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Posts Tagged ‘Big Government’

As a general rule, we worry too much about deficits and debt. Yes, red ink matters, but we should pay more attention to variables such as the overall burden of government spending and the structure of the tax system.

That being said, Greece shows that a nation can experience a crisis if investors no longer trust that a government is capable of “servicing” its debt (i.e., paying interest and principal to people and institutions that hold government bonds).

This doesn’t change the fact that Greece’s main fiscal problem is too much spending. It simply shows that it’s also important to recognize the side-effects of too much spending (if you have a brain tumor, that’s your main problem, even if crippling headaches are a side-effect of the tumor).

Anyhow, it’s quite likely that Italy will be the next nation to travel down this path.

This in in part because the Italian economy is moribund, as noted by the Wall Street Journal.

Italy’s national elections…featured populist promises of largess but neglected what economists have long said is the real Italian disease: The country has forgotten how to grow. …The Italian economy contracted deeply in Europe’s debt crisis earlier this decade. A belated recovery now under way yielded 1.5% growth in 2017—a full percentage point less than the eurozone as a whole and not enough to dispel Italians’ pervasive sense of national decline. Many European policy makers view Italy’s stasis as the likeliest cause of a future eurozone crisis.

Why would Italy be the cause of a future crisis?

For the simple reason that it is only the 4th-largest economy in Europe, but this chart from the Financial Times shows it has the most nominal debt.

So what’s the solution?

The obvious answer is to dramatically reduce the burden of government.

Interestingly, even the International Monetary Fund put forth a half-decent proposal based on revenue-neutral tax reform and modest spending restraint.

The scenario modeled assumes a permanent fiscal consolidation of about 2 percent of GDP (in the structural primary balance) over four years…, supported by a pro-growth mix of revenue and expenditure reforms… Two types of growth-friendly revenue and spending measures are considered along the envisaged fiscal consolidation path: shifting taxation from direct to indirect taxes, and lowering expenditure and shifting its composition from transfers to investment. On the revenue side, a lower labor tax wedge (1.5 percent of GDP) is offset by higher VAT collections (1 percent of GDP) and introducing a modern property tax (0.5 percent of GDP). On the expenditure side, spending on public consumption is lowered by 1.25 percent of GDP, while productive public investment spending is increased by 0.5 percent of GDP. The remaining portion of the fiscal consolidation, 1.25 percent of GDP, is implemented via reduced social transfers.

Not overly bold, to be sure, but I suppose I should be delighted that the IMF didn’t follow its usual approach and recommend big tax increases.

So are Italians ready to take my good advice, or even the so-so advice of the IMF?

Nope. They just had an election and the result is a government that wants more red ink.

The Wall Street Journal‘s editorial page is not impressed by the economic agenda of Italy’s putative new government.

Five-Star wants expansive welfare payments for poor Italians, revenues to pay for it not included. Italy’s public debt to GDP, at 132%, is already second-highest in the eurozone behind Greece. Poor Italians need more economic growth to generate job opportunities, not public handouts that discourage work. The League’s promise of a pro-growth 15% flat tax is a far better idea, especially in a country where tax avoidance is rife. The two parties would also reverse the 2011 Monti government pension reforms, which raised the retirement age and moved Italy toward a contribution-based benefit system. …Recent labor-market reforms may also be on the block.

Simply stated, Italy elected free-lunch politicians who promised big tax cuts and big spending increases. I like the first part of that lunch, but the overall meal doesn’t add up in a nation that has a very high debt level.

And I don’t think the government has a very sensible plan to make the numbers work.

…problematic for the rest of Europe are the two parties’ demand for an exemption from the European Union’s 3% GDP cap on annual budget deficits. …the two parties want the European Central Bank to cancel some €250 billion in Italian debt.

Demond Lachman of the American Enterprise Institute suggests this will lead to a fiscal crisis because of two factors. First, the economy is weak.

Anyone who thought that the Eurozone debt crisis was resolved has not been paying attention to economic and political developments in Italy…the recent Italian parliamentary election…saw a surge in support for populist political parties not known for their commitment to economic orthodoxy or to real economic reform. …To say that the Italian economy is in a very poor state would be a gross understatement. Over the past decade, Italy has managed to experience a triple-dip economic recession that has left the level of its economy today 5 percent below its pre-2008 peak. Meanwhile, Italy’s current unemployment level is around double that of its northern neighbors, while its youth unemployment continues to exceed 25 percent. …the country’s public debt to GDP ratio continued to rise to 133 percent, making the country the most indebted country in the Eurozone after Greece. …its banking system remains clogged with non-performing loans that still amount to 15 percent of its balance sheet…

Second, existing debt is high.

…having the world’s third-largest government bond market after Japan and the United States, with $2.5 trillion in bonds outstanding, Italy is simply too large a country for even Germany to save. …global policymakers…, it would seem not too early for them to start making contingency plans for a full blown Italian economic crisis.

Since he writes on issues I care about, I always enjoy reading Lachman’s work. Though I don’t always agree with his analysis.

Why, for instance, does he think an Italian fiscal crisis threatens the European currency?

…the Italian economy is far too large an economy to fail if the Euro is to survive in anything like its present form.

Would the dollar be threatened if (when?) Illinois goes bankrupt?

But let’s not get sidetracked.3

To give you an idea of the fairy-tale thinking of Italian politicians, I’ll close with this chart from L’Osservatorio on the fiscal impact of the government’s agenda. It’s in Italian, but all you need to know is that the promised tax cuts and spending increases are on the left side and the compensating savings (what we would call “pay-fors”) are on the right side.

Wow, makes me wonder if Italy has passed the point of no return.

By the way, Italy may be the next domino, but it’s not the only European nation with fiscal problems.

P.S. No wonder some people want Sardinia to secede from Italy and become part of “sensible” Switzerland.

P.P.S. Some leftists genuinely think the United States should emulate Italy.

P.P.P.S. As a fan of spending caps, I can’t resist pointing out that anti-deficit rules in Europe have not stopped politicians from expanding government.

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Ordinary Americans have a low opinion of Washington, but they’re underestimating the extent of the problem.

The nation’s capital is basically a playpen for special interests. It’s now the richest region of the country, with lobbyists, bureaucrats, contractors, politicians, and other insiders and cronies getting fat and happy thanks to money that is taken from people in the productive sector of the economy.

Republicans play the game and Democrats play the game, with both sides getting undeserved wealth at our expense.

Let’s take an up-close look at how this sordid game is played.

Here are some excerpts from a column by Catherine Rampell in today’s Washington Post.

The GOP is no longer the Party of Reagan. It’s the Party of Michael Cohen. …the Cohen blueprint for achieving the American Dream: Work minimally, if you can, and leverage government connections whenever possible. …following Donald Trump’s unexpected presidential victory, Cohen cashed in. …Cohen told companies that he could provide valuable “insights” into the new administration. Huge multinational corporations lined up to purchase these “insights,” dumping millions into Essential Consultants LLC… Cohen is hardly the only prominent Trumpster invoking White House connections… Cabinet members and other senior government officials, too, have enjoyed a sweetheart apartment deal, lobbyist-arranged vacations and private jet rides. These are not amenities secured through brains, honesty and hard work, the virtues that Republicans traditionally say are required for upward mobility and financial comfort. They are the fruits of luck, cronyism and a loose approach to ethical lines.

This is disgusting. Republicans often come to Washington claiming they’re going to “drain the swamp.” Many of them, however, quickly decide it’s a hot tub.

But don’t forget that sleaze is a bipartisan activity in Washington.

Here are excerpts from a Wall Street Journal report about influence-peddling on the other side of the aisle.

Tony Podesta was in line to be king of K Street. His lobbying firm ended 2015 as the third largest in Washington, D.C., with nearly $30 million in revenue from more than 100 clients, spanning Alphabet Inc.’s Google to Wells Fargo & Co. With his longtime friend Hillary Clinton expected to win the White House, 2016 promised to be even better. Mr. Podesta…hosted lawmakers and power brokers at his flat in Venice during the Art Biennale. It was one of many homes around the globe, including the Washington mansion where he displayed a collection of museum-grade artwork. In early 2016, he was ready to buy a $7.4 million condo overlooking Madison Square Park in New York City. …At age 59, he married Heather Miller, a congressional staffer 26 years younger. …Mrs. Podesta started her own lobbying firm, Heather Podesta + Partners, and they emerged a Washington power couple. …Mr. Podesta drew an annual salary of more than $2 million and made millions more in commissions and bonuses. …The Podesta Group grew from the 20th largest lobbying firm to third in three years, in terms of domestic and foreign lobbying revenues, propelled by business during President Barack Obama’s first term.

But this story of graft and corruption has a happy ending.

Then he fell, a calamitous collapse… The Podesta Group lost its banker over news the firm did work for the U.S. subsidiary of a Russian bank under sanctions. …Mrs. Clinton’s…victory would go a long way to fixing many of his problems. She lost…and Mr. Podesta, like many who had banked on her victory, did too. Clients who had hired him for access to a new Clinton administration fell away. By the end of the year, the departures cost the firm more than $10 million in annual business… the Podesta Group did public relations work in 2015 for Raffaello Follieri, an Italian businessman who had pleaded guilty to swindling millions of dollars from an investment fund run partly by Mr. Clinton, one of Mr. Podesta’s early patrons. …Before closing the firm’s doors, Mr. Podesta gave himself an advance on his lobbying commissions.

The common theme, as explained by Karen Tumulty for the Washington Post, is that D.C. is an utterly corrupt place.

…the game in Washington never really changes. The only things that shift from election to election are the most sought-after players. …When Trump won, the traditional rosters of lobbyists — ex-congressmen, lawyers from white-shoe firms, former congressional staffers — were of little use in figuring out and gaining access to a band of outsiders who came to town vowing to demolish the old order. Cohen was not the only Trump insider to see a chance to cash in… The president’s former campaign manager, Corey Lewandowski, along with former Trump aide Barry Bennett, also opened a consulting firm, which quickly had more business than it could handle. “It was like shooting fish in the barrel,” Bennett told The Post. …Nor is Team Trump unique in seizing these opportunities. President Barack Obama had not been in office a month before his 2008 campaign manager, David Plouffe, was paid $50,000 to give a speech in Azerbaijan to a group with close ties to that repressive government. …Washington continues to have a most durable ecosystem: The swamp is never drained; it just gets taken over by different reptiles.

Utterly nauseating.

But allow me to point out that lobbying isn’t inherently bad. And neither are campaign contributions. It all depends on the reason.

If a company hires a lobbyist or give cash to a politician because it wants handouts or government intervention that will produce unearned profit, that’s wrong. Sort of like being a co-conspirator to a crime.

However, if a company hires a lobbyist and donates money because it is fighting tax hikes or new regulatory burdens, that’s noble and just. Sort of like engaging in an act of self-defense.

But wouldn’t it be wonderful if there wasn’t a need for either the bad type of lobbying or the good type of lobbying?

Richard Ebeling, a professor at the Citadel, offers a very good solution in a column for the Foundation for Economic Education. He starts by explaining that government and corruption have always been connected.

The corruption of government officials seems to be as old as recorded history. …the ancient Roman senate passed laws against such political corruption in the first century, B.C. …Emperor Constantine issued one of the strongest decrees against corruption during this time in A.D. 331. …Today, high levels of political corruption remain one of the major problems people confront around the world. …Political corruption, clearly, is found everywhere around the world… Why?

Richard answers his own question, pointing out that big government is a major enabler of corruption.

Part of the answer certainly…can be found in the relationship between the level of corruption in society and the degree of government intervention in the marketplace. In a generally free market society, …government officials have few regulatory or redistributive responsibilities, and therefore they have few special favors, privileges, benefits, or dispensations to “sell”… The smaller the range of government activities, therefore, the less politicians or bureaucrats have to sell to voters and special interest groups. And the smaller the incentive or need for citizens to have to bribe government officials to allow them to peacefully go about their private business and personal affairs. …On the other hand, the…interventionist state…taxes the public and has huge sums of money to disburse to various programs and projects. It imposes licensing and regulatory restrictions on free and open competition. It transfers great amounts of income and wealth to different groups through sundry “redistributive” schemes. …Those in the government who wield these powers hold the fate of virtually everyone in their decision-making hands. It is inevitable that those drawn to employment in the political arena often will see the potential for personal gain… The business of the interventionist state, therefore, is the buying and selling of favors and privileges. It must lead to corruption because by necessity it uses political power to harm some for the benefit of others, and those expecting to be either harmed or benefited will inevitably try to influence what those holding power do with it.

So what’s the bottom line?

Ending global political corruption in its various “petty” and “grand” forms, therefore, will only come with the removal of government from social and economic life. When government is limited to protecting our lives and property, there will be little left to buy and sell politically.

Amen. That’s the message I also shared in this video from the Center for Freedom and Prosperity.

Sadly, Donald Trump’s promises to “drain the swamp” don’t seem to have been very sincere. Earlier this year, he meekly acquiesced to a budget deal that produced a feeding frenzy among the swamp creatures.

How is that any different from what would have happened if Hillary Clinton was in the White House? Big government doesn’t magically become less harmful and corrupt just because Republicans are in charge.

Indeed, there’s some hard evidence the problem actually becomes worse.

As Ms. Tumulty wrote, “Same swamp, different reptiles.”

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A couple of months ago, I thought I did something meaningful by sharing six separate examples of the International Monetary Fund pressuring sub-Saharan African nations to impose higher tax burdens. This was evidence, I suggested, that the IMF had a disturbing agenda of bigger government for the entire region.

I didn’t imply the bureaucrats were motivated by racism. After all, the IMF has pushed for higher taxes in the United States, in China, in Latin America, in the Middle East, and in Europe. (folks who work at the IMF don’t pay taxes on their own salaries, but they clearly believe in equal opportunity when urging higher taxes for everyone else).

Nonetheless, I thought it was scandalous that the IMF was systematically agitating for taxes in a region that desperately needs more investment and entrepreneurship. And my six examples were proof of a continent-wide agenda!

But it turns out that I wasn’t exposing some sort of sinister secret. The IMF just published a new report where the bureaucrats openly argue that there should be big tax hikes in all sub-Saharan nations.

Domestic revenue mobilization is one of the most pressing policy challenges facing sub-Saharan African countries. …the region as a whole could mobilize about 3 to 5 percent of GDP, on average, in additional revenues. …domestic revenue mobilization should be a key component of any fiscal consolidation strategy. Absent adequate efforts to raise domestic revenues, fiscal consolidation tends to rely excessively on reductions in public spending.

Notice, by the way, the term “domestic revenue mobilization.” Such a charming euphemism for higher taxes.

And it’s also worth pointing out that the IMF openly urges more revenue so that governments don’t have to impose spending restraint.

Moreover, the IMF is happy that there have been “substantial gains in revenue mobilization” over the past two decades.

Over the past three decades, many sub-Saharan African countries have achieved substantial gains in revenue mobilization. For the median sub-Saharan African economy, total revenue excluding grants increased from around 14 percent of GDP in the mid-1990s, to more than 18 percent in 2016, while tax revenue increased from 11 to 15 percent. …Two-thirds of sub-Saharan African countries now have revenue ratios above 15 percent, compared with fewer than half in 1995. …the region still has the lowest revenue-to-GDP ratio compared to other regions in the world. The good news is that there are signs of convergence. Over the past three decades, the increase in sub-Saharan Africa’s revenue ratio has been double that for all emerging market and developing economies.

To the bureaucrats at the IMF, the “convergence” toward higher taxes is “good news.”

However, there is some data in the report that is genuine good news.

In most regions of the world, there has been a trend in recent years toward reducing rates for the CIT and the personal income tax (PIT). In sub-Saharan African countries, the average top PIT rate has been reduced from about 44 to 32 percent since 2000, while average top CIT rates have been reduced by more than 5 percentage points during the same period.

Here are two charts showing the decline in tax rates, not only in Africa, but in most other regions.

By the way, the IMF bureaucrats appear to be surprised that revenues went up as tax rates went down. I guess they’ve never heard of the Laffer Curve.

Despite this decline in rates, total direct taxes (PIT and CIT) as a percentage of GDP have been trending upward.

But the IMF obviously didn’t learn from this evidence (or from the evidence it shared last year).

Rather than proposing lower tax rates, the report urges a plethora of tax hikes.

Successful experiences in revenue mobilization have relied on efforts to implement broad-based VATs, gradually expand the base for direct taxes (CIT and PIT), and implement a system to tax small businesses and levy excises on a few key items.

Wow. I don’t know what’s worse, claiming that tax increases are good for growth, or pushing higher taxes in the world’s poorest region.

Let’s close by debunking the IMF’s absurd contention that bigger government would be good for Africa.

I suppose the simplest response would be to share my video series about the economics of government spending, especially since I cite a wealth of academic research.

But let’s take an even simpler approach. The IMF report complained that governments in sub-Saharan Africa don’t have enough money to spend.

The good news, as illustrated by this chart (based on data from the bureaucracy’s World Economic Outlook database), is that the IMF is accurate about relative fiscal burdens.

The bad news is that the IMF wants us to believe that a low fiscal burden is a bad thing. The bureaucrats at the IMF (and at other international bureaucracies) actually want people to believe that bigger government means more prosperity. Which is why the report urges big tax hikes.

But you won’t be surprised to learn that the IMF doesn’t provide any evidence for this bizarre assertion.

Though I’ve had folks on the left sometimes tell me that bigger government must be good for growth because rich nations in the western world have bigger governments while poor nations in Africa have comparatively small governments.

If you want to get in the weeds of public finance theory, the IMF bureaucrats are misinterpreting Wagner’s Law.

But there’s no need to delve into theory. When people make this assertion to me, I challenge them to identify a poor nation that ever became a rich nation with big government.

It’s true, of course, that there are rich nations that have big governments, but all of those countries became rich in the 1800s when government was very small and welfare state programs were basically nonexistent.

So let’s take the previous chart, which supposedly showed too little spending in sub-Saharan Africa, and add another column (in red) showing the level of government spending in North America and Western Europe in the 1800s.

The obvious takeaway is that African nations should cut taxes and reducing spending. The exact opposite of what the IMF recommends.

In other words, the IMF’s agenda of bigger government and higher taxes is a recipe for continued poverty.

But keep in mind that fiscal policy is just one piece of the puzzle. As explained in Economic Freedom of the World, a nation’s prosperity also is affected by regulatory policy, trade policy, monetary policy, and quality of governance.

And nations in sub-Saharan Africa generally score even lower in those areas than they do for fiscal policy. So while those countries should reduce their fiscal burdens, it’s probably even more important for them to address other policy mistakes.

To end on an upbeat note, here’s a video from Reason about how free markets can help bring prosperity to Africa.

I also recommend this video from the Center for Freedom and Prosperity since it does a great job of debunking the argument that higher taxes and bigger government are a recipe for prosperity.

And this video about Botswana is a good case study of how African nations can enjoy more prosperity with market-oriented policy.

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When I wrote about “crazy Bernie Sanders” in 2016, I wasn’t just engaging in literary hyperbole. The Vermont Senator is basically an unreconstructed leftist with a disturbing affinity for crackpot ideas and totalitarian regimes.

His campaign agenda that year was an orgy of new taxes and higher spending.

Though it’s worth noting that he’s at least crafty enough to steer clear of pure socialism. He wants massive increases in taxes, spending, and regulation, but even he doesn’t openly advocate government ownership of factories.

Then again, there probably wouldn’t be any factories to nationalize if Sanders was ever successful in saddling the nation with a Greek-sized public sector.

He’s already advocated a “Medicare-for-All” scheme with a 10-year price tag of $15 trillion, for instance. And now he has a new multi-trillion dollar proposal for guaranteed jobs.

In a column for the Washington Post, Robert Samuelson dissects Bernie’s latest vote-buying scheme. Here’s a description of what Senator Sanders apparently wants.

Sen. Bernie Sanders (I-Vt.) wants the federal government to guarantee a job for every American willing and able to work. The proposal sounds compassionate and enlightened, but in practice, it would almost certainly be a disaster. …Just precisely how Sanders’s scheme would work is unclear, because he hasn’t yet submitted detailed legislation. However, …a job-guarantee plan devised by economists at Bard College’s Levy Economics Institute…suggests how a job guarantee might function. …anyone needing a job could get one at a uniform wage of $15 an hour, plus health insurance (probably Medicare) and other benefits (importantly: child care). When fully deployed, the program would create 15 million public-service jobs, estimate the economists. …the federal government would pay the costs, the program would be administered by states, localities and nonprofit organizations.

As you might expect, the fiscal costs would be staggering (and, like most government programs, would wind up being even more expensive than advertised).

This would be huge: about five times the number of existing federal jobs (2.8 million) and triple the number of state government jobs (5 million). …The proposal would add to already swollen federal budget deficits. The Bard economists put the annual cost at about $400 billion. …overall spending is likely underestimated.

But the budgetary costs would just be the beginning.

Bernie’s scheme would basically destroy a big chunk of the job market since people in low-wage and entry-level jobs would seek to take advantage of the new government giveaway.

…uncovered workers might stage a political rebellion or switch from today’s low-paying private-sector jobs to the better-paid public-service jobs… The same logic applies to child-care subsidies.

And there are many other unanswered questions about how the plan would work.

Does the federal government have the managerial competence to oversee the creation of so many jobs? …Can the new workers be disciplined? …Finally, would state and local governments substitute federally funded jobs for existing jobs that are supported by local taxes?

If the plan ever got adopted, the only silver lining to the dark cloud is that it would provide additional evidence that government programs don’t work.

The irony is that, by assigning government tasks likely to fail, the advocates of activist government bring government into disrepute.

But that silver lining won’t matter much since a bigger chunk of the population will be hooked on the heroin of government dependency.

In other words, just as it’s now difficult to repeal Obamacare even though we know it doesn’t work, it also would be difficult to repeal make-work government jobs.

So we may have plenty of opportunity to mock Bernie Sanders, but he may wind up with the last laugh.

P.S. Regarding getting people into productive work, I figure the least destructive approach would be “job training” programs.

Beyond that, I’m not sure whether make-work government jobs are more harmful or basic income is more harmful.

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I wrote last July about how greedy politicians in Seattle, Washington, were trying to impose a local income tax.

That effort has been stymied since there’s anti-income-tax language in the state constitution (Washington is one of nine states without that punitive levy), but that doesn’t mean the city’s tax-and-spend crowd has given up.

There’s a proposal for a new scheme to impose a “head tax” on successful companies.

The top three percent of the high grossing businesses in Seattle will carry the load of Seattle’s proposed employee head tax. Backers are calling it the “Progressive Tax on Business.” The tax will apply only to those companies with $20 million or more annually in taxable gross receipts as measured under the City’s Business and Occupation tax. The city estimates that will be 500 businesses. …the tax is based on total revenues and not net-income. …Councilmember Mike Obrien has been pushing to a head tax for two years and doesn’t believe businesses will leave Seattle because of it.

I suppose this might be a good opportunity to point out that this tax is bad for growth and that it will encourage out-migration from the city.

Or perhaps I could make a wonky point about how this tax is related to the income tax in the same way a gross receipts tax is related to a sales tax.

But I’m motivated instead to focus on the very heartening response to this tax grab by both business and labor.

Here’s how the city’s leading employer is responding.

Amazon is…making its opposition known to a proposed Seattle tax by bringing a halt to all planning on a massive project scheduled for construction in Downtown Seattle, and may tweak its plans to occupy a new downtown skyscraper. “I can confirm that pending the outcome of the head tax vote by City Council, Amazon has paused all construction planning on our Block 18 project in downtown Seattle and is evaluating options to sub-lease all space in our recently leased Rainier Square building,” says Amazon Vice President Drew Herdener. …Jon Scholes, president of the Downtown Seattle Association, said the City Council should take heed of Amazon’s decision.

But some of the class-warfare politicians are oblivious to real-world concerns.

Two supporters of the tax, City Council members Kshama Sawant and Mike O’Brien, seemed unmoved by Amazon’s decision. “I understand Amazon doesn’t like it. I’m sure they would love to go to a city that has no taxes. And maybe they will find that place,” O’Brien said. …Added Sawant, “Amazon is perfectly capable of paying that, double, even four times that.” She also called Amazon’s tactic “extortion.”

I don’t know if Sawant is an idiot or a demagogue. What’s she’s basically arguing is that if a victim runs away from a mugger, the victim is an extortionist.

Wow, that’s a novel (and French) way of looking at the world.

That being said, there’s probably nothing surprising about the business community resisting a tax on business. So here’s the part of the story that really warms my heart.

Private-sector workers also are protesting.

Construction workers shouted down Seattle City Councilmember Kshama Sawant on Thursday as she attempted to speak in favor of Seattle ‘s proposed new “head tax” at an open-air news conference. The construction workers shouted “No head tax!” each time Sawant tried to speak in favor of the measure… The conference, held outside Amazon’s Spheres, was intended to show support for the head tax and opposition to Amazon’s announcement of a construction pause on a massive downtown construction project. But the group of about 20 construction workers showed up and drowned out Sawant’s message. …construction workers…praised Amazon for providing well-paying jobs to thousands of Seattle-area residents.

Unsurprisingly, Ms. Sawant doesn’t care about workers. She simply wants the money so she can buy votes.

Amazon would pay more than $20 million of that total under the proposal. …Sawant maintains that Amazon could easily afford to pay that amount.

Let’s close with some good news. Seattle isn’t normally considered a hotbed of free market thinking (though a disproportionate share of my readers are in the state of Washington).

So I’m guessing Ms. Sawant and her greedy colleagues probably are not very happy about this (admittedly unscientific) polling data.

This is very encouraging. Hopefully it’s a sign of the good things that can happen with private workers (unionized or not) and private employers join forces to protect themselves from politicians.

It will be interesting to see how the City Council responds. If they move forward with this tax grab, Seattle truly will be in the running to the Greece of America.

And if that trend continues, don’t be surprised if Amazon’s soon-to-be-announced second headquarters eventually morphs into its primary headquarters (hopefully without any cronyism).

P.S. It goes without saying (but I’ll say it anyhow) that the state of Washington should never, ever, allow a state income tax.

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Because of their aggressive support for bigger government, my least-favorite international bureaucracies are the International Monetary Fund and the Organization for Economic Cooperation and Development.

But I’m increasingly displeased by the European Bank for Reconstruction and Development, which is another international bureaucracy (like the OECD and IMF) that is backed by American taxpayers.

And what does it do with our money? As I explained earlier this month in this short speech to the European Resource Bank in Prague, the EBRD undermines growth with cronyist policies that distort the allocation of capital.

In some sense, the argument against the EBRD is no different than the standard argument against foreign aid. Simply stated, you don’t generate growth by having the government of a rich nation give money to the government of a poor nation.

Poor nations instead need to adopt good policy – something that’s less likely when profligate and corrupt governments in the developing world are propped up by handouts.

That being said, the downsides of the EBRD go well beyond the normal problems of foreign aid.

I recently authored a study on this bureaucracy for the Center for Freedom and Prosperity.

Here are some of the main findings.

The EBRD was created with the best of intentions. The collapse of communism was an unprecedented and largely unexpected event, and policymakers wanted to encourage and facilitate a shift to markets and democracy. …But good intentions don’t necessarily mean good results. Especially when the core premise was that growth somehow would be stimulated and enabled by the creation of another multilateral government bureaucracy. …Unfortunately, even though its founding documents pay homage to markets…, there’s nothing in the track record of the EBRD that indicates it has learned from pro-intervention and pro-statism mistakes made by older international aid organizations. Indeed, there’s no positive track record whatsoever.

• There is no evidence that nations receiving subsidies and other forms of assistance grow faster than similar nations that don’t get aid from the EBRD.
• There is no evidence that nations receiving subsidies and other forms of assistance enjoy more job creation than similar nations that don’t get aid from the EBRD,
• There is no evidence that nations receiving subsidies and other forms of assistance have better social outcomes than similar nations that don’t get aid from the EBRD.

I also delved into three specific downsides of the EBRD, starting with its role in misallocating capital.

In a normal economy, savers, investors, intermediaries, entrepreneurs, and others make decisions on what projects get funded and what businesses attract investment. These private-sector participants have “skin in the game” and relentlessly seek to balance risk and reward. Wise decisions are rewarded by profit, which often is a signal for additional investment to help satisfy consumer desires. There’s also an incentive to quickly disengage from failing projects and investments that don’t produce goods and services valued by consumers. Profit and loss are an effective feedback mechanism to ensure that resources are constantly being reshuffled in ways that produce the most prosperity for people. The EBRD interferes with that process. Every euro it allocates necessarily diverts capital from more optimal uses.

I explain why taxpayers shouldn’t be subsidizing cronyism.

…the EBRD is in the business of “picking winners and losers.” This means that intervention by the bureaucracy necessarily distorts competitive markets. Any firm that gets money from the EBRD is going to have a significant advantage over rival companies. Preferential financing for hand-picked firms from the EBRD also is a way of deterring new companies from getting started since there is not a level playing field or honest competition. … cronyism is a threat to prosperity. It means the playing field is unlevel and that those with political connections have an unfair advantage over those who compete fairly. To make matters worse, nations that receive funds from the ERBD already get dismal scores from Economic Freedom of the World for the two subcategories (“government enterprises and investment” and “business regulations”) that presumably are the best proxies for cronyism.

Here’s a chart from the study showing that recipient nations already get low scores from Economic Freedom of the World for variables that reflect the degree of cronyism in an economy.

Last but not least, I warn that the EBRD enables and facilitates corruption.

When governments have power to arbitrarily disburse large sums of money, that is a recipe for unsavory behavior. For all intents and purposes, the practice of cronyism is a prerequisite for corruption. The EBRD openly brags about the money it steers to private hands, so is it any surprise that people will engage in dodgy behavior in order to turn those public funds into private loot? …Recipient nations get comparatively poor scores for “legal system and property rights” from Economic Freedom of the World. They also do relatively poorly when looking at the World Bank’s “governance indicators.” And they also have disappointing numbers from Transparency International’s “corruption perceptions index.” So, it’s no surprise that monies ostensibly disbursed for the purpose of development assistance wind up lining the pockets of corrupt insiders. For all intents and purposes, the EBRD and other dispensers of aid enable and sustain patterns of corruption.

And here’s the chart showing that recipient nations have poor quality of governance, which means that EBRD funds are especially likely to get misused.

I also cite several EBRD documents that illustrates the bureaucracy’s hostility for free markets and limited government.

Just in case you didn’t want to watch the entire video, here’s the relevant slide from my presentation.

And remember that your tax dollars back this European bureaucracy. Indeed, American taxpayers have a larger exposure than any of the European countries.

P.S. I’m also not a fan of the United Nations, though I take comfort in the fact that the UN is not very effective in pushing statist policy.

P.P.S. I’m most tolerant of the World Bank, though that bureaucracy periodically does foolish things as well.

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The good news is that some honest leftists have thrown in the towel and now openly admit that capitalism generates more prosperity.

They still don’t want free markets, of course. For ideological reasons, they continue to push for a big welfare state. But at least they admit their redistributionist policies lead to weaker economic performance. Perversely, they are willing to reduce living standards for poor people so long as rich people suffer even bigger drops in their income (in other words, Thatcher was right).

Many statists, though, realize that this is not a compelling agenda.

So they try to claim – notwithstanding reams of evidence – that bigger government somehow enables more growth.

And they’re crafty. Most of them are clever enough that they don’t embrace full-scale socialism. Instead, they push for an ad hoc approach based on subsidies, bailouts, social engineering, price controls, and other forms of intervention.

If you want to get technical, they’re actually pushing a variant of fascism, with nominal private ownership but government direction and control.

But let’s avoid that loaded term and simply call it cronyism.

In a column for the Washington Post, Nicholas Borroz observes that this approach exists all over the world.

China’s consolidation of its state-owned enterprises (SOEs), Russia’s oligarch-led economy, the proliferation of sovereign wealth funds (SWFs) and growing government intervention in the West are clear indicators of state-led capitalism… Controlling market activity gives governments obvious advantages when it comes to advancing political agendas at home and foreign policy abroad. …SWFs are an important feature of today’s global economic landscape; governments also use them as agents of statecraft. …State-led capitalism is even finding support in the West. …President Trump has bragged that he personally influences firms’ decisions about where to place their factories. …we have entered an era when state-led capitalism is firmly entrenched.

Unfortunately, I think Mr. Borroz is correct.

Though “state-led capitalism” an oxymoronic phrase.

Borroz also notes that the shift to cronyism reverses some of the progress that occurred at the end of the 20th century.

This is a dramatic reversal of the trend from two decades ago. In the 1990s, there was a rush around the world to liberalize economies. Capitalism’s defeat of communism made it seem that unfettered market activity was the key to success.

If you look at the data from Economic Freedom of the World, the period of liberalization actually began in the 1980s, but I’m being a nit-picker.

So let’s shift to parts of his column where I have substantive disagreements.

First, my jaw hit the proverbial floor when I read the part about the International Monetary Fund supposedly being a beacon of free-market reform.

Developing countries signed up with the International Monetary Fund’s structural adjustment programs (SAPs), gaining access to loans in exchange for adopting neoliberal economic prescriptions.

Since I’ve referred to the IMF as the “dumpster fire” or “Dr. Kevorkian” of the global economy, I obviously have a different perspective.

Though, to be fair, the bureaucrats at the IMF generally do advocate for deregulation and free trade. But they are bad news on fiscal policy and oftentimes misguided on monetary policy as well.

But here’s the part of the column that is even more galling. Borroz defends cronyism because free markets allegedly failed.

…a number of factors led to skepticism about free markets. One was the underwhelming developmental effect of SAPs and liberalization. …A further blow to the neoliberal model was a series of financial disasters caused by unrestricted flows of capital, notably the 1997 Asian financial crisis and the 2008 global financial crisis. Perhaps the factor that has most undermined neoliberalism’s attractiveness, though, is…countries with state-led economies, such as China and Russia…remain relevant not despite state intervention but because of it.

This is remarkably wrong. Three big mistakes in a handful of sentences.

  1. When IMF structural adjustment programs fail, that’s an unsurprising consequence of big tax increases, not the fault of capitalism.
  2. Government monetary policy deserves the bulk of the blame for financial crises with Fannie and Freddie also playing a role in the case of America.
  3. China and Russia are relevant from a geopolitical perspective, but their economies could be far more prosperous if government played a smaller role.

Heck, per-capita output in both China and Russia is far below U.S. levels, so the notion that they are role models is amazingly oblivious to reality.

Now let’s review some evidence about the downside of “state-led” economic policy.

The Economist notes that cronyism does not have a very successful track record.

Some argue it makes no sense for a government to place VC bets, directly or otherwise. …Massimo Colombo, an academic who studies government VC in Europe at the Polytechnic University of Milan, …admits that, when results are measured by jobs created or productivity boosted, the private sector is far better at deploying capital. Studying 25,000 government VC investments in 28 countries, between 2000 and 2014, he and colleagues concluded that they worked only when they did not compete directly with the private sector.

And research from three economists at Italy’s central bank specifically measured the loss of economic efficiency when governments operate and control businesses.

In OECD countries public services, especially at local level, are often provided by public enterprises (Saussier and Klien, 2014). Therefore, the efficiency of LPEs is important for the overall efficiency of the economy and the sustainability of public finances. …we are able to build a very detailed dataset that allows us to compare firms that are observationally equivalent, apart from the ownership indicator, thus making possible the definition of the appropriate set of comparison firms. …Although we focus on Italy, which represents a particularly interesting case to analyze for several reasons, the approach we have followed in this paper may be easily adapted to other countries. We find that the performance of Italian LPEs, measured in terms of total factor productivity, is on average lower than that of private enterprises by about 8%… our results show that the ownership structure is more important than the market structure in explaining the performance of LPEs with respect to their private sector counterparts. …Our results imply that policy measures aimed at privatizing LPEs (totally or, at least, partially) can improve their performance, by reducing the level of public control and promoting cost-benefit analysis for investments.

In other words, the type of statism doesn’t really matter.

The inevitable result is less growth and prosperity.

Which is why I advocate “separation of business and state.”

Simply stated, I want to reverse the data in this chart because I understand the data in this video and this chart.

P.S. If my statist friends disagree, accept my challenge and please show me a cronyist nation that is outperforming a market-oriented nation.

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