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Posts Tagged ‘Free Markets’

I write frequently about the economic damage caused by European fiscal policy, but today let’s comment on the (comparatively) good policies that exist on the other side of the Atlantic.

We’ll start with this video excerpt from a presentation last month.

If you don’t have time to watch the video, everything you need to know is captured in this data from Economic Freedom of the World. As you can see, European nations (circled in red) dominate the top half.

Indeed, it’s safe the say that Europe dominates the top quartile (the blue nations, categorized as “mostly free”).

As I noted in the video, this does not mean these nations have great policy. Or even good policy.

But it does mean that European nations generally enjoy more economic liberty than countries from other parts of the world (or, if you like looking at the glass as half empty, they suffer from less economic repression).

If you dig into the details, what you will find is that Europeans nations generally have bad fiscal policy, but they tend to score highly in other areas (i.e., good rule of law, low levels of red tape, etc).

To be sure, not all European nations are the same. There’s a big difference between laissez-faire Switzerland and dirigiste Greece, for instance.

But I’ll close be reiterating a comment from the above video, which is that that there’s a much bigger gap between Greece and Venezuela than there is between the United States and Greece.

P.S. A new edition of Economic Freedom of the World has been released, but there were only minor changes for the United States (down one spot) and Europe. And if you look at the latest edition of the Heritage Foundation’s Index of Economic Freedom, the United States is only #25, lagging behind 17 European nations. Including all of the supposedly socialist welfare states in Scandinavia.

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There are some Caribbean jurisdictions that are very rich and successful, such as the Cayman Islands. There are others that have middle-of-the-road track records, such as Barbados.

Then there’s the basket case of Haiti.

Here’s data from the World Bank about per-capita economic output, showing how these three jurisdictions compare to both the United States and the world average.

And if you want another perspective, the United Nations’ Human Development Index also shows big gaps (the Cayman Islands is a territory of the United Kingdom rather than an independent nation, so it’s not part of the UN’s dataset).

So why am I citing this data?

Because Lydia Polgreen has a column about Haiti in the New York Times that contains a lot of fascinating history about that unfortunate nation, including the reign of left-wing firebrand Jean-Bertrand Aristide earlier this century.

But I was especially interested in her analysis about the current crisis and what may happen in the future.

Haiti is in free fall. …Gangs, most of which have ties to political and business leaders, have all but shut down Haiti’s economy by cutting off the flow of fuel and food. Hunger is bearing down on many families. Cholera, which once killed around 10,000 people here, is again spreading. …For all its seeming complexity, the current upheaval turns on the same question that has driven almost every crisis on this island for the past 230 years: Who will rule Haiti? …Haiti has long had independence, but where was its true freedom? …What does the world owe Haiti today? First and foremost to leave it alone. To give Haitians the time, space and support to imagine a different future for their own country. ..Over the past dozen years, Haitian politics has grown ever more fractured as the country has been battered by a shattering earthquake and a series of storms and hurricanes. The political scene has been dominated by American-backed center-right leaders… In the absence of a modern industrial economy, the country quickly stratified. There is a mercantile class that makes most of its money importing goods and selling them to everybody else — desperately poor people surviving on subsistence wages and remittances from a thriving diaspora in the United States, Canada, France and beyond. …The first step to helping Haiti fulfill its destiny, to be the independent Black republic its revolution promised, may be for the rest of us to get out of its way.

I’m in favor of Haiti having a stronger and better democracy. That hopefully would lead to improvements in the “rule of law.”

But I fear that Haiti’s economy is mostly being held back by statist economic policy.

The Heritage Foundation’s Index of Economic Freedom ranks Haiti a lowly #150 (out of 177 nations), with failing scores in many categories.

The Fraser Institute’s Economic Freedom of the World gives Haiti a somewhat better score (though still a dismal #96 out of 165).

But notice that the nation’s overall level of economic liberty today is lower than it was in the early 2000s, when Aristide was in power.

So if Haiti has been “dominated by American-backed center-right leaders” in recent years, as Ms. Polgreen writes in her column, they obviously are not center-right on economic policy.

The bottom line is that we know the recipe that makes nations economically successful. And we also know that Haiti has not been following that recipe (other than perhaps looking at what works and then choosing the opposite).

So even if the nation somehow achieves perfect democracy, don’t hold your breath expecting a big jump in living standards.

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I have a multi-part series making the case for capitalism (Part IPart IIPart IIIPart IV, Part V, and Part VI), and I’ve shared lots of long-run data showing how some people began to enjoy unimaginable prosperity as capitalism emerged and monarchism, feudalism, and mercantilism began to fade.

For those interested in this remarkable story of human enrichment, Don Boudreaux and Deirdre McCloskey have must-watch videos on how capitalism enabled (some) nations to escape poverty.

But not everybody understands or appreciates the benefits of capitalism.

MSN has an article, authored by Claire Conway, about new research that ostensibly shows that capitalism has been bad news for people.

…a study recently published in World Development…provided three conclusions. They found that extreme poverty was not, in fact, a normal or universal condition prior to the 19th century. …The second conclusion is that the rise and expansion of capitalism saw a dramatic deterioration in human welfare. …The third conclusion reached is that recovery from this prolonged period of immiseration occurred only recently. Progress in human welfare did not begin until the late 19th century in Northwest Europe and not until the mid-20th century in the global South. Researchers point out that this coincides with the rise of the labor movement, de-colonization, and socialist political parties.

At the risk of understatement, these results are very shocking.

So I tracked down the study, authored by Dylan Sullivan and Jason Hickel, which can be read here. Here are some highlights from the research.

The common notion that extreme poverty is the “natural” condition of humanity and only declined with the rise of capitalism rests on income data that do not adequately capture access to essential goods. Data on real wages suggests that, historically, extreme poverty was uncommon and arose primarily during periods of severe social and economic dislocation, particularly under colonialism. The rise of capitalism from the long 16th century onward is associated with a decline in wages to below subsistence, a deterioration in human stature, and an upturn in premature mortality. ..Where progress has occurred, significant improvements in human welfare began only around the 20th century. These gains coincide with the rise of anti-colonial and socialist political movements.

Yes, shocking results. But, having read the article, they are not accurate results.

Some of the mistakes are fundamental, such as blaming capitalism for bad results under colonialism.

Other mistakes are the result of data manipulation, such as the authors arbitrarily deciding that poverty only exists during times of famine.

But I want to focus on one of the study’s final points, which is that human progress is correlated with the rise of socialism.

Here are some further excerpts from the study.

The European data, then, does not support the standard poverty narrative. …The rise of capitalism, rather than delivering improvements in human welfare, was associated with plummeting wages… Progress did not begin until the 1880s in the European core, and the 20th century in the European periphery…The evidence reviewed here suggests that, where poverty has declined, it was not capitalism but rather progressive social movements and public policies…that freed people from deprivation. …Poverty alleviation and gains in human health have historically been linked to socialist political movements and public action, not to capitalism.

Is this true? Were people in Western Europe just as poor in 1875 as they were in 1575? Or perhaps even worse off? Did living standards only increase after government started to intervene and redistribute?

Let’s go to Our World in Data, operated by Max Roser and his team at Oxford University.

Here’s a chart on major European economies (along with the United States, for the benefit of U.S. readers). As you can see, it does appear that almost all the growth has occurred very recently.

But we just looked at a linear chart, which is considered inferior when measuring and understanding long-run trends.

What happens if we look at a logarithmic chart?

As you can see, rapid growth began well before 1900. Before income taxes. Before the welfare state. And long before anything resembling socialism.

In other words, Sullivan and Hickel have a very shaky hypothesis that collapses like a house of cards when you examine real-world data.

But we don’t need to rely on numbers from 100 years ago or 200 years ago. My “anti-convergence club” is based on dozens of comparisons over recent decades and in every case we see that market-oriented nations easily out-perform countries with more bigger and more intrusive governments.

The bottom line is that Sullivan and Hickel have no good answer to my never-answered question.

P.S. The authors assert that there’s more statism today than in the 1800s, probably because they are focused on fiscal policy. But that may not be true because of big, offsetting improvements in other policy areas.

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I wrote just yesterday about Europe lagging behind the United States, and that’s in addition to many similar columns over the past year.

But let’s not forget that Europe is also the cradle of classical liberalism, and that the continent became rich because of market-oriented policies.

As I often say when giving speeches in developing nations, it is a good idea to copy Europe’s rich nations. But I then include a very important caveat. Copy the policies that those counties had when they became rich.

Back in the 1800s, that meant very small government, very low taxes, and very low levels of red tape (i.e., the types of policies that helped trigger the industrial revolution).

Heck, the fiscal burden of government in Western Europe was relatively modest as recently as 1960.

It wasn’t until the mid-1960s that the welfare state exploded in size (aided and abetted by the imposition of value-added taxes).

Now taxes drain huge amounts of money from people’s pockets and government budgets now divert immense amounts of money from the economy’s productive sector.

P.S. The news isn’t all bad. As fiscal burdens increased in Europe. some other policies moved in the right direction.

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A core libertarian principle is that people have the right to do whatever they want with their own bodies. And that includes things that may be harmful, such as taking drugs, smoking, and over-eating.

It also includes personal choices that are not harmful, but may upset the sensibilities of others, such as selling your organs.

As you might expect, I also think people should be allowed to sell their plasma.

But this rubs some people the wrong way.

Vanessa Veselka has a column in the New York Times grousing about the fact that poor people in the United States have the freedom to benefit from voluntary exchange.

Very few countries allow payment for plasma, in part out of concern that financially vulnerable people would risk their health for money. Other developed nations place stricter limits on the number of times one can donate. In Britain, plasma can be given every two weeks; in Germany, it’s up to 60 times a year. The United States allows a person to sell plasma 104 times a year. The word “sell” is, of course, rarely used in the United States. Instead, the term is “donate,” which allows companies to pretend they are not in the business of scavenging the bodies of poor people for biological treasure. Our system of “donation” is so successful that the United States provides about two-thirds of the plasma available worldwide and accounts for 35 percent to 40 percent of the plasma used in medicine in Europe — so much of which comes out of the veins of America’s poor.

The author is right, of course, that people sell rather than donate their plasma.

Other than that, however, her hostility does not make sense. The only good news is that Ms. Veselka does not want to prohibit plasma sales.

I have no problem with people being paid for plasma. I just think that companies should take less of the plasma and that donors should be paid more.

Since I sold plasma during my college years, I would have been happy if there was more compensation. But I also would have been happy if I was paid more when I worked at the Heritage Foundation and Cato Institute.

We all want to receive more income and we all want to pay less for the things we buy.

What makes capitalism a moral system is that there’s no ability to use coercion to turn our preferences into reality.

P.S. Returning to the topic of organ sales, there’s also a very persuasive utilitarian case because many lives would be saved. Plasma sales presumably have the same indirect effect.

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When I wrote about the 2021 edition of Economic Freedom of the World, I noted that both Chile and Canada were drifting in the wrong direction.

In the just-released 2022 version, there’s not any good news about those two countries, but I was more struck by the very bad news about the United Kingdom, which fell out of the top 20 thanks to a big drop in its score.- from 8.16 to 7.71 (more evidence that Boris Johnson was bad news).

Here are the jurisdictions with the most economic liberty.

The bad news is that every nation in the top 20 had less economic liberty in 2020 than in 2019.

American readers will be interested to see that the United States dropped from #6 to #7.

And Switzerland leapfrogged New Zealand to claim the #3 slot.

Denmark, Japan, and Estonia jumped several spots in the rankings. Not because their scores increased, but rather because other nations moved in the wrong direction at an even-faster pace (note that Denmark now ranks above the USA).

By the way, few people will be surprised to see that Venezuela remains in last place, though fairness requires that I acknowledge that it was one of the few countries to get a better score.

Here are some of the other key findings.

The index published in Economic Freedom of the World measures the degree to which the policies and institutions of countries are supportive of economic freedom. …The EFW index rates 165 jurisdictions. The data are available annually from 2000 to 2020… The most recent comprehensive data available are from 2020. Hong Kong remains in the top position, though its rating fell an additional 0.28 points. Singapore, once again, comes in second. The next highest-scoring nations are Switzerland, New Zealand, Denmark, Australia, United States, Estonia, Mauritius, and Ireland. …lowest-rated countries are…Iran, Libya, Argentina, Syria, Zimbabwe, Sudan, and lastly, Venezuela. …Nations in the top quartile of economic freedom had an average per-capita GDP of $48,251 in 2020, compared to $6,542 for nations in the bottom quartile.

The final sentence in the above excerpt is key. More economic liberty is strongly associated with more national prosperity.

I was curious about whether Hong Kong would retain the #1 slot. And it did, even though its score dropped to 8.59. For what it’s worth, the authors are not optimistic about the future.

Hong Kong has been…at the top of the EFW index for all years for which we have data, and this remains the case in 2020. In previous annual reports, we sounded the alarm bell about signs of declining economic—and other—freedoms in Hong Kong. In particular, we highlighted the new security law imposed in 2020 by the Chinese government with potential sentences of life imprisonment and the accompanying arrests in its aftermath. In this year’s report, Hong Kong’s overall EFW rating fell by a stunning 0.28 points to 8.59 for 2020 from 8.87 in 2019. …Hong Kong’s decline was much larger than the world’s average decline.

Speaking of declines, here’s a very sad chart. It shows that global economic liberty suffered a big drop from 2019 to 2020.

The pandemic is the main reason for the decline.

The policy responses to the coronavirus pandemic, including massive increases in government spending, monetary expansion, travel restrictions, regulatory mandates on businesses related to masks, hours, and capacity, and outright lockdowns undoubtedly contributed to an erosion of economic freedom for most people. Not surprisingly, virtually all jurisdictions, 146 out of the 165 to be exact, recorded lower scores in 2020 than in 2019, and the global average of the summary EFW index fell by 0.18 points. … these various policies…very well may have saved millions of lives, or they may have been completely ineffectual. That is a question for epidemiologists and health economists to work out. Our concern is economic freedom, and, on that margin, there is no question that government policies responding to the coronavirus pandemic have reduced economic freedom.

We’ll probably have to wait two years to see whether governments undo pandemic-related policy mistakes.

Next year’s version will reflect 2021 data, and many nations such as the United States were still imposing bad fiscal and monetary policy at that time.

It’s possible that we will see some improvement next year, but I’ll be even more curious to see EFW‘s 2024 edition, which will be based on 2022 data.

My fear is that politicians and bureaucrats will have self-interested reasons to retain the additional power they grabbed during the pandemic. But I’ll keep my fingers crossed.

Let’s close with a depressing look at the nations that lost the most economic freedom in the current edition.

For personal reasons, I’m sad to see the big declines in Taiwan, Georgia, Singapore, and Panama.

And it’s amazing (in a bad way) that Argentina and Greece managed to fall so much, given that they started with bad scores.

Sadly, every developed nation moved in the wrong direction. The industrialized countries that moved in the wrong direction by the smallest amounts are Switzerland (-.12), Australia (-.13), Sweden (-.14), and Denmark (-.14).

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Last week, I shared some great information from Superabundance, a new book that shows how economic liberty has made us much better off, as measured by how much more we can buy per hour worked.

Today, let’s look at a related benefit of capitalism, which is that we don’t have to work nearly as many hours to achieve high living standards.

Here’s a tweet from Chris Freiman, a professor of philosophy at William & Mary University. As you can see, people in market-oriented nations work far fewer hours than they did 150 years ago. In some cases, hours worked per year have dropped by more than 50 percent.

When economists study these issues, they generally say the willingness of people to supply labor (whether to work and how much to work) depends on compensation. In other words, people give up leisure because they want money so they can consume.

But that choice can be complicated. It is governed by an “income effect” and a “substitution effect.”

For those who want to learn the economics, here’s a good description from the University of Washington.

  • Substitution effect of an increase in the real wage, w. As w increases, income increases by working more and a worker substitutes work for leisure so labor supply, NS, increases.
  • Income effect of an increase in the real wage, w. As w increases, working the same number of hours still gives an increase in income so that a worker may decrease the number of hours worked and maintain the previous level of income so labor supply, NS, decreases.

Simply stated, people like both income and leisure. So we all make choices about how much to work depending on our preferences and tradeoffs.

However, that decision can be influenced by economic policy. If there are generous government handouts, for instance, people may decide to work fewer hours. Or not at all.

And a decision to work only a small amount may be a result of high implicit marginal tax rates that are embedded in redistribution programs.

Taxes also play a big role. High marginal tax rates can discourage labor supply, which helps to explain why people work more hours in the United States than in Europe.

And that’s true even though Americans are much richer, thus showing how the substitution effect can outweigh the income effect. At least in the short run.

In the long run, the above chart shows how the income effect is dominant.

But let’s forget about economic jargon. What the chart really shows is how free markets enable societies to generate so much income that we can enjoy better lives in exchange for far less effort.

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I wrote last year that today’s Americans are much richer than their parents and grandparents (and the gap becomes even more enormous when comparing with earlier generations).

But the data I cited almost surely understate the improvement in living standards.

That’s the core takeaway of a new book, Superabundance, authored by Marian Tupy of the Cato Institute and Professor Gabe Pooley from Brigham Young University in Hawaii.

The book is filled with an immense amount of data and analysis, all of which shows that life is getting better. For purposes of today’s column, we’re going to highlight some fascinating numbers about the “time price” of various goods.

The authors explain that the “time price (TP) denotes the amount of time that a person needs to work in order to earn enough money to be able to buy something.”

In simple terms, this calculation shows how many hours we had to work to buy something in the past compared to how many hours we have to work to buy the same thing today.

For some items, such as food, there’s enough long-run data to see how the “time price” has changed over the past 100 years. The bottom line is that there’s been an amazing increase in our purchasing power.

What about non-food items?

Well, many of the things we buy today did not exist 100 years ago, so let’s look at four decades of data to see what’s happened to purchasing power in the United States.

As you can see, we can obtain almost everything by working far fewer hours.

For people who like hard data, the book is like an encyclopedia.

You can also get numbers for a “personal resource abundance multiplier” to see how much and how fast living standards have increased.

For example, a 97.2% decline in the price of eggs relative to the wages of a blue-collar worker between 1919 and 2019 means that:

  • a) The same length of work that got the blue-collar worker one egg in 1919 got him 36 eggs in 2019
  • b) That worker’s “egg abundance” rose by 3,500%
  • c) That worker’s egg abundance increased by 3.65% per year
  • d) The egg abundance doubled every 19.34 years.

For those who want to augment numbers with analysis, Chapter 8 describes what happened.

Even after Homo sapiens embraced agriculture some 12,000 years ago, progress was painfully slow. People lacked basic medicines and died relatively young. They had no painkillers, and people with ailments spent much of their lives in agonizing pain. Entire families lived in bug-infested dwellings that offered neither comfort nor privacy. They worked in the fields from sun- rise to sunset, yet hunger and famines were commonplace. …In a remarkable and sudden transition, though, standards of living sky- rocketed over the last two centuries, first in Western Europe and North Amer- ica, and then in other parts of the world. The consequences of that increase in economic growth were monumental. For the first time in human history, our species overcame Malthusian limits on production and consumption. The Age of Innovation ushered in unprecedented and even unimaginable improvements in wealth, life expectancy, nutrition, health, clothing, working conditions, and education. Extreme poverty, infant and maternal mortalities, and child labor declined.

Chapter 9 describes why it happened.

Individuals, who lack equal legal rights, and face onerous regulatory burdens, confiscatory taxation, or insecure property rights, will be disincentivized from turning their ideas into inventions and innovations. Conversely, people who function under conditions of legal equality, sensible regulation, moderate taxation, and secure property rights will apply their talents to their benefit and, ultimately, to that of society. …Free markets serve one other beneficial role in human society: they build trust and cooperation. Competition, as everyone knows, is an essential part of a capitalist economy. It drives businesses to innovate and to provide consumers with less costly and better products. If businesses fail to innovate, they go under. …Capitalism is also one of the most cooperative of human endeavors, though. Goods and services are traded among strangers and across vast distances, guided to a great degree by the price mechanism and by the reputation of the trading parties. …In the short run, competition produces winners and losers (although over the long run it is very difficult to find anyone in a market society who does not daily enjoy substantial gains or “wins” from market competition).

I’ll also add this flowchart from Chapter 9 to show the importance of free markets and entrepreneurship.

I’ll add one final point, which is that we don’t need perfect policy to get more prosperity.

The economy simply needs “breathing room,” which will exist so long as politicians don’t get too crazy about over-taxing, over-spending, and over-regulating.

After all, even small differences in annual economic growth compound into big changes in living standards.

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At the start of this interview, I cite Economic Freedom of the World and the Index of Economic Freedom to make the point that more economic liberty is correlated with more human prosperity.

For purposes of today’s column, I want to focus on the last half of the interview. I point out that a handful of nations began to escape poverty, largely back in the 1800s, when the fiscal burden of government was very small.

But that’s just a partial explanation. As Professors Donald Boudreaux and Deirdre McCloskey explained in short videos, the adoption of capitalism in a few nations enabled a stunning increase in living standards starting a couple of hundred years ago.

If you want a one-sentence summary, all you need to know is that capitalism enabled the industrial revolution and the industrial revolution triggered a huge increase in living standards.

If you prefer to see this in a visual form, here’s a compelling chart put together by Luke Muehlhauser of the Open Philanthropy Project.

And here’s some of what he wrote on his personal page.

The gains in human well-being observed since the industrial revolution are vastly larger than pre-industrial fluctuations in human well-being. No other transitions in recorded history, either positive or negative, are remotely similar in magnitude. …world GDP per capita (in 1990 international dollars) was relatively flat until the final decades of the industrial revolution, when the trajectory for this measure changed dramatically. …In general, the gains and losses in (these measures of) human well-being during the pre-industrial era are miniscule compared to the gains made during the post-industrial era, and there is a sharp upward trajectory change for all these measures shortly after 1800. …many major historical events seem to have not produced anything close to such a transformative change.

Let’s see what others have to say on this topic.

My former colleague Marian Tupy, in an article for the Foundation for Economic Education, pointed out that living through the industrial revolution was no picnic by today’s standards, but the wealth generated by free markets is what enabled environmental improvements.

It is well known that industrialization helped to pollute the environment, but that does not mean that air and water were clean before factories and mills came along! Compared to today, our ancestors had to endure horrific environmental conditions. …John Harrington invented the toilet in 1596, but bathrooms remained rare luxuries two hundred years later. Chamber pots continued to be emptied into streets, turning them into sewers. To make matters worse, even large towns continued to engage in husbandry well into the 18th century. As Fernand Braudel noted in The Structures of Everyday Life, “Pigs were reared in freedom in the streets. And the streets were so dirty and muddy that they had to be crossed on stilts.” …The situation was no better on the European mainland. …industrialization did great damage to the environment during the second half of the 19th century. But it also created wealth that allowed advanced societies to build better sanitation facilities and spurred the creation of an enlightened populace with a historically unprecedented concern over the environment and a willingness to pay for its stewardship.

Very similar to the issue of child labor.

Market-driven prosperity is what enabled children to go to school rather than being put to work.

In a column for the American Institute for Economic Research, Professor Vincent Geloso of King’s University College looked at new research about the rise of living standards as the United Kingdom went through the industrial revolution.

I began asking my own students about their assessments of the Industrial Revolution. The set of answers I obtained was roughly the same: living standards did not increase for the poor; only the rich got richer; the cities were dirty and the poor suffered from ill-health; the artisans were crowded out; the infernal machines of the Revolution dumbed down workers, etc. In other words, the imagery that seems to have seeped into popular imagination is one that resembles the Marxian version of history… As such, any new research on the topic of living standards during the Industrial Revolution is worth communicating… Two recent articles, published in the European Review of Economic History, that consider living standards in Britain (the cradle of industrialization) during the Industrial Revolution offer such a chance… The first of the two articles, authored by Luis Zegarra, made a series of modifications to the way that wages are deflated. …He made two important findings. The first is that living standards were lower than depicted in previous works of economic history. He found that living standards in London (i.e. a proxy for England) were overestimated by 40%. The second is that the increase in living standards was sustained from 1600 onwards. The second article, authored by Daniel Gallardo-Albarrán and Herman de Jong, decided to go a step further and attempted to measure welfare as broadly defined as possible. …their results…show…the increase started later but there was a pronounced sustained increase. 

P.S. Here’s a video about how industrialization dramatically improved lives in a country that used to be part of Britain.

P.P.S. And here’s another video on the link between free markets and growth.

P.P.P.S. If you want more historical information about the industrial revolution, click here and here.

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I’ve written many times that convergence (or lack thereof) is the way to assess a nation’s economic policy.

Based on this metric, Estonia deserves praise. Here’s a chart from a recent OECD report, which shows Estonia (and other countries to emerge from the wreckage of communism) converging with the world’s rich nations.

Why is per-capita output converging? What has made Estonia an “improbable success“?

Part of the answer surely must be that Estonia (like other Baltic nations) has reasonably good public policy.

According to the latest edition of Economic Freedom of the World, Estonia ranks #13 (out of 165 nations).

Some of my friends on the left will grudgingly admit that capitalism leads to higher per-capita output, but they always fret that it is only because the rich get richer.

But here’s a chart from the OECD report showing that poverty has been dramatically reduced ever since Estonia made the shift from socialism to free enterprise.

To understand more about the country’s achievements, here are some excerpts from a column by Luis Pablo de la Horra for the Foundation for Economic Education.

…in recent decades we have seen that the right policies can significantly speed up economic development. Estonia is a paradigmatic example of this. …On Aug. 20, 1991, Estonia gained its independence after 51 years under the yoke of communism. …From day one, the new government committed to undertaking market-oriented reforms that laid the foundations for a successful transition from socialism to capitalism. The political agenda included monetary reform, the creation of a free-trade zone, a balanced budget, the privatization of state-owned companies, and the introduction of a flat-rate income tax. …When compared to the other former Soviet Republics, Estonia’s progress is even more astonishing. In terms of PPP-adjusted income, Estonia ranks first ahead of countries such as Russia… Estonia is the living example that human progress is closely linked to economic freedom.

Since I’m a fiscal policy wonk, I’m especially impressed by Estonia’s flat tax, as well as the fact that there is no double taxation on corporate income.

Here’s a chart from the OECD report showing that Estonia is tied for having the best system (as defined by the lowest tax burden).

As an aside, the tax burden on corporate income in the United States is higher than the average. That’s not good. But what’s really bad is that we would be the worst in the world if Biden’s tax plan gets enacted.

But I’m digressing. Let’s put the focus back on Estonia, because I want to close on a worrisome note.

To be blunt, the burden of government spending already is excessive in the country. And it is going to get worse because Estonia faces a demographic crisis (like other Baltic nations specifically and Eastern European countries generally).

Will Estonia undertake the entitlement reforms needed to preemptively address this looming problem? I’m not overly optimistic, particularly since the OECD is pushing in the wrong direction (which will be the topic of a follow-up column).

P.S. One of Paul Krugman’s more infamous mistakes occurred when he implied that Estonia’s 2008 recession was caused by spending cuts (real ones!) that took place in 2009.

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As part of a conference organized by the Face of Liberty International in Nigeria, I reviewed realworld evidence to explain the recipe needed for poor nations to become rich nations. With an emphasis on fiscal policy, of course.

I think much of what I said is common sense backed by hard data.

Indeed, the evidence is so clear that I put together a never-answered-question challenge back in 2020 (which built upon an earlier version from 2014).

Why is it “never-answered”?

Because my left-leaning friends have never been able to provide an example, either now or at some point in the past, of a poor nation becoming a rich nation by imposing higher taxes and a bigger burden of government spending.

Yet supposed experts in economic development for decades have pushed foreign aid in failed efforts turn poor countries into rich countries.

More recently (and even more preposterously), international bureaucracies like the OECD, UN, and IMF have been arguing that higher taxes and bigger government are needed to promote economic development.

For all intents and purposes, my argument is based on the fact that western nations became rich in the 1800s and early 1900s when they had very low taxes and very small governments.

And if you don’t have 20 minutes to watch the above video, the most important charts come from a column I wrote back in 2018.

The first chart shows that there was a stunning reduction in poverty in western nations over a 100-year time period.

And the second chart shows that this near-miraculous improvement occurred before those nations had welfare states or any other forms of redistribution spending.

P.S. Rule of law (rather than arbitrary rule by kings, chiefs, emperors, and dictators) is a necessary prerequisite for growth. And weak rule of law is an even bigger challenge in the developing world than bad advice from international bureaucracies.

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Regarding Russia’s reprehensible attack on Ukraine, I’ve written three columns.

Today, let’s address the topic of foreign aid for Ukraine, specifically whether American taxpayers should help restore that country’s economy once the conflict ends.

I’ll start by recycling an observation I made back in 2014, which is that Ukraine has been an economic laggard because of statist economic policies.

More specifically, I compared Poland (which has engaged in substantial liberalization) and Ukraine (which has not) and showed a growing gap between the two nations (another case study for the anti-convergence club).

Now let’s look at some updated data from the latest edition of Economic Freedom of the World.

As you can see, Ukraine is a cesspool of statism, ranking a miserable #129 out of 165 jurisdictions.

That’s lower than Russia, which is #100.

And the same is true if you look at the latest edition of the Index of Economic Freedom, which ranks Ukraine #130 and Russia #113.

At the risk of stating the obvious, giving economic aid to Ukraine would be flushing money down the toilet.

Unless, of course, western nations such as the United States somehow made aid contingent on sweeping economic liberalization.

We know what works. Don BoudreauxDeirdre McCloskey, and Dan Hannan have all explained how Western Europe and North America became rich in the 1800s and early 1900s with the tried-and-true approach of free markets and limited government.

Even a curmudgeonly libertarian like me would relax my long-standing hostility to aid under those conditions.

The odds of that happening, however, are slim to none. And I would put my money on none, as explained by the “Foreign Aid Paradox.”

P.S. Some people incorrectly claim Western Europe recovered after World War II because of government aid (the “Marshall Plan”). The real credit belongs with people like Ludwig Erhard.

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I’ve written about President Warren Harding’s under-appreciated economic policies.

He restored economic prosperity in the 1920s by slashing tax rates and reducing the burden of government spending.

I’ve also written many times about how President Franklin Roosevelt’s economic policies in the 1930s were misguided.

And that’s being charitable. For all intents and purposes, he doubled down on the bad policies of Herbert Hoover. As a result, what should have been a typical recession wound up becoming the Great Depression.

But I’ve never directly compared Harding and FDR.

Ryan Walters, who teaches history to students at Collins College, has undertaken that task. In a piece for the Foundation for Economic Education, he explains how Harding and Roosevelt took opposite paths when facing similar situations.

Both men came into office with an economy in tatters and both men instituted ambitious agendas to correct the respective downturns. Yet their policies were the polar opposite of one another and, as a result, had the opposite effect. In short, Harding used laissez faire-style capitalism and the economy boomed; FDR intervened and things went from bad to worse. …Unlike FDR, who was no better than a “C” student in economics at Harvard, Harding understood that the old method of laissez faire was the best prescription for a sick economy.

Here’s some of what he wrote about Harding’s successful policies.

America in 1920, the year Harding was elected, fell into a serious economic slide called by some “the forgotten depression.” …The depression lasted about 18 months, from January 1920 to July 1921. During that time, the conditions for average Americans steadily deteriorated. Industrial production fell by a third, stocks dropped nearly 50 percent, corporate profits were down more than 90 percent. Unemployment rose from 4 percent to 12, putting nearly 5 million Americans out of work. …Harding campaigned on exactly what he wanted to do for the economy – retrenchment. He would slash taxes, cut government spending, and roll back the progressive tide. …Under Harding and his successor, Calvin Coolidge, and with the leadership of Andrew Mellon at Treasury, taxes were slashed from more than 70 percent to 25 percent. Government spending was cut in half. Regulations were reduced. The result was an economic boom. Growth averaged 7 percent per year, unemployment fell to less than 2 percent, and revenue to the government increased, generating a budget surplus every year, enough to reduce the national debt by a third. Wages rose for every class of American worker.

And here’s what happened under FDR.

Basically the opposite path, with horrible consequences.

FDR certainly inherited a bad economy, like Harding, yet he made it worse, not better, prolonging it for nearly a decade. With the stock market crash in October 1929, the American economy slid into a steep recession, which Herbert Hoover…proceeded to make worse by intervening with activist government policies – increased spending, reversing the Harding-Coolidge tax cuts, and imposing the Smoot-Hawley tariff. …once in office FDR set in motion a massive government economic intervention called the New Deal. …under FDR taxes were tripled and new taxes, like Social Security, were added, taking more money out of the pockets of ordinary Americans and businesses alike. Between 1933 and 1936, FDR’s first term, government expenditures rose by more than 83 percent. Federal debt skyrocketed by 73 percent. In all, spending shot up from $4.5 billion in 1933 to $9.4 billion in 1940. …The results were disastrous. …Unemployment under Roosevelt averaged a little more than 17 percent and never fell below 14 percent at any time. And, to make matters worse, there was a second crash in 1937. From August 1937 to March 1938, the stock market fell 50 percent.

At the risk of understatement, amen, amen, and amen.

Sadly, very few people understand this economic history.

This is mostly because they get spoon fed inaccurate information in their history classes and now think that laissez-faire capitalism somehow failed in the 1930s.

And they know nothing about what happened under Harding.

P.S. What happened in the 1920s and 1930s also is very instructive when thinking about the growth-vs-equality debate.

P.P.S. Shifting back to people not learning history (or learning bad history), it would be helpful if there was more understanding of how supporters of Keynesian economics were completely wrong about what happened after World War II.

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For most of human history, we’ve had primitive and impoverished societies based on feudalism and tribalism.

The good news is that capitalism began to emerge a couple of hundred years. The parts of the world that adopted free enterprise became incredibly rich. And there even have been meaningful improvements in living standards in the parts of the world that only partly liberalized.

But not everyone likes economic freedom. They argue for alternatives to markets.

And they’ve put forth all sorts of ideas over the past 100-plus years. Some of them utterly reprehensible, such as communism and Nazism.

Others ideas have caused immense damage, such as socialism and fascism. And others such as corporatism and the welfare state, have undermined the benefits of free markets.

The bottom line is that none of those alternatives have worked. They’ve produced stagnation at best. And, in many cases, oppression and deprivation.

Yet our friends on the left haven’t given up. Like medieval monks searching for the Holy Grail, they desperately want to find something that can replace capitalism.

And some of those folks on the left are putting big money into the effort, as reported by Steve Lohr of the New York Times.

Wages have been stagnant for most Americans for decades. Inequality has increased sharply. …Those problems…are partly byproducts of…free markets, free trade and a hands-off role for government. Its most common label is neoliberalism. …The William and Flora Hewlett Foundation and Omidyar Network announced on Wednesday that they were committing more than $41 million to economic and policy research focused on alternatives. “Neoliberalism is dead, but we haven’t developed a replacement,” said Larry Kramer, president of the Hewlett Foundation. …The Ford Foundation and the Open Society Foundations have pledged to join the initiative and make grants later this year. …many prominent economists have questioned the wisdom of leaving so many human outcomes to the whims of markets. …“Reducing inequality has to be a goal of economic progress,” said Dani Rodrik, an economist at Harvard’s Kennedy School and a leader of its project on reimagining the economy. …Mike Kubzansky, chief executive of Omidyar Network, said today’s economic challenges spanned partisan divisions. “I think there’s pretty broad agreement that the traditional set of economic ideas has passed its sell-by date,” he said.

As a quick aside, when folks on the left use “neoliberal” as a slur, they are using the word to depict capitalism or libertarianism (the “neo” indicating today’s version of classical liberalism).

And I also can’t resist pointing out that Rodrik needs to learn about the “Eighth Theorem of Government.”

But let’s focus on the main issue. The Wall Street Journal editorialized on the left’s search for an alternative to free enterprise and pointed out that the real goal is to give Washington more power and control.

The 20th-century economist Joseph Schumpeter famously wrote that capitalism sows its own destruction by creating a knowledge class who despise its success. Behold the Hewlett Foundation and Omidyar Network’s $40 million gift to the paupers at Harvard and MIT to “reimagine capitalism.” …By “reimagining capitalism,” …what these foundations really mean is putting politicians and the administrative state in charge of redistributing more of its proceeds.

Amen.

One point I’ll add is that the left’s goal may be “redistributing more,” but an unavoidable economic consequence is that the economy doesn’t produce as much.

And that’s bad news over time, even for the people who are the supposed beneficiaries.

Which is why genuinely compassionate people support capitalism, which is the only system that has a proven track record of reducing poverty.

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While specific examples can be very complex, the economic analysis of regulation is, at least in theory, quite simple.

Rules and red tape impose burdens that hinder economic activity, and this leads to higher costs for businesses and consumers.

These higher costs may be justified in some cases. That’s why it’s important to have high-quality cost-benefit analysis.

But in many cases, such analysis will show that regulation doesn’t make sense.

Fortunately, some presidents have understood that too much regulation is bad for prosperity.

Consider, for instance, the excellent track record of Jimmy Carter. We’ll start with an article by Norm Singleton for RealClearMarkets.

…deregulation was a major part of Carter’s economic agenda and one of the greatest aspects of his legacy.  It’s something that Carter and Reagan had in common, not something that set them apart. Carter—and other leading progressives at the time such as Ralph Nader—understood…Regulation frequently, if not always, benefits big businesses…at the expense of small businesses and most importantly, consumers. …the Civil Aeronautics Board (CAB), set airline routes, flight, schedules, and even prices. The result was 10 airlines enjoyed a de facto government-protected 90% of the air travel market: a monopoly with extra steps. This supposedly “pro-consumer” regulatory system made flying unaffordable for many Americans. Consequently, Carter signed the Airline Deregulation Act of 1978, ending the CAB’s power to control air travel. The result was new airlines entering the market offering lower prices and expanded routes. …Carter also pushed Congress to deregulate trucking and railroads.

Here are some details on the benefits of trucking deregulation, from a study by Andrew Crain published in the Journal on Telecommunication and High Tech Law.

The ICC was given jurisdiction over trucking companies and prevented competitive entry by rarely granting new trucking permits. The development of efficient trucks should have been a great boon to shippers. …ICC regulations, however, prevented truckers from offering those benefits to consumers. Trucking companies were forced to travel set routes at set prices. …During his presidential campaign, Carter promised to pursue deregulation. …Carter was good to his word. In 1979, he appointed three deregulation proponents to the ICC, Darius B. Gaskins, Marcus Alexis and Thomas Trantum. …In July 1980, Carter signed the Motor Carrier Act, which lifted most restrictions on entry, on the goods truckers could carry, and on the routes they could travel. …Rates fell, and trucking companies multiplied.

Jeremy Lott discusses Carter’s achievement on rail deregulation in a piece for the Washington Examiner.

The same regulatory regime had been in place since the Interstate Commerce Act of 1887, which regulated railroads…with price controls and mandates…. The elected official who took the lead on changing things is the person for whom the Staggers Act is named, Democratic Rep. Harley Staggers of West Virginia, then the chairman of the House Interstate and Foreign Commerce Committee. “The good thing about the Staggers Act is that it eliminated or greatly reduced federal regulation over most railroad operations that had been slowly killing the industry over decades. Freight railroads on life support were freed from rigid price controls and service mandates and quickly began to rebound, became profitable again, and U.S. freight railroads are once again the top-performing freight rail system in the world,” Marc Scribner…told the Washington Examiner. …”Over the past 40 years, rail traffic has doubled … rail rates are down more than 40% when adjusted for inflation … and recent years have been the safest on record,” the AAR said. 

And Ian Jefferies of the Association of American Railroads, in a column for the Wall Street Journal, explained how the industry has improved with less red tape.

…there was a time when both parties could agree on the benefit of…regulatory reform. The bipartisan Staggers Rail Act of 1980, passed by a Democratic Congress and signed by President Jimmy Carter, deregulated the freight railroad industry. …Previously, railroad rates and service were set by government, and carriers were often forced to provide service on lines lacking commercial viability. …The impact on railroads was predictable and disastrous. At one point, 1 in 5 rail miles was serviced by bankrupt railroads. …deregulation was chosen over nationalization, which would have cost taxpayers billions of dollars. …the Staggers Act not only improved service along the mainline network; it helped give birth to a short-line rail industry that today operates 50,000 miles of the 140,000-mile network that spans across the United States. …Since 1980, freight railroads have poured more than $710 billion of their own funds back into their operations. Average rail rates are 43% lower today than in 1981 when adjusted for inflation. This translates into at least $10 billion in annual savings for U.S. consumers.

Michael Derchin’s column in the Wall Street Journal notes how a retiring Supreme Court Justice played a key role in deregulating air travel.

Justice Breyer, who joined the Supreme Court in 1994 and plans to retire this summer, has cited his research for the Airline Deregulation Act as among his best and most significant work. …The late Sen. Edward M. Kennedy reached out to Mr. Breyer in 1975. Kennedy…saw deregulation as key to increasing competition and making air travel more affordable. Mr. Breyer, then a professor at Harvard Law School, worked with Kennedy… The Airline Deregulation Act of 1978 passed with bipartisan support and created a free market in the commercial airline industry. Government control of fares, routes and market entry for airlines was removed, and the Civil Aeronautics Board’s regulatory powers were phased out. …Since deregulation, average domestic round-trip real airfares have plunged about 60%, to $302 from $695. Load factors—the percentage of seats filled on each flight—stood at 84% just before the pandemic, compared with 55% before deregulation. In the early 1970s, 49% of U.S. adults had flown. In 2020 the share was 87%.

Here’s a chart showing how consumers have been big winners.

So what’s the bottom line?

As Phil Gramm and Mike Solon explained last year in the Wall Street Journal, the United States is still enjoying the fruits of Jimmy Carter’s deregulatory achievements.

Far from hurting consumers, as progressive myth alleges, deregulation of the U.S. transportation system unleashed a wave of invention and innovation that reduced logistical transportation cost—the cost of moving goods as a percentage of gross domestic product—by an astonishing 50% over 40 years. Airline fares were cut in half on a per mile basis, while air cargo surged from 5.4% of all shipments to 14.5% by 2012… In this Carter-Kennedy led reform, the duty of government was to protect the consumer from harm, not to protect the producer from competition. Without the productive energy released by deregulating airlines, trucking, railroads…, the U.S. might not have found its competitive legs as its postwar dominance in manufacturing ended in the late 1970s. The benefits of deregulation to this day continue to make possible powerful innovations that remake the world.

That’s the good news.

The bad news is that Joe Biden is hardly another Jimmy Carter.

P.S. Daniel Bier, in a column for the Foundation for Economic Education, points out that Carter even deserves credit for deregulating the beer market.

Carter’s most lasting legacy is as the Great Deregulator. Carter deregulated oil, trucking, railroads, airlines, and beer. …In 1978, the USA had just 44 domestic breweries. After deregulation, creativity and innovation flourished in the above-ground economy. Today, there are 1,400 American breweries. And home brewing for personal consumption is also now legal.

If you want to know more about beer deregulation, click here. If you want to know who makes a lot of money from beer sales, click here.

P.P.S. Jimmy Carter didn’t have a good record on fiscal issues, but he was more frugal than almost every Republican president over the past six decades (with Reagan being the obvious exception).

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When I first wrote about the Index of Economic Freedom back in 2010, the United States was comfortably among the world’s 10-freest nations with a score of 78 out of 100.

By last year, America had dropped to #20, with a very mediocre score of 74.8.

Sadly, the United States is continuing to decline. The Heritage Foundation recently released the 2022 version of the Index and the United States is now down to #25, with an even-more-mediocre score of 72.1.

As you can see, the biggest reason for the decline is bad fiscal policy (we can assume that Biden’s so-called stimulus deserves much of the blame).

So what nations got the best scores?

Our next visual shows that Singapore has the world’s freest economy, narrowly edging out Switzerland.

Notice, though, that Singapore’s score dropped and Switzerland’s improved. So it will be interesting to see if the “sensible nation” takes the top spot next year.

Also notice that only 7 nations qualified as “Free,” meaning scores of 80 or above.

The United States is in the “Mostly Free” category, which is for nations with scores between 70 and 80.

By the way, notice that the United States trails all the Nordic nations. Indeed, Finland, Denmark, Sweden, Iceland, and Norway get scores in the upper-70s.

How is this possible when those countries have high-tax welfare states? Because they follow a very laissez-faire approach for all of their other policies (trade, regulation, monetary policy, etc).

I’ll close with a depressing look at how the United States has declined over the past two decades. I already mentioned that the U.S. gets a score of 72.1 in the 2022 version. That’s far below 81.2, which is where America was back in 2006.

P.S. The Fraser Institute’s Economic Freedom of the World shows a similar decline for the United States.

P.P.S. Taiwan is an under-appreciated success story.

P.P.P.S. New Zealand is still in the “Free” group, but it’s decline is worrisome.

P.P.P.P.S. Kudos to Estonia for climbing into the top group.

P.P.P.P.P.S. The bottom three nations are Cuba, Venezuela, and North Korea.

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I only share long videos when they satisfy key criteria, such as being very informative and very educational.

This video from Arthur Brooks is both.

What I like most is that he does a very good job of showing that concern for the disadvantaged is the most important reason to support free markets and limited government.

And he does this by exploring some very interesting and challenging topics, such as Denmark’s unusual mix of free markets and a welfare state (I’ve referred to that country’s public policy as a combination of Dr. Jekyll and Mr. Hyde).

But I want to focus on his discussion of India’s partial economic liberalization. We’ll start by perusing the most-recent edition of Economic Freedom of the World to confirm that there was a significant increase in economic liberty during the 1990s.

But it’s also important to stress that India’s partial economic liberalization was…well, partial.

India is currently ranked #108 for economic freedom, which is mediocre at best, and it does especially poorly in areas such as regulation and trade.

The good news is that the country’s policies are not as bad as Venezuela’s. The bad news, though, is that it’s also nowhere close to being as good as Singapore.

If you want to understand economic policy in India, you should read this study by Swaminathan S. Anklesaria Aiyar.

He starts by explaining the awful policies that existed prior to 1991.

India was in such poor shape before 1991 that it takes an effort to recall how bad things were. …India’s slow-growing, inward-looking socialism made it unimportant in global terms, save as an aid recipient. …India’s poverty ratio did not improve at all between independence in 1947 and 1983; it remained a bit under 60 percent. …In 1991, it took two years for anyone to get a telephone landline connection. N. R. Narayana Murthy, head of top software company Infosys, recalls that in the 1980s, it took him three years to get permission to import a computer and over one year to get a telephone connection. …In 1991 Indian politicians and industrialists feared that economic liberalization would mean the collapse of Indian industry… Before 1991 very high tax rates (up to a 58 percent corporate tax) plus a high wealth tax meant that businesses kept income off the books.

There was a decent amount of economic liberalization in the 1990s.

After 1991 direct tax rates gradually came down substantially (to 30 percent plus surcharges for individuals and corporations). The wealth tax on shares was abolished, making it possible to raise shareholder value without being penalized for it. …The corporate tax was cut from a maximum of 58 percent to 30 percent, yet corporate tax collections increased from 1 percent of GDP to almost 6 percent at one point. …Personal income tax rates also fell from 50 percent to 30 percent, but once again collections rose, from 1 percent of GDP to almost 2 percent. …economic liberalization has facilitated the rise to the top of a vast array of new entrepreneurs. …In the two decades since 1991, India’s literacy rate has shot up by a record 21.8 percentage points, to 74 percent…much faster in the era of reform than in the earlier era of socialism. …Life expectancy in India is up from an average of 58.6 years in 1986-91 to 68.5 years. Infant mortality is down from 87 deaths per 1,000 births to 40.

This partial liberalization has produced good results, as illustrated by Table 2.

India’s growth rate has improved, which is why various social indicators (poverty, literacy, mortality) have improved.

But India should not be considered a role model.

There is still far too much government.

How can we sum up 25 years of economic reform? Three major trends are visible. First, the vast majority of successes have been private‐​sector successes, whereas the vast majority of failures have been government failures, mainly in service delivery. Second, wherever markets have become competitive and globalized, the outcomes have been excellent. …In the 1990s, the government gradually opened up the economy, abolishing industrial and import licensing, freeing foreign exchange regulations, gradually reducing import tariffs and direct tax rates, reforming capital and financial markets, and generally cutting red tape. Those changes enabled India to boom and become a potential economic superpower. But some areas were never liberalized, such as land and natural resources, and those areas have been marked by massive scams.

I’ll close by sharing this chart, which is based on the Maddison database.

As you can see, per-capita economic output climbed faster after a few pro-market reforms were implemented.

After giving some speeches in India back in 2018, here’s how I summarized my conflicted assessment.

Indians are enormously successful when they emigrate to the United States. And they also do very well when they migrate to Singapore, South Africa, and other places around the world. Yet Indians in India remain comparatively poor. …There’s a saying in the country that “India grows at night, while government sleeps.” …In other words, policy is generally not friendly, but the private sector manages to find “breathing room” to operate in spite of government. So poverty is falling, slowly but surely.

It would be great if poverty could fall much faster, but the current government doesn’t seem to have any interest in the policies that would make that happen.

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There were many notable tweets in 2021.

I realize there are still more than 11 months left in 2022, but we may have a winner for this year’s best tweet.

The hack leftists at Oxfam have a new report with the laughable title of “Inequality Kills.” As part of the report, they grouse about “the recent 40-year period of neoliberalism” that supposedly helped only rich elitists.

Johan Norberg destroyed Oxfam’s sophomoric argument with a tweet showing that this era of free-market policy is associated with dramatic reductions in extreme poverty.

As Johan points out, if neoliberalism (in Europe, that’s the left’s term for people who support economic liberty) was a sinister plot by “rich, powerful, and corrupt elites,” their scheme failed.

They wound up enriching poor people instead!

In reality, of course, there was no secret plot.

What actually happened is that nations did shift toward free markets. And pro-market policies are the only effective way to reduce poverty.

Here’s a chart from the latest edition of Economic Freedom of the World. As you can see, economic freedom has increased over the past two decades, from an average score of 6.61 up to 7.04.

By the way, the above chart underestimates the policy improvement in poor nations.

That’s because the level of economic liberty has declined in the United States since 2000. It’s also declined in Western Europe. And it’s declined slightly in Japan.

So if we took the average score of developing nations, we would see an even bigger increase.

And that increase from 2000-2019 would be relatively small compared to the huge increase in the average Fraser Institute score the preceding two decades.

As you can see from this chart, we got a dramatic increase in economic liberty during the years of the Washington Consensus, with average scores increasing from 5.31 to 6.60.

So what’s the bottom line?

The developing world has enjoyed huge reductions in severe poverty thanks to improvements in economic freedom.

Which is exactly the opposite of the statist agenda being advocated by the kooks at Oxfam.

P.S. For those interested, Johan added a follow-up tweet to show that the reduction in global poverty was not just the result of what happened in China.

Since we shifted to China, I’ll augment Johan’s tweet by noting that China’s partial liberalization after Mao led to more inequality in addition to a giant reduction in poverty.

So even though poor people were big winners, Oxfam probably thinks this is bad news since rich people got richer faster than poor people got richer.

P.P.S. The cranks at Oxfam are not the only ones who are willing to hurt the poor so long as the rich get hurt even more.

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I have shared five videos (Part I, Part II, Part III, Part IV, and Part V) that make the case for capitalism.

Here’s a sixth example.

The video notes that poverty was the natural condition for humanity (notwithstanding the economic illiteracy of Congresswoman Pressley).

But then, starting a couple of hundred years ago, capitalism gained a foothold and – for the first time in world history – there were nations with mass prosperity.

We learn about how various places became rich, including the United States, Hong Kong, and New Zealand.

The narrator also pointed out that Ireland experienced a period of dramatic market-driven growth.

Which gives me a good excuse to make the following comparison, which shows the dramatic divergence between Ireland and Greece beginning in the mid-1980s.

Why the stunning divergence (one of many examples I’ve collected)?

Ireland controlled spending and cut tax rates and now routinely ranks among the nations with the most economic liberty.

Greece, by contrast, has imposed more and more government over time.

Let’s close with this tweet, which nicely summarizes Walter Williams’ famous observation.

P.S. This comparison of Sweden and Greece also makes the key point about the superiority of markets over statism.

P.P.S. Don Boudreaux and Deirdre McCloskey have must-watch videos on how capitalism enabled (some) nations to escape poverty.

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As I warned a few days ago, Biden’s so-called Build Back Better plan is not dead.

There’s still a significant risk that this economy-sapping plan will get enacted, resulting in big tax increases and a larger burden of government spending.

Proponents of a bigger welfare state say the President’s plan should be approved so that the United States can be more like Europe.

This argument is baffling because it doesn’t make sense to copy countries where living standards are significantly lower.

In some cases dramatically lower.

Let’s explore this issue in greater detail.

In a column for Bloomberg, Allison Schrager analyzes America’s supply-chain problems and the impact on consumption patterns.

But what caught my eye were the numbers comparing the United States and Europe.

Americans can’t spend like they used to. Store shelves are emptying, and it can take months to find a car, refrigerator or sofa. If this continues, we may need to learn to do without — and, horrors, live more like the Europeans. That actually might not be a bad thing, because the U.S. economy could be healthier if it were less reliant on consumption. …We consume much more than we used to and more than other countries.  Consumption per capita grew about 65% from 1990 to 2015, compared with about 35% growth in Europe. …What would that mean for the U.S. economy? European levels of consumption coexist with lower levels of growth.

Here’s the chart that accompanied her article.

As you can see, consumption in the United States is far higher than it is in major European nations – about $15,000-per-year higher than the United Kingdom and about double the levels in Germany, Belgium, and France.

So when someone says we should expand the welfare state and be more like Europe, what they’re really saying is that we should copy nations that are far behind the United States.

Some of you may have noticed that Ms. Schrager is citing per-capita consumption data from the World Bank and you may be wondering whether other numbers tell a different story.

After all, if higher levels of consumption in America are simply the result of borrowing from overseas, that would be a negative rather than a positive.

So I went to the same website and downloaded the data for per-capita gross domestic product instead. I then created this chart (going all the way back to 1971). As you can see, it shows that Americans not only consume more, but we also produce more.

For those interested, I also included Japan and China, as well as the average for the entire world.

The bottom line is that it’s good to be part of western civilization. But it’s especially good to be in the United States.

Since we’re on the topic of comparative economics, David Harsanyi of National Review recently wrote about the gap between the United States and Europe.

More than anything, it is the ingrained American entrepreneurial spirit and work ethic that separates us from Europe and the rest of the world. …Europe, despite its wealth, its relatively stable institutions, its giant marketplace, and its intellectual firepower, is home to only one of the top 30 global Internet companies in the world (Spotify), while the United States is home to 18 of the top 30. …One of the most underrated traits we hold, for instance, is our relative comfort with risk — a behavior embedded in the American character. …Americans, self-selected risk-takers, created an individual and communal independence that engendered creativity. …Because of a preoccupation with “inequality” — one shared by the modern American Left — European rules and taxation for stock-option remuneration make it difficult for start-up employees to enjoy the benefits of innovation — and make it harder for new companies to attract talent. …But the deeper problem is that European culture values stability over success, security over invention…in Europe, hard work is less likely to guarantee results because policies that allow people to keep the fruits of their labor and compete matter far less.

In other words, there’s less economic dynamism because the reward for being productive is lower in Europe (which is simply another way of saying taxes are higher in Europe).

P.S. The main forcus of Ms. Schrager’s Bloomberg article was whether the U.S. economy is too dependent on consumption.

It feels like our voracious consumption is what fuels the economy. But that needn’t be the case. Long-term, sustainable growth doesn’t come from going deep into debt to buy stuff we don’t really need. It comes from technology and innovation, where we come up with new products and better ways of doing things. An economy based on consumption is not sustainable.

I sort of agree with her point.

Simply stated high levels of consumption don’t cause a strong economy. It’s the other way around. A strong economy enables high levels of consumption.

But this doesn’t mean consumption is bad, or that it would be good for America to be more like Europe.

Instead, the real lesson is that you want the types of policies (free markets and limited government) that will produce innovation and investment.

That results in higher levels of income, which then allows higher levels of consumption.

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A new edition of the Human Freedom Index has been released. When you combine measures of personal freedom and economic freedom, the “sensible nation” of Switzerland is at the top of the rankings.

I don’t know if this means we should view Switzerland as the world’s most libertarian nation (or perhaps the world’s least statist nation), but it’s obviously good to lead this list.

And it’s not surprising that New Zealand is next, though many people are probably shocked to see Denmark in third place (it has very bad fiscal policy, but otherwise is a very laissez-faire nation).

The United States is #15, which is good but not great.

Here are a few passages from the report’s executive summary.

The Human Freedom Index (HFI) presents a broad measure of human freedom, understood as the absence of coercive constraint. This seventh annual index uses 82 distinct indicators of personal and economic freedom… The HFI covers 165 jurisdictions for 2019, the most recent year for which sufficient data are available. …fully 83 percent of the global population lives in jurisdictions that have seen a fall in human freedom since 2008. That includes decreases in overall freedom in the 10 most populous countries in the world. Only 17 percent of the global population lives in countries that have seen increases in freedom over the same time period. …Jurisdictions in the top quartile of freedom enjoy a significantly higher average per capita income ($48,748) than those in other quartiles; the average per capita income in the least free quartile is $11,259. The HFI also finds a strong relationship between human freedom and democracy

If you want to know the world’s worst nations, here are the bottom 10.

Venezuela is normally the worst of the worst, but in this case Syria wins the Booby Prize.

Let’s now give some extra attention to Hong Kong.

The report notes that there’s been a very unfortunate decline in human freedom in Hong Kong, mostly because of an erosion of personal freedom.

And Hong Kong’s score is expected to drop even further in future editions.

Freedom has suffered a precipitous decline in Hong Kong. The territory was once one of the freest places in the world, but the Chinese Communist Party’s (CCP) escalating violations of Hong Kong’s traditional liberties has caused its ranking in our index to fall from 4th place in 2008—when the first globally comprehensive data appeared—to 30th place in 2019, the most recent year in our report… Our survey does not yet capture the suppression of 2020 and 2021, including the CCP’s imposition of a draconian security law that enabled its aggressive takeover of Hong Kong.

Thanks to the recent election, I expect we will see a similar discussion of Chile’s decline in future editions.

Here’s a final observation that should be highlighted.

Because the report relies on hard data (which often takes a year or two to be finalized and reported), this year’s HFI is based on 2019 data.

And that means we won’t see the effect of pandemic-related restrictions, which generally were adopted in early 2020, until next year’s version.

…this year’s report does not capture the effects of the coronavirus pandemic on freedom.

P.S. Here’s what I wrote about the previous edition of the Human Freedom Index. And if you want to dig into the archives, I also wrote about the publication in 2016 and 2018.

P.P.S. For what it’s worth, I still think Australia might have the best long-run outlook for human freedom.

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Since it’s Christmas Eve, let’s use this opportunity for a holiday-themed economics lesson.

I did a version of this back in 2012 by sharing a remake of Christmas songs. This year, we’re going to look at A Christmas Carol by Charles Dickens.

Let’s start with an analysis of the story from Jacqueline Isaacs.

Many communist and socialist leaders have looked to Dickens as a champion for their cause. Even Karl Marx was a self-professed fan. …many have labeled Dickens a socialist and have used his ever-popular seasonal classic A Christmas Carol, as a condemnation of capitalism and consumerism. …I would challenge anyone…to notice the decidedly non-socialist themes Dickens presents. …First, Dickens never condemns capitalism, decries the success of business owners, nor denounces the trading by which they amassed their wealth. …When the character has gone through his revelatory experience and come out a better man, he does not then become poor. Instead, the new Scrooge uses his wealth to help those around him. …Secondly, Dickens seems to go out of his way to point out the inadequacies of government anti-poverty programs. …If the government takes over the responsibility of caring for the poor, then we will all be Scrooges. …Lastly, Dickens takes a relatively narrow view of community. The New Ebenezer did not set forth to save all of England, but he took care of those needy people whom he encountered every day. …Socialism and communism take very large views of community. They require large numbers of people to participate in the system so that the more productive members of society can fully support the less productive.

Senator Phil Gramm and a former aide, Mike Solon, pointed out in the Wall Street Journal last year that Scrooge may have been an unhappy miser, but his frugality generated benefits for everyone else.

Scrooge is a distilled caricature of a businessman in the Victorian era: a rich, obsessive wealth hoarder. …It does not appear that Dickens seriously considered the possibility that Scrooge and Marley’s business contributed to the common welfare of mankind. Like Scrooge, Marley created and accumulated wealth, leaving it to Scrooge, who continued to invest and accumulate. When Dickens has Scrooge’s nephew say his uncle’s wealth “is of no use to him” because he doesn’t spend it, it is made clear that Dickens never considered who Scrooge’s wealth was useful to. …For all Dickens knew or could envision, the only hope for the poor was charity. Yet unknown to him and his contemporaries, a revolution was beginning at the moment “A Christmas Carol” was published. The Market Revolution, funded by the thrift of Britain’s Scrooges, was already enriching mankind. …the period from 1840-1900 to have been the beginning of a golden age for workers. Wages, stagnant for more than 600 years, exploded during the Victorian era—rising from less than $567 a year in 1840 to $1,216 in 1900 (expressed in 1970 dollars). Life expectancy rose by 20%. Literacy rates soared. …Who then benefited from the accumulated wealth of Scrooge and Marley? First Britain and then all mankind. Since Scrooge and Marley never consumed the wealth they created, its use was a gift to all. It funded the factories and railroads, the tools and jobs that fed and clothed millions of British subjects and then billions around the world. Their unspent wealth was of no use to them, but it was of sublime use to humanity.

Gary North then explains how the thrift of rich people is good for the rest of us, as well as how free enterprise translates self interest into the common interest.

Dickens was living in the second generation after the Industrial Revolution began. Sometime around 1780, an economic revolution like no other in history had begun. It was marked by compound economic growth… The driving force of this revolution was specialization — specialization funded by capital, itself the product of thrift, by double-entry bookkeeping, and by attention to detail. In short, it was men like Ebenezer Scrooge who were the architects of capitalism. …The spread of capital is the basis for men’s increased productivity. The spread of the bookkeeper’s mindset is the basis of net retained earnings, which in turn finance additional capital. Taking care of business reduces poverty as nothing else in man’s history ever has. …without Scrooge and men like him, who are devoted to the details of their businesses, the shops of London would not be filled with cornucopias — at Christmas or all year round. …The heart of capitalism is service to the consumer. In serving the consumer, the producer must pay attention to what the consumer wants, at what price, when, and where. But the same is true of the producers’ attitude toward his employees. They, too, must be served… The free market does not make men good. It does encourage them to serve the consumer. It forces losses on them if they are less efficient in their service than their competitors. The free market society is not a dog-eat-dog world. It is dog-serve-master world. The consumer is the master.

Jerry Bowyer then puts Dickens’ work in context, noting that it could be viewed as a debunking of Malthus.

Thomas Malthus. Malthus’ ideas were still current in British intellectual life at the time A Christmas Carol was written. …What was Dickens really doing when he wrote A Christmas Carol? Answer: He was weighing in on one of the central economic debates of his time… Malthus famously argued that in a world in which economies grew arithmetically and population grew geometrically, mass want would be inevitable. …Jean Baptiste Say…argued on the other hand…that the gains from global population growth, spread over vast expanses of trading, trigger gains from a division of labor which exceed those ever thought possible before the rise of the market order. …If Scrooge has modern counterparts, they’re more likely to be found among those sad, self-sterilizing minimizers of carbon footprints than in the circles of supply-side entrepreneurs. …The debate between Say and Malthus, between Scrooge and the Ghosts, continues to this day. Is the market economy a source of abundance or shortage? Is each new little boy or a girl mostly mouth, or mostly mind? Is it a Say/(Julian) Simon/Forbes/Wanniski/Gilder world, or is it a Keynes/Ehrlich/Krugman/Gore world?

In other words, three cheers for capitalism.

P.S. Another famous character this time of year is George Bailey, the lead character in Frank Capra’s classic, It’s a Wonderful Life.

In a 2019 column for the Wall Street Journal, Gramm and Solon highlight the film’s main economic lesson.

The film’s antagonist is the banker Henry Potter (Lionel Barrymore), who epitomizes the Democrats’ caricature of unredeemable capitalism. Peter Bailey (Samuel Hinds) defends capitalism in an often overlooked dialogue when he asks his son George (Jimmy Stewart) to join his building-and-loan business. …George…wants no part of “this business of nickels and dimes and spending all your life trying to figure out how to save 3 cents on a length of pipe.” His father, being older and wiser, responds: “I feel that in a small way we are doing something important. Satisfying a fundamental urge. It’s deep in the race for a man to want his own roof and walls and fireplace, and we’re helping him get those things in our shabby little office.” By squeezing nickels and dimes, the Baileys made limited resources and labor go further, producing “dozens of the prettiest little homes you ever saw, 90% owned by suckers who used to pay rent” to old Potter. …Peter Bailey’s insight reflects a vision originating in the Enlightenment, which set people free to promote their interest, and in the process, through Adam Smith’s invisible hand, promote the interests of mankind. …Capitalism alone respects life’s greatest gift: the freedom to choose how you live your life, where you discover meaning, and what you sacrifice for.

P.P.S. If you still need to do some last-minute shopping, here’s a gift for your left-wing friends, another for your right-wing friends, and a lot of options for your libertarian friends.

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Greetings from Santiago. Chileans vote today for a new president and there’s a risk that a Venezuelan-style leftist, Gabriel Boric, will prevail.

And that puts at risk the economic progress described in this video.

The video has a good discussion of Chile’s very successful system of private pensions (which will be in danger if Boric wins).

But it also points out how free trade helped create the prosperity of modern Chile.

And that narrative is confirmed by looking at Chile’s score from the Fraser Institute’s Economic Freedom of the World.

I’m always happy to sing the praises of free trade and condemn protectionism, but let’s keep the focus on today’s election in Chile and why it matters.

That’s why this tweet tells you everything you need to know.

Notice how Chile began to prosper after it began to shift to free markets around 1980 and notice how Venezuela began to fall after it shifted to statism starting around 2000.

Notwithstanding all this evidence, Boric is favored to win today’s election. Which would be a vote for national economic suicide – perhaps akin to the British people voting for the pro-nationalization Labour Party after World War II (described in this video, for those interested).

I hope I’m wrong, both about the results of the election and the potential changes to economic policy if Boric prevails.

P.S. If you’ve enjoyed my Chilean election coverage, I did the same thing a couple of years ago in the United Kingdom (see here, here, here, here, and here).

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I explained a few days ago that Sunday’s presidential runoff in Chile should be viewed as the most important election of 2021.

This is because the left’s candidate, Gabriel Boric, wants to turn Chile into Venezuela, as I mention in this radio interview with Ross Kaminsky.

For some reason, you only hear my voice during this Zoom discussion, which means I don’t even have a face good enough for radio.

But let’s set aside that technical glitch and focus on Mr. Boric’s agenda.

Here’s a flyer that a campaign worker gave me as I was walking around Santiago yesterday.

It’s in Spanish, but one of my Chilean friends translated. Here are Boric’s economic proposals.

There was one attractive proposal. He’s proposing to cut the pay of politicians. But that will yield trivial savings if it happens and the odds of it actually happening are laughably small.

Also, he says he wants to fight crime, which is good (in theory).

His worst idea, though, is not on this flyer. If you go to his website, you’ll find this passage in his economic plan (as translated by Google): “The tax reform will collect on the order of 8% of GDP under the regime.”

He is not overly specific on how he will collect so much additional money, but the website mentions higher income taxes, green taxes, and the imposition of a wealth tax.

All of which sounds like a recipe to drive entrepreneurs and investors (and/or their money) out of the country.

To understand the radical nature of his plan, tax revenues in Chile currently grab about 21 percent of the country’s economic output according to the OECD – so Boric is advocating a 38-percent increase.

By comparison, Biden’s tax plan in the U.S. is awful, but he’s “only” proposing a 4-percent increase in the tax burden (about 1 percent of GDP).

P.S. Since Ross and I were comparing Argentina and Chile, here’s a chart I put together using the Maddison database.

P.S. Given that Chile’s free-market reforms have been especially beneficial to poor people (see here, here, here, and here), I wonder if they understand how Boric’s election would threaten their upward mobility.

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If you want visual proof of Chile’s “improbable success,” this chart tells you everything you need to know.

Thanks to free-market reforms in the 1980s and 1990s, growth exploded, Chile became the Latin Tiger and poverty plummeted.

It’s remarkable how quickly per-capita GDP has increased compared to the average of other major Latin American economies (Argentina, Bolivia, Brazil, Colombia, Ecuador, Mexico, Peru, Paraguay, Uruguay, and Venezuela).

Some folks on the left (including editors at the New York Times) bizarrely think Chile’s “neoliberal experiment” has been a failure. Given their upside-down perspective, they probably think Venezuela is a smashing success.

But today’s column is not about what’s happened in the past. It’s about what may happen in the future because of an upcoming presidential election.

Let’s start with this article from the Economist, which expressed concern back in November that the first round of the presidential election would lead to a stark ideological choice between the hard left and hard right.

…stable Chile disappeared two years ago, in an explosion of massive and sometimes violent protests…In a vote for the constitutional convention in May (in which only 43% turned out), support surged for the hard left while drying up for mainstream parties. As a result, the convention has become a theatre of wokeness, with calls to wage war against pivotal industries…, alongside…for a bigger role for the state in pensions, health care and green regulation. …pessimists fear a Utopian list of unaffordable rights and anti-capitalism. …Gabriel Boric, the candidate of the hard left, has seemed poised to win the presidential election. A former student leader, …some of his allies…include the Communist Party… Mr Boric wants to expand tax revenues by 8% of gdp over six to eight years (impossible, say many economists) and review trade agreements in order to engage in industrial policy. …That is why support has grown for José Antonio Kast of the hard right. …Whereas Mr Boric promises the most left-wing government since the chaotic Socialist-Communist administration of Salvador Allende, Mr Kast offers the most right-wing one since the dictatorship of General Augusto Pinochet.

Sure enough, the November election put Boric and Kast in a runoff, which is scheduled for December 19.

I don’t know if it would be accurate to say this is akin to a hypothetical Rand Paul-Bernie Sanders contest, but a report in the Wall Street Journal suggests that are very big economic implications.

After years of protests and political upheaval that seemed certain to shift Chile’s politics sharply to the left, voters in the first round of a presidential election largely backed candidates who support the country’s free-market economy… More than half of the ballots in the Sunday vote went to three right-wing candidates who support the market economy, led by first-place finisher José Antonio Kast with 28% of the vote. Gabriel Boric, the leftist candidate who backs dismantling a private pension system and creating a state-run lithium company, finished second with 26% of the votes… “People didn’t buy the idea that Chile needs to dismantle the market-friendly model, they just want a stronger social safety net,” said Patricio Navia, a Chilean political scientist at New York University. …The future of Chile’s once-lauded economic model that bolstered foreign trade and slashed poverty over the last three decades has been in doubt since mass protests erupted two years ago… Mr. Kast, a 55-year-old former lawmaker…, says he is a democrat who is offering Chileans economic prosperity and freedom.

By the way, the presidential election isn’t the only big thing that’s about to happen in Chile.

The article also acknowledges something I wrote about last year, which is the possibility of a new constitution based on entitlements rather than liberties (i.e., positive rights vs negative rights).

The election is being held as a special assembly made up of mainly leftist delegates is writing a new constitution, which could weaken investor protections and expand social rights. The constitution is expected to be finished next year when it will be put to a referendum.

A Washington Post column published yesterday by Professor Michael Albertus summarizes what’s at stake.

Chile’s presidential runoff election on Dec. 19 is the country’s most important election since its return to democracy in 1990. …Chile’s election pits José Antonio Kast, a bombastic far-right politician whom many liken to Donald Trump and Jair Bolsonaro, against Gabriel Boric, a far-left lawmaker and former student organizer. …The stakes couldn’t be higher. Chile’s ongoing constitutional convention is poised to propose next year the biggest overhaul to the country’s political system since the Pinochet dictatorship.

Prof. Albertus points out that the election isn’t just about economics.

There are big fights about immigration, law and order, abortion, and indigenous rights.

For those of us who care a lot about prosperity, Mary Anastasia O’Grady of the Wall Street Journal opined two days ago on the implications of Chile’s upcoming choice.

The stakes are high in Chile’s Dec. 19 runoff presidential election pitting the free-market former Congressman José Antonio Kast against socialist Congressman Gabriel Boric. The country has been trending left for years. But Mr. Kast’s surprise first-place finish in the election’s first round—with 28% of the vote—and the center-right’s strong showing in legislative elections suggests that Chileans are reconsidering national suicide. …If the vote goes left, Chileans can expect policy geared toward greater redistribution of the existing wealth-and-income pie—higher taxes, nationalization of pensions, populism, etc. If the vote goes right, there will be a chance to restore the fast growth of the 1990s by deepening the liberal economic agenda. …there’s something much bigger at stake. That is the survival of the democratic institutions protecting the pluralism, property rights and public order that have made Chile one of Latin America’s richest countries. Mr. Boric is backed by a coalition—Approved Dignity—heavily influenced by the Communist Party and other hard-left groups. …If Mr. Boric wins the runoff, you can bet they will demand their pound of flesh.

Ms. O’Grady’s column notes that Chile’s free-market reforms dramatically reduced poverty (for more details, see here, here, and here).

The market economy has been enormously successful in Chile. The share of Chileans living in poverty fell to 8.6% in 2017 from 68.5% in 1990, according to official data. Extreme poverty over the same period dropped to 2.3% from 48.8%. It’s a development record that few countries in the world have achieved.

Last but not least, she makes a very important point that Chile’s recent performance has not been very impressive.

…the clamor for change isn’t irrational. According to Chilean economist and investor José Luis Daza, …In the five years before the pandemic in 2020, the country grew at an average annual rate of 1.9%, less than half that of the world economy. “After 2000,” he told me in a phone interview from Santiago last week, “there has been zero productivity growth. In fact, it has been marginally negative.” …It was in the midst of this economic malaise in October 2019 that extreme-left militants burst onto the scene in Santiago. …Mr. Daza recently put his work in New York on hold to join Mr. Kast’s economic advisory team with a focus on growth.

I’m not surprised. There has not been any meaningful pro-growth reform this century. Indeed, the opposite is true. Policy has actually drifted in the wrong direction.

But if Boric wins this weekend, a drift in the wrong direction could become a tidal wave, washing away the Chilean Miracle.

The last thing Latin America needs is another Venezuela. Milton Friedman will be rolling over in his grave.

P.S. I’m especially concerned that a victory for the left could lead to the repeal of some of Chile’s best policies, including social security personal accounts and nationwide school choice.

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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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Back in 2016, I shared a television program about the “Improbable Success” of Switzerland. Today, here’s a follow-up look at that “sensible country.”

There are elements to this video that are outside my area of expertise, such as the role of the reformation.

But the video mentions policies that I find very appealing, such as the country’s strong federalist system (unlike the United States, federalism hasn’t eroded).

This means jurisdictional competition, which has played a big role in curtailing bad policy.

And there was a brief indirect mention of the nation’s spending cap, which also has been a big success.

Interestingly, Switzerland’s strong track record is getting noticed in unusual places.

Here are some excerpts from a New York Times column by Ruchir Sharma.

There is…a country far richer and just as fair as any in the Scandinavian trio of Sweden, Denmark and Norway. ….with lighter taxes, smaller government, and a more open and stable economy. Steady growth recently made it the second richest nation in the world…with an average income of $84,000, or $20,000 more than the Scandinavian average. …surveys also rank this nation as one of the world’s 10 happiest. This less socialist but more successful utopia is Switzerland. …Wealth and income are distributed across the populace almost as equally as in Scandinavia, with the middle class holding about 70 percent of the nation’s assets. The big difference: The typical Swiss family has a net worth around $540,000, twice its Scandinavian peer. …Capitalist to its core, Switzerland imposes lighter taxes on individuals, consumers and corporations than the Scandinavian countries do. In 2018 its top income tax rate was the lowest in Western Europe at 36 percent, well below the Scandinavian average of 52 percent. Government spending amounts to a third of gross domestic product, compared with half in Scandinavia. And Switzerland is more open to trade, with a share of global exports around double that of any Scandinavian economy. …Only one in seven Swiss work for the government, about half the Scandinavian average. …The Swiss have become the world’s richest nation by getting it right, and their model is hiding in plain sight.

Kristian Niemietz of London’s Institute of Economic Affairs also pointed out that Switzerland is a role model.

Classical liberal ideas work. But they are usually counterintuitive, and often hard to explain. …It is therefore helpful for classical liberals if we can point to a practical example…it is Switzerland which, in many ways, represents such an example. Switzerland is not a libertarian paradise. But it is a country which, through its mere existence and its economic success, refutes a lot of…conventional wisdoms. …Take decentralisation. …the Swiss example shows that local autonomy and pluralism can be a recipe for success. In Switzerland, even tiny cantons like Glarus or Obwalden, which have far fewer inhabitants than a typical London borough, enjoy a degree of political autonomy that London, which has more inhabitants than the whole of Switzerland, can only dream of. …the Swiss system shows that a healthcare system based on choice and competition can work exceptionally well. The Swiss system offers ample choice between insurers, insurance plans, providers and delivery models. …Liberal market economists…can simply refer to the successful example of Switzerland. We can end a lot of tedious discussions by simply saying, “Of course it works – just look at Switzerland”.

Amen.

Switzerland is a great role model.

By the way, neither the video nor the two articles mentions Switzerland’s private pension system, which is another big advantage the country has over most other nations.

If you want to see a chart that illustrates Switzerland’s stunning success, this look at both life expectancy and per-capita economic output is very revealing.

The link between prosperity and longevity isn’t big news, but Switzerland’s rapid upward ascent is very remarkable.

To conclude, there are numerous reasons to rank Switzerland above the United States, at least with regard to public policy.

P.S. The video mentions that Switzerland is the closest example in the world of a direct democracy. I’m instinctively opposed to that approach, because of the dangers of majoritarianism.

That being said, Swiss voters usually vote the right way.

P.P.S. It wasn’t mentioned in the video, but I like that Switzerland is one of the few European nations with widespread gun ownership.

P.P.P.S. We should not be surprised that some folks in Sardinia would like to secede from Italy and join Switzerland.

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If you want to understand why some nations enjoy much stronger economic growth than other nations, the best place to start is the Fraser Institute’s Economic Freedom of the World.

And if you want to understand why some states have more vibrant economies than other states, you should check out the latest edition of the Fraser Institute’s Economic Freedom of North America.

Since most readers are from the United States, I’ll start with a look at the publication’s sub-national index, which shows how American states rank in terms of economic liberty. Unsurprisingly, a bunch of jurisdictions with no income tax are at the top of the list and California and New York are at the bottom.

By the way, the authors (Dean Stansel, José Torra, and Fred McMahon) specifically note that the rankings are based on 2019 data (the latest-available data) and thus “do not capture the effect on economic freedom of COVID-19 and government responses to it.

With that caveat out of the way, here are some of the findings for the sub-national index (which is where Figure 1.2b from above can be found).

Since the Fraser Institute is based in Canada, they understandably start by looking at Canadian provinces, but you can then read about results for the rest of North America.

For the purpose of comparing jurisdictions within the same country, the subnational indices are the appropriate choice. There is a separate subnational index for each country. In Canada, the most economically free province in 2019 was again Alberta with 6.17, followed by British Columbia with 5.44, and Ontario at 5.31. However, the gap between Alberta and second-place British Columbia continues to shrink, down from 2.30 points in 2014 to 0.73 in 2019. The least free by far was Quebec at 2.83, following New Brunswick at 4.09, and Prince Edward Island and Nova Scotia at 4.20. In the United States, the most economically free state was New Hampshire at 7.83, followed closely by Tennessee at 7.82, Florida at 7.78, Texas at 7.75, and Virginia at 7.59. …In Mexico, the most economically free state was Baja California at 6.01.

Here are the provincial rankings from Canada.

Alberta is the best place for economic growth and Quebec is the worst (by a significant margin).

Here are the some of the findings for the all-government index (which uses a different methodology than the sub-national index mentioned above).

The good news, from the perspective of folks in the U.S., is that most states rank above every other jurisdiction in North America (and the Mexican state all rank at the bottom).

The top jurisdiction is New Hampshire at 8.23, followed by Florida (8.17), Idaho (8.16), and then South Carolina, Utah, and Wyoming tied for fourth (8.15). Alberta is the highest ranking Canadian province, tied for 33rd place with a score of 8.00. The next highest Canadian province is British Columbia in 47th at 7.91. Alberta had spent seven years at the top of the index but fell out of the top spot in the 2018 report (reflecting 2016 data). The highest-ranked Mexican state is Baja California with 6.65, followed by Nayarit (6.62)… Seven of the Canadian provinces are ranked behind all 50 US states.

By the way, here’s some historical context showing that all three nations had their best scores back in the early 2000s (when the “Washington Consensus” for pro-market policy still had some impact.

Historically, average economic freedom in all three countries peaked in 2004 at 7.74 then fell steadily to 7.24 in 2011. Canadian provinces saw the smallest decline, only 0.19, whereas the decline in the United States was 0.51 and, in Mexico, 0.58. Since then average economic freedom in North America has risen slowly to 7.43 but still remains below that peak in 2004. However, economic freedom has increased in the United States and Mexico since 2013. In contrast, in Canada, after an increase in 2014, it has fallen back below its 2013 level.

P.S. If you want some additional historical context, Alberta’s fall from the top (mentioned in the first excerpt) can be partly blamed on the provincial government’s fiscal profligacy when it was collecting a lot of energy-related tax revenue.

P.P.S. I first wrote about Economic Freedom of North America in 2013 and more recently shared commentary about the 2019 and 2020 versions.

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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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