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Posts Tagged ‘Competitiveness’

Illinois is a mess. Taxes and spending already are too high, and huge unfunded liabilities point to an even darker future.

Simply stated, politicians and government employee unions have created an unholy alliance to extract as much money as possible from the state’s beleaguered private sector.

That’s not a surprise. Indeed, it’s easily explained by the “stationary bandit” theory of government.

But while the bandit of government may be stationary, the victims are not. At least not in a nation with 50 different states. Indeed, Illinois Policy reports that a growing number of geese with golden eggs decided to fly away after a big tax hike in 2011.

Politicians enacted Illinois’ 2011 income-tax hike during a late-night legislative session in January 2011 and raised the state’s personal income-tax rate to 5 percent from 3 percent. This 67 percent income-tax hike lasted for four years, during which time Illinois experienced record wealth flight. …The short-term increase in tax revenue gained from higher tax rates is offset by the long-term loss of substantial portions of Illinois’ tax base. The average income of taxpayers leaving Illinois rose to $77,000 per year in 2014, according to new income migration data released by the IRS. Meanwhile, the average income of people entering Illinois was only $57,000. …During the four years of the full income-tax hike, prior to its partial sunset in 2015, Illinois lost $14 billion in annual adjusted gross income, or AGI, to other states, on net.

Illinois has always had an unfavorable ratio when comparing the incomes of immigrants and emigrants. But you can see from this chart that there was a radically unfavorable shift after the tax hike.

Here’s a table from the article showing the 10-worst states.

Illinois leads this list of losers by a comfortable margin. Connecticut, meanwhile, has a strong hold on second place (which shouldn’t be a surprise).

The IP report observes that the states benefiting from internal migration have much better fiscal policy. In particular, most of them are on the admirable list of states that don’t impose income taxes.

…the top five states with favorable income differentials were Florida, Wyoming, Nevada, South Carolina and Texas. Notably, 4 of 5 of these states have no income tax, and none of them have a death tax.

It’s worth noting that the high-tax approach is not producing good results.

Instead, as reported by Bloomberg, the Land of Lincoln is the land of red ink.

Illinois had its bond rating downgraded to one step above junk by Moody’s Investors Service and S&P Global Ratings, the lowest ranking on record for a U.S. state… Illinois’s underfunded pensions and the record backlog of bills…are equivalent to about 40 percent of its operating budget. …investors have demanded higher premiums for the risk of owning its debt. Moody’s called Illinois “an outlier among states” after suffering eight downgrades in as many years. …like other states, has no ability to resort to bankruptcy to escape from its debts. A downgrade to junk, though, would add further financial pressure by increasing its borrowing costs.

Amazing, in spite of this ongoing meltdown, the Democrats who control the state legislature are pushing hard to once again increase the income tax.

Heck, they want to increase all sorts of taxes. Including higher burdens on the financial industry.

Kristina Rasumussen, the President of Illinois Policy, warned in the Wall Street Journal that this was not a good recipe.

Proponents here call it the “privilege tax.” …The Illinois bill would put a 20% levy on fees earned by investment advisers. It passed the state Senate in a 32-24 vote Tuesday, and backers are hoping to get it through the House before the legislative session ends May 31. The new tax is pitched as a way to squeeze more revenue—as much as $1.7 billion a year—from hedge funds and private-equity firms… An earlier version of the Illinois proposal included a provision so that the 20% tax would take effect only if and when New York, New Jersey and Connecticut enacted similar measures. But the bill as written now would impose the tax regardless, and lawmakers will simply have to hope other states follow suit. Yet who says financiers can’t do their jobs just as well in Palm Beach, Fla.—or London, Zurich or Hong Kong? The progressives peddling this idea don’t understand that Chicago competes for these businesses not only with New York and Greenwich, Conn., but with anywhere that can offer cellphone service and an internet connection. …Railing against supposed “fat cats” might satisfy progressive groups, but lawmakers shouldn’t be in the business of hounding the people who help connect capital with new opportunities for growth. …Rather than focus on how to make everyone miserable together, policy makers should work to increase their states’ competitiveness. A start would be to rally against this proposed privilege tax and instead fix the spiraling pension costs and outdated labor rules that are dragging Illinois and other blue states down.

Let’s hope the governor continues to reject any and all tax increases.

If he does hold firm, he’ll have allies.

Including the Chicago Tribune, which recently editorialized about the state’s dire position

Illinois legislators fumble repeated attempts to send a balanced budget to Gov. Bruce Rauner; while the stack of Illinois’ unpaid bills climbs by the minute; while our leaders prioritize politics over policy… Employers and other taxpayers are hopping over Illinois’ borders with alarming regularity. …What an embarrassment. What a dereliction of duty. …Illinois, boasting the lowest credit rating and the highest population loss of any state in the country, has doubled down. State government is in a full-blown crisis. Again. Since January, Democrats have discussed plans to raise income taxes and borrow money to pay down bills. They approved bills that would make Illinois a less attractive place to do business; under one proposal, Illinois would have the highest minimum wage of all its neighboring states.

This is some very sensible analysis from a newspaper that endorsed Obama in both 2008 and 2012.

Even more important, the state’s taxpayers are mostly on the correct side.

Illinoisans feel the strain of the state’s two-year budget impasse, but they are emphatic that tax hikes should not be part of any budget deal. These are the findings of a new poll of likely Illinois voters… Only 31 percent of survey respondents support raising the state income tax to end the budget impasse. An increase in the state sales tax is even more unpopular, with 76 percent of survey respondents opposed. Another key takeaway from the poll: A plurality (49 percent) of respondents who are directly affected by the state budget impasse prefer a cuts-only, no-tax-hike budget. …Survey respondents were also asked what they think of political candidates who support raising taxes to end the budget impasse. The poll found that likely Illinois voters will be unforgiving of candidates for governor or the General Assembly who raise the state income tax or sales tax.

I suspect taxpayers realize that higher taxes will simply lead to more spending.

Indeed, a leftist in the state inadvertently admitted that the purpose of tax hikes is to enable more spending.

If there is to be any hope for the future in Illinois, Governor Rauner needs to hold firm. So long as Republicans in the state legislature hold firm, he can use his veto power to stop any tax hikes.

Or he can be Charlie Brown.

P.S. Illinois is invariably near the bottom in comparisons of state fiscal policy. The one saving grace is that the state has a flat tax. If the statists ever succeed in replacing that system with a so-called progressive tax, it will just be a matter of time before the state passes New York and California in the real race to the bottom.

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What’s the best argument for reducing the onerous 35 percent corporate tax rate in the United States?

These are all good reasons to dramatically lower the corporate tax rate, hopefully down to the 15-percent rate in Trump’s plan, but the House proposal for a 20-percent rate wouldn’t be a bad final outcome.

But there’s a 9th reason that is very emotionally appealing to me.

  • 9. Should the rate be lowered to trigger a new round of tax competition, even though that will make politicians unhappy? Actually, the fact that politicians will be unhappy is a feature rather than a bug.

I’ve shared lots of examples showing how jurisdictional competition leads to better tax policy.

Simply stated, politicians are less greedy when they have to worry that the geese with the golden eggs can fly away.

And the mere prospect that the United States will improve its tax system is already reverberating around the world.

The German media is reporting, for instance, that the government is concerned that a lower corporate rate in America will force similar changes elsewhere.

The German government is worried the world is slipping into a ruinous era of tax competition in which countries lure companies with ever-more generous tax rules to the detriment of public budgets. …Mr. Trump’s “America First” policy has committed his administration to slashing the US’s effective corporate tax rate to 22 from 37 percent. In Europe, the UK, Ireland, and Hungary have announced new or rejigged initiatives to lower corporate tax payments. Germany doesn’t want to lower its corporate-tax rate (from an effective 28.2 percent)… Germany’s finance minister, Wolfgang Schäuble, …left the recent meeting of G7 finance ministers worried by new signs of growing beggar-thy-neighbor rivalry among governments.

A “ruinous era of tax competition” and a “beggar-thy-neighbor rivalry among governments”?

That’s music to my ears!

I”d much rather have “competition” and “rivalry” instead of an “OPEC for politicians,” which is what occurs when governments impose “harmonization” policies.

The Germans aren’t the only ones to be worried. The Wall Street Journal observes that China’s government is also nervous about the prospect of a big reduction in America’s corporate tax burden.

China’s leaders fear the plan will lure manufacturing to the U.S. Forget a trade war, Beijing says a cut in the U.S. corporate rate to 15% from 35% would mean “tax war.” The People’s Daily warned Friday in a commentary that if Mr. Trump succeeds, “some powerful countries may join the game to launch competitive tax cuts,” citing similar proposals in the U.K. and France. …Beijing knows from experience how important tax rates are to economic competitiveness. …China’s double-digit growth streak began in the mid-1990s after government revenue as a share of GDP declined to 11% in 1995 from 31% in 1978—effectively a supply-side tax cut. But then taxes began to rise again…and the tax man’s take now stands at 22%. …Chinese companies have started to complain that the high burden is killing profits. …President Xi Jinping began to address the problem about 18 months ago when he launched “supply-side reforms” to cut corporate taxes and regulation. …the program’s stated goal of restoring lost competitiveness shows that Beijing understands the importance of corporate tax rates to growth and prefers not to have to compete in a “tax war.”

Amen.

Let’s have a “tax war.” Folks on the left fret that this creates a “race to the bottom,” but that’s because they favor big government and think our incomes belong to the state.

As far as I’m concerned a “tax war” is desirable because that means politicians are fighting each other and every bullet they fire (i.e., every tax they cut) is good news for the global economy.

Now that I’ve shared some good news, I’ll close with potential bad news. I’m worried that the overall tax reform agenda faces a grim future, mostly because Trump won’t address old-age entitlements and also because House GOPers have embraced a misguided border-adjustment tax.

Which is why, when the dust settles, I’ll be happy if all we get a big reduction in the corporate rate.

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Earlier today, I gave a speech about populism and capitalism at the Free Market Road Show in Thessaloniki, Greece.

But I’m not writing about my speech (read this and this if you want to get an idea of what I said about American policy under Trump). Instead, I want to share some remarkable data from a presentation by Ewa Balcerowicz of Poland’s Center for Social and Economic Research.

She talked about “The Post Socialist Transition in Poland in a Comparative Perspective” and showed that Poland and Spain has similar living standards after World War II. But over the next 40 years, thanks to the brutal communist system imposed by the Soviet Union, Poland fell far behind.

But look what has happened over the past 25 years.

Per-capita GDP has skyrocketed in Poland and the gap between the two nations has dramatically narrowed.

So why is Poland now rising relative to Spain?

For the simple reason that public policy has moved in the right direction. Here’s the data from Economic Freedom of the World, comparing Poland’s score in 1990 and today. Poland has jumped from 3.54 to 7.42, and the nation has jumped from a dismal ranking of #104 to a respectable ranking of #40.

By the way, Spain’s score also has increased, but by a much smaller amount. And because the world has become more free, Spain’s ranking has dropped. Indeed, Spain now ranks below Poland

Which means that we shouldn’t be surprised if per-capita GDP in Poland soon jumps about Spanish levels.

Just as Poland has out-paced Ukraine because it has better policy.

Here are additional examples showing the long-run benefits of pro-market policy.

And here’s a must-watch video on the relationship between good policy and better economics performance.

All of which helps to explain why I’m so disappointed in both Bush and Obama. Their statist policies have caused a drop in America’s score and relative ranking.

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The tax system is bad news for professional sports, with plenty of anecdotal evidence showing that athletes (and even fans) get pillaged by government.

Now we have some comprehensive academic research to augment the anecdotes.

The Wall Street Journal opined today on a new study about the impact of marginal tax rates on professional sports teams.

Erik Hembre, an economist at the University of Illinois-Chicago, looked at the question: Do tax rates affect a team’s performance? He analyzed data in professional football, basketball, baseball and hockey between 1977 and 2014. Since the mid-1990s, he writes, “a ten percentage point increase in income tax rates is associated with between a 1.9-3.0 percentage point decrease in winning percentage.” Here’s why: Professional athletes are taxed at the highest marginal rate. The average NBA player earned more than $4.8 million in 2013 and the average was $2.3 in the NFL, so athletes who play for the Minnesota Vikings earn less after taxes than do Dallas Cowboys. …The effect appears strongest in the NBA, “where moving from a high-tax state to a low-tax state has a similar effect on winning as upgrading a bench player to an All-Star.” An NBA team that fled Minnesota (top rate: 9.85%) for Florida (0%) could expect to win an additional 4.5 games a season, Mr. Hembre found.

This makes sense.

Indeed, there’s evidence from Monaco, which plays in the French soccer league, that low taxes produce better results on the playing field.

The editorial concludes with a caveat…and a political lesson.

Players make free-agent decisions for many reasons, and New York or Los Angeles can offer attractions and endorsement deals that offset their horrendous tax rates. But no one should be surprised that professional athletes respond to incentives like individuals in any industry. Perhaps this evidence will tempt governors and state lawmakers to cut rates now that they know that, along with a growing economy, they might end up with better sports teams and happier fans, also known as voters.

None of this should be a surprise. We know taxes impact the decisions of high-income, high-productivity people, everyone from entrepreneurs to inventors.

Now that we’ve looked at the impact of taxes on an industry, let’s now consider the impact of taxes on the overall economy.

Professor Ed Lazear, in an article for the University of Chicago’s Becker-Friedman Institute, makes some critical observations on the American tax code.

Starting with the system’s complexity.

In the first 20 years after the 1986 Tax Reform Act was passed, there were already about 15,000 changes to the basic law. The lack of transparency is costly: resources devoted to tax preparation and avoidance alone amount to more than 1% of GDP.

Continuing with distortions in the internal revenue code.

The tax system is full of inconsistencies, preferences, complex rules, and contradictory definitions that encourage distortionary behavior by Americans in their legitimate attempts to minimize their tax liabilities. …Additionally, there are parallel systems that are not fully integrated into one coherent tax structure. Within the income tax category, the Alternative Minimum Tax has rules that are layered on top of the basic tax rate structure, which override the tax calculation for a sizeable fraction of taxpayers. Beyond that, the payroll tax, both employer and employee contributions, are distinct from the income tax rules, but for most Americans, act as a basic income tax that is an add-on to the income taxes that they pay.

And there’s a big section on the economic harm caused by over-taxing business investment.

…growth is most affected by taxes on capital. Notorious is the high US corporate tax rate of 35% that the US imposes, which results in obvious evasive action like locating business overseas. More important, but less visible, is the actual reduction in investment that occurs because capital is taxed so heavily in the United States. The marginal dollar of investment is one that can find its home in another country as easily as in the US. When we raise taxes on capital, a German investor who might have preferred to invest in an American company simply chooses to keep that money in Germany. The easy flow of capital across borders means that lowering tax rates will encourage more capital to flow to American businesses. …if investment were untaxed altogether, the economy would grow by an additional 5% to 9%. In the short run, the easiest way to accomplish this is to allow full expensing of investment with indefinite carry-forwards. This simply means that firms can deduct the cost of investments from their tax liabilities immediately and fully. Allowing full and immediate deductibility of investment expenses removes the distortions that impede capital investment and, as a consequence, raises productivity, incomes, and GDP.

Augmented by the economic damage caused by over-taxing human capital.

Economists have estimated the human capital portion of the total capital stock in the United States as between 70% and 90%. …increasing tax rates is likely to have profound effects on occupational choice and investment in the skills that are required to be productive in high-value occupations. …The personal income tax, and especially extreme progressivity, which places high burdens on professionals, discourages entry into professional occupations. Since human capital is such an important component of all capital, it is important to avoid over-taxing individuals directly. …

He concludes by explaining why the class-warfare crowd is misguided.

Lowering capital taxation and paying close attention to the progressivity of the tax structure both benefit the rich directly. The middle- and lower-income parts of the income distribution also benefit, however. …there is a close relation between average income wage growth and productivity. Furthermore, there is a close link between GDP growth and productivity growth…unless we ensure that the economy grows, which means that productivity grows, we will not have wage growth. …the poor and rich alike did best when economic growth was robust.

This last excerpt is critical. Some of my leftist friends think the economy is fixed pie, and this leads them to think the rest of us lose money any time a rich person earns more money.

Or they are motivated by envy. In some cases, this even leads them to support policies that hurt poor people so long as rich people suffer even more.

Both these views are wrong. President John F. Kennedy was right about a rising tide lifting all boats.

And we see that in the incredible data that’s been shared by scholars such as Deirdre McCloskey and Don Boudreaux.

And since we just quoted Kennedy, let’s close with an equally appropriate quote from Winston Churchill, who famously observed that “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”

And the best example of that is in the data comparing the US with Denmark and Sweden. Or the words of Margaret Thatcher.

The moral of the story is that Slovakia has the right approach on taxes while Sweden has the wrong approach. That’s true, whether you want a winning sports team or a winning economy.

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I expressed pessimism yesterday about Trump’s tax plan. Simply stated, I don’t think Congress is willing to enact a large tax cut given the nation’s grim fiscal outlook.

In this Fox Business interview, I elaborated on my concerns while also pointing out that the plan would be very good if it somehow got enacted.

We now have some preliminary numbers that illustrate why I’m concerned.

The Committee for a Responsible Federal Budget put together a quick guess about the revenue implications of Trump’s new plan. Their admittedly rough estimate is that federal revenues would be reduced by close to $6 trillion over 10 years.

Incidentally, these revenue estimates are very inaccurate because they are based on “static scoring,” which is the antiquated notion that major changes in tax policy have no impact on economic performance.

But these numbers nonetheless are useful since the Joint Committee on Taxation basically uses that approach when producing official revenue estimates that guide congressional action.

In other words, it doesn’t matter, at least for purposes of enacting legislation, that there would be substantial revenue feedback in the real world (the rich actually paid more, for instance, when Reagan dropped the top tax rate from 70 percent to 28 percent). Politicians on Capitol Hill will point to the JCT’s static numbers, gasp with feigned horror, and use higher deficits as an excuse to vote no (even though those same lawmakers generally have no problem with red ink when voting to expand the burden of government spending).

That being said, they wouldn’t necessarily have that excuse if the Trump Administration was more aggressive about trying to shrink the size and scope of the federal government. So there’s plenty of blame to go around.

Until something changes, however, I don’t think Trump’s tax cut is very realistic. So if you want my prediction on what will happen, I’m sticking to the three options I shared yesterday.

  1. Congress and the White House decide to restrain spending, which easily would create room for a very large tax cut (what I prefer, but I won’t hold my breath for this option).
  2. Congress decides to adopt Trump’s tax cuts, but they balance the cuts with dangerous new sources of tax revenue, such as a border-adjustment tax, a carbon tax, or a value-added tax (the option I fear).
  3. Congress and the White House decide to go for a more targeted tax cut, such as a big reduction in the corporate income tax (which would be a significant victory).

By the way, the Wall Street Journal editorialized favorably about the plan this morning, mostly because it reflects the sensible supply-side view that it is good to have lower tax rates on productive behavior.

While the details are sparse and will have to be filled in by Congress, President Trump’s outline resembles the supply-side principles he campaigned on and is an ambitious and necessary economic course correction that would help restore broad-based U.S. prosperity. …Faster growth of 3% a year or more is possible, but it will take better policies, and tax reform is an indispensable lever. Mr. Trump’s modernization would be a huge improvement on the current tax code that would give the economy a big lift, especially on the corporate side. …The Trump principles show the President has made growth his highest priority, and they are a rebuke to the Washington consensus that 1% or 2% growth is the best America can do.

But the WSJ shares my assessment that the plan will not survive in its current form.

…the blueprint is being assailed from both the left and the balanced-budget right. The Trump economic team acknowledges that their plan would mean less federal revenue than current law… Mr. Trump’s plan is an opening bid to frame negotiations in Congress, and there are plenty of bargaining chips. Perhaps the corporate rate will rise to 20%… Budget rules and Democratic opposition could force Republicans to limit the reform to 10 years.

For what it’s worth, if the final result is a 15 percent or 20 percent corporate tax rate, I’ll actually be quite pleased. That reform would be very good for the economy and national competitiveness. And regardless of what JCT projects, there would be substantial revenue feedback.

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My crusade against the border-adjustable tax (BAT) continues.

In a column co-authored with Veronique de Rugy of Mercatus, I explain in today’s Wall Street Journal why Republicans should drop this prospective source of new tax revenue.

…this should be an opportune time for major tax cuts to boost American growth and competitiveness. But much of the reform energy is being dissipated in a counterproductive fight over the “border adjustment” tax proposed by House Republicans. …Republican tax plans normally receive overwhelming support from the business community. But the border-adjustment tax has created deep divisions. Proponents claim border adjustability is not protectionist because it would automatically push up the value of the dollar, neutralizing the effect on trade. Importers don’t have much faith in this theory and oppose the GOP plan.

Much of the column is designed to debunk the absurd notion that a BAT is needed to offset some mythical advantage that other nations supposedly enjoy because of their value-added taxes.

Here’s what supporters claim.

Proponents of the border-adjustment tax also are using a dodgy sales pitch, saying that their plan will get rid of a “Made in America Tax.” The claim is that VATs give foreign companies an advantage. Say a German company exports a product to the U.S. It doesn’t pay the American corporate income tax, and it receives a rebate on its German VAT payments. But an American company exporting to Germany has to pay both—it’s subject to the U.S. corporate income tax and then pays the German VAT on the product when it is sold.

Sounds persuasive, at least until you look at both sides of the equation.

When the German company sells to customers in the U.S., it is subject to the German corporate income tax. The competing American firm selling domestically pays the U.S. corporate income tax. Neither is hit with a VAT. In other words, a level playing field.

Here’s a visual depiction of how the current system works. I include the possibility that that German products sold in America may also get hit by the US corporate income tax (if the German company have a US subsidiary, for instance). What’s most important, though, is that neither American-produced goods and services nor German-produced goods and services are hit by a VAT.

Now let’s consider the flip side.

What if an American company sells to a customer in Germany? The U.S. government imposes the corporate income tax and the German government imposes a VAT. But guess what? The German competitor selling domestically is hit by the German corporate income tax and the German VAT. That’s another level playing field. This explains why economists, on the right and left, repeatedly have debunked the idea that countries use VATs to boost their exports.

Here’s the German version of the map. Once again, I note that it’s possible – depending on the structure of the US company – for American products to get hit by the German corporate income tax. But the key point of the map is to show that American-produced goods and services and German-produced goods and services are subject to the VAT.

By the way, it’s entirely possible that an American company in Germany or a German company in America may pay higher or lower taxes depending on whether there are special penalties or preferences. Those companies may also pay more or less depending on the cleverness of their tax lawyers and tax accountants.

But one thing can be said with total certainty: The absence of an American VAT does not result in a “Made-in-America” tax on American companies. Even Paul Krugman agrees that VATs don’t distort trade.

Moreover, Veronique and I point out that the lack of a VAT creates a big advantage for the United States.

One big plus for Americans is that Washington does not impose a VAT, which would enable government to grow. This is a major reason that the U.S. economy is more vibrant than Europe’s. In Germany, the VAT raises so much tax revenue that the government consumes 44% of gross domestic product—compared with 38% in America.

And to the extent that there is a disadvantage, it’s not because of some sneaky maneuver by foreign governments. It’s because of a self-inflicted wound.

America’s top corporate income tax of 35% is the highest in the developed world. If state corporate income taxes are added, the figure hits nearly 40%, according to the Congressional Budget Office. That compares very unfavorably with other nations. Europe’s average top corporate rate is less than 19%, and the global average is less than 23%… That’s the real “Made in America Tax,” and it’s our own fault.

The column does acknowledge that BAT supporters have their hearts in the right place. They are proposing that new source of revenue to help finance a lower corporate tax rate, as well as expensing.

But there’s a much better way to enable those pro-growth reforms.

If Congress simply limits the growth of outlays to about 2% a year, that would create enough fiscal space to balance the budget over 10 years and adopt a $3 trillion tax cut. If Republicans want a win-win, dropping the border-adjustment tax is the way to get one.

And what if Republicans aren’t willing to restrain spending? Then maybe the sensible approach is to simply cut the corporate tax rate and declare victory.

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I wrote yesterday about the most recent OECD numbers on “Average Individual Consumption” in member nations.

There was a very clear lesson in that data about the dangers of excessive government. The United States was at the top in this measure of household living standards, not because American policies are great, but rather because huge welfare states in Europe have undermined economic vitality on the other side of the Atlantic.

Indeed, the only countries even remotely close to the United States were oil-rich Norway and the two tax havens of Switzerland and Luxembourg.

Those AIC numbers gave us an interesting snapshot of relative living standards in 2014.

But what would we discover if we looked at how that data has changed over time?

It appears that the OECD began assembling that data back in 2002. Here’s a table showing how nations rose or fell, relative to other OECD nations, since then. Based on convergence theory, one would expect to see that poorer nations enjoyed the biggest relative gains, while richer nations fell in the rankings. And that is what generally happened, but with some notable exceptions.

Here are the countries that did not conform, for either good reasons or bad reasons, to convergence theory.

We’ll start with the nations that have bragging rights.

  • Chile started at the very bottom compared to the rich nations of the western world, so anything other than a large increase would have been a disappointment. But the magnitude of Chile’s increase is nonetheless quite impressive and presumably a testament to pro-market reforms.
  • Finland was almost 7 points below the OECD average in 2002 and now is more than 2 points above the average, which is a significant jump for a nation near the middle of the pack. Maybe having sensible leaders is a good idea.
  • Oil-rich Norway was above average at the start of the period and even farther above average at the end of the period.
  • The United States was very high in 2002 and remained very high in 2014. Since that outcome violates convergence theory, that’s a non-trivial accomplishment and another piece of evidence that big governments in Europe are imposing a harsh economic cost.
  • Switzerland also started high and remained high. That’s presumably a reflection of good policies such as federalism and spending restraint.

Now for the nations that did not fare well.

  • Luxembourg suffered a large drop, some of which is understandable since the tiny tax haven was in first place back in 2002. But the magnitude of the decline – particularly compared to the United States and Switzerland – is not an encouraging sign. This may be a sign that anti-tax competition efforts by the OECD have hit the nation hard.
  • Greece, Spain, Ireland, and Italy all tumbled in the rankings even though – at best – they started in the middle of the pack. It will be interesting to see how these nations perform as they recover (or don’t recover, as I expect in the cases of Italy and Greece) from the European fiscal crisis.
  • Slovenia also went from bad to worse, which perhaps is not a big surprise since it is one of the least reform-oriented countries to emerge from the Soviet Bloc.
  • The United Kingdom suffered a rather large decline, almost all of which happened under the profligate Blair and Brown Labour governments. This will be another nation that will be interesting to watch in coming years, particularly because of Brexit.
  • France and the Netherlands also suffered, starting well above average in 2002 but falling to the mean in 2014.

If you like this kind of data on whether nations are trending in the right direction or wrong direction, I’ve also tinkered with the data from Economic Freedom of the World.

Last year, I highlighted countries that have made significant moves in the EFW rankings, including oft-overlooked success stories such as Israel and New Zealand.

I also looked specifically at changes in Europe this century and did not find any reason for optimism.

The bottom line is that there’s no substitute for free markets and limited government. If nations want faster growth and more prosperity, they need to mimic jurisdictions such as Hong Kong and Singapore.

Unfortunately, there’s very little reason to be optimistic about that happening in Europe.

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