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Posts Tagged ‘Centralization’

I wrote earlier this month about coronavirus becoming an excuse for more bad public policy.

American politicians certainly have been pushing all sorts of proposals for bigger government, showing that they have embraced the notion that you don’t want to let a “crisis go to waste.”

But nothing that’s happening in the United States is as monumentally misguided as the effort to create a new method of centralized redistribution in the European Union.

Kai Weiss of the Vienna-based Austrian Economic Center explains what is happening in a column for CapX.

…‘never let a good crisis go to waste’ seems to have become the mantra of both the European Commission a number of national leaders. The coronavirus has become a justification for…‘more Europe’ (which tends to actually mean more EU, to the detriment of Europe). The clearest sign of this renewed Euro-fervour is the plan cooked up by Angela Merkel and Emmanuel Macron earlier this week… Seasoned Brussels observers will be shocked to learn that their proposals have very little to do with the pandemic, and everything to do with deepening the centralisation of EU power and top-down policymaking. While Germany has traditionally…opposed the idea of eurobonds or similar debt collectivisation instruments, it is now advocating for precisely those policies. A €500 billion Recovery Fund… the initial plan is for the European Commission to raise the money on the financial markets. It would subsequently be paid back by the member states and through increased “own resources” – i.e., new taxes levied directly by Brussels… The good news is that none of these policy proposals are yet set in stone. There are some big legal questions, particularly on the Recovery Fund, and national parliaments would need to agree to this expansion of Brussels’ writ. Already countries like the Netherlands, Austria, Denmark, and Sweden have voiced criticism… But for all these obstacles, the direction of travel looks alarmingly clear. The consensus among the EU’s power brokers, as with pretty much any major world event, is that the answer is ‘more Europe’. ..For Macron  Merkel and their allies, this is far too good a crisis to pass up.

A story in the New York Times has additional details, including a discussion of potential obstacles.

Ms. Merkel this week agreed to break with two longstanding taboos in German policy. Along with the French president, Emmanuel Macron, Ms. Merkel proposed a 500 billion euro fund… It would allow the transfer of funds from richer countries… And it would do so with money borrowed collectively by the European Union as a whole. …Whatever emerges from the European Commission will be followed by tough negotiations… Chancellor Sebastian Kurz of Austria has raised objections to the idea of grants rather than loans, saying that he has been in contact with the leaders of Sweden, the Netherlands and Denmark. “Our position remains unchanged,’’ he said. …opposition may also come from member states in Central and Eastern Europe. …Those countries are going to be reluctant…to see so much European aid — for which they will in the end have to help pay — skewed to southern countries that are richer than they are. …in northern countries, moves for collective debt to bail out poorer southern countries may feed far-right, anti-European populists like the Alternative for Germany or the Sweden Democrats. They are angry at the idea of subsidizing southerners who, they believe, work less hard and retire much earlier.

What’s depressing about this report is that it appears the battle will revolve around whether the €500 billion will be distributed as grants or loans.

The real fight should be whether there should be any expansion of intra-E.U. redistribution.

For what it’s worth, Germany used to oppose such ideas, especially if funded by borrowing. But Angela Merkel has decided to throw German taxpayers under the bus.

Let’s close with some analysis from Matthew Lynn of the Spectator.

Die-hard European Union federalists have plotted for it for years. …The Greeks and Italians have pleaded for it. And French presidents have made no end of grand speeches, full of references to solidarity and common visions, proposing it. The Germans have finally relented and agreed, at least in part, to share debt within the EU and the euro-zone, and bail-out the weaker members of the club. …The money will be borrowed, based on income from the EU’s future budgets, but it will in effect be guaranteed by the member states, based on the EU’s ‘capital key’. …the rescue plan is completely unfair on all the EU countries outside the euro-zone. …why should they pay for it? Poland…will still be expected to pay in five per cent (or 25bn euros (£22bn)) to bail-out of far richer Italy (Polish GDP per capital is $15,000 (£12,000) compared with $34,000 (£27,000) for Italy).

Pro-centralization politicians are claiming this fund is needed to deal with the consequences of the coronavirus, but that’s largely a smokescreen. It will take many months for this proposal to get up and running – assuming, of course, that Merkel and Macron succeed in bullying nations such as Austria and the Netherlands into submission.

By that time, even the worst-hit countries already will have absorbed temporary health-related costs.

The bottom line is that this initiative is really about the long-held desire by the left to turn the E.U. into a transfer union.

The immediate losers will be taxpayers in Germany, as well as those in Austria, Sweden, the Netherlands, Finland, and a few other nations.

But all of Europe will suffer in the long run because of an increase in the continent’s overall fiscal burden.

And keep in mind that this is just the camel’s nose under the tent. It’s just a matter of time before this supposedly limited step becomes a template for further expansions in the size and scope of government.

Yet another reason why E.U. membership is increasingly an anchor for nations that want more prosperity.

P.S. As suggested by Mr. Lynn’s column, countries in Eastern Europe should fight this scheme. After all, these countries are relatively poor (a legacy of communist enslavement) and presumably don’t want to subsidize their better-off cousins in places like Spain and Italy. But that argument also implies that they should have resisted the Greek bailout about ten years ago, yet they didn’t. Sadly, Eastern European governments acquiesce to bad ideas because their politicians are bribed with “structural adjustment funds” from the European Union.

P.P.S. The luckiest Europeans are the British. They wisely opted for Brexit so they presumably won’t be on the hook for this costly new type of E.U.-wide redistribution (indeed, my main argument for Brexit, which now appears very prescient, was that the E.U. would morph into a transfer union).

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Libertarians and other supporters of limited government historically have mixed feelings about the European Union (and its various governmental manifestations).

On the plus side, there are no trade barriers between nations that belong to the EU, and membership also makes it difficult for countries to impose regulatory burdens that hinder trade. The EU also has helped to improve the rule of law in some nations, particularly for newer members from the former Soviet Bloc.

On the minus side, the EU imposes trade barriers against the rest of the world. There is also continuous pressure for tax harmonization policies and regulatory harmonization policies that increase the burden of government – compounded by efforts to export those bad polices to non-member nations.

Given these good and bad features, it’s understandable that proponents of economic liberty don’t have a consensus position on the European Union.

But views may become more universally hostile since some European politicians now want to use the coronavirus crisis as an excuse to expand redistribution and enable bailouts by changing existing EU rules.

Currently, there is very limited scope for bad European-wide fiscal policy because Article 125 of the Treaty on the Functioning of the European Union ostensibly prohibits cross-country redistribution or bailouts.

For what it’s worth, there is another provision for nations that use the euro currency. Article 136 of the Treaty allows for a “stability mechanism” to “safeguard the stability of the euro,” but also states that “the mechanism will be made subject to strict conditionality.”

Now let’s apply this background knowledge to the current situation.

As I wrote last month, the coronavirus-triggered economic mess is wreaking havoc with the finances of EU nations, especially for “Club Med” nations.

For example, Desmond Lachman of the American Enterprise Institute writes for the Hill about the potential consequences for Italy.

The Eurozone’s moment of truth has arrived with the coronavirus pandemic. …a supply side-shock of unprecedented size to Europe in general and to a highly indebted Italy in particular. Indeed, Italy, the Eurozone’s third-largest member country, is now at the epicenter of the pandemic and is being subject to an economic shock of biblical proportions. …That is all too likely to cause the country’s public debt to skyrocket to over 160 percent of GDP by year-end. It is also likely to put enormous strain on the country’s rickety banking system…it would seem to be only a matter of time before markets…became increasingly reluctant to buy Italian government bonds for fear of an eventual default. They would also…chose to move their deposits out of the Italian banks to safer havens abroad. …we should brace ourselves for an Italian exit from the euro that would almost certainly roil the world’s financial markets.

None of this should be a surprise. Italy is a fiscal mess and I’ve been making that point with tiresome regularity.

The coronavirus and the concomitant economic shutdown are merely a final (and very big) straw on the camel’s back.

So is Italy going to default? And maybe crash out of the euro? Or, alternatively, actually impose some long-overdue spending restraint?

Well, why make any tough decision if there’s a potential new source of money – i.e., cash from taxpayers in Germany, Finland, Austria, the Netherlands, Sweden, and other EU nations in Northern Europe.

Needless to say, that’s a very controversial concept. British newspapers have been writing about this issue.

Here are some passages from a report in the left-leaning Guardian.

The European Union has weathered the storms of eurozone bailouts, the migration crisis and Brexit, but some fear coronavirus could be even more destructive. …Jacques Delors, the former European commission president who helped build the modern EU, broke his silence last weekend to warn that lack of solidarity posed “a mortal danger to the European Union”. …The pandemic has reopened the wounds of the eurozone crisis, resurrecting stereotypes about “profligate” southern Europeans and “hard-hearted” northerners. …The Dutch finance minister, Wopke Hoekstra,…infuriat[ed] his neighbours by asking why other governments didn’t have fiscal buffers to deal with the financial shock of the coronavirus. His comments were described as “repugnant”, “small-minded” and “a threat to the EU’s future” by Portugal’s prime minister, António Costa.

Here are excerpts from a piece in the right-leaning Telegraph.

Italian politicians took out a full-page advertisement in one of Germany’s most prestigious newspapers…, urging parsimonious northern Europe to do more to help the south… They urged Berlin to drop its opposition to a proposed EU scheme to issue so-called “coronabonds” to raise funds to fight the crisis. And they accused the Netherlands, which has led opposition to the scheme, of operating as a tax haven and diverting revenue from other member states. …Several EU members – led by France, Italy, Spain and Belgium – have called for EU-wide “coronabonds” to help poorer member states borrow as they struggle with the economic impact of the crisis. But a rival faction of northern members, led by the Netherlands, Finland, Austria and Germany, has opposed what it sees as an attempt to saddle the countries with the debts of their more feckless neighbours.

An article in the Express highlighted divisions between Portugal and the Netherlands.

Portugal’s Prime Minister Antonio Costa has stunned fellow EU leaders after raising the idea…that the Netherlands could be kicked out of the European Union… The Netherlands held up the talks after blocking demands from Italy, Spain and France for so-called ‘corona-bonds’ where the EU would issue joint shared debt to help finance a recovery. …The Portuguese leader said: “If under these conditions it’s not possible for Europe to ensure a common response to this challenge, this is a sign of great concern for those who believe in Europe.” Mr Costa went on to question whether “there is anyone who wants to be left out” of the EU or eurozone. He added: “Naturally, I’m referring to the Netherlands. “There is at least one country in the euro zone that resists understanding that sharing a common currency implies sharing a common effort.”

The rest of this column is going to explain why it’s a very bad idea to have intra-EU redistribution and bailouts.

But I first want to debunk the claim from the Portuguese Prime Minister that a common currency requires a common fiscal policy.

Indeed, he’s not the only one to make this mistake. In a column for the U.K.-based Times, Iain Martin also asserts that a common currency somehow necessitates cross-country redistribution.

European finance ministers and leaders have spent the week arguing over desperate pleas from countries such as Italy…who want the European Central Bank and the EU to underpin common debt that will cover the epic bills being faced by national governments. …The fiscally conservative northern nations see no reason why they should take on the “pooled” debt of weaker southern European economies. …The core problem is what it has always been: the elementary design flaw of the euro. Currency blocs that work depend on that notion of common endeavour and “pooling” debt and risk, and ideally must function as one political organisation. …the euro needed an institutional structure that would operate roughly as the United States does. …This escalating economic emergency is a tragedy…a currency and monetary and fiscal construction that is not capable of swiftly transferring resources to the weak.

Both Costa and Martin are wrong.

Panama does very well using the dollar as its currency, yet there’s obviously no common fiscal policy with the United States. Other nations also have “dollarized” without any adverse impact.

Or consider the fiscal history of the United States. For much of American history, the federal government was trivially small. Most spending happened at the state and local level.

Needless to say, having a common currency in this decentralized system wasn’t a hindrance to U.S. economic development.

With this topic out of the way, let’s now deal with whether the coronavirus crisis should be used as an excuse to open the floodgates for intra-EU redistribution and bailouts.

Politicians from nations on the receiving end obviously approve.

But some Americans also like the idea.

Max Bergmann, a former Obama appointee at the State Department, likes the idea. He argues in the Washington Post for more centralization and more redistribution in the EU.

…this is in fact a fight over the future of Europe. The common European bond proposal hits at the core of what Europe’s union is for. It is an act of unity… A common E.U. bond would take the debt that individual European states accrue to fight this crisis and make it a collective European responsibility. …Moving ahead with it would entail a sweeping increase in the power of the federal union. …The move by…nine countries for a common E.U. bond was in fact a revolt against Europe’s status quo. It was at its core therefore a revolt against Merkel and the past decade of austerity in Europe. …Merkel is also the architect of a decade of devastating austerity that has caused economic devastation and deprivation… The crisis revealed that Europe’s new currency (the euro) had a design flaw. While the E.U. had a common monetary policy with its own central bank, it lacked a common fiscal policy. …Merkel could have pushed for that. …Merkel lectured southern European countries about profligacy. She turned what was a manageable crisis into a systemic shock to Europe’s economies. …As the coronavirus crisis hit, …Merkel has stuck to her guns.

The New York Times, unsurprisingly, has editorialized for centralization and redistribution.

…the European Union is…an alliance of sovereign countries, not a central government, and Brussels has control only over external trade and competition. For the rest, its executive branch, the European Commission, can only seek cooperation, not order it. The states that share the euro do not have true fiscal union, under which wealthier parts of the bloc would prop up the poorer. …Europe could do better. Much better. …Italians or Spaniards confronted with death and economic catastrophe…aren’t in a bind due to profligate spending; they’re in the throes of a plague… The question to ask is what’s the point of any union if it cannot find unity when it is needed most…true leadership requires knowing that we’re all in this together and can only conquer it together.

Is this correct? Would it be a good idea to have “a sweeping increase in the power of the federal union”? Would that be “true leadership”?

Gideon Rachman warns in the Financial Times that such policies will cause political fallout.

…northern Europeans will…feel exploited by the south. …The longer-term fears of the northern Europeans are also legitimate. …The northerners are alert to any sign that they are being sucked into permanent, large transfers of cash to heavily indebted EU partners. They are justifiably concerned that the current anguish is being used to push forward ideas that they have already rejected, many times over. …if political leaders renege on longstanding promises…, they should not be particularly surprised if voters then turn to populist, anti-European parties. …Anti-EU parties have already made strong gains across northern Europe in recent years.

That’s very sensible political analysis.

But the bigger problem, at least from my perspective, is that a common fiscal policy would be very bad economics.

It means more redistribution, with all the unfortunate incentives that creates for both those paying and those receiving (as illustrated by this cartoon).

And it means more overall government spending. The “Club Med” countries obviously would spend any money they got (whether from so-called coronabonds, a common-EU budget, or any other mechanism), and there’s no reason to think the nations in Northern Europe would reduce spending as their taxpayers started to underwrite the budgets of other nations.

This is a problem since government already is far too large in every EU country. Here’s the most-recent data from the European Commission. If you focus on the left, you’ll see the average fiscal burden in the EU is about 45 percent of GDP (and slightly higher in the subset of eurozone countries).

The bottom line is that countries such as Italy, Spain, Greece, and Portugal are in trouble because their governments have been spending too much.

Sadly, I fear it is just a matter of time before Article 125 is somehow sidelined and the profligacy of those “Club Med” nations is rewarded.

And if/when that happens, what’s good about the EU (open trade and the remnants of mutual recognition) definitely will be dwarfed by bad policy (bailouts, transfers, and others form of redistribution).

P.S. One of the strongest arguments for Brexit was that the EU inevitably would morph into a transfer union – and thus accelerate the economic decline of Europe. Given what’s now happening, the British were very wise to escape.

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Today is Brexit Day. As of 6:00 P.M. EST (Midnight in Brussels), the United Kingdom no longer will be a member of the European Union.

This is definitely good news in the long run since the U.K. will now be somewhat insulated from inevitable economic crises caused by the European’s Union’s dirigiste economic model and grim demographic outlook.

Whether it’s also good news in the short run depends mostly on decisions in London, such as whether Prime Minister Boris Johnson and his Tory government expand economic freedom (which should be the case, but there are worrisome signs that the spending burden will increase).

But Washington and Brussels also will play a role since the U.K. wants to sign free-trade agreements. This could be a problem since the E.U. will be tempted to behave in a spiteful manner and Trump and his trade team are protectionists.

But let’s set that aside for the moment and look at the big picture.

The Wall Street Journal nicely summarized the key takeaways in yesterday’s editorial about Brexit.

The EU was founded on the notion that only an ever-deeper economic union—with an ever-closer political union close on its heels—could secure peace and prosperity… Most continental political leaders, if not their voters, still believe this. …British voters think otherwise. Their 2016 vote to leave the EU, ratified in December’s general election, was not a vote for war and poverty. …voters had the temerity to assert themselves despite resistance from a political and bureaucratic class invested in the status quo. …One feature of this new politics is how immune voters have become to economic scaremongering… Britons instead have heard European anxiety that Brexit will trigger a “race to the bottom” on economic policy. What this really means is that EU politicians are aware that a freer economy more open to commerce at home and trade outside the EU would deliver more prosperity to more people than continental social democracy. British voters may not embrace this open vision in the end, but they’ve given themselves the choice. …All of this frightens so-called good Europeans…because it’s a direct challenge to…their “European project.” Central to this worldview is a distrust of…markets… A Britain with greater political independence and deep trading ties to Europe without all the useless red tape and hopeless centralizing could be a model. …Britain’s voters in 2016, and again in 2019, chose peaceful and prosperous coexistence with their neighbors rather than mindless but relentless integration. It’s the most consequential choice any European electorate has made in at least a generation.

Amen.

Brexit is very good news (December’s election in the U.K., which ensured Brexit, was the best policy-related development of 2019).

It means more jurisdictional competition, which is good news for those of us who want some sort of restraint on government greed.

And it means less power for the E.U. bureaucracy, which has a nasty habit of trying to export bad tax policy and bad regulatory policy.

Brexit also is a victory for Nigel Farage. Here are his final remarks to the European Parliament.

Farage has been called the “most consequential political figure in a generation in Europe, perhaps the whole of the West.”

This actually may be true. Brexit almost surely happened because of Farage’s efforts.

And to achieve that goal in the face of unified establishment opposition is truly remarkable.

Speaking of establishment opposition, let’s close today with an updated version of a PG-13 song about how the British people responded to the practitioners of “Project Fear.”

P.S. You can enjoy other Farage speeches by clicking here, here, and here.

P.P.S. And you can enjoy more Brexit-themed humor by clicking here, here, and here.

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Donald Trump is an incoherent mix of good policies and bad policies.

Some of his potential 2020 opponents, by contrast, are coherent but crazy.

And economic craziness exists in other nations as well.

In a column for the New York Times, Jochen Bittner writes about how a rising star of Germany’s Social Democrat Party wants the type of socialism that made the former East Germany an economic failure.

Socialism, the idea that workers’ needs are best met by the collectivization of the means of production… A system in which factories, banks and even housing were nationalized required a planned economy, as a substitute for capitalist competition. Central planning, however, proved unable to meet people’s individual demands… Eventually, the entire system collapsed; as it did everywhere else, socialism in Germany failed. Which is why it is strange, in 2019, to see socialism coming back into German mainstream politics.

But this real-world evidence doesn’t matter for some Germans.

Kevin Kühnert, the leader of the Social Democrats’ youth organization and one of his party’s most promising young talents, has made it his calling card. Forget the wannabe socialism of American Democrats like Bernie Sanders or Alexandria Ocasio-Cortez. The 29-year-old Mr. Kühnert is aiming for the real thing. Socialism, he says, means democratic control over the economy. He wants to replace capitalism… German neo-socialism is profoundly different from capitalism. …Mr. Kühnert took specific aim at the American dream as a model for individual achievement. …“Without collectivization of one form or another it is unthinkable to overcome capitalism,” he told us.

In other words, he wants real socialism (i.e., government ownership). And that presumably means he also supports central planning and price controls.

What makes Kühnert’s view so absurd is that he obviously knows nothing about his nation’s history.

Just in case he reads this, let’s look at the evidence.

Jaap Sleifer’s book, Planning Ahead and Falling Behind, points out that the eastern part of Germany was actually richer than the western part prior to World War II.

The entire country’s economy was then destroyed by the war.

What happened afterwards, though, shows the difference between socialism and free enterprise.

Before…the Third Reich the East German economy had…per capita national income…103 percent of West Germany, compared to a mere 31 percent in 1991. …Here is the case of an economy that was relatively wealthy, but lost out in a relatively short time… Based on the official statistics on national product the East German growth rates were very impressive. However, …the actual performance was not that impressive at all.

Sleifer has two tables that are worth sharing.

First, nobody should be surprised to discover that communist authorities released garbage numbers that ostensibly showed faster growth.

What’s really depressing is that there were more than a few gullible Americans – including some economists – who blindly believe this nonsensical data.

Second, I like this table because it confirms that Nazism and communism are very similar from an economic perspective.

Though I guess we should give Germans credit for doing a decent job on product quality under both strains of socialism.

For those who want to read further about East German economic performance, you can find other scholarly articles here, here, and here.

I want to call special attention, though, to a column by an economist from India. Written back in 1960, even before there was a Berlin Wall, he compared the two halves of the city.

Here’s the situation in the capitalist part.

The contrast between the two Berlins cannot miss the attention of a school child. West Berlin, though an island within East Germany, is an integral part of West German economy and shares the latter’s prosperity. Destruction through bombing was impartial to the two parts of the city. Rebuilding is virtually complete in West Berlin. …The main thoroughfares of West Berlin are near jammed with prosperous looking automobile traffic, the German make of cars, big and small, being much in evidence. …The departmental stores in West Berlin are cramming with wearing apparel, other personal effects and a multiplicity of household equipment, temptingly displayed.

Here’s what he saw in the communist part.

…In East Berlin a good part of the destruction still remains; twisted iron, broken walls and heaped up rubble are common enough sights. The new structures, especially the pre-fabricated workers’ tenements, look drab. …automobiles, generally old and small cars, are in much smaller numbers than in West Berlin. …shops in East Berlin exhibit cheap articles in indifferent wrappers or containers and the prices for comparable items, despite the poor quality, are noticeably higher than in West Berlin. …Visiting East Berlin gives the impression of visiting a prison camp.

The lessons, he explained, should be quite obvious.

…the contrast of the two Berlins…the main explanation lies in the divergent political systems. The people being the same, there is no difference in talent, technological skill and aspirations of the residents of the two parts of the city. In West Berlin efforts are spontaneous and self-directed by free men, under the urge to go ahead. In East Berlin effort is centrally directed by Communist planners… The contrast in prosperity is convincing proof of the superiority of the forces of freedom over centralised planning.

Back in 2011, I shared a video highlighting the role of Ludwig Erhard in freeing the West German economy. Given today’s topic here’s an encore presentation.

Samuel Gregg, writing for FEE, elaborates about the market-driven causes of the post-war German economic miracle.

It wasn’t just Ludwig Erhard.

Seventy years ago this month, a small group of economists and legal scholars helped bring about what’s now widely known as the Wirtschaftswunder, the “German economic miracle.” Even among many Germans, names like Walter Eucken, Wilhelm Röpke, and Franz Böhm are unfamiliar today. But it’s largely thanks to their relentless advocacy of market liberalization in 1948 that what was then West Germany escaped an economic abyss… It was a rare instance of free-market intellectuals’ playing a decisive role in liberating an economy from decades of interventionist and collectivist policies.

As was mentioned in the video, the American occupiers were not on the right side.

Indeed, they exacerbated West Germany’s economic problems.

…reform was going to be easy: in 1945, few Germans were amenable to the free market. The Social Democratic Party emerged from the catacombs wanting more top-down economic planning, not less. …Further complicating matters was the fact that the military authorities in the Western-occupied zones in Germany, with many Keynesians in their contingent, admired the economic policies of Clement Atlee’s Labour government in Britain. Indeed, between 1945 and 1947, the Allied administrators left largely in place the partly collectivized, state-oriented economy put in place by the defeated Nazis. This included price-controls, widespread rationing… The result was widespread food shortages and soaring malnutrition levels.

But at least there was a happy ending.

Erhard’s June 1948 reforms…abolition of price-controls and the replacement of the Nazi-era Reichsmark with much smaller quantities of a new currency: the Deutsche Mark. These measures effectively killed off…inflation… Within six months, industrial production had increased by an incredible 50 percent. Real incomes started growing.

And Germany never looked back. Even today, it’s a reasonably market-oriented nation.

I’ll close with my modest contribution to the debate. Based on data from the OECD and Wikipedia, here’s a look at comparative economic output in East Germany and West Germany.

You’ll notice that I added some dotted lines to illustrate that both nations presumably started at the same very low level after WWII ended.

I’ll also assert that the blue line probably exaggerates East German economic output. If you doubt that claim, check out this 1990 story from the New York Times.

The bottom line is that the economic conditions in West Germany and East Germany diverged dramatically because one had good policy (West Germany routinely scored in the top 10 for economic liberty between 1950 and 1975) and one suffered from socialism.

These numbers should be very compelling since traditional economic theory holds that incomes in countries should converge. In the real world, however, that only happens if governments don’t create too many obstacles to prosperity.

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What’s socialism?

Is it the centrally planned economies of Cuba and North Korea? Or the kleptocracies of Zimbabwe and Venezuela?

How about the interventionist welfare states of Greece, Italy, and France? Or the redistribution-oriented Nordic nations?

Since socialism means different things to different people, the answers will be all over the map.

But there’s one constant. However it’s defined, it doesn’t work.

Joshua Muravchik, writing for the Wall Street Journal, shares the many and inevitable failures of socialism.

It’s hard to think of another idea that has been tried and failed as many times in as many ways or at a steeper price in human suffering. …Marx (1818-83)…called his vision “scientific socialism.” Inspired by the dream of proletarian revolution overthrowing capitalist immiseration, socialist parties sprouted across Europe. Yet instead of growing poorer, workers in industrialized countries saw improvement in their living standards; and instead of disappearing, middle classes expanded—all disproving Marx. …Lenin pioneered modern communism, which in the 20th century was imposed on 18 countries and one-third of mankind. Repression was justified by socialism’s purported economic benefits, but the actual trade-off entailed economic misery and the snuffing out of as many as 100 million lives. …“Social democrats” and “democratic socialists” rejected Lenin’s methods. But their goals remained transformational. …British Labour Party leader Clement Attlee…sought to bring “main factors in the economic system”—including banks, mining and energy—under “public ownership and control.” Nationalization worked so badly, however, that Attlee soon beat a retreat and was voted out in 1951.

Though there was plenty of socialism until Margaret Thatcher was elected.

And if you consider the creaky National Health Service, some sectors of the economy remain socialized.

Anyhow, self-described American socialists claim they simply want to be like Scandinavian countries.

But as Muravchik notes, those nations aren’t technically socialist (i.e., they don’t have government ownershipcentral planningprice controls).

Yes, they have expensive welfare states (which have hampered growth), but markets determine how resources are allocated.

American socialists like Mr. Sanders, while often defending the likes of Fidel Castro, Daniel Ortega, Hugo Chávez and Nicolás Maduro, prefer to point to Scandinavia as a model. But Scandinavian social democrats learned to settle for dense social safety nets underwritten by remarkably free, capitalist economies. On the World Bank’s Ease of Doing Business scale, Denmark ranks third of 190 countries, Norway seventh and Sweden 12th.

The bottom line is that socialism has failed every place it’s been tried.

Socialism has failed everywhere it’s been tried… Surely today’s young people can create their own ideas and make their own mistakes rather than repeat those that darkened the times of their parents, grandparents and the generations before.

Now let’s look at a column by Richard Geddes of the American Enterprise Institute.

He notes that there’s a grim relationship not only between socialism and economic failure, but also that the ideology has a long list of victims.

Socialism has an abysmal record in the twentieth and twenty-first century, its effects include economic destruction, failure, and misery — Venezuela being the latest in a long line of wretched examples. Yet today, Democratic Party leaders such as Bernie Sanders and Alexandra Ocasio-Cortez are still proud to adopt the label of “democratic socialist.” …the more rigorously socialist principles are applied, the greater the human suffering, regardless of race, creed, or geographic location. …the grim statistics of those who died in the Soviet Union and elsewhere in the name of socialist experimentation (such as those who suffered forced starvation during the collectivization of agriculture) are pegged at about 100 million.

Geddes looks at the argument over how to define socialism and notes that regulation can be a back door form of socialism.

The Oxford English Dictionary defines socialism as: “A political and economic theory of social organization which advocates that the means of production, distribution, and exchange should be owned or regulated by the community as a whole.” New socialists argue that the distinction between government ownership and regulation is critical, and that they want extensive regulation but not nationalization. Yet, if regulation is sufficiently intrusive and onerous, private property rights are neutered, and control is effectively transferred to the socialist state.

That’s also a good definition of fascism, for what it’s worth. In other words, nominal private ownership, but the heavy hand of government actually determines how resources are allocated.

Geddes notes that American socialists don’t favor dictatorship, but that doesn’t change the fact that their policies will have a very adverse impact on the economy.

New socialists argue that, unlike their 20th century counterparts, they oppose the use of force to achieve their policy goals, instead preferring peaceful democratic processes. …however, whether socialist ends are achieved through forceful or democratic processes matters little when it comes to the nefarious effects of policies such as “free” healthcare, “free” college tuition, and so on. The destructive effects on both the supply and demand side of those markets would be much the same in the end.

Like Muravchik, Geddes also explains that Nordic nations don’t qualify as socialist.

Nordic countries (Denmark, Finland, Iceland, Norway, and Sweden) — beloved by some as examples of successful socialism. …those countries are in many ways more market-oriented that the United States… Indeed, those countries are decades ahead of the United States in adopting market reforms in two of my areas of policy expertise: postal services and infrastructure delivery.

My two cents is that the Scandinavian nations are not socialist based on the technical definition.

And here’s my amateur depiction of how that works, with degree of intervention measured from top to bottom. Notice that Sweden is well above the line and isn’t socialist (indeed, it is farther from socialism than the United States.

But if everyone now thinks socialism simply means a lot of redistribution, then we get a different picture.

Under this Crazy Bernie/AOC approach, Sweden is to the right of the line and is socialist but (perversely) Venezuela doesn’t qualify.

But maybe the way to accommodate both the traditional definition and the modern usage is to draw a diagonal line.

Here’s my depiction, and I deliberately put Sweden on the socialist side to make some of my lefty friends happy (though if you’re looking at overall levels of economic freedom, they shouldn’t be socialist unless the United States also is socialist).

The obvious takeaway is that it’s best to be near the top left, near Hong Kong. And it’s also good to avoid the bottom right (Venezuela being closest to that corner, which makes sense since it is in last place according to Economic Freedom of the World).

P.S. Since I bent over backwards to define socialism in ways to make the left happy, I will atone by calling attention to my collection of socialism/communism humor.

P.P.S. The Soviet Union, as far as I understand, didn’t have any sort of welfare state other than meager pensions for the elderly. So it’s in the lower left.

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Thanks to the glorious miracle of capitalism, I’m writing this column 36,000 feet above the Atlantic Ocean.

I’m on my way back from Europe, where I ground through about a dozen presentations as part of a swing through 10 countries.

Most of my speeches were about the future of Europe, which was the theme of the Austrian Economic Center’s 2019 Free Market Road Show.

So it was bad timing that I didn’t have a chance until now to comb through a new study from three scholars about the economic impact of the European Union. As they point out at the start of their research, EU officials clearly want people to believe European-wide governance is a recipe for stronger growth.

The great European postwar statesmen, including the EU founding fathers, clearly…envisaged the establishment of a common political and economic entity as a guarantor of…domestic economic progress. …Article 2 of the foundational Treaty of Rome explicitly talked about “raising the standard of living.” … in practice EU today mainly emphasizes growth, as is evident from its most ambitious recent policy agendas. In 2000, a stated aim of the Lisbon Agenda was to make the European economy the “most competitive and knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion.” And all seven of the Flagship Initiatives adopted as part of the Europe 2020 Strategy were about growth—smart, sustainable, and inclusive.

Here’s a bit of background on their methodology.

…the focus of the present paper will be on prosperity as the key outcome that the EU will be measured up against… Our approach in the present paper is to use different empirical strategies (difference-in-differences type setups and standard growth regressions); slice the length of the panel in various ways (e.g., dropping post crisis observations); look at different samples of countries (e.g., a global sample, the sample of original OECD countries, the sample of formerly planned economies, and the sample of EU member countries); pay attention to spatial dependencies; and, finally, require manipulability of the treatment variable.

And what did they find?

It seems that the European Union has not triggered or enabled better economic performance.

The conclusion that emerges upon looking systematically at the data is that EU membership has no impact on economic growth. …We start by simply looking at the comparative performance of the EU and the United States, which is the comparison that Niall Ferguson makes. The IMF’s World Economic Outlook Database provides real GDP growth rates going back to 1980 for the EU and the US. These are plotted in Figure 1. The EU only managed to outperform the US economy in terms of real GDP growth in ten out of the 35 years between 1980 and 2015. …With these growth rates, the US economy would double its size every 27 years, whereas the corresponding number for the EU is 36 years. This hardly amounts to stellar performance on part of the EU.

What makes this data so remarkable is that convergence theory tells us that poorer nations should grow faster than richer nations.

So EU countries should be catching up to America.

Yet the opposite is happening. Here’s the relevant chart on US vs. EU performance.

The scholars conducted various statistical tests.

Many of those test actually showed that EU membership is associated with weaker performance.

…we basically measure pre- and post-entry growth for the EU countries up against the growth trajectories of all other countries. …EU membership is associated with lower economic growth in all columns. …where we use the maximum length WDI sample (i.e., 1961-2015), EU entry is associated with a statistically significant growth reduction of roughly 1.8 percentage points per year. When we remove the period associated with the sovereign debt crisis in the Eurozone (i.e., 2010-15), the reduction remains significant but is lower (1.27 percentage points per year). Finally, when we remove the global financial crisis of 2008-09, the reduction (which is now statistically insignificant) is 0.5 percentage points per year. Using GDP per worker growth from PWT gives roughly similar results… Consequently, in a difference-in-differences type setting EU entry seems to have reduced economic growth.

Moreover, a bigger EU (i.e., more member nations) is associated with slower average growth.

Last but not least, the authors compared former Soviet Bloc nations to see if linking up with the EU led to improvements in economic performance.

…we ask whether growth picked up in the new Eastern European EU countries after accession vis-à-vis growth in 18 formerly planned non-EU countries. …Of the 11 accession countries, not a single one had higher average annual real GDP per capita growth in the period after the EU accession as compared to the period before.

Ouch.

These are not flattering results.

Here’s a look at the relevant chart.

These findings leave me with a feeling of guilt. For almost twenty years, I’ve been telling audiences in Eastern Europe that they probably should join the EU.

Yes, I realized that meant a lot of pointless red tape from Brussels, but I always assumed that those costs would be acceptable because the EU would give them expanded trade and help improve the rule of law.

I’ll have to do some thinking about this issue before my next trip.

P.S. In case you’re wondering why I’ve been telling Eastern European nations to join the EU while telling the United Kingdom to go for a Clean Brexit, my analysis (at least up til now) has been that market-oriented nations are held back by being in EU while poorer and more statist economies are improved by EU membership.

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There’s a very strong economic argument for Brexit which is partly based on an independent United Kingdom having more leeway to adopt pro-market policies.

This case for Brexit is also based – indeed, primarily based – on the fact that the European Union is a slowly sinking ship thanks to horrible demographics and economic weakness. I think the Brits made the right choice (assuming Prime Minister May doesn’t sabotage the process) in voting to get in a lifeboat.

By the way, the chronic stagnation in Europe is largely the fault of member nations.

For instance, I don’t blame the euro (the common currency used in 19 nations) or the European Commission (the easy-to-mock Brussels-based bureaucracy of the EU) for the bad policies adopted in nations such as France, Italy, and Greece.

That being said, the European Commission and its political supporters want the power to make things worse. Actually, they want two powers to make things worse.

  1. The first bad idea, generally supported by the French and Germans, is to give Brussels direct fiscal powers. This almost certainly would mean E.U.-wide taxes imposed by Brussels, presumably accompanied by expanded levels of intra-E.U. redistribution.
  2. The second bad idea, also supported by France and Germany, would be E.U.-wide rules to force national governments to adopt bad policy. This almost certainly would mean greater levels of tax harmonization, presumably accompanied by mandates to expand the welfare state.

I’ve written before about the first bad idea, so let’s focus today on the threat of Brussels-mandated tax harmonization.

The main obstacle to this bad idea is a “unanimity rule” that basically prevents further centralization of tax policy unless every member nation concurs.

This rule is what saved the E.U. from prior attempts to force member nations to adopt anti-growth policy.

…efforts to create a tax cartel have a long history, beginning even before Reagan and Thatcher lowered tax rates and triggered the modern era of tax competition. The European Commission originally wanted to require a minimum corporate tax rate of 45 percent. And as recently as 1992, there was an effort to require a minimum corporate tax rate of 30 percent.

But the bureaucrats in Brussels have not given up.

Politico reports on the latest effort to weaken fiscal sovereignty.

The European Commission…is set to unveil a communication…that will call on the bloc’s leaders to consider moving to qualified majority voting in EU taxation policy. That system would allow a tax initiative to become EU law as long as 16 out of the 28 countries agree on it. Any tax-related decision currently requires unanimity, leaving many tax proposals doomed to fail. The tax veto has undermined the bloc’s policy ambitions…the…veto…has left several tax files gathering dust on Brussels’ shelves, like the financial transactions tax, which the Commission first proposed in 2011. …The communication is set to suggest introducing qualified majority “step-by-step” for tax… The French commissioner discussed the plan over a lunch with EU ambassadors… “Ireland, Malta, Sweden and Cyprus were against it,” one diplomat that received a debrief on the meeting said. “The rest were cautious and few were for it.” France, Spain, Italy and Portugal were among the few that spoke in favor of the plan. …The Commission is determined to make its case. …The tax veto has…deprived national coffers of billions of euros, according to the draft communication… The digital and financial transaction taxes alone would have generated over €60 billion a year in revenue, the document says.

I do give the European Commission credit for honesty.

The bureaucrats are openly stating they want to get rid of the unanimity rule so that politicians in 16 member nations can force all 28 member nations to have high taxes.

You may be wondering, incidentally, why the European Commission, and the pro-tax governments like France want one-size-fits-all rules for the European Union? Why not have a let-a-thousand-flowers-bloom approach so that all 28 nations to make their own choices?

Once again, they are brutally honest. They unabashedly state that they want harmonized rules so they can eliminate tax competition (the left fears a “race to the bottom“).

Speaking of which, the bottom line is that Europe will decay and decline much faster if the European Commission is successful in its latest effort to kill the unanimity requirement. The last thing the E.U. needs is more taxes and higher spending.

P.S. There already are rules for harmonized VAT taxation in Europe, which predictably has enabled ever-higher tax rates.

P.P.S. The European Commission even tries to brainwash children into supporting higher taxes.

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I’ve warned many times that Italy is the next Greece.

Simply stated, there’s a perfect storm of bad news. Government is far too big, debt is too high, and the economy is too sclerotic.

I’ve always assumed that the country would suffer a full-blown fiscal crisis when the next recession occurs. At that point, tax receipts will fall because of the weak economy and investors will realize that the nation no longer is able to pay its bills.

But it may happen even sooner thanks to a spat between Italy’s left-populist government and the apparatchiks at the European Commission.

Here’s what you need to know. There are (poorly designed) European budget rules, known as the Maastricht Criteria, that supposedly require that nations limit deficits to 3 percent of GDP and debt to 60 percent of GDP.

With cumulative red ink totaling more than 130 percent of GDP, Italy obviously fails the latter requirement. And this means the bureaucrats at the European Commission can veto a budget that doesn’t strive to lower debt levels.

At least that’s the theory.

In reality, the European Commission doesn’t have much direct enforcement power. So if the Italian government tells the bureaucrats in Brussels to go jump in a lake, you wind up with a standoff. As the New York Times reports, that’s exactly what’s happened.

In what is becoming a dangerous game of chicken for the global economy, Italy’s populist government refused to budge on Tuesday after the European Union for the first time sent back a member state’s proposed budget because it violated the bloc’s fiscal laws and posed unacceptable risks. …the commission rejected the plan, saying that it included irresponsible deficit levels that would “suffocate” Italy, the third-largest economy in the eurozone. Investors fear that the collapse of the Italian economy under its enormous debt could sink the entire eurozone and hasten a global economic crisis unseen since 2008, or worse. But Italy’s populists are not scared. They have repeatedly compared their budget, fat with unemployment welfare, pension increases and other benefits, to the New Deal measures of Franklin D. Roosevelt.

Repeating the failures of the New Deal?!? That doesn’t sound like a smart plan.

That seems well understood, at least outside of Italy.

The question for Italy, and all of Europe, is how far Italy’s government is willing to go. Will it be forced into submission by the gravity of economic reality? Or will Italian leaders convince their voters that the country’s financial health is worth risking in order to blow up a political and economic establishment that they say is stripping Italians of their sovereignty? And Brussels must decide how strict it will be. …the major pressure on Italy’s budget has come from outside Italy. Fitch Ratings issued a negative evaluation of the budget, and Moody’s dropped its rating for Italian bonds to one level above “junk” last week.

So now that Brussels has rejected the Italian budget plan, where do things go from here?

According to CNBC, the European Commission will launch an “Excessive Deficit Procedure” against Italy.

…a three-week negotiation period follows in which a potential agreement could be found on how to lower the deficit (essentially, Italy would have to re-submit an amended draft budget). If that’s not reached, punitive action could be taken against Italy. Lorenzo Codogno, founder and chief economist at LC Macro Advisors, told CNBC…“it’s very likely that the Commission will, without making a big fuss, will move towards making an ‘Excessive Deficit Procedure’…to put additional pressure on Italy…” Although it has the power to sanction governments whose budgets don’t comply with the EU’s fiscal rules (and has threatened to do so in the past), it has stopped short of issuing fines to other member states before. …launching one could increase the already significant antipathy between Brussels and a vociferously euroskeptic government in Italy. Against a backdrop of Brexit and rising populism, the Commission could be wary of antagonizing Italy, the third largest euro zone economy. It could also be wary of financial market nerves surrounding Italy from spreading to its neighbors… Financial markets continue to be rattled over Italy’s political plans. …This essentially means that investors grew more cautious over lending money to the Italian government.

For those who read carefully, you probably noticed that the European Commission doesn’t have any real power. As such, there’s no reason to think this standoff will end.

The populists in Rome almost certainly will move forward with their profligate budget. Bureaucrats in Brussels will complain, but to no avail.

Since I’m a nice guy, I’m going to give the bureaucrats in Brussels a much better approach. Here’s the three-sentence announcement they should make.

  1. The European Commission recognizes that it was a mistake to centralize power in Brussels and henceforth will play no role is overseeing fiscal policy in member nations.
  2. The European Commission (and, more importantly, the European Central Bank) henceforth will have a no-bailout policy for national governments, or for those who lend to national governments.
  3. The European Commission henceforth advises investors to be appropriately prudent when deciding whether to lend money to any government, including the Italian government.

From an economic perspective, this is a far superior approach, mostly because it begins to unwind the “moral hazard“that undermines sound financial decision making in Europe.

To elaborate, investors can be tempted to make unwise choices if they think potential losses can be shifted to taxpayers. They see what happened with the various bailouts in Greece and that tells them it’s probably okay to continue lending money to Italy. To be sure, investors aren’t totally blind. They know there’s some risk, so the Italian government has to promise higher interest payments

But it’s highly likely that the Italian government would have to pay even higher rates if investors were convinced there would be no bailouts. Incidentally that would be a very good outcome since it would make it more costly for Italy’s politicians to continue over-spending.

In other words, a win-win situation, with less debt and more prudence (and maybe even a smaller burden of government!).

My advice seems so sensible that you’re probably wondering if there’s a catch.

There is, sort of.

When I talk to policy makers, they generally agree with everything I say, but then say my advice is impractical because Italy’s debt is so massive. They fret that a default would wipe out Italy’s banks (which imprudently have bought lots of government debt), and might even cause massive problems for banks in other nations (which, as was the case with Greece, also have foolishly purchased lots of Italian government debt).

And if banks are collapsing, that could produce major macroeconomic damage and even lead/force some nations to abandon the euro and go back to their old national currencies.

For all intents and purposes, the Greek bailout was a bank bailout. And the same would be true for an Italian bailout.

In any event, Europeans fear that bursting the “debt bubble” would be potentially catastrophic. Better to somehow browbeat the Italian government in hopes that somehow the air can slowly be released from the bubble.

With this in mind, it’s easy to understand why the bureaucrats in Brussels are pursuing their current approach.

So where do we stand?

  • In an ideal world, the problem will be solved because the Italian government decides to abandon its big-spending agenda and instead caps the growth of spending (as I recommended when speaking in Milan way back in 2011).
  • In an imperfect world, the problem is mitigated (or at least postponed) because the European Commission successfully pressures the Italian government to curtail its profligacy.
  • In the real world, though, I have zero faith in the first option and very little hope for the second option. Consider, for instance, the mess in Greece. For all intents and purposes, the European Commission took control of that nation’s fiscal policy almost 10 years ago. The results have not been pretty.

So this brings me back to my three-sentence prescription. Yes, it almost certainly would be messy. But it’s better to let the air out of bubbles sooner rather than later.

P.S. The so-called Basel Rules contribute to the mess in Europe by directing banks to invest in supposedly safe government debt.

P.P.S. If the European Union is going to impose fiscal rules on member nations, the Maastricht criteria should be jettisoned and replaced with a Swiss-style spending cap.

P.P.P.S. Some of the people in Sardinia have the right approach. They want to secede from Italy and become part of Switzerland. The Sicilians, by contrast, have the wrong mentality.

P.P.P.P.S. Italy is very, very, very well represented in the Bureaucrat Hall of Fame.

P.P.P.P.P.S. You’ll think I’m joking, but a columnist for the New York Times actually argued the United States should be more like Italy.

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When I argue against tax increases, I generally rely on two compelling points.

  1. Higher taxes will undermine prosperity by penalizing productive behavior.
  2. More money for politicians will trigger more spending, so red ink will increase.

When I argue against centralization and urge Swiss-style federalism, I also rely on two very strong points.

  1. Local governments will be more responsible if they raise and spend their own funds.
  2. Competition among local jurisdictions will encourage better public policy.

Now let’s mix these issues together by looking at some academic research on what happens when politicians get a windfall of revenue from a  centralized source.

Well, according to new research from Italy’s central bank, bigger government means more corruption.

…large financial transfers from a central unit of government to lower levels of government…come with the risk of exacerbating the agency problem due to the fact that the funds are collected at a higher level and then managed locally with typically little transparency on the actual amount of resources received by each local area. This moral hazard problem may increase incentives for local administrators to extract rents from the funds received. …growing evidence suggests that illegal practices and rent seeking are still often associated with the receipt of transfers from a central government. …we investigate the relationship between financial transfers from a central level of government to local administrations and the coincident occurrence of white collar crimes at the same local level drawing from the case of EU funding to Southern Italy. …The South of Italy has been one of the largest recipients of EU funds: in the most recent programming period it received 25 billion euro out of the 35 billion total allocated to Italy and managed at the local level. The empirical analysis exploits a unique administrative dataset of criminal episodes in Italy and matches them to the records of all the transfers from the EU to each single municipality over the period 2007-2014. We find evidence of a significant positive relationship between EU funds and the occurrence of corruption and fraudulent behaviors in the recipient municipality in the same year. …the robustness analysis we performed provided evidence that the correlation between transfers and corruption that we estimate is likely not just spurious or due to confounding effects

As far as I’m concerned, these results belong in the “least surprising” category. Of course you get more corruption when government gets bigger.

Now let’s look at another study. A few years ago, academic scholars produced even more compelling research from Brazil.

The paper studies the effect of additional government revenues on political corruption and on the quality of politicians, both with theory and data. The theory is based on a version of the career concerns model of political agency with endogenous entry of political candidates. The evidence refers to municipalities in Brazil, where federal transfers to municipal governments change exogenously according to given population thresholds. We exploit a regression discontinuity design to test the implications of the theory and identify the causal effect of larger federal transfers on political corruption and the observed features of political candidates at the municipal level. In accordance with the predictions of the theory, we find that larger transfers increase political corruption and reduce the quality of candidates for mayor. …The empirical findings accord well with the implications of the theory. Specifically, an (exogenous) increase in federal transfers by 10% raises the incidence of a broad measure of corruption by 12 percentage points (about 17% with respect to the average incidence), and the incidence of a more restrictive measure—including only severe violation episodes—by 10.1 percentage points (about 24%).

By the way, this persuasive research isn’t just an argument for smaller government and fewer transfers.

It’s also why foreign aid generally has harmful effects on recipient countries. Handouts line the pockets of the political elite and enable a bigger burden of government.

It’s also one of the reasons why I’ve referred to the International Monetary Fund as a “dumpster fire.” That bureaucracy leverages its money (the U.S. is the biggest backer) to encourage higher tax burdens and more redistribution in countries that already are suffering from too much bad policy.

The two studies we’ve reviewed today are simply an exclamation point.

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The real world is like a cold shower for our friends on the left. Everywhere they look, there is evidence that jurisdictions with free markets and small government outperform places with big welfare states and lots of intervention.

That’s true when comparing nations. And it’s also true when comparing states. That must be a source of endless frustration an disappointment for statists.

Speaking of disappointed statists, the real world has led to more bad news. The left-wing Mayor of Baltimore campaigned in favor of a $15 minimum wage, but then decided to veto legislation to impose that mandate. The Wall Street Journal opines on this development.

Mayor Catherine Pugh, a Democrat, has rejected a bill that would raise the city’s minimum wage to $15 an hour by 2022. She did so even though she had campaigned in favor of raising the minimum wage, which shows that economic reality can be a powerful educator. She explained her change of heart by noting that raising the rate above the $8.75 an hour minimum that prevails in the rest of Maryland would send jobs and tax revenue out of Baltimore to surrounding counties. The increase would also have raised the city’s payroll costs by $116 million over the next four years when she’s already coping with a deficit of $130 million in the education budget.

The key thing to notice is that the Mayor recognized that the real-world impact of bad legislation is that economic activity would shrink in the city and expand outside the city.

Writing for Reason, Eric Boehm also points out that the Mayor was constrained by the fact neighboring jurisdictions weren’t making the same mistake.

Pugh said the bill would not be in the best interest of Baltimore’s 76,000 unemployed workers and would drive businesses out of the city to the surrounding counties. …Indeed. Raising the minimum wage would not solve Baltimore’s economic troubles, and would likely only add to them. While support for a $15 minimum wage has become something of a litmus test for progressive politicians, the true test of any politician should be whether he or she is willing to set aside campaign trail rhetoric that flies in the face of economic reality. Signing the bill would have made progressive pols and activists happy—one Baltimore city councilman called Pugh’s decision “beyond disappointing” and a minimum wage activist group said it would remind voters of Pugh’s “broken promise”—but there’s no honor in following through on a promise to do more damage to an already struggling city’s economy. Pugh’s decision to veto a $15 minimum wage bill isn’t disappointing in the least. More politicians should learn from her example of valuing economic reality over populist rhetoric.

The Mayor’s veto is good news, though it remains to be seen whether city legislators will muster enough votes for an override.

Regardless of what happens, notice that the Mayor didn’t do the right thing because she believed in economic liberty and freedom of contract. She also didn’t do the right thing because she recognized that higher minimum wage mandates would lead to more joblessness.

Instead, she felt compelled to do the right thing because of jurisdictional competition. She was forced to acknowledge that bad policy in her city would explicitly backfire since economic activity is mobile. She had to admit that there are no magic boats.

And this underscores why federalism and decentralization are vital features of a good system. Governments are more likely to do bad things when the costs can be imposed on an entire nation (or, even better from their perspective, the entire world). But when bad policy is localized, it becomes very hard to disguise the costs of bad policy.

And, as today’s column illustrates, decentralization stopped the Mayor of Baltimore from a bad policy that would hurt poorly skilled workers. Just as federalism stopped Vermont politicians from imposing a destructive single-payer health system.

Let’s close by circling back to the minimum wage.

Writing in today’s Wall Street Journal, Andy Puzder makes a very timely point about automation.

Entry-level jobs matter—and you don’t have to take my word for it. In a speech last week on workforce development in low-income communities, Federal Reserve Chair Janet Yellen said that “it is crucial for younger workers to establish a solid connection to employment early in their work lives.” Unfortunately, government policies are destroying entry-level jobs by giving businesses an incentive to automate at an accelerated pace. In a survey released last month, the publication Nation’s Restaurant News asked 319 restaurant operators to name their biggest challenge for 2017. Nearly a quarter of them, 24%, said rising minimum wages. …The trend toward automation is particularly pronounced in areas where the local minimum wage is high.

Need more evidence?

By the way, even the normally left-leaning World Bank has research on the damaging impact of minimum wage mandates.

This paper uses a search-and-matching model to examine the effects of labor regulations that influence the cost of formal labor (notably minimum wages and payroll taxes) on labor market outcomes… The results indicate that these regulations, especially minimum wage policy, contribute to higher unemployment rates and constraint formalization…, especially for youth and women.

The research was about the labor market in Morocco, but the laws of supply and demand are universal.

As I’ve repeatedly stated, when you mandate that workers get paid more than what they’re worth, that’s a recipe for unemployment. And as the World Bank points out, it’s the more vulnerable members of society who pay the highest price.

In an ideal world, there should be no minimum wage mandates. But since that’s not an immediately practical goal, the best way of protecting low-skilled workers is to make sure Washington does not impose a nationwide increase. That won’t stop every state and local government from imposing destructive policies that cause unemployment, but the pressure of jurisdictional competition will

And when those bad policies do occur, that will simply give us more evidence against intervention. Which brings us back to where we started. The real world is a laboratory that shows statism is a bad idea.

P.S. In honor of Equal Pay Day, I can’t resist sharing this tidbit from the Washington Free Beacon.

Oh, you also won’t be surprised to learn that there was also a big pay gap in Hillary Clinton’s Senate office, as well as Obama’s White House. In reality, of course, the market punishes genuine discrimination and the pay gap is basically nonexistent when comparing workers with similar education, experience, and work patterns.

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The annual budget for our bloated and sclerotic federal government consumes about $4 trillion of America’s economic output, yet President Trump so far has not proposed to reduce that overall spending burden by even one penny.

A few programs are targeted for cuts, to be sure, but I explained last week, that “taxpayers won’t reap the benefits since those savings will be spent elsewhere, mostly for a bigger Pentagon budget.” More worrisome, I also pointed out that his budget proposal is “silent on the very important issues of tax reform and entitlement reform.”

All things considered, you would think that statists, special interest groups, and other denizens of the D.C. swamp would be happy with Trump’s timid budget.

Not exactly. There’s so much wailing and screaming about “savage” and “draconian” budget cuts, you would think the ghost of Ronald Reagan is haunting Washington.

Much of this whining is kabuki theater and political posturing as various beneficiaries (including the bureaucrats, lobbyists, contractors, and other insiders) make lots of noise as part of their never-ending campaigns to get ever-larger slices of the budget pie.

And nothing demonstrates the vapidity of this process more than the imbroglio over the Meals on Wheels program. Based on news reports, the immediate assumption is that Trump’s budget is going to starve needy seniors by ending delivery of meals.

Here’s how CNN characterized the proposal.

The preliminary outline for President Donald Trump’s 2018 budget could slash some funding for a program that provides meals for older, impoverished Americans.

“Slash”? That sounds ominous. Sounds like a cut of 40 percent, 50 percent, or 60 percent!

And a flack for Meals on Wheels added her two cents, painting a picture of doom and despair for hungry seniors.

…spokeswoman Jenny Bertolette said, “It is difficult to imagine a scenario in which they will not be significantly and negatively impacted if the President’s budget were enacted.”

Oh no, “significantly and negatively impacted” sounds brutal. How many tens of thousands of seniors will starve?

Only near the bottom of the story do we learn that this is all nonsense. All that Trump proposed, as part of his plan to shift some spending from the domestic budget to the defense budget, is to shut down a pork-riddled and scandal-plagued program at the Department of Housing Development. However, because a tiny fraction of community development block grants get used for Meals on Wheels, interest groups and leftist journalists decided to concoct a story about hungry old people.

In reality, the national office (appropriately) gets almost all its money from private donations and almost all the subsidies to the local branches are from a separate program.

About 3% of the budget for Meals on Wheels’ national office comes from government grants (84% comes from individual contributions and grants from corporations and foundations)… The Older Americans Act, as a function of the US Department of Health and Human Services, …covers 35% of the costs for the visits, safety checks and meals that the local agencies dole out to 2.4 million senior citizens, Bertolette said.

In other words, CNN engaged in what is now known as fake news, publishing a story designed to advance an agenda rather than to inform readers.

My colleague Walter Olson wrote a very apt summary for National Review.

The story that Trump’s budget would kill the Meals on Wheels program was too good to check. But it was false. …it wouldn’t have taken long for reporters to find and provide some needed context to the relationship between federal block grant programs, specifically Community Development Block Grants (CDBG), and the popular Meals on Wheels program. …From Thursday’s conversation in the press, it was easy to assume that block grant programs — CDBG and similar block grants for community services and social services — are the main source of federal funding for Meals on Wheels. Not so.

And if you want some accurate journalism, the editorial page of Investor’s Business Daily has a superb explanation.

What Trump’s budget does propose is cutting is the corruption-prone Community Development Block Grant program, run out of Housing and Urban Development. Some, but not all, state and local governments use a tiny portion of that grant money, at their own discretion, to “augment funding for Meals on Wheels,” according to the statement. …So what’s really going on? As Meals on Wheels America explained, some Community Development Block Grant money does end up going to some of the local Meals on Wheels programs. But it’s a small amount. HUD’s own website shows that just 1% of CDBG grant money goes to the broad category of “senior services.” And 0.17% goes to “food banks.” …All of this information was easily available to anyone reporting on this story, or anyone commenting on it, which would have prevented the false claims about the Meals on Wheels program from spreading in the first place. But why bother reporting facts when you can make up a story…?

The IBD editorial then shifted to what should be the real lesson from this make-believe controversy

…this fake budget-cutting story ended up revealing how programs like Meals on Wheels can survive without federal help. As soon as the story started to spread, donations began pouring into Meals on Wheels. In two days, the charity got more than $100,000 in donations — 50 times more than they’d normally receive. Clearly, individuals are ready, willing and eager to support this program once they perceive a need. Isn’t this how charity is supposed to work, with people donating their own time, money and resources to causes they feel are important, rather than sitting back and expecting the federal government to do it for them?

At the risk of being flippant, Libertarian Jesus would approve that message.

But to be more serious, IBD raises an important point that deserves some attention. Some Republicans think the appropriate response to CNN‘s demagoguery is to point out that Meals on Wheels gets the overwhelming share of its federal subsidies from the Older Americans Act rather than CDBG.

In reality, the correct lesson is that the federal government shouldn’t be subsidizing Meals on Wheels. Or any redistribution program that purports to help people on the state and local level.

There’s a constitutional argument against federal involvement. There’s a fiscal argument against federal involvement. There’s a diversity argument against federal involvement. And there’s a demographic argument against federal involvement.

But there’s also a common-sense argument against federal involvement. And that gives me an excuse to introduce my Third Theorem of Government. Simply stated, it’s a recipe for waste to launder money through Washington.

P.S. For those interested, here is the First Theorem of Government and here is the Second Theorem of Government.

P.P.S. I started today’s column by noting that Trump hasn’t proposed “even one penny” of lower spending. That’s disappointing, of course, but the news is not all bad. The President has  endorsed the Obamacare reform legislation in the House of Representatives, and while that legislation does not solve the real problem in our nation’s health sector, at least it does lower the burden of taxes and spending.

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The famous French diplomat Charles Maurice de Talleyrand supposedly said that a weakness of the Bourbon monarchs was that they learned nothing and forgot nothing.

If so, the genetic descendants of the Bourbons are now in charge of Europe.

But before explaining why, let’s first establish that Europe is in trouble. I’ve made that point (many times) that the continent is in trouble because of statism and demographic change.

What’s far more noteworthy, though, is that even the Europeans are waking up to the fact that the continent faces a very grim future.

For instance, the bureaucrats in Brussels are pessimistic, as reported by the EU Observer.

…the report warns of a longer term risk for the EU economy. “As expectations of low growth ahead affect investment today, there is potential for a vicious circle,” the commission’s director general for economic and financial affairs writes in the report’s foreword. “In short, the projected pace of GDP growth may not be sufficient to prevent the cyclical impact of the crisis from becoming permanent (hysteresis), ” Marco Buti writes.

The people of Europe share that grim assessment.

Pew has some very sobering data on angst across the continent.

Support for European economic integration – the 1957 raison d’etre for creating the European Economic Community, the European Union’s predecessor – is down over last year in five of the eight European Union countries surveyed by the Pew Research Center in 2013. Positive views of the European Union are at or near their low point in most EU nations, even among the young, the hope for the EU’s future. The favorability of the EU has fallen from a median of 60% in 2012 to 45% in 2013.

Here’s the relevant chart.

Establishment-oriented voices in the United States also agree that the outlook is rather dismal.

Writing in the Washington Post, Sebastian Mallaby offers a grim assessment of Europe’s future.

…since 2008…, the 28 countries in the European Union managed combined growth of just 4 percent. And in the subset consisting of the eurozone minus Germany, output actually fell. …most of the Mediterranean periphery has suffered a lost decade. …The unemployment rate in the euro area stands at 9.8 percent, more than double the U.S. rate. Unemployment among Europe’s youth is even more appalling: In Greece, Spain, France, Croatia, Italy, Cyprus and Portugal, more than 1 in 4 workers under 25 are jobless.

The bottom line is that there’s widespread consensus that Europe is a mess and that things will probably get worse unless there are big changes.

But the key question, as always, is whether the changes are positive or negative. And this is why I started with a reference to the Bourbon kings. European leaders today also are infamous for learning nothing and forgetting nothing.

Indeed, the proponents of bad policy want to double down on the mistakes of bigger government and more centralization.

The International Monetary Fund (aka, the “Dr. Kevorkian” or “dumpster fire” of the global economy), led by France’s Christine Lagarde, actually is urging a new form of redistribution in Europe.

The International Monetary Fund called on Thursday for the creation of a fund…in the euro zone… Managing Director Christine Lagarde said… “countries would be pooling budgetary resources in a common pot which could be used for projects and certain operations”

Lagarde says the new fund should have strings attached, so that nations could access the loot if they complied with the EU’s budget rules, and also if they use the money for structural reform.

That sounds prudent, but only until you look at the fine print.

The current budget rules are misguided and are more likely to encourage tax hikes rather than spending restraint. And while many European nations need good structural reform, that’s not what the IMF has in mind.

Lagarde told a news conference the new fund could pay for projects related to migration, refugees, security, energy and climate change.

Instead, it appears that this is just a scheme to transfer money from countries such as Germany and Estonia that have restrained spending in recent years.

Germany, Estonia and Luxembourg are the only EU countries that have posted budget surpluses since 2014. Lagarde said the pooling of budgetary resources could put these surpluses to good use.

Sigh.

But the problem goes way beyond an international bureaucracy led by someone from Europe. This is the mentality that is deeply embedded in most European policymakers.

Simply stated, the people who helped create the European mess by pushing for bigger government and more centralization agree that the time if right for…you guessed it…bigger government and more centralization. Here’s an excerpt from a report by the Delors Institute.

…a true economic and monetary union still needs to be built. It will have to be based on significant risk sharing and sovereignty sharing within a coherent and legitimate framework of supranational economic governance. This third building block includes turning the ESM into a fully-fledged European Monetary Fund.

The bureaucrats in Brussels predictably agree that they should get more power, as noted in a story from the EU Observer.

The EU should raise its own taxes and use Brexit as an opportunity to push for the idea, a report by a group of top officials says. …”The Union must mobilise common resources to find common solutions to common problems,” says the document, seen by EUobserver. …The paper also proposes a EU-level corporate income tax that would be combined with a common consolidated corporate tax base… Other proposals include a bank levy, a financial transaction tax, or a European VAT that would top national VATs. …The new budget EU commissioner Guenther Oettinger said that the report was “of great quality”.

And the senior politicians in Brussels are also beating the drum for added centralization.

…divergence creates fragility… Progress must happen…towards a genuine Economic Union…towards a Fiscal Union…need to shift from a system of rules and guidelines for national economic policy-making to a system of further sovereignty sharing within common institutions…some degree of public risk sharing…including a ‘social protection floor’…a shared sense of purpose among all Member States

Wow. I don’t know if I’ve ever read something so wildly wrong. As Nassim Nicholas Taleb has sagely observed, it is centralization and harmonization that creates systemic risk.

And all this talk about “common resources” and “public risk sharing” is simply the governmental version of co-signing a loan for the deadbeat family alcoholic.

Yet Europe’s ideologues can’t resist their lemming-like march in the wrong direction.

What makes this especially odd is that there is so much evidence that Europe originally became rich for the opposite reason.

It was decentralization and jurisdictional competition that enabled prosperity.

Matt Ridley, writing for the UK-based Times, drives this point home.

…the leading theory among economic historians for why Europe after 1400 became the wealthiest and most innovative continent is political fragmentation. Precisely because it was not unified, Europe became a laboratory for different ways of governing, enabling the discovery of regimes that allowed free markets and invention to flourish, first in northern Italy and some parts of Germany, then the low countries, then Britain. By contrast, China’s unity under one ruler prevented such experimentation. …Baron Montesquieu…remarked, Europe’s “many medium-sized states” had incubated “a genius for liberty, which makes it very difficult to subjugate each part and to put it under a foreign force other than by laws and by what is useful to its commerce”. …David Hume…mused…Europe is the continent “most broken by seas, rivers, and mountains” and so “the divisions into small states are favourable to learning, by stopping the progress of authority as well as that of power”. …the idea has gained almost universal agreement among historians that a disunited Europe, while frequently wracked by war, was also prone to innovation and liberty — thanks to the ability of innovators and skilled craftsmen to cross borders in search of more congenial regimes.

But now Europe has swung completely in the other direction.

The European Commission’s obsession with harmonisation prevents the very pattern of experimentation that encourages innovation. Whereas the states system positively encouraged governments to be moderate in political, religious and fiscal terms or lose their talent, the commission detests jurisdictional competition, in taxes and regulations. The larger the empire, the less brake there is on governmental excess.

Ralph Raico echoes these insights in an article for the Foundation for Economic Education.

In seeking to answer the question why the industrial breakthrough occurred first in western Europe, …what was it that permitted private enterprise to flourish? …Europe’s radical decentralization… In contrast to other cultures — especially China, India, and the Islamic world — Europe comprised a system of divided and, hence, competing powers and jurisdictions. …Instead of experiencing the hegemony of a universal empire, Europe developed into a mosaic of kingdoms, principalities, city-states, ecclesiastical domains, and other political entities. Within this system, it was highly imprudent for any prince to attempt to infringe property rights in the manner customary elsewhere in the world. In constant rivalry with one another, princes found that outright expropriations, confiscatory taxation, and the blocking of trade did not go unpunished. The punishment was to be compelled to witness the relative economic progress of one’s rivals, often through the movement of capital, and capitalists, to neighboring realms. The possibility of “exit,” facilitated by geographical compactness and, especially, by cultural affinity, acted to transform the state into a “constrained predator”.

In other words, the “stationary bandit” couldn’t steal as much and that gave the private sector the breathing room that’s necessary for growth.

But today’s politicians in Europe want to strengthen the ability of governments to seize more money and power.

That strategy may work in the short run, but bailouts, redistribution, easy money, and statism are not a good long-run strategy.

So perhaps it’s appropriate that we conclude with a warning. As reported in a column for the UK-based Telegraph, one of the architects of the euro fears that bailouts are crippling the continent-wide currency.

The European Central Bank is becoming dangerously over-extended and the whole euro project is unworkable in its current form, the founding architect of the monetary union has warned. “One day, the house of cards will collapse,” said Professor Otmar Issing, the ECB’s first chief economist… Prof Issing lambasted the European Commission as a creature of political forces that has given up trying to enforce the rules in any meaningful way. “The moral hazard is overwhelming,” he said. The European Central Bank is on a “slippery slope” and has in his view fatally compromised the system by bailing out bankrupt states in palpable violation of the treaties. “…Market discipline is done away with by ECB interventions. …The no bailout clause is violated every day,” he said… Prof Issing slammed the first Greek rescue in 2010 as little more than a bailout for German and French banks, insisting that it would have been far better to eject Greece from the euro as a salutary lesson for all.

For what it’s worth, I fully agree that Greece should have been cut loose.

But European politicians and bureaucrats, driven by an ideological belief in centralization (and a desire to bail out their big banks), instead decided to undermine the euro by creating a bigger mess in Greece and sending a very bad signal about bailouts to other welfare states.

And keep in mind that the fuse is still burning on the European fiscal crisis.

As the old saying goes, this won’t end well.

P.S. While my prognosis for Europe is relatively bleak, there were some hopeful signs in the aforementioned Pew data.

First, Europeans at some level understand that government is simply too big. Indeed, they recognize that economic growth is far more likely to occur if fiscal burdens are reduced rather than increased.

Second, they also realize that the euro, while weakened and flawed, is a better option than restoring national currencies, which would give their governments the power to finance bigger government by printing money.

P.P.S. I can’t resist sharing one final bit of polling data from Pew. I’m amused that every nation sees itself as the most compassionate (though if you look at real data, all European nations lag the USA in real compassion). Meanwhile, the prize for self-doubt (or perhaps self-awareness?) goes to the Italians, who labeled themselves as least trustworthy. The schizophrenia prize goes to the Poles, who simultaneously view the Germans as the most trustworthy and least trustworthy.

Oh, and there’s probably some lesson to be learned from Germany dominating the data for being most trustworthy and least compassionate.

Maybe this poll should be added to my European humor collection.

P.P.P.S. Given the sorry state of Europe, now perhaps skeptics will understand why Brexit was the only good option for Brits.

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The concept of secession (part of a jurisdiction breaking away to become independent) has a bad reputation in the United States because it is linked to the reprehensible institution of slavery.

But, as Walter Williams has explained, secession today may be an effective way of protecting liberty from ever-expanding centralized government.

And I’ve favorably written about secessionist movements in Sardinia, Scotland, and Belgium, largely because the historical data shows that better policy is more likely when there are many jurisdictions competing with each other.

So it was with considerable interest that I saw an article in Fortune about a secessionist movement in California.

“Calexit” didn’t start with Donald Trump, but his victory on Election Day certainly sparked more interest in the idea. A play on “Brexit,” it’s the new name for the prospect of California seceding from the U.S. The movement…seems to have gained steam in the past six months, thanks in part to the U.K.’s recent Brexit vote and Donald Trump being elected president. …The group’s goal is to hold a referendum in 2018 that, if passed, would transition California into its own independent country. …the movement has even grabbed the attention of some potential Silicon Valley bankrollers.

I like this idea, though I’m not sure it’s good for California since the state faces very serious long-run challenges.

Though this is one of the reasons I like secession. As an independent nation, California no longer would have any hope of getting a bailout from Washington, so the politicians in Sacramento might start behaving more responsibly.

And there are examples of secession in the modern world, such as Slovakia and the Czech Republic emerging from Czechoslovakia. That was a very tranquil divorce, unlike what happened in the former Yugoslavia.

As is so often the case, we can learn a lot from Switzerland. There is a right of secession, albeit dependent on a nationwide vote of approval. Municipalities also can vote to switch cantons, as happened in 1996 when Vellerat left Bern and became part of Jura. By the way, villages in Liechtenstein have the unilateral right to secede from the rest of the nation (though that seems highly unlikely since it is the second-richest nation in the world).

Notwithstanding these good role models, the secessionist movement in California presumably won’t get very far.

But maybe full-blown secession isn’t necessary. If Californians don’t like what’s happening in Washington (or, for that matter, if Texans aren’t happy with the antics in DC), that should be an argument for genuine and comprehensive federalism.

In other words, get rid of the one-size-fits-all policies emanating from the central government and allow states to decide the size and scope of government.

California can decide to do crazy things (such as regulate babysitters and give bureaucrats too much pay) and Texas can choose to do sane things (such as no income tax), but neither state could dictate policy for the entire nation.

This also happens to be the system envisioned by America’s Founding Fathers.

Think of federalism as a live-and-let-live system. New York doesn’t have to become North Dakota and Illinois doesn’t have to become Alabama. Red states can be red and blue states can be blue. And we can add all the other colors in the rainbow as well. Let a thousand flowers bloom, and all that.

And consider how well federalism works in Switzerland, a nation that doesn’t have a single language, culture, or religion.

Now, perhaps, you’ll understand why I even suggested federalism as a solution to the mess in Ukraine.

P.S. If California actually chooses to move forward with secession, the good news is that we already have a template (albeit satirical) for a national divorce in the United States.

P.P.S. Here’s an interesting historical footnote. There’s a small part of Germany that is entirely surrounded by Switzerland. This enclave wanted to become part of Switzerland many decades ago, but there was no right of secession notwithstanding overwhelming sentiment for a shift of nationality.

A whopping 96 percent of the inhabitants voted for annexation by Switzerland. The people had spoken loud and clear, but their voices were ignored. As the Swiss were unable to offer Germany any suitable territory in exchange, the deal was off. Büsingen would remain, somewhat reluctantly, German.

Since Germany is a reasonably well-run nation, I guess we shouldn’t feel too sorry for the people of Büsingen (unlike, say, the residents of Menton and Roquebrune in France, who used to be part of a tax haven but now are part of a tax hell).

P.P.P.S. Let’s close with some additional election-related humor.

Here’s some satire from the twitter account of the fake North Korean News Service.

And here’s another Hitler parody to add to our collection.

And here’s Michelle Obama feeling sad about what’s about to happen.

P.P.P.P.S. We also have some unintentional humor. When Trump prevailed, Paul Krugman couldn’t resist making a prediction of economic doom.

Since markets have since climbed to record highs, Krugman’s forecasting ability may be even worse than all the hacks who predicted Brexit would result in economic calamity for the United Kingdom.

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During the election, Donald Trump promised a big package of infrastructure spending, twice as much new spending as Hillary Clinton was proposing.

During his victory speech the night of the election, he doubled down on this approach, promising that more infrastructure spending would be one his first priorities.

This sounds like bad news for advocates of limited government. And it may turn out to be bad news. Though if you look at what the Trump campaign actually proposed, there’s a lot of wiggle room.

I will work with Congress to introduce the following broader legislative measures and fight for their passage within the first 100 days of my Administration: …American Energy & Infrastructure Act. Leverages public-private partnerships, and private investments through tax incentives, to spur $1 trillion in infrastructure investment over 10 years. It is revenue neutral.

In other words, it’s possible that President-Elect Trump might give us an Obama-style stimulus scheme. Or he may take a radically different approach by removing roadblocks that hinder more private-sector involvement.

And my colleague Chris Edwards points out that the private sector already does most of the heavy lifting when it comes to infrastructure spending.

Hillary Clinton says that “we are dramatically underinvesting” in infrastructure and she promises a large increase in federal spending. Donald Trump is promising to spend twice as much as Clinton. …But more federal spending is the wrong way to go.  …let’s look at some data. There is no hard definition of “infrastructure,” but one broad measure is gross fixed investment in the BEA national accounts. …The first thing to note is that private investment at about $3 trillion was six times larger than combined federal, state, and local government nondefense investment of $472 billion. Private investment in pipelines, broadband, refineries, factories, cell towers, and other items greatly exceeds government investment in schools, highways, prisons, and the like. …if policymakers want to boost infrastructure spending, they should reduce barriers to private investment.

This is very helpful and interesting data. And one of the obvious conclusions is that the types of infrastructure that historically are the responsibility of the private sector (pipelines, cell towers, etc) are handled much more efficiently than those (highways, mass transit, etc) that have been monopolized by governments.

Trump presumably intends his infrastructure plan to focus on the latter type of infrastructure, so let’s consider three simple rules to help guide an effective approach for transportation.

1. More private-sector involvement

A key principle for good infrastructure policy is to harness the efficiency of the private sector.

Why? Because, as Lawrence McQuillan of the Independent Institute argues, governments naturally are inefficient and incompetent at building and managing infrastructure.

Government authorities view maintenance solely as a cost, rather than as an investment that can increase future revenues. As a result, roads remain riddled with potholes, bridges crumble, airports are overcrowded, water is contaminated, and we have classrooms with mold and falling ceilings. Moreover, without a profit motive, repairs are seldom done in a timely manner or at lowest cost. Instead of assets being owned and controlled by people who understand the economics of the industry and have the technical knowledge to operate and repair them efficiently, politicians (the majority of whom appear to be lawyers these days) and bureaucrats control them. This guarantees waste, inefficiency and cronyism, such as the greenlighting of white-elephant projects that are driven by politics rather than economics.

But there is some good news.

Chris Edwards explains that the private sector is taking a larger role.

Before the 20th century, for example, more than 2,000 turnpike companies in America built more than 10,000 miles of toll roads. And up until the mid-20th century, most urban rail and bus services were private. With respect to railroads, the federal government subsidized some of the railroads to the West, but most U.S. rail mileage in the 19th century was in the East, and it was generally unsubsidized. The takeover of private infrastructure by governments here and abroad in the 20th century caused many problems. Fortunately, most governments have reversed course in recent decades and started to hand back infrastructure to the private sector. …Short of full privatization, many countries have partly privatized portions of their infrastructure through public-private partnerships (“PPPs” or “P3s”). PPPs differ from traditional government contracting by shifting various elements of financing, management, maintenance, operations, and project risks to the private sector. …Unfortunately, the United States “has lagged behind Australia and Europe in privatization of infrastructure such as roads, bridges and tunnels,” notes the OECD. More than one fifth of infrastructure spending in Britain and Portugal is now through the PPP process, so this has become a normal way of doing business in some countries. Canada is also a leader in using PPP for major infrastructure projects.

2. Less involvement from Washington

To the extent that government must be involved, another important principle is to let state and local governments handle infrastructure.

That’s what I argued back in 2014.

…the Department of Transportation should be dismantled for the simple reason that we’ll get better roads at lower cost with the federalist approach of returning responsibility to state and local governments. …Washington involvement is a recipe for pork and corruption. Lawmakers in Congress – including Republicans – get on the Transportation Committees precisely because they can buy votes and raise campaign cash by diverting taxpayer money to friends and cronies. …the federal budget is mostly a scam where endless streams of money are shifted back and forth in leaky buckets. This scam is great for insiders and bad news for taxpayers. Washington involvement necessarily means another layer of costly bureaucracy. And this is not a trivial issues since the Department of Transportation is infamous for overpaid bureaucrats.

For a more detailed explanation, Professor Edward Glaeser of Harvard has some devastating analysis in an article for City Journal.

The most pressing problem with federal infrastructure spending is that it is hard to keep it from going to the wrong places. We seem to have spent more in the places that already had short commutes and less in the places with the most need. Federal transportation spending follows highway-apportionment formulas that have long favored places with lots of land but not so many people. …Low-density areas are remarkably well-endowed with senators per capita, of course, and they unsurprisingly get a disproportionate share of spending from any nationwide program. Redirecting tax dollars across jurisdictions is rarely fair—and it isn’t right, either, that poorer, lower-density regions should subsidize New York’s subway and airports. Washington’s involvement also distorts infrastructure planning by favoring pet projects. The Recovery Act set aside $8 billion for high-speed rail, for instance, despite the fact that such projects would never be appropriate for most of moderate-density America. California was lured down the high-speed hole with Washington support… Detroit’s infamous People Mover Monorail would never have been built without federal aid. Alaska’s $400 million Gravina Island bridge to nowhere was a particularly notorious example of how Congress abuses transportation investment. As the Office of Management and Budget noted, during the Bush years, highway funding was “not based on need or performance and has been heavily earmarked.”

3. Sensible cost-benefit analysis

Our third principle is that infrastructure should only be built if it makes sense. In other words, do the benefits exceed the costs?

In the private sector, the profit motive automatically generates that type of calculation.

With government, that effort becomes much more challenging.

Professor Michael Boskin at Stanford explains the problem in a column for the Wall Street Journal.

…a huge pot of additional money earmarked for infrastructure, on top of the recently passed $305 billion five-year highway bill, is sure to unleash a mad scramble in Congress to secure funds for the home turf. The logrolling and pork will get ugly without far tighter cost-benefit tests and oversight. …Most federal infrastructure spending is done by sending funds to state and local governments. For highway programs, the ratio is usually 80% federal, 20% state and local. But that means every local district has an incentive to press the federal authorities to fund projects with poor national returns. We all remember Alaska’s infamous “bridge to nowhere.” In other words, if a local government is putting up only 20% of the funds, it needs the benefits to its own citizens to be only 21% of the total national cost. Yet every state and every locality has potential infrastructure needs that it would like the rest of the country to pay for. That leads to the misallocation of federal funds and infrastructure projects that benefit the few at the cost of the many. …taxpayers generally don’t notice all the fiscal cross-hauling, sending their money to Washington to be sent back in leaky buckets to local jurisdictions. Since we all reside in a state and locality, it’s an inefficient negative sum game with complex cross-subsidies. If these local projects are so good, why aren’t citizens willing to finance the projects locally?

And don’t forget government infrastructure always is more expensive – sometimes far more expensive – than politicians first promise. Chris Edwards has the details.

Federal infrastructure projects often suffer from large cost overruns. Highway projects, energy projects, airport projects, and air traffic control projects have ended up costing far more than promised. When both federal and state governments are involved in infrastructure, it reduces accountability. That was one of the problems with the federally backed Big Dig highway project in Boston, which exploded in cost to five times the original estimate. U.S. and foreign studies have found that privately financed infrastructure projects are less likely to have cost overruns.

The challenge, of course, is getting governments to produce honest cost-benefit analysis. Bureaucrats respond to the people who control their jobs and control their pay. So if politicians want to squander more money, it’s quite likely that bureaucrats will concoct the numbers needed to justify the expansion of government.

To cite a high-profile example, I caught the IMF making up numbers to justify infrastructure boondoggles, even though that politically driven analysis contradicted the work of the bureaucracy’s professional economists.

Let’s finish with two additional points.

First, advocates of more infrastructure spending act like there’s some national crisis.

But if this is true, why does the United States get relatively high scores from the World Economic Forum?

Second, let’s consider the example of Japan. That nation has been stuck in a multi-decade period of stagnation, with very little expectation of an economic turnaround. But if infrastructure spending was some sort of elixir, that economy should be booming.

…a look at ailing Japan, which has spent over $6.3 trillion since 1981 on truly impressive bridges and bullet trains, suggests infrastructure isn’t always a cure for economic woes.

The bottom line is that Donald Trump should not follow the business-as-usual approach of simply dumping more money into a system that almost always produces poor results.

P.S. Whoever does the “Redpanels” cartoons is very clever. I’ve already shared ones on the minimum wage, universal basic income, and Keynesian economics. Now, here’s one on federal infrastructure.

P.P.S. I wrote two years ago about the guy in England who built a private road to help drivers avoid lengthy delays caused by poor government planning. We have an even more…um…interesting example from Russia of how the private sector can take over when the government founders.

Gangs smuggling goods into Russia have secretly repaired a road on the Belarussian border in order to boost business, the TASS news agency reported Monday. Smugglers have transformed the gravel track in the Smolensk region in order to help their heavy goods vehicles traveling on the route, said Alexander Laznenko from the Smolensk region border agency. The criminal groups have widened and raised the road and added additional turning points, he said. The road, which connects Moscow to the Belarussian capital of Minsk, is known to be used by smugglers wishing to avoid official customs posts.

This is like a libertarian fantasy. The private sector builds a road to help entrepreneurs avoid trade taxes. What’s not to love? And unlike the libertarian sex fantasy or my 1992 debate fantasy, it’s actually true!

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Back in 2012, I wrote a detailed article explaining that Europe became rich in part because Europe didn’t exist.

The geographic landmass of Europe existed, of course, but the continent was characterized by massive political fragmentation. And this absence of centralized authority, many scholars concluded, meant lots of inter-government rivalry, a process that gave the private economy room to prosper.

Europe benefited from decentralization and jurisdictional competition. More specifically, governments were forced to adopt better policies because labor and capital had significant ability to cross borders in search of less oppression. …the intellectual history of this issue is enormous, and the common theme is that big, centralized states hinder development. …sovereignty should be celebrated. Not because national governments are good, but because competition between governments is the best protector of liberty and civilization. …promotion of better tax policy is just the tip of the iceberg.

I mention this because I’m currently in Maastricht, a city in the Netherlands that is (in)famous for hosting the meeting that led to the creation of the European Union.

But today, it is the European Students for Liberty meeting in Maastricht, in this case for a regional conference on “The Future of Europe.”

I’m here to give a speech on “Ensuring Sustainable Prosperity in Europe,” but that’s a topic for another day. Instead, I want to highlight Clemens Schneider’s speech on “Patchwork Continent – A History of Federalism in Europe.”

Clemens is with the Prometheus Institute, a German think tank, and he discussed how federalism was critical to Europe’s development.

What made his presentation especially fascinating is that he suggested that 1356 was a very important year in the history of Europe.

Clemens based his claim on two historical events that advanced the principles of decentralization and federalism.

First, he cited the “Golden Bull” of 1356. What’s that, you ask? Wikipedia gives us the details about this remarkable development in the history of the Holy Roman Empire.

The Golden Bull of 1356 was a decree issued by the Imperial Diet at Nuremberg and Metz (Diet of Metz (1356/57)) headed by the Emperor Charles IV which fixed, for a period of more than four hundred years, important aspects of the constitutional structure of the Holy Roman Empire. It was named the Golden Bull for the golden seal it carried. …the Bull cemented a number of privileges for the Electors, confirming their elevated role in the Empire. It is therefore also a milestone in the establishment of largely independent states in the Empire, a process to be concluded only centuries later, notably with the Peace of Westphalia of 1648.

In other words, what was important about the Golden Bull is that signified that the Holy Roman Empire no longer was an Empire. Instead, independent (and competing) principalities became the defining feature of European polity.

Second, he cited the creation of the Hanseatic League in the same year. Once again, Wikipedia has a good description.

The Hanseatic League…was a commercial and defensive confederation of merchant guilds and their market towns. It dominated Baltic maritime trade (c. 1400–1800) along the coast of Northern Europe. …The Hanseatic cities had their own legal system and furnished their own armies for mutual protection and aid. Despite this, the organization was not a state… Much of the drive for this co-operation came from the fragmented nature of existing territorial government, which failed to provide security for trade. Over the next 50 years the Hansa itself emerged with formal agreements for confederation and co-operation covering the west and east trade routes. The principal city and linchpin remained Lübeck; with the first general Diet of the Hansa held there in 1356, the Hanseatic League acquired an official structure.

I’m not sure whether it would be accurate to say this is an example of private governance, but the Hanseatic League definitely was an example of voluntary cooperation among sovereign cities wanting peaceful trade.

Schneider basically argued in favor of this “confederalist” approach and cited Switzerland and the United States as positive examples (at least during their early years).

All of which is quite consistent with my view that centralization is the enemy of liberty. We need to make governments compete with each other. And when that happens, we’re more likely to get good policy.

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What an amazing vote. The people of the United Kingdom defied the supposed experts, rejected a fear-based campaign by advocates of the status quo, and declared their independence from the European Union.

Here are some takeaway thoughts on this startling development.

1. The UK has voted to leave a sinking ship. Because of unfavorable demographics and a dirigiste economic model, the European Union has a very grim future.

2. Brexit is a vote against centralization, bureaucratization, and harmonization. It also is a victory for more growth, though the amount of additional long-run growth will depend on whether the UK government seizes the opportunity for lower taxes, less red tape, and a smaller burden of government.

3. President Obama once again fired blanks. Whether it was his failed attempt early in his presidency to get the Olympic Games in Chicago or his feckless attempt in his final year to get Britons to remain in the EU, Obama has a remarkably dismal track record. Maybe I can get him to endorse the Boston Red Sox, thus ensuring the Yankees make it to the World Series?

4. Speaking of feckless foreign leaders, but I can’t resist the temptation to point out that the Canadian Prime Minister’s reaction to Brexit wins a prize for vapidity. It would be amusing to see Trudeau somehow justify this absurd statement, though I suspect he’ll be too busy expanding government and squandering twenty-five years of bipartisan progress in Canada. Potential mea culpa…I can’t find proof that Trudeau actually made this statement. Even with the excuse that I wrote this column at 3:00 AM, I should have known better than to believe something I saw on Twitter (though I still think he’s vapid).

5. Nigel Farage and UKIP have voted themselves out of a job. A common joke in Washington is that government bureaucracies never solve problems for which they were created because that would eliminate their excuse for existing. After all, what would “poverty pimps” do if there weren’t poor people trapped in government dependency? Well, Brexit almost surely means doom for Farage and UKIP, yet they put country above personal interest. Congratulations to them, though I’ll miss Farage’s acerbic speeches.

6. The IMF and OECD disgracefully took part in “Project Fear” by concocting hysterical predictions of economic damage if the U.K. decided to get off the sinking ship of the European Union. To the extent there is some short-term economic instability over the next few days or weeks, those reckless international bureaucracies deserve much of the blame.

7. As part of his failed effort to influence the referendum, President Obama rejected the notion of quickly inking a free-trade agreement with the UK. Now that Brexit has been approved, hopefully the President will have the maturity and judgement to change his mind. Not only should the UK be first in line, but this should be the opportunity to launch the Global Free Trade Association that my former Heritage Foundation colleagues promoted last decade. Unfettered trade among jurisdictions with relatively high levels of economic freedom, such as the US, UK, Australia, Switzerland, New Zealand, Chile, etc, would be a great way of quickly capturing some of the benefits made possible by Brexit.

8. David Cameron should copy California Governor Jerry Brown. Not for anything recent, but for what he did in 1978 when voters approved an anti-tax referendum known as Proposition 13. Brown naturally opposed the referendum, but he completely reversed himself after the referendum was approved. By embracing the initiative, even if only belatedly, he helped his state and himself. That would be the smart approach for Cameron, though there’s a distinct danger that he could do great harm to himself, his party, and his country by trying to negotiate a deal to somehow keep the UK in the EU.

9. Last but not least, I’m very happy to be wrong about the outcome. I originally expected that “Project Fear” would be successful and that Britons would choose the devil they know over the one they don’t know. Well, I’m delighted that Elizabeth Hurley and I helped convince Britons to vote the right way. We obviously make a good team.

Joking aside, the real credit belongs to all UK freedom fighters, even the disaffected Labour Party voters who voted the right way for wrong reasons.

I’m particularly proud of the good work of my friends Allister Heath of the Telegraph, Eamonn Butler of the Adam Smith Institute, Dan Hannan of the European Parliament, and Matthew Elliott of Vote Leave. I imagine Margaret Thatcher is smiling down on them today.

Now it’s on to the second stage of this campaign and convincing California to declare independence from the United States!

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Remember the cluster-you-know-what in New Orleans following Hurricane Katrina? Corrupt and incompetent politicians in both the city and at the state level acted passively, assuming that Uncle Sam somehow should be responsible for dealing with the storm.

And we’ve seen similar behavior from other state and local politicians before, during, and after other natural disasters.

The obvious lesson to be learned is that the federal government shouldn’t have any responsibility for dealing with natural disasters. All that does it create a wasteful layer of bureaucracy, while also inculcating a sense of learned helplessness on the part of state and local officials who should be responsible for dealing with storms and other local crises.

In other words, the answer is federalism. State and local governments should be solely responsible for state and local issues.

But not just because of some abstract principle. There’s a very strong practical argument that you get more sensible decisions when the public sector is limited (as Mark Steyn humorously explained) and there is clear responsibility and accountability at various levels of government.

And this is why the biggest lesson from the scandal of tainted water in Flint, Michigan, is that local politicians and bureaucrats should not be able to shift the blame either to the state or federal government. Which was my main point in this interview.

To be sure, it is outrageous that state and federal bureaucrats knew about the problem and didn’t make it public, so I surely don’t object to officials in Lansing and Washington getting fired.

But I do object to the political finger pointing, with Democrats trying to blame the Republican Governor and Republicans trying to blame the Democratic President.

Nope, the problem is an incompetent local government that failed to fulfill a core responsibility.

The Wall Street Journal has the same perspective, opining that the mess in Flint is a failure of government.

…the real Flint story is a cascade of government failure, including the Environmental Protection Agency.

More specifically (and as I noted in the interview), we have a local government that became a fiefdom for a self-serving bureaucracy that was more concerned with its privileged status than in providing core government services.

…after decades of misrule: More than 40% of residents live in poverty; the population has fallen by half since the 1960s to about 100,000. Bloated pensions and retiree health care gobble up about 33 cents of every dollar in the general fund.

And the WSJ editorial also castigated the state and federal bureaucrats that wrote memos rather than warning citizens.

MDEQ and the EPA were chatting about Flint’s system as early as February. MDEQ said it wanted to test the water more before deciding on corrosion controls, though it isn’t clear that federal law allows this. …the region’s top EPA official, political appointee Susan Hedman, responded… “When the report has been revised and fully vetted by EPA management, the findings and recommendations will be shared with the City and MDEQ and MDEQ will be responsible for following up with the City.” She also noted over email that it’s “a preliminary draft” and it’d be “premature to draw any conclusions.” The EPA did not notify the public.

The lesson is that adding state and federal bureaucracy impedes effective and competent local government.

The broader lesson is that ladling on layers of bureaucracy doesn’t result in better oversight and safety. It sometimes lets agencies shirk responsibility for the basic public services like clean water that government is responsible for providing.

Here’s the bottom line.

Federalism is about getting better government by creating clear lines of responsibility and accountability in an environment that allows state and local governments to learn from each other on best practices.

The current system blurs responsibility and accountability, by contrast, while also imposing needless expense and bureaucracy. And we get Katrina and Flint with this dysfunctional approach.

So whether it’s Medicaid, education, transportation, welfare, or disasters, involvement from Washington makes things worse rather than better.

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I’ve argued (repeatedly) that we should abolish the Department of Transportation and allow states to make decisions on how to fund and whether to fund transportation projects.

As an interim measure to control federal spending, involvement, and intervention, I’ve explained that Congress should do nothing to increase revenues into the highway trust fund.

Supporters of centralization disagree, arguing that there would be inadequate transportation funding if the federal government doesn’t have a large – and growing – role. Most of them want a higher gas tax to finance an expansion of federal transportation spending.

I’ve never thought this claim made sense. After all, how do you magically get more roads built by sending money in a leaky budget to Washington, only to then turn around and send those funds in a leaky budget back to the states? Seems to me like that’s nothing more than a unsavory recipe for an additional layer of bureaucracy and lobbying.

Well, we now have some very powerful evidence from a report in the Washington Post that states will act – at least once they conclude that “free” money from Uncle Sam won’t be as forthcoming.

While Congress remains stalled on a long-term plan for funding highways, state lawmakers and governors aren’t waiting around. Nearly one-third of the states have approved measures this year that could collectively raise billions of dollars through higher fuel taxes, vehicle fees and bonds to repair old bridges and roads and relieve traffic congestion, according to an analysis by The Associated Press. The surge of activity means at least half of the states — from coast to coast, in both Republican and Democratic areas — now have passed transportation funding measures since 2013. And the movement may not be done yet. …The widespread focus on transportation funding comes as state officials are becoming frustrated by federal inaction in helping to repair roads and bridges described as crumbling, aging and unsafe.

By the way, I have no idea if these states are making sensible decisions. Indeed, based on what was proposed (and rejected) in Michigan, I wouldn’t be surprised to learn that many of these initiative contain wasteful pork-barrel projects (just like when funded from DC). And my colleague Chris Edwards has poked holes in the assertion that we’re facing an infrastructure crisis.

But who cares? The beauty of federalism is that states are free to make their own decisions so long as they’re playing with their own money.

If they waste the money and make bad choices, at least the damage will be contained. And voters presumably have some ability to change the direction of policy if repeated mistakes are made.

To get a sense of how things would work at the state level with real federalism, here are some excerpts from a column in the Tampa Tribune by Karen Jaroch, a member of the Hillsborough Area Regional Transit agency.

…what if you could pay less at the pump? With passage of H.R. 2716 — the Transportation Empowerment Act — this could be possible. H.R. 2716 would devolve the responsibility for our surface transportation programs (including transit) to the states by incrementally decreasing the federal gas tax over five years from 18.3 cents to 3.7 cents per gallon. That reduction would empower the states to fund and manage it — not politicians and Washington bureaucrats. The bill was filed by Florida’s U.S. Rep. Ron DeSantis, R-Ponte Vedra Beach, and cosponsored by Rep. David Jolly, R-Indian Shores, with Sen. Marco Rubio co-sponsoring the bill’s twin in the Senate.

I can understand why Florida lawmakers are especially interested in decentralization.

As you can see from this map and table, the Sunshine State is one of many that lose out because of the redistribution inherent in a centralized scheme.

The real question if why politicians in California, Texas, and Ohio aren’t also pushing for federalism.

Though it’s important to underscore that this issue shouldn’t be determined based on which states get more money or less money. It’s really about getting better decisions when states raise and spend their own money.

Particularly when compared to a very inefficient Washington-centric system, as Ms. Jaroch explains.

Well-heeled lobbyists and those in Congress who would see their power base decline are in opposition. …The feds fund roughly 30 percent of Florida’s transportation infrastructure; however, the costly regulations, red tape and strings they tack on permeate the process almost universally. As a board member of the Hillsborough Area Regional Transit Authority (HART), I’ve witnessed the agency routinely shackled by federal handcuffs that are common when accepting federal funds. H.R. 2716 would wrest control from D.C. bureaucrats and politicians in 49 other states that have never commuted on our streets and roads and instead empower state and local agencies like HART that are better positioned to make these decisions. …A new state-led process would be controlled entirely by Floridians and would be absent the horse trading and infighting between 49 other states, two houses of Congress, a president of a different party and a myriad of federal agencies.

Last but not least, state and local governments will be far less likely to engage in boondoggle spending if they can’t shift some of the cost to Uncle Sam.

P.S. While decentralization is a good first step, the ideal end point is to have more private-sector involvement in transportation.

P.P.S. If you think the federal government’s involvement is bad now, you probably don’t even want to know about some of the ideas floating around Washington for further greedy and intrusive revenue grabs.

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If you want to pinpoint the leading source of bad economic policy proposals, I would understand if someone suggested the Obama Administration.

But looking to Europe might be even more accurate.

For instance, I’d be hard pressed to identify a policy more misguided than continent-wide eurobonds, which I suggested would be akin to “co-signing a loan for your unemployed alcoholic cousin who has a gambling addiction.”

And now there’s another really foolish idea percolating on the other side of the Atlantic Ocean.

The U.K.-based Financial Times has a story about calls for greater European centralization from Italy.

Italy’s finance minister has called for deeper eurozone integration in the aftermath of the Greek crisis, saying a move “straight towards political union” is the only way to ensure the survival of the common currency. …Italy and France have traditionally been among the most forceful backers of deeper European integration but other countries are sceptical about supporting a greater degree of political convergence. …Italy is calling for a wide set of measures — including the swift completion of banking union, the establishment of a common eurozone budget and the launch of a common unemployment insurance scheme — to reinforce the common currency. He said an elected eurozone parliament alongside the existing European Parliament and a European finance minister should also be considered. “To have a full-fledged economic and monetary union, you need a fiscal union and you need a fiscal policy,” Mr Padoan said.

This is nonsense.

The United States has a monetary union and an economic union, yet our fiscal policy was very decentralized for much of our nation’s history.

And Switzerland has a monetary and economic union, and its fiscal policy is still very decentralized.

Heck, the evidence is very strong that decentralized fiscal systems lead to much better outcomes.

So why is Europe’s political elite so enamored with a fiscal union and so opposed to genuine federalism?

There’s an ideological reason and a practical reason for this bias.

The ideological reason is that statists strongly prefer one-size-fits-all systems because government has more power and there’s no jurisdictional competition (which they view as a “race to the bottom“).

The practical reason is that politicians from the weaker European nations see a fiscal union as a way of getting more transfers and redistribution from nations such as Germany, Finland, and the Netherlands.

In the case of Italy, both reasons probably apply. Government debt already is very high in Italy and growth is virtually nonexistent, so it’s presumably just a matter of time before the Italians will be looking for Greek-style bailouts.

But the Italian political elite also has a statist ideological perspective. And the best evidence for that is the fact that Signore Padoan used to be a senior bureaucrat at the Paris-based OECD.

The Italian finance minister…served as former chief economist of the OECD.

You won’t be surprised to learn that French politicians also have been urging a supranational government for the eurozone. And presumably for the same reasons of ideology and self-interest.

But here’s the man-bites-dog part of the story.

The German government also seems open to the idea, as reported by the U.K.-based Independent.

France and Germany have agreed a new plan for closer eurozone political unionThe new Franco-German agreement would see closer cooperation between the 19 countries.

Wow, don’t the politicians in Berlin know that a fiscal union is just a scheme to extract more money from German taxpayers?!?

As I wrote three years ago, this approach “would involve putting German taxpayers at risk for the reckless fiscal policies in nations such as Greece, Italy, and Spain.

But maybe the Germans aren’t completely insane. Writing for Bloomberg, Leonid Bershidsky explains that the current German position is to have a supranational authority with the power to reject national budgets.

The German perspective on a political and fiscal union is a little more cautious. Last year, German Finance Minister Wolfgang Schaeuble and a fellow high-ranking member of the CDU party, Karl Lamers, called for a euro zone parliament (not elected, but comprising European Parliament members from euro area countries) and a budget commissioner with the power to reject national budgets if they contravene a certain set of rules agreed by euro members.

And since the German approach is disliked by the Greeks, then it can’t be all bad.

Former Greek finance minister Yanis Varoufakis, Schaeuble’s most eloquent hater, pointed out in a recent article for Germany’s Die Zeit that, in the Schaeuble-Lamers plan, the budget commissioner is endowed only with “negative” powers, while a true federation — like Germany itself — elects a parliament and a government to formulate positive policies.

But “can’t be all bad” isn’t the same as good.

Simply stated, any sort of eurozone government almost surely will morph over time into a transfer union. And that means more handouts, more subsidies, more harmonization, more bailouts, more centralization, and more bureaucracy.

So you can see why Europe’s political elite may be even more foolish than their American counterparts.

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For understandable reasons, the fiscal mess in Greece has dominated the European economic headlines.

But there are other developments that deserve attention. Amazingly, some politicians think Europe’s stagnant economy can be improved with more harmonization, more bureaucratization, and more centralization.

The EU Observer has a story about a French scheme to transform the eurozone into a supranational government.

French president Francois Hollande has called for a stronger more harmonised eurozone… “What threatens us is not too much Europe, but too little Europe,” he said in a letter published in the Journal du Dimanche. He called for a vanguard of countries that would lead the eurozone, which should have its own government, a “specific budget” and its own parliament. …French prime minister Manuel Valls Sunday said…France would prepare “concrete proposals” in the coming weeks. “We must learn the lessons and go much further,” he added, referring to the Greek crisis.

I’m not sure what lessons Monsieur Valls wants people to learn. Greece got in trouble because of big government and excessive intervention.

So why is anyone supposed to believe that adding a new layer of government is going to make Europe more prosperous?

In all likelihood, the French are pursuing this agenda for two selfish reasons.

  1. A “harmonised eurozone” means that all affected nations would have to abide by the same rules, and that inevitably means taxes and regulations are set at the most onerous levels. The French think that’s a good idea because it’s a way of undermining the competitiveness of other eurozone nations.
  2. A eurozone government with a “specific budget” sets the stage for more intergovernmental transfers in Europe. The French think that’s a good idea since they presumably could prop up their decrepit welfare state with money from taxpayers in nations such as Germany, Finland, and the Netherlands.

By the way,not all French politicians are totally misguided.

At least one of them is expressing more sensible ideas, as reported by the U.K.-based Telegraph.

France is “the sick man of Europe”, François Fillon, the former centre-Right prime minister, has said in an open letter to French president Francois Hollande, calling for urgent economic reforms.“The Greek tragedy shows that the threat of bankruptcy is not abstract,” according to Mr Fillon… French commentators writing about the Greek crisis in recent days have pointed out that France’s own national debt of more than €2 trillion (£1.4 trillion), amounting to 97.5 per cent of GDP, places it in the same league as Spain and other southern European countries.

By the way, the commentators who are fretting about French debt are focused on the wrong variable. The French disease is big government. High levels of debt are simply a symptom of that disease.

Moreover, I’m not sure that Monsieur Fillon is a credible spokesman for smaller government and free markets since he served during the statist tenure of President Sarkozy.

In any event, if there are any serious reformers in France, they face an uphill battle. As I’ve previously noted, many successful people and aspiring entrepreneurs have left France.

Here’s a news report on the phenomenon.

And just in case you think this is merely anecdotal data, here’s a table showing the nations that lost the most millionaires since 2000.

In the case of China and India, rich people leave because they want to establish a domicile in a developed nation.

But successful people escape France in spite of its first-world attributes.

Let’s now cross the Pyrenees and see what’s happening in Spain.

Our Keynesian friends, as well as other big spenders, are always trumpeting the value of infrastructure projects because they ostensibly pump money into an economy.

I’ve made the point that such outlays should be judged using cost-benefit analysis. Well, it appears that Spain listened to the wrong people. It got a €10,000 return on an infrastructure “investment” of €1,100,000,000.

One of Spain’s “ghost airports”—expensive projects that were virtually unused—received just one bid in a bankruptcy auction after costing about €1.1 billion ($1.2 billion) to build. The buyer’s offer: €10,000. Ciudad Real’s Central airport, about 235 kilometers south of Madrid, became a symbol of the country’s wasteful spending.

Wow, and I thought Social Security was a bad deal.

But Spanish politicians should be known for more than just misguided boondoggles.

Some of them also are working hard to make sure citizens don’t work too hard. Here’s a story from an English-language news outlet in Spain (h/t: Commentator).

Between the hours of 2pm and 5pm you will struggle to find anyone in the Valencian town of Ador; the town’s inhabitants will have taken to their beds to catch their mandatory forty winks. The town’s summer siesta tradition is so deep-rooted the mayor has enshrined his citizen’s right to an afternoon snooze in law. …Ador could be the first town in Spain to actually make taking a siesta obligatory by law. …The new rules also stipulate that children should remain indoors:

One imagines the next step will be mandatory bed checks by new bureaucrats hired for just that purpose.

Though maybe they would need special permission to take their mandatory siestas from 11:00-2:00 so they would be free to harass the rest of the population between 2:00-5:00.

In any event, we can add mandatory siestas to our list of bizarre government-granted human rights.

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One would think that Europeans might finally be realizing that an ever-growing welfare state and an ever-rising tax burden are a form of economic suicide.

The most obvious bit of evidence is to look at what’s happening in Greece. Simply stated, public policy for too long has punished workers and producers while rewarding looters and moochers. The result is economic collapse, bailouts, and the destruction of cultural capital.

But Greece is just the tip of the iceberg. Many other European nations are heading in the same direction and it shows up in the economic data. Living standards are already considerably lower than they are in the United States. Yet instead of the “convergence” that’s assumed in conventional economic theory, the Europeans are falling further behind instead of catching up.

There are some officials sounding the alarm.

In a column for the Brussels Times, Philippe Legrain, the former economic adviser to the President of the European Commission, has a glum assessment of the European Union.

In 2007, the EU accounted for 31 per cent of the world economy, measured at market prices. This year, it will account for only 22 per cent, according to the International Monetary Fund (IMF). Eight years ago, the EU’s economy was a fifth bigger than the US’s; this year it is set to be smaller than America’s. …Continued economic decline seems inevitable.

But it seems that the folks who recognize that there is a problem are greatly out-numbered by those who want to make the problem worse.

For instance, one would think that any sentient adult would understand that the overall burden of government spending in Europe is a problem, particularly outlays for redistribution programs that undermine incentives for productive behavior.

Yet, as reported by the EU Observer, some statists at the European Commission want to mandate the amounts of redistribution in member nations.

The European Commission is to push for minimum standards on social protection across member states… Employment commissioner Marianne Thyssen Tuesday (9 June) said she wants to see minimum unemployment benefits, a minimum income, access to child care, and access to basic health care in all 28 countries. …The commission will look into whether “enough people are covered in member states when they have an unemployment problem; how long are they protected. What is the level of the unemployment benefit in comparison with the former wage they earned,” said Thyssen. …”The aim is to have an upper convergence…”

This is a horrible idea. It’s basically designed to impose a rule that forces nations to be more like France and Greece.

Instead of competition, innovation, and diversity, Europe would move even further in the direction of one-size-fits-all centralization.

Though I give her credit for admitting that the purpose of harmonization is to force more spending, what she calls “upper convergence.” So we can add Ms. Thyssen to our list of honest statists.

And speaking of centralization, some politicians want to go beyond mandates and harmonization and also have EU-wide taxes and spending.

Here are some of the details from a report in the U.K.-based Guardian.

German and French politicians are calling for a…eurozone treasury equipped with a eurozone finance chief, single budget, tax-raising powers, pooled debt liabilities, a common monetary fund, and separate organisation and representation within the European parliament. …They call for the setting up of “an embryo euro area budget”, “a fiscal capacity over and above national budgets”, and harmonised corporate taxes across the bloc. The eurozone would be able to borrow on the markets against its budget, which would be financed from a kind of Tobin tax on financial transactions and also from part of the revenue from the new business tax regime.

By the way, this initiative to impose another layer of taxes and spending in Europe isn’t being advocated by irrelevant back-bench politicians. It’s being pushed by Germany’s Vice Chancellor and France’s Economy Minister!

Thankfully, not everyone in Europe is economically insane. Syed Kamall, a member of the European Parliament form the U.K.’s Conservative Party, is unimpressed with this vision of greater centralization, harmonization, and bureaucratization.

Here’s some of what he wrote in a column for the EU Observer.

The socialist dream that these two politicians propose would soon turn into a nightmare not just for the Eurozone, but for the entire EU. …Their socialist vision of harmonised taxation and more social policies sounds utopian on paper but it fails to accept a basic fact: that Europe is not the world, and Europe cannot close itself off from the world. …After several decades of centralisation in the EU, we have seen the results: …a failure to keep up with growing economic competitiveness in many parts of the world. …Specific proposals such as harmonised corporate taxes are nothing new from the socialists, but they would reduce European competitiveness. …With greater harmonisation Europe’s tax rate would only be as low as the highest-taxing member. …

Syed’s point about Europe not being the world is especially relevant because the damage of one-size-fits-all centralization manifests itself much faster when jobs and capital can simply migrate to other jurisdictions.

And while the Europeans are trying to undermine the competitiveness of other nations with various tax harmonization schemes, that’s not going to arrest Europe’s decline.

Simply stated, Europe is imposing bad policy internally at a much faster rate than it can impose bad policy externally.

P.S. Let’s close with some humor sent to me by the Princess of the Levant.

It features the libertarian character from Parks and Recreation.

And I even found the YouTube clip of this scene.

Which is definitely worth watching because of how Swanson explains the tax system.

I particularly like the part about the capital gains tax. It’s a good way of illustrating double taxation.

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I wrote just yesterday about new evidence showing that decentralized government is more efficient.

Part of the reason is because local governments are easier for voters to monitor and more likely to reflect the actual preferences of residents.

Another reason is tax competition. It’s relatively easy to “vote with your feet” by moving from one community to another, and this makes it difficult for interest groups and politicians to impose excessive tax burdens.

Now we have some serendipity.

I’m in Gdansk, Poland, for a Liberty Fund seminar on “Economic Growth, Entrepreneurship, and the Future of the Welfare State.”

Two of the readings, by great scholars from the Austrian school of economics, had passages about the importance of decentralization.

In 1960, here’s some of what Friedrich Hayek wrote in his classic, The Constitution of Liberty.

While it has always been characteristic of those favoring an increase in governmental powers to support maximum concentration of these powers, those mainly concerned with individual liberty have generally advocated decentralization. There are strong reasons why action by local authorities offers the next-best solution…it has many of the advantages of private enterprise and fewer of the dangers of coercive action by government. Competition between local authorities or between larger units within an area where there is freedom of movement…will secure most of the advantages of free growth. Though the majority of individuals may never contemplate a change of residence, there will usually be enough people, especially among the young and more enterprising, to make it necessary for the local authorities to provide as good services at a reasonable costs as their competitors. It is usually the authoritarian planner who…supports the centralist tendencies.

I should have remembered that quote from my collection of pro-tax competition statements by Nobel laureates.

In any event, I’m glad my memory was refreshed.

And here’s some of what Ludwig von Mises wrote in his 1944 book, Omnipotent Government. He approached the issue from the opposite direction, explaining that proponents of redistribution needed centralization so their intended victims couldn’t escape by moving across city borders.

Every step toward more government interference and toward more planning means at the same time an expansion of the jurisdiction of the central government. …It is a very significant fact that the adversaries of this trend toward more government control describe their opposition as a fight against Washington…against centralization. …This evolution is not accidental. It is the inevitable outcome of policies of interference and planning. …There can be no question of adopting these measure for only one state. It is impossible to raise production costs within a territory not sheltered by trade walls.

And remember that there’s academic evidence showing that decentralization limits redistribution.

So the statists were smart to oppose welfare reform, since that meant decentralization and less wasteful and counterproductive spending.

Just as the statists are smart to push for a nationwide sales tax cartel. And just as the statists are wise to push for an end to international tax competition.

All of which means, of course, that the rest of us (at least those of us who value liberty) should follow the wisdom of Hayek and Mises.

P.S. Hayek even has groupies.

P.P.S. And Hayek even came back to life for Part I and Part II of the Hayek v Keynes rap videos.

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In early November of last year, I shared some remarkable data from a groundbreaking study published by the European Central Bank (ECB).

The study looking at public sector efficiency (PSE) in developed nations and found that “big governments spend a lot more and deliver considerably less.”

Later in the month, I wrote about a second ECB study that looked at a broader set of nations and further confirmed that smaller government produces better results.

The first ECB study clearly concluded that “small” government is more efficient and productive than either “medium” government or “big” government. Based on the second ECB study, we can conclude that it’s even better if government is…well, I guess we’ll have to use the term “smaller than small.”

Today, we can augment this research by looking at a new study from the International Monetary Fund.

The IMF’s new working paper on “Fiscal Decentralization and the Efficiency of Public Service Delivery” shows that it’s not only good to have small government, but that it’s also good to have decentralized government. Here are the main findings.

This paper analyzes the impacts of fiscal decentralization on the efficiency of public service delivery. …The paper’s findings suggest that fiscal decentralization can serve as a policy tool to improve performance… an adequate institutional environment is needed for decentralization to improve public service delivery. Such conditions include effective autonomy of local governments, strong accountability at various levels of institutions, good governance, and strong capacity at the local level. Moreover, a sufficient degree of expenditure decentralization seems necessary to obtain a positive outcome. And finally, decentralization of expenditure needs to be accompanied by sufficient decentralization of revenue to obtain favorable outcomes.

Here’s some explanation of why it’s better to have decisions made by sub-national governments.

Local governments possess better access to local preferences and, consequently, have an informational advantage over the central government in deciding which provision of goods and services would best satisfy citizens’ needs. …Local accountability is expected to put pressure on local authorities to continuously search for ways to produce and deliver better public service under limited resources, leading to “productive efficiency.” …Decentralization…encourages competition across local governments to improve public services; voters can use the performance of neighboring governments to make inferences about the competence or benevolence of their own local politicians… Fiscal decentralization may lead to a decrease in lobbying by interest groups.

I especially like the fact that the study recognized the valuable role of tax competition in limiting the greed of the political class.

The study also noted that genuine federalism leads to spending competition, though I get the impression that the authors seems to think this is a negative outcome.

Fiscal decentralization can also obstruct the redistribution role of the central government.

For what it’s worth (and based on previous academic research), I agree that decentralization makes it harder for government to be profligate.

But that’s a good thing. I want to “obstruct” economically destructive redistribution.

Now let’s look at the specific finding from the study.

…expenditure decentralization seems to improve the efficiency of public service delivery in advanced economies… To quantify this effect, one could say that a 5 percent increase in fiscal decentralization would lead to 2.9 percentage points of efficiency gains in public service delivery. …about one third of public expenditure would need to be shifted to the local authorities to obtain positive outcomes from fiscal decentralization.

Though it’s worth emphasizing that decentralization works when the sub-national levels of government are completely responsible for raising and spending their own money.

Revenue decentralization shows positive and statistically significant impacts on public service delivery for advanced economies and emerging economies and developing countries. …These findings might imply the need to accompany expenditure decentralization with sufficient revenue decentralization to ensure improvement of performance.

I’ve already argued that federalism is good politics and good policy.

Now we have evidence that it’s good government.

And who would have guessed that the normally statist IMF would be the bearer of this good news.

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To save the nation from a future Greek-style fiscal meltdown, we should reform entitlements.

But as part of the effort to restore limited, constitutional government, we also should shut down various departments that deal with issues that shouldn’t be handled by the central government.

I’ve already identified some low-hanging fruit.

Get rid of the Department of Housing and Urban Development.

Shut down the Department of Agriculture.

Eliminate the Department of Transportation.

We need to add the Department of Education to the list. And maybe even make it one of the first targets.

Increasing federal involvement and intervention, after all, is associated with more spending and more bureaucracy, but NOT better educational outcomes.

Politicians in Washington periodically try to “reform” the status quo, but rearranging the deck chairs on the Titanic never works. And that’s true whether you look at the results of GOP plans, like Bush’s no-bureaucrat-left-behind scheme, or Democratic plans, like Obama’s Common Core.

The good news, as explained by the Washington Examiner, is that Congress is finally considering legislation that would reduce the federal government’s footprint.

There are some good things about this bill, which will serve as the reauthorization of former President George W. Bush’s No Child Left Behind law. Importantly, the bill removes the Education Department’s ability to bludgeon states into adopting the controversial Common Core standards. The legislative language specifically forbids both direct and indirect attempts “to influence, incentivize, or coerce” states’ decisions. …The Student Success Act is therefore a step in the right direction, because it returns educational decisions to their rightful place — the state (or local) level. It is also positive in that it eliminates nearly 70 Department of Education programs, replacing them with more flexible grants to the states.

But the bad news is that the legislation doesn’t go nearly far enough. Federal involvement is a gaping wound caused by a compound fracture, while the so-called Student Success Act is a band-aid.

…as a vehicle for moving the federal government away from micromanaging schools that should fall entirely under state and local control, the bill is disappointing. …the recent explosion of federal spending and federal control in education over the last few decades has failed to produce any significant improvement in outcomes. Reading and math proficiency have hardly budged. …the federal government’s still-modest financial contribution to primary and secondary education has come with strings that give Washington an inordinate say over state education policy. …The Student Success Act…leaves federal spending on primary and secondary education at the elevated levels of the Bush era. It also fails to provide states with an opt-out.

To be sure, there’s no realistic way of making significant progress with Obama in the White House.

But the long-run battle will never be won unless reform-minded lawmakers make the principled case. Here’s the bottom line.

Education is one area where the federal government has long resisted accepting the evidence or heeding its constitutional limitations. …Republicans should be looking forward to a post-Obama opportunity to do it for real — to end federal experimentation and meddling in primary and secondary education and letting states set their own policies.

Amen.

But now let’s acknowledge that ending federal involvement and intervention should be just the first step on a long journey.

State governments are capable of wasting money and getting poor results.

Local governments also have shown that they can be similarly profligate and ineffective.

Indeed, when you add together total federal/state/local spending and then look at the actual results (whether kids are getting educated), the United States does an embarrassingly bad job.

The ultimate answer is to end the government education monopoly and shift to a system based on choice and competition.

Fortunately, we already have strong evidence that such an approach yields superior outcomes.

To be sure, school choice doesn’t automatically mean every child will be an educational success, but evidence from SwedenChile, and the Netherlands shows good results after breaking up state-run education monopolies.

P.S. Let’s close with a bit of humor showing the evolution of math lessons in government schools.

P.P.S. If you want some unintentional humor, the New York Times thinks that government education spending has been reduced.

P.P.P.S. And you’ll also be amused (and outraged and disgusted) by the truly bizarre examples of political correctness in government schools.

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In the grand scheme of things, the most important development in health policy is the pending Supreme Court case revolving around whether subsidies can be provided to people obtaining health insurance from the federal exchange, even though the law explicitly says handouts are only available to people getting policies via state exchanges.

If the Court rules correctly (unlike, ahem, the last time the Justices dealt with Obamacare), it will then be very important that congressional reformers use the resulting mess to unwind as much of the law as possible.

That will be a challenge because statists already are arguing that the “only” solution is to re-write the law so that subsidies are also available via the federal government. For what it’s worth, my colleague Michael Cannon outlines the right strategy in Cato’s newly released Policy Priorities for the 114th Congress.

But let’s set aside that issue because we have a great opportunity to review another example of how government-run healthcare is a miserable failure.

Our topic for today is government-dictated electronic health records (EHRs). Dr. Jeffrey Singer is on the front lines of this issue. As a physician in Arizona, he deals with the real-world impact of this particular mandate.

And he’s so unhappy that he wrote a column on the topic for the Wall Street Journal.

Starting this year, physicians like myself who treat Medicare patients must adopt electronic health records, known as EHRs, which are digital versions of a patient’s paper charts. …I am an unwilling participant in this program. In my experience, EHRs harm patients more than they help.

By way of background, he explains that EHRs were part of Obama’s failed “stimulus” legislation and they were imposed on the theory that supposed experts could then use the resulting data to make the system more efficient and effective.

The federal government mandated in the 2009 stimulus bill that all medical providers that accept Medicare adopt the records by 2015. Bureaucrats and politicians argued that EHRs would facilitate “evidence-based medicine,” thereby improving the quality of care for patients.

But Dr. Singer says the real-world impact is to make medical care less effective and more expensive.

Electronic health records are contributing to two major problems: lower quality of care and higher costs. The former is evident in the attention-dividing nature of electronic health records. They force me to physically turn my attention away from patients and toward a computer screen—a shift from individual care to IT compliance.The problem is so widespread that the American Medical Association—a prominent supporter of the electronic-health-record program—felt compelled to defend EHRs in a 2013 report, implying that any negative experiences were the fault of bedside manner rather than the program. Apparently our poor bedside manner is a national crisis, judging by how my fellow physicians feel about the EHR program. A 2014 survey by the industry group Medical Economics discovered that 67% of doctors are “dissatisfied with [EHR] functionality.” Three of four physicians said electronic health records “do not save them time,” according to Deloitte. Doctors reported spending—or more accurately, wasting—an average of 48 minutes each day dealing with this system.

Here’s what he wrote about costs.

The Deloitte survey also found that three of four physicians think electronic health records “increase costs.” There are three reasons. First, physicians can no longer see as many patients as they once did. Doctors must then charge higher prices for the fewer patients they see. This is also true for EHRs’ high implementation costs—the second culprit. A November report from the Agency for Healthcare Research and Quality found that the average five-physician primary-care practice would spend $162,000 to implement the system, followed by $85,000 in first-year maintenance costs. Like any business, physicians pass these costs along to their customers—patients. Then there’s the third cause: Small private practices often find it difficult to pay such sums, so they increasingly turn to hospitals for relief. In recent years, hospitals have purchased swaths of independent and physician-owned practices, which accounted for two-thirds of medical practices a decade ago but only half today. Two studies in the Journal of the American Medical Association and one in Health Affairs published in 2014 found that, in the words of the latter, this “vertical integration” leads to “higher hospital prices and spending.”

Last but not least, Dr. Singer explains that electronic health records don’t reduce errors or increase efficiency, notwithstanding the claims of advocates.

The EHR system assumes that the patient in front of me is the “average patient.” When I’m in the treatment room, I must fill out a template to demonstrate to the federal government that I made “meaningful use” of the system. This rigidity inhibits my ability to tailor my questions and treatment to my patient’s actual medical needs. It promotes tunnel vision in which physicians become so focused on complying with the EHR work sheet that they surrender a degree of critical thinking and medical investigation. Not surprisingly, a recent study in Perspectives in Health Information Management found that electronic health records encourage errors that can “endanger patient safety or decrease the quality of care.” America saw a real-life example during the recent Ebola crisis, when “patient zero” in Dallas, Thomas Eric Duncan, received a delayed diagnosis due in part to problems with EHRs.

Wow, not exactly an uplifting read.

Indeed, Dr. Singer’s perspective is so depressing that I hope he’s at least partially wrong. Maybe after a couple of years, and with a bit of luck, doctors will adapt and we’ll get some benefits in exchange for the $20 billion-plus of taxpayer money that has been plowed into this project (not to mention all the time and expense imposed on the medical profession).

But the big-picture lesson to be learned is that planners, politicians, and bureaucrats in Washington should not be in charge of the healthcare system.

Which brings us to the real challenge of how to put the toothpaste back in the tube.

Government intervention is so pervasive in the healthcare sector that – with a few rare exceptions – normal market forces have been crippled.

As such, we have a system that produces higher and higher costs accompanied by ever-rising levels of inefficiency.

Amazingly, the statists then argue that more government is the only solution to this government-caused mess. Sort of Mitchell’s Law on steroids.

But that path leads to single-payer healthcare, and the horror stories from the U.K. should be enough to show any sensible person that’s a bad outcome.

The only real solution is to restore a free market. That means not only repealing Obamacare, but also addressing all the other programs and policies which have caused the third-party payer crisis.

P.S. Just like yesterday, I want to finish a grim column with something uplifting.

Here’s a sign that will irk statists driving through one part of Pennsylvania.

Now take the IQ test for criminals and liberals and decide whether this means more crime or less crime.

If you’re having trouble with the answer, here’s a hint from Chuck Asay.

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I’m a relentless (probably to the point of being annoying) proponent of tax competition among jurisdictions.

It’s one of the reasons why I favor tax havens and federalism. Simply stated, politicians are less likely to do bad things when they know economic activity can escape to places with better policy.

And I’m more than happy to pontificate on the theories that support my position. But every so often it helps to have a powerful real-world example.

Our example today deals with the fact that the United Kingdom has a very punitive tax on air passengers, but the U.K. government also is devolving some powers to regions such as Scotland. And this bit of decentralization is already generating some pressure for tax reductions.

Here are excerpts from a story in Scotland’s Herald.

The UK government’s decision to devolve control of Air Passenger Duty (APD) to Holyrood means that a family of four could eventually be saving as much as £388 for a one-way journey to long-haul destinations. The promise to hand the Scottish Government control of APD is part of the UK government’s devolution package… The Scottish Government last week said it would halve the rate within the next Parliament and abolish completely “when the public finances allow”.

That sounds like good news for travelers, but some folks aren’t happy.

…airports as well as tourism bodies south of the border are up in arms, fearing that it will create an uneven playing field for the aviation sector as passengers in the catchment areas of airports such as Newcastle, Manchester and Liverpool will simply drive across the border to rival airports in Scotland to avoid potentially huge APD costs. Newcastle airport’s planning director Graeme Mason told the Sunday Herald that Scotland cutting or scrapping the passenger levy would create an unfair “cross-border market distortion” that would fester unless the UK government matches any reduction in APD south of the border.

Notice the Orwellian distortion of language from Mr. Mason. We’re supposed to view lower taxes as a “cross-border market distortion.”

But what he (and others) refer to as a “distortion” is actually the healthy process of competition.

Just as the I-Phone was a “distortion” for the Blackberry, but very good news for consumers. Just as the personal computer was a “distortion” for the typewriter industry, but very good news for consumers.

Countries, just like companies, should suffer when they don’t provide good value in exchange for people’s hard-earned money.

Here’s more from the story, including the fact that English airports in the long run will probably benefit because the government will now feel pressure to lower the tax burden on air travel.

…anyone travelling long-haul could potentially save themselves hundreds of pounds. The saving could be enough, for example, to undermine direct flights between Newcastle and New York that are set to launch in the May. But in Scotland, the decision to devolve APD to Holyrood has been greeted with delight by airports, the tourist industry and businesses which have campaigned both before and since the independence referendum to get rid of the tax. And many of those behind the campaign say that airports in England will eventually benefit from the abolition of the tax in Scotland, as this increases pressure on the UK government to follow suit.

Here’s some real-world evidence of tax competition promoting better policy on travel taxes.

After introducing a form of APD in 2008 the Dutch government scrapped the tax within a year after Dutch residents started travelling in their droves to airports in neighbouring Germany to avoid the tax. Belgium, Denmark, Malta and Norway have also scrapped flight taxes for similar reasons. That leaves the UK as one of only five countries in Europe to levy a passenger departure tax (the others being Austria, France, Germany and Italy) but the UK tax is, on average, five times higher than those other countries and is thought to be the highest in the world… In 2011 the UK government was forced to slash APD on long-haul flights in Northern Ireland, to stem the flow of passengers travelling south to Dublin to take advantage of the Republic of Ireland’s low and now abolished tax on flights.

By the way, the story also reminds us about how dangerous it is to give a government a new source of revenue.

Air Passenger Duty (APD) was introduced by John Major’s UK Conservative government in 1994. It was originally payable at just £5 for one-way domestic and European flights and £10 elsewhere but it has become a nice little earner for successive governments who have steadily increased the levy to the point that it is now the highest tax of its kind anywhere in the world. Long-haul flights in the cheapest economy class are now charged between £67 and £94 per flight, depending on the distance travelled. Other classes of travel, including so-called premium economy class, are charged between £138 and £194 per long-haul flight while anyone travelling in a small plane is charged between £276 and £388 per flight.

Jut keep all this data in mind the next time someone tells you we should let politicians impose a VAT, an energy tax, or a financial tax.

Since we’re on the topic of tax competition, let’s look at the tennis world to see how taxes drive behavior.

In her column for the Wall Street Journal, Allysia Finley explains that top tennis players respond to fiscal incentives.

…tennis players respond to economic incentives and often act as strategically off the court as on. For the past three years Spain’s Rafael Nadal…has bowed out of England’s annual Queen’s Club tournament, traditionally a Wimbledon warm-up, because the U.K. charges foreign athletes a prorated tax on their world-wide income (including endorsements). The more tournaments he plays in Britain, the more he owes Her Majesty’s Government.

Heck, those U.K. tax laws on worldwide income are so powerful (in a bad way) that they even chased away the world’s fastest man.

So what nations offer a more hospitable environment?

Two of my favorite places, Monaco and Switzerland, are high on the list.

The top five French players on the men’s circuit— Jo-Wilfried Tsonga, Gael Monfils, Gilles Simon, Julien Benneteau and Richard Gasquet, as well as Germany’s Philipp Kohlschreiber, all claim residence in Switzerland, ostensibly to avoid paying their home countries’ punitive 45% top personal income-tax rates (not including surcharges or social-security contributions). …the most popular haven for tennis players is the principality of Monaco, which doesn’t tax foreigners’ world-wide income. …Swedish tennis legends Bjorn Borg and Mats Wilander escaped to Monte Carlo during their primes in the 1970s and ’80s to dodge their home country’s 90% top marginal rate, which has since fallen to 57%. …Today, Monaco is the putative home of many of the world’s top-ranked men and women players. They include Serbia’s Novak Djokovic (1), the Czech Republic’s Petra Kvitova (4), Tomas Berdych (7) and Lucie Safarova (16); Canada’s Milos Raonic (8); Denmark’s Caroline Wozniacki (8); Bulgaria’s Grigor Dimitrov (11); and Ukraine’s Alexandr Dolgopolov (23). Players who hail from former communist countries are especially keen, it seems, on keeping their hard-earned money.

Even inside the United States, we see the benefits of tax competition.

Florida is one of the big winners and California is a big loser.

The U.S. has its own Monaco: no-income-tax Florida. It’s no coincidence that America’s top-ranked players Serena (1) and Venus Williams (18) and John Isner (21), as well as Russia’s Maria Sharapova (2) and Japan’s Kei Nishikori (5) live in the Sunshine State. So do twins Mike and Bob Bryan, who have won 16 Grand Slam doubles titles. Like the Williamses, they come from California, where the 13.3% state income-tax rate is the nation’s highest.

Indeed, it’s not just tennis players. Golfers like Tiger Woods have Florida residency. And those that remain in California are plotting their escapes.

Even soccer players become supply-side economists!

So whether it’s taxpayers escaping from France or from New Jersey, tax competition is a wonderful and necessary restraint on the greed of politicians.

P.S. I’ve shared horror stories of anti-gun political correctness in schools.

Well, the Princess of the Levant just sent me this bit of humor.

For more gun control humor, click here.

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I’m a big believer in federalism, both as a matter of policy and politics.

So you won’t be surprised that I’ve called for the abolition of the Department of Transportation. On more than one occasion.

But when you’re trying to convince politicians to give up power and money, it takes a lot repetition. So, to paraphrase what Ronald Reagan said to Jimmy Carter, here we go again.

I want to emphasize one part of the interview. I’m agnostic on the issue of whether America as a whole needs more infrastructure spending, but I’m sure some parts of the nation could use more roads.

But that doesn’t mean that Washington should be in charge of that spending.

My colleague at Cato, Chris Edwards, is an expert on these issues. Here’s what he recently wrote about the various schemes in DC to fund more transportation spending with higher taxes.

HTF spending on highways and urban transit adds up to $53 billion a year, while the HTF rakes in $39 billion in revenues, mainly from the federal gasoline tax. That leaves a gap of $14 billion. President Obama wants to fill the gap with corporate tax revenues, but that bad idea is dead on arrival in Congress. Senator Bob Corker (R., Tenn.) has a different idea. His bill, co-sponsored by Senator Chris Murphy (D., Conn.), would hike the federal gas tax by 12 cents per gallon. …Corker’s position is the opposite of conservative. If Tennessee needs more money for roads, it can raise its own gas tax any time it wants.

And here are some of the numbers that Chris put together showing that highway spending has been rising rather than falling.

Elizabeth Nolan Brown of Reason adds more context.

About 27 percent of highway and transit spending currently comes from the federal government, via the HTF, while states kicking in about 38 percent and 35 percent coming from municipalities. The HTF isn’t set to “run dry” in August, as many are reporting, but it did tell states to expect an average 28 percent reduction in aid at that point unless Congress acts. …there’s nothing stopping states from taking this matter into their own hands. Since 2013, seven states have raised fuel levies, reports Reuters… When left a little more to their own devices, it seems states get innovative. They develop localized solutions. They experiment.

Let’s close with one interesting piece of data. The International Institute for Management Development recently published its World Competitiveness Yearbook.

The good news is that the United States maintained its hold on first place. That’s a lot better than we’re doing in the Economic Freedom of the World rankings.

But what’s particularly relevant and fascinating is to see America’s scores in the various sub-components of the Yearbook. The United States may rank only 22 out of 60 nations for government effectiveness, but we beat every nation for infrastructure.

So if we have an “infrastructure crisis” in the United States, it certainly doesn’t show up in either the hard data or the business leader opinion survey that generate those rankings.

P.S. Back in 2011, I shared a couple of serious videos about bitcoin.

On a lighter note, here’s “bitcoin girl” encouraging more people to use this private money.

But since I don’t want anyone to accuse me of bias, fans of the Federal Reserve can enjoy this alleged film clip from Ben Bernanke’s childhood.

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Let’s enjoy some semi-good news today.

We’ve discussed many times why Obamacare is bad news, whether we’re looking at it from the perspective of the healthcare system, taxpayers, or workers.

But it could be worse. Writing in the Washington Post, Robert Samuelson explains that two-dozen states have refused the lure of expanding Medicaid (the means-tested health care program) in exchange for “free” federal money.

From 1989 to 2013, the share of states’ general funds devoted to Medicaid has risen from 9 percent to 19 percent, reports the National Association of State Budget Officers. Under present law, the squeeze will worsen. The White House report doesn’t discuss this. …To the White House, the right-wing anti-Obamacare crusade is mean-spirited partisanship at its worst. The 24 non- participating states are sacrificing huge amounts of almost-free money… Under the ACA, the federal government pays all the cost of the Medicaid expansion through 2016 and, after that, the reimbursement rate drops gradually to a still-generous 90 percent in 2020.

But that “almost-free money” isn’t free, of course. It’s simply money that the federal government (rather than state governments) is diverting from the productive sector of the economy.

So the 24 states that have rejected Medicaid expansion have done a huge favor for America’s taxpayers. To be more specific, Nic Horton of Watchdog.org explains that these states have lowered the burden of federal spending (compared to what it would have been) by almost $90 billion over the next three years.

By not expanding Medicaid, 24 states are saving taxpayers $88 billion over the next three years. That is $88 billion that will not be added to the national debt — debt that will not be passed on to future generations of taxpayers. On the other hand, states that have expanded Medicaid through Obamacare are adding roughly $84 billion to the national debt through 2016.

Returning to Samuelson’s column, he would like a grand bargain between states and the federal government, with Washington agreeing to pay for all of Medicaid (currently, states pay a portion of the bill) in exchange for states taking over all spending for things such as roads and education.

We could minimize this process for states and localities by transferring all Medicaid costs to Washington (or at least the costs of the elderly and disabled). To pay for it, Washington would reduce transportation and education grants to states. Let Washington mediate among generations. Let states and localities concentrate on their traditional roles of education, public safety and roads. Spare them the swamp of escalating health costs. This is the bargain we need — and probably won’t get.

I like half of that deal. I want to transfer education, law enforcement, and roads back to the state level (or even the local level).

But I don’t want Washington taking full responsibility for Medicaid. Instead, that program also should be sent down to the states as well. This video explains why that reform is so desirable.

P.S. Since we’re on the topic of Obamacare, this Chip Bok cartoon perfectly captures the essence of the Hobby Lobby decision. The left wants the mandate that contraception and abortifacients be part of health insurance packages.

Rather than exacerbate the damage of using insurance to cover routine costs, wouldn’t it make more sense to have employers simply give their workers more cash compensation and then allow the workers to use their money as they see fit?

That way there’s no role for those evil, patriarchal, oppressive, and misogynistic bosses!

I realize this might upset Sandra Fluke, but at least she has the comfort of knowing that her narcissistic statism generated some good jokes (here, here, and here).

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

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

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

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

Russian in Ukraine

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

Ukraine Election Results

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

No wonder there’s conflict.

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

It seems there are two options.

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

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

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

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

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

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

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

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

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

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

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

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

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I’ve posted hundreds of charts over the past several years, including on favorite topics such as tax code corruption and counterproductive government spending.

But arguably the most powerful and compelling chart I’ve ever shared is on the topic of education. Prepared by my Cato colleague, Andrew Coulson, it shows that massive increases in spending and bureaucracy (which accompanied increasing federal involvement and intervention) have had zero impact on educational performance.

Keep that chart in the back of your mind as we consider what George Will has to say about President Obama’s scheme – known as Common Core – to expand federal involvement and intervention.

We have several excerpts, beginning with this passage outlining some of his concerns.

Common Core…is the thin end of an enormous wedge. It is designed to advance in primary and secondary education the general progressive agenda of centralization and uniformity. …proponents of the Common Core want its nature and purpose to remain as cloudy as possible for as long as possible. Hence they say it is a “state-led,” “voluntary” initiative to merely guide education with “standards” that are neither written nor approved nor mandated by Washington… Proponents talk warily when describing it because a candid characterization would reveal yet another Obama administration indifference to legality.

Will then notes that we’ve been sliding down the slippery slope of centralization and Washington control.

The 1965 Elementary and Secondary Education Act (ESEA), the original federal intrusion into this state and local responsibility, said “nothing in this act” shall authorize any federal official to “mandate, direct, or control” schools’ curriculums. The 1970 General Education Provisions Act stipulates that “no provision of any applicable program shall be construed to authorize any” federal agency or official “to exercise any direction, supervision, or control over the curriculum, program of instruction” or selection of “instructional materials by any” school system. The 1979 law creating the Education Department forbids it from exercising “any direction, supervision, or control over the curriculum” or “program of instruction” of any school system.

And Common Core is just the latest example.

…what begins with mere national standards must breed ineluctable pressure to standardize educational content. Targets, metrics, guidelines and curriculum models all induce conformity in instructional materials. Washington already is encouraging the alignment of the GED, SAT and ACT tests with the Common Core. By a feedback loop, these tests will beget more curriculum conformity. All of this will take a toll on parental empowerment, and none of this will escape the politicization of learning like that already rampant in higher education.

If this sounds familiar, it’s probably because you’re aware of other slippery slope examples, such as the tiny income tax in 1913 that has morphed into the internal revenue code monstrosity of today.

Returning to the topic of education, Will warns that the one-size-fits-all approach will undermine the innovation and experimentation needed to figure out how best teach kids.

Even satisfactory national standards must extinguish federalism’s creativity: At any time, it is more likely there will be half a dozen innovative governors than one creative federal education bureaucracy. And the mistakes made by top-down federal reforms are continental mistakes.

I particularly like his warning about “continental” mistakes. You get the same problem with global regulation, by the way.

The bottom line, as Will explains, is that Common Core is yet another example of a failed approach.

What is ludicrous is Common Core proponents disdaining concerns related to this fact: Fifty years of increasing Washington input into K-12 education has coincided with disappointing cognitive outputs from schools. Is it eccentric that it is imprudent to apply to K-12 education the federal touch that has given us HealthCare.gov? …Opposition to the Common Core is surging because Washington, hoping to mollify opponents, is saying, in effect: “If you like your local control of education, you can keep it. Period.”

You won’t be surprised to learn that Cato Institute experts are among the leading opponents of Common Core. Here’s what Andrew Coulson, in a column warning about the negative impact on private schools, has written.

…the Common Core–aligned tests create a powerful incentive for schools to teach the same concepts in the same order at the same time. This would make it all but impossible for schools to experiment with new ways of tailoring education to meet the needs of individual children — they will instead have to resort to expecting that all children who happened to be born in the same year progress at the same rate across subjects.

And another Cato scholar, Neil McCluskey, points out that other education experts also think Common Core is a dud.

The Common Core is opposed by scholars at leading think tanks on the right and the left, including the Heritage Foundation, the Hoover Institution, the Brookings Institution and the Cato Institute. My research has shown that there is essentially no meaningful evidence that national standards lead to superior educational outcomes. Hoover Institution Senior Fellow Eric Hanushek, an education economist and supporter of standards-based education reform, has reached a similar conclusion, recently writing: “We currently have very different standards across states, and experience from the states provides little support for the argument that simply declaring more clearly what we want children to learn will have much impact.” Hanushek’s conclusion dovetails nicely with Common Core opposition from Tom Loveless, a scholar at the left-leaning Brookings Institution. In 2012, Loveless demonstrated that moving to national standards would have little, if any, positive effect because the performance of states has very little connection to the rigor or quality of their standards, and there is much greater achievement variation within states than among them. In fact, Loveless has been one of the clearest voices saying the Core is not a panacea for America’s education woes, writing: “Don’t let the ferocity of the oncoming debate fool you. The empirical evidence suggests that the Common Core will have little effect on American students’ achievement. The nation will have to look elsewhere for ways to improve its schools.”

We started this post with a very powerful chart, so let’s end with another chart.

It’s not as visually compelling, but it shows that the United States already spends more on education than another other nation.

But if you look at the data is this post, you’ll see that American students are lagging behind their counterparts in other developed nations.

Maybe, just maybe, it’s time to put kids first. Perhaps we should discard the Bush-Obama approach of centralization and spending and instead choose a better path.

In other words, let’s learn from Chile, Sweden, and the Netherlands.

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