The World’s Best- and Worst-Governed Countries

When I want to know the nations with the best and worst policies, I peruse Economic Freedom of the World or the Index of Economic Freedom.

But what if you want to know the countries with the best and worst consequences? In that case, the best option might be Professor Steve Hanke’s annual Misery Index.

On that basis, the worst-governed country in 2022 was Zimbabwe, followed by Venezuela and Syria.

What’s the methodology for Professor Hanke’s Index?

Here’s some of his explanation for National Review.

In the economic sphere, misery tends to flow from high inflation, steep borrowing costs, and unemployment. …Comparing countries’ metrics can tell us a lot about where in the world people are sad or happy. Hanke’s Annual Misery Index (HAMI) gives us the answers. My version of the misery index is the sum of the year-end unemployment (multiplied by two), inflation, and bank-lending rates, minus the annual percentage change in real GDP per capita. Higher readings on the first three elements are “bad” and make people more miserable. These “bads” are offset by a “good” (real GDP per capita growth).

What are the countries with the best outcomes?

The nation with the least misery is Switzerland, which also happens to be the world’s most libertarian nation (needless to say, I don’t think that’s a coincidence).

I’ll share one final excerpt from Hanke’s article. He points out that Switzerland’s spending cap is a big reason for the nation’s success.

Switzerland has the lowest HAMI score in the world. One reason for that is the Swiss debt brake. The debt brake has worked like a charm. Unlike most countries, Switzerland’s debt-to-GDP ratio has been on a downward trend in the last two decades, since it enshrined its debt brake into its constitution in a 2002 national referendum. In 2002, central-government debt stood at 29.7 percent of GDP, and by 2018 had been reduced to 18.7 percent.

I agree with him, but the real benefit of the debt brake is that it restrains spending.

The falling debt numbers should be viewed as a fringe benefit of the spending restraint.

P.S. Needless to say, other nations should adopt a Swiss-style spending cap.

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Spending Caps are the Fiscal Gold Standard

Earlier this month, I wrote separate columns about the spending cap in Switzerland (the “debt brake“) and the spending cap in Colorado (“TABOR“).

In this clip from my appearance on Let People Prosper, I explain those spending caps are the gold standard for fiscal rules.

It should go without saying that spending caps are good only if they actually constrain the size of government, just as speed limits in school zones are good only if they protect children from reckless drivers.

Which is why I favor spending caps that comply with my Golden Rule.

As you might suspect, politicians generally don’t want any constraint their ability to spend money (and buy votes).

But sometimes they do the right thing. Or at least propose the right thing.

In an article for the Hill, Aris Folley and Mychael Schnell explain that Republicans are offering to give Biden more borrowing authority if Biden agrees to spending caps for the “discretionary” part of the budget.

Here are the relevant excerpts.

House Republicans on Wednesday passed a bill to raise the borrowing limit and implement sweeping spending cuts… The bill would raise the debt ceiling by $1.5 trillion or through the end of next March, whichever happens first, in exchange for a wide range of Republican proposals to decrease government spending that, according to the Congressional Budget Office (CBO), amount to $4.8 trillion. The bill would cap federal funding hashed during the annual appropriations process at fiscal 2022 levels, while also limiting spending growth to 1 percent every year over the next decade.

The good news is that Republicans are talking about spending caps. This is a welcome change of pace after the profligacy of the Trump years.

The bad news is that the GOP plan presumably has very little likelihood of getting approved.

And even if Biden and Senate Democrats somehow agree to the spending cap, it only applies to discretionary spending. That’s better than nothing, but entitlements are America’s big fiscal problem.

Moreover, keep in mind that Republicans got spending caps on discretionary spending back in 2011, but those caps were then abandoned after some early success.

In other words, I’m not brimming with optimism. But let’s not make the perfect the enemy of the good. Politicians are talking about spending caps today, so maybe there’s a chance of getting real results at some point in the not-too-distant future.

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Is Switzerland the World’s Best Nation?

In the past, I’ve referred to Switzerland as the world’s most sensible nation.

Does that make it also the world’s best nation?

I actually won’t try to answer that question, but we can say that Switzerland is the world’s most libertarian nation and a role model for others.

At least according to the Human Freedom Index, which ranks nations based on both economic and personal liberty.

Here are the 25 jurisdictions that lead the rankings.

For what it’s worth, Switzerland also was in first place the previous year.

New Zealand, which had been in first place in earlier years, still ranks very high. Estonia is in third place and several other European nations round out the top 10.

The United States, meanwhile, fell to #23, which is disappointing but predictable given the subpar politicians that have governed the nation this century.

But Hong Kong has suffered an even bigger fall. It’s now ranked #34, which is not good for a jurisdiction that used to lead the rankings as recently as 2016.

For those interested, here’s a description of how the Human Freedom Index is calculated, along with some of the grim findings.

The Human Freedom Index (HFI) presents a broad measure of human freedom, understood as the absence of coercive constraint. This eighth annual index uses 83 distinct indicators of personal and economic freedom… Human freedom deteriorated severely in the wake of the coronavirus pandemic. Most areas of freedom fell, including significant declines in the rule of law; freedom of movement, expression, association and assembly; and freedom to trade. On a scale of 0 to 10, where 10 represents more freedom, the average human freedom rating for 165 jurisdictions fell from 7.03 in 2019 to 6.81 in 2020. On the basis of that coverage, 94.3 percent of the world’s population saw a fall in human freedom from 2019 to 2020, with many more jurisdictions decreasing (148) than increasing (16) their ratings and 1 remaining unchanged. The sharp decline in freedom in 2020 comes after years of slow descent following a high point in 2007.

Here’s some additional analysis, most of it depressing.

The rating for France fell from 8.65 in 2007 to 7.8 in 2020, Brazil’s rating decreased from 7.61 to 6.86, the United States’ score dropped from 8.92 to 8.23, and Mexico’s rating fell from 7.27 to 6.6. … some countries that ranked high on personal freedom ranked significantly lower in economic freedom. For example, Sweden ranked 1st in personal freedom but fell to 33rd place in economic freedom, and Argentina ranked 29th in personal freedom but 161st in economic freedom. Similarly, some countries that ranked high in economic freedom found themselves significantly lower in personal freedom. For example, Singapore ranked 2nd in economic freedom while ranking 81st in personal freedom.

I’ll close by observing that Syria is the lowest-ranked nation, followed by Yemen, Venezuela, Iran, and Egypt.

P.S. Here are five more reasons to admire Switzerland.

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More Evidence for Switzerland’s Spending Cap

Back in 2012, I wrote a column for the Wall Street Journal to highlight the success of Switzerland’s spending cap (also known as the “debt brake”).

Swiss voters voted for this spending cap in 2001 and ever since it took effect in 2003, government spending has increased by an average of 2.2 percent annually, only about half as fast as it was growing in the decades before the cap was imposed.

To show the ongoing success of the debt brake, here’s a map comparing changes in the burden of spending in Switzerland and its four major neighbors (France, Germany, Italy, and Austria). As you can see, IMF data reveals that Switzerland has been more responsible.

I even calculated changes in national spending burdens since the start of the pandemic.

You can see that all governments used the virus as an excuse for more spending, but the fiscal damage was most contained in Switzerland.

Seems like Switzerland is a role model, right?

Professors Steve Hanke and Barry Poulson presumably agree. They have a column in National Review arguing in favor of a similar spending cap for the United States.

President Biden’s budget proposal for 2024 makes it clear that the U.S. needs a budget straitjacket sooner rather than later. …Switzerland has been arguably the most successful country in reining in budget deficits and its debt burden. …The Swiss debt brake requires that expenditures be brought into balance with revenues. A cap is imposed on spending based on expected revenue, and revenue is projected based on long-term trends in the real growth of national income. Expenditures may exceed the cap in response to extraordinary events such as war, but if that’s the case, eventually, revenues from budget surpluses must be generated and set aside to offset this excess expenditure. We propose a debt brake for the U.S. that would initially be more stringent than the Swiss debt brake…a spending limit (read: cap) be calculated each year, and that the cap be reduced by 1 percent.

Interestingly, they want a spending cap that is stricter than the Swiss version.

That would be ideal (the tighter the cap, the greater the progress), but I’d settle for the Swiss approach. Why? Because here’s the data comparing US profligacy and Swiss prudence.

When I contemplate these numbers, my disdain for Bush, Obama, Trump, and Biden becomes even more intense.

They all put political ambition about what’s best for America.

But I’m digressing. Let’s put the focus back on the success of the Swiss spending cap.

It’s worth noting, for instance, that Switzerland also is out-performing the United States when comparing changes in government debt.

And the Swiss also have been enjoying better economic performance since they imposed a spending cap on their politicians.

I’ll close by observing that a spending cap would have prevented massive debt accumulation in the United States. And the same is true for other nations as well.

P.S. Colorado has a very successful spending cap known as TABOR.

P.P.S. There’s plenty of academic evidence for Switzerland’s debt brake. But what’s more surprising are that pro-spending cap studies from the International Monetary Fund (here and here), the Organization for Economic Cooperation and Development (here and here) and the European Central Bank (here and here).

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Swiss-Style Federalism Is Better than National Divorce

Some people are urging a national divorce between blue states and red states, but a far more practical approach is Swiss-style federalism.

I’ve been a long-time advocate of copying Switzerland.

It ranks very high for economic liberty, and this (predictably) translates into widespread prosperity.

And it has specific policies that warm my heart, such as a very successful spending cap (sort of like the Taxpayer Bill of Rights in Colorado) as well as a retirement system based on private savings.

Another great policy is federalism, and that is the focus of today’s column.

Richard Rahn explained in the Washington Times some reasons why Switzerland is a role model of sensible governance.

The Swiss have developed over the last nine centuries (and particularly since their major constitutional rewrite in 1848) a system most responsive to the needs of the people, including protection of person, property and civil liberties. Most government takes place at the local level (2,172 communes) by democratic consensus. Decisions that cannot be made at the local level are then made at the canton (26 states) level, and the few remaining decisions, such as defense, trade and other treaties, are made at the federal level. At the federal level, there are seven councilors who govern the country as equals with staggered five-year terms and with the principle of collegiality — representing the major political parties. They rotate the title of “president” among them for one-year terms. This system has given the Swiss unparalleled stability and prosperity, and no cult of personality. The collective and forced-tempered decision-making has kept them from doing many of the unwise and destructive things other countries have done.

Even the OECD has noticed the advantages of federalism.

And the Economist also recognizes advantages of the Swiss approach. Here are some excerpts from an article about the business environment from last May.

Switzerland has prospered as a haven for businesses far beyond what might be expected of a small, landlocked country with few natural resources. It is home to 13 of the top 100 European firms by market capitalisation and 12 of the top 500 worldwide. What is the secret sauce of the Swiss? …a unique political model that mixes federalism and direct democracy, a weak central government, light regulation, top-notch research universities, and rivalry in education and taxation between the cantons that make up the Swiss confederation. …The Swiss have no particular affinity for their compatriots in other cantons. …But they joined together in such a way as to foster self-reliance and responsibility. …This approach makes for light regulation from the top. …Cantons run health care, welfare, education, law enforcement and fiscal policy. That allows them to compete to be attractive to businesses and their workers. Corporate taxes are low.

How low are corporate taxes?

Not as low as places such as Bermuda and the Cayman Islands, where the rate is zero.

But lower than other major nations, as illustrated by this chart that accompanied the article.

The Economist also ran an article on national comity last October.

…at the heart of Europe, one nation in one state is one of the most happily, successfully multilingual places on Earth. Switzerland, which has a population comparable in size to Hungary’s or Austria’s, has four official languages… How can a country so linguistically diverse work, and indeed be one of the richest in the world? …The key to Switzerland’s functioning is its principle of territoriality: in most of the 26 cantons, one language rules. (Three cantons are bilingual in German and French, and Graubünden is trilingual in Italian, Romansh and German.) …Switzerland is the product of fiercely independent cantons joining the confederation for mutual benefit while still considering themselves sovereign. The country must respect localism, or it would not exist. …unity and uniformity are not the same thing.

The October article specifically focused on the benefits of federalism. Sort of unity through diversity.

But notice that the the pro-growth business climate described in the May article is a consequence of federalism.

Last but not least, in a column for the Foundation for Economic Education, Corey Iacono lists some of the reasons why advocates of individual liberty should admire Switzerland.

Switzerland has the fourth-freest economy in the entire world. …the ninth-highest per capita income in the world. …The Swiss have the third-highest median household income in the world… Switzerland has the fourth-lowest level of government spending as a share of the economy among the 34 OECD countries. …The Swiss have genuine federalism and decentralized government. …The Swiss have a long history of armed neutrality…the fourth-highest gun ownership rate in the world. ..Marijuana is decriminalized. …the third-happiest country in the world. …Switzerland just might be one of the most libertarian countries in the world.

Indeed, it is the most libertarian country in the world according to one index.

To be sure, being the “most libertarian” is not the same as being libertarian Nirvana.

As illustrated by this chart, Switzerland has done a much better job than the United States at preserving federalism, but there has been a trend toward more centralization.

And there are specific policies, such as a wealth tax, that definitely are not consistent with either libertarian principles or good tax policy.

But it’s still better than almost every other place in the world.

P.S. Given Switzerland’s relative success, I’m not surprised that there’s a movement in Sardinia to secede from Italy and become a Swiss canton.

P.P.S. More federalism and decentralization would help ease divisions in nations such as Belgium and Ukraine.

P.P.P.S. Here’s some humor about a possible red-blue divorce in the United States.

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Mirror, Mirror, on the Wall, Which Nation Punishes Success Most of All?

Marginal tax rates (how much you are taxed for earning additional money) have a big impact on incentives to engage in productive activity such as work, saving, investment, and entrepreneurship.

This is why governments should keep tax rates at modest levels.

But as you can see from this map from the Tax Foundation, European governments generally cannot resist the temptation to impose onerous top tax rates on investors, entrepreneurs, business owners, and other successful taxpayers.

Congratulations to Hungary for having the lowest rate, followed by Estonia, the Czech Republic, and Slovakia.

And “congratulations” to Denmark for having the highest top tax rate, followed by France, Austria, and Spain.

At this point, a few caveats are necessary. A nation’s top income tax rate is important, but it’s not the only thing that matters for tax policy.

• It’s also important to look at social insurance (payroll) taxes, particularly if they apply to all income.
• It’s also important to look at the level of “double taxation” on income that is saved and invested.
• It’s also important to look at VATs, which increase the wedge between pre-tax income and post-tax consumption.

Needless to say, other economic policies also matter. A nation might have a good tax system but very dirigiste policies in other areas. Or vice-versa.

For instance, even though Hungary has the lowest top tax rate on personal income and Denmark has the highest, there’s actually more overall economic liberty in Denmark.

Some readers may be wondering how the United States compares to the European nations shown in the above map.

The good news (relatively speaking) is that the top tax rate in the United States is 42.9 percent, so that’s lower than the average in Europe.

The bad news is that the US would have the highest tax rate if Biden’s budget was approved.

However, the top income tax rate in the United States can vary substantially depending on state.

A resident of New York or California, for instance, will face a much higher top tax rate than a resident of a zero-income-tax state such as Texas or Florida.

The same thing is even more true in Switzerland, where top tax rates vary substantially.

A successful taxpayer in Zug pays a top tax rate of 22.22 percent, less than half as much as a similar taxpayer in Geneva.

I’ll close by noting that this map is another example of the advantages of genuine federalism.

When the central government is small and most government takes place at the state and local level (or, in the case of Switzerland, at the cantonal and municipal level), there is more diversity, choice, and jurisdictional competition.

That type of federalism still exists in Switzerland, but unfortunately is eroding in the United States.

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Convergence and Divergence for the United Kingdom

I’m a big believer in looking at long-run trends, particularly whether countries are experiencing convergence of divergence with regards to per-capita economic output.

Poor nations normally should grow faster than rich nations, so we can learn a lot when we see exceptions to this rule based on several decades of data.

• Why does/did South Korea out-perform North Korea?
• Why does/did Chile out-perform Venezuela?
• Why does/did the United States out-perform Western Europe?
• Why does/did West Germany out-perform East Germany?
• Why does/did Hong Kong out-perform Cuba?
• Why does/did Taiwan out-perform China?

I think the answer to these questions is obvious, for what it’s worth.

Today, let’s consider another example. Mike Bird of the U.K.-based Economist tweeted about how the United Kingdom is diverging from Australia.

Since Australia and the United Kingdom have similar levels of economic liberty, some people speculate the divergence we’re seeing has a lot to do with regional economic performance.

That makes some sense. Many of Australia’s trading partners are fast-growing nations in East Asia. More specifically, those countries have been buying a lot of of natural resources from Australian producers.

The United Kingdom, by contrast, has a lot of trade with Europe’s slow-growing nations.

The above chart is based on household disposable income.

So I decided to also check the Maddison database to see whether there were similar changes to per-capita GDP.

The charts don’t match exactly, but the trends are similar (I added the Czech Republic since it was mentioned in the tweet).

So is this the end of the story?

Not exactly. My next step was to add Switzerland to see whether trade with Europe dooms a nation to divergence.

Lo and behold, it is diverging with Australia, but in a positive way. It’s getting comparatively richer over time, just the opposite of what we see in the United Kingdom.

So maybe the real lesson is that there’s more prosperity – and the right kind of divergence – in nations with greater levels of economic liberty.

And Switzerland surely is a good role model for policy.

I’ll close with a couple of caveats. The level of economic liberty is important, but it does not tell us everything. Likewise, the level of growth in neighboring nations is important, but it does not tell us everything. Moreover, I normally like looking at four or five decades of data rather than just 20 years.

All that being said, I’m definitely not optimistic about the long-run outlook in the United Kingdom.

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European Fiscal Policy Week, Part VI: The Swiss Spending-Cap Solution

As part of “European Fiscal Policy Week,” I’ve complained about bad Italian fiscal policy, bad Europe-wide fiscal policy, bad British fiscal policy, and also the unhelpful role of the European Union.

But I want to end the week on an optimistic note, so let’s take a look at Switzerland‘s spending cap.

Known as the “debt brake,” the rule was approved by 84.7 percent of voters back in 2001 and took effect with the 2003 fiscal year.

And if you want to know whether it has been successful, here’s a comparison of average spending increases before the debt brake and after the debt brake.

The above data comes directly from the database of the IMF’s World Economic Outlook.

There are some caveats, to be sure.

• The IMF data cited above is not adjusted for inflation, though inflation has not been a problem in Switzerland.
• The IMF numbers also show total government spending rather than just the outlays of the central government, but most cantons also have spending caps.

The bottom line is that Swiss fiscal policy dramatically improved after the spending cap took effect.

Switzerland’s Federal Finance Administration has a nice English-language description of the policy.

The debt brake is a simple mechanism for managing federal expenditure. …Expenditure is limited to the level of structural, i.e. cyclically adjusted, receipts. This allows for a steady expenditure trend and prevents a stop-and-go policy. …The debt brake has passed several tests since its introduction in 2003… The binding guidelines of the debt brake helped to swiftly balance the federal budget when it was introduced. The debt brake prevented the high tax receipts from the pre-2009 economically strong years from being used for additional expenditure. Instead, it was possible to build up surpluses and reduce debt. …s public finances are well positioned when compared internationally. Aside from the Confederation, most of the cantons have a debt brake too.

Here’s a chart from the report. It shows that debt is on a downward trajectory, especially when measured as a share of economic output (the right axis).

For what it’s worth, I’m glad the debt brake reduced debt, but I care more about controlling government spending. That being said, the Swiss spending cap also is a success on that basis.

The burden of spending as a share of GDP was increasing before the debt brake was approved. And since 2003, it’s been on a downward trajectory.

Here’s what Avenir Suisse, a Swiss think tank, wrote back in 2017.

Since the early 2000’s, Switzerland’s fiscal institutions have been successful in keeping the overall levels of taxation and spending at moderate levels. The country’s high fiscal strength is based on…Switzerland’s debt brake, a key institutional mechanism for managing public finances which subjects the Confederation’s fiscal policy to a binding rule…and contributes significantly to the country’s fiscal discipline. …Switzerland’s spending cap has helped the country avoid the fiscal crisis affecting so many other European nations. …The Swiss debt brake is the ideal model for other countries lacking fiscal discipline to embrace. …The Swiss debt brake’s most important contribution, however, cannot be measured in figures… In the early 1990s fiscal policy was oriented more towards the demands of the public sector… Today, however, the administration, the government and the parliaments believe it is self-evident that expenditures must develop in the medium term in line with revenue. Fiscal federalism, as an important element in the cantons, protects against overcrowding access to the tax side.

That last sentence deserves some elaboration. The authors are noting (“overcrowding access to the tax side”) that it is possible to increase spending by increasing taxes, but that’s not an easy option in Switzerland because voters can use direct democracy to reject tax hikes (as they have in the past).

P.S. The Debt Brake has an opt-out clause that allows more spending in an emergency. And, during the pandemic, spending did jump by more than 12 percent in just one year. But there’s also a claw-back provision that requires lawmakers to be extra frugal in subsequent years. And that policy seems to be successful. The big spending surge in 2020 was followed by two years of zero spending growth (with another year of no spending growth projected for 2023).

P.P.S. Look at this map if you want to see how much better Switzerland is than the rest of Europe.

P.P.P.S. Look at these charts if you want to see how Switzerland is doing better than the United States.

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Visualizing the Difference Between Switzerland and Europe’s Welfare States

What accounts for Switzerland’s “improbable success“? How did a small, land-locked nation with few natural resources become so successful?

Switzerland routinely ranks very high in international comparisons of economic liberty, so that means that there are many good policies.

But since I’m a public finance economist, I think this map from the Tax Foundation helps to explain why Switzerland is a role model. As you can see, the tax burden on workers is dramatically lower than in other European nations. Indeed, Switzerland is almost 10 percentage points lower than the next-closest country.

The map shows the tax burden on a single worker with no dependents, but you find a similarly large gap when looking at the tax burden on a four-person household.

By the way, Switzerland’s value-added tax is far lower than any other European nation, so ordinary workers aren’t being indirectly pillaged (and tax “progressivity” is very low in Switzerland, so high-income workers are not being pillaged, either).

How does Switzerland succeed in maintaining a relatively low tax burden?

Well, it’s easy to keep taxes under control when there are limits on the burden of government spending.

And, thanks to the nation’s very effective spending cap, you can see from this OECD chart that Switzerland is in a far stronger position than most European nations.

So kudos to Switzerland, which is sometimes thought to be the world’s most libertarian nation.

P.S. The Swiss also deserve praise for maintaining federalism, as well as their private retirement system.

P.P.S. Ireland also is a success story, but it’s not as good as suggested by the above chart.

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Switzerland, Decentralization, and Tax Competition

There are many reasons to admire Switzerland.

• The nation’s very effective spending cap.
• The nation’s libertarian-leaning governance.
• The nation’s system of private pensions.
• The nation’s genuine decentralization.
• The nation’s support for gun rights.
• The nation’s high public sector efficiency.

For today, let’s focus on how tax competition is one of the benefits of Swiss decentralization.

More specifically, most fiscal policy (both taxes and spending) takes place at the cantonal and municipal level. And this means that the Swiss can vote with their feet if they want more government or less government.

Not surprisingly, they tend to move to lower-tax areas. In a summary for VoxEU, Isabel Martínez shares some of her research on the impact of tax cuts and tax competition in the canton of Obwalden.

…economic research has made important contributions, showing that top earners indeed relocate across borders for tax reasons. …And as relocating within a country is typically less costly than moving across national borders, top earners tend to be even more sensitive to tax differences…ample evidence exists that lowering taxes is an effective means to attract top earners… I study a tax cut by the small Swiss canton of Obwalden, located in central Switzerland. The goal explicitly was to attract high-income taxpayers… In 2006, Obwalden changed its tax code and introduced falling marginal tax rates…in 2008 the canton introduced a flat rate tax, which lowered the tax load for top earners …the reform had the intended effect: by 2016, the share of high-income taxpayers in Obwalden had grown by 0.53 percentage points relative to other cantons. This is an increase of 100% compared to Obwalden’s initial share of top earners. Net income per taxpayer had risen by 17%. …I find a large elasticity of in-migration in the five years after the reform. A 1% increase in the net-of-average-tax rate increased the inflow of top earners by up to 7.2%.

For those who like getting into the weeds, here’s a chart from her report that shows how income taxes and wealth taxes dropped from 1995 (light blue) to 2001 (dark blue) to 2006 (red) to 2008 (green).

Ms. Martinez speculates whether these lower taxes were a net positive.

…besides having more high-income earners living in the canton, how much did Obwalden really gain? …Obwalden’s total tax revenue rose over time, but personal tax revenue in other cantons rose even more in comparison. …Where does this leave us? Attracting high-skilled top earners might have positive spillovers to the local economy. …between 2005 and 2008, the number of full-time equivalent (FTE) jobs rose by 11%, compared to a 4.3% increase in all Switzerland over the same period. This is even more remarkable as the total number of FTE jobs had been constant in Obwalden between 1995 and 2005. …However, these increases may not be solely due to the personal income tax reform: in 2006, Obwalden also substantially reduced its corporate tax rates to a uniform rate of 6.6%, the lowest in the country at the time.

While the headline of the article indicates that Obwalden’s reforms “might not be a winning strategy,” all of Ms. Martinez’s data shows good results.

Maybe the government isn’t collecting as much revenue, but that’s a good outcome from my perspective.

And the increase in jobs and income should be good news from everybody’s perspective.

By the way, tax competition is continuing to produce good results for Switzerland.

An article from SwissInfo catalogues some of the more-recent tax cuts by Swiss cantons.

In 2021, the average corporate tax rate dropped slightly from 14.9% to 14.7% in Switzerland. This is largely due to tax cuts made in three cantons… Canton Zug, home to several major companies including commodities giant Glencore, maintains the lowest corporate tax rate (11.9%) followed by the cantons of Nidwalden (12%) and Lucerne (12.2%). …The KPMG analysis found that the Swiss tax rates for high-income earners declined slightly compared to the previous year, from 33.7 to 33.5% due to the fact that 12 cantons cut tax rates for top incomes. The biggest cuts were made by the cantons of Schwyz (-1.5 percentage points), Schaffhausen (-1.0 percentage points), Thurgau and Lucerne (roughly -0.6 percentage points each). Top incomes are taxed at the lowest rates in canton Zug (22.2%).

P.S. There is some federalism in the United States and this means many Americans also can vote with their feet and benefit as various states lower tax rates and embrace tax reform.

P.P.S. For more data on the benefits of decentralization, click here, here, here, and here.

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Updated Assessment of Switzerland’s Spending Cap

Since I’m a big fan of spending caps, I’m very happy to be in Zurich as part of the Free Market Road Show.

Switzerland’s spending cap (called “the debt brake“) is probably the best system in the world. It does have an escape clause for emergencies, so the government did increase spending during the pandemic.

But as this chart illustrates, Swiss lawmakers were much more responsible than their American counterparts. Over the past few years, IMF data shows that the national debt (as a share of GDP) increased by about 3.4 percent in Switzerland compared to 12.8 percent in the United States.

Even more amazing, Switzerland is now quickly restoring spending restraint.

Indeed, as reported by Le News, Switzerland already is going to be back to fiscal balance by the end of this year.

The Covid-19 pandemic plunged Switzerland’s budget into the red in 2020 and 2021. The federal government expects to return to normality with a balanced budget in 2022. …In 2022, the federal government expects to spend CHF 0.6 billion less than it collects. …the government is aiming for an ordinary operating surplus of CHF 1 billion. Past budget surpluses may also be applied to the accumulated deficit to bring the accounting into line with the debt brake rules.

If you want to know why there such quick progress, one of the big banks, Credit Suisse, recently analyzed the nation’s fiscal status and explained how the debt brake requires future spending restraint to compensate for the emergency spending during the pandemic.

As part of the pandemic response, the Federal Council approved fiscal measures of over 70 billion Swiss francs… As a result of the debt brake, this deficit should be offset in the immediate following years. …the Federal Council announced that it would classify the majority of the fiscal measures as extraordinary spending. Under the law, this can be paid back more slowly – specifically, within six years. Additionally, with the escape clause, the Federal Assembly has the option of extending the repayment deadline even further in special cases.

Another international bank, ING, also issued a report about the country’s spending cap and actually expressed concern that the level of government debt is too low.

The main cause of Switzerland’s low indebtedness is a mechanism introduced by the Confederation to stabilise the federal debt: “the debt brake”. Enabled in the Constitution since 2003, with a population approval rate of 85% in 2001, the rule has strong legitimacy and many cantons have introduced similar models. The principle: public spending should not exceed revenues over a full economic cycle. The formula allows for a deficit during a recession, offset by surpluses during an expansion period. …the implementation of this system has resulted in a significant debt reduction, rather than just stabilisation. This is because the rule is applied asymmetrically and expenditure tends to be overestimated each year, while revenue is systematically underestimated. …every budget surplus is greeted with a self-congratulatory round of applause on the sound management of public finances.

Here’s a chart from the article showing on government debt began to decline once the spending cap was implemented. By contrast, debt in other industrialized nations has continued to climb.

Keep in mind, by the way, that this chart was before the pandemic.

Given Switzerland’s more prudent approach, the gap between the two lines is even higher today.

P.S. If you want a more in-depth discussion of how Switzerland’s de facto spending cap operates, there’s a very good article in the Swiss Journal of Economics and Statistics. Authored by Tobias Beljean and Alain Geier, the 2013 study has a lot of useful information.

…the success is not just visible in figures – it is also evident in the way that the budget process has changed. The debt brake has turned the budget process upside down. Previously, spending intentions were submitted by individual government offices, and it was very difficult to make changes to a large number of budget items during the short interval between the first consolidated budget plan (largely influenced by government offices) between April and the final budget proposal in June. More problematic still, the finance minister faced the potential opposition of six “spending” ministers, who were each looking for support to get their policy proposals into the budget. The budget process is now essentially a top-down process, in which targets are set at the beginning of the process and then broken down to individual ministries and offices. …One key aspect is the fact that the debt brake sets a clear target for the deficit and expenditure. …the (risk-averse) administration tends to plan its spending cautiously so as to not exceed the limit of the credit item. Hence, actual outcomes are mostly below spending limits and are not compensated for by occasional overspending and supplementary credits. The consequence for overall spending is a systematic undershooting of expenditure with respect to the budget. … This “revenue brake” and the “debt brake” taken together now result in a framework similar to an expenditure rule, as it is rather difficult to meet the requirements of the debt brake through revenue-side measures – at least in the short term.

P.P.S. You can also read a couple of good summaries (here and here) from the Swiss government’s Federal Finance Administration.

P.P.P.S. Hong Kong also has a spending cap, and Colorado’s Taxpayer Bill of Rights is a spending cap as well. You can click here to watch informative video presentations about the various spending caps.

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The Role Model of Switzerland

Back in 2016, I shared a television program about the “Improbable Success” of Switzerland. Today, here’s a follow-up look at that “sensible country.”

There are elements to this video that are outside my area of expertise, such as the role of the reformation.

But the video mentions policies that I find very appealing, such as the country’s strong federalist system (unlike the United States, federalism hasn’t eroded).

This means jurisdictional competition, which has played a big role in curtailing bad policy.

And there was a brief indirect mention of the nation’s spending cap, which also has been a big success.

Interestingly, Switzerland’s strong track record is getting noticed in unusual places.

Here are some excerpts from a New York Times column by Ruchir Sharma.

There is…a country far richer and just as fair as any in the Scandinavian trio of Sweden, Denmark and Norway. ….with lighter taxes, smaller government, and a more open and stable economy. Steady growth recently made it the second richest nation in the world…with an average income of $84,000, or $20,000 more than the Scandinavian average. …surveys also rank this nation as one of the world’s 10 happiest. This less socialist but more successful utopia is Switzerland. …Wealth and income are distributed across the populace almost as equally as in Scandinavia, with the middle class holding about 70 percent of the nation’s assets. The big difference: The typical Swiss family has a net worth around $540,000, twice its Scandinavian peer. …Capitalist to its core, Switzerland imposes lighter taxes on individuals, consumers and corporations than the Scandinavian countries do. In 2018 its top income tax rate was the lowest in Western Europe at 36 percent, well below the Scandinavian average of 52 percent. Government spending amounts to a third of gross domestic product, compared with half in Scandinavia. And Switzerland is more open to trade, with a share of global exports around double that of any Scandinavian economy. …Only one in seven Swiss work for the government, about half the Scandinavian average. …The Swiss have become the world’s richest nation by getting it right, and their model is hiding in plain sight.

Kristian Niemietz of London’s Institute of Economic Affairs also pointed out that Switzerland is a role model.

Classical liberal ideas work. But they are usually counterintuitive, and often hard to explain. …It is therefore helpful for classical liberals if we can point to a practical example…it is Switzerland which, in many ways, represents such an example. Switzerland is not a libertarian paradise. But it is a country which, through its mere existence and its economic success, refutes a lot of…conventional wisdoms. …Take decentralisation. …the Swiss example shows that local autonomy and pluralism can be a recipe for success. In Switzerland, even tiny cantons like Glarus or Obwalden, which have far fewer inhabitants than a typical London borough, enjoy a degree of political autonomy that London, which has more inhabitants than the whole of Switzerland, can only dream of. …the Swiss system shows that a healthcare system based on choice and competition can work exceptionally well. The Swiss system offers ample choice between insurers, insurance plans, providers and delivery models. …Liberal market economists…can simply refer to the successful example of Switzerland. We can end a lot of tedious discussions by simply saying, “Of course it works – just look at Switzerland”.

Amen.

Switzerland is a great role model.

By the way, neither the video nor the two articles mentions Switzerland’s private pension system, which is another big advantage the country has over most other nations.

If you want to see a chart that illustrates Switzerland’s stunning success, this look at both life expectancy and per-capita economic output is very revealing.

The link between prosperity and longevity isn’t big news, but Switzerland’s rapid upward ascent is very remarkable.

To conclude, there are numerous reasons to rank Switzerland above the United States, at least with regard to public policy.

P.S. The video mentions that Switzerland is the closest example in the world of a direct democracy. I’m instinctively opposed to that approach, because of the dangers of majoritarianism.

That being said, Swiss voters usually vote the right way.

• In 2001, the people of Switzerland voted by a 5-1 margin in favor of a spending cap.
• In 2010, nearly 60 percent of the electorate rejected a class-warfare income tax proposal.
• In 2014, Swiss voters overwhelmingly killed a minimum-wage mandate.
• Also in 2014, the voters of Switzerland rejected single-payer healthcare by a landslide margin.
• And in 2015, more than 70 percent of voters rejected a federal death tax.
• In 2016, there was a landslide vote against a scheme to provide universal basic income.
• Earlier this year, there was another landslide vote, this time against class-warfare tax policy.

P.P.S. It wasn’t mentioned in the video, but I like that Switzerland is one of the few European nations with widespread gun ownership.

P.P.P.S. We should not be surprised that some folks in Sardinia would like to secede from Italy and join Switzerland.

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Swiss Voters Reject Bidenomics

Biden wants lots of class-warfare tax increases to fund a big increase in the welfare state.

That would be bad news for the economy, but his acolytes claim that voters favor the president’s approach.

Maybe that’s true in the United States, but it’s definitely not the case in Switzerland. By a landslide margin, Swiss voters have rejected a plan to impose higher tax rates on capital.

It’s nice to see that every single canton rejected the class-warfare initiative.

In an article for Swissinfo.ch, Urs Geiser summarizes the results.

Voters in Switzerland have rejected a proposal to introduce a tax on gains from dividends, shares and rents. The left-wing people’s initiative targeted the wealthiest group in the country. Final results show 64.9% of voters and all of the country’s 26 cantons dismissing the proposed constitutional reform, in some cases with up to 77% of the vote. …The Young Socialists who had launched the proposal admitted defeat, accusing the political right and the business community of “scare mongering”… The Young Socialists, supported by the Social Democrats, the Greens and the trade unions had hoped to increase tax on capital revenue by a factor of 1.5 compared with regular income tax. …Opponents argued approval of the initiative would jeopardise Switzerland’s prosperity and damage the sector of small and medium-sized companies, often described as the backbone of the country’s economy.

For what it’s worth, I’m not surprised that the Swiss rejected the proposal. Though I was pleasantly surprised by the margin.

Though perhaps I should have been more confident. After all, the Swiss have a good track record when asked to vote on fiscal and economic topics.

• In 2001, the people of Switzerland voted by a 5-1 margin in favor of a spending cap.
• In 2010, nearly 60 percent of the electorate rejected a class-warfare income tax proposal.
• In 2014, Swiss voters overwhelmingly killed a minimum-wage mandate.
• Also in 2014, the voters of Switzerland rejected single-payer healthcare by a landslide margin.
• And in 2015, more than 70 percent of voters rejected a federal death tax.
• In 2016, there was a landslide vote against a scheme to provide universal basic income.

Though not every referendum produces the correct result. In 2018, Swiss voters rejected an opportunity to get rid of most of the taxes imposed by the central government.

P.S. Professor Garett Jones wrote a book, 10% Less Democracy, that makes a persuasive case about limiting the powers of ordinary voters (given my anti-majoritarian biases, I was bound to be sympathetic).

This implies that direct democracy is a bad idea. And when you look at some of the initiatives approved in places such as California and Oregon, Garett’s thesis makes a lot of sense. But the Swiss seem to be the exception that proves the rule.

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Great Moments in Foreign Government

Time to update our series on “great moments in foreign government.”

We’ll start with Jersey. I wrote a few years ago about the (relatively) good tax laws in that British dependent territory off the coast of France.

But there are two ways those laws could be improved. First, officials could abolish its income tax because a zero income tax is better than a flat tax.

And with tax policy heading in the wrong direction in the United Kingdom, that would further enhance Jersey’s competitive advantage.

Sadly, the island’s lawmakers haven’t opted for that choice.

But they did approve a second reform. As reported by the New York Times, Jersey has joined the 20th century.

Lawmakers on the island of Jersey have approved scrapping a decades-old law that prevented married women from talking to the tax authorities without the permission of their husband or filing taxes under their own names… a popular tax haven, …its financial laws have not always kept up with the times: Under its current tax law, introduced in 1928, only the husband in a heterosexual marriage can pay taxes, with his wife’s earnings considered part of his income. …Things became a bit more modern in 2013, when a box appeared on income tax forms that husbands could tick rather than giving written permission. When civil unions and same-sex marriages became legal on the island, the law allowed the older partner to take the role of “husband” and the younger “wife.” …Under the proposal backed by a majority of lawmakers on Tuesday, taxpayers would be considered as individuals. …Legislation to bring in the changes will be drafted later this year and should come into effect in 2021.

Next, we’ll visit Indonesia, where the guy who drafted a law actually got some first-hand experience with how the law is implemented. The Daily Mail has the amusing details.

An Indonesian man working for an organisation which helped draft strict religious laws ordering adulterers to be flogged has himself been whipped after he was caught having an affair with a married woman. Mukhlis, who is a member of the Aceh Ulema Council and only goes under one name like many Indonesians, was beaten 28 times with a rattan cane in the provincial capital of Banda Aceh on Thursday. Mukhlis grimaced and flinched during the punishment, before his married companion was brought to the stage and flogged some 23 times.

Now let’s travel to Switzerland, which is a sensible country (at least by standards of the modern world) with all sorts of admirable policies.

But, as reported by the Economist, that nation’s politicians have some weird ideas. Such as a strategic coffee reserve.

The 15 big Swiss coffee retailers, roasters and importers, such as Nestlé, are required by law to store heaps of raw coffee. Together, these mandated coffee reserves amount to about 15,000 tonnes—enough for three months’ consumption. The government finances the storage costs through a levy on imports of coffee. All 15 companies are in favour of maintaining the coffee reserve—as long as they are paid for it. IG Kaffee, a lobby group, asks why the government wants to scrap a stockpile that has served Switzerland so well.

Not as strange as Germany’s coffee tax or Japan’s coffee enemas, but still rather odd.

Last but not least, the Venezuelan government is well known for economic mismanagement.

But BBC reports that it also should be known for military incompetence.

A Venezuelan navy coastal patrol boat sank in the Caribbean after allegedly ramming a cruise ship that it had ordered to change direction. …The incident took place near La Tortuga Island, a Venezuelan federal dependency, on 30 March.Columbia Cruise Services, which operates the Resolute, said the cruise ship had been carrying out routine engine maintenance in international waters…shortly after midnight, the Naiguata radioed the Resolute, questioning its intentions, and ordered the captain to follow it to a port on Isla Margarita, to the east. “While the master was in contact with the head office, gunshots were fired and, shortly thereafter, the navy vessel approached the starboard side at speed… and purposely collided with the RCGS Resolute,” it added. “The navy vessel continued to ram the starboard bow in an apparent attempt to turn the ship’s head towards Venezuelan territorial waters.” …the patrol boat began taking on water.

The moral of all these stories is that governments piss away money in very interesting and novel ways.

But while these stories are somewhat entertaining, they also confirm that it’s never a good idea to give politicians more money when they’ve repeatedly shown that they squander the revenues they already have.

P.S. Here are my posts about “great moments in local government” and “great moments in state government.”

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More Scholarly Evidence for Switzerland’s Debt Brake

For a land-locked nation without many natural resources, Switzerland is remarkably successful.

One reason for the country’s success is pro-market policy. Switzerland routinely scores in the top 5 according to both Economic Freedom of the World and Index of Economic Freedom.

More specifically, I’m a big fan of the country’s fiscal policy, especially the “Debt Brake,” which was imposed when voters overwhelmingly adopted the provision (84.7 percent approval) early this century.

There’s always been a debate, however, whether Switzerland’s good outcomes are because of the debt brake, or because of some random reason, such as the sensibility of Swiss voters.

Three academic economists, Michele Salvi, Christoph Schaltegger, and Lukas Schmid, investigated this issue in a study for Kyklos, a scholarly journal published by the University of Basel.

A prominent means to prevent excess debt accumulation is the use of fiscal rules. In fact,fiscal rules focus on securing solvency of governments by concentrating on the intertemporal budget constraint. …there is a strong positive association between constrained fiscal discretion and improved fiscal performance. …Our paper presents evidence on the effect of a fiscal rule with a strict enforcement mechanism… We analyze the consequences of the centrally imposed balanced budget rule on public debt in Switzerland. …the Swiss debt containment rule stands out as a clearly defined fiscal rule with a constitutional basis that constrains deviating from a balanced budget in the long-term. …The rule consists of a simple mechanism stating that expenditure may not exceed revenues over the course of an economic cycle. …The debt containment rule brings a“top-down”element into the budgeting process, which has a strong disciplinary appeal and leads to more accurate budgeting. …one key aspect is the fact that the debt containment rule sets a clear expenditure ceiling.

The key parts from the above excerpt are “expenditure may not exceed” and “clear expenditure ceiling.”

Those statements ratify my oft-made point that the debt brake is really a spending cap. And spending caps are far and away the only effective macro-fiscal rule.

The policy certainly has generated good results for Switzerland. Here’s what the authors found when thy crunched numbers to compare the country’s current fiscal trajectory with what would have happened without a spending cap.

To construct the counterfactual outcome of the debt ratio for Switzerland without a debt containment rule, we select a control group…countries expected to be driven by a similar structural process as Switzerland. …Due to the availability of comprehensive debt data, the observation period is restricted to last from 1980 until 2010. …we divide the time period into a pre-treatment period from 1980 to 2002 and a postintervention period from 2003 to 2010. …Figure 2 displays the central government debt ratio for Switzerland and its synthetic counterpart during the study period. …In 2003, the two debt ratio curves start to diverge. …it appears that the introduction of the debt containment rule led to a substantial and persistent decrease in the debt ratio in Switzerland.

And here’s the relevant set of charts from the study.

Here’s one more sentence I want to cite since it echoes the argument I’ve made to my Keynesian friends about how they also should support a Swiss-style spending cap.

The debt containment rule has made a significant contribution to switching from a procyclical to a cyclically appropriate fiscal policy.

Simply stated, the political tradeoff embedded in the debt brake is that politicians get to modestly increase spending during a downturn, even though revenues are falling, but they also can only enact modest spending increases during growth years, even if revenue is growing much faster.

By the way, you will have noticed that the study focused on how the debt brake helped to reduce red ink.

Regular readers know that I’m far more interested in focusing on the real fiscal problem, which is excessive government spending.

So I’ll close by looking at some additional evidence from Switzerland. Here’s a chart, based on IMF data, showing that the growth rate of spending fell sharply after the debt brake was adopted.

I looked at the 2003-2010 period, since it matched the years in the study discussed above.

But I also calculated the spending growth rate for 2003-2019 and confirmed that the debt brake’s success hasn’t just been a temporary phenomenon.

P.S. Click here for a short presentation on the debt brake, as well as similar presentations on Hong Kong’s spending cap and Colorado’s TABOR spending cap.

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OECD Research Acknowledges Big Benefits from Federalism

Largely because of my support for jurisdictional competition, I’m a big fan of federalism.

Simply stated, our liberties are better protected when there’s decentralization since politicians are less like to over-tax and over-spend when they know potential victims of plunder have the option of moving across a border.

Indeed, I cited some academic research back in 2012 which showed that there as less economy-weakening redistribution in nations with genuine federalism (see, for instance, how Vermont politicians were forced to backtrack when they try to impose government-run healthcare).

Now let’s look at some additional scholarly evidence. A study published by the OECD, authored by Hansjörg Blöchliger, Balázs Égert and Kaja Fredriksen, investigates the impact of federalism on outcomes in developed nations.

Here are the key findings from the abstract.

This paper presents empirical research on the potential effects of fiscal decentralisation on a set of outcomes such as GDP, productivity, public investment and school performance. The results can be summarised as follows: decentralisation, as measured by revenue or spending shares, is positively associated with GDP per capita levels. The impact seems to be stronger for revenue decentralisation than for spending decentralisation. Decentralisation is strongly and positively associated with educational outcomes as measured by international student assessments (PISA). While educational functions can be delegated either to sub-central governments (SCG) or to schools, the results suggest that both strategies appear to be equally beneficial for educational performance. Finally, investment in physical and – especially – human capital as a share of general government spending is significantly higher in more decentralised countries.

Here’s some detail from the body of the paper about the pro-growth impact of decentralization (especially when sub-national governments are responsible for raising their own funds).

Across countries, sub-central fiscal power, as measured by revenue or spending shares, is positively associated with economic activity. Doubling sub-central tax or spending shares (e.g. increasing the ratio of sub-central to general government tax revenue from 6 to 12%) is associated with a GDP per capita increase of around 3%. …Revenue decentralisation appears to be more strongly related with income gains than spending decentralisation. This empirical finding may reflect that “true” fiscal autonomy is better captured by the sub-central revenue share, as a large part of sub-central spending may be mandated or regulated by central government. … the estimated relationship never becomes negative and is not hump-shaped, i.e. “more decentralisation always tends to be better”.

The part of “more decentralisation always tends to be better” is a good result.

But it’s also a sad result since the United States has moved in the wrong direction in recent decades.

Though we’re still less centralized than most nations, as you can see from this chart from the OECD study.

Kudos to Canada and Switzerland for leading the world in federalism.

Here are some additional details from the study. I’m especially interested to see that the authors acknowledge how jurisdictional competition helps to explain why nations with federalism perform better.

Decentralised fiscal frameworks can raise TFP through an increase in the efficiency and productivity of the public sector… Public sector productivity is influenced by competition between SCGs and inter-jurisdictional mobility. Most SCGs aim at attracting and retaining mobile production factors, in order to promote investment and economic activity. They can do so by using fiscal policy, among other instruments. Since firms are choosing their location based on where they expect the highest returns on investment, and since returns depend (partly) on public inputs, SCGs have an incentive to raise the productivity of their public sector. SCGs may also try to improve the relationship between taxation and public service levels, by lowering taxes… The more decentralised a country, the stronger these competitive forces could be. Competition and inter-jurisdictional mobility could be weakened by large intergovernmental transfer systems, in particular fiscal equalisation.

As a aside, it’s rather ironic that that the professional economists at the OECD produce rigorous studies (here’s another one) showing the benefits of jurisdictional competition while the political appointees push for anti-growth policies such as tax harmonization.

Let’s close by looking at the study’s estimates of how nations would enjoy more prosperity by shifting in the direction of decentralization.

…an assessment of what a country might gain in terms of higher GDP if it moved to the benchmark of the most decentralised country. To be more specific, the gains were calculated for each federal country if it moved tax decentralisation to the level of Canada, and for each unitary country if it moved tax decentralisation to the level of Sweden (Figure 6). Further decentralisation could potentially be associated with an average increase of GDP of around 1% to 2% for federal countries and 3% to 4% for unitary countries, with values for more centralised countries being larger.

Here’s the accompanying chart.

Since the U.S. still has some federalism, our gain isn’t very large, but nations such as Austria, Belgium, Slovakia, Ireland, Luxembourg, and the United Kingdom could get big boosts.

P.S. I didn’t focus on the findings about better educational outcomes in decentralized nations. But I can’t resist pointing out that this is an additional reason to abolish the Department of Education.

P.P.S. Here’s a video discussing how Switzerland benefits from federalism.

P.P.P.S. And here’s what scholars from the Austrian school of economics wrote about federalism.

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The Unfortunate Decline of Federalism in the United States

Last week, I participated in a webinar with IES Europe. The program covered a wide range of issues, including tax competition, Social Security reform, and the recipe for national prosperity.

Here’s what I said on the topic of federalism.

To add some hard data to the discussion, let’s compare the degree of fiscal decentralization in the United States in both 1902 and 2019, based on numbers from the Census Bureau (click on Govt_Finances) and the Office of Management and Budget (click on Table 14.3).

As you can see from the chart, Washington now accounts for a much bigger share of overall government spending.

By the way, these numbers should not be misinterpreted.

There’s been no reduction in the burden of state and local government outlays. Indeed, there’s been a steady increase in such spending, even after adjusting for inflation.

But the federal government has grown far more rapidly.

Indeed, the fiscal history of the United States is a sad story about the loss of almost all constraints and limits that America’s Founders put in the Constitution in hopes of controlling the size and scope of Washington.

The bottom line is we now have much bigger government and it’s more remote because of centralization.

I mentioned Switzerland in the latter part of my answer.

Here’s the data comparing Switzerland and the United States. As you can see, Switzerland has been more successful in retaining genuine federalism.

Indeed, the two countries are mirror images, with nearly 2/3rds of government spending in the U.S. coming from Washington and nearly 2/3rds of government in Switzerland taking place a the level of cantons and municipalities.

P.S. Here’s what scholars from the Austrian School have said about federalism.

P.P.S. Here’s my two cents on federalism in the context of issues such as welfare, natural disasters, transportation, coronavirus, infrastructure, and Medicaid,

P.P.P.S. Because there’s strong evidence that decentralization produces better outcomes, I’m even willing to accept bad examples of federalism.

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More Global Evidence for Spending Caps

Spending caps are the most effective way of fulfilling my Golden Rule for fiscal policy.

And we have good evidence for this approach, as I explain in this FreedomWorks discussion.

I also discuss tax competition in the interview, as well as other topics. You can watch the entire discussion by clicking here.

But I’m sharing the part about spending caps because it fits perfectly with some new research from Veronique de Rugy and Jack Salmon of the Mercatus Center.

They point out that America faces a grim fiscal future, but suggest that fiscal rules may be part of the solution.

…the federal budget process as it exists today has proven inadequate…it is a great way to enable politicians to do what they want to do (cater to interest groups) while avoiding what they don’t want to do (living within their means). …The negative consequence emerging from this chaos and the resulting failure to follow budget rules is an unremitting expansion of the size and scope of government… With countries around the world experiencing growing debt-to-GDP ratios, resultant stagnation in economic growth, and, in extreme cases, default on debts, academics have been paying an increasing amount of attention to the potential of rules toward restraining unsustainable deficit spending. …The good news is that the evidence suggests that these fiscal rules are broadly effective at restraining deficit spending. …The bad news is that not all fiscal rules are effective in restraining government profligacy and curtailing debt growth.

The authors are right. Some fiscal rules don’t work very well.

As I stated in the interview, balanced budget requirements tend to be ineffective.

Spending caps, by contrast, have a decent track record.

The Mercatus study looks at Hong Kong.

Hong Kong…might actually represent the gold standard of good fiscal policy. …Hong Kong’s Financial Secretary, Mr. John Tsang, explained, “Our commitment to small government demands strong fiscal discipline. . . . It is my responsibility to keep expenditure growth commensurate with growth in our GDP.” …in Hong Kong it’s actually a constitutional requirement: Article 107 requires that the government should strive to achieve a fiscal balance, avoid deficit, and more importantly, make sure government spending doesn’t grow faster than the growth of the economy. …Hong Kong’s spending-to-GDP ratio has fluctuated between 14 and 20 percent since the 1990s, its debt as a share of GDP is zero, social welfare spending remains steady at less than 3 percent of GDP.

Amen.

I’ve also praised Hong Kong’s fiscal policy.

Now let’s look at what the authors wrote about Switzerland.

Swiss politicians are not allowed to increase spending faster than average revenue growth over a multiyear period (as calculated by the Swiss Federal Department of Finance), which confines spending growth to a rate no higher than the rate of inflation plus population growth. The Swiss debt brake rule is significant in that it appeals to economists and policymakers on both sides of the aisle. Advocates for fiscal restraint support this rule because it is effectively a spending cap, while social democrats support the rule as it allows for deficit spending during recessionary periods. …There’s no arguing with the results: Annual spending growth fell from an average of 4.3 percent to 2.5 percent since the rule was implemented. Also, in 10 out of the past 14 years, Switzerland has had budget surpluses, while deficits have remained rare and small… At the same time, the Swiss debt-to-GDP ratio has fallen from almost 60 percent in 2003 to around 42 percent in 2017.

Once again, I say amen.

Switzerland’s spending cap is a big success.

Here’s Figure 1 from the study, which shows a big drop in Swiss government debt. I’ve augmented the chart with OECD data to focus on something even more important – which is that the burden of spending (which started very low by European standards) has declined since the debt brake was implemented.

Last but not least, let’s look at the Danish example.

In 2014 Denmark implemented The Budget Act to ensure more efficient management of public expenditures. The act is aimed at ensuring a balance or surplus on the general government balance sheet, as well as appropriate expenditure management at all levels of government. In practice, the rule sets a limit of 0.5 percent of GDP on the structural budget deficit. Policymakers decided that managing fiscal policy on the basis of a balanced structural budget would lead to an appropriate fiscal position in the long term. They also designed the system to take discretion out of their own hands by making the cuts automatic. In addition to structural deficit rules, the Budget Act introduces four-year rolling expenditure ceilings. These ceilings set legally binding limits for spending at all levels of government and for each program. If one program spends under its cap, any money not spent cannot be reallocated to another program.

I guess this is time for a triple-amen.

Here’s Figure 2 from the study, which I’ve also augmented to highlight the most important success of Denmark’s policy of spending restraint.

The economic case for spending caps is ironclad.

The problem is that it’s an uphill climb from a political perspective.

Politicians prefer legislative spending caps. After all (as we saw in 2013, 2015, 2018, and this year), those can be evaded with a simple majority, so long as there’s a profligate president who approves higher spending levels.

And those caps have never applied to entitlements, which are the part of the budget that eventually will bankrupt the nation.

So why would public choice-motivated lawmakers actually allow a serious and comprehensive spending cap to become part of the Constitution?

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Where in the Developed World Are Average Workers Most Over-Taxed?

I periodically explain that a European-sized welfare state can only be financed by huge taxes on lower-income and middle-class taxpayers.

Simply stated, there aren’t enough rich people to prop up big government. Moreover, at the risk of mixing my animal metaphors, those golden geese also have a tendency to fly away if they’re being treated like fatted calves.

I have some additional evidence to share on this issue, thanks to a new report from the Tax Foundation. The research specifically looks at the tax burden on the average worker in developed nations

The tax burden on labor is referred to as a “tax wedge,” which simply refers to the difference between an employer’s cost of an employee and the employee’s net disposable income. …The OECD calculates the tax burden by adding together the income tax payment, employee-side payroll tax payment, and employer-side payroll tax payment of a worker earning the average wage in a country. …Although payroll taxes are typically split between workers and their employers, economists generally agree that both sides of the payroll tax ultimately fall on workers.

The bad news for workers (and the good news for politicians) is that average workers in the advanced world loses more than one-third of their income to government.

In some cases, such as the unfortunate Spanish household I wrote about back in February, the government steals two-thirds of a worker’s income.

So which country is best for workers and which is worst?

Here’s a look at a map showing the tax burden for selected European nations.

Suffice to say, it’s not good to be dark red.

But that map doesn’t provide a complete answer.

To really determine the best and worst countries, the Tax Foundation made an important correction to the OECD data by including the burden of the value-added tax. Here’s why it matters.

The tax burden on labor is broader than personal income taxes and payroll taxes. In many countries individuals also pay a value-added tax (VAT) on their consumption. Because a VAT diminishes the purchasing power of individual earnings, a more complete picture of the tax burden should include the VAT. Although the United States does not have a VAT, state sales taxes also work to diminish the purchasing power of earnings. Accounting for VAT rates and bases in OECD countries increased the tax burden on labor by 5 percentage-points on average in 2018.

And with that important fix, we can confidently state that the worst country for ordinary workers is Belgium, followed by Germany, Austria, France, and Italy.

The best country, assuming we’re limiting the conversation to rich countries, is Switzerland, followed by New Zealand, South Korea, Israel, and the United States.

By the way, this report just looks at the tax burden on average workers. We would also need estimates of the tax burden on things such as investment, business, and entrepreneurship to judge the overall merit (or lack thereof) of various tax regimes.

Let’s close by looking at the nations that have moved the most in the right direction and wrong direction this century.

Congratulations to Hungary, Israel, and Sweden.

I’m not surprised to see Mexico galloping in the wrong direction, though I’m disappointed that South Korea and Iceland are also deteriorating.

P.S. The bottom line is that global evidence confirms that ordinary people will be the ones paying the tab if Crazy Bernie and AOC succeed in expanding the burden of government spending in America. Though they’re not honest enough to admit it.

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There’s No Galt’s Gulch, but New Zealand, Switzerland, and Hong Kong Are the Next-Best Alternatives

What’s the world’s freest nation?

I’ve suggested that Australia as an option if the United States ever suffers a Greek-style collapse, but my answer wasn’t based solely on that country’s level of freedom.

Another option is to look at Economic Freedom of the World, which is an excellent resource, but it only measures the degree to which a nation allows free markets.

If you want to know the world’s freest nation, the best option is to peruse the Human Freedom Index.  First released in 2013, it combines economic freedom and personal freedom.

The 2018 version has just been published, and, as you can see, New Zealand is the world’s most-libertarian nation, followed by Switzerland and Hong Kong. The United States is tied with Sweden for #17.

If you scan the top-20 list, you’ll notice that North America, Western Europe, and the Antipodes (Australia and New Zealand) dominate.

And that also is apparent on this map (darker is better). So maybe “western civilization” isn’t so bad after all.

Here is an explanation of the report’s guiding methodology. Simply stated, it’s a ranking of “negative liberty,” which is basically freedom from government coercion.

The Human Freedom Index casts a wide net in an attempt to capture as broad a set of freedoms as could be clearly identified and measured. …Freedom in our usage is a social concept that recognizes the dignity of individuals and is defined by the absence of coercive constraint. …Freedom thus implies that individuals have the right to lead their lives as they wish as long as they respect the equal rights of others. Isaiah Berlin best elucidated this notion of freedom, commonly known as negative liberty. In the simplest terms, negative liberty means noninterference by others. …This index is thus an attempt to measure the extent to which the negative rights of individuals are respected in the countries observed. By negative rights, we mean freedom from interference—predominantly by government—in people’s right to choose to do, say, or think anything they want, provided that it does not infringe on the rights of others to do likewise.

Unsurprisingly, there is a correlation between personal freedom and economic freedom.

Though it’s not a perfect correlation. The Index highlights some of the exceptions.

Some countries ranked consistently high in the human freedom subindexes, including Switzerland and New Zealand, which ranked in the top 10 in both personal and economic freedom. By contrast, some countries that ranked high on personal freedom rank significantly lower in economic freedom. For example, Sweden ranked 3rd in personal freedom but 43rd in economic freedom; Slovenia ranked 23rd in personal freedom but 71st in economic freedom; and Argentina ranked in 42nd place in personal freedom but 160th in economic freedom. Similarly, some countries that ranked high on economic freedom found themselves significantly lower in personal freedom. For example, Singapore ranked in 2nd place in economic freedom while ranking 62nd in personal freedom; the United Arab Emirates ranked 37th in economic freedom but 149th in personal freedom; and Qatar ranked 38th in economic freedom but 134th in personal freedom.

This raises an interesting question. If you had to move, and assuming you couldn’t move to a nation that offered both types of freedom, would you prefer a place like Sweden or a place like Singapore?

As an economist, my bias would be to choose Singapore.

But if you look at the nations in the top-10 for personal freedom, they’re all great place to live (and they tend to be very market-oriented other than their big welfare states). So I certainly wouldn’t blame anyone for instead choosing Sweden.

P.S. There are some very attractive micro-states that were not including in the Human Freedom Index, presumably because of inadequate data. I suspect places such as Bermuda, Liechtenstein, Monaco, and the Cayman Islands would all get very high scores if they were included.

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New Rankings for Economic Freedom: The United States Climbs to #6

Since I’ve been writing a column every day since 2010, you can imagine that there are some days where that’s a challenge.

But not today. The Fraser Institute has released a new edition of Economic Freedom of the World, which is like a bible for policy wonks. So just like last year, and the year before, and the year before, and so on (you may sense a pattern), I want to share the findings.

First, here’s what EFW measures.

The cornerstones of economic freedom are personal choice, voluntary exchange, open markets, and clearly defined and enforced property rights. …The EFW measure might be thought of as a measure of the degree to which scarce resources are allocated by personal choices coordinated by markets rather than centralized planning directed by the political process. It might also be thought of as an effort to identify how closely the institutions and policies of a country correspond with the ideal of a limited government, where the government protects property rights and arranges for the provision of a limited set of “public goods” such as national defense and access to money of sound value, but little beyond these core functions.

Now let’s get to the good stuff.

Unsurprisingly, Hong Kong is at the top of the rankings, followed closely by Singapore. Those jurisdictions have been #1 and #2 in the rankings every year this century.

The rest of the top 5 is the same as last year, featuring New Zealand, Switzerland, and Ireland.

The good news for Americans is that we’re back in the top 10, ranking #6.

Here’s what the report says about the United States.

…the United States returned to the top 10 in 2016 after an absence of several years. During the 2009–2016 term of President Obama, the US score initially continued to decline as it had under President Bush. From 2013 to 2016, however, the US rating increased from 7.74 to 8.03. This is still well below the high-water mark of 8.62 in 2000 at the end of the Clinton presidency.

It’s important to understand that the improvement in the U.S. score has nothing to do with Trump. The EFW ranking is based on America’s economic policies as of 2016 (there’s always a lag in getting hard data).

President Trump’s policies may increase America’s score (think taxes and regulation) or they may decrease America’s score (think trade and spending). But we won’t know for sure until we see future editions.

Here’s what’s happened to economic liberty in America between 1970 and 2016.

As you can see from the historical data, the U.S. enjoyed progress through the Reagan and Clinton years, followed by decline during the Bush years and early Obama years. But we’ve trending in the right direction since 2013.

Let’s look at other nations that get decent scores.

Here are the other nations that are in the top quartile.

Canada and Australia were tied for #10, so the rest of the rankings start with the under-appreciated success story of Taiwan at #12.

All the Baltic nations do well, especially Estonia and Lithuania. Chile also remains highly ranked, as is the supposedly socialist nation of Denmark.

Luxembourg, which was ranked #1 as recently as 1985, is now #25.

I also noticed that Rwanda (#40) has eased past Botswana (#44) to become the highest-ranked nation in Sub-Saharan Africa.

By the way, I’m not going to bother showing the bottom nations, but nobody should be surprised to learn that Venezuela is in last place.

Though that may simply be because there’s isn’t adequate data to include North Korea and Cuba.

Let’s close by including a chart that hopefully will show why economic liberty is important.

Simply stated, people enjoy much higher living standards in nations with free markets and small government. Conversely, people living under statist regimes suffer from poverty and deprivation.

The bottom line is that Economic Freedom of the World shows the recipe for growth and prosperity.

Sadly, very few nations follow the instructions because economic liberty is not in the interests of politicians.

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The Continuing Success of Switzerland’s Spending Cap

There are many threats to prosperity, both in the short run and long run.

• A tit-for-tat global trade war that would repeat the mistakes of the 1930s.
• Punitive class-warfare taxes stifling investment and entrepreneurship.
• Financial bubbles fueled by the easy-money policies of central banks.

Those are all things we should worry about. But here’s the issue that worries me the most.

• More government spending resulting from demographic change and entitlements.

Fortunately, there’s a solution. Governments should copy Switzerland and impose a spending cap. I explained this system in a column for the Wall Street Journal back in 2012.

…85% of its voters approved an initiative that effectively requires its central government spending to grow no faster than trendline revenue. The reform, called a “debt brake” in Switzerland, has been very successful. Before the law went into effect in 2003, government spending was expanding by an average of 4.3% per year. Since then it’s increased by only 2.6% annually. …politicians aren’t able to boost spending when the economy is doing well and the Treasury is flush with cash. Equally important, it is very difficult for politicians to increase the spending cap by raising taxes.

By the way, I just updated the calculations using IMF data. Looking at the numbers from 2003-2018, government spending has grown by an average of 2.1 percent per year since the debt brake went into effect.

In other words, the policy is becoming more successful over time.

Some argue, by the way, that spending restraint is bad for an economy. The Keynesians think that more government is “stimulus.” And many of the international bureaucracies (including the IMF) argue that more government is an “investment.”

There’s lots of evidence that smaller government is the right route for prosperity. But for today’s purposes, let’s focus just on the United States and Switzerland.

Both nations are prosperous by world standards, though the United States generally enjoyed a small advantage in terms of per-capita economic output according to the Maddison database. But in the past 15 years, Switzerland has jumped ahead.

Time for a big caveat. There are dozens of policies that help determine a nation’s prosperity, so it would be improper to claim that Switzerland overtook the United States solely because of the spending cap.

Switzerland ranks above the United States in Economic Freedom of the World, so many factors doubtlessly contributed to the nation’s superior performance. Both theory and evidence, however, suggest that fiscal discipline is good for prosperity.

But what about government debt? Did the spending cap in the debt brake succeed in controlling red ink?

The answer is yes, an emphatic yes.

Here are two charts, based on data from the International Monetary Fund’s World Economic Outlook database for the years since the debt brake went into effect. We can see that both gross debt and net debt increased in advanced countries and euro countries. In Switzerland, however, debt levels fell.

In other words, while debt levels have jumped in other industrialized nations, the level of red ink in Switzerland has declined. While other European nations have experienced fiscal crisis and ever-increasing amounts of debt, Switzerland has been an island of budgetary tranquility.

By the way, I can’t resist pointing out that Switzerland relies on spending restraint, and red ink fell. Other nations have adopted lots of tax increases, and red ink rose.

Hmmm…, maybe there’s a lesson to be learned?

P.S. Hong Kong also has a spending cap.

P.P.S. You can watch short presentations about their respective spending caps from Swiss and Hong Kong diplomats at an event I organized for staffers on Capitol Hill.

P.P.P.S. That event also included a speech about the very successful spending cap (TABOR) in Colorado.

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European Bureaucrats Threatening Swiss Gun Rights

As an economist, I admire Switzerland for its sensible approach to issues such as spending restraint and taxation.

As an observer of political systems, I admire Switzerland for its robust federalism.

As a supporter of human rights, I admire Switzerland’s protection of financial privacy (sadly weakened because of external pressure).

As an advocate of freedom, I admire Switzerland because there is a tradition of gun rights.

Indeed, there is a gun store less than a mile from the federal parliament in Bern that sells (gasp!) military-style assault rifles.

Sadly, it wasn’t open when I walked by this past weekend, so I could only snap a photo of the display window.

I couldn’t help but mentally compare the Swiss capital, where guns are sold, with the U.S. capital, where favors are sold.

There’s also a pro-gun culture in Switzerland, as reflected in this article.

“Shooting is becoming increasing popular again among the young, and the federal decision to lower the age of access to lessons is a big part of it,” says a happy Christoph Petermann, deputy chief of communications for the Swiss Target Shooting Federation. In 2016, the government lowered the age at which young people can attend target shooting lessons from 17 to 15. “In addition, we’re particularly pleased with the number of girls and young women who choose shooting…” When it comes to training children how to shoot, …Children are admitted from the age of five – but not to shoot with an assault rifle. This young, they train with pistols, air rifles, crossbows or bows. It gets serious from the age of ten – with small-calibre weapons – and from 12, in general, with assault rifles.

Unfortunately, Swiss gun rights are being attacked.

The problem isn’t the politicians in Bern. It’s the bureaucrats at the European Commission.

The Swiss media is covering the issue.

…the EU gun control plans, due to be completed by 2019, aim to curb online weapons sales and impose tight restrictions on assault weapons. …Swiss army-issue weapons would still be allowed to be kept at home after military service, in keeping with tradition. Hunters are also not affected by the plan. But certain semi-automatic weapons – such as those with magazines holding over 20 rounds of ammunition – and some high-capacity shoulder-supported rifles would be banned. …Gun collectors will be required to catalogue and report their collections to the authorities.

Needless to say, Swiss gun groups are not happy.

Critics…say the government proposal was decided undemocratically and the clampdown will have no influence on public safety or terrorism in Europe. They are concerned about its impact on their right to bear arms and are particularly unhappy with restrictions on certain categories of semi-automatic weapons and magazines, the possible impact on army-issue guns, and additional bureaucracy. …Jean-Robert Consolini, the owner of Lagardere Armoury, said he would fight the proposal. “These terror attacks were carried out by people using guns from the black market, not from a legal trade via an armoury. So, this directive won’t prevent the traffic of weapons…” Today, Switzerland has among the highest gun ownership rates per capita among Western countries. It is thought that around two million are in circulation. High rates of ownership and existing gun laws reflect the country’s deep-rooted belief in the right to bear arms and the needs of its militia army.

Monsieur Consolini is completely correct, by the way, about the EU directive having no effect on terrorists, who invariably can get weapons on the black market.

In any event, American gun groups have sympathy for their Swiss counterparts.

The National Rifle Association has opined about the controversy.

Switzerland…has the most civilian-owned firearms per capita in Europe and ranks third worldwide… The experience of Switzerland, just like many parts of the United States, serves to refute gun control advocates’ contention that more firearm ownership means more violence. Unfortunately, …a tradition of peaceful gun ownership will not dissuade gun prohibitionists. …the latest push for gun control in Switzerland stems from the updates to the European Union Firearms Directive Brussels adopted in April 2017. …The most controversial change to EU gun law…classified handguns equipped with a magazine with a capacity greater than 20 rounds and long guns equipped with a magazine with a capacity greater than 10 rounds as Category A firearms. Category A firearms are generally prohibited for civilian use. Further, the legislation required EU Member States to create firearms registries… Switzerland is not a member of the EU, however, the country is a member of the Schengen Area… As such, Switzerland is obligated to conform to the EU’s firearms restrictions.

Here are more details from the NRA report.

On April 9, Swiss gun rights organization ProTell (named for legendary marksman William Tell…) expressed their opposition to the EU changes to the Swiss legislature. Calling Switzerland’s gun laws “an expression of trust and respect between citizen and state,”… In December, ProTell made clear that it is willing to fight any further restrictions on gun rights through the referendum process. The Swiss People’s Party has also registered its staunch opposition to the new EU restrictions.

So what’s going to happen?

There are two possible positive outcomes.

First, as I noted last year, the Czech Republic is on the right side of this fight. And its government is challenging the European Commission’s interference in what should be a matter decided by national governments.

The Czech Republic filed a lawsuit…against a new European Union directive tightening gun ownership, aimed at limiting access to semi-automatic and other weapons… EU interior ministers gave a final nod to the changes…despite the Czech Republic, Luxembourg and Poland voicing opposition. The Czech Interior Ministry said the directive was too harsh, affecting for example thousands of hunters – a popular activity with a long tradition in the central European country. …“Such a massive punishment of decent arms holders is unacceptable, because banning legally-held weapons has no connection with the fight against terrorism,” Interior Minister Milan Chovanec said in a statement. “This is not only a nonsensical decision once again undermining people’s trust in the EU, but implementing the directive could also have a negative impact on the internal security of the Czech Republic, because a large number of weapons could move to the black market,” he said. …The lower chamber of the Czech parliament approved a bill in June putting gun owners’ rights in the constitution.

In theory, the Czech government’s legal argument should prevail since “subsidiarity” is ostensibly enshrined in European treaties.

But I fear that principle of decentralization will be overlooked because of the pro-harmonization ideology that is so prevalent in EU institutions.

So the second option for a positive outcome is a referendum in Switzerland, which has a long tradition of direct democracy.

And since the Swiss tend to be very sensible when voting on national issues, we can hope that they reject gun control and – for all intents and purposes – tell the European Commission to take a hike.

Let’s hope so. There are very few libertarian-minded jurisdictions in the world. It would be a shame if the Swiss rolled over and let EU bureaucrats dictate their gun laws.

P.S. For more info on global gun control data on information, click here and here.

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Switzerland: Home to Practical Libertarians rather than Ideological Libertarians

The Swiss people are normally very sensible when asked to vote in national referendums. Here are some recent results.

• In 2010, nearly 60 percent of the electorate rejected a class-warfare income tax proposal.
• In 2014, Swiss voters overwhelmingly killed a minimum-wage mandate.
• Also in 2014, the voters of Switzerland rejected single-payer healthcare by a landslide margin.
• And in 2015, more than 70 percent of voters rejected a federal death tax.
• In 2016, there was a landslide vote against a scheme to provide universal basic income.

Though my favorite referendum result occurred several years before I started writing on this site.

• In 2001, the people of Switzerland voted by a 5-1 margin in favor of a spending cap.

Given all these results, you won’t be surprised to learn that Switzerland is near the top in rankings of economic freedom, trailing only Hong Kong, Singapore, and New Zealand.

But this does not mean that Switzerland is a libertarian nation. At least not in an ideological sense. And we have two new referendum results that underscore this point.

This past weekend, Swiss voters had an opportunity to get rid of the central government’s value-added tax, personal income tax, and corporate income tax.

Ending those taxes would be a libertarian fantasy, but the initiative to extend the levies was easily approved.

More than 84% of voters have renewed the government’s right to tax its citizens and companies for another 15 years. This is a unique feature of Switzerland’s political system of direct democracy and federalism.  …rejection would have been a nightmare for the government. …said Finance Minister Ueli Maurer in January. “If voters were to say no, the Swiss government wouldn’t have enough funds and there’s no way we could find another source of revenue or introduce spending cuts of the same order.”

Voters were swayed by arguments that a no vote would cause too much fiscal disruption. Slashing the central government’s budget by 60 percent might appeal to ideological libertarians, but it didn’t fly with don’t-rock-the-boat Swiss voters.

The direct federal tax and the sales tax together contributed about two-thirds of the Swiss central government’s budget, bringing in around 43.5 billion Swiss francs ($44.25 billion) in 2016. …Should voters reject the measure, the government would have to slash spending by more than 60 percent practically overnight or find new sources of revenue, Maurer told reporters.

Here’s a pie chart showing the revenue sources for the central government.

I would have voted no, of course, and I wish more Swiss voters had lined up against the initiative.

Not because I would have thought that an immediate 60-percent reduction in the size of the central government was feasible. But a larger share of no votes at least would have sent a signal to politicians in Bern that frugality is a good idea.

There was another referendum over the weekend that also produced an unfortunate result. Swiss voters approved continuing subsidies for state-run media.

The Swiss Broadcasting Corporation, Switzerland’s public broadcaster is largely funded by a broadcasting fee. This fee, known colloquially as Billag, the name of the agency that collects it, is paid by most companies and essentially every household. The No Billag initiative, is a bid to do away with fee. …the No Billag vote was rejected by 71.6% of voters.

The margin of defeat is especially disappointing since libertarians actively campaigned for this initiative.

Switzerland, like many European nations, has certain television and radio channels that are run by the government. …Together with other classical liberals in Switzerland, Frédéric Jollien is fighting against the royalties imposed by the government for media consumption. 450 Swiss Francs, the equivalent of €382 or $456, is the annual fee that consumers are required to pay, regardless if they want state-run TV and radio channels or not. …Journalists (who, by the way, are exempt from paying this fee) are releasing heavy verbal fire on the campaigners. They claim it would cause massive unemployment in the media sector, that it is anti-democratic, and that it would enable big foreign companies to take over the Swiss market.

Alas, the fear campaign succeeded.

But I hasten to add that this doesn’t mean Switzerland is turning towards statism. I suspect the real story is that the Swiss are content with the status quo.

And the status quo (especially by European standards) is a practical form of libertarianism.

Here’s some of what Dan Hannan wrote last year.

I have always loved Switzerland…its devolved decision-making, its entrenched Euroskepticism. …I am a Helvetophile for many of the same reasons as America’s Founders. James Madison was fascinated by the way Switzerland had “no concentered authority, the Diets being only a Congress of Delegates from some or all of the Cantons.” …George Mason was entranced by the militia system: “Every Husbandman will be quickly converted into a Soldier, when he knows & feels that he is to fight for his own. It is this which preserves the Freedom and Independence of the Swiss Cantons, in the midst of the most powerful Nations.” …Switzerland has stubbornly retained its sovereignty, despite being surrounded by the EU. …Swiss democracy is direct, decentralized and devolved. Most fiscal decisions are taken locally. Result? Swiss voters are the happiest in Europe, their economy is the freest, and their state budget the smallest.

And let’s not forget that Switzerland is still a bright spot on gun rights.

In February 2011, Swiss citizens voted in a referendum that called for a national gun registry and for firearms owned by members of the military to be stored in public arsenals. …Hermann Suter, who at the time was vice president of the Swiss gun-rights group Pro Tell, told the BBC then. “The gun at home is the best way to avoid dictatorships—only dictators take arms away from the citizens.” Apparently many of his fellow Swiss agreed. The referendum was easily defeated. Gun ownership in the country has deep historic roots… guns are popular… Children as young as 12 are taught how to shoot…and are encouraged to participate in highly popular target-shooting competitions. The country’s cultural attachment to firearms resembles America’s in some ways…it has the third-highest rate of private gun ownership in the world… The Swiss Defense Ministry estimates that there are 2 million privately owned weapons in the country of 8.3 million people.

Yet there’s almost no gun-related crime.

Switzerland has a low rate of gun crime, and hasn’t seen a mass shooting since 2001.

And let’s not forget that the fiscal burden of government in Switzerland is comparatively modest.

Not by libertarian standards. Not by historical standards.

But compared to other European nations, Switzerland is a fiscal Shangi-La. The tax burden is lower, and spending consumes a smaller share of economic output.

And this translates into lower levels of red ink.

P.S. I find Switzerland to be a very interesting case study, for reasons noted above and also on issues such as decentralization, privacy rights, gun rights, and private retirement savings. But I’m a policy wonk, so I’m drawn to unusual examples. What does surprise me is that other people must be interested in the country as well. My 2011 column comparing Switzerland and the United States is the 7th-most-viewed piece in the history of this site.

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Ranking Nations for Economic and Personal Liberty

Last September, Economic Freedom of the World was released, which was sort of like Christmas for wonks who follow international economic policy.

I eagerly combed through that report, which (predictably) had Hong Kong and Singapore as the top two jurisdictions. I was glad to see that the United States climbed to #11.

The good news is that America had dropped as low as #18, so we’ve been improving the past few years.

The bad news is that the U.S. used to be a top-5 country in the 1980s and 1990s.

But let’s set aside America’s economic ranking and deal with a different question. I’m frequently asked why European nations with big welfare states still seem like nice places.

My answer is that they are nice places. Yes, they get terrible scores on fiscal policy, but they tend to be very pro-market in areas like trade, monetary policy, regulation, and rule of law. So they almost always rank in the top-third for economic freedom.

To be sure, many European nations face demographic challenges and that may mean Greek-style crisis at some point. But that’s true of many developing nations as well.

Moreover, there’s more to life than economics. Most European nations also are nice places because they are civilized and tolerant. For instance, check out the newly released Human Freedom Index, which measures both economic liberty and personal liberty. As you can see, Switzerland is ranked #1 and Europe is home to 12 of the top 16 nations.

And when you check out nations at the bottom, you won’t find a single European country.

Instead, you find nations like Venezuela and Zimbabwe. Indeed, the lowest-ranked Western European country is Greece, which is ranked #60 and just missed being in the top-third of countries.

Having now engaged in the unusual experience of defending Europe, let’s take a quick look at the score for the United States.

As you can see, America’s #17 ranking is a function of our position for economic freedom (#11) and our position for personal freedom (#24).

For what it’s worth, America’s worst score is for “civil justice,” which basically measures rule of law. It’s embarrassing that we’re weak in that category, but not overly surprising.

Anyhow, here’s how the U.S. score has changed over time.

Let’s close with a few random observations.

Other nations also improved, not just the United States. Among advanced nations, Singapore jumped 16 spots and is now tied for #18. There were also double-digit increases for Suriname (up 14 spots, to #56), Cambodia (up 16 spots, to #58), and Botswana (up 22 spots, to #63). The biggest increase was Swaziland, which jumped 25 spots to #91, though it’s worth pointing out that it’s easier to make big jumps for nations with lower initial rankings.

Now let’s look at nations moving in the wrong direction. Among developed nations, Canada dropped 7 spots to #11. Still a very good score, but a very bad trend. It’s also unfortunate to see Poland drop 10 spots, to #32. Looking at developing nations, Brunei Darussalam plummeted an astounding 52 spots, down to #115, followed by Tajikistan, which fell 46 spots to #118. Brazil is also worth highlighting, since it plunged 23 spots to #120.

P.S. I don’t know if Moldova, Ukraine, and Russia count as European countries or Asian nations, but they all rank in the bottom half. In any event, they’re not Western European nations.

P.P.S. I mentioned last year that Switzerland was the only nation to be in the top 10 for both economic freedom and personal freedom. In the latest rankings, New Zealand also achieves that high honor.

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The Case for Jury Nullification, Part I

I haven’t written in any detail about “jury nullification” since late 2010 and it’s time to rectify that sin of omission.

Nullification occurs when a jury votes not guilty because a law is either unjust or wrongly applied, not because a defendant is actually innocent. And I know that’s what I would do if I was on a jury and the government was persecuting someone for engaging is self-defense or getting nabbed by a revenue camera.

The bottom line is that Walter Williams is right when he says that it is immoral to obey bad laws.

Let’s review some expert opinions.

Writing on the editorial page of the New York Times, a former prosecutor urges jury nullification.

Earlier this year, prosecutors charged Julian P. Heicklen, a retired chemistry professor, with jury tampering because he stood outside the federal courthouse in Manhattan providing information about jury nullification to passers-by. …The prosecutors who charged Mr. Heicklen said that “advocacy of jury nullification, directed as it is to jurors, would be both criminal and without constitutional protections no matter where it occurred.” The prosecutors in this case are wrong. The First Amendment exists to protect speech like this — honest information that the government prefers citizens not know. …Jury nullification is not new; its proponents have included John Hancock and John Adams. The doctrine is premised on the idea that ordinary citizens, not government officials, should have the final say as to whether a person should be punished. As Adams put it, it is each juror’s “duty” to vote based on his or her “own best understanding, judgment and conscience, though in direct opposition to the direction of the court.” …Nullification has been credited with helping to end alcohol prohibition and laws that criminalized gay sex. Last year, Montana prosecutors were forced to offer a defendant in a marijuana case a favorable plea bargain after so many potential jurors said they would nullify that the judge didn’t think he could find enough jurors to hear the case.

A column in the Washington Post by Professor Glenn Reynolds at the University of Tennessee argues that juries have an obligation to rein in bad prosecutors.

Despite the evidence, those responsible for convicting you may choose to let you go, if they think that sending you to jail would result in an injustice. That can happen through what’s called “prosecutorial discretion,” where a prosecutor decides not to bring or pursue charges against you because doing so would be unfair, even though the evidence is strong. Or it can happen through “jury nullification,” where a jury thinks that the evidence supports conviction but then decides to issue a “not guilty” verdict because it feels that a conviction would be unjust. …Prosecutorial discretion is regularly applied and generally regarded as a standard part of criminal justice. …So-called jury nullification, on the other hand, gets far less respect. Though it is clearly within the power of juries to refuse to convict whenever they choose, judges and prosecutors tend to view this practice with hostility. …there has been a massive shift of power toward prosecutors, the result of politics, over-criminalization, institutional leverage and judges’ failure to provide supervision. It’s time to redress the balance.

By the way, Glenn has proposed ways (see postscript of this column) of addressing this imbalance, which is tied to over-criminalization.

And here’s another column in the Washington Post arguing in favor of jury empowerment.

As I tried cases, I gained enormous respect for the seriousness with which jurors approached their work. …These jurors had no problem convicting anyone of a violent offense, if the government proved its case. For drug crimes, however, it was a different story. …they frequently voted “not guilty” in nonviolent drug cases, no matter how compelling the evidence. …When I started teaching law, I published an article in the Yale Law Journal situating these D.C. jurors in a long line of jurors…who refused to convict American patriots of sedition against the British crown; jurors who acquitted people guilty of violating the Fugitive Slave Act; and jurors who would not punish gay people for “sodomy” for having consensual sex.

Amen. Juries should pursue justice, not act as rubber stamps when prosecutors act as cogs for an unjust regime.

Now let’s look at a real-world example, as reported by the New York Times.

As much as chocolate and watches, Switzerland is known for bank secrecy. …it also made Swiss banks targets for an assault by the United States government… Bank Frey was among the very few to defy the legal onslaught. And Mr. Buck…was the bank’s public face, responsible for landing and then managing American accounts. That put Mr. Buck in the government’s cross hairs. In 2013, a federal grand jury indicted him for conspiring to help Americans avoid taxes. …But things didn’t go as prosecutors had planned… The crux of the defense was that the responsibility to pay taxes and declare income did not rest with Mr. Buck. It was his clients who had decided not to pay taxes. He was under no obligation to tattle… Prosecutors branded him as a crucial cog in an international tax-evasion scheme. …Then it was Mr. Agnifilo’s turn. …“Stefan Buck has nothing whatsoever, nothing whatsoever, to do with the choice that an American taxpayer makes” to not declare offshore assets. …The jury deliberated for a little more than a day. …the verdict: not guilty.

The story doesn’t mention jury nullification, but I’m assuming – from a technical legal perspective – the prosecutors had an open-and-shut case against Mr. Buck. After all, he did “conspire” to help Americans protect their income from the IRS.

But the jury decided that conviction would be absurd because a Swiss person on Swiss soil has no obligation to help enforce bad U.S. tax policy. So they voted not guilty because that was the only moral choice.

And the good news is that this is becoming a pattern.

In October 2014, one of UBS’s top executives, Raoul Weil, went on trial in Florida. Federal prosecutors accused him of helping clients hide billions. Mr. Weil’s lawyers argued he had no knowledge of or responsibility for what had happened. The jury deliberated for barely an hour before acquitting him. The same week, a Los Angeles jury acquitted an Israeli banker who faced similar accusations. The Americans’ pursuit of foreign bankers no longer looked invincible.

The even-better news is that these nullification decisions by juries may now lead to some “prosecutorial discretion.”

The Justice Department had now lost the three cases it had tried against foreign bankers who helped Americans avoid taxes. Dozens more cases are pending. Those who represent accused Swiss bankers say they expect Mr. Buck’s verdict to embolden defendants and to cause prosecutors to think twice before bringing new charges.

In other words, the bad law will still exist but hopefully will have little or no impact because prosecutors are less likely to file charges and juries won’t convict when they do.

That’s a victory for liberty, though it surely would be best – as we discussed just a few days ago – if politicians repealed the bad laws that make unjust prosecutions possible.

P.S. I’ve confessed mixed feelings about potential nullification in cases of vigilante justice.

P.P.S. In my younger days, I assumed that cops and prosecutors were the good guys, helping to maintain an orderly society. I still think that most of them want to do what’s right, but I also now realize that our Founding Fathers were very wise to include strong protections for defendants in our Constitution. Simply stated, some cops and some prosecutors are bad and those bad apples are why I favor strengthening the Fourth Amendment and have become more skeptical of the death penalty.

P.P.P.S. Even if you’re a law-abiding person, you should support civil liberties.

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The Universal Private Retirement System Is an Additional Reason to Admire Switzerland

There’s a lot to admire about Switzerland, particularly compared to its profligate neighbors.

• It has a spending cap, imposed in a landslide referendum early last decade, that has constrained the growth of government.
• It has a genuinely decentralized system with a very small central government and vigorous competition among cantons.
• There’s widespread gun ownership, and the number of guns owners keeps expanding.
• It has strong human rights laws protecting financial privacy (though unfortunately has been bullied into weakening protections for non-Swiss investors).
• It has comparatively modest tax rates and a relatively low level of redistribution.

With all these features, you won’t be surprised to learn that Switzerland is highly ranked by Human Freedom Index (#2), Economic Freedom of the World (#4), Index of Economic Freedom (#4), Global Competitiveness Report (#1), Tax Oppression Index (#1), and World Competitiveness Yearbook (#2).

Today let’s augment our list of good Swiss policies for reviewing the near-universal system of private pensions. I’ve been in Switzerland this week for a couple of speeches in Geneva, as well as interviews and meetings in Zurich and Bern.

As part of my travels around the country, I took the time to learn more about the “second pillar” of the country’s pension system.

Here’s a basic description from the Swiss government (with the help of Google translate).

The first pension funds were founded more than a hundred years ago… In 1972 the occupational pensions were included in the constitution. There it represents the second column in the three-column concept… The BVG compulsory scheme applies to all employees who are already insured in the first pillar… Pension provision in the second pillar is based on an individual savings process. This starts at 25 years. However, the condition is an annual income that exceeds the threshold (since 2015: 21’150 francs). The savings process ends with the reaching of the pension age. The accumulated savings in the individual account of the insured [are] used to finance the retirement pension.

If you want something in original English, here’s a brief description from the Swiss-American Chamber of Commerce.

The second pillar is governed by the provisions of the laws on occupational pension provision (BVG)… Employees who are paid by the same employer an annual salary exceeding CHF 21,150 are subject to compulsory insurance. The share of the salary which is subject to compulsory insurance is…between CHF 24,675 (the coordination deduction) and CHF 84,600… An employer who employs persons subject to compulsory insurance must be affiliated to a provident institution entered in the register for occupational benefit plan. The contributions into the pension scheme depend on age and include a minimum saving portion of 7% – 18% of the coordinated salary plus a risk portion. Both are equally shared between employer and employee. The benefits of the insured persons consist in the old age, invalidity and survivors pensions.

One of the interesting quirks of the system is that the mandatory contribution rate changes with age. The older you are, the more you pay.

I’m not sure that makes a lot of sense if the goal is for people to have big nest eggs when they retire, but nobody asked me. In any event, here’s a table showing the age-dependent contribution rates from an OECD description of the Swiss system.

Technically speaking, the contributions are evenly split between employees and employers, though labor economists widely agree that workers bear the real cost.

It’s also worth noting that the Swiss system is based on “defined contribution” like the Chilean and Australian private retirement systems. This means  retirement income generally is a function of how much is saved and how well it is invested.

By contrast, the Dutch private system is based on “defined benefit,” which means that workers get a pre-determined level of retirement income. As evidenced by huge shortfalls in the defined benefit regimes maintained by many public and private employers in the United States, this approach is very risky if there aren’t high levels of integrity and honesty.

Though that doesn’t seem to be a problem in the Netherlands. Speaking of the Dutch system, here’s a chart I shared back in 2014.

It was designed to laud the Netherlands, but you can see that Switzerland also had a large pool of pension assets, equal to more than 110 percent of GDP (according to OECD data, now 123 percent of GDP).

Looking at this data, ask yourself whether Switzerland (or the Netherlands, Iceland, Australia, etc) will be in a stronger position to handle the fiscal challenge of aging populations, particularly when compared to nations with virtually no private pension assets, such as France, Greece, and Japan.

The Swiss regime certainly isn’t perfect, and neither are the systems in other nations with private retirement savings. But at least those nations are in much better shape to deal with future demographic changes. Workers in Switzerland and other countries with similar systems have real assets rather than unsustainable political promises. And it’s also worth pointing out that there are macroeconomic benefits for nations that rely more on private savings rather than tax-and-transfer entitlement schemes.

In other words, the Swiss system is much better than America’s bankrupt Social Security scheme.

P.S. Back in 2011, I compared five good features of the United States to five good features of Switzerland. If retirement systems were part of that discussion, Switzerland would have enjoyed a sixth advantage.

P.P.S. Switzerland does have some warts. It is only ranked #31 in the World Bank’s Doing Business. It also has a self-destructive wealth tax. And  government spending, though modest compared to neighbors, consumes slight more than one-third of economic output.

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New “Tax Oppression Index” Shows Grim Toll of OECD’s Statist Agenda

Back in 2009, I shared the results of a very helpful study by Pierre Bessard of Switzerland’s Liberal Institute (by the way, “liberal” in Europe means pro-market or “classical liberal“).

Pierre ranked the then-30 member nations of the Organization for Economic Cooperation and Development based on their tax burdens, their quality of governance, and their protection of financial privacy.

Switzerland was the top-ranked nation, followed by Luxembourg, Austria, and Canada.

Italy and Turkey were tied for last place, followed by Poland, Mexico, and Germany.

The United States, I’m ashamed to say, was in the bottom half. Our tax burden was (and still is) generally lower than Europe, but there’s nothing special about our quality of governance compared to other developed nations, and we definitely don’t allow privacy for our citizens (though we’re a good haven for foreigners).

Pierre’s publication was so helpful that I’ve asked him several times to release an updated version.

I don’t know if it’s because of my nagging, but the good news is that he’s in the final stages of putting together a new Tax Oppression Index. He just presented his findings at a conference in Panama.

But before divulging the new rankings, I want to share this slide from Pierre’s presentation. He correctly observes that the OECD’s statist agenda against tax competition is contrary to academic research in general, and also contrary to the Paris-based bureaucracy’s own research!

Yet the political hacks who run the OECD are pushing bad policies because Europe’s uncompetitive governments want to prop up their decrepit welfare states. And what’s especially irksome is that the bureaucrats at the OECD get tax-free salaries while pushing for higher fiscal burdens elsewhere in the world.

But I’m digressing. Let’s look at Pierre’s new rankings.

As you can see, Switzerland is still at the top, though now it’s tied with Canada. Estonia (which wasn’t part of the OECD back in 2009) is in third place, and New Zealand and Sweden also get very high scores.

At the very bottom, with the most oppressive tax systems, are Greece and Mexico (gee, what a surprise), followed by Israel and Turkey.

The good news, relatively speaking, is that the United States is tied with several other nations for 11th place with a score of 3.5.

So instead of being in the bottom half, as was the case with the 2009 Tax Oppression Index, the U.S. is now in the top half.

But that’s not because we’ve improved policy. It’s more because the OECD advocates of statism have been successful in destroying financial privacy in other nations. Even Switzerland’s human rights laws on privacy no longer protect foreign investors.

As such, Pierre’s new index basically removes financial privacy as a variable and augments the quality of governance variable with additional data about property rights and the rule of law.

P.S. When measuring the tax burden, the reason that America ranks above most European nations is not because they impose heavier taxes on rich people and businesses (indeed, the U.S. has a much higher corporate tax rate). Instead, we rank above Europe because they impose very heavy taxes on poor and middle-income taxpayers (mostly because of the value-added tax, which helps to explain why I am so unalterably opposed to that destructive levy).

P.P.S. Also in 2009, Pierre Bessard authored a great defense of tax havens for the New York Times.

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The Best and Worst News of 2016

There was some genuinely good news in 2016, which is more than I can say for 2015 (my “best” development for that year was some polling data, followed by some small-ball tinkering).

Though the good news for 2016 was mostly overseas. Here are the four things from around the world that made me happy this year.

• Constitutional spending caps in Brazil – I’m a big believer that good fiscal policy is achieved when government spending grows slower than the private economy. So I was very happy when Brazil changed its constitution to limit spending to the rate of inflation. Brazil joins Hong Kong and Switzerland in an elite club of jurisdictions with constitutional provisions that focus on the real problem of excessive government rather than the symptom of red ink.
• The landslide vote against a government-guaranteed income in Switzerland – I’m rather worried that there’s a growing movement (including some libertarians!) in support of a minimum income provided by taxpayers. So I was gratified that the “Sensible Swiss,” in a referendum this past May, overwhelmingly rejected an initiative to impose such a policy. I even like to think that perhaps I played a (very minor) role in the outcome.
• The British vote for Brexit – The European Union started as a free-trade zone but in recent decades morphed into a pro-harmonization and pro-centralization bureaucracy, contrary to the principles that made Europe great. That shift, combined with the continent’s horrible demographics, means the European Union is a slowly sinking ship. I was delighted and amused (played Rule Britannia over and over again on my laptop) that Brits voted for independence and (hopefully) liberty.
• Abolition of the income tax in Antigua and Barbuda – It’s a terrible idea (as we know from America’s experience) to give politicians a new source of revenue. They’ll quickly use the new levy to finance a permanent expansion in the burden of government (which is why I’m willing to go halfway around the world to fight such schemes). With that in mind, the repeal of the income tax in the Caribbean nation of Antigua and Barbuda was a truly joyous development.

And while we didn’t have any major positive developments in the United States, there was a bit of good news. Yes, it’s “small-ball tinkering,” but I’m always glad for any progress.

• Reductions in food stamp dependency – There are many redistribution programs that contribute to America’s dependency crisis, so food stamps can’t take the entire blame for the economic damage of the welfare state. But the program is riddled with fraud and should be ended on the federal level. We haven’t seen any progress out of Washington (hardly a surprise since we have a “food stamp President“), but Kansas joined Maine and Wisconsin by taking steps to limit the program’s one-way handouts.

So those are the noteworthy good things that happened this year. Now let’s look at the other side of the ledger. What was the bad news of 2016?

Well, the good news (so to speak) is that there was not a lot of bad news. At least if we’re focusing on actual policy changes.

But there are three developments that cause me to worry about the future.

• Growing support for the value-added tax from Republicans – At the risk of hyperbole, I view the value-added tax as the single-greatest threat to the long-run viability of the United States. Simply stated, our ability to restrain the growth of spending will be terribly weakened if politicians get this new source of revenue. Why would they ever reform entitlements, for instance, if they had the ability boost the VAT rate by a point or two every few years? With that in mind, I’m perplexed and horrified that some otherwise sensible lawmakers (including Rand Paul and Ted Cruz) have embraced this money machine for big government. I don’t care if their plans are theoretically sensible. I worry about what will happen in the real world.
• An erosion of the pro-trade consensus – The economic damage caused by higher fiscal burdens since World War II has been offset by lower trade burdens thanks to various agreements to reduce tariffs and other protectionist barriers. So it’s very good news that there’s been a bipartisan consensus for freer trade. Unfortunately, the unexpected appeal of Donald Trump and Bernie Sanders suggests that both parties have voters susceptible to the siren song of protectionism.
• A major political party almost nominated an out-of-the-closet socialist – It is rather troubling that Senator Bernie Sanders managed to attract considerable support while openly embracing a very strident form of statism. His voting record in the Senate may have been very similar to conventional Democrats (including Hillary Clinton and Barack Obama), but his sympathy for totalitarian regimes such as Venezuela suggests he is genuinely radical.  It worries me that millions of my fellow citizens voted for someone with such deep hostility to individual liberty.

Tomorrow I will write about my hopes and fears for 2017.

Let’s close today’s column with a few special categories.

If there was an award for the most disgusting news of 2016, the NAACP would be the clear winner for their decision to sacrifice black children in order to collect blood money from teacher unions.

And if we also had a prize for most moronic leftist in 2016, there would be another easy winner. Trevor Noah inadvertently showed why gun control doesn’t work even though he wanted to make the opposite point.

Last but not least, if there was a category for surprising news in 2016, there’s no question that Paul Krugman would win that prize for writing something sensible about tax policy.

P.S. My most popular post in 2016 (which also set the all-time record) was the very clever image showing that the enemies of liberty are looters, regardless of their economic status.

P.P.S. My most surreal moment in 2016 was getting attacked on the front page of the Washington Post. I must be doing something right.

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The United States Has the Third-Most Competitive Economy, but Could Be #1 if Government Was Smaller and Less Expensive

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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