Market-Driven Growth and the Asian Tigers

I’m currently in Tanzania as part of a speaking tour in Africa. My remarks today largely repeated the message I gave to an audience last week in Nigeria.

So I won’t bother sharing anything from my presentation. Instead, I want to highlight some numbers from a presentation by Professor Ken Schoolland.

He shared some data showing how the “Asian Tigers” grew far faster than major Latin American nations between 1950 and 2000.

These are very impressive examples of convergence (as the Asian Tigers caught up with Latin America) followed by divergence (as the Tigers then continued to grow much faster).

I’ll be adding this data to my “anti-convergence club.”

But I also noticed that Professor Schoolland was sharing some old data from 1995.

So I went to the Maddison website and created some new charts based on the latest-available data.

As you can see, the Latin American nations were richer in 1950, but they have not enjoyed fast growth in the past 70 years.

By contrast, the Asian Tigers have enjoyed spectacular growth since 1950.

So not only are these nations much more prosperous than nations in Latin America, in most cases they have even surpassed European countries and Singapore is now richer than the United States.

Since I’m writing about the success of the Asian Tigers, let’s address the myth that they became rich because of industrial policy.

Sam Gregg of the Acton Institute examined this controversy in an article for Law & Liberty.

…what about some of the East Asian Tiger countries? Aren’t they proof that, when devised and implemented by wise governments guided by even cleverer experts, industrial policy can work? …There is, however, a wealth of evidence indicating that these policies produced similarly pedestrian outcomes in these countries. As for the Tigers, what primarily took them from the status of economic backwaters to first-world economies was economic liberalization and especially trade openness… Even the most devoted industrial policy advocates hesitate to present two of the Tigers, Singapore and Hong Kong, as industrial policy successes. They do nevertheless regard South Korea and Taiwan’s postwar histories as demonstrating why industrial policy should play a major role.

Gregg takes a close look at what actually happened in South Korea.

Beginning in 1954 and until about 1963, Korea’s government focused upon import-substitution industrialization policies… however,…economic growth in Korea only began taking off between 1963 and 1973 following a decisive shift towards export-orientated development and trade openness. …Industrial policy assumed a larger place in Korea’s economy in the mid-1970s. …Korea’s turn towards industrial policy in this period does not appear to have produced spectacular results. Economic growth during this period—whether in terms of GDP, trade, employment, manufacturing output, or exports in goods and services—was actually lower than what had been realized in the 1960s. …These results may help explain why Korea’s drift towards industrial policy was reversed, beginning in the late-1970s. …The overall result was a return to high growth throughout Korea’s economy.

And here’s his analysis of what happened in Taiwan.

…the Kuomintang government adopted an import-substitution approach to trade characterized by high tariffs and import quotas. The Taiwan Production Board oversaw the extensive use of industrial policy, especially through preferential loan-treatment… In the mid-1950s, key Taiwanese officials and their American advisors recognized that Taiwan could not keep going down this path. Hence in the late-1950s, decisions were made that re-orientated Taiwan’s economy towards competition and trade openness by, among other things, liberalizing imports and foreign investment rules as well as beginning a process of steadily removing export controls and gradually giving more and more exporters what amounted to a free trade status. As in Korea’s case, growth in Taiwan took off. …the general direction of Taiwan’s economy from 1958 onwards was away from industrial policy and tariffs and towards increasing integration into global markets. Like Korea, Taiwan underwent a limited return to interventionist policies in the mid-1970s, but, again, like Korea, this did not last.

The bottom line is that South Korea and Taiwan are not as rich as Hong Kong and Singapore and one reason they are lagging is that their governments tried to pick winners and losers.

But both those nations largely have abandoned industrial policy, so at least they recognized their mistakes.

P.S. A big issue at the conference is whether the “China Model” should be emulated. I shared some data showing why that would be a big mistake.

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Why Did South Korea Diverge from Brazil?

Traditional economics, specifically convergence theory, tells us that poor nations should grow faster than rich nations.

I’m more interested, however, in why convergence often doesn’t happen, or only partially happens.

And I’m extremely interested in why we often see divergence, which occurs when two countries are at a similar level of development, but then one grows much faster than the other.

Let’s consider the example of Brazil vs, South Korea.  Otaviano Canuto has an interesting article, published by the Center for Macroeconomics and Development, that looks at how the two countries have diverged over the past 50 years.

Here’s the chart that depicts the dramatic difference.

The author analyzes many of the reasons that South Korea has enjoyed faster growth.

It’s especially worth noting that Brazil’s protectionism has been self-defeating.

The “middle-income trap” has captured many developing countries: they succeeded in evolving from low per capita income levels, but then appeared to stall, losing momentum along the route toward the higher income levels… Such a trap may well characterize the experience of Brazil and most of Latin America since the 1980s. Conversely, South Korea maintained its pace of evolution, reaching a high-income status… The path from low- to middle- and then to high-income per capita corresponds to increasing the shares of population moved from subsistence activities to simple modern tasks and then to sophisticated ones. …South Korea relied extensively on international trade to accelerate their labor transfer by inserting themselves into the labor-intensive segments of global value chains… with the “helping winners and saving losers” of Brazil’s industrial policies…, the temptation to use surpluses to accumulate wealth in ways to maximize frontiers of interaction with the public sector prevails… Brazil’s long-standing high levels of trade protection and closure also favored such an option… The Brazilian economy pays a price in terms of productivity foregone because of its lack of trade openness.

As a big fan of trade, I obviously agree with this analysis.

But I also think that’s not the full story.

If you compare the scores the two countries get from the most-recent edition of Economic Freedom of the World, you’ll find that South Korea scores better on trade.

But you’ll also notice that there are much bigger gaps when looking at scores for size of government, legal system and property rights, and regulation (and the gaps for the latter two indices have existed for decades).

The bottom line is that there are many policy reasons why Brazil lags behind South Korea.

So if Brazil wants to break out of the “middle-income trap,” it needs to follow the tried-and-true recipe for growth and prosperity (what used to be known as the “Washington Consensus“).

P.S. And that means ignoring poisonous advice from the International Monetary Fund and Organization for Economic Cooperation and Development.

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The “Trump of Brazil” Has a Much Better Understanding of Trade than the Trump of America

According to the most-recent edition of Economic Freedom of the World, Brazil is only ranked #120, which is lower than nations such as Greece, Haiti, and China.

Brazil gets a horrible grade on regulation, and it’s also in the bottom half of all nations when looking at fiscal policy, quality of governance, and trade.

But things may be about to change. Voters elected a president last year, Jair Bolsonaro, who is best known for populist rhetoric, but he also expresses support for market-friendly reforms.

And even though he’s sometimes referred to as the “Brazilian Trump,” President Bolsonaro seems to have a much better understanding of trade than his American counterpart.

At least if this report from the Wall Street Journal is any indication.

President Jair Bolsonaro ’s administration is opening up one of the world’s most closed big economies, slashing import tariffs on more than 2,300 products and exposing local industries long accustomed to protectionism to the challenges of free trade. With little fanfare, the conservative government has since taking office in January eased the entry of ultrasonic scalpels, cancer drugs, heavy machinery and more, in some cases with tariffs reduced to zero from as much as 20%. The tariff cuts…reflect a significant shift in the world’s eighth-largest economy, where duties were twice as high as in Mexico, China and the European Union last year. The new opening is a central feature in Economy Minister Paulo Guedes ’s plans to make the country of 210 million more competitive, part of an effort to rekindle a moribund economy historically shielded from foreign competition and bogged down by bureaucracy. …“Brazil’s model of protectionism has failed,” Deputy Economy Minister for Trade Marcos Troyjo, one of Brazil’s chief trade negotiators, said in an interview. “It’s been 40 years without sustainable economic growth.”

Here are some excerpts about how Brazil has been hurt by trade barriers.

The problems created by protectionism are evident throughout Brazil’s economy. When Mauá University outside São Paulo imported American equipment last year that it couldn’t find in Brazil to upgrade its physics lab, for example, import tariffs doubled the price tag to $70,000, said Francisco Olivieri, a business professor and head of Mauá’s technology department. …Protectionism hurts businesses that need to import supplies or parts and face high tariffs and bureaucracy to do so, which pushes them away from global supply chains. Red tape related to tariffs at Brazilian ports mean imported supplies can take weeks to reach buyers, causing production delays. Fifty-five percent of foreign products require the importing companies to obtain permits from as many as six different government agencies, according to a recent study by the National Confederation of Industry, or CNI, a trade group that represents Brazilian factories. Importers are subject to steep fines if they fail to request a permit, but it is often difficult to determine from which agencies they must seek approval.

In other words, Brazilian companies are hit by a double-whammy of trade barriers and red tape.

This is why liberalization is so important.

Incidentally, the EFW data only captures what happened up through 2017.

And since Brazil (#87) isn’t that far behind the United States (#55) in the trade rankings, I won’t be overly surprised in a few years if Brazil jumps the United States given the combination of Bolsonaro’s good policies and Trump’s bad policies.

P.S. Brazil is also in the process of curtailing pensions and already has adopted a constitutional spending cap.

P.P.S. President Bolsonaro is quite good on gun rights.

P.P.P.S. A few years ago, I fretted Brazil has passed a tipping point of dependency. I’m somewhat hopeful that assessment was too pessimistic.

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Obama, Brazil, and Guns

I have a confession. I miss Obama. On the issue of guns, at least.

He was so wrong, yet so ineffective, that it was almost funny.

Heck, it was funny.

Fortunately, he’s decided to make an encore performance. So there’s a new opportunity to puncture his pious pronouncements.

Writing for the Federalist, Ryan Cleckner debunks Obama’s fatuous statements about gun control at a recent speech in Brazil.

On May 30, former president Barack Obama was a keynote speaker at an event in Brazil. …During a conversation with a host on stage during the digital innovation event, Obama took the opportunity to speak negatively about U.S. gun laws. He said, “Our gun laws in the United States don’t make much sense. Anybody can buy any weapon, any time, without much, if any, regulation. They can buy [guns] over the internet, they can buy machine guns.” His statement to a foreign audience includes six lies about our gun laws.

Here are Obama’s six lies, with the concomitant corrections.

1. Anybody Can Buy a Firearm

There are three major federal restrictions on who may purchase firearms in the United States… The first category of persons who may not purchase firearms under federal law is based on age.  Persons under 21 years of age may not purchase handguns from a gun dealer, and persons under 18 years of age may not purchase rifles nor shotguns. The second category of persons who may not purchase firearms under federal law are referred to as “prohibited persons.” This category includes, among others…Felons, Those convicted of domestic violence, Unlawful users of controlled substances, Illegal aliens, Those subject to certain restraining orders, Those adjudicated as mental defectives or committed to mental institutions, Fugitives, and Veterans with dishonorable discharges… The third major category includes non-U.S. citizens.

2. Any Firearm Can Be Purchased

Under federal law, machine guns made after 1986 may not be purchased by civilians (more on this under lie No. 5 below). Also, the National Firearms Act of 1934 (NFA) regulates other firearms which may be purchased, but clearly not in the way insinuated by Obama’s comments (more on this under lie No. 3 below).

3. A Firearm Can Be Purchased at Any Time

When purchasing a firearm from a federally licensed gun dealer (FFL), background-check requirements must be satisfied. In most cases, this includes a background check being run through the federal National Instant Criminal Background Check System (NICS). …Federal background checks may only be run between 8 a.m. and 1 a.m. Eastern… Within the statement that a firearm can be purchased at any time is also the inference that a firearm may be purchased anywhere. This is also false. For example, handguns many only be purchased in a person’s state of residence. Therefore, if a person wants to purchase a handgun while he out of his home state, that is a time at which he is not permitted to purchase a firearm. For the class of firearms covered by the NFA, such as short-barreled rifles, a purchaser must wait until certain paperwork is approved by the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF). This wait time is often up to 10 months.

4. Firearms Can Be Purchased with Few Regulations

…the United States has many regulations on the purchase and possession of firearms.

5. Firearms Can Be Purchased Over the Internet

It seems clear that Obama wants people to think that a gun can be purchased online and shipped straight to a purchaser’s home like any other online purchase. This is not true. It is technically true that firearms may be purchased online. However, when a person purchases a firearm online from an out-of-state retailer, the firearm must first be shipped to a local FFL, where the purchaser must appear in person to fill out the federally required paperwork and satisfy the background check requirements.

6. Anyone Can Purchase a Machine Gun

…machine guns made after 1986 may not be purchased nor possessed by an ordinary civilian. These machine guns may only be purchased or possessed by FFLs or government entities. Machine guns made before 1986 are still NFA firearms and may only be purchased after the extensive paperwork and wait times that accompany all NFA firearm purchases. Additionally, some local laws outright ban the possession of any machine guns.

It’s unclear whether Obama actually knew he was lying.

I suspect he actually thinks he was being truthful. After all, he lives in a bubble and probably never hears any voices other than those from the leftist echo chamber.

Regardless, what makes this episode especially amusing is that Brazil is moving in the right direction on civil rights for gun owners.

Here are some excerpts from a CNN report in May.

Brazil’s President Jair Bolsonaro has signed an executive order relaxing gun rules in the country, making it easier to import guns and increasing the amount of ammunition a person can buy in a year. Bolsonaro announced the signing of the decree at a Tuesday news conference, arguing “it is an individual right of the one who may want to have a firearm or seek the possession of a firearm… obviously respecting and fulfilling some requirements.”The conservative provocateur…appears to delivering on his campaign promise to loosen gun laws. …Among the other changes, it simplifies the procedure to transfer the ownership of a firearm, and eases import restrictions on firearms,”allowing free initiative, stimulating competition, rewarding quality and safety, as well as economic freedom, so privileged by the Lord,” the Brazilian government wrote in a statement. …Bolsonaro had previously signed a decree in January making it easier to own a gun in the South American country.

I’m glad that law-abiding people in Brazil now have a better chance of protecting themselves from criminals.

Combined with the spending cap adopted a few years ago, there’s some small reason to hope that Brazil could become the next Chile.

Though we’ll have to wait and see if the country enacts some desperately needed pension reform.

In the meantime, kudos to Bolsonaro for doing the right thing on guns.

And too bad nobody in Brazil asked Obama why Brazil wasn’t following his empty advice.

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Hopes and Fears for 2019

I started my end-of-year “best and worst” series back in 2013, but didn’t begin my start-of-year “hopes and fears” series until 2017.

In that first year, I got part of what I hoped for (some tax reform and a bit of regulatory easing) and part of what I feared (no Medicaid and Medicare reform), but I mostly felt relieved that some of my fears (border-adjustment tax and an infrastructure boondoggle) weren’t realized.

For 2018, none of my hopes (government collapse in Venezuela and welfare reform) became reality, but we dodged one of my fears (Trump killing NAFTA) and moved in the wrong direction on another (a bad Brexit deal).

Time for third edition of this new tradition. It is the first day of the year and here are my good and bad expectations for 2019.

We’ll start with things I hope will happen in the coming year.

• Hard Brexit – There is a very strong long-run argument for the United Kingdom to have a full break with the European Union. Unfortunately, the political establishment in both London and Brussels is conspiring to keep that from happening. But the silver lining to that dark cloud is that the deal they put together is so awful that Parliament may vote no. Under current law, that hopefully will lead to a no-deal Brexit that gives the U.K. the freedom to become more free and prosperous.
• Supreme Court imposes limits of Washington’s power – I didn’t write about the fight over Brett Kavanaugh’s nomination to the Supreme Court because I don’t know if he believes in the limits on centralized power in Article 1, Section 8. But I’m semi-hopeful that his vote might make the difference in curtailing the power of the administrative state. And my fingers are crossed that he might vote with the Justices who want to restore the Constitution’s protection of economic liberty.
• Gridlock – Some people think gridlock is a bad thing, but it is explicitly what our Founders wanted when they created America’s separation-of-powers system. And if the alternative to gridlock is politicians agreeing to bad policy, I will cheer for stalemate and division with great gusto. I will be perfectly content if Trump and House Democrats spend the next two years fighting with each other.
• Maduro’s ouster – For the sake of the long-suffering people of Venezuela, I’m going to keep listing this item until it eventually happens.
• Limits on the executive branch’s power to impose protectionism – Trade laws give a lot of unilateral power to the president. Ideally, the law should be changed so that any protectionist policies proposed by an administration don’t go into effect unless also approved by Congress.
• Chilean-style reform in Brazil – Brazil recently elected a president who is viewed as the Trump of Latin America. But he might be the good kind of populist who uses his power to copy Chile’s hugely successful pro-market reforms.

Here are the things that worry me for 2019.

• Trump – The President does not believe in small government, so I’m concerned we may get the opposite of gridlock. In my nightmare scenario, I can see him rolling over to Democrat plans for a higher minimum wage, infrastructure pork, wage subsidies, and busting (again) the spending caps.
• Recession-induced statism – If there’s an economic downturn this year, then I fear we might get an Obama-style Keynesian spending orgy in addition to all the things I just mentioned.
• More protectionism – Until and unless there are limits on the president’s unilateral power, there is a very real dangers that Trump could do further damage to global trade. I’m particularly concerned that he might pull the U.S. our of the very useful World Trade Organization and/or impose very punitive tariffs on auto imports.
• Fake Brexit – This is the flip side of my hope for a hard Brexit. Regardless of the country, it’s not easy to prevail when big business and the political elite are lined up on the wrong side of an issue.

Sadly, I think my fears for 2019 are more likely than my hopes.

And I didn’t even mention some additional concerns, such as what happens if China’s economy suffers a significant downturn. I fear that is likely because there hasn’t been much progress on policy since the liberalization of the 1980s and 1990s.

Or the potential implications of anti-market populism in important European nations such as Germany, Sweden, and Italy.

Last but not least, we have a demographic sword of Damocles hovering over the neck of almost every nation.

That was a problem last year, it’s a bigger problem this year, and it will become an even-bigger problem in future years.

We know the right answer to this problem, but real solutions are contrary to the selfish interests of politicians.

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Can Brazil’s New President Copy the Chilean Miracle?

Brazil appears to be a tragic example of what happens when societal capital erodes (or never gets established in the first place) and too many people in the country see government as a vehicle for redistribution.

That environment leads to statist policies.

Which presumably helps to explain why Brazil is ranked #144 in Economic Freedom of the World. That’s not as low as some of its neighbors, such as last-place Venezuela (#162) or close-to-last Argentina (#160), but it’s still miserable. The country definitely deserves to be in the “Least Free” group.

Today’s question is whether Brazil also belongs in the “give up hope” group. In other words, has the country passed a “tipping point” of big government?

I’ve previously speculated whether the United States eventually may reach that point, and I definitely think it’s a relevant issue for states like Illinois and nations such as Greece.

A few weeks ago, I would have put Brazil in the same category. But the nation just elected Jair Bolsonaro, a right-populist who promises to shake things up when he takes power.

Mauricio Bento of Brazil’s Instituto Mercado Popular explains that Bolsonaro won in part because of a weak economy.

Most of the coverage from international media has been simplistic and is mostly repeating cliches, such as calling him the “Brazilian Trump”…you might have read about how “terrible” Bolsonaro is, and you might be wondering how he managed to win by such a wide margin. …In the last four years, Brazil has been in a deep economic crisis, suffering from double-digit unemployment rates and a lack of confidence that a recovery is coming.

And in part because his opponent, Fernando Haddad, wanted to undo a handful of recent pro-growth reforms and make Brazil more like Venezuela.

Michel Temer…passed some important reforms, such as the spending cap amendment and the labor law reform… Haddad sought to repeal Temer’s reforms and increase government spending and taxes. This made many business owners and investors support Bolsonaro.

Since I am a big fan of the spending cap that was approved in late 2016, I’m glad that Haddad didn’t win.

But should anybody be happy that Bolsonaro won? I don’t know the answer to that question, but it looks like Brazil is about to have a very good Finance Minister.

The UK-based Financial Times has an encouraging report.

For Brazil’s new finance minister Paulo Guedes, the government of far-right president-elect Jair Bolsonaro could represent a “Pinochet” moment for Latin America’s largest economy.  Mr Bolsonaro, who won elections last Sunday, ending almost 15 years of leftwing rule, will take over a moribund economy burdened by a bloated public sector when he assumes office on January 1. …The Chilean dictator’s solution was a dose of Milton Friedman-style free market economics from University of Chicago-trained academics. Mr Bolsonaro is considering the same medicine in the form of Mr Guedes, who has a doctorate from Chicago… For supporters of Mr Bolsonaro, the 69-year-old Mr Guedes’ uncompromisingly free market view of the world is the only answer. “Liberals know how to do it,” Mr Guedes once said.

Since pro-market reforms turned Chile into the “Latin Tiger,” let’s hope Guedes is serious.

He definitely has a pro-growth agenda.

Mr Guedes — who first considered joining Mr Bolsonaro’s campaign only last year — has repeatedly said his priority is to end Brazil’s 7 per cent fiscal deficit through privatisations of the country’s 147 state-owned enterprises. ..Mr Guedes’ other plans include a radical simplification of Brazil’s tax system, one of the world’s most convoluted, and reforming the country’s costly pension system, which is threatening to overwhelm the budget.

Sounds like Guedes has the right ideas. Assuming Bolsonaro does what is right for his country (such as much-needed pension reform), Guedes could be the Jose Pinera of Brazil.

Here’s a chart from Economic Freedom of the World. It shows how economic liberalization produced a dramatic increase in freedom between 1975 and 1995. Chile is now ranked #15 for economic liberty. Brazil, by contrast, has slowly lost ground since a period of pro-market reform between 1985 and 2000.

I’ll close with a video that was released before the recent Brazilian election.

It’s directed to mushy-headed young people in America, but it neatly summarizes how Brazil go in trouble.

A great video. I especially appreciate the indirect endorsement of my Golden Rule. The criticisms of former President Lula also are spot on, though I once expressed perverse admiration for him.

In any event, let’s hope President-Elect Bolsonaro give Mr. Guedes free rein to bring economic liberty to Brazil.

P.S. Bolsonaro is good on gun rights, so that’s a positive sign.

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Bureaucrat Pensions and America’s Brazilian Future

When I write about poorly designed entitlement programs, I will warn about America’s Greek future. Simply stated, we will suffer the same chaos and disarray now plaguing Greece if we don’t engage in serious reform.

Ideally sooner rather than later.

But when I write about state governments, perhaps it would be more appropriate to warn about a Brazilian future. That’s because many American states have made unaffordable and unfunded promises to give lavish benefits to retired bureaucrats, a topic that I’ve addressed on numerous occasions.

And why does that mean a Brazilian future? Because as Greece is already suffering the inevitable consequences of a bloated welfare state, Brazil is already suffering the inevitable consequences of a pension system that treats bureaucrats as a protected and cossetted class. Here are some excerpts from a sobering report in the Wall Street Journal.

Twenty years before Michel Temer became president of Brazil, he did something millions of his compatriots do, at great cost to the country’s coffers: He retired at age 55 and started collecting a generous pension. Delaying that moment until age 65 is at the center of Mr. Temer’s proposed economic overhaul. …making that happen is seen as a make-or-break test of whether the government can get its arms around mounting economic problems like rising debt, low investment and a stubborn recession now entering its third year. New pension rules are considered central to fixing an insolvent system.

It’s easy to understand why the system is bankrupt when you read the details.

…some retirees receive pensions before age 50 and surviving spouses can receive full pensions of the deceased while still drawing their own. The generosity of Brazil’s pension system is legendary—and, economists say, troubling as the country’s fertility rate plummets and life expectancy climbs. João Mansur, a long-time state legislator in Paraná state, served as interim governor there for 39 days in 1973, a stint that qualified him to retire with a $8,000 monthly pension. …Other former public workers who retire not only reap nearly the same income they got while on the job, but also see their checks get bumped up whenever those still working in the same job category get raises. …Retirement outlays will eat up 43% of the $422-billion national budget this year. …Demographics are playing against a generous system created in great part to bridge Brazil’s infamous social gap. Official statistics say there are 11 retirees for every 100 working-age Brazilians; that will rise to 44 per 100 by 2060.

Fixing this mess won’t be easy.

Brazil’s constitution must be amended to allow its pension system to be restructured… Mr. Temer has already been forced to make a series of major compromises, including exempting state and local government employees from the overhaul. …legislators have sought to further water down Mr. Temer’s proposals, by for instance maintaining the lower retirement ages for women and dragging out the transition from the old social-security regime to the new one.

In other words, Brazilian politicians are in the same position Greek politicians were in back in 2003. There’s a catastrophically bad fiscal forecast and the only issue is whether reforms will happen before a crisis actually begins. If you really want to be pessimistic, it’s even possible that Brazil has passed the tipping point of too much government dependency.

In any event, it appears that legislators prefer to kick the pension can down the road – even though that will make the problem harder to solve. Assuming they ever want to solve it.

Which is exactly what’s happening at the state level in America.

Consider these passages from a recent Bloomberg column.

Unfunded pension obligations have risen to $1.9 trillion from $292 billion since 2007. Credit rating firms have begun downgrading states and municipalities whose pensions risk overwhelming their budgets. New Jersey and the cities of Chicago, Houston and Dallas are some of the issuers in the crosshairs. …unlike their private peers, public pensions discount their liabilities using the rate of returns they assume their overall portfolio will generate. …Put differently, companies have been forced to set aside something closer to what it will really cost to service their obligations as opposed to the fantasy figures allowed among public pensions. …many cities and potentially states would buckle under the weight of more realistic assumed rates of return. By some estimates, unfunded liabilities would triple to upwards of $6 trillion if the prevailing yields on Treasuries were used.

But this looming disaster will not hit all states equally.

Here’s a map from the Tax Foundation which shows a tiny handful of states actually have funded their pensions (in other words, they may provide extravagant benefits, but at least they’ve set aside enough money to finance them). Most states, though, have big shortfalls.

The lighter the color, the bigger the financing gap.

To get a sense of the states that have a very good economic outlook, look for a combination of zero income taxes and small unfunded liabilities.

South Dakota (best tax system and negative pension liability!) gets the top marks, followed by Tennessee and Florida. Honorable mention for the state of Washington.

And is anyone surprised that Illinois is tied for last place? Or that Connecticut and New Jersey are near the bottom? Kentucky’s awful position, by contrast, is somewhat unexpected.

P.S. Brazil’s government may kick the can down the road on pension reform, but at least they added a spending cap to their constitution.

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The Best and Worst News of 2016

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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All I Want for Christmas Is…a Spending Cap

What could be more fun than to spend the day before Christmas reading about fiscal policy?

I realize there are probably endless ways to answer that question, particularly since normal people are probably more concerned about the rumor that the feds are going to arrest Santa Claus.

But America’s fiscal future is very grim, so hopefully some of you will be interested in some relevant new research on spending caps.

My buddy Sven Larson has a scholarly article about deficits and the Swiss Debt Brake that has just been published by the Journal of Governance and Regulation.

The first half of his article is a review of the academic debate on whether deficits are good (the Keynesians) or bad (the austerity crowd). This literature review is necessary for that sort of article, though I think it’s a distraction because deficits are merely a symptom. The real problem is excessive government.

Sven then gets to the meat of his article, which considers whether the Swiss Debt Brake (which imposes a cap on annual spending increases) is a better approach because it isn’t focused on annual budget deficits (which are susceptible to big swings because income tax revenues can dramatically increase or decline based on the economy’s performance).

…the Swiss Debt Brake…focuses primarily on the non-cyclical, i.e., structural part of the deficit in Switzerland (Geier 2011). By focusing on the long-term debt outlook rather than the short-term or annual ebbs and flows, the debt brake allows the economy to move through a business cycle without disruptive fiscal-policy incursions. …Since it was introduced in 2003 it appears to have worked as intended. Beljean and Geier (2013) present evidence suggesting that the brake has ended a long period of sustained government deficits.

Sven then cites my Wall Street Journal column on the Debt Brake, which is nice, and he then shares some new evidence about the economic benefits of the Swiss spending cap.

The Swiss economy grew faster in the first decade after the brake went into effect than in the decade immediately preceding its enactment.

And, in his conclusion, he speculates that the United States could reap similar economic benefits with a spending cap.

Should Congress manage to pass and comply with an adapted version of the Swiss debt brake, it is reasonable to expect…stronger economic growth. As an indication of the potential macroeconomic gains, a real growth rate of three percent as opposed to two percent over a period of ten years would add more than $2.3 trillion in annual economic activity to the U.S. GDP.

The degree of additional growth that would be triggered by a spending cap is an open question, of course, but if we could get even half of that additional growth, it would be a boon for American living standards.

Let’s now shift to an article with a much more hostile view of spending caps.

I wrote very recently about the adoption of a spending cap in Brazil. This new system will limit government spending so that it can’t grow faster than inflation. Sounds very reasonable to me, but Zeeshan Aleem has a Vox column that is apoplectic about the supposed horrible consequences.

Americans worried that Donald Trump will try to shred the nation’s social welfare programs can take some grim comfort by looking south: No matter what Republicans do, it will pale in comparison with the changes that are about to ravage Brazil. On Thursday, a new constitutional amendment goes into effect in Brazil that effectively freezes federal government spending for two decades. Since the spending cap can only increase by the rate of inflation in the previous year, that means that spending on government programs like education, health care, pensions, infrastructure, and defense will, in real terms, remain paused at 2016 levels until the year 2037.

Since the burden of government spending in Brazil has been rising far faster than the growth of the private sector (thus violating fiscal policy’s Golden Rule), I view the spending cap as a long-overdue correction.

Interesting, Aleem admits that the policy is being welcomed by financial markets.

As far as inspiring faith from investors, the amendment appears to be working. Brazil’s currency and stocks rose during December in part because of the passage of the measure.

But the author is upset that there won’t be as much redistribution spending.

…the spending cap…places the burden of reining in government spending entirely on beneficiaries of government spending — all Brazilians, but especially the poor and the vulnerable.

Instead, Aleem wants big tax increases.

…the amendment does a great deal to limit the expenditure of government funds, it doesn’t do anything to directly address how to generate them directly: taxes. “The major cause of our fiscal crisis is falling revenues,” Carvalho says… Carvalho says taking an ax to spending is coming at the expense of discussing “taxing the very rich, who do not pay very much in taxes, or eliminating tax cuts that have been given to big corporations.”

Wow, methinks Professor Carvalho and I don’t quite see things the same way.

I would point out that falling revenues in a deep recession is not a surprise. But that’s an argument for policies that boost growth, not for big tax hikes.

Especially since the long-run fiscal problem in Brazil is a growing burden of government spending.

And it’s worth noting that overall impact of the spending cap, even after 10 years, will be to bring the size of the public sector back to where it was in about 2008.

Let’s close by reviewing an article by Charles Blahous of the Mercatus Center. Chuck starts by noting that we have a spending problem. More specifically, the burden of government is expanding faster than the private economy.

…to say we have a problem with deficits and debt is an oversimplification. What we have instead is an overspending problem, and the federal debt is essentially a symptom of that problem. …federal spending has grown and will grow (under current projections) faster than our Gross Domestic Product (GDP).

The solution, he explains, is a procedural version of a spending cap.

To solve this, future federal budgets in which spending grows as a percentage of GDP from one year to the next should require a congressional supermajority (e.g., three-fifths or two-thirds) to pass. Only if spending in the budget does not rise as a percentage of GDP from one year to the next could it be passed with a simple majority.

Chuck explains why there should be a limit on spending increases.

…we cannot permanently continue to allow federal spending to grow faster than America’s production. …as government spending growth exceeds GDP growth, we all lose more control over our economic lives. As individuals we will have less of a say over the disposition of each dollar we earn, because the government will claim a perpetually-growing share.

And higher taxes are never a solution to a spending problem.

…this problem cannot be solved by raising taxes. Raising taxes…does not avoid the necessity of keeping spending from rising faster than our productive output. Raising taxes may even have the downside of deferring the necessary solutions on the spending side.

The last sentence in that abstract is key. I’ve written about why – in theory – I could accept some tax increases in order to obtain some permanent spending reforms. In the real world of Washington, however, politicians will never adopt meaningful spending restraint if there’s even the slightest rumor that higher taxes may be an option.

He concludes that current budget rules need to be updated.

…budget rules apply no procedural barriers to continuing unsustainable spending growth rates, while legislative points of order protect baseline fiscal practices in which both federal spending and revenues grow faster than the economy’s ability to keep pace.

I certainly agree, though it would be nice to see something much stronger than just changes in congressional procedures.

Perhaps something akin to the constitutional spending caps in Hong Kong and Switzerland?

Now that would be a nice Christmas present for American taxpayers.

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A Big Fiscal Victory: Constitutional Spending Caps for Brazil!

The good thing about being a libertarian (above and beyond respecting the rights and liberties of other people) is that you can always say “I told you so” when government intervention leads to bad results. Obamacare is a very good (albeit very painful) example.

The bad thing about being a libertarian is that you don’t win many victories. No matter how much evidence is on your side, politicians usually do the wrong thing. Not because they are necessarily evil. They’re simply responding to “public choice” incentives.

Indeed, the only big victory that I’ve had in recent years was the sequester. And even that victory has been tarnished by the 2013 and 2015 deals that weakened the caps on discretionary outlays.

So I’m delighted to report that Brazil has actually amended its constitution to impose a spending cap. I was somewhat hopeful that this might happen when I wrote about the issue back in October, but never allowed myself to think it would actually happen.

The Wall Street Journal reports on this remarkable development.

Brazil’s Senate approved a measure capping public spending, delivering a victory to embattled President Michel Temer, who is struggling to close a massive budget deficit and revive the nation’s moribund economy. In an unusually rapid session with little discussion, lawmakers on Tuesday voted 53 to 16 to approve a constitutional amendment limiting the country’s annual spending growth to the previous year’s inflation rate. The move was a drastic shot of discipline for Brazil’s government, whose public debt and deficits have expanded at rates so worrisome that three major credit agencies have downgraded the nation’s credit rating to junk status. Several economists and analysts praised the constitutionally enforced limits as the only way for Brazil’s government to live within its means and restore investor confidence.

It’s remarkable that Brazil’s politicians were willing to tie their own hands, but they presumably had no choice because the nation’s finances deteriorated to the point that drastic measures were necessary.

The spending cap applies to the federal budget starting in 2017, except for education and health costs, which will be subject to the limits starting in 2018. It was the centerpiece of austerity measures proposed by Mr. Temer to shore up Brazil’s shaky public finances. Brazil’s budget deficit was a hefty 8.3% of gross domestic product in October, after growing almost steadily from 1.8% of GDP in July 2011. Gross debt was 70.3% of GDP in October, up from its more recent low of 51% of GDP in December 2012.

As you might expect, there was opposition.

..the measure drew the ire of opposition politicians, labor unions and citizens concerned that spending limits could harm Brazil’s troubled health-care and education systems.

So it is impressive that the this constitutional reform received supermajority support for two votes in the Brazilian House, followed by supermajority support for two votes in the Brazilian Senate.

I would like to think I played at least a tiny role in this development. I’ve crunched numbers showing that nations get very good results when spending is restrained for multi-year periods.

I’ve written extensively on the successful spending caps in Switzerland and Hong Kong, both of which are part of those nations’ constitutions.

And I’ve highlighted the fact that international bureaucracies, when they investigate the efficacy of various fiscal rules, always conclude that spending caps are the only effective approach.

I also wrote an article for the Brazilian media back in October.

But even if I had no impact on the debate, I’m still very happy about the outcome.

Assuming, of course, that Brazil doesn’t have a Supreme Court Justice like John Roberts who will somehow make a politicized decision and sabotage the new spending cap!

P.S. I seem to have more success overseas than in the United States. I did help defeat the income tax in the Cayman Islands a few years ago, and I also hope that my recent trip to Vanuatu will lead to a similar outcome.

But since I’m a patriot (in the proper sense) who wants the United States to be a beacon of liberty for the world, it sure would be nice to win a few battles here at home.

P.P.S. Brazil may be on the cusp of other pro-market reforms, in part because of a vibrant libertarian movement in the country.

Here’s a video from Reason on this positive development.

Jeff Tucker of the Foundation for Economic Education has a very upbeat assessment.

I went on a three-city speaking tour in Brazil. …I found an amazingly well-educated crowd of students, young professionals, professors, media personalities, and digital activists, all dedicated to using the upheaval to the advantage of freedom itself. Organizations like Mises Brazil, and many others that have spun off from Students for Liberty and other organizations, have spent years translating and distributing books and articles, holding seminars, and cultivating young people for a life of activism. …The libertarians in Brazil seem to understand that ideological slogans and promises for change mean nothing so long as states are huge, invasive, and offer a bounty to anyone who gains power.

Let’s hope this is right and Brazil becomes a star reformer. Chile (and, in recent years, Peru) have been lonely outposts of good policy in South America.

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Proposed Spending Cap in Brazil Could Be a Key for Economic Recovery and Renaissance

One of the most remarkable developments in the world of fiscal policy is that even left-leaning international bureaucracies are beginning to embrace spending caps as the only effective and successful rule for fiscal policy.

The International Monetary Fund is infamous because senior officials relentlessly advocate for tax hikes, but the professional economists at the organization have concluded in two separate studies (see here and here) that expenditure limits produce good results.

Likewise, the political appointees at the Organization for Economic Cooperation and Development generally push a pro-tax increase agenda, but professional economists at the Paris-based bureaucracy also have produced studies (see here and here) showing that spending caps are the only approach that leads to good results.

Heck, even the European Central Bank has jumped into the issue with a study that reaches the same conclusion.

This doesn’t mean balanced budget requirements are bad, by the way, but the evidence shows that they aren’t very effective since they allow lots of spending when the economy is expanding (and thus generating tax revenue). But when the economy goes into recession (causing a drop in tax revenue), politicians impose tax hikes in hopes of propping up their previous spending commitments.

With a spending cap, by contrast, fiscal policy is very stable. Politicians know from one year to the next that they can increase spending by some modest amount. They don’t like the fact that they can’t approve big spending increases in the years when the economy is expanding, but that’s offset by the fact that they don’t have to cut spending when there’s a recession and revenues are falling.

From the perspective of taxpayers and the economy, the benefit of a spending cap (assuming it is well designed so that it satisfies Mitchell’s Golden Rule) is that annual budgetary increases are lower than the long-run average growth of the private sector.

And nations that have followed such a policy have achieved very good results. The burden of government spending shrinks as a share of economic output, which naturally also leads to less red ink relative to the size of the private economy.

But it’s difficult to maintain spending discipline for multi-year periods. In most cases, governments that adopt good policy eventually capitulate to pressure from interest groups and start allowing the budget to expand too quickly.

That’s why the ideal policy is to make a spending cap part of a nation’s constitution.

That’s what happened in Switzerland early last decade thanks to a voter referendum. And that’s what has been part of Hong Kong’s Basic Law since it was approved back in 1990.

And while many nations struggle with ever-growing government, both Switzerland and Hong Kong have enjoyed good outcomes and considerable fiscal stability.

Now a Latin American nation may enact a similar reform. Brazil, which is suffering a recession in part because of bad government policies, is trying to boost its economy with market-based reforms. Given my interests, I’m especially excited that it has taken the first step in a much-needed effort to impose a spending cap.

The Brazil Chamber of Deputies on Monday voted in favor of a constitutional amendment that would limit government spending to counteract the country’s alarming economic downturn. …The amendment proposal must pass two rounds of voting in the lower House and Senate. Should it be passed, the government would limit spending increases to the rate of inflation… Following approval, the amendment would take effect in 2017.

The specific reform in Brazil would limit spending so it doesn’t grow faster than inflation. And it would apply only to the central government, so the provinces would be unaffected.

Capping central government outlays would be a significant step in the right direction. The central government would consume 16.8 percent of economic output in 2025 with the cap, compared to 20.8 percent of GDP if fiscal policy is left on autopilot.

Of course, there’s no guarantee this reform will become part of the Constitution. It needs to be approved a second time by the Chamber of Deputies (akin to our House of Representatives) and then be approved twice by the Senate.

But the good news is that more than 71 percent of Deputies voted for the measure. And there’s every reason to expect a sufficient number of votes when it come up for a second vote.

Brazil’s Senate, however, may be more of a challenge. Especially since various interest groups are now mobilizing against the proposal.

Advocates of the reform should go over the heads of the interest groups and other pro-spending lobbies and educate the Brazilian people. They should make two arguments that hopefully will be appealing even to those who don’t understand economic policy.

First, a spending cap doesn’t require spending cuts in a downturn. Outlays can continue to grow according to the formula. This should be a compelling argument for Keynesians who think government spending somehow stimulates growth (and also may appease those who simply think it is “harsh” to reduce spending when the economy is in recession).

Second, by preventing big spending increases during the boom years, a spending cap is a self-imposed constraint to protect against “Goldfish Government,” which should be an effective argument for those who are familiar with the underlying fiscal and demographic trends that already have caused so much chaos and misery in nations such as Greece.

P.S. While I haven’t been a fan of Brazilian economic policy in past years, I actually defended that nation when Hillary Clinton applauded Brazil for being more statist than it actually is.

P.P.S. Being less statist than Hillary is not exactly something to brag about, so I will note that Brazil deserves credit for moving in the right direction on gun rights and also having some semi-honest left-wing politicians.

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Brazil and Mitchell’s Theorem of Societal Collapse

I remember feeling like an outlier a few years ago when so many people were waxing rhapsodic about a glowing economic outlook for Brazil, Russia, India, China, and South Africa. These so-called BRICS nations were enjoying some decent growth at the time, but I was not optimistic about their long-run prospects because they all suffered from too much statism according to the rankings from Economic Freedom of the World.

Well, the long run has arrived, at least to some degree. All of these nations have hit some serious speed bumps.

I’ve previously written about the economic challenges now being faced by China and South Africa. Today, let’s focus on Brazil.

Here’s some very dismal but accurate analysis from an article in this week’s Economist (h/t: Tyler Cowen).

By the end of 2016 Brazil’s economy may be 8% smaller than it was in the first quarter of 2014, when it last saw growth; GDP per person could be down by a fifth since its peak in 2010, which is not as bad as the situation in Greece, but not far off. Two ratings agencies have demoted Brazilian debt to junk status. Joaquim Levy, who was appointed as finance minister last January with a mandate to cut the deficit, quit in December. Any country where it is hard to tell the difference between the inflation rate—which has edged into double digits—and the president’s approval rating—currently 12%, having dipped into single figures—has serious problems.

And why is Brazil’s economy is so much trouble?

Two words: Excessive government.

…the federal constitution of 1988… This 70,000-word doorstop of a document crams in as many social, political and economic rights as its drafters could dream up, some of them highly specific: a 44-hour working week; a retirement age of 65 for men and 60 for women. The “purchasing power” of benefits “shall be preserved”, it proclaims, creating a powerful ratchet on public spending. Since the constitution’s enactment, federal outlays have nearly doubled to 18% of GDP; total public spending is over 40%. Some 90% of the federal budget is ring-fenced either by the constitution or by legislation. Constitutionally protected pensions alone now swallow 11.6% of GDP, a higher proportion than in Japan, whose citizens are a great deal older. …government expenditure as a share of output rose in 2015. …Taxes already consume 36% of GDP, up from a quarter in 1991.

Ugh, what a grim set of numbers. Moreover, the pension system is terrible, as we discussed a few months ago.

And here’s some additional analysis from last week’s issue, which also highlights the negative impact of too much government.

Brazil faces political and economic disaster. …Ms Rousseff and her left-wing Workers’ Party (PT) have made a bad situation much worse. During her first term, in 2011-14, she spent extravagantly and unwisely on higher pensions.. The minimum benefit is the same as the minimum wage, which has risen by nearly 90% in real terms over the past decade. Women typically retire when they are 50 and men stop work at 55, nearly a decade earlier than the average in rich countries… A typical manufacturing firm spends 2,600 hours a year complying with the country’s ungainly tax code; the Latin American average is 356. Labour laws modelled on those of Mussolini make it expensive for firms to fire even incompetent employees. ….Because it is so hard to reform, Brazil’s public sector rivals European welfare states for size but emerging ones for inefficiency. Long a drain on economic vitality, Brazil’s overbearing state is now a chief cause of the fiscal crisis.

All this sounds very grim, but I’m going to argue that it’s even worse than it sounds.

In part, the problems are similar to what is found in so many nations facing economic challenges.

First, government is growing faster than the private sector. The fact that government spending now consumes twice as much of the economy’s output today as it did back in 1988 means that politicians have been repeatedly (and vigorously!) violating my Golden Rule.

Second, there’s too much government intervention. A nation that models any of its policies on Mussolini-style fascism obviously is making a big mistake since the net result is an economy burdened by corrupt cronyism (sadly, a common problem in Latin America).

But there’s another reason to be down on Brazil, and it is far more discouraging.

Third, the social capital of the country has been eroded. Simply stated, there are too many people (as data from the 2014 election reveal) who view government as a vehicle for personal (and unearned) enrichment.

And when this third problem develops, it’s all but certain that a nation is doomed. After all, many nations have reversed bad fiscal policy. And many nations have reduced government intervention. But fixing the culture of a people is like putting toothpaste back in a tube.

Indeed, I’m going to augment my list of pithy adages. In addition to Mitchell’s Golden Rule and Mitchell’s Law, we not have Mitchell’s Theorem of Societal Collapse.

Like my other adages, I’m not pretending there’s any original insight. In this case, I’ve simply come up with a different way of saying the line attributed (erroneously, from what I can tell) to either Benjamin Franklin or Alexis de Tocqueville: “A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. ”

P.S. I’m worried about the degree to which America has traveled down the path toward societal decay, but I don’t think we’ve yet reached a tipping point.

P.P.S. While I’m not a fan of Brazilian economic policy, I actually defended that nation when Hillary Clinton applauded Brazil for being more statist than it actually is.

P.P.P.S. Being less statist than Hillary is not exactly something to brag about, so I will note that Brazil deserves credit for moving in the right direction on gun rights and also having some semi-honest left-wing politicians.

P.P.P.P.S. Let’s end, however, with some bad news. Recall from above that Brazil has a very statist constitution. Well, it’s always possible to make a bad thing even worse. And that’s what some Brazilian politicians are trying to do with a proposal to have government somehow create a “right to happiness.”

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A Potential Human Rights Victory in Brazil Would Be Bad News for Criminals

On Friday, I was asked at a Colorado briefing if I had any good policy news from around the world.

I was stumped. Because mostly we’ve seen policy move in the wrong direction.

In recent years, we’ve seen a couple of nations repeal their flat tax systems. A few governments also have sabotaged their nations’ private Social Security systems. There have been all sorts of bailouts, and the human right of financial privacy has been eroded by tax-greedy politicians.

So I gave a pessimistic answer. But I should have thought beyond economic policy because there is a bit of potential good news from Brazil. Time reports that citizens may soon get the right to keep and bear arms.

Congressmen in Brazil, one of the most violent countries in the world, are proposing to dramatically loosen restrictions on personal gun ownership, bringing the country much closer to the American right to bear arms. The politicians say the measures are necessary to allow embattled citizens the right to defend themselves from criminals armed with illegal weapons. …The draft law…introduces a right for citizens to own firearms for self-defense or the protection of property.

Not surprisingly, the statists think people should have to rely on government.

…opponents say the move will only increase the country’s toll of nearly 60,000 murders in 2014. …“Without doubt we will see an increase in the murder rate,” says Ivan Marques, executive director of the Sou de Paz institute, which campaigns for disarmament. …Marques said Brazil should not try to emulate the United States. “Our constitution emphasizes collective security not individual security,” he added. …José Mariano Beltrame, the state security secretary in Rio de Janeiro… “We need to disarm the bandits not arm the people,” he says in an emailed statement.

But the reality is that the government is incapable of protecting people. The bad guys can get guns (as we’ve repeatedly seen in Europe). Prohibition simply means the good guys are disarmed.

“…the state has failed to resolve this problem,” the law’s author Laudivio Carvalho of the powerful Brazilian Democratic Movement Party, says in a telephone interview. “The population needs the right to defend themselves, their family and their property as they are the ones being attacked. Ninety percent of assaults are being carried out with illegal weapons.”

So let’s keep our fingers crossed that human rights will be expanded in Latin America.

And since we’re on the topic of gun control, here are some clever posters.

This second one reminds me of my IQ test for criminals and leftists.

And this one reminds me of this libertarian joke.

Last but not least.

P.S. You can  see some amusing pro-Second Amendment posters here, here, here, here, and here. And some amusing images of t-shirts and bumper stickers on gun control here, here, and here.

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What Happens When Too Many Voters Support Redistribution?

Back in 2010, I shared some wise words from Walter Williams and Theodore Dalrymple about how society can become unstable when people figure they can “vote themselves money.”

On a related note, I shared the famous “riding in the wagon” cartoons in 2011 and the “Danish party boat” image in 2014. Both of these posts highlighted the danger that exists when societies reach a tipping point, which occurs when too many people vote themselves into dependency and expect (and vote) for never-ending handouts.

Indeed, this is why I’m very pessimistic about the future of welfare states such as Greece.

And, depending what happens in an upcoming run-off election, I probably won’t be very optimistic about Brazil.

Investor’s Business Daily has shared some fascinating – and disturbing – data from that country’s recent election.

A Brazilian economist has shown a near-exact correlation between last Sunday’s presidential election voting choices and each state’s welfare ratios. Sure enough, handouts are the lifeblood of the left. …Neves won 34% of the vote, Rousseff took 42% and green party candidate Marina Silva took about 20% — and on Thursday, Silva endorsed Neves, making it a contest of free-market ideas vs. big-government statism. But what’s even more telling is an old story — shown in an infographic by popular Brazilian economist Ricardo Amorim. …Amorim showed a near-exact correlation among Brazil’s states’ welfare dependency and their votes for leftist Workers Party incumbent Rousseff. Virtually every state that went for Rousseff has at least 25% of the population dependent on Brazil’s Bolsa Familia welfare program of cash for single mothers… States with less than 25% of the population on Bolsa Familia overwhelmingly went for Neves and his policies of growth. …Fact is, the left cannot survive without a vast class of dependents. And once in, dependents have difficulty getting out.So Brazil’s election may come down to a question of whether it wants to be a an economic powerhouse — or a handout republic.

Here’s the map from IBD showing the close link between votes for the left-wing candidate and the extent of welfare dependency.

It’s not a 100 percent overlap, but the relationship is very strong.

Sort of like the maps I shared on language and voting in Ukraine.

That being said, I’m a policy wonk who wants economic liberty, not a political hack with partisan motives. So let’s look at the implications of growing dependency.

As IBD explains, the greatest risk is that people get trapped in dependency. We see that in advanced nations like the United States and United Kingdom (and the Nordic nations) so is it any surprise that it’s also a problem in a developing country like Brazil (or South Africa)?

Problem is, “some experts warn that a wide majority cannot get out of this dependence relationship with the government,” as the U.K. Guardian put it. And whether it’s best for a country that aspires to become a global economic powerhouse to have a quarter of the population — 50 million people — dependent on welfare and producing nothing is questionable.

I especially appreciate the last part of this excerpt. Economic output is a function of how capital and labor are productively utilized.

In other words, a welfare state imposes a human cost and an economic cost.

Now let’s consider possible implications for the United States. A few years ago, I put together a “Moocher Index” to show which states had the highest percentage of non-poor households receiving some form of redistribution.

Do the moocher states vote for leftists? Well, it we use the 2012 presidential election as a guidepost, 7 of the top 10 moocher states voted for Obama.  That suggests that there is a relationship.

But if you look at the states with the lowest levels of dependency, they were evenly split, with 5 for Obama and 5 for Romney. So perhaps there aren’t any big lessons for America, though Obama’s margins in Ohio, Florida, Virginia, Colorado, and Nevada were relatively small.

For what it’s worth, I’m far more worried about these economic numbers, not the aforementioned political numbers.

P.S. I probably shouldn’t assume that a leftist victory automatically means more statism in Brazil. After all, keep in mind that we got more economic freedom during the Clinton years and bigger government during the Bush years. Moreover, it was a left-leaning Brazilian president who had the wisdom to acknowledge that you can’t redistribute unless someone first produces.

P.P.S. At least one honest leftist admits there is a heavy cost to government dependency.

P.P.P.S. If you live in a nation that already has passed the tipping point of too much dependency and you want to live more freely, you can always escape. As reported by the U.K.-based Independent.

Up to 2.5 million French people now live abroad, and more are bidding “au revoir” each year. …the “lifeblood” of France are leaving because of “the impression that it’s impossible to succeed”… There is “an anti-work mentality, absurd fiscal pressure, a lack of promotion prospects, and the burden of debt hanging over future generations,” he told Le Figaro. …while the figure of 2.5 million expatriates is “not enormous”, what is more troubling is the increase of about 2 per cent each year. “Young people feel stuck, and they want interesting jobs. Businessmen say the labour code is complex and they’re taxed even before they start working. Pensioners can also pay less tax abroad,” she says. France’s unemployment rate is hovering around 10 per cent. As for high-earners, almost 600 people subject to a wealth tax on assets of more than €800,000 (£630,000) left France in 2012, 20 per cent more than the previous year.

The good news is that some people escape. The bad news is that the political environment becomes even worse for those remaining.

P.P.P.P.S. And don’t forget that the Obama campaign celebrated dependency during the 2012 campaign.

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Life, Liberty, and the Pursuit of Government-Subsidized Happiness in Brazil

One of the many great things about America’s Founding Fathers is that the Declaration of Independence refers to “unalienable rights” including “life, liberty, and the pursuit of happiness.” But there’s not even a suggestion that it is the job of government to provide happiness.

Brazil’s politicians have a different view of such matters. They’re considering an amendment to the nation’s Constitution that would create a similar right, but with the expectation that it would be the job of government to provide happiness.

There are two huge problems with this approach. First, government can’t give something to one person without first taking it from another. So if politicians decide that this new “right” to happiness means more redistribution of food and housing (things supposedly “guaranteed” by the Brazilian Constitution already), then that means more government coercion through the tax system. Second, happiness isn’t achieved by being a moocher. Dependency breeds resentment, not joy.

It would be simple to dismiss this proposal as a hollow political stunt, but there actually are many things that Brazil’s government could do to open doors for the poor, such as enforcing property rights, opening markets, deregulating the economy, and lowering tax rates. Then poor people would have the ability to achieve true happiness by improving their own lives rather than kowtowing for crumbs from a corrupt political elite.

Here’s a report on Brazil’s Orwellian happiness proposal.

…a bill to amend Brazil’s Constitution to make the search for happiness an inalienable right is widely expected to be approved soon by the Senate, which reconvened Tuesday. The bill would then go to the lower house. …supporters say the happiness bill is a serious undertaking despite the revelry, meant to address Brazil’s stark economic and social inequalities. “In Brazil, we’ve had economic growth without the social growth hoped for,” said Mauro Motoryn, the director of the Happier Movement, a non-governmental organization backing the legislation. “With the constitutional amendment, we want to provoke discussion, to seek approval for the creation of conditions in which social rights are upheld.” Similar explorations of officially finding happiness have been pushed by other governments. Both Japan and South Korea include the right to happiness in their constitutions, and earlier this month, the British government detailed plans to begin a $3 million project to measure citizens’ well being. …The bill before Brazil’s Congress would insert the phrase “pursuit of happiness” into Article 6 of the constitution, which states that education, health, food, work, housing, leisure and security – among other issues – are the social rights of all citizens.

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Is Hillary Clinton Ignorant about Geography, Fiscal Policy, or Both?

Hillary Clinton recently opined that Brazil was a great role model for the idea of soaking the rich with higher tax rates. She didn’t really offer evidence for that specific assertion, but Politico reports that she did say that “”Brazil has the highest tax-to-GDP rate in the Western Hemisphere and guess what — they’re growing like crazy.”

I’m not sure if “growing like crazy” is an accurate description, particularly since poor nations normally have decent growth rates because they start from such a low baseline.

But let’s excuse that bit of rhetorical excess and focus on the really flawed portion of her remarks.

Contrary to her direct quote, Brazil does not have the “highest tax-to-GDP rate in the Western Hemisphere.” It may have the highest tax burden in South America. And it may even have the highest tax burden in all of Latin America, but its overall tax burden of about 24 percent of GDP is slightly below the aggregate tax burden in America.

I suppose I should issue a caveat and say there’s a very slight chance that the recession has temporarily pushed American tax receipts as a share of GDP below the Brazilian level, but that isn’t apparent from the IMF data. Moreover, there’s no doubt that the tax burden in Canada is significantly higher than the Brazilian burden.

So Mrs. Clinton either was unaware that the United States and Canada are in the Western Hemisphere, or has no clue how to read fiscal statistics.

But let’s suspend reality and assume that Brazil has a higher tax-to-GDP ratio. Would that somehow be proof that Brazil is a role model for class-warfare taxation? There is no precise definition of that term, to be sure, but high tax rates on the rich presumably are a necessary component of any class-warfare system. Yet Brazil’s top tax rate is 27.5 percent. That’s not exactly a low-rate system such as Hong Kong, and it’s 27.5 percentage points higher than the zero-percent rate in the Cayman Islands, but it also happens to be significantly lower than the 35 percent (soon to be 39.6 percent) rate in the United States. If that’s class warfare, sign me up for the Brazilian approach.

I suppose it’s possible that Brazil’s top tax rate recently has been boosted, but that didn’t show up in a Google search. And even if the rate was just increased, that would hardly be proof of Mrs. Clinton’s strange hypothesis that high tax rates and/or high tax-to-GDP rates are a magical formula for growth. That would require looking at future economic performance with the higher top tax rate, not the recent growth rates with the 27.5 percent top tax rate.

But pointing out Mrs. Clinton’s mistakes seems a bit rude and I do like to be a gentleman, so let’s at least give her points for consistency. Earlier this year, she urged higher tax rates on the so-called rich in Pakistan, so at least she doesn’t discriminate in her desire to punish success.

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