke out in the Volga region in 1891—one that would kill 400,000 people—Lenin welcomed the event, hoping that it would topple the Czarist regime. …Later, in 1905, when Czarist forces killed hundreds of striking workers and 86 children in Moscow, Lenin refused to mourn for the dead and, instead, hoped the event would further enflame class antagonisms. In his eyes, human lives were expendable… While in exile, Lenin railed against the imperial government for its oppressive ways—for instance, its censorship of the opposition and dismissal of parliament. Of course, once in power, Lenin repeated these policies and usually exceeded their cruelty, imprisoning and confiscating the property of his opponents. …Lenin appointed the homicidal Felix Dzerzhinsky to head up the Cheka (the secret police)… In less than a year, hundreds, if not thousands, were executed… He marked wealthy peasants, or kulaks, as enemies of the revolution and encouraged violence against them. He imposed fixed grain prices at low rates, straining peasants who already were living on the margins, seized their grain, and left them to starve. When the peasants began resisting, Lenin ordered government officials to torture them or apply poison gas.

By the way, it’s not directly relevant to the dissolution of the Soviet Union, but I can’t resist sharing this story from the BBC.

Karl Marx’s Grade I-listed memorial in Highgate Cemetery has been “mindlessly vandalised”. The marble plaque on the imposing sculpture’s base has been attacked, seemingly with a hammer. A cemetery spokesman said they did not know when it had happened, but believed it was within the last couple of days. No witnesses have come forward. …Ian Dungavell, chief executive of Friends of Highgate Cemetery Trust, said: “This is mindless vandalism, not political commentary. …This is not the first time the monument has been damaged. In 1970 a pipe bomb blew up part of the face, swastikas have been painted on it and emulsion paint has been thrown at it.

My only comment it that the memorial wasn’t “mindlessly vandalised.” There were 100 million reasons why it was defaced.

Now let’s look at the economic performance of the Soviet Union.

I’ll start with the simple and near-tautological observation that there’s no longer a Soviet Union in large part because its economy became so anemic.

Yet some people believed that the Soviet Union’s version of socialism could be economically successful. I wrote about their naivete as part of my collection of essays on the 100th anniversary of the Bolshevik revolution.

I suppose we can partially forgive them because much of the economic misery in the Soviet Union was hidden from outsiders.

What’s less forgivable is that some people still make absurd claims about the Soviet economy. Consider this screenshot of the first paragraph of the Wikipedia entry on the economy of the Soviet Union. I’ve highlighted in red the parts that are laughable.

Though, to be fair, there wasn’t a problem with unemployment and job security in the Soviet Union. Just like slaves in Alabama in 1830, Soviet workers were victims of state coercion. They were forced to show up at the collective farms and state-run industries.

And state coercion was the basis of a failed system. Contrary to whoever authored that Wikipedia entry, the Soviet Union did not enjoy high growth rates.

A 1994 World Bank study by William Easterly and Stanley Fischer exposed the Soviet Union’s very poor track record.

Soviet growth from 1960 to 1989 was the worst in the world after we control for investment and human capital; the relative performance worsens over time. …The declining Soviet growth rate from 1950 to 1987 can be accounted for by a declining marginal product of capital with a constant rate of growth of total factor productivity. The Soviet reliance on extensive growth (rising capital-to-out-put ratios) was no greater than that of market economies, such as Japan and the Republic of Korea, but a low elasticity of substitution between capital and labor implied especially acute diminishing returns to capital compared with the case in market economies.

“Worst in the world” is quite an achievement.

Not that any sentient being should be surprised. Politicians are bureaucrats don’t do a good job of allocating labor and capital.

If you want prosperity, it’s not a good idea to have central planning and other features of socialism.

Here’s a fascinating look at the world’s largest economies (by overall size, not on a per-capita basis) from 1961-1989.

How the Soviet Union lost the race with the US: a brilliant infographic on Soviet attempt and failure to catch up with America

pic.twitter.com/DxQ5suZkfi

— Alex Kokcharov (@AlexKokcharov) December 23, 2019

Here’s a chart based on the Maddison database, so we can make comparisons based on per-capita economic output.

As you can see, even though convergence theory says poor countries should grow faster than rich countries, the gap between the United States and the Soviet Union grew ever larger.

Last but not least, here’s a chart that compares the Soviet Union’s claims about growth (blue) with both CIA estimates (red) and later revisions from a Russian economist (green).

There are two lessons to be learned.

• First, socialism and central planning are a recipe for economic stagnation.
• Second, don’t believe official government numbers from dodgy regimes.

That latter point may be relevant for people who think China is an economic powerhouse.

P.S. The Soviet Union is gone, but most of the countries that emerged from the wreckage are still struggling with a legacy of statism and intervention.

P.P.S. In addition to celebrating today, we also should celebrate November 9.

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Putin, Trump, and False Moral Equivalence

Back in the 1980s, I would get very agitated when folks made excuses for brutal communist regimes by asserting that the United States also did bad things. This “moral equivalence” argument is now being recycled by Donald Trump, who basically excuses Putin’s brutality because America supposedly isn’t in any position to throw stones.

Here’s the interview, set to start at the point where Trump discusses Putin.

This is wrong. Absurdly wrong.

Though let’s start by acknowledging that the United States is far from perfect. Our history includes black eyes such as slavery, mistreatment of native populations, incomplete legal rights for women, internment of Japanese-Americans, Jim Crow laws, persecution of gays, and other sins.

Even today, we have plenty of bad policies that restrict human liberty, often exacerbated by examples of thuggish actions by government.

But, at the risk of sounding jingoistic and patriotic, the United States began with a wonderful set of ideals and our history largely reflects a struggle to extend those ideals to the entire population.

Now let’s look at Putin.

When I tweeted my column about Russia’s flat tax two days ago, I screwed up by making a joke about the Trump-Putin “bro-mance.” I got savaged on Twitter by people who accused me of somehow endorsing (or at least accepting) the many repressive policies that exist in Russia.

The silver lining to Trump’s disturbing interview is that it gives me an opportunity to make clear my disapproval of both Putin and the silly doctrine of moral equivalence.

With regards to Russia’s president, do we have any reason to believe that he is motivated by the principles of classical liberalism? Does anyone think he wants to make Russia a free society? That he respects human rights and the rule of law?

Heck, even Trump didn’t dispute the premise that he’s a killer.

Moreover, how can anyone believe in moral equivalence when there’s a huge gap between the United States and Russia on measures of liberty.

Consider, for instance, the Human Freedom Index. As you can see, the United States is far from perfect. We’re ranked #23 for overall freedom, #28 for personal freedom, and #16 for economic freedom.

But we look good compared to Russia, which is #115 for overall freedom, #110 for personal freedom, and #102 for economic freedom.

And the Freedom House rankings show an equally dramatic difference.

The United States has a score of 90 on a 0-100 scale, with the highest rating for political rights and civil liberties.

Russia, by contrast, only has a score of 22 and gets the next-to-last rating for political rights and civil liberties.

To conclude, some folks sometimes say the continuing imperfections in the United States mean that there’s only a “difference in degree” between us and Russia.

My response is that if the “difference in degree” is large, then you also have a “difference in kind.”

There is no moral equivalence.

P.S. On a separate topic, you won’t be surprised by this report from the Washington Times.

More than half of IRS employees found to have intentionally cheated on their taxes last year were allowed to keep their jobs, according to numbers released by the inspector general that suggest the agency is still reluctant to punish its own staffers for breaking tax laws.

Yet another example of hypocrisy in government. I’ve noted the IRS has thieving employees, incompetent employees, thuggish employees, brainless employees, protectionist employees, wasteful employees, and victimizing employees. Now it has slapped-on-the-hand employees.

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Is Putin Being Honest and Accurate about the Benefits of Russia’s Flat Tax?

February 5 Addendum: For my left-wing friends and others who are bending over backwards to misread this column, saying nice things about Russia’s flat tax doesn’t mean (as noted below) that Russia’s overall economic policy is admirable. And it obviously doesn’t imply anything favorable about Russia’s dismal political system or Putin himself. I like the Russia flat tax for the same reason that I like trade liberalization in China and Social Security reform in Chile. Every so often, bad governments stumble upon a good policy and I think that’s laudable because I want people to have better lives. Sadly, I don’t think the Putin-Trump “bromance” will lead to a flat tax in the US, but that would be an unexpected and nice silver lining to that dark cloud.

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I’m obviously a big fan of a simple and fair flat tax.

In part, my support for fundamental reform is driven by my desire for a low rate, for no double taxation, and for the elimination of loopholes. Those are the economic reasons for reform.

But I also am very much motivated by the moral case for tax reform. It offends me that we have 70,000-plus pages of special favors for the friends and contributors of politicians. I value the rule of law, so I want everyone in America to play by the same rules.

And I confess that I’m jealous that other nations have adopted this common-sense reform while we’re still stuck with a punitive and unfair internal revenue code.

But the silver lining to this dark cloud is that we can learn from the experiences of other nations.

A recent report looks at what’s happened in Russia following the introduction of the flat tax.

On December 23, 2016, in his annual end-of-year press conference, Russian President Vladimir Putin said that despite his “many doubts” at the initial stage of introducing a flat 13-percent personal income tax in 2001, tax reform in Russia has been a major success. …Putin claimed that in 2001, when the tax reform was introduced, he was “concerned that the budget would lose revenue, because those who earn more would have to pay less.” He said he was also concerned “whether social justice would be ensured and so on.” However, as the reform gained traction, “personal-income tax collection has increased – pay attention – seven times,” Putin said. …Daniel Mitchell, a senior fellow at the Cato Institute, told Polygraph.info that two factors contributed to a significant increase in personal income tax revenue: “the low rate made tax evasion and avoidance much less attractive, and increased incentives to earn income.”

I appreciated the chance to talk to the reporter and get quoted in the story, but I am naturally suspicious about the claims of government officials. So I wondered about Putin’s claim about a seven-fold increase in income tax receipts.

I know there were good results in the first few years after reform. I authored a study for the Center for Freedom and Prosperity last decade, and there was data at the time showing an impressive increase in revenues from the personal income tax. That data certainly bolstered the argument for tax reform.

But we now have almost another full decade of data. Has the Russian flat tax continued to produce good results? Is the low tax rate continuing to encourage both the earning of income and reporting of income?

To answer these questions, I had my intern cull through various IMF Article IV consultation reports on Russia to get up-to-date data on personal income tax receipts in Russia. And what did I learn? Was Putin wrong?

Yes, Putin’s claim of a seven-fold increase in tax receipts was completely misleading. There was actually a 10-fold jump in personal income tax revenue.

In other words, the flat tax is a success. In today’s Washington, you would say the Russian government is winning bigly.

But there are caveats.

• Russia has experienced significant inflation, at least compared to the United States. So if you factor out increases in the price level, personal income tax revenues are “only” about three times higher today than they were before the flat tax was implemented.
• Moreover, a flat tax is not a panacea. Notwithstanding the good results it has delivered, Russia has an unimpressive ranking of #102 from Economic Freedom of the World. In other words, there’s still a long way to go if Russia wants to become a rich nation.

But these caveats don’t change the main conclusion, which is that the Russian flat tax works. Just as it works in Hong Kong. And just as it works in Jersey. It works wherever it is tried.

Let’s look at another example. Writing for Forbes, Fahim Mostafa explains that the Hungarian flat tax also has been a big success.

A fair number of Eastern European nations have…chosen this system of taxation over its progressive counterpart. Among the latest to join this club is Hungary, replacing progressive rates from 17% to 32% with a flat tax of 16% on income effective from 2012 onward… There is reason to believe that the implementation of this system has largely benefited the Eastern European nation. …The results from the following years have been remarkable. Total government revenue in 2015 (the last year for which OECD data is available at this time) stood at 23.8% higher than the maximum prior to the flat tax reform… According to the OECD, public debt in Hungary has been decreasing steadily since 2011. Increased revenues allow for this debt to be paid. …The flat tax has boosted consumption in Hungary, greatly increasing taxes collected from sales. Total tax revenue has shot up despite the massive cuts made to income tax. Politicians seeking to implement this policy in their own nation would do well to point out the example of Hungary.

I’ll add two comments.

First, the same caveats I applied to Russia apply to Hungary. The country is ranked #57 from Economic Freedom of the World, so it’s great that there’s a successful flat tax, but a lot more reform is needed for Hungary to become a role model for overall market-friendly reform.

Second, the author should probably make a change to the column. Instead of writing that “tax revenue has shot up despite the massive cuts,” it might be more accurate to write that “tax revenue has shot up because of the massive cuts.”

Yes, every so often you can find examples of nations being on the downward-sloping portion of the Laffer Curve, either because tax rates are ridiculously high (the U.S. before Reagan) or because a nation is developing or transitioning and needs low tax burdens to boost growth and encourage compliance.

It’s never my goal to boost revenue for governments, of course, but there’s surely a lesson to be learned about the benefits of low tax rates when both taxpayers and the government wind up with more money.

P.S. If we really want to learn from other places about the ideal tax system, we should check out Bermuda, Monaco, and the Cayman Islands.

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The Statism Spectrum and the Texas Grocery Store that Helped Push the Evil Empire on to the Ash Heap of History

Whenever I need to explain the difference between socialism and capitalism, I start by noting that socialism technically is different from Obama-style big-government redistributionism and cronyism.

Socialism involves something more pervasive, involving government ownership of the means of production (which, if you read this postscript, is why Jeremy Corbyn in the United Kingdom is far more radical than previous Labour Party leaders).

It also means eviscerating the competitive price system as a means of determining value and allocating resources, relying instead on politicians and bureaucrats to arbitrarily wield that power (some American politicians favor this latter approach in certain circumstances).

Needless to say, socialism has an unmatched track record of failure. It was such a disaster than only a few supposedly high-ranked academics (see this postscript) thought it worked.

But what about high-ranked communists who grew up under socialism. Did they think it worked?

The Houston Chronicle dug into its archives to produce a story about an incident that may have played a big role in history. It’s about a senior communist functionary who was exposed to a slice of capitalism.

Yeltsin visited mission control and a mock-up of a space station. According to Houston Chronicle reporter Stefanie Asin, it wasn’t all the screens, dials, and wonder at NASA that blew up his skirt, it was the unscheduled trip inside a nearby Randall’s location. Yeltsin, then 58, “roamed the aisles of Randall’s nodding his head in amazement,” wrote Asin. He told his fellow Russians in his entourage that if their people, who often must wait in line for most goods, saw the conditions of U.S. supermarkets, “there would be a revolution.” …In the Chronicle photos, you can see him marveling at the produce section, the fresh fish market, and the checkout counter. He looked especially excited about frozen pudding pops. “Even the Politburo doesn’t have this choice. Not even Mr. Gorbachev,” he said.

This random trip to a typical supermarket may have changed history.

About a year after the Russian leader left office, a Yeltsin biographer later wrote that on the plane ride to Yeltsin’s next destination, Miami, he was despondent. He couldn’t stop thinking about the plentiful food at the grocery store and what his countrymen had to subsist on in Russia. In Yeltsin’s own autobiography, he wrote about the experience at Randall’s, which shattered his view of communism, according to pundits. Two years later, he left the Communist Party and began making reforms to turn the economic tide in Russia. …“When I saw those shelves crammed with hundreds, thousands of cans, cartons and goods of every possible sort, for the first time I felt quite frankly sick with despair for the Soviet people,” Yeltsin wrote. “That such a potentially super-rich country as ours has been brought to a state of such poverty! It is terrible to think of it.”

Since the Soviet Union was mired in poverty at the time, Yeltsin presumably was speculating about the potential wealth of his country.

And the good news is that the rigid communism of the Soviet Union is gone. Heck, the Soviet Union doesn’t even exist. Reagan was right when he predicted  the triumph of freedom, with Marxism being relegated to the “ash heap of history.”

But the bad news is that Russia (the most prominent of the 15 nations to emerge after the crackup of the Soviet Union) is a laggard on economic reform. There was a shift away from close-to-pure communism in the 1990s, to be sure, but the country still has a long way to go before it can be considered capitalist.

Here’s a back-of-the-envelope “statism spectrum” that I created. It’s designed to show that there are no pure libertarian paradises, not even Hong Kong. And there are no pure statist dystopias, not even North Korea (though that despotic regime is as close to pure evil as exists in the world).

Russia, I’m guessing, would be somewhere between China and Mexico.

And this gives me a chance to close with an important point.

Perfect economic policy almost surely is an impossible goal. But that’s fine. We can still enjoy good growth so long as we strive to at least move in the right direction. As I explained back in 2012, the private sector is capable of producing impressive results so long as it has sufficient breathing room to operate.

P.S. If you want a simpler and more amusing explanation of different economic systems, here’s the famous “two cows” approach.

P.P.S. The United States isn’t a socialist nation, but we’re not fully immune to that destructive virus. After all, we have a government-run rail company in America, a government-run postal service, a government-run retirement system, and a government-run air traffic control system, all things that would function far more efficiently in the private sector.

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Encouraging Polling Data…Plus Disturbing Policy Developments from Russia and the United Kingdom

The polling data I shared last month about confused young people was a bit of a downer, so let’s look at three different polls that are a bit more encouraging.

First, I’m glad to see that many Americans feel that government and politicians are their leading cause of daily stress.

Here’s some of what the Washington Post reported on this poll.

…much of that emotional response is completely justified. As if it weren’t enough that our politicians are actively working to harm the global economy and otherwise failing to do their jobs or even show up for work in general, they’re also stressing everyone out with the astonishing breadth and depth of their incompetence. And since high stress is linked to shorter life expectancy, they are also literally killing us with their incompetence. In other words, thanks, Obama (and everyone in Congress too).

My job is to connect the dots so that people understand that the only way to reduce stress is to make government smaller.

And, for what it’s worth, that’s the best way to make government at least semi-competent.

Our second batch of polling numbers come from Rasmussen. I’ve shared research and data on the negative impact of redistribution spending (as illustrated by this powerful chart), but I figured most Americans didn’t understand that such programs trap people in dependency.

I’m glad to read that I’m wrong. In an article entitled, “49% Believe Government Programs Increase Poverty in America,” Rasmussen reports the following.

Most Americans still believe current government anti-poverty programs have no impact on poverty in this country or actually increase it. A new Rasmussen Reports national telephone survey finds that a plurality (44%) of American Adults still think the government spends too much on poverty programs.

The Rasmussen folks also have this encouraging bit of public opinion research.

A new Rasmussen Reports national telephone survey finds that 67% of American Adults think there are too many in this country who are dependent on the government for financial aid, up slightly from 64% in September of last year.

Our third set of polling numbers come from the periodic Reason-Rupe poll.

I’ll share several pieces of data, but here are the numbers I find most encouraging. Apparently most people realize that pro-growth policy is the right approach, not class warfare and redistribution.

In terms of economic policies, 74 percent of Americans would like Congress to focus on policies to promote economic growth, while 20 percent favor policies to reduce income inequality.

I guess I’m also happy about these results, though I can’t help but think that there are some very confused folks in the Tea Party.

Fifty-five percent of Americans tell Reason-Rupe they have a favorable opinion of capitalism. Meanwhile, 36 percent of those surveyed, including 33 percent of independents and 26 percent of self-described Tea Party supporters, have a favorable opinion of socialism.

I don’t even think Obama’s a socialist, so these ostensibly anti-Obama folks apparently favor even more government than our statist President. Go figure.

Last but not least, I should like this result, but I’m actually disturbed since the margin is much smaller than it should be.

When asked about the size of government, 54 percent of Americans favor a smaller government providing fewer services. Forty-two percent favor a larger government providing more services.

P.S. Remember when I warned that the one downside to personal retirement accounts is that future politicians might steal the money?

Well, it’s happened again according to Reuters, this time in Russia.

Russia’s government has approved a plan to use contributions to employees’ privately-managed pension funds to plug budget holes for a second year running. The move was confirmed by Labour Minister Maxim Topilin on Tuesday in comments published on the ministry’s website. It has been heavily criticised by some officials and analysts, who say it will hurt the pensions industry and financial markets.

P.P.S. I was beginning to feel a bit more positive about the Tory-led government in the United Kingdom, particularly after reading about some well-designed welfare reform, significant corporate tax cuts, and postal service privatization.

Then I read something awful. And what could be worse than imposing a death tax on people who are still alive.

Savers could be forced to pay inheritance tax while they are still alive, under a new drive against tax avoidance planned by the Government. …Under plans put out for consultation, HM Revenue & Customs would have powers to subject people minimising inheritance tax to “accelerated payment” laws, meaning they would be forced to pay up front if officials suspect them of using new schemes to avoid tax. Experts have warned that under the rules, taxpayers will be treated as “guilty until proven innocent”. …there will be concerns that innocent people could be investigated and made to pay large sums before they are able to defend themselves. …Economists, tax experts and Tory MPs have called for reform of the tax, warning that it predominantly hits middle-class families.

Shame on David Cameron for allowing this to happen. But I’m not surprised given the government’s track record.

And what else would you expect from a government that brainwashes children to rat out their parents and also puts despicable Orwellian ads on subways and trains?

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Rand Paul: A Modern-Day Horatius in the Fight to Protect Private Financial Information from Corrupt and Evil Governments

Senator Rand Paul is being criticized and condemned by the Washington establishment.

That’s almost certainly a sign that he’s doing the right thing. And given the recent events in Russia and Ukraine, we should say he’s doing a great thing.

This is because Senator Paul is waging a lonely battle to stop the unthinking and risky move to a world where governments – including corrupt and evil regimes – collect and share our private financial information.

I’ve written about this topic many times and warned about the risks of letting unsavory governments have access to personal information, but the Obama Administration – with the support of some Republicans who think government power is more important than individual rights – is actively pushing this agenda.

The White House has even endorsed the idea of the United States being part of a so-called Convention on Mutual Administrative Assistance in Tax Matters, even though that would require the sharing of large amounts of personal financial data with thuggish and corrupt regimes such as Argentina, Azerbaijan, China, Greece, Mexico, Nigeria, Russia, and Saudi Arabia!

I’m sure Vladimir Putin very much appreciates this insider access so he can monitor dissidents and track political opponents. His government even signed onto a recent G-20 Communique that endorsed automatic information-sharing.

Heck, there’s even a Russian heading up the Financial Action Task Force, which is endlessly pushing to give governments untrammeled access to private information. FATF even wants banks and other financial institutions to spy on customers, regardless of whether there’s the slightest evidence of any wrongdoing.

The general mindset in Washington is that we should all bury our heads in the sand and blithely allow this massive accumulation of power and information by governments. After all, Putin and other thugs would never abuse this system, right?

Senator Paul battles the statists

Fortunately, at least one lawmaker is trying to throw sand in the gears. Like Horatius at the bridge, who single-handedly thwarted an invasion of Rome in 509 BC, Senator Paul is objecting to this massive invasion of privacy.

He has this old-fashioned appreciation for the Constitution and doesn’t think government should have carte blanche to access private financial data. He even – gasp! – thinks that government power should be restrained by the 4th Amendment and that there should be due process legal protections for individuals.

No wonder the DC establishment doesn’t like him.

One example of this phenomenon is that Senator Paul has placed a “hold” on some tax treaties. Here are some excerpts from a recent article in Politico.

Paul for years has single-handedly blocked an obscure U.S.-Swiss tax treaty that lawmakers, prosecutors, diplomats and banks say makes the difference between U.S. law enforcement rooting out the names of a few hundred fat-cat tax evaders — and many thousands more. …International tax experts for years have seethed over Paul’s block on the Swiss and several other tax treaties. These sorts of mundane tax protocols used to get approved by unanimous consent without anyone batting an eyelash — until Paul came to town.

These pacts are “mundane” to officials who think there shouldn’t be any restrictions on the power of governments.

Fortunately, Senator Paul has a different perspective.

Kentucky’s tea party darling says the treaty infringes on privacy rights. …Paul, a libertarian Republican widely believed to be eyeing a 2016 presidential run, says his hold stems from concerns about Fourth Amendment protections against “unreasonable search and seizure.” “These are people that are alleged, not convicted of doing anything wrong,” Paul said a few weeks ago. “I don’t think you should have everybody’s information from their bank. There should be some process: accusations and proof that you’ve committed a crime.”

The article also notes that Senator Paul is one of the few lawmakers to fight back against the egregious FATCA legislation.

Paul’s protest is also linked to his abhorrence of the soon-to-take-effect Foreign Account Tax Compliance Act, which will force foreign banks to disclose U.S. account information to the IRS, and domestic banks to reciprocate to other nations’ revenue departments. …the senator has legislation to repeal FATCA and hesitates to support a treaty that enables a law he views as U.S. government overreach.

I don’t know how long Senator Paul can withstand the pressure in his lonely fight for individual rights, but I’m glad he’s waging the battle.

Even the Swiss government and Swiss banks have thrown in the towel, having decided that they have no choice but to weaken their nation’s human rights laws on financial privacy because of threats of financial protectionism by the United States.

So let’s give three cheers to our modern-day Horatius, a very rare elected official who is doing the right thing for the right reason.

For more information on the importance of financial privacy, here’s my video on the moral case for tax havens.

P.S. I shared some good jokes about Keynesian economics a few weeks ago.

Now, via Cafe Hayek, I have a great cartoon showing the fancy equation that left-wing economists use when they tell us that the economy will grow faster if there’s a bigger burden of government spending.

Now you can see how the Congressional Budget Office puts together its silly estimates.

Indeed, Chuck Asay even produced a cartoon on CBO’s fancy methodology.

The next step is to find the secret equation that CBO uses when it publishes nonsensical analysis implying that growth is maximized when tax rates are 100 percent.

But to be fair, the politicians who pay their salaries want them to justify bigger government, so should we expect anything else?

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Ukraine’s Biggest Problem Isn’t Putin, It’s Putinonomics

With Crimea potentially breaking away from Ukraine and the ongoing risk of conflict, it’s time to revisit the topic.

I explained a few weeks ago that decentralization was one way of defusing the crisis.

Now Kevin Hassett of the American Enterprise Institute has a refreshing and important analysis explaining how bad economic policy has hindered Ukraine’s development.

He explains that Ukraine was one of the former Soviet Bloc nations that made the mistake of not copying the more market-oriented nations of Western Europe.

Prior to the breakup [of the Soviet Empire], Eastern Europe was underdeveloped relative to the West, mostly because of the failure created by central planning. When a market economy is unleashed in such a setting, “convergence” of the standard of living to that of the developed world can be quite rapid. …A large academic literature has emerged analyzing the impact of “going west.” The literature documents that those nations that assimilated into the EU saw dramatic economic growth. …The countries, like Ukraine, that failed to take that path have stagnated.

The impact is remarkable. Using EU membership as a proxy for nations that “went west,” Kevin put together a graph showing how the more market-oriented nations have dramatically out-performed the rest.

He notes that per-capita income has climbed far faster in the western-oriented nations.

Income per capita has grown sharply since the mid 1990s, more than doubling for the former Soviet countries, and increasing about 50 percent for the Eastern Bloc countries (such as the Czech Republic) that have joined the EU. …The three lines on the bottom of the chart depict what has happened to those nations that have not joined the EU. Each of these countries has stagnated, seeing a standard of living that has barely budged since the fall of the USSR.

So what’s the moral of the story? Kevin bluntly writes that people who want to affiliate with Putin are traitors because they are condemning their fellow citizens to economic misery.

Vladimir Putin’s desire to maintain a zone of influence has had a dramatically negative effect on the economic well-being of citizens of the affected countries. It is hard to imagine how anyone could look at such data and not conclude that Putin supporters outside Russia are traitors, if not to their nations at the very least to their compatriots’ prospects of economic security and prosperity.

Now I want to build on what Kevin wrote by stating that “going west” is important because it is a proxy for more economic freedom.

Let’s take another look at his chart, but augment it with some numbers from Economic Freedom of the World.

I collected both the absolute ranking and relative economic freedom scores for the former Soviet Bloc nations, and then put together averages for each of the categories in Kevin’s chart. The first number is the average ranking and the second number is the average score. As you can see, the nations that have enjoyed more growth are the ones that have the most economic liberty.

Time for some caveats. Because of data limitations, the EFW Index does not have numbers for nations such as Kosovo. Moreover, Kevin didn’t include the former Soviet states that are in Asia, and I confess I don’t know for sure whether that means nations such as Armenia and Georgia are excluded.

But those issues only influence the green and red lines, and adding or subtracting those nations doesn’t change the look of the graph.

That having been said, the real moral of the story is that Ukraine needs economic liberty. It doesn’t have that now, and it almost surely won’t have that if it falls more under Putin’s influence.

Why? Because Ukraine already has been practicing Putinonomics (which is a sordid mix of cronyism, regulation, corruption, and weak rule of law), so more Russian control presumably will mean jumping from one frying pan to another.

Simply stated, if you want more prosperity, there’s no substitute for free markets and small government. The more nations move in that direction, the richer they will become.

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Ukraine, Ethnic Division, Decentralization, and Secession

Ukraine is in the news and that’s not a good thing.

I’m not a foreign policy expert, to be sure, but it can’t be a positive sign when nations with nuclear weapons start squabbling with each other. And that’s what’s happening now that Russia is supposedly occupying Crimea and perhaps other parts of Ukraine and Western powers are complaining.

I’m going to add my two cents to this issue, but I’m going to approach it from an unusual angle.

Look at this linguistic map of Ukraine. The red parts of the country show where Russian is the primary language and most people presumably are ethnically Russian.

Now look at these maps (from here, here, here, and here) showing various election results in the country.

Like I said, I’m not overly literate on foreign policy, but isn’t it obvious that the Ukrainians and the Russians have fundamentally different preferences?

No wonder there’s conflict.

But is there a solution? And one that doesn’t involve Putin annexing – either de facto or de jure – the southern and eastern portions of the nation?

It seems there are two options.

1. Secession – The first possibility is to let the two parts of Ukraine have an amicable (or at least non-violent) divorce. That’s what happened to the former Soviet Union. It’s what happened with Czechoslovakia became Slovakia and the Czech Republic. And it’s what happened (albeit with lots of violence) when Yugoslavia broke up.

For what it’s worth, I’ve already suggested that Belgium should split into two nations because of linguistic and cultural differences. So why not the same in Ukraine?

Heck, Walter Williams has argued that the same thing should happen in America, with the pro-liberty parts of the nation seceding from the statist regions.

2. Decentralization – The second possibility is for Ukraine to copy the Swiss model of radical decentralization. In Switzerland, even though there are French cantons, German cantons, and an Italian canton, the various regions of the country don’t squabble with each other because the central government is relatively powerless.

This approach obviously is more attractive than secession for folks who think that existing national borders should be sacrosanct.

And since this post is motivated by the turmoil in Ukraine, it’s worth pointing out that this also seems to be a logical way of defusing tensions across regions.

I confess I have a policy reason for supporting weaker national governments. Simply stated, there’s very strong evidence that decentralization means more tax competition, and when governments are forced to compete for jobs and investment, the economy is less likely to be burdened with high tax rates and excessive redistribution.

Indeed, we also have very strong evidence that the western world became prosperous precisely because the proliferation of small nations and principalities restrained the natural tendencies of governments to oppress and restrain economic activity.

And since Ukraine (notwithstanding it’s flat tax) has a very statist economic system – ranking only 126th in the Economic Freedom of the World index, maybe a bit of internal competition would trigger some much-needed liberalization.

P.S. If you’re intrigued by the secession idea promoted by Walter Williams, you’ll definitely enjoy this bit of humor about a national divorce in the United States.

P.P.S. If you think decentralization and federalism is a better option than secession, the good news is that more and more Americans have unfavorable views of Washington.

P.P.P.S. The tiny nation of Liechtenstein is comprised of seven villages and they have an explicit right to secede if they become unhappy with the central government in Vaduz. And even the statist political crowd in the United Kingdom is considering a bit of federalism.

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Ex-Communist Spy Chief Says Europeans Have a “Dependency Mentality”

Although he implemented a flat tax in Russia, I don’t think of Vladimir Putin as a supporter of free markets.

Heck, he was head of the a senior officer of the KGB during the communist era, and he presides over a country that is more known for cronyism rather than competitive markets.

So if he criticizes European nations for having excessive welfare states, it’s like being called ugly by a frog.

Here are some of the amusing details from Euractiv.com.

He’s no Milton Friedman, but he’s right about the welfare state

Russian President Vladimir Putin, speaking ahead of the G8 Summit in Northern Ireland on 17-18 June, said his country would not follow the mistakes of Europe that led to the eurozone crisis. In a wide-ranging interview he blamed the EU’s “mentality” for endangering the economy and the “moral basics of society”. …Asked if Europe’s welfare state model can be competitive today, Putin said Europe is living beyond its means, losing control of the economic situation and that Europe’s structural distortions were “unacceptable” to Russia. “Many European countries are witnessing a rise of [the] dependency mentality when not working is often much more beneficial than working. This type of mentality endangers not only the economy but also the moral basics of the society. It is not a secret that many citizens of less developed countries come to Europe intentionally to live on social welfare,” Putin said.

It’s hard to disagree with anything Putin says in that passage.

Seems like he understands that Europe made a big mistake by having too many people in the wagon and too few people pulling the wagon.

Addendum: Oops, I gave Putin an undeserved promotion. He was a high-ranking KGB official – Lieutenant Colonel – but did not head that warm and cuddly organization.

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When Will Obama Have an Epiphany on the Road to Greece?

After reading a story about economic liberalization in Cuba, I wondered (somewhat tongue in cheek) whether we should trade Obama for Castro.

I also blogged about the former socialist president of Brazil, who seemed to have more sense than Obama because he recognized that you can’t redistribute unless people first produce.

We now have another example of a foreign statist who has had an epiphany. Here’s an excerpt from a Canadian Press story about the President of Russia recognizing that big government is a recipe for stagnation.

Russian President Dmitry Medvedev on Friday challenged the legacy of his powerful predecessor, Vladimir Putin, condemning the state’s heavy role in the economy and the centralization of power at the Kremlin… “The proposition that the government is always right is manifested either in corruption or benefits to ‘preferred’ companies,” he said. “My choice is different. The Russian economy ought to be dominated by private businesses and private investors. The government must protect the choice and property of those who willingly risk their money and reputation.” …Medvedev said that the country must begin to tackle the problem immediately to avoid “the point of no return from the (economic) models that are moving the country backwards.” “Corruption, hostility to investment, excessive government role in the economy and the excessive centralization of power are the taxes on the future that we must and will scrap,” he said.

There’s a serious point to all this, of course, and it’s the fact that we know we are on a road that will lead to a Greek-style economic collapse. Yet Obama’s response is to step on the accelerator.

(h/t: Powerline)

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Russian Government Announces 20 Percent Reduction in Number of Bureaucrats

I’ve already commented on Cuba’s surprising announcement to slash the number of government workers. And I’ve complained about the federal workforce expanding in the United States. This is not what one would expect when comparing policy developments in a communist nation and a (supposedly) capitalist nation. Well, Russia wisely is following the Cuban approach on this issue (I never thought I would type those words!) and plans to get rid of 100,000 bureaucrats over the next three years.

Russia will cut its army of bureaucrats by more than 100,000 within the next three years, saving 43 billion rubles ($1.5 billion), Finance Minister Alexei Kudrin said on Monday. “We assume more than 100,000 federal state civil jobs will be cut within three years. The government has already included a schedule for cutting the number of federal civil servants in the draft budget for the next three years and coordinated it with ministries and agencies,” Kudrin told President Dmitry Medvedev, who in June ordered a 20 percent cut in the number of bureaucrats. Under the government plan, ministries and agencies will have to sack five percent of their staff in 2011 and 2012, and 10 percent in 2013. …In the last three years, the number of bureaucrats in the federal government had increased by nearly 20,000, in regional governments by 60,000 and at municipalities by 50,000, he said.

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Canadian Boondoggles and Russia Is More Capitalist than the U.S. (Again)

The G-20 gab-fest is in Canada this weekend, but Canadian taxpayers are definitely not winners. In a display of waste that might even embarrass a French politician, the Canadian government somehow is going to squander $1 billion hosting the event. I can’t even conceive of why such an event should even cost $10 million. Maybe hookers are very expensive up north. One interesting policy issue at the meeting is that the United States is siding with Euro-socialist nations in pushing a bank tax. Fortunately for taxpayers and financial consumers, the former communists in charge of Russia are helping to block this money-grab. This adds to the irony of Russia recently proposing to eliminate capital gains taxation while Obama (and the U.K.’s Cameron) are increasing the tax rate on entrepreneurship and investment. The world is upside down. The EU Observer reports:

With international eyes focusing on the potential ‘stimulus versus austerity’ scrap between different member states, Canadian citizens meanwhile have reacted in uproar at news that the weekend’s bill is set to total over $1 billion. Although 90 percent of that cost comes under the ‘security’ heading, it is a artificial lake intended to impress journalists in the press area that has come in for the heaviest criticism. The controversy may not be helped by the forecast lack of tangible results set to emanate from the two sets of meetings… The need for a global bank levy provides one the more concrete topics for discussion, but there is no guarantee that participants around the table will come to an agreement. “In the G20, the idea of a bank levy is not supported by at least half of the members,” Russian ambassador to the EU Vladimir Chizhov told a group of journalists on Friday morning in Brussels. “Neither is it acceptable to Russia,” he continued, arguing that banks would merely pass on the extra costs to their clients.

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Russia Getting Rid of Capital Gains Tax

The former communists running Russia apparently understand tax policy better than the buffoons in charge of U.S. tax policy. Not only does Russia have a 13 percent flat tax, but the government has just announced it will eliminate the capital gains tax (which shouldn’t exist in a pure flat tax anyhow). Here’s a passage from the BBC report:

Russia will scrap capital gains tax on long-term direct investment from 2011, President Dmitry Medvedev has said. …Mr Medvedev told the St Petersburg International Economic Forum that long-term direct investment was “necessary for modernisation”. …Its oil revenues fund, which has been financing the deficit, is expected to end next year, and the government wants to attract more foreign investment to boost the economy.

Sounds like President Medvedev has watched the Center for Freedom and Prosperity’s video explaining why there should be no capital gains tax. Now we just need to get American politicians to pay attention.

Welcome Instpundit readers!

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