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Posts Tagged ‘Economics’

Earlier this year, extrapolating from a study by the nonpartisan Congressional Budget Office, Robert O’Quinn (former Chief Economist at the Department of Labor) and I authored a study on the economic impact of Biden’s fiscal plan.

The results are not pretty.

Lost jobs, lost wages, lower living standards, and lost competitiveness.

But those estimates were based on the parameters of Biden’s economic plan in the summer.

His agenda has since been modified, which raises the question of how the current proposal would affect economic performance.

In a piece for Canada’s Fraser Institute (publishers of Economic Freedom of the World and Economic Freedom of North America), Robert and I updated our numbers and explained the implications of Biden’s tax-and-spend agenda.

According to independent experts at the Committee for a Responsible Federal Budget, the actual cost of the president’s policies is closer to $4.9 trillion. Some of this new spending will be financed with red ink, but President Biden also has embraced higher tax rates on work, saving, investment and entrepreneurship. Indeed, if his plan were enacted, the United States would have both the highest corporate tax rate and the highest capital gains tax rate in the developed world. …But how much would the economy be hurt? There are groups such as the Tax Foundation that do excellent work measuring the adverse effects of higher tax rates. But it’s also important to measure the harmful impact of a bigger welfare state. …Based on that CBO study, and using the CBO fiscal and economic baselines, we calculated the following unpalatable outcomes if Build Back Better bill (pushed by the president and Democrats in Congress) becomes law and growth is reduced by 2/10ths of 1 per cent per year.

And here are the results.

The good news is that the latest version of Biden’s plan doesn’t do quite as much damage as what was being discussed earlier this year.

The bad news is that our economy will be much weaker (and our results are in line with other estimates, including those done before the election and since the election).

Not that we should be surprised. If the United States becomes more like Europe, we’ll be more likely so suffer from European-style anemia.

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A couple of years ago, to help build the case against socialism, I showed how West Germany enjoyed much faster growth and much more prosperity than East Germany.

The obvious lesson to be learned from this example of “anti-convergence” is that market-oriented economies out-perform state-controlled economies.

I want to revisit this topic because I recently dealt with someone who claimed that government spending via the Marshall Plan deserves the credit for West Germany’s post-war economic renaissance.

What does the evidence say? Was foreign aid from the United States after World War II a key driver (for Keynesian or socialist reasons) of the West German economy.

The answer is no.

Professor David Henderson explained the role of the Marshall Plan for Econlib.

After World War II the German economy lay in shambles. …less than ten years after the war people already were talking about the German economic miracle. What caused the so-called miracle? The two main factors were currency reform and the elimination of price controls, both of which happened over a period of weeks in 1948. A further factor was the reduction of marginal tax rates later in 1948 and in 1949. …Marshall Plan aid to West Germany was not that large. Cumulative aid from the Marshall Plan and other aid programs totaled only $2 billion through October 1954. Even in 1948 and 1949, when aid was at its peak, Marshall Plan aid was less than 5 percent of German national income. Other countries that received substantial Marshall Plan aid exhibited lower growth than Germany.

Moreover, the money that was dumped into Germany as part of the Marshall plan was offset by money that was taken out of the country.

…while West Germany was receiving aid, it was also making reparations and restitution payments well in excess of $1 billion. Finally, and most important, the Allies charged the Germans DM7.2 billion annually ($2.4 billion) for their costs of occupying Germany.

Inconvenient facts like this make the socialism or Keynesian argument very difficult to maintain.

In a 1990 study on whether there should be something similar to the Marshall Plan for Eastern Europe, Melanie Tammen summarized some of the research on how the original plan for Western Europe was a flop.

…those that received relatively large amounts of aid per capita, such as Greece and Austria, did not recover economically until U.S. assistance was winding down. Germany, France, and Italy, on the other hand, began their recovery before receiving Marshall Plan funds. As for Belgium, it embarked on a radical monetary reform program in October 1944, only one month after liberation. Belgium’s economic stabilization and recovery were well under way by 1946, fully two years before the arrival of U.S. aid. Great Britain, conversely, received more Marshall Plan aid than any other nation but had the lowest postwar economic growth rate of any European country. The critical problem facing Europe was…simply bad economic policy.

Kai Weiss of the Austrian Economic Center in Vienna also addressed this issue. Here’s some of what he wrote for the Foundation for Economic Education.

Common knowledge says that the United States’ Marshall Plan was responsible for the rapid economic growth, rebuilding the country by throwing a lot of money at it. But that’s a mistaken view. …why was there a “Wirtschaftswunder”? …two main reasons: a monetary reform and the freeing of the economy by abolishing price controls and cutting taxes. All of this was implemented thanks to one man: Ludwig Erhard. …What Erhard did was unthinkable in a hostile environment. The Allied forces, still heavily controlling Germany, left the Nazi price controls and rationing intact. But when Erhard became Secretary of the Economy in West Germany, he quickly ended all price controls and stopped rationing — to the dismay of the US advisors. …He, not a Keynesian Project like the Marshall Plan, enabled the miracle.

Speaking of Ludwig Erhard, here’s a video clip on what he did to trigger West Germany’s prosperity.

I have one minor disagreement with that video.

It states that Germany combined “free markets with a strong welfare state.”

That’s a very accurate description of, say, current policy in Denmark.

But total social welfare spending in Germany was less than 20 percent of GDP for the first few decades after World War II, considerably less than social welfare spending today in the United States.

At the risk of being pedantic, it would be more accurate to state that Germany combined free markets with a medium-sized welfare state.

Let’s close with one final bit of evidence.

Here’s a look at the most pro-market nations in the decades after the war. Germany (outlined in red) was never at the top of the list, but it was almost always in the top 10.

Was Germany a libertarian paradise?

Hardly.

But the main takeaway from today’s column is that it’s even more absurd to claim that Germany’s post-war growth was because of big government.

P.S. Regarding Eastern Europe, western nations ultimately decided to create a cronyist institution, the European Bank for Reconstruction and Development, in hopes of boosting post-Soviet economies. Needless to say, that was a mistake. Many nations have enjoyed good growth after escaping communist tyranny, but the cause was good policy rather than handouts.

P.P.S. The Erhard video is an excerpt from The Commanding Heights, a must-watch video that basically tells the economic history of the 20th century).

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There are certain topics that seem to be slam-dunk wins for those who favor free markets and limited government, and one reason I make this assertion is that folks on the left don’t even bother to make counter-arguments.

Here are just a few examples:

Prior to today, I also would have included this example:

But now I can no longer include Chile’s economic renaissance because I finally found someone who concocted an alternative explanation.

As part of a column in today’s Washington Post about Chile’s upcoming presidential election, Anthony Faiola made this claim about that nation’s economic performance.

After Pinochet’s ruthless rule came to an end in 1990, the newly democratic nation witnessed a historic period of economic growth. Gross domestic product growth between 1990 and 2018 averaged 4.7 percent annually, well above the Latin American average. Over that same period, democratic governments increased social spending. Extreme poverty (below $1.5 per day) was virtually wiped out.

But now let’s consider whether this alternative explanation is accurate.

Mr. Faiola wants readers to believe that the positive developments in Chile (“historic period of growth” and “extreme poverty…was virtually wiped out”) occurred after 1990.

But if that’s the case, why did per-capita living standards begin to climb much earlier?

As shown by these two charts, it’s far more likely that the dramatic rise in per-capita economic performance around 1980 is the result of a big increase in economic liberty (as measured by Economic Freedom of the World) that also was occurring around that time.

(There is a separate measure of economic freedom for the years before 1970, so the orange and blue lines are discontinuous.)

One should always be careful about interpreting numbers. For instance, national economic data at a given moment in time will be affected when there are periods of global recession, such as the early 1980s and 2008.

Which is why it is important to look at longer periods of time. And when looking at decades of data for Chile, the big jump in prosperity clearly began after the economy was liberalized, not after Pinochet ceded power in 1990.

We’ll close with some bad news and good news.

The bad news, as captured by the bottom-half of the stacked charts abvoe, is that there hasn’t been much pro-market reform in recent decades.

But the good news is that Chile hasn’t deteriorated. The nation has endured some left-leaning governments, but economic freedom has remained high by world standards. Which means the economy continues to grow.

P.S. I’ll add some worrisome news. The left in Chile wants a new constitution that would give politicians more power over the economy. If that effort is successful, I fear the country will suffer Argentinianstyle decline.

P.P.S. I suppose Mr. Faiola deserves some credit for cleverness. Some leftists have tried to argue Chile is a failed “neoliberal experiment.” Given the nation’s superior performance, that’s obviously an absurd strategy. So Faiola came up with a new hypothesis that acknowledges the growth, but tries to convince readers that it’s all the result of things that happened after 1990. He’s wildly wrong, but at least he tried.

P.P.P.S. I have a three-part series (here, here, and here) on how low-income people have been big winners as a result of Chile’s shift to free enterprise.

P.P.P.P.S. Here’s a column on Milton Friedman’s indirect contribution to Chilean prosperity.

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Back in May, as part of a discussion about the tradeoff between free markets (efficiency) and redistribution (equity), I put together a chart to show how poor people are better off in the long run if policy makers focus on the former rather than the latter.

I made sure to assume that pro-market policies would generate only a small increase in growth.

However, thanks to “the miracle of compounding growth,” even that tiny increase results in the poor being better off when compared to a world with less growth and more redistribution.

But I was just providing a theoretical example, and it would be easy to change some assumptions to show that the poor would have better lives (as measured by consumption levels) with bigger government.

Fortunately, there’s a new study, authored by Justin Callais of Texas Tech University and Vincent Geloso of George Mason University, that looks at hard data to see which approach is best for poor people.

Here’s a description of their methodological approach, which uses the positive liberty vs negative liberty construct.

While it is true that economic freedom speaks directly to negative liberty, it also speaks indirectly to positive liberty because of its welldocumented effects on economic growth, health outcomes and education. We build on these works by using a rich dataset of estimates of income mobility of people born in the 1980s. …the dataset employed includes a larger number of poor and rich countries. Combining these data with those of the Fraser Institute’s Economic Freedom of the World (henceforth EFW) index, we try to measure its indirect effect (through growth and income levels) on intergenerational income mobility in a horse race with income inequality.

For all intents and purposes, they want to see which effect dominates in this flowchart.

And here’s the way they describe the chart.

…the true effect of economic freedom on intergenerational mobility is 𝛽1 + 𝛼1𝛽2. As long as 𝛽1 + 𝛼1𝛽2 > β3, economic freedom’s effects outweigh those of income inequality on positive liberty (as intergenerational income mobility is a standin for positive liberty).

So what did they find?

We find that economic freedom has both a direct and indirect effect on intergenerational income mobility. More importantly, those effects are more important than those of income inequality. We argue that our results militate for the claim that good institutions matter more to securing positive liberty than income redistribution does.we find that the lifetime institutional environment is a strong predictor of incomes today. The indirect effect of economic freedom (through income levels) on mobility is again strong and negatively correlated (indicated greater income mobility). economic freedom has both a direct and indirect effect on intergenerational income mobility. Economic freedom provides the legal right to engage in commerce, but through economic freedom’s impact on income, the institutional environment speaks to increasing the practical and realistic choice sets of people to better their situation.

The bottom line is that the poor are better off with economic freedom (i.e., negative liberty). Free markets lead to more upward mobility and higher living standards.

So if you want less poverty, push for more capitalism.

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There are some issues – such as class-warfare tax rates and the minimum wage – where intelligent people on the left will privately admit being wrong (or at least they will admit adverse consequences).

Another example is rent control.

Indeed, it’s so obvious that imposing price controls on housing will create shortages that some folks on the left even admit publicly that it’s a bad idea.

Yet leftist politicians are drawn to the policy for the simple reason that renters outnumber landlords.

Simply stated, they’re willing to impose considerable damage so long as they can grab a few extra votes.

Let’s look at some evidence about the folly of rent control, and we’ll start with a hot-off-the-presses column by Ryan Mills for National Review.

Democratic leaders in Minnesota’s capital city are scrambling for solutions after developers put several large projects on hold across St. Paul in the wake of last week’s election, when residents approved what may be the strictest rent-control policy in the country. …left-wing activists on the eastern bank of the Mississippi River succeeded in their effort to cap rent increases at 3 percent annually, including on new construction, a step most communities that have imposed rent-control policies have specifically avoided out of concern that it would discourage future investments. The St. Paul initiative passed last week with 53 percent support. …Large developers who spoke to the Minneapolis Star Tribune and the St. Paul Pioneer Press told reporters that they’re pausing their projects across the city, and they are “re-evaluating what – if any – future business we’ll be doing in St. Paul.” Lenders are pulling out of new projects, they say, worried about the impact of the new policy. …dozens of buildings…have had 2022 rehabilitation projects stopped.

Wow. Sounds like St. Paul wants to supplant Minneapolis as the worst-governed city in the state.

Speaking of poorly governed cities, Christian Britschgi of Reason wrote early last year about what’s happening with rent control in New York City.

When the New York legislature passed major changes to the state’s rent regulations in June 2019, critics warned the new law would reduce investment in, and renovations of, rental properties in New York City. …those predictions are bearing out. …sales of apartment buildings in the Big Apple fell by 36 percent in 2019, and…the money spent on those sales fell by 40 percent. The prices investors were paying for rent-stabilized units—where allowable rent increases are set by the government and usually capped at around 1 or 2 percent per year—fell by 7 percent. …69 percent of building owners have cut their spending on apartment upgrades by more than 75 percent since the passage of the state’s rent regulations. Another 11 percent of the landlords in the survey decreased investments in their properties by more than 50 percent.

Some European cities also have adopted price controls on housing.

In a column for the Foundation for Economic Education, Jon Miltimore explains the damage this approach has caused in Stockholm.

Stockholm is just one of many Swedish cities struggling with a housing shortage. It’s not just that prices are too high; wait times for flats are also stunningly long. In Stockholm, for example, the average waiting time for a typical property is about nine years…, but wait-time in Stockholm’s most attractive neighbourhoods can run double that. …For younger Swedes in particular, the housing situation is a real problem—and it stems from Sweden’s decades-long embrace of rent control policies, which stretch back to World War II. …the results of Sweden’s rent control policies were quite predictable. The reality is price controls and other government regulations can’t fix housing problems.

The mess in Stockholm has even attracted attention from the BBC, as illustrated by the excerpt in this tweet.

Jon Miltimore also wrote about disastrous impact of rent control in Berlin.

In February 2020, Berlin introduced the so-called Mietendeckel—a cap on rent—to keep Berlin from becoming the next London or New York, cities where pricey rents have driven out many lower- and middle-class residents. The rent caps didn’t apply to everyone, however. They applied to properties built prior to 2014, freezing rent at June 18, 2019 levels. …Well, a year later, and the results of Berlin’s experiment are in. …Housing supply has shrunk and many landlords have reportedly exited the market, making the shortage much worse. …The lesson? Rent control has effects on housing supply, and those effects are not good.

And it you want more bad news from Germany, Berlin voters just approved a scheme to confiscate some apartments.

Here’s the story from the EU Observer.

Berliners voted in favour of expropriating apartments owned by big real-estate companies, with 56 percent of voters in the German capital saying ‘yes’ in the non-binding referendum at this weekend, the Financial Times reported on Monday. Now Berlin’s new municipal government has to decide how to proceed, since the expropriation of housing units could be legally challenged as against the German constitution.

I don’t know the outcome (if any) of the court challenge, but I do know that rent control is horrible policy.

And other economists agree.

P.S. Price controls are also bad news for pharmaceutical products and emergency supplies.

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I’ve shared lots of socialism humor and communism humor, but only a few examples of economics humor.

So let’s use today’s column as an opportunity to augment that limited collection.

We’ll start with a couple of items about the minimum wage. I wrote a column back in 2009 about why unions support a higher minimum wage.

Now we have an example of why investors might support that policy as well.

Here’s the second item about the minimum wage, and it depicts the response I often use when discussing the issue.

Here’s some satire mocking economists, though it’s more of a stereotype about clever folks from Wall Street.

Sort of reminds me of the “two cows” parable.

Next we have a joke about monetary policy, sort of the humor version of this long video.

Last but not least, nobody should be surprised that this is my favorite item from today’s collection.

It reminds people that “free” government in Europe is actually very, very, expensive for ordinary people.

Adding insult to injury, Europeans have considerably less income to begin with.

At the risk of being momentarily serious, this is why I’m baffled that Biden wants to make the U.S. more like Europe.

Shouldn’t we copy nations that are richer than America rather than poorer?

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Way back in 2009, I shared a meme that succinctly summarizes how Washington operates.

It’s basically a version of Mitchell’s Law. To elaborate, governments cause problems and politicians then use those problems as an excuse to make government even bigger.

Lather, rinse, repeat.

I worry the same thing may be about to happen because of the current concern about “supply chain” issues, perhaps best illustrated by the backlog of ships at key ports, leading to shortages of key goods.

Some of this mess is fallout from the coronavirus pandemic, but it’s being exacerbated by bad policy.

In a column for Reason, J.D. Tuccille points out that government is the problem, not the solution.

…supply-chain issues…create shortages and push prices up around the world. …Lockdowns also changed people’s lives, closing offices and factories and confining people at home. That resulted in massive and unpredictable shifts in demand and unreliable supply. …”Market economies tend to be pretty good at getting food on the supermarket shelves and fuel in petrol stations, if left to themselves,” agrees Pilkington. “That last part is key: if left to themselves. Heavy-handed interference in market economies tends to produce the same pathologies we see in socialist economies, including shortages and inflation. That has been the unintended consequence of lockdown.” …The danger is that people see economic problems caused by earlier fiddling and then demand even more government intervention. …if the government were to further meddle in the market to allocate products made scarce by earlier actions, it’s hard to see how the result wouldn’t be anything other than increased supply chain chaos.

Allysia Finley opines for the Wall Street Journal about California’s role in the supply-chain mess.

The backup of container ships at the Long Beach and Los Angeles ports has grown in recent weeks… The two Southern California ports handle only about 40% of containers entering the U.S., mostly from Asia. Yet ports in other states seem to be handling the surge better. Gov. Ron DeSantis said last month that Florida’s seaports had open capacity. So what’s the matter with California? State labor and environmental policies. …business groups recently asked Gov. Gavin Newsom to declare a state of emergency and suspend labor and environmental laws that are interfering with the movement of goods. …One barrier is a law known as AB5. …Trucking companies warned that the law could put small carriers out of business and cause drivers to leave the state. …there’s little doubt the law hinders efficiency and productivity. …State officials have also pressed localities to attach green mandates to permits for new warehouses, which can be poison pills. …This boatload of regulations is making it more expensive and difficult to store goods arriving at California ports.

Needless to say, I’m not surprised California is making things worse.

The state seems to have some of the nation’s worst politicians.

But let’s set that aside and close with some discussion about one of the differences between government and the private sector.

This may surprise some readers, but people and businesses in the private sector make mistakes all the time.

So part of the supply-chain mess presumably is a result of companies and entrepreneurs making bad guesses.

That being said, there’s a big feedback mechanism in the private sector. It’s called profit and loss.

So when mistakes are made, there’s a big incentive to quickly change.

With government, by contrast, there’s very little flexibility (as we saw during the pandemic). And when politicians and bureaucrats do act, they often respond to political incentives that lead them to make things worse.

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When President Biden first proposed a global minimum tax on companies, I immediately warned that creating a corporate tax cartel would be very bad news for workers, consumers, and shareholders.

I also warned a BBC audience that proponents would use the agreement as a stepping stone for other statist initiatives to increase the power of politicians.

Simply stated, I’ve been ringing the alarm bells that a tax cartel will lead to ever-higher corporate tax rates. And it will serve as a model for other forms of harmonization.

Well, now that Ireland has capitulated and governments formally adopted the scheme, this is my “I told you so” column.

In a column for the Washington Post, Larry Summers, a former top adviser for Bill Clinton and Barack Obama, celebrates the creation of a global tax cartel.

His column has a laughably inaccurate title, but he starts with some accurate observations about the importance of the agreement.

This agreement is arguably the most significant international economic pact of the 21st century so far. It is built around a profoundly important principle: Countries should cooperate to raise corporate taxation, not compete to reduce it. …It also demonstrates the power of ideas to shape economic policy, as tax scholars have for years been pondering the conundrums of taxing global companies.

I also think the agreement is important, albeit in a very bad way.

And it does show the power of ideas, albeit very bad ideas (though politicians instinctively want more money and power and merely rely on left-leaning academics and policy wonks for after-the-fact rationalizations of statism).

As you might expect, Summers veers from reality to fantasy when discussing the implications of the new tax cartel.

Countries have come together to make sure that the global economy can create widely shared prosperity, rather than lower tax burdens for those at the top. By providing a more durable and robust revenue base, the new minimum tax will help pay for the sorts of public investments that are fundamental to economic success in all countries.

For all intents and purposes, he’s embracing the absurd notion that more growth will materialize if politicians impose higher tax rates and use the money to expand the burden of government.

Proponents of this view conveniently never offer any evidence.

Why? Because there isn’t any.

The scholarly research shows the opposite is true. Free markets and small government are the recipe for growth and prosperity.

I’ll now shift back to a part of the column that is unfortunately accurate.

It is also a template for much more that needs to be done to tackle the adverse side effects of our modern, global capitalism.

What’s accurate about that sentence isn’t the jibe about “adverse side effects” of capitalism (unless, of course, he thinks mass prosperity is a bad thing).

But he’s right about the statists using the global tax cartel as “a template” for further schemes to empower politicians and their cronies.

Summers mentions issues such as public health (I guess he wants to reward the World Health Organization’s corruption and incompetence).

Since I’m a public-finance economist, I’m more worried about cartels that will be created for personal income tax, capital gains tax, dividend tax, wealth tax, etc.

P.S. The corporate tax cartel will lead to higher tax rates, but OECD and IMF data (and U.S. data) show that this doesn’t necessarily mean higher revenue.

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Two days ago, I shared the most morally reprehensible tweet of the year.

Today, we’re going to share a tweet that also is painful to read, but in this case only our friends on the left will be discomforted.

I’ve opined about Chile’s success and Venezuela’s failure on multiple occasions, but here’s the great José Piñera with an especially powerful comparison of the two nations.

I’ve had dozens and dozens of conversations with friends on the left about Chile and Venezuela and they have no response other than to sputter “Pinochet was a dictator!”

That’s true, I tell them, but please respond to my question about what we can learn when we compare Chile’s successful experience with economic liberty and Venezuela’s awful experience with statism.

At which point they bring up Pinochet again and refuse to deal with the actual data.

Speaking of data, since embedding a chart in a tweet sometimes doesn’t lead to the most user-friendly presentation, I went to the Our World in Data website to create my own version of Jose’s chart.

This type of chart looks at “relative changes” in per-capita economic output, so all nations start at the same place and we then examine which ones grew the fastest.

Or, in the case of Venezuela, which ones declined (and the ones, such as Argentina, that performed poorly).

Here’s another version of the chart, but this one gets rid of all the other nations so we can more easily compare Chile and Venezuela. As José Piñera wrote in his tweet, this is “extraordinary.”

Because Venezuela has a lot of oil, the nation’s economy does face exaggerated ups and downs as energy prices fluctuate.

But it’s easy to see a trend of economic stagnation (the nation’s energy industry was nationalized and is now collapsing, so that will augment Venezuela’s misery).

Our final version of the chart adds the average performance for the world and the average performance for Latin America. As you can see, Chile is still the best performer and Venezuela is still at the bottom.

I’ll close with two final observations.

But perhaps José Piñera‘s preferred candidate, José Antonio Kast Rist, will win this year’s election and save Chile from going in the wrong direction.

P.S. Venezuela used to be much richer than Chile, so it makes sense that Chile began to converge. But now the two countries are part of the anti-convergence club because Chile is now richer and continuing to grow much faster.

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A regular theme of these columns is that the economy is not a fixed pie. If Person A becomes rich, that doesn’t mean less income for Persons B and C.

Indeed, the evidence is very strong that successful entrepreneurs only capture a tiny fraction of the wealth they create.

And there’s also lots of data showing how average incomes can rise over time and how all segments of society tend to rise together.

My reason for revisiting this topic is a story in the Economist about the possibility of an “grossly uneven” recovery, as illustrated by this chart.

My knee-jerk reaction to this chart is that nobody should pay attention to economic forecasters for the simple reason that they have a terrible track record.

And IMF economists seems to be among the worst of the worst when they make predictions.

This may be because economists at the IMF have a mistaken Keynesian view of the economy.

Or it may simply reflect the fact that it’s basically impossible to make such predictions (if any economists actually had that ability, they would be billionaires).

But today’s topic isn’t the foibles of the economics profession.

Instead, I want to focus on this issue of whether rich countries should be blamed for being richer than poor countries.

Here’s some of what the Economist wrote.

Over the longer term, the economic recovery is projected to remain grossly uneven. That, the fund argues, reflects…variations in fiscal largesse. In 2020 rich and poor countries alike loosened the purse-strings to protect households and businesses from the impact of lockdowns. This year fiscal support in the rich world is projected to remain broadly as generous as it was last year, allowing time for the private sector to get back on its feet (and, some economists would argue, even leading to some overheating in America). Emerging markets, by contrast, have shrunk their budget deficits (adjusted for the economic cycle, and before interest payments). The result will be a two-speed global economy. Output in the rich world is expected to return to its pre-pandemic trend by next year, and then to rise slightly above it. For the rest of the world, however, gdp is expected to remain well below trend at least until 2025.

As you can see from the excerpt, the IMF is wedded to the Keynesian view that government spending supposedly is good for growth – notwithstanding all the real-world evidence to the contrary.

But I’m more interested in the two points that aren’t mentioned, both of which revolve around the strong link between economic liberty and national prosperity.

  • First, rich countries tend to be rich because they have (or had) good economic policy.
  • Second, poor countries fail to converge because they tend to have bad economic policy.

For what it’s worth, the IMF’s failure to grasp these two points may help to explain why the bureaucracy advises poor countries to make bad choices.

The bottom line is that the global economy is not a fixed pie. If there are “grossly uneven” growth rates in the world, the reason is that some nations don’t follow the prudent recipe for prosperity.

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President Biden’s fiscal agenda of higher taxes and bigger government is not a recipe for prosperity.

How much will it hurt the economy?

Last month, I shared the results of a new study I wrote with Robert O’Quinn for the Club for Growth Foundation.

We based our results on a wide range of economic research, especially a scholarly study from the Congressional Budget Office, and found a big drop in economic output, employment and labor income.

Most troubling was the estimate of a long-run drop in living standards, which would be especially bad news for young people.

Today, I want to share some different estimates of the potential impact of Biden’s agenda.

A study for the Texas Public Policy Foundation, authored by  E. J. Antoni, Vance Ginn, and Stephen Moore, found even higher levels of economic damage. Here are some main excerpts.

President Biden and congressional Democrats seek to spend another $6.2 trillion over the next decade, spread across at least two bills that comprise their “Build Back Better” plan. This plan includes heavy taxing, spending, and debt, which contributes to reducing growth rates for GDP, employment, income, and capital stock.  Compared to baseline growth over the next decade, this plan will result in estimated dynamic economic effects of 5.3 million fewer jobs, $3.7 trillion less in GDP, $1.2 trillion less in income, and $4.5 trillion in new debt. …There are many regulatory changes and transfer payments in current legislation whose effects have not been included in this paper but are worth mentioning in closing since they will have many of the same effects as the tax increases discussed in this paper. Extending or expanding the enhanced Child Tax Credit, Earned Income Tax Credit, Child and Dependent Care Tax Credit, and more, disincentivizes working, reducing incomes, investment, and GDP. Just the changes to these three tax credits alone are expected to cause a loss of 15,000 jobs… Permanently expanding the health insurance premium tax credits would similarly have a negative effect… Regulatory changes subsidizing so-called green energy while increasing tax and regulatory burdens on fossil fuels also result in a less efficient allocation of resources.

If we focus on gross domestic product (GDP), the TPPF estimates a drop in output of $3.7 trillion, which is higher than my study, which showed a drop of about $3 trillion.

Part of the difference is that TPPF looked at the impact of both the so-callled infrastructure spending package and Biden’s so-called Build Back Better plan, while the study for the Club for Growth Foundation only looked at the impact of the latter.

So it makes sense that TPPF would find more aggregate damage.

And part of the difference is that economists rarely agree on anything because there are so many variables and different experts will assign different weights to those variables.

So the purpose of sharing these numbers is not to pretend that any particular study perfectly estimates the effect of Biden’s agenda, but rather to simply get a sense of the likely magnitude of the economic damage.

Speaking of economic damage, here’s a table from the TPPF showing state-by-state job losses.

I’ll close by noting that you can also use common sense to get an idea of what will happen if Biden’s agenda is approved.

He wants to make the United States more like Western Europe’s welfare states, so all we have to do is compare U.S. living standards and economic performance to what’s happening on the other side of the Atlantic Ocean.

And when you do that, the clear takeaway is that it’s crazy to “catch up” to nations that are actually way behind.

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There are many reasons to reject Joe Biden’s proposal for higher corporate tax rates, and I listed many of them when I narrated this nine-minute video.

This two-minute video from the Tax Foundation has a similar message.

The main message is that workers, consumers, and shareholders are the ones who actually pay when suffer when politicians impose higher taxes on business.

And the damage grows over time because higher corporate tax rates reduce investment, which inevitably leads to lower wages.

By the way, while a low tax rate is very important, there are many other policy choices that determine the overall damage of business taxation.

This is just a partial list. There are other policies – such as alternative minimum taxation, book income, loopholes, and extenders – that also can increase the damage of the corporate taxation.

The bottom line is that we know the sensible approach to business taxation, but the Biden Administration is motivated instead by class warfare and grabbing revenue.

P.S. For more information on corporate taxation and wages, click here, here, here, here, and here.

P.P.S. For more information on corporate tax rates and corporate tax revenue, click here, here, here, and here.

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A couple of days ago, I shared the most-recent data about “actual individual consumption” in nations that are part of the Organization for Economic Cooperation and Development.

My goal was to emphasize my oft-stated point about people in the United States enjoying higher living standards – in large part because European nations are saddled with a bigger fiscal burden of government.

President Biden, however, wants to make the United States more like Europe.

What’s happening this week in Congress may determine whether he succeeds.

Since I’m policy wonk rather than a political pundit, I don’t pretend to have any great insight on matters such as vote counting.

But I feel compelled to warn that adoption of Biden’s plan would have a negative economic impact.

And I’m not the only one raising alarm bells.

Professor Greg Mankiw of Harvard opined for the New York Times about Biden’s fiscal plan. He starts be noting that Biden’s plan is affordable.

President Biden and many congressional Democrats aim to expand the size and scope of government substantially. …People of all ages are in line to get something… If there is a common theme, it is that when you need a helping hand, the government will be there for you. …Western European nations have more generous social safety nets than the United States. The Biden plan takes a big step in that direction. Can the United States afford to embrace a larger welfare state? From a narrow budgetary standpoint, the answer is yes.

But affordable is not the same as sensible.

He points out that a bigger government will mean a smaller economy.

The costs of an expanded welfare state…extend beyond those reported in the budget. There are also broader economic effects. Arthur Okun, the former economic adviser to President Lyndon Johnson, addressed this timeless issue in his 1975 book, “Equality and Efficiency: The Big Tradeoff.” …As policymakers attempt to rectify the market’s outcome by equalizing the slices, the pie tends to shrink. …Which brings us back to Western Europe. Compared with the United States, G.D.P. per person in 2019 was 14 percent lower in Germany, 24 percent lower in France and 26 percent lower in the United Kingdom. …In other words, most European nations use that leaky bucket more than the United States does and experience greater leakage, resulting in lower incomes. By aiming for more compassionate economies, they have created less prosperous ones.

And less prosperous economies mean lower living standards, as honest folks on the left (such as Okun) openly admit.

That’s bad news for everyone, including lower-income people who theoretically are supposed to benefit from the various new and expanded redistribution programs in Biden’s fiscal plan.

Yes, they may get money from government in their pockets in the short run, but even a small reduction in economic growth will lead to larger income losses in the long run.

The bottom line is that the American experiment has been successful. Why put it at risk by copying nations that aren’t as successful.

After all, you don’t want to “catch up” to countries that are lagging.

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Writing last week about the new edition of Economic Freedom of the World, I largely focused on the jurisdictions that got high scores (Hong Kong, Singapore, and New Zealand) and countries that got low scores (Venezuela in last place, of course).

But I also included a chart showing that higher levels of economic liberty are correlated with higher levels of income.

That’s hardly a surprise for anyone who’s compared North Korea and South Korea. Or West Germany and East Germany.

But what about income mobility? Do free markets give low-income people an opportunity to climb the economic ladder?

Some new research from Vincent Geloso of George Mason University and James Dean of West Virginia University answers that question.

Here’s the abstract from their study.

Economic freedom is robustly associated with income growth, but does this association extend to the poorest in a society? In this paper, we employ Canada’s longitudinal cohorts of income mobility between 1982 and 2018 to answer this question. We find that economic freedom, as measured by the Fraser Institute’s Economic Freedom of North America (EFNA) index, is positively associated with multiple measures of income mobility for people in the lowest income deciles, including a) absolute income gain; b) the percentage of people with rising income; and c) average decile mobility. For the overall population, economic freedom has weaker effects.

And here’s the part of the study that I found most interesting.

We learn that labor market freedom is most important.

When focusing on the bottom decile’s average decile mobility (see table 5), we must note this variable only measures upward decile mobility, as those in the poorest decile cannot move down a decile and the upper decile can only move down or stay put. As a result, the effect of economic freedom is likely somewhat understated because of these mathematical boundaries. Nevertheless, we see that greater economic freedom increases the lowest decile’s upward decile mobility. In essence, higher amounts of economic freedom improve the relative gains of those at the bottom of the distribution, allowing them to move to higher deciles. Here, again, we see that the labor market freedom component is key for the nation’s poorest, such that an additional point of labor market freedom allows those beginning in the poorest decile to move up an additional 0.145 deciles… To put that number into perspective, using the differences in economic freedom between Quebec and Alberta (i.e. the lowest and highest economic freedom units in our data) is again useful. The greater labor market freedom of Alberta entails that the poorest Albertans have 0.44 extra deciles of mobility on average than the poorest Quebeckers.

Wonky readers may enjoy the aforementioned Table 5.

The bottom line is that free markets and limited government are the recipe to help poor people climb the economic ladder, not class warfare and redistribution (as I explained here, here, here, and here).

It’s much better to focus on how to make poor people rich rather than trying to make rich people poor.

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Ten days ago, I shared some data and evidence illustrating how redistribution programs result in high implicit tax rates and thus discourage low-income people from climbing the economic ladder.

Simply stated, why work harder or work more when an additional dollar of income only leads to a net benefit of 10 cents or 20 cents? Or why work harder or work more when you can actually wind up being worse off?

Or why work at all if the governments provides enough goodies?

But don’t ask such questions if you’re in the same room as Helaine Olen of the Washington Post. She is very upset that some people think welfare payments discourage work.

It’s a dangerous myth, this idea that government help causes some people to just loaf off. It’s also untrue. Reminder: Before the pandemic, most working-age people receiving benefits like food stamps worked. They just didn’t earn enough money. …the temporary child tax credit signed into law this year by President Biden demonstrates the opposite. It is an extraordinary success. Almost 90 percent of families with children under age 18 are eligible to receive a monthly check from the federal government through the end of the year. …Many other developed nations offer almost all residents a child allowance of some sort.

If you read the entire column, you’ll notice that she provides very little evidence, particularly considering her very bold assertion that a negative link between redistribution and labor supply is “a dangerous myth.”

Yet we know from the experience of welfare reform in the 1990s that work requirements did boost labor supply.

And don’t forget about the very recent evidence that turbo-charged unemployment benefits encouraged more joblessness.

We also have evidence from overseas showing that there’s a negative relationship between handouts and idleness.

Including research from the Netherlands and the Nordic nations such as Denmark. And the same is true in Canada. And the United Kingdom.

Ms. Olen seems primarily motivated by her support for permanent per-child handouts, as President Biden has proposed.

And she wants us to believe that everyone will continue to work, even if they can get $3000-plus for each kid, along with all the other goodies that are provided by Uncle Sam (often topped up by state governments).

For what it’s worth, I think she admits her real agenda toward the end of her column.

…an argument can be made that the children of the irresponsible deserve more support from us, not less. Children can’t push their parents to get with the work-and-education program. As a result, you’re not “helping” children if you insist on financially punishing their parents for not making an “effort.” …human infrastructure matters too.

In other words, Ms. Olen seems to share Rep. Ocasio-Cortez’s view that money should be given to people “unwilling to work.”

Which is how some of our friends actually view the world. They think there is a right to other people’s money. Which is why they support big handouts, including so-called basic income.

The bottom line is that Biden’s per-child handouts and other expansions of the welfare state clearly would make work less attractive for some people.

Not all people, of course, because it takes time to erode societal capital.

But why would we want a society where a growing number of people think it’s okay to live off of others?

P.S. There is scholarly research that redistribution programs lure older people out of the workforce.

P.P.S. There is also scholarly research showing redistribution programs discourage households from building wealth.

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The Biden Administration’s approach to tax policy is awful, as documented here, here, here, and here.

We’ve now reached the stage where bad ideas are being turned into legislation. Today’s analysis looks at what the House Ways & Means Committee (the one in charge of tax policy) has unveiled. Let’s call this the Biden-Pelosi plan.

And we’re going to use some great research from the Tax Foundation to provide a visual summary of what’s happening.

We’ll start with a very depressing look at the decline in American competitiveness if the proposal becomes law (the good news is that we’ll still be ahead of Greece!).

Next, let’s look at the Tax Foundation’s map of capital gains tax rates if the plan is approved.

Unsurprisingly, this form of double taxation will be especially severe in California.

Our third visual is good news (at least relatively speaking).

Biden wanted the U.S. to have the developed world’s highest corporate tax rate. But the plan from the House of Representatives would “only” put America in third place.

Here’s another map, in this case looking at tax rates on non-corporate businesses (small businesses and other entities that get taxed by the 1040 form).

This is not good news for America’s entrepreneurs. Especially the ones unfortunate enough to do business in New York.

Last but not least, here’s the Tax Foundation’s estimate of what will happen to the economy if the Biden-Pelosi tax plan is imposed on the nation.

There are two things to understand about these depressing growth numbers.

  • First, small differences in growth rates produce very large consequences when you look 20 years or 30 years into the future. Indeed, this explains why Americans enjoy much higher living standards than Europeans (and also why Democrats are making a big economic mistake to copy European fiscal policy).
  • Second, the Tax Foundation estimated the economic impact of the Biden-Pelosi tax plan. But don’t forget that the economy also will be negatively impacted by a bigger burden of government spending. So the aggregate economic damage will be significantly larger when looking at overall fiscal policy.

One final point. In part because of the weaker economy (i.e., a Laffer Curve effect), the Tax Foundation also estimated that the Biden-Pelosi tax plan will generate only $804 billion over the next 10 years.

P.S. Here’s some background for those who are not political wonks. Biden proposed a budget with his preferred set of tax increases and spending increases. But, in America’s political system (based on separation of powers), both the House and Senate get to decide what they like and don’t like. And even though the Democrats control both chambers of Congress, they are not obligated to rubber stamp what Biden proposed. The House will have a plan, the Senate will have a plan, and they’ll ultimately have to agree on a joint proposal (with White House involvement, of course). The same process took place when Republicans did their tax bill in 2017.

P.P.S. It’s unclear whether the Senate will make things better or worse. The Chairman of the Senate Finance Committee, Ron Wyden, has some very bad ideas about capital gains taxation and politicians such as Elizabeth Warren are big proponents of a wealth tax.

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The Fraser Institute in Canada has released its latest edition of Economic Freedom of the World, an index that measure and ranks nations based on whether they follow pro-growth policy.

Based on the latest available data on key indicators such as taxes, spending, regulation, trade policy, rule of law, and monetary policy, here are the top-20 nations.

You may be wondering how Hong Kong is still ranked #1.

In this summary of the findings, the authors explain that EFW is based on 2019 data. In other words, before Beijing cracked down. This means Hong Kong will probably not be the most-free jurisdiction when future editions are released.

The most recent comprehensive data available are from 2019. Hong Kong remains in the top position. The apparent increased insecurity of property rights and the weakening of the rule of law caused by the interventions of the Chinese government during 2020 and 2021 will likely have a negative impact on Hong Kong’s score, especially in Area 2, Legal System and Property Rights, going forward. Singapore, once again, comes in second. The next highest scoring nations are New Zealand, Switzerland, Georgia, United States, Ireland, Lithuania, Australia, and Denmark.

The United States was #6 in last year’s edition and it remains at #6 this year.

There are some other notable changes. The country of Georgia jumped to #5 while Australia dropped to #9.

Perhaps the most discouraging development is that Chile dropped to #29, a very disappointing result (and perhaps a harbinger of further decline in the nation that used to be known as the Latin Tiger).

And it’s also bad news that Canada has deteriorated over the past five years, dropping from #6 to #14.

The good news is that the world, on average, is slowly but surely moving in the right direction. Not as rapidly as it did during the era of the “Washington Consensus,” but progress nonetheless.

By the way, the progress is almost entirely a consequence of better policy in developing nations, especially the countries that escaped the tyranny of Soviet communism.

Policy has drifted in the wrong direction, by contrast, in the United States and Western Europe.

Indeed, the United States currently would be ranked #3 if it still enjoyed the level of economic liberty that existed in 2000.

In other words, the BushObamaTrump years have been somewhat disappointing.

Let’s look at another chart from the report. I’ve previously pointed out that there’s a strong relationship between economic freedom and national prosperity.

Well, here’s some additional evidence.

Let’s close by considering some of the nations represented by the red bar in the above chart.

You probably won’t be surprised to learn that Venezuela is once again ranked last. Though it is noteworthy that its score dropped from 3.31 to 2.83. I guess Maduro and the other socialists in Venezuela have a motto, “when you’re in a hole, keep digging.”

Argentina isn’t quite as bad as Venezuela, but I also think it’s remarkable that its score dropped from 5.88 to 5.50. That’s a big drop from a nation that already has a bad score.

Given these developments (as well as what’s happening in Chile), it’s not easy to be optimistic about Latin America.

P.S. There isn’t enough reliable data to rank Cuba and North Korea, so it’s quite likely that Venezuela doesn’t actually have the world’s most-oppressive economic policies.

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The welfare state and the so-called war on poverty has been very bad news for taxpayers.

But it’s also very bad news for poor people, in part because various redistribution programs can lure them out of the productive economy and into total dependency on government (and this will become an even bigger problem if Biden’s per-child handouts are approved).

But it’s also bad news because redistribution programs can result in very high implicit tax rates for low-income people who try to improve their lives by climbing the economic ladder.

I shared an example back in 2012, which showed how a single mother in Pennsylvania would be worse off with $57,000 of income instead of $29,000.

In other words, she would be dealing with a de facto marginal tax rate of more than 100 percent.

If you want to understand how this happens, Professors Craig Richardson and Richard McKenzie wrote about this topic in an article for The Library of Economics and Liberty.

…by expanding public assistance programs, the President’s plan will unavoidably impose a higher, hidden tax rate—known as an “implicit marginal income tax rate” (which we shorten to implicit tax rate)—on low-wage workers who receive welfare benefits. Those workers will pay an implicit tax rate because many welfare benefits are reduced as earnings rise. Ironically, the poorest Americans often pay implicit tax rates that are far higher than the IRS’s explicit marginal income-tax rates imposed on the country’s highest income earners. …Consider a household that receives benefits from only two welfare programs, with one tapering off at 20 cents for each added dollar earned and another tapering off at 40 cents for each added dollar earned. Those cuts create an implicit tax rate of 60 percent, which means the worker has only 40 cents in additional spendable income for each added dollar earned. This implicit tax rate can be expected to affect work incentives in much the same way that a federal income tax rate does.

The authors cite a real-world example.

…consider a real-life, low-income single mother of two children in Forsyth County, North Carolina earning $10 an hour in a full-time job, which means she has a monthly earned income of $1,600 (or $19,200 annually). Suppose the single mother receives monthly benefits from five welfare programs: $425 in food stamps, $1,471 in subsidized childcare, $370 in housing subsidies, $180 in WIC benefits, and $493 in an earned income tax credit (EITC). Her monthly welfare benefits will total $2,939 (or $35,271 a year). Now, suppose the single mother takes a new job paying $15 an hour, a 50 percent increase. Her monthly earned income will rise by $800 to $2,400 (with her annual income rising to $28,800 a year, an annual earnings increase of $9,600). However, she will face decreases in four out of her five monthly benefit streams, with each benefit reduction based on the same $800-increase in earnings (a problem known among welfare researchers as the “cumulative stacked effect”). The single mother will lose $231 in food stamps, $80 in childcare benefits, $216 in housing benefits, and $166 in EITC. Her total decrease in monthly benefits will reach $694 (which means her annual benefit total will drop by $8,328).4 Her implicit tax rate on her added monthly earnings of $800 is 87 percent—more than two times the highest explicit marginal tax rate proposed for the rich. …In addition, the single mother will be required to pay an added $185 a month in federal and state income taxes on her added earned monthly income of $800, which is an explicit tax rate of 23 percent. Adding the 87 percent implicit tax rate to the 23 percent explicit tax rate leads to an overall tax rate of 110 percent. Her raise has left her $79 per month poorer in lost wages and benefits—surely a strong disincentive for her to take the higher paying job.

Here’s a table showing those results.

If you want more evidence, check out Chart 7 from this column and Figure 8 from this column.

And the same problem exists in other nations as well.

P.S. Obamacare may have lured as many as 2 million people into full dependency.

P.P.S. I already mentioned how Biden’s per-child handouts could lure many more into full dependency, but “basic income” could be far worse.

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Thomas Sowell is a great economist, but his expertise extends to other fields of study. Everything from history to education.

But he’s also famous for being a great communicator, with dozens of well-known quotes.

I use one of them on my rotating banner because it succinctly summarizes why the left has to rely on emotional appeals rather than rigorous evidence.

For purposes of today’s column, I want to cite one of his other quotes, this one dealing with the fact that tradeoffs are an inevitable reality.

Simply stated, if you want more of one thing, you have to accept less of another thing.

And this has important implications for regulatory policy – especially about the value of cost-benefit analysis.

Let’s look at two examples.

First, here’s the abstract from a study by Jordan Nickerson from MIT and David Solomon from Boston College.

Since 1977, U.S. states have passed laws steadily raising the age for which a child must ride in a car safety seat. These laws significantly raise the cost of having a third child, as many regularsized cars cannot fit three child seats in the back. Using census data and stateyear variation in laws, we estimate that when women have two children of ages requiring mandated car seats,they have a lower annual probability of giving birth by 0.73 percentage points. Consistent with a causal channel, this effect is limited to third child births, is concentrated in households with access to a car, and is larger when a male is present (when both front seats are likely to be occupied). We estimate that these laws prevented only 57 car crash fatalities of children nationwide in 2017. Simultaneously, they led to a permanent reduction of approximately 8,000 births in the same year, and 145,000 fewer births since 1980, with 90% of this decline being since 2000.

This raises all sorts of challenging questions, such as what’s the value of a life saved compared to the value of lives that might have existed (a philosopher might have a different answer than an actuary at the Social Security Administration!).

And let’s not forget that you seemingly could save more lives if there were mandatory 5-mph speed limits, but that policy also has tradeoffs that could produce more deaths elsewhere.

For what it’s worth, I think parents should get to decide whether they need a car seat for a 7-year old (and thus have more children), but I’m not going to pretend there are no negative consequences.

Let’s look at another example.

In a post for Marginal Revolution, Prof. Alex Tabarrok of George Mason University points out that you can save lives in India by selling cars with abysmally low safety ratings.

These cars are very inexpensive. A Renault Kwid, for example, can be had for under $4000. In the Indian market these cars are competing against motorcycles. Only 6 percent of Indian households own a car but 47% own a motorcycle. Overall, there are more than five times as many motorcycles as cars in India. Motorcycles are also much more dangerous than cars. …The GNCAP worries that some Indian cars don’t have airbags but forgets that no Indian motorcycles have airbags. Even a zero-star car is much safer than a motorcycle. Air bags cost about $200-$400…and are not terribly effective. (Levitt and Porter, for example, calculated that air bags saved 550 lives in 1997 compared to 15,000 lives saved by seatbelts.) At $250, airbags would increase the cost of a $5,000 car by 5%. A higher price for automobiles would reduce the number of relatively safe automobiles and increase the number of relatively dangerous motorcycles and thus an air bag requirement could result in more traffic fatalities.

Unlike the issue of car seats for kids, there’s no moral ambiguity on this topic.

Indians should be allowed to buy “unsafe” cars because there will be far fewer fatalities and serious injuries.

By the way, cost-benefit analysis is not a panacea. Benjamin Zycher of the American Enterprise Institute wrote a few years ago that such analysis can be counterproductive if you have a biased and ideologically driven bureaucracy such as the Environmental Protection Agency.

But even halfway competent and fair cost-benefit analysis would be very helpful in the world of public policy.

Then again, politicians and bureaucrats probably have incentives to not produce that kind of information..

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I’m a big believer in focusing on results rather than reputation or rhetoric. For instance, many Republican politicians talk a good game about spending restraint. But when you crunch the numbers, it turns out that they often increase spending even faster than Democrats.

What’s true about politicians (the gap between reputation and reality) can also be true about countries.

Folks on the left seem to think Denmark is a big-government paradise, while many people on the right now think Hungary is a beacon of freedom.

But if you look at the data from the latest edition of Economic Freedom of the World, it turns out the Denmark (#11) ranks much higher for economic liberty than Hungary (#53).

Veronique de Rugy of the Mercatus Center wrote an interesting article for Reason about the strange way that some Americans have decided to embrace the two nations.

Yet she explains Denmark is hardly a socialist role model.

Sen. Bernie Sanders (I–Vt.) on the left and Fox News host Tucker Carlson on the right…have recently pointed to pet foreign countries as exemplars of what America should strive to be. Yet Sanders and Carlson are each misled by a superficial understanding of what these countries are really about. …Let’s look more closely at Denmark: Yes, the country has some big government policies… That said, not only is Denmark more economically free than it is socialist, but the country has also spent the last 30 years running away from the socialism that Sanders wants the United States to run toward.

And she notes that Hungary is hardly a hotbed of laissez-faire policy.

Orban…has created a patronage economy where licenses and aid are handed to businesses that are friendly to his administration. He even passed a law that gives the state considerable control over churches and other religious institutions. …these policies…could backfire spectacularly on these conservatives. Once the limits on state power are gone, if the progressive left truly gets into power, it will have a much easier time implementing the very agenda that these conservatives fear the most. …I wonder what we are to make of these conservatives who have become the biggest cheerleaders for many progressive spending programs.

Since Veronique mentioned government spending, I decided to peruse the IMF’s World Economic Outlook Database to see whether Hungary’s right-leaning government has adopted right-leaning spending policies during Viktor Orban’s time in power.

Compared to Denmark, the answer is no. As you can see from the chart, nominal spending has increased four times faster in Hungary.

By the way, inflation was higher in Hungary during the period, but a comparison based on inflation-adjusted numbers would make Denmark’s performance look even better since there was almost no “real” growth in the burden of spending last decade (yes, Denmark has followed my Golden Rule).

For what it’s worth, the goal of today’s column is not to denigrate Hungary, which has some very attractive policies (such as a 9 percent corporate tax rate).

And I also like that Hungary resists the pro-centralization, pro-harmonization ideology of the European Union (I especially hope that Hungary will block the EU from embracing Biden’s awful proposal for a global corporate minimum tax).

That being said, I’m not going to laud Hungary as a role model when it should be (and could be) doing a much better job of limiting the size and scope of government.

Let’s close by also seeing how Denmark compares to Hungary in the latest edition of the Heritage Foundation’s Index of Economic Freedom. As you can see, Denmark (#10) does much better than Hungary (#55).

P.S. Supporters can argue, with some merit, that it’s not completely fair to compare Denmark and Hungary because the latter is still hamstrung by having to overcome decades of communist tyranny. But it’s worth noting that other nations that emerged from Soviet enslavement, such as Georgia and the Baltic countries, have managed to achieve much higher levels of economic freedom.

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Public finance theory teaches us that the capital gains tax should not exist. Such a levy exacerbates the bias against saving and investment, which reduces innovation, hinders economic growth, and lowers worker compensation.

All of which helps to explain why President Biden’s proposals to increase the tax burden on capital gains are so misguided.

Thanks to some new research from Professor John Diamond of Rice University, we can now quantify the likely damage if Biden’s proposals get enacted.

Here’s some of what he wrote in his new study.

We use a computable general equilibrium model of the U.S. economy to simulate the economic effects of these policy changes… The model is a dynamic, overlapping generations, computable general equilibrium model of the U.S. economy that focuses on the macroeconomic and transitional effects of tax reforms. …The simulation results in Table 1 show that GDP falls by roughly 0.1 percent 10 years after reform and 0.3 percent 50 years after reform, which implies per household income declines by roughly $310 after 10 years and $1,200 after 50 years. The long run decline in GDP is due to a decline in the capital stock of 1.0 percent and a decline in total hours worked of 0.1 percent. …this would be roughly equivalent to a loss of approximately 209,000 jobs in that year. Real wages decrease initially by 0.2 percent and by 0.6 percent in the long run.

Here is a summary of the probable economic consequences of Biden’s class-warfare scheme.

But the above analysis should probably be considered a best-case scenario.

Why? Because the capital gains tax is not indexed for inflation, which means investors can wind up paying much higher effective tax rates if prices are increasing.

And in a world of Keynesian monetary policy, that’s a very real threat.

So Prof. Diamond also analyzes the impact of inflation.

…capital gains are not adjusted for inflation and thus much of the taxable gains are not reflective of a real increase in wealth. Taxing nominal gains will reduce the after-tax rate of return and lead to less investment, especially in periods of higher inflation. …taxing the nominal value will reduce the real rate of return on investment, and may do so by enough to result in negative rates of return in periods of moderate to high inflation. Lower real rates of return reduce investment, the size of the capital stock, productivity, growth in wage rates, and labor supply. …Accounting for inflation in the model would exacerbate other existing distortions… An increase in the capital gains tax rate or repealing step up of basis will make investments in owner-occupied housing more attractive relative to other corporate and non-corporate investments.

Here’s what happens to the estimates of economic damage in a world with higher inflation?

Assuming the inflation rate is one percentage point higher on average (3.2 percent instead of 2.2 percent) implies that a rough estimate of the capital gains tax rate on nominal plus real returns would be 1.5 times higher than the real increase in the capital gains tax rate used in the standard model with no inflation. Table 2 shows the results of adjusting the capital gains tax rates by a factor of 1.5 to account for the effects of inflation. In this case, GDP falls by roughly 0.1 percent 10 years after reform and 0.4 percent 50 years after reform, which implies per household income declines by roughly $453 after 10 years and $1,700 after 50 years.

Here’s the table showing the additional economic damage. As you can see, the harm is much greater.

I’ll conclude with two comments.

P.S. If (already-taxed) corporate profits are distributed to shareholders, there’s a second layer of tax on those dividends. If the money is instead used to expand the business, it presumably will increase the value of shares (a capital gain) because of an expectation of higher future income (which will be double taxed when it occurs).

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I periodically warn that the United States is on a path to become a European-style welfare state.

That sounds good to some people since it implies lots of goodies paid for by other people.

So I always explain that there’s a downside. The economic data clearly show that there’s been less growth in Europe and this has real-world consequences.

This is why it’s so depressing that Joe Biden has a radical agenda of higher tax rates and much bigger government.

He wants us to copy an approach that has produced inferior outcomes.

The editorial page of the Wall Street Journal has been sounding the alarm.

In a recent column, Professor Josef Joffe contemplates the impact of more dependency on America’s economy.

America is the land of “predatory capitalism,” German chancellor Helmut Schmidt liked to say. …President Biden’s tax plans might soon make Europe look like a capitalist heaven by comparison. …The middle class will pay the bill. …Reversing course won’t be easy because gifts, once given, are hard to take back, whether in the U.S. or in Europe. …As government expands and hands out more goodies, it also tightens its grip on the economy. It shrinks the private sector, the engine of U.S. wealth creation. It is no accident that Europe has grown more slowly over the past 40 years as government spending, regulations and taxes have increased.

Prof. Joffe’s point about the durability of entitlements (“once given, are hard to take back”) is vitally important.

This is why it is so important to block Biden’s per-child handouts.

Dan Henninger made similarly important points a couple of months ago.

The club Mr. Biden is joining…is one the U.S. has stayed out of since World War II. That is the club known as the European welfare state. It is the government-directed system of lifetime paternalism built up by the nations of Western Europe after 1945. …Public welfare has never been America’s reason for being, notwithstanding our substantial spending on social support programs. Despite the entitlement creations of FDR’s New Deal and LBJ’s Great Society, the U.S., unlike Europe, has remained a nation driven and led by capitalist initiative. For current-generation Democrats, that fact is anathema. …The March stimulus bill already had one foot inside the economic club of Europe’s door.

For what it’s worth, I’m not quite as positive about the United States as Henninger. Our welfare state is a significant burden, though he is right that it is smaller than the welfare states in Europe.

Let’s not quibble about that point, though, because Henninger has another observation that is spot on.

Biden’s agenda is a recipe for big tax increases on the middle class.

Europe became famous for its perpetual-motion tax machine, which suppressed the continent’s entrepreneurial instincts. Besides income taxes, Europe relies heavily on the collection of notoriously high value-added taxes…total tax revenue from all governments in the U.S. as a percentage of GDP is 24%, compared with an average of more than 40% in seven European nations… Those European tax levels will never fall. Their governments gotta have the money. Mr. Biden purports that his proposed $3 trillion in tax increases hit only corporations and “the wealthiest.” But if his entitlements become law, European levels of middle-class taxation—perhaps a VAT or carbon tax—are inevitable. Mr. Biden’s plans to increase Internal Revenue Service audits lay the groundwork for that.

Amen.

Honest folks on the left openly admit that this is true.

I’ll close with two final points.

First, it would be a mistake to copy Europe’s welfare states, but there are worse things that could happen. Those nations may lag the United States, but they are generally richer than other parts of the world.

But I’m not sure “better than Venezuela” is a persuasive selling point.

Second, because of demographic change and poorly designed entitlement programs, we’re already on a path to become a European welfare state.

But I’m not sure “let’s drive faster over the cliff” is a persuasive selling point.

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I’ve made the case for capitalism (Part I, Part II, Part III, Part IV, and Part V) and the case against socialism (Part I, Part II, and Part III), while also noting that there’s a separate case to be made against redistribution and the welfare state.

This video hopefully ties together all that analysis.

If you don’t want to spend 10-plus minutes watching the video, I can sum everything up in just two sentences.

  1. Genuine socialism (government ownershipcentral planning, and price controls) is an utter failure and is almost nonexistent today (only in a few basket-case economies like Cuba and North Korea).
  2. The real threat to free enterprise and economic liberty is from redistributionism, the notion that politicians should play Santa Claus and give us a never-ending stream of cradle-to-grave goodies.

For purposes of today’s column, though, I want to focus on a small slice of the presentation (beginning about 2:00).

Here’s the slide from that portion of the video.

I make the all-important point that profits are laudable – but only if they are earned in the free market and not because of bailoutssubsidiesprotectionism, or a tilted playing field.

This is hardly a recent revelation.

I first wrote about this topic back in 2009.

And many other supporters of genuine economic liberty have been making this point for much longer.

Or more recently. In a new article for City Journal, Luigi Zingales emphasizes that being pro-market does not mean being pro-business.

The first time I visited the Grand Canyon many years ago, I was struck…by a sign that said, “Please don’t feed the wild animals.” Underneath was an explanation: you shouldn’t feed them because it’s not good for them. …We should post something of this kind on Capitol Hill as well—with the difference being that the sign would read, “Please don’t feed the businesses.” That’s not because we don’t like business. Quite the opposite: we love business so much that we don’t want to create a situation where business is so dependent on…a system of subsidies, that it is unable to compete and succeed… This is the…difference between being pro-market and being pro-business. If you are pro-business, you like subsidies for businesses; you want to make sure that they make the largest profits possible. If, on the other hand, you are pro-markets, you want to behave like the ranger in the Grand Canyon: …ensuring that markets remain competitive and…preventing businesses from becoming too dependent on a crony system to survive.

Amen.

Cronyism is bad economic policy because government is tilting the playing field and luring people and businesses into making inefficient choices.

But I also despise cronyism because some people mistakenly think it is a feature of free enterprise (particularly the people who incorrectly assume that being pro-market is the same as being pro-business).

The moral of the story is that we should have separation of business and state.

P.S. There’s one other point from Prof. Zingales’ article that deserves attention.

He gives us a definition of capitalism (oops, I mean free enterprise).

We use the term “free markets” so often that we sometimes forget what it actually means. If you look up “free markets” in the dictionary, you might see “an economy operating by free competition,” or better, “an economic market or system in which prices are based on competition among private businesses and not controlled by a government.”

For what it’s worth, I did the same thing for my presentation (which was to the New Economic School in the country of Georgia).

Here’s what I came up with.

By the way, the last bullet point is what economists mean when they say things are “complementary.”

In other words, capital is more valuable when combined with labor and labor is more valuable when combined with capital – as illustrated by this old British cartoon (and it’s the role of entrepreneurs to figure out newer and better ways of combining those two factors of production).

One takeaway from this is that Marx was wrong. Capital doesn’t exploit labor. Capital enriches labor (just as labor enriches capital).

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Long-time readers know that I periodically pour cold water on the notion that China is an economic superstar.

Yes, China did engage in some economic liberalization late last century, and those reforms should be applauded because they were very successful in reducing severe poverty.

But from a big-picture perspective, all that really happened is that China went from terrible policy (Maoist communism) to bad policy (best described as mass cronyism).

Economic Freedom of the World has the best data. According to the latest edition, China’s score for economic liberty rose from a horrible 3.69 in 1990 to 6.21 in 2018.

That’s a big improvement, but that still leaves China in the bottom quartile (ranking #124 in the world). Better than Venezuela (#162), to be sure, but way behind even uncompetitive welfare states such as Greece (#92), France (#58), and Italy (#51).

And I fear China’s score will get even worse in the near future.

Why? Because it seems President Xi is going to impose class-warfare tax increases.

In an article for the Guardian, Phillip Inman shares some of the details.

China’s president has vowed to “adjust excessive incomes” in a warning to the country’s super-rich that the state plans to redistribute wealth… The policy goal comes amid a sweeping push by Beijing to rein in the country’s largest private firms in industries, ranging from technology to education. …Xi…is expected to expand wealth taxes and raise income tax rates… Some reforms could be far reaching, including higher taxes on capital gains, inheritance and property. Higher public sector wages are also expected to be part of the package.

And here are some excerpts from a report by Jane Li for Quartz.

Chinese president Xi Jinping yesterday sent a stark message to the country’s wealthy: It is time to redistribute their excessive fortunes. …Another reason for the Party’s focus on outsize wealth is to reduce rival centers of power and influence in China, which has also been an impetus for its crackdown on the tech sector… China already has fairly high income tax rates for its wealthiest. That includes a top income tax rate of 45% for those who earn more than 960,000 yuan ($150,000) a year… Upcoming moves could include…a nationwide property tax.

These stories may warm the hearts of Joe Biden and Bernie Sanders, but they help to explain why I’m not optimistic about China’s economy.

If you review the Economic Freedom of the World data, you find that China is especially bad on fiscal policy (“size of government”), ranking #153.

That’s worse than China does even on regulation.

Yet the Chinese government is now going to impose higher taxes to fund even bigger government?!?

Is the goal to be even worse than Venezuela and Zimbabwe?

P.S. Many wealthy people in China (maybe even most of them) achieved their high incomes thanks to government favoritism, so there’s a very strong argument that their riches are undeserved. But the best policy response is getting rid of industrial policy rather than imposing tax increases that will hit both good rich people and bad rich people.

P.P.S. I’ve criticized both the OECD and IMF for advocating higher taxes in China. A few readers have sent emails asking whether those international bureaucracies might be deliberately trying to sabotage China’s economy and thus preserve the dominance of Europe and the United States. Given the wretched track records of the OECD and IMF, I think it’s far more likely that the bureaucrats from those organizations sincerely support those bad policies (especially since they get tax-free salaries and are sheltered from the negative consequences).

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Like most libertarians, I favor drug legalization for the simple reason that people should have control over their own bodies, even if they’re doing something stupid.

But I’ve never claimed legalization is a zero-cost policy. Instead, as I wrote in 2018, “I think the social harm of prohibition is greater than the social harm of legalization.”

These two flowcharts both make the same point about why the War on Drugs is foolish.

 

Apparently, voters and politicians are beginning to get the message. More and more states have moved in the direction of legalization.

Have the results been positive?

In an article for National Review, Aron Ravin has a very critical assessment of legalization.

…the old-fashioned, party-pooper folk with whom I find myself sympathizing tend to fall back on one point: Weed is unhealthy. Since 2002, the proportion of Americans twelve and older who reported having used marijuana in the last year has increased by over 60 percent. …Pot smoke can cause lung cancer in the same way tobacco can, and secondhand marijuana smoke may have even more carcinogens than cigarettes. Marijuana smoke can also compromise the immune system, and there’s a growing amount of scientific literature indicating a significant correlation between any form of cannabis consumption and psychosis.

As a non-user, I’m very sympathetic to the health argument.

Regularly drawing any kind of smoke into one’s lungs simply can’t be healthy.

That being said, regularly eating big mounds of french fries also can’t be healthy, but that’s not an argument for criminalization.

Ravin then asserts that legalization is a failure because there are still black markets.

Advocates claimed that legalization would cripple the black market and weaken Mexican cartels. They argued that legalizing weed would reduce children’s access to it, as licensed distributors would have a greater incentive to card than criminal dealers, and that users would actually be healthier, as the government would be better able to regulate and inspect the stuff they were smoking. …Top that all off with the Cato Institute’s promises of billions of dollars in new tax revenue and billions more in law-enforcement expenses saved, and you’d have to be silly to disagree. But the libertarians got it wrong.

And he has some good evidence about the continued presence of illegal sales.

…the predicted benefits rested on one assumption: that legal weed would render criminal dealers obsolete much in the same way that repealing prohibition weakened bootlegging mobsters. But that has not happened. It has been nearly a decade since Colorado became the first state to legalize recreational marijuana, and the state is dealing with a larger black market than ever before. …Upwards of 80 percent of all of California’s marijuana sales go through the black market. Massachusetts (70 percent) isn’t faring much better, and Nevada is growing desperate. …Legal dispensaries simply cannot match the low prices offered by their criminal competition when they’re being stifled by so much regulation and taxation, legalization advocates say. Yet weren’t generating tax revenue and protecting users major arguments for legalization in the first place?

I will admit that Ravin makes one very strong point. If libertarians were arguing that legalization would simultaneously deliver lots of tax revenue and also eliminate the black market, that doesn’t make sense.

Simply stated, excessive taxation means illegal sellers will stay in business because their prices will be much lower than their legal (but highly taxed) competitors.

That being said, at least one libertarian (ahem, me) explicitly pointed out that generating additional tax revenue was actually an argument against legalization (I included this issue in my collection of Libertarian Quandaries).

Let’s look at another perspective on legalization.

Jacob Sullum has a largely upbeat assessment of what’s happened, though he agrees that excessive taxation is a problem.

Here are some excerpts from his Reason column.

…when it comes to taxes, New York legislators do not seem very keen on helping the industry—or consumers. …The THC levy may amount to a tax as high as 30 percent, depending on costs, THC content, and product type. That’s on top of a 13 percent marijuana sales tax, which is in addition to general state and local sales taxes that can run as high as 8.9 percent. New Jersey plans to impose an excise tax ranging from less than 3 percent to more than 30 percent, depending on the average retail price per ounce… The state also will allow local governments to collect multiple taxes from growers, manufacturers, wholesalers, and retailers… New Mexico’s marijuana sales tax is simple and modest by comparison: 12 percent initially, rising gradually to 18 percent by July 2030. States such as Alaska, Illinois, Maine, Massachusetts, and Michigan tax marijuana even more lightly. These states seem to recognize that heavy taxes make it harder for licensed retailers to compete with black-market dealers. It’s a lesson that some politicians will have to learn all over again.

A 2018 Bloomberg article is a good primer on the issue of pot taxation.

What’s the optimal tax rate on legal marijuana if the goal is to eliminate the black market? …There are signs that California, with its longstanding pot culture and thriving black market, is taxing weed too much, while Washington state has already moved to lower its rate. …Lawmakers debating the issue are typically trying to balance two goals: generating revenue to boost state coffers while also creating a legal market that will put street dealers out of business. …The economics of elastic demand hold that consumers will buy less of a product as it gets more expensive, and the theory is being tested in the various legal markets around the U.S. …Oregon and California…have struggled to eliminate the black market, in part because high tax rates and regulatory red tape have made it attractive for some producers, sellers and customers to stay underground. …Light taxation and liberal licensing under Colorado’s adult-use law slashed the black market to 33 percent of cannabis sales last year, Adams said. In contrast, illicit sales were 78 percent of California cannabis sales and were even higher this year under adult-use laws that imposed extraordinary taxes and regulatory hurdles.

For those interested, I’ve written a few times (here, here, here, and here) about California’s over-taxation of marijuana.

I also have two columns (here and here) about Colorado’s experience.

So what’s the bottom line?

I fully expect that politicians in most states will continue to set tax rates too high, which means black market sales of marijuana will remain strong.

Why will they make this mistake? For the same reason they have excessively high tax rates on income, on sales, on property, on booze, and everything else.

Greedy politicians can’t resist the temptation to over-tax anything and everything in hopes of getting their hands on more money to buy more votes.

That’s America’s real (and bipartisan) addiction problem.

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Our friends on the left who want more government spending generally have a short-run argument and a long-run argument.

  • In the short run, they assert that more government spending can stimulate a weak economy. This is typically known as Keynesian economics and it means temporary borrowing and spending.
  • In the long run, they claim that big government is an investment that leads to better economic performance. This is the “Nordic Model” and it means permanent increases in taxes and spending.

In many ways, the debate about short-run Keynesianism is different than the debate about the appropriate long-run size of government.

But there is one common thread, which is that proponents of more government pay too much attention to consumption and too little attention to production.

I wrote a somewhat wonky column about this topic back in April, but let’s take another look at this issue.

In a column last month for the Wall Street Journal, Andy Kessler shared some economic fundamentals.

Here’s how capitalism works—pay attention if you took the social-justice version of Econ 101. SIPPC: Save. Invest. Produce. Profit. Consume. Save means postponing consumption, money and time. Only then you can invest, especially your human capital, in something productive. Usually this means doing more with less, being efficient and effective. This is when innovation happens. Wealth comes only from productivity, not from giving away money. …Supply first and then consume…, creating incentives to put money into the hands of entrepreneurs and clearing a path for them to innovate by getting government out of the way.

In some sense, this is simply the common-sense observation that you can’t consume (or redistribute) unless someone first produces.

But it’s also a deeper message about what actually drives production.

There are no shortcuts. You can’t induce demand without supply. Didn’t the lockdowns prove that? Stimulus checks did little good given that there were few places to spend them until businesses were allowed to reopen. We’re now perversely sitting on almost $3 trillion in excess savings and even more new government debt. Yet the government stimulus mentality continues in Congress. …Through taxes and currency depreciation, demand-side spending steals savings needed to invest in future supply, which is why it never works. It is why the Great Depression lasted so long, why Japan lost two decades, and why 2009-16 saw subpar U.S. economic growth. When demand drops, government spending and giveaways make things worse. The only solution to kickstart production is to increase investment and make jobs more plentiful by cutting taxes and easing regulation. ..Price signals tell entrepreneurs what to supply. But price signals are only as good as their inputs. Minimum-wage laws mess up labor price signals. Tariffs mess up trade price signals. The Federal Reserve’s bond-buying blowouts mess up interest-rate price signals.

Amen. We know the policies that lead to more prosperity, but politicians constantly throw sand in the gears.

Simply stated, bigger government diverts resources from the productive sector of the economy. And that makes it more difficult to get the innovation and investment that are necessary for rising wages.

To be sure, there are some types of government spending that arguably help a private economy function.

But that’s not what we get from much of the federal government (Department of Housing and Urban DevelopmentDepartment of EducationDepartment of EnergyDepartment of AgricultureDepartment of Transportation, etc).

Which is why the growth-maximizing size of government is far smaller than what we are burdened with today.

P.S. I can’t resist sharing this additional segment of Mr. Kessler’s column.

Modern Monetary Theory, known as MMT—what economist John Christensen called the “Magic Money Tree”—is the worst of demand-side nonsense. MMT believers think that to boost aggregate demand we can have government print money and spend, spend, spend. We tried this in the 1960s and ’70s with Great Society programs

At the risk of understatement, I agree with his concerns.

P.P.S. It’s worth noting that the World BankOECD, and IMF have all published research showing the benefits of smaller government.

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I’m not a big fan of the Federal Reserve, mostly because of its Keynesian monetary policy.

Incumbent politicians often applaud when the central bank intervenes to create excess liquidity and artificially low interest rates. That’s because the Keynesian approach produces a short-run “sugar high” that seems positive.

But such policies also create boom-bust conditions.

Indeed, the Federal Reserve deserves considerable blame for some of the economy’s worst episodes of the past 100-plus years – most notably the Great Depression, 1970s stagflation, and the 2008 financial crisis.

So what’s the solution?

I’ve previously pointed out that the classical gold standard has some attractive features but is not politically realistic.

But perhaps it’s time to reassess.

In a column for today’s Wall Street Journal, Professors William Luther and Alexander Salter explain the differences between a gold standard and today’s system of fiat money (i.e., a monetary system with no constraints).

Under a genuine gold standard, …Competition among gold miners adjusts the money supply in response to changes in demand, making purchasing power stable and predictable over long periods. The threat of customers redeeming notes and deposits for gold discourages banks from overissuing… Fiat dollars aren’t constrained by the supply of gold or any other commodity. The Federal Reserve can expand the money supply as much or as little as it sees fit, regardless of changes in money demand. When the Fed expands the money supply too much, an unsustainable boom and costly inflation follow.

They then compare the track records of the two systems.

…nearly all economists believe the U.S. economy has performed better under fiat money than it would have with the gold standard. This conventional wisdom is wrong. The gold standard wasn’t perfect, but the fiat dollar has been even worse. …in practice, the Fed has failed to govern the money supply responsibly. Inflation averaged only 0.2% a year from 1790 to 1913, when the Federal Reserve Act passed. Inflation was higher under the Fed-managed gold standard, averaging 2.7% from 1914 to 1971. It has been even higher without the constraint of gold. From 1972 to 2019, inflation averaged 4%. …the Fed…has also become less predictable. In a 2012 article published in the Journal of Macroeconomics, George Selgin, William D. Lastrapes and Lawrence H. White find “almost no persistence in the variance of inflation prior to the Fed’s establishment, and a very high degree of persistence afterwards.” …One might be willing to accept the costs of higher inflation and a less predictable price level if a Fed-managed fiat dollar reduced undesirable macroeconomic fluctuation. But that hasn’t happened. Consider the past two decades. The early 2000s had an unsustainable boom, as the Fed held interest rates too low for too long.

There was also a column on this issue in the WSJ two years ago.

James Grant opined about (the awful) President Nixon’s decision to make Federal Reserve policy completely independent of the gold anchor.

Richard Nixon announced the suspension of the Treasury’s standing offer to foreign governments to exchange dollars for gold, or vice versa, at the unvarying rate of $35 an ounce. The date was Aug. 15, 1971. Ever since, the dollar has been undefined in law. …In the long sweep of monetary history, this is a new system. Not until relatively recently did any central bank attempt to promote full employment and what is called price stability (but is really a never-ending inflation) by issuing paper money and manipulating interest rates. …a world-wide monetary system based on the scientifically informed discretion of Ph.D. economists. The Fed alone employs 700 of them.

But Grant says the gold standard worked reasonably well.

A 20th-century scholar, reviewing the record of the gold standard from 1880-1914, was unabashedly admiring of it: “Only a trifling number of countries were forced off the gold standard, once adopted, and devaluations of gold currencies were highly exceptional. Yet all this was achieved in spite of a volume of international reserves that, for many of the countries at least, was amazingly small and in spite of a minimum of international cooperation . . . on monetary matters.” …Arthur I. Bloomfield wrote those words, and the Federal Reserve Bank of New York published them, in 1959.

The new approach, which Grant mockingly calls the “Ph.D. standard,” gives central bankers discretionary power to do all sorts of worrisome things.

The ideology of the gold standard was laissez-faire; that of the Ph.D. standard (let’s call it) is statism. Gold-standard central bankers bought few, if any, government securities. Today’s central bankers stuff their balance sheets with them. In the gold-standard era, the stockholders of a commercial bank were responsible for the solvency of the institution in which they held a fractional interest. The Ph.D. standard brought the age of the government bailout and too big to fail.

By the way, the purpose of today’s column isn’t to unreservedly endorse a gold standard.

Such as system is very stable in the long run but can lead to short-term inflation or deflation based on what’s happening with the market for gold. And those short-term fluctuations can be economically disruptive.

I was messaging earlier today with Robert O’Quinn, the former Chief Economist at the Department of Labor (who also worked at the Fed) and got this reaction to the Luther-Salter column.

Which is better matching the long-term growth of the economy and the demand for money? The profitability of gold mining or central bank decision-making? A good monetary rule may be better than a classical gold standard. The difficulty is sustaining a good rule.

The ;problem, of course, is that I don’t trust politicians (and their Fed appointees) to follow a good rule.

  • Especially in a world where many of them believe in Keynesian boom-bust monetary policy.
  • Especially in a world where many of them think the Fed should prop up or bailout Wall Street.
  • Especially in a world where many of them might use the central bank to finance big government.
  • Especially in a world where many of them support a “war against cash” to empower politicians.

The bottom line is that we have to choose between two imperfect options and decide which one has a bigger downside.

P.S. Since a return to a classical gold standard is highly unlikely (and because the libertarian dream of “free banking” is even more improbable), the best we can hope for is a president who 1) makes good appointments to the Fed, and 2) supports sound-money policies even when it means short-run political pain. We’ve had one president like that in my lifetime.

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China is not going to surpass the United States as the world’s dominant economy.

As I first wrote back in 2010, China is a paper tiger. Yes, there was some pro-market reform last century, which helped reduce mass poverty, but China only took modest steps in the right direction.

According to the latest edition of Economic Freedom of the World, China scores just 6.21, which places it 124th out of 162 nations.

Is that better than a score of 3.69, which is where China was in 1990?

Yes, of course.

But does that score indicate that China will become richer than the United States, which has a current score of 8.22 (the world’s 6th-highest level of economic liberty)?

Of course not.

My answer might change of China engaged in more economic liberalization, as I have urged. But it seems the opposite is happening and China is backsliding toward more state control.

And that means the United States almost surely will remain far more prosperous.

(While Joe Biden is doing his best to drag economic policy in the wrong direction, but it would takes decades of far-worse policy to bring the U.S. down to the level of France (#58) or Greece (#92), much less all the way down to being on par with China).

But some people must not be very familiar with data about China and its economy.

For instance, President Trump’s former top trade official, Robert Lighthizer, wrote that the United States should copy China’s cronyism in a column in the New York Times.

I’m not joking. Mr. Lighthizer openly embraces industrial policy and protectionism.

…we need a multifaceted long-term strategy. …Our strategy must include…an industrial policy that includes subsidies to foster the development of the most advanced science and technology…and a robust plan to combat China’s unfair trade practices. …The Senate legislation would achieve some of what is needed. It calls for $200 billion to bolster scientific and technological innovation, $52 billion to rebuild our capacity to make semiconductors, and a supply-chain resiliency program… The House should perfect the provisions of the Senate bill that restructure and enhance federal support for science and innovation and strip out those that weaken our trade laws and encourage Chinese imports.

Geesh, no wonder Trump’s trade policy was such a disaster.

Lighthizer not only doesn’t understand economics, he also doesn’t know history.

Adam Thierer of the Mercatus Center points out that the current angst about China is a repeat verse of a song we heard over and over again in the late 1980s.

Back then, everyone though Japan was on the verge of overtaking the United States, ostensibly because that nation had wise politicians and bureaucrats who knew how to pick winners and losers.

Thierer’s article tells us what really happened.

In 1949, the Japanese government created the Ministry of International Trade and Industry (MITI) to work with other government bodies (especially the Bank of Japan) to devise plans for industrial sectors in which they hoped to make advances. Although not as heavy-handed as Chinese planning authorities are today, MITI came to have enormous influence over private-sector research and investment decisions during the next five decades. The organization used a variety of the same policy levers that Chinese officials do today, with a particular focus on trade management and industrial policy investments in sectors perceived to be “strategic” for future economic advance. …By the late 1970s…, U.S. officials and market analysts came to view MITI with a combination of reverence and revulsion, believing that it had concocted an industrial policy cocktail that was fueling Japan’s success at the expense of American companies and interests. …By the end of the 1980s, fears about “Japan Inc.” had reached a fever pitch. …Just as Japan phobia was reaching its zenith in the early 1990s, Japan’s fortunes began taking a turn for the worse. The Japanese stock market crashed in 1990… Japan suffered a brutal economic downturn that became known as the Lost Decade, which really lasted almost two decades. …by the late 1990s many scholars came to view most Japanese industrial policy initiatives as a costly bust.

Amen.

I wrote that Japan was a “basket case” back in 2013. A bit of hyperbole, to be sure, but I was trying to drive home the point that the nation’s politicians have made some costly mistakes.

Not just industrial policy, but also tax increases, Keynesian spending, and other forms of intervention.

No wonder the country has gone downhill in terms of competitiveness.

But let’s not focus too much on Japan (which, despite all my grousing, still ranks #20 for economic liberty).

For purposes of today’s column, the main points are 1) that China is no threat to overtake the United States, and 2) that copying that nation’s industrial policy would be a mistake.

P.S. If China wants to pursue industrial policy and other forms of cronyism, that’s a mistake that mostly hurts the Chinese people. To the extent such policies are designed to subsidize exports (as Lighthizer argues), the best response is to utilize the World Trade Organization, not to copy China’s misguided interventionism.

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I have plenty of politician humor, collectivism humor, libertarian humor, and gun control humor.

I also have big-government humor and European humor.

But only a very limited collection of economics humor.

Today, we’ll make up for that oversight, starting with this cartoon strip about the Federal Reserve’s easy-money policy.

Next we have a cartoon about incentives and the welfare state.

For our third item, I’ve generally cited supply and demand curves when trying to explain “deadweight loss,” but they also explain how prices are determined.

And since they’re a core tool of economics, what better choice for a tattoo?

Our fourth item is about a company that is more worried about stakeholders rather than shareholders.

Last but not least, here’s my favorite item.

It shows what happens if economists are very sinful during their lives.

To be fair, while it’s very common for Krugman to screw up, he’s not always wrong.

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In my four-part series on inequality (here, here, here, and here), I argue that that it is more important to instead focus on reducing poverty – especially since we know the policies needed to achieve that latter goal.

In this discussion, I contemplate why some folks don’t understand that message.

One reason is that some of them don’t care.

As explained by the Eighth Theorem of Government, they are motivated first and foremost by a desire for bigger government.

And it doesn’t matter whether they are driven by ideology or “public choice.” The bottom line is that helping people climb the economic ladder is – at best – a secondary concern.

But what about the well-meaning folks on the left? Is there a way of convincing them to channel their compassion in a better direction?

As mentioned in the interview, these are the people who generally believe that the economy is a fixed pie. As such when someone like Jeff Bezos is rich, they think it means other people are poor.

So it should be simple to show them that this isn’t true. There is a wealth of data showing how good (or even just decent) policies create more prosperity.

Looking specifically at the United States, we’re much richer today than we were in the past. And that’s true whether you go back 200 years or if you simply compared today’s economy with where America was after World War II.

And the same pattern exists in other market-based nations.

But here’s what frustrates me. When I share this data with my left-leaning friends, they seem to have some sort of mental block that prevents them from reaching the obvious conclusion.

A few of them will pivot, acknowledge that broad-based growth happens, but then argue that growth is unaffected by policy.

In other words, nations can become more prosperous whether government is big or government is small.

Needless to say, there’s also a wealth of data showing that this isn’t true.

At which point the honest and intelligent folks on the left will explicitly or implicitly embrace Arthur Okun’s argument that it’s okay to have less growth if there’s more equality.

That’s when I point out that even small differences in growth make a big difference to income levels over just a few decades. Which means poor people ultimately will be richer if there’s more economic liberty.

So if they really care about the well-being of the less fortunate, they should be the biggest advocates of free markets and limited government.

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