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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here’s another remarkable admission in the OECD report.

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

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

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

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

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

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

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

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

I confess that I’m never sure how best to persuade and educate people about the value of limited government.

Regular readers presumably will put me in the second camp since most of my columns involve data and evidence on the superior outcomes associated with markets compared to statism.

That being said, I actually don’t think we will prevail until and unless we can convince people that it is ethically wrong to use government power to dictate and control the lives of other people.

So I’m always trying to figure out what motivates people and how they decide what policies to support.

With this in mind, I was very interested to see that nine scholars from five continents (North America, South America, Europe, Asia, and Australia), representing six countries (Canada, United States, Argentina, Netherlands, Israel, and Australia) and four disciplines (psychology, criminology, economics, and anthropology), produced a major study on what motivates support for redistribution.

Why do people support economic redistribution? …By economic redistribution, we mean the modification of a distribution of resources across a population as the result of a political process. …it is worthwhile to understand how distributive policies are mapped into and refracted through our evolved psychological mechanisms.

The study explain how human evolution may impact our attitudes, a topic that I addressed back in 2010.

The human mind has been organized by natural selection to respond to evolutionarily recurrent challenges and opportunities pertaining to the social distribution of resources, as well as other social interactions. …For example, it was hypothesized that modern welfare activates the evolved forager risk-pooling psychology — a psychology that causes humans to be more motivated to share when individual productivity is subject to chance-driven interruptions, and less motivated to share when they think they are being exploited by low-effort free riders. Ancestrally, sharing resources that came in unsynchronized, high-variance, large packages (e.g., large game) allowed individuals to buffer each other’s shortfalls at low additional cost.

Here’s how the authors structured their research.

…we propose that the mind perceives modern redistribution as an ancestral game or scene featuring three notional players: the needy other, the better-off other, and the actor herself. …we use the existence of individual differences in compassion, self-interest, and envy as a research tool for investigating the joint contribution of these motivational systems to forming attitudes about redistribution.

And here’s how they conducted their research.

We conducted 13 studies with 6,024 participants in four countries to test the hypothesis that compassion, envy, and self-interest jointly predict support for redistribution. Participants completed instruments measuring their (i) support for redistribution; (ii) dispositional compassion; (iii) dispositional envy; (iv) expected personal gain or loss from redistribution (our measure of self-interest); (v) political party identification; (vi) aid given personally to the poor; (vii) wealthy-harming preferences; (viii) endorsement of pro-cedural fairness; (ix) endorsement of distributional fairness; (x) age; (xi) gender; and (xii) socioeconomic status (SES).

Now let’s look at some of the findings, starting with the fact that personal compassion is not associated with support for coerced redistribution. Indeed, advocates of government redistribution tend to be less generous (a point that I’ve previously noted).

Consider personally aiding the poor—as distinct from supporting state-enacted redistribution. Participants in the United States, India, and the United Kingdom (studies 1a–c) were asked whether they had given money, food, or other material resources of their own to the poor during the last 12 mo; 74–90% of the participants had. …dispositional compassion was the only reliable predictor of giving aid to the poor. A unit increase in dispositional compassion is associated with 161%, 361%, and 96% increased odds of having given aid to the poor in the United States, India, and the United Kingdom. …Interestingly, support for government redistribution was not a unique predictor of personally aiding the poor in the regressions… Support for government redistribution is not aiding the needy writ large—in the United States, data from the General Social Survey indicate that support for redistribution is associated with lower charitable contributions to religious and nonreligious causes (61). Unlike supporting redistribution, aiding the needy is predicted by compassion alone.

But here’s the most shocking part of the results.

The people motivated by envy are often interested in hurting those above them than they are in helping those below them.

…consider envy. Participants in the United States, India, and the United Kingdom (studies 1a–c) were given two hypothetical scenarios and asked to indicate their preferred one. In one scenario, the wealthy pay an additional 10% in taxes, and the poor receive an additional sum of money. In the other scenario, the wealthy pay an additional 50% in taxes (i.e., a tax increment five times greater than in the first scenario), and the poor receive (only) one-half the additional amount that they receive in the first scenario. That is, higher taxes paid by the wealthy yielded relatively less money for the poor, and vice versa… Fourteen percent to 18% of the American, Indian, and British participants indicated a preference for the scenario featuring a higher tax rate for the wealthy even though it produced less money to help the poor (SI Appendix, Table S3). We regressed this wealthy-harming preference simultaneously on support for redistribution… Dispositional envy was the only reliable predictor. A unit increase in envy is associated with 23%, 47%, and 43% greater odds of preferring the wealthy-harming scenario in the United States, India, and the United Kingdom.

This is astounding, in a very bad way.

It means that there really are people who are willing to deprive poor people so long as they can hurt rich people.

Even though I have shared polling data echoing these findings, I still have a hard time accepting that some people think like that.

But the data in this study seem to confirm Margaret Thatcher’s observation about what really motivates the left.

The authors have a more neutral way of saying this. They simply point out that compassion and envy can lead to very different results.

Compassion and envy motivate the attainment of different ends. Compassion, but not envy, predicts personally helping the poor. Envy, but not compassion, predicts a desire to tax the wealthy even when that costs the poor.

Since we’re on the topic or morality, markets, and statism, my colleague Ryan Bourne wrote an interesting column for CapX looking at research on what type of system brings out the best in people.

It turns out that markets promote cooperation and trust.

…experimental work of Herbert Gintis, who has analysed the behaviours of 15 tribal societies from around the world, including “hunter-gatherers, horticulturalists, nomadic herders, and small-scale sedentary farmers — in Africa, Latin America, and Asia.” Playing a host of economic games, Gintis found that societies exposed to voluntary exchange through markets were more highly motivated by non-financial fairness considerations than those which were not. “The notion that the market economy makes people greedy, selfish, and amoral is simply fallacious,” Gintis concluded. …Gintis again summarises, “movements for religious and lifestyle tolerance, gender equality, and democracy have flourished and triumphed in societies governed by market exchange, and nowhere else.”

Whereas greater government control and intervention produce a zero-sum mentality and cheating.

…we might expect greed, cheating and intolerance to be more prevalent in societies where individuals can only fulfil selfish desires by taking from, overpowering or using dominant political or hierarchical positions to rule over and extort from others. Markets actually encourage collaboration and exchange between parties that might otherwise not interact. This interdependency discourages violence and builds trust and tolerance. …In a 2014 paper, economists tested Berlin residents’ willingness to cheat in a simple game involving rolling die, whereby self-reported scores could lead to small monetary pay-offs. Participants presented passports and ID cards to the researchers, which allowed them to assess their backgrounds. The results were clear: participants from an East German family background were far more likely to cheat than those from the West. What is more, the “longer individuals were exposed to socialism, the more likely they were to cheat.”

All of which brings me back to where I started.

How do you persuade people to favor liberty if they are somehow wired to have a zero-sum view of the world and they think that goal of public policy is to tear down the rich, even if that hurts the poor?

Though the internal inconsistency of the previous sentence maybe points to the problem. If the poor and the rich are both hurt by a policy (or if both benefit from a policy), then the world clearly isn’t zero-sum. And we now from voluminous evidence, of course, that the world isn’t that way.

But how to convince people, other than making the same arguments over and over again?

P.S. Jonah Goldberg and Dennis Prager both have videos with some insight on this issue.

The internal revenue code is a reprehensible mess that torments taxpayers and undermines American competitiveness.

The good news is that Americans don’t like the tax system.

The bad news is that they don’t dislike it nearly as much as they should. At least in my humble opinion.

There are two reasons for the inadequate level of disdain.

  • First, nearly half of all households are no longer are subject to the income tax. Indeed, the system is actually a revenue generator for some households since the EITC wage subsidy is a redistribution program laundered through the tax code.
  • Second, many people get a warm and fuzzy feeling when they file their taxes because of the expectation that they will get a sizable refund, even though that payment from the IRS is simply a reflection of having paid too much tax during the prior year.

For those of us who want to scrap the tax system, this is a challenge.

And I’m not shy about admitting the problem.

About three-quarters typically get money back, with refunds so far this year averaging almost $3,000. For many, it will be the single biggest payment they receive all year. …the fact that so many people are getting paid by the IRS, and not the other way around, takes some of the edge off a day when they’re trying to stoke public anger at the tax system. “The fact that people are looking forward to tax time rubs me the wrong way,” said Dan Mitchell, a tax expert at the libertarian Cato Institute. “I would like them to be upset.”

I also have a good idea of why the problem exists.

It’s withholding. And it started back during World War II. Here’s some background.

During the war, tax rates went up, and a broader number of people were expected to pay them. Professor Anuj Desai from the University of Wisconsin Law School said there was a saying that income tax went from “a class tax to a mass tax.” …“The thought was that if we withhold a little bit every bit every paycheck, people won’t have to worry about the problem of coming up with a huge chunk of money,” Desai said. But withholding is also a remarkably efficient way for the government to raise money, and policymakers knew that. …“You could never have the taxes that were levied during World War II without withholding. It was absolutely essential for that purpose,” economist Milton Friedman said in an interview… Friedman worked with the Treasury Department at the time withholding was introduced. Withholding stuck around after the war, much to Friedman’s chagrin. “Unfortunately, once you got it installed, it’s almost impossible to get rid of it,”  Friedman said. “It’s too useful to the people in power.”

Jeffrey Tucker of the Foundation for Economic Education elaborates.

The problem is…the withholding tax. Instead of being collected directly from the payer, the government  collects them “at the source,” which is to say that they are collected from the institution that pays wages and salaries — on behalf of the taxpayer. …one of the most amazingly brilliant innovations of the modern state. This tinkering with the system — the creation of the institution called withholding — has created an illusion that paying taxes is really about getting free money! When the check arrives from the government a month or so later, the taxpayer is actually tempted to think: wow, this is really great! A pillaging has been spun to look like a gift. …Withholding dramatically changed the psychology of paying taxes. It almost feels like you aren’t paying any at all. The worker gets used to how much after-tax income she makes and adapts to it quickly. Then when tax time arrives, there is no more to pay. Instead you file and find yourself on the receiving end of what seems like an unexpected gift of a check from government. Yet in reality your refund is nothing more than the belated return of a zero-interest loan you were forced to provide the government.

Exactly.

Every time I talk to somehow who is happy about a refund, I ask them whether they will give me an interest free loan instead. After all, I’d be happy to collect money from them all year long and then return it the following April.

But I’m digressing.

Jeffrey points out how the political dynamics of tax day would change in the absence of withholding.

If we really wanted to make a wonderful change in favor of transparency and decency, one that would mark a shift in people’s perceptions of the costs of government, the withholding tax could just be repealed completely. …every taxpayer would pay the full amount owed to the government every April 15 and otherwise receive full compensation the rest of the year. Such a seemingly small change would have a dramatic effect on public perceptions of taxation and government. Even from the age of 16, every citizen would have a more pungent reminder of the costs of government. We would no longer live the illusion that we can all get something for nothing and that government isn’t really expensive after all.

Ben Domenech of the Federalist agrees.

The overwhelming majority of Americans pay their taxes by having them extracted from their paychecks before they ever see the money. Operating under the fiction that the government is giving you money as opposed to returning what it has already taken is damaging to the psyche of the nation’s taxpayers. …Withholding was originally mandated as a wartime step, but its continuation since then disguises the property rights involved, essentially offers the government an interest free loan, and shields taxpayers from the ramifications of federal spending. The country would be better off if everyone experienced what entrepreneurs and business owners do: writing the most sizable checks every year to the government, and watching that hard-earned money walk out the door.

By the way, this isn’t merely impractical libertarian fantasy.

There’s a real-world example of a tax system where people actually write checks to the government and are much more aware of the cost of the public sector. It’s called Hong Kong, which is – not coincidentally – an economic success story in large part because of a good fiscal system.

And I would argue that good fiscal system exists because taxpayers are directly sensitive to the cost of government (it also helps that there’s a spending cap in Hong Kong).

Let’s close with some government propaganda. This Disney cartoon was produced before withholding. As you can see the government basically had to make the case that people should set aside money out of their paychecks so they would have enough money to make periodic tax payments.

This was a plausible case when seeking to finance a war against National Socialism and Japanese imperialism. It wouldn’t be nearly as persuasive today when the government seems to specialize in financing waste, fraud, and abuse.

P.S. At the bottom of this column, you can watch a much better cartoon from the 1940s.

The notion that government should automatically give everyone money – a policy known as “universal basic income” – is now getting a lot of attention.

From an economic perspective, I acknowledge that the idea should not be summarily rejected. Here’s some of what I wrote earlier this year.

…there actually is a reasonable argument that the current welfare state is so dysfunctional that it would be better to simply give everyone a check instead.

But I’m nonetheless very skeptical. Simply stated, the math doesn’t work, people would have less incentive to work, and there would be “public choice” pressures to expand the size of the checks.

So when the topic came up as part of a recent interview, I criticized the proposal and praised Swiss voters for rejecting – by an overwhelming margin – a referendum that would have created a basic income in that nation.

My reaction was probably even more hostile than normal because I don’t like it when guilt-ridden rich people try to atone for their wealth by giving away my money.

Moreover, it’s silly for Zuckerberg to use Alaska as an example because of its oil wealth and small population.

That being said, if I had more time, I would have been more nuanced and pointed out that we hopefully will learn more from some of the experiments that are happening around the world. Especially what’s happening on the other side of the north pole from Alaska.

The New York Times published an in-depth preview of Finland’s experiment late last year. Here’s a description of the problem that Finnish policymakers want to solve.

…this city has…thousands of skilled engineers in need of work. Many were laid off by Nokia… While entrepreneurs are eager to put these people to work, the rules of Finland’s generous social safety net effectively discourage this. Jobless people generally cannot earn additional income while collecting unemployment benefits or they risk losing that assistance. For laid-off workers from Nokia, simply collecting a guaranteed unemployment check often presents a better financial proposition than taking a leap with a start-up.

For anyone who has studied the impact of redistribution programs on incentives to work, this hardly comes as a surprise.

Indeed, the story has both data and anecdotes to illustrate how the Finnish welfare state is subsidizing idleness.

In the five years after suffering a job loss, a Finnish family of four that is eligible for housing assistance receives average benefits equal to 73 percent of previous wages, according to data from the Organization for Economic Cooperation and Development. That is nearly triple the level in the United States. …the social safety net…appears to be impeding the reinvigoration of the economy by discouraging unemployed people from working part time. …Mr. Saloranta has his eyes on a former Nokia employee who is masterly at developing prototypes. He only needs him part time. He could pay 2,000 euros a month (about $2,090). Yet this potential hire is bringing home more than that via his unemployment benefits. “It’s more profitable for him to just wait at home for some ideal job,” Mr. Saloranta complains.

So the Finnish government wants to see if a basic income can solve this problem.

…the Finnish government is exploring how to change that calculus, initiating an experiment in a form of social welfare: universal basic income. Early next year, the government plans to randomly select roughly 2,000 unemployed people — from white-collar coders to blue-collar construction workers. It will give them benefits automatically, absent bureaucratic hassle and minus penalties for amassing extra income. The government is eager to see what happens next. Will more people pursue jobs or start businesses? How many will stop working and squander their money on vodka? Will those liberated from the time-sucking entanglements of the unemployment system use their freedom to gain education, setting themselves up for promising new careers? …The answers — to be determined over a two-year trial — could shape social welfare policy far beyond Nordic terrain.

The results from this experiment will help answer some big questions.

…basic income confronts fundamental disagreements about human reality. If people are released from fears that — absent work — they risk finding themselves sleeping outdoors, will they devolve into freeloaders? “Some people think basic income will solve every problem under the sun, and some people think it’s from the hand of Satan and will destroy our work ethic,” says Olli Kangas, who oversees research at Kela, a Finnish government agency that administers many social welfare programs. “I’m hoping we can create some knowledge on this issue.” …Finland’s concerns are pragmatic. The government has no interest in freeing wage earners to write poetry. It is eager to generate more jobs.

As I noted above, this New York Times report was from late last year. It was a preview of Finland’s experiment.

People have been getting checks for several months. Are there any preliminary indications of the impact?

Well, the good news is that recipients apparently like getting free money. Here are some excerpts from a report by Business Insider.

…some of the 2,000 recipients are already reporting lower levels of stress. The $600 they receive each month might not be much, but it’s enough to put some people’s anxiety at ease.

But the bad news is that the handouts are giving people the flexibility to reject work.

Marjukka Turunen, head of Kela’s legal benefits unit, told Kera News. “There was this one woman who said: ‘I was afraid every time the phone would ring, that unemployment services are calling to offer me a job,'”… Scott Santens, a basic income advocate and writer…says basic income redistributes power into the middle-class — namely, to turn down unappealing jobs.

The last sentence of the excerpt is particularly worrisome. Some advocates think universal handouts are good precisely because people can work less.

It’s obviously too early to draw sweeping conclusions, especially based on a couple of anecdotes.

However, a recent column in the New York Times by two left-leaning Finns suggests that the data will not be favorable to universal handouts. The authors start with a basic explanation of the issue.

Universal basic income is generating considerable interest these days, from Bernie Sanders, who says he is “absolutely sympathetic” to the idea, to Mark Zuckerberg, Facebook’s chief executive, and other tech billionaires. The basic idea behind it is that handing out unconditional cash to all citizens, employed or not, would help reduce poverty and inequality… As a rich country in the European Union, with one of the highest rates of social spending in the world, Finland seemed like an ideal testing ground for a state-of-the-art social welfare experiment. …Kela, the national social-insurance institute, randomly selected 2,000 Finns between 25 and 58 years of age who were already getting some form of unemployment benefits. The subsidies were offered to people who had been unemployed for about one year or more, or who had less than six months of work experience.

But then they denigrate the study.

…the Finnish trial was poorly designed… The trial size was cut to one-fifth of what had originally been proposed, and is now too small to be scientifically viable. Instead of giving free money to everyone, the experiment is handing out, in effect, a form of unconditional unemployment benefits. In other words, there is nothing universal about this version of universal basic income. …The government has made no secret of the fact that its universal basic income experiment isn’t about liberating the poor or fighting inequality. Instead, the trial’s “primary goal” is “promoting employment,” the government explained in a 2016 document proposing the project to Parliament. Meaning: The project was always meant to incentivize people to accept low-paying and low-productivity jobs.

Maybe I’m reading between the lines, but it sounds like they are worried that the results ultimately will show that a basic income discourages labor supply.

Which reinforces my concerns about the entire concept.

Yes, the current system is bad for both poor people and taxpayers. But why would anyone think that we’ll get better results if we give generous handouts to everyone?

So if we replace all those handouts with one big universal handout, is there any reason to expect that somehow people will be more likely to find jobs and contribute to the economy?

Again, we need to wait another year or two before we have comprehensive data from Finland. But I’m skeptical that we’ll get a favorable outcome.

P.S. The Wizard-of-Id parody shown above contains a lot of insight about labor supply and incentives. As does this Chuck Asay cartoon and this Robert Gorrell cartoon.

P.P.S. Since I rarely write about Finland, I should point out that it is ranked #20 for economic liberty, only four spots behind the United States (and the country is more pro-market than America when looking at non-fiscal policy factors).

P.P.P.S. On the minus side, Finland has decided that broadband access is somehow a human right. On the plus side, the country’s central bank produces good research on the burden of government spending, and its former president understood the essential flaw of Keynesian economics.

In the eight years of writing this column, I’ve periodically confessed to certain fantasies. But you’ll notice that these fantasies don’t involve supermodels from Victoria’s Secret (though they did make a cameo appearance in one column).

Instead, either because I’m getting old or because I’m a dorky libertarian, my fantasies involve public policy. Here are imaginary things that have caused my pulse to quicken.

I now have a new fantasy. It involves Donald Trump. But the fantasy doesn’t involve the size of his hands, or any other body part.

Instead, I want President Trump to use his existing power to create irresistible pressure for Obamacare repeal.

Simply stated, I’m fantasizing that this tweet becomes reality.

Michael Cannon, my prescient colleague at the Cato Institute, has been urging this approach since the beginning of the year.

Here’s some of what he wrote for National Review.

Trump…can restore the Constitution’s limits on executive power, provide relief to Americans suffering under Obamacare, and hasten repeal.

Michael has a 14-point list, but here are the ones that matter for our purposes today.

First, put pressure on Congress.

1. End Congress’s illegal Obamacare exemption. Obamacare threw members of Congress and congressional staff out of their health plans and in effect cut their pay by up to $12,000 per year. Obama ignored the law and made illegal payments to private insurance companies on behalf of members of Congress and their staff for six years — all to prevent Congress from reopening the law. Trump should announce that he will end those illegal payments immediately, and that he will veto any bill restoring the pay cut that Obamacare dealt Congress, until Congress earns that money by repealing and replacing the law. Congress shouldn’t get an exemption from Obamacare until the American people do. Democrats who actually voted for Obamacare especially should have to live under it.

Second, put pressure on insurance companies.

2. End Obamacare’s unconstitutional cost-sharing subsidies. In House v. Burwell, a federal judge ruled that the Obama administration “violate[d] the Constitution” by paying billions of dollars in “cost-sharing” subsidies to private insurance companies without a congressional appropriation. Trump should immediately drop the Obama administration’s appeal of that decision, stop the unconstitutional payments, and prevent insurers from canceling Obamacare plans until 2018.

3. End Obamacare’s illegal “reinsurance” payments. The Government Accountability Office found that the Obama administration illegally diverted additional billions of dollars in “reinsurance” payments from the Treasury to private insurance companies. Trump should immediately stop the diversion of those funds and demand that insurers repay the more than $3 billion in unlawful payments they have received.

4. Block Big Insurance’s “risk-corridor” raid on the Treasury. The Obama administration tried to circumvent a statutory cap on “risk-corridor” payments to private insurance companies by offering to settle lawsuits filed by the insurers. Trump should immediately announce that his administration will not settle but will instead vigorously defend taxpayers’ interests in all such lawsuits.

Needless to say, the combination of angst-ridden folks on Capitol Hill and angst-ridden bigwigs from insurance companies would probably be more than enough to get weak-kneed Republicans to climb on board for repeal.

Indeed, in my fantasy, Trump uses his bully pulpit (and Twitter account) to specifically pressure those callow Republicans who voted for major repeal in 2015 and then flip-flopped and voted against various (usually partial) repeal proposals earlier this month.

Various media sources certainly agree that Trump has a huge amount of leverage.

Here are excerpts from a Bloomberg story.

Ending the CSR subsidies, paid monthly to insurers, is one way that Trump could hasten Obamacare’s demise without legislation, by prompting more companies to raise premiums in the individual market or stop offering coverage. …health-care analyst Spencer Perlman at Veda Partners LLC said in a research note that there’s a 30 percent chance Trump will end CSR payments, which may “immediately destabilize the exchanges, perhaps fatally.” …Many insurers have already dropped out of Obamacare markets in the face of mounting losses, and blamed the uncertainty over the future of the cost-sharing subsidies and the individual mandate as one of the reasons behind this year’s premium increases.

The Blaze has a similar report.

President Donald Trump announced on Saturday that if Congress doesn’t act soon on health care, he could end federal “BAILOUTS” for insurance companies, which could effectively force Congress to act or else put health insurance companies in the difficult position of having to raise rates on people who can’t afford to pay them or to leave Obamacare exchanges entirely. …The “BAILOUTS” to insurance companies Trump referred to in his tweet are “cost sharing reduction” payments… If Trump were to withhold these funds from health insurance companies, it would likely result in many insurers choosing to leave the Obamacare health insurance exchanges… If health insurance companies choose to leave the insurance exchanges, which is the most likely response, it could catalyze the collapse of the Obamacare exchange system, making it more difficult for members of Congress to wait on implementing a repeal and replace bill.

And here are passages from a Wall Street Journal story.

President Donald Trump made one of his most explicit threats to cut off payments to insurance companies to force senators and lobbyists back to the bargaining table for a GOP health-care bill, and saying, for the first time, that he was also willing to cancel some of lawmakers’ health-care benefits. …Those payments have been challenged in court by House Republicans, who argue the funds were never authorized by Congress. A federal judge has sided with the House but allowed the payments to continue until the litigation concludes. Democrats have said that cutting off the payments would be tantamount to sabotaging the insurance markets… Mr. Trump’s Saturday tweet…also the first to mention that he was open to another idea proposed by conservative activists to pull lawmakers back to the task of a health-care bill: cutting off their existing health benefits. …some lawmakers contending that it is an end-run around a provision in the 2010 health law that requires members of Congress to get their health coverage like other Americans.

Keep in mind, by the way, that this isn’t just a matter of political brinksmanship. The various payments to insurance companies are either not authorized by the law, or they were authorized and Congress has declined to appropriate funds. In other words, these payments make a mockery of the rule of law. They are illegal and/or unconstitutional.

Moreover, my former Heritage colleague Mike Needham has a good explanation of how the Obama Administration preposterously decided to classify Congress as a small business in order to enable subsidies that were not part of the Obamacare legislation. Once again, throwing the rule of law overboard for political convenience (which was a pattern with the previous Administration).

So even if Trump didn’t want to get rid of Obamacare, these payments should end.

But we may as well make a policy virtue out of legal necessity by getting rid of these payments as part of a campaign to pressure Capitol Hill to do what’s right and get rid of the disastrous Obamacare legislation.

P.S. Never forget that we wouldn’t be in this mess if John Roberts had upheld his oath and ruled that Obamacare was unconstitutional.

P.P.S. From the moment he emerged on the national stage, I’ve been worried that Donald Trump would preside over an expansion in the burden of government. But if there’s a libertarian bone in his body, it becomes apparent when he tweets. Not only did he tweet a very appropriate and effective threat against Obamacare yesterday, he also tweeted a very appropriate and effective threat about a government shutdown back in May.

P.P.S. It wasn’t one of my fantasies, but here’s something from 2013 about a libertarian fantasy dealing with ammo and sex.

As a former Connecticut resident, I’m ashamed that my home state, which used to be a success story with no income tax, has now morphed into a high-tax welfare state that is now increasingly infamous for the outflow of productive people and taxable income.

And even though I left several decades ago, I also feel vaguely guilty that my former state produces politicians such as Senator Chris Murphy.

Most people have never heard of him since he’s never accomplished anything in Washington. Though I would argue that’s a good thing since he’s a knee-jerk statist.

But I gather that Senator Murphy no longer wants to be in the shadows. Here’s a tweet he issued yesterday that has received a lot of publicity.

Wow, this is an astounding display of statolatry. The kind of statement one might expect from a functionary from a totalitarian regime.

Or maybe a line from George Orwell’s 1984. Just think of the implications:

  • Are you afraid of spiders? Hey, government can help!
  • Are there dandelions in your yard? Don’t worry, Big Brother to the rescue!
  • Did McDonald’s forget to include a toy in your Happy Meal? Time for political action!

While his views are reprehensible, I’m actually glad Senator Murphy inadvertently revealed his statism.

If nothing else, it’s produced some clever humor. The folks at Twitchy have been sharing this tweet, which came from a parody account for a North Korean news service.

By the way, if you’re like me and are not familiar with “Juche,” it’s apparently a North Korean twist on Marxism.

In other words, take the traditional horror of communism and then add a layer of autarky to ensure even greater misery.

And here’s another amusing take, juxtaposing Murphy’s statolatry with Reagan’s wisdom (see last video from this collection). And they even demoted him to Representative rather than Senator.

But we shouldn’t merely mock Murphy.

His views truly are reprehensible because they imply there is no element of human existence that is independent of government. The state is everything.

And if that sounds familiar, it’s probably because you know something about economics, philosophy, and history. The most evil people in world history have expressed the same sentiment.

Such as the leader of Germany’s National Socialist Workers Party.

And the first dictator of the Soviet Union.

Though if I had to pick the quote that is closest to Murphy’s, it would be this awful statement from Mussolini.

Senator Murphy obviously doesn’t share the horrid ideology of either national socialism or international socialism, so his version of statolatry is far more benign.

Sort of like this cartoon instead of gulags and concentration camps.

But I still think his views are reprehensible. We’re not children and the government is not our parents. America’s Founding Fathers strictly limited the powers of the federal government because they understood the risks of a coercive state dictating our lives. Even if it’s benign statism rather than totalitarian statism.

When I give speeches about the economic case for small government, one of my main points is that people in the private sector (workers, investors, managers, entrepreneurs, etc) are motivated by self interest to allocate labor and capital efficiently. To be more specific, the pursuit of higher pay and greater profit will lead people to allocate resources productively.

I freely admit that people in the private sector make mistakes (most new business ventures ultimately fail, for instance), but I explain that’s part of a dynamic process in a market economy. Every success and every mistake leads to feedback, both via the price system and also via profits and losses. All of which leads to continuous changes as people – especially entrepreneurs – seek to better serve the needs and wants of consumers, since that’s how they can increase their income and wealth.

In other words, Adam Smith was right when he said that self interest encourages people to focus on making others better off.

By contrast, when politicians and bureaucrats allocate resources (either directly via spending programs, or indirectly via regulation or tax distortions), feedback mechanisms are very weak. Once politicians intervene, they never seem to care if they are generating positive results. There are plenty of examples, however, of government imposing high costs while producing no benefits. Or even producing harm.

And let’s not forget that “Public Choice” teaches us that interest groups will manipulate government to obtain unearned benefits.

The main lesson from all this information is that it’s good to have small government rather than large government.

But there’s a secondary lesson about how the economic harm of government can be reduced if market forces somehow can be part of the process. And that’s why a new study from two Italian economists at the Centre for Economic and International Studies is worth sharing.

The abstract of the study is a good summary.

We empirically investigate the effect of oversight on contract outcomes in public procurement. In particular, we stress a distinction between public and private oversight: the former is a set of bureaucratic checks enacted by contracting offices, while the latter is carried out by private insurance companies whose money is at stake through so-called surety bonding. We analyze the universe of U.S. federal contracts in the period 2005-2015 and exploit an exogenous variation in the threshold for both sources of oversight, estimating their causal effects on costs and execution time. We find that: (i) public oversight negatively affects outcomes, in particular for less competent buyers; (ii) private oversight has a positive effect on outcomes by affecting both the ex-ante screening of bidders – altering the pool of winning firms – and the ex-post behavior of contractors.

In other words, normal bureaucratic waste, featherbedding, and cost overruns are less likely when the private sector does the oversight.

And here’s an excerpt from the text for those who want more details.

…we propose a distinction between public and private oversight, depending on its source. Public oversight includes all formal checks – cost certifications, pricing data transmission, production surveillance – which the contracting authorities enact during the contract awarding phase and execution. It typically involves considerable paperwork for both the buyer and the sellers. At the cost of some red tape, it is aimed at alleviating the moral hazard problem… On the other hand, private oversight involves third parties – surety companies – issuing bonds (surety bonds) to secure the buyer against unpredictable events. If the seller fails to fulfill contractual tasks, contracting authorities make claims to recover losses. A surety is then called on either to complete the public work by themselves (i.e. with their own resources or by subcontracting) or to refund the authority of the bond value. Being liable in case of unsatisfactory contract outcomes, the sureties have strong incentives both to screen bidders (ex ante) and to monitor contractors (ex post). They help mitigate the asymmetry of information between the buyer and the sellers thanks to their experience of the market – i.e. access to private information – and the screening enacted through price discrimination on premia, which directly affects offers placed by potential contractors. Hence, private oversight enhances the selection of the best contractors and provides a second tier of monitoring of contractors’ progresses.

This is encouraging. It would be nice to have smaller government, but it also would be nice to get the most bang for the buck when the government does spend money.

To be sure, there are probably many parts of government that are impervious to market forces.

But surely there are many ways to protect taxpayers by creating incentives to save money.

  • For instance, on the programmatic level, we can enlist the private sector to fight rampant Medicare and Medicaid fraud by allowing private investigators to keep a slice of any recovered funds.
  • And on the sectoral level, we can achieve big educational gains with school choice, thus giving schools a bottom-line incentive to attract students with better outcomes.
  • Last but not least, we can rely on the competitive impact of federalism to encourage better macroeconomic policy by state and local governments.

The moral of the story, needless to say, is that the private sector does a better job than government. So let’s do what we can to unleash market forces. Be more like Hong Kong and less like Venezuela.

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