Feeds:
Posts
Comments

Posts Tagged ‘Free Markets’

Last month, I criticized the New York Times for a very inaccurate attack against Chile’s successful pro-market reforms.

The paper’s editorial asserted that only the rich have gained, a view that is utterly nonsensical and inaccurate.

Indeed, I visited Chile about a year ago and finished a three-part series (here, here, and here) showing how the less fortunate have been the biggest winners.

But numbers and facts are no match for ideology at the NYT.

We now have a new story, written by Amanda Taub, asserting that free markets have failed in Chile.

For three weeks, Chile has been in upheaval. …Perhaps the only people not shocked are Chileans. …The promise that political leaders…have made for decades — that free markets would lead to prosperity, and prosperity would take care of other problems — has failed them. …Inequality is still deeply entrenched. Chile’s middle class is struggling… There is broad agreement, among protesters and experts alike, that the country needs structural reforms.

This view is echoed by a Chilean professor in a column for the U.K.’s left-leaning Guardian.

Inequality in Chile is scandalous and most middle-class Chileans live in precarity. …the country has a structural problem with a clear name: inequality. The per capita income of the bottom quintile of Chileans is less than $140 a month. Half the population earns about $550. …This crisis is, at heart, an urgent message to the Chilean elite: profound changes are needed to rebuild the social contract.

But if Chile is a failure, then other nations in Latin America must be in a far worse category.

Look at what’s happened to average incomes over the past three decades.

It’s also worth noting Argentina’s decline and Venezuela’s collapse. Does Ms. Taub prefer those outcomes over Chile’s growing prosperity?

Speaking of which, here’s a powerful video comparing Chile and Venezuela.

So why is there discontent when Chile has been so successful?

In her Wall Street Journal column, Mary Anastasia O’Grady worries that the left controls the narrative in Chile.

…the hard left has spent years planting socialism in the Chilean psyche via secondary schools, universities, the media and politics. Even as the country has grown richer than any of its neighbors by defending private property, competition and the rule of law, Chileans marinate in anticapitalist propaganda. The millennials who poured into the streets to promote class warfare reflect that influence. The Chilean right has largely abandoned its obligation to engage in the battle of ideas in the public square. Mr. Piñera isn’t an economic liberal and makes no attempt to defend the morality of the market. He hasn’t even reversed the antigrowth policies of his predecessor, Socialist Michelle Bachelet. Chileans have one side of the story pounded into their heads. As living standards rise, so do expectations. When reality doesn’t keep up, the ground is already fertile for socialists to plow.

Incidentally, even the center-left Economist doesn’t agree with the argument that Chile is a failure.

In Chile, free-marketeers’ favourite economy in the region, protests against a rise in fares on the Santiago metro descended into rioting and then became a 1.2m-person march against inequality… Despite its flaws, Chile is a success story. Its income per person is the second-highest in Latin America and close to that of Portugal and Greece. Since the end of a brutal dictatorship in 1990 Chile’s poverty rate has dropped from 40% to less than 10%. Inflation is consistently low and public finances are well managed. …This is no argument for complacency in Chile. …Chileans still feel underserved by the state. They save for their own pensions, but many have not contributed long enough to provide for a tolerable retirement. Waiting times in the public health service are long. So people pay extra for care.

Sadly, the article then goes on to endorse bigger government and more redistribution – policies which would erode Chile’s competitiveness and prosperity.

Unfortunately, the President of Chile seems willing to embrace these bad policies.

In another column for the WSJ, Ms. O’Grady warns about the possible consequences.

The pain for Latin America’s most successful economy is only beginning. …Mr. Piñera…has opened the door to rewriting Chile’s Constitution to meet the demands of socialists, communists and others on the left. If Latin American history is any guide, a constitutional rewrite will strip away political and economic rights, concentrate power and leave the nation poorer and more unjust. The biggest losers would be the aspirational poor, who will be denied access to a better life in what has become one of the world’s most socially mobile economies. …Mr. Piñera has agreed to talks with the “citizens” whose interests are presumably represented by the firebombers and looters. …This is a stunning surrender and it is hardly surprising that it seems only to have whet the appetite of the radical left.

She points out that Chile’s market reforms have been hugely successful.

What isn’t debatable is the economic gains, across the board, that the market model has created. Less than 9% of the nation now lives below the poverty level. In a 2018 Organization for Economic Cooperation and Development report titled “A Broken Social Elevator? How to Promote Social Mobility,” Chile stands out for its social mobility. According to the data, 23% of sons whose fathers were in the bottom quartile of earners make it to the top quartile. By this measure, Chile had the highest social mobility among 16 OECD countries in the study. …inequality in Chile has been falling for 20 years. …That’s something for Mr. Piñera to think about before he helps the left destroy a model that works.

Amen.

It would be a tragedy if politicians wrecked Latin America’s biggest success story.

Let’s close with some analysis in Harvard’s Latin America Policy Journal by Rodrigo Valdés, who was a finance minister under the previous center-left government.

What are the facts? Chile’s per capita GDP increased almost threefold between 1990 and 2015, with short-lived and shallow recessions in 1999 and 2009 only. More precisely, per capita GDP increased a cumulative 280 percent, or 5.3 percent per year (at PPP and constant dollars). At the same time, the distribution of income improved. …Remarkably, all but the top quintile (actually, all but the top decile) improved their share of total income after taxes and transfers. …For the middle 20 percent or “middle class,” growth explained more than 10 times what they gained through better income distribution. For the bottom 20 percent, the redistribution effort was more relevant, though growth was still dominant, explaining six times more than redistribution. Second, what Chile accomplished in the last 25 years is impressive. For the middle class, even a sudden transformation to the Nordics in terms of income distribution (without changes in aggregate GDP) produces less than one-tenth of what the combination of actual growth and better distribution produced for this segment. The bottom 20 percent gained in these two and half decades more than four times what they would achieve with a sudden Nordic distribution.

I suppose I should highlight the fact that a high-level official for a left-leaning government is pointing out that Chile’s reforms have been very successful.

But what really matters is the point he makes about how growth being far more important than redistribution – assuming the goal is to actually help low-income people live better lives.

The third column shows how much income has expanded for each segment of the population. And you can see (highlighted in red) that the bottom 10 percent has enjoyed more than twice the income gains as the top 10 percent.

But pay extra attention to the first and second columns. Economic growth far and away is the most important factor in boosting prosperity for the less fortunate.

Which shouldn’t be a surprise. I’ve shared lots of evidence (over and over and over again) showing that market-driven growth is the best way of helping low-income people.

Indeed, even the World Bank agrees the Chilean model is vastly superior to the Venezuelan approach.

Read Full Post »

Many libertarians support capitalism because of ethics and morality. Simply stated, they want an economic system based on voluntary exchange compared to statist alternatives (socialism, fascism, communism, etc) that rely on government coercion.

I also like the non-aggression principle, so I certainly don’t want to dissuade anyone from supporting free markets for that reason.

But one of my main goals is to show people that economic liberty also is the best approach from the utilitarian perspective.

This is why I share so many examples showing how market-oriented jurisdictions out-perform statist nations over multi-decade periods.

I want to build on this empirical foundation by sharing some 2009 research from Professor Peter Leeson. Here’s the abstract from his study.

According to a popular view that I call “two cheers for capitalism,” capitalism’s effect on development is ambiguous and mixed. This paper empirically investigates that view. I find that it’s wrong. Citizens in countries that became more capitalist over the last quarter century became wealthier, healthier, more educated, and politically freer. Citizens in countries that became significantly less capitalist over this period endured stagnating income, shortening life spans, smaller gains in education, and increasingly oppressive political regimes. The data unequivocally evidence capitalism’s superiority for development. Full-force cheerleading for capitalism is well deserved and three cheers are in order instead of two.

Here are his data sources.

I consider the trajectory of capitalism and four “core” development indicators in countries that have embraced and rejected capitalism over the past quarter century. These categories are average income, life expectancy, years of schooling, and democracy. …My data are drawn from several sources. The first is the Fraser Institute’s Economic Freedom of the World Project (2008), which provides data on the extent of capitalism across countries and over time. …I get data for my development indicators from Shleifer (2009), who collects his information from several standard sources. His data on countries’ GDP per capita and life expectancies are from the World Bank’s World Development Indicators (2006). His data on education and democracy are from the Barro-Lee (2000) dataset and the Polity IV Database (2000) respectively.

He then compares nations that moved toward free markets with those that gravitated to statism.

The results are unambiguous.

The data are clear: countries that became more capitalist became much wealthier. The average country that became more capitalist over the last 25 years saw its GDP per capita (PPP) rise from about $7600 to nearly $11,800—a 43% increase. If rapidly rising wealth deserves cheering, so does capitalism. What about longevity? All the money in the world doesn’t mean anything if you’re not alive to spend it on things that improve your life. Figure 2b charts the movement of average life expectancy at birth in countries that became more capitalist over the last quarter century at 5-year intervals. Growing capitalism is clearly associated with growing life expectancy. In the average country that became more capitalist over the last 25 years, the average citizen gained nearly half a decade in life expectancy. … In the average country that became more capitalist, the average number of years of schooling in the population rose from 4.7 to just over 6. …Countries that became more capitalist over the last 20 years became dramatically more democratic.

Here are the charts showing great results from capitalism.

Now let’s look at what Professor Lesson discovered about nations that moved in the wrong direction.

The good news is that there weren’t that many since this was the era when the “Washington Consensus” held sway.

Although most countries became more capitalist over the past quarter century, not every country did. …Fortunately, only five countries became significantly less capitalist over the last quarter century when most everyone else was busy reaping the rewards of becoming more capitalist. These countries are: Myanmar, Rwanda, Ukraine, Venezuela, and Zimbabwe. Each of these countries lost more than 1 point of economic freedom over the period on Fraser’s 10-point scale. This decline translates into a 20–40% loss of economic freedom depending on the country one considers.

Unsurprisingly, bad things happen when nations suffer a decline in economic liberty.

Here’s what happened to the four key indicators in countries that moved toward statism.

Professor Leeson’s conclusions are very blunt…and very accurate.

Unless one prefers poverty, premature death, ignorance, and political oppression to wealth, longevity, knowledge, and freedom, less capitalism deserve no cheers. …Global capitalism’s effect is clear to the point of smacking one in the face: it has made the world unequivocally better off.

Amen.

We know the recipe for growth and prosperity. The challenge is convincing self-interested politicians to reduce their power and control over the economy.

P.S. I’m still waiting for any of my left-leaning friends to provide an answer – even just a partial answer – to my two-question challenge.

Read Full Post »

In early September, I wrote about how capital and labor are both necessary to create prosperity.

Economists sometimes explain this with lots of jargon, referring to capital and labor as “factors of production” and pointing out how they are “complementary.”

In ordinary English, this simply means that workers earn more income when they are equipped with better machinery, equipment, and technology. Similarly, investors can only generate earnings if they have people to utilize capital.

This doesn’t mean that there’s a happy relationship between labor and capital. Indeed, there’s a constant tug or war over who gets what slice of the economic pie.

That being said, the relationship tends to be reasonably cordial so long as the pie is growing.

According to some folks on the left, though, that’s not the case. From their perspective, workers get screwed and capitalists grab ever-larger slices. Consider, for example, this tweet from @existentialcoms.

This tweet made a big splash, with nearly 30,000 likes and more than 12,500 re-tweets.

But there was a slight problem. Actually, a big problem.

There was a counter-tweet from @ne0liberal featuring three graphs that demolish the core premise of the tweet from @existentialcoms.

Here are the three graphs that @ne0liberal shared.

The first one confirms that workers enjoy far more leisure time than in the past.

The second one uses current data to show that more productive workers have much more leisure time.

And the third one reveals that worker compensation has increased significantly.

The unambiguous conclusion is that capitalism produces very good outcomes for workers. If @existentialcoms and @ne0liberal were in a boxing match, this would be a first-round knockout.

My modest contribution to this discussion is to point out that there are no real-world examples of good results produced by socialism. Or Marxism. Or fascism. Or by any form of statism.

Yes, there are some rich nations with big welfare states, but they only imposed those policies after they became rich.

Which is why I’m still waiting for any of my friends on the left to successfully respond to this challenge.

P.S. Since I’ve decided that @ne0liberal produced the counter-tweet of the year, I may as well also call attention to the best-ever tweet about capitalism and socialism, the world’s most-depressing tweet, and Trump’s worst-ever tweet.

Read Full Post »

By every possible measure, Chile is the most successful country in Latin America.

Income has soared and poverty has plummeted thanks to market-based reforms.

It’s not perfect, of course. The nation’s economic freedom score – 7.89 on a 0-10 scale – is good enough for a #13 ranking, but there’s still room for improvement.

But there’s also plenty of room for economic decline, and that might be the unfortunate outcome if politicians respond in a misguided way to recent protests.

Especially if they take advice from the wrong sources. For instance, the New York Times opined yesterday about the supposed shortcomings of the Chilean model.

Chile is often praised as a capitalist oasis, a prospering and stable nation on a continent where both prosperity and stability have been in short supply. But that prosperity has accumulated mostly in the hands of a lucky few. As a result, Chile has one of the highest levels of economic inequality in the developed world. …Chileans live in a society of extraordinary economic disparities. …What makes Chile an outlier among those 36 nations is that the government does less than nearly any other developed nation to reduce economic inequality through taxes and transfers. As a result, Chile has the highest level of post-tax income inequality among O.E.C.D. members. …Even after increases in recent years, the Chilean government still spends a smaller share of total economic output than every other nation in the O.E.C.D. The obvious path for Chile is for the government to spend more money.

As is sometimes the case with the New York Times, parts of the editorial are downright false. Income in Chile has jumped significantly for all quintiles, not just a “lucky few.”

And even the parts that are technically accurate are very misleading.

Notice, for instance, what the NYT is doing with inequality numbers. It is comparing Chile with rich nations, mostly from Europe.

But what happens if Chile is compared to other countries from Latin America.

That tells an entirely different story, as you can see from this poverty map (dark red is bad, light yellow is good) produced by the Center for Distributive, Labor, and Social Studies in Argentina.

All of a sudden, Chile looks very good.

Even if you use U.N. numbers that rely on the left’s misleading definition of poverty (i.e., based on relative income), Chile is a success story compared to other nations in the region.

It’s especially important to understand that Chile is getting good results for the right reason.

Poverty is falling because of the private economy rather than coercive redistribution. Here are some excerpts from a recent U.N. release.

In an analysis of the countries with the greatest reductions in poverty in the 2012-2017 period, in Chile, El Salvador and the Dominican Republic, the increase in income from wages in lower-income households was the source that contributed the most to that reduction, while in Costa Rica, Panama and Uruguay, the main factor was pensions and transfers received by lower-income households.

Sadly, some people in Chile don’t have the fortitude to build on the market reforms that have boosted national prosperity.

Indeed, it appears there will be backsliding according to the aforementioned New York Times editorial

Sebastián Piñera, the billionaire elected president in 2017, …proposed a slate of reforms, including an increase in the top income tax rate, an increase in retirement benefits, and a guaranteed minimum monthly income. …Andrónico Luksic Craig, chairman of Quiñenco, a financial and industrial conglomerate, wrote on Saturday on Twitter that he was ready to pay higher taxes.

I’m disappointed but never surprised when politicians unravel progress.

But it’s always discouraging when guilt-ridden rich people embrace statist policies (sounds familiar, huh?).

For the sake of the Chilean people, let’s hope this is empty rhetoric.

P.S. Since we’re on the topic of Chile, here are some excerpts from the abstract of a study in the Journal of Development Economics that estimated the heavy economic cost of the nation’s detour to socialism in the 1970s.

…we look at share prices in the Santiago exchange during the tumultuous political events that characterized Chile in the early 1970s. …deploying previously unused daily data and exploiting two largely unexpected shocks which involved substantial variation in policies and institutions, providing a rare natural experiment. Allende’s election and subsequent socialist experiment decreased share values, while the military coup and dictatorship that replaced him boosted them, in both cases by magnitudes unprecedented in the literature. The most parsimonious interpretation of these share price changes is that they reflected, respectively, the perceived threat to private ownership of the means of production under a socialist government, and its subsequent reversal.

By the way, this in no way should be interpreted as support for the Pinochet dictatorship.

But what it does say is that dictatorships that allow economic freedom produce much better results than dictatorships impose totalitarian economic policies in addition to totalitarian political policies.

Which is basically the point Milton Friedman made when asked about his connection to Chile.

For what it’s worth, Pinochet eventually allowed a transition to democracy, which somewhat atones for his sins.

P.S. To be fair, the NYT editorial was merely misguided, which is better than the wild inaccuracy that has characterized some analyses.

P.P.S. If you want to learn about Chile’s reforms, here are columns about the private social security system and the national school choice system. And this World Bank comparison of Chile and Venezuela is very instructive as well.

Read Full Post »

John Papola has done it again. His video showing a Keynes v. Hayek rap contest was superb, and was followed by an equally enjoyable sequel featuring a boxing match between Keynes and Hayek.

Now he has a rap contest about capitalism and socialism featuring Ludwig von Mises and Karl Marx.

The video touches on three economic topics.

The obvious focus is the track record of capitalism vs. socialism. Given the wealth of evidence, that’s a slam-dunk victory for free markets.

But there are also two wonky issues referenced in the video.

  • The socialist calculation debate – As I’ve repeatedly noted, genuine socialism involves government ownershipcentral planning, and price controls. Economists from the Austrian school, such as Mises, were the ones who explained that governments were incapable of having either the information or knowledge to make such a system work.
  • The labor theory of value – Marxism is based on the strange notion that the value of a product is a function of the hours it took to produce. This overlooks the role of capital and entrepreneurship. Moreover, as explained in the video, value is subjective, determined by the preferences of consumers.

Let’s close with a nice compare-and-contrast image a reader sent to me.

P.S. John Papola also did a great satirical commercial for left-wing toys.

P.P.S. Even though it’s not the right time of year, here’s his satirical commercial for Keynesian Christmas carols.

P.P.P.S. If you want to learn about the Austrian macroeconomics, click here and here.

Read Full Post »

Last century, I remember reading about the “Washington Consensus,” which was a term that was used to describe the kind of policy advice in those days provided to (or imposed upon) the developing world by the IMF, World Bank, and U.S. Treasury.

I never studied the topic since I was focused at the time on domestic issues such as tax reform, Social Security reform, and the economic effect of government spending.

But I recall thinking that the Washington Consensus was pro-market, but nonetheless a bit timid because it did not include a plank to limit the size of government.

Wikipedia helpfully lists the 10 policies that defined this consensus.

  1. Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;
  2. Redirection of public spending from subsidies (“especially indiscriminate subsidies”) toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
  3. Tax reform, broadening the tax base and adopting moderate marginal tax rates;
  4. Interest rates that are market determined and positive (but moderate) in real terms;
  5. Competitive exchange rates;
  6. Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
  7. Liberalization of inward foreign direct investment;
  8. Privatization of state enterprises;
  9. Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;
  10. Legal security for property rights.

With the benefit of hindsight, I now want to praise the Washington Consensus.

Yes, it would be nice if there had been some focus on the size of government, but all of the advice on trade, regulation, monetary policy, and quality of governance was very sound. And those policies account for 80 percent of a nation’s grade according to Economic Freedom of the World.

Moreover, the planks on fiscal policy were good, even if they didn’t go far enough.

Additionally, it was good to have multilateral institutions such as the International Monetary Fund and World Bank using their leverage to push for pro-market reforms (unlike today, when international bureaucracies often push a statist agenda).

So what was the effect of – to use the terms of opponents – this emphasis on “neoliberalism” or “market fundamentalism”?

Well, it seems to have made a difference. Here the data from the Fraser Institute on economic freedom for all nations. As you can see, economic liberty around the world increased significantly between 1980-2000, the years when the Washington Consensus was most influential.

But did that period of pro-market reform lead to better outcomes?

The answer is a resounding yes, at least in my humble opinion.

Here’s the most persuasive evidence, showing the dramatic decline in extreme poverty.

Let’s also look at some new research from Professor William Easterly, who worked for many years as an economist at the World Bank.

He notes that many people think the Washington Consensus was a failure. So he took a fresh look at the data.

Many authors…have proclaimed the failure of a package of market-oriented reforms proposed in the 1980s and 1990s — variously known as the Washington Consensus, …globalization, or neoliberalism. This paper seeks to update the stylized facts on policies and growth that influenced this verdict. …The earlier stylized facts featured the zero or low per capita growth in the regions that were the focus of reform: Africa and Latin America. …these stylized facts have not been updated in the literature, as much more data have become available with the passage of time. …This paper will report new stylized facts. First, there has been additional and quite remarkable progress on reform outcomes since the late 1990s — this is a principal finding of this paper. Earlier judgments on the reforms often happened before the reform process was complete and/or had enough post-reform growth data to evaluate reforms. …The second stylized fact is that there is a strong correlation between improvements in policy outcomes and changes in growth outcomes. The third stylized fact is that growth has recovered in Africa and Latin America in the new millennium, and the regression of growth on policy outcomes explains a substantial part of the growth recovery. …This paper will extend the method of analyzing extremely bad and moderately bad policy outcomes to other policies, specifically — in addition to inflation — the black market premium on foreign exchange, overvaluation of the domestic currency, negative real interest rates on bank savings deposits, and abnormally low trade shares to GDP. Updating the data on these outcomes is not trivial and constitutes one of the main contributions of this paper.

And what did Prof. Easterly discover?

It turns out that the prevalence of bad outcomes has declined.

Figure 6 shows a summary measure of share of countries with any bad policy. Any bad policy is defined as having any of the moderate or extreme policy dummies set to one, with a minimum of 4 policy observations available for that country-year. The summary measure shows a downward trend in bad policy outcomes worldwide, in Latin America, and in Sub-Saharan Africa. The sharpest break is around the mid-1990s, somewhat after the formulation of the Washington Consensus and the first negative reactions it received.

Here’s the aforementioned Figure 6.

And he also looks at the prevalence of extremely bad poliicy.

Figure 7 shows a similar graph to Figure 6, but now limited to extremely bad policy outcomes. It shows if any of the extremely bad policy dummies is set to one, for the sample with a minimum of at least two out of five policy outcomes available. The decline in the prevalence of any extreme policy is even more dramatic beginning in the early 1990s, going from surprisingly common (above 35 percent of countries up to the early 1990s) to almost non-existent for the world. The same pattern is even more striking for Africa and for Latin America.

Here’s Figure 7.

Most important, these better outcomes also are associated with stronger growth.

This paper showed these changes in policy outcomes – especially away from extreme policies — were accompanied by growth increases. It documented that the policy reforms can explain the growth increases in the regions most emphasized earlier – Africa and Latin America. We have seen that the old data available through 1998 was indeed consistent with the reform pessimism, partly because of weaker results on growth payoffs associated with reform outcomes and partly because less reform had happened.

Prof. Easterly acknowledges that there are still many issues to investigate and that his research is just one slice at a big pie.

But the bottom line is that we now have some good evidence that the Washington Consensus led to better results. Simply stated, capitalism produces more growth and less poverty. Too bad the IMF and other international bureaucracies have forgotten this lesson.

Read Full Post »

The folks at the Fraser Institute in Canada have just released a new version of Economic Freedom of the World.

As has been the case for many years, Hong Kong is #1 and Singapore is #2, followed by New Zealand (#3) and Switzerland (#4).

Interestingly, the United States improved one spot, climbing to #5.

Here’s the data for the top two quartiles.

The new version includes 2017, so fans of Trump will be able to claim vindication.

But not much.

As you can see, the EFW data shows that America’s score rose only slightly, from 8.17 to 8.19.

My view, for what it’s worth, is that Trump’s economic policy is somewhat incoherent.

He’s been good on taxes and red tape, but bad on spending and trade. So I’m not surprised we’re mostly treading water.

Now let’s look at the bottom half of the ranking.

In last place, unsurprisingly, we find Venezuela.

Let’s close with two final visuals.

Here’s a chart showing that poor people in the nations with the most economic liberty have much higher incomes that poor people in countries with less economic liberty.

The moral of the story, needless to say, is that people who genuinely want to help the poor should support free markets and limited government.

Last but not least, here are two tables I prepared.

The one on the left shows the nations with the biggest positive and negative changes since 2010, while the one on the right shows the biggest changes since 2000.

In some cases, such as Zimbabwe, a nation improved because it was in such terrible shape that it would have been difficult to do worse.

Though Venezuela seems determined to show that a terrible score can drop even farther.

For what it’s worth, Egypt’s slide toward statism is being subsidized by massive amounts of aid from American taxpayers.

And speaking of America, I’m embarrassed to acknowledge that the United States has suffered the 10-largest drop when looking at changes since 2000. That’s a legacy of the bad policies we got from George W. Bush and Barack Obama. Thanks for nothing, guys!

Read Full Post »

I first opined about Pope Francis in 2013, when I told a BBC audience why the Pope was wrong on economic policy.

The following year, I expanded on that point, explaining that statist policies are bad for the poor. And I revisited the issue again last year.

I’m not the only one making these arguments. In a column for Reason, Stephanie Slade explained why Pope Francis is deeply misguided.

I’ve had some harsh words to describe Pope Francis. …the pontiff’s ignorance of basic economics has led him to a bad conclusion about which public policies are best able to reduce the crushing yoke of poverty in the world. …as a matter of empirical fact, markets are the single greatest engine for growth and enrichment that humanity has yet stumbled upon. …He seems to be arguing that an outlook that places the individual above “the common good” is morally suspect. …his statements betray a shallowness in his understanding of the philosophy he’s impugning. If he took the time to really engage with our ideas, he might be surprised by what he learned. …what Pope Francis calls an “antisocial” paradigm…is better known by another name: the liberty movement, a cooperative and sometimes even rather social endeavor among people who cherish peaceful, voluntary human interactions.

Sadly, there’s zero evidence that Pope Francis has learned any economics since taking up residence in the Vatican.

For instance, he just visited Mauritius, a small island nation to the east of Madagascar.

His economic advice, as reported by Yahoo, was extremely primitive.

Pope Francis on Monday urged Mauritius, a prosperous magnet for tourists and a global tax haven, to shun an “idolatrous economic model” that excludes the youth and the poor… While the island is a beacon of stability and relative prosperity, Pope Francis honed in on the struggles of the youth… “It is a hard thing to say, but, despite the economic growth your country has known in recent decades, it is the young who are suffering the most. They suffer from unemployment, which not only creates uncertainty about the future, but also prevents them from believing that they play a significant part in your shared history,” said the pope. …Since independence in 1968, Mauritius has developed from a poor, agriculture-based economy, to one of Africa’s wealthiest nations and financial services hub. …General unemployment is low compared to the rest of the continent at 6.9 percent in 2018 according to the World Bank…

I’m glad the article acknowledges that Mauritius has been economically successful.

Though I’m frustrated by the failure to explain why.

So I’ll redress that error of omission by showing that Mauritius dramatically expanded economic liberty in the 1980s and 1990s. The nation’s absolute score jumped from 5.11 in 1980 to 8.07 in the most-recent estimates from Economic Freedom of the World.

It’s done such a good job that Mauritius is now ranked as the world’s 9th-freest economy.

So what has greater economic liberty produced?

More national prosperity.

A lot more. Based on the Maddison data, you can see that living standards (as measured by per-capita GDP) have tripled over the past three-plus decades.

I confess that I’ve never been to Mauritius.

So maybe it’s possible that the country is filled with “idolotrous” folks who think of nothing but money.

But I’m guessing that people in Mauritius are just like the rest of us. But with one key difference in that they’ve been following the recipe for growth and prosperity.

Too bad Pope Francis instead believes in the Peronist model that has wreaked so much havoc in Argentina.

P.S. The Pope should read Stephanie Slade’s column. Walter Williams and Thomas Sowell also should be on his list.

P.P.S. Methinks Pope Francis should have a conversation with Libertarian Jesus. He could start herehere, and here.

Read Full Post »

I’ve periodically explained that capital formation (more machines, technology, etc) is necessary if we want higher wages.

Simply stated, workers get paid on the basis of what they produce and the most effective way of boosting productivity is to have more saving and investment.

This is (one of the reasons) why I have so much disdain for politicians who try to foment discord and division between workers and capitalists.

To be sure, there will always be a tug of war between investors and employees over which group gets bigger or smaller slices. But so long as we have the right policies, they’ll be bickering over how to divide an ever-growing pie.

That’s a nice problem to have. Especially compared to what happens when politicians intervene – for the ostensible purpose of helping workers – and adopt policies that create economic stagnation.

Think Greece or Venezuela.

Larry Reed of the Foundation for Economic Education wrote with great insight about the link between labor and capital a few years ago. He starts with some basic economics.

…as complementary factors of production, labor and capital are not only indispensable but hugely dependent upon each other as well. Capital without labor means machines with no operators, or financial resources without the manpower to invest in. Labor without capital looks like Haiti or North Korea: plenty of people working but doing it with sticks instead of bulldozers, or starting a small enterprise with pocket change instead of a bank loan. …There may be no place in the world where there’s a shortage of labor but every inch of the planet is short of capital. There is no worker who couldn’t become more productive and better himself and society in the process if he had a more powerful labor-saving machine or a little more venture funding behind him. It ought to be abundantly clear that the vast improvement in standards of living over the past century is not explained by physical labor (we actually do less of that), but rather to the application of capital.

He concludes that we should be celebrating Labor Day and Capital Day.

I’m not “taking sides” between labor and capital. I don’t see them as natural antagonists in spite of some people’s attempts to make them so. Don’t think of capital as something possessed and deployed only by bankers, the college-educated, the rich, or the elite. We workers of all income levels are “capital-ists” too—every time we save and invest, buy a share of stock, fix a machine, or start a business. …I’ve traditionally celebrated labor on Labor Day weekend—not organized labor or compulsory labor unions, mind you, but the noble act of physical labor to produce the things we want and need. …on Labor Day weekend, I’ll also be thinking about the remarkable achievements of inventors of labor-saving devices, the risk-taking venture capitalists who put their own money (not your tax money) on the line and the fact that nobody in America has to dig a ditch with a spoon or cut his lawn with a knife. …Labor Day and Capital Day. I know of no good reason why we should have just one and not the other.

Courtesy of Mark Perry at the American Enterprise Institute, here’s a nice depiction of how labor and capital are interdependent.

P.S. When economists write about the relationship between capital and labor (savings => investment => productivity => wages), some critics assert this is nothing other than “trickle-down economics.”

Yet this is the mechanism for growth under every economic theory – even Marxism and socialism. The only thing that changes under those approaches is that politicians and bureaucrats control investment decisions. And we know that doesn’t work very well.

Read Full Post »

Having been inspired by Ronald Reagan’s libertarian-ish message (and track record), I’ve always been suspicious of alternative forms of conservatism for the simple reason that they always seem to mean bigger government.

To be fair, proponents of all these approaches always paid homage to the role of markets, so we’re not talking about Bernie Sanders-type nuttiness.

But I don’t want to travel in the wrong direction, even if only at 10 miles-per-hour rather than 90 miles-per-hour.

Now there’s a new alternative to Reaganism called “national conservatism.” It’s loosely defined, as you can see by reports from both left-leaning outlets (New York, New Republic) and right-leaning outlets (Townhall, Daily Signal).

There are parts of this new movement that are appealing, at least if I’m reading them correctly. Proponents are appropriately skeptical of global governance, though maybe not for the reasons that arouse my antipathy. But the enemy of my enemy is my friend in this battle.

They also don’t seem very fond of nation building, which also pleases me. And I also am somewhat sympathetic to their arguments about national unity – assuming it’s based on the proper definition of patriotism.

But their economic views, at best, are worrisome. And, as George Will opines, they’re sometimes awful.

…“national conservatives”…advocate unprecedented expansion of government to purge America of excessive respect for market forces and to affirm robust confidence in government as a social engineer allocating wealth and opportunity. …The Manhattan Institute’s Oren Cass advocates “industrial policy” — what other socialists call “economic planning”… He especially means subsidizing manufacturing..he admits that as government, i.e., politics, permeates the economy on manufacturing’s behalf, “regulatory capture,” other forms of corruption and “market distortions will emerge.” Emerge? Using government to create market distortions is national conservatism’s agenda. …Their agenda is much more ambitious than President Richard M. Nixon’s 1971 imposition of wage and price controls, which were temporary fiascos. Their agenda is even more ambitious than the New Deal’s cartelization of industries, which had the temporary (and unachieved) purpose of curing unemployment. What national conservatives propose is government fine-tuning the economy’s composition and making sure resources are “well” distributed, as the government (i.e., the political class) decides, forever. …Although the national conservatives’ anti-capitalism purports to be populist, it would further empower the administrative state’s faux aristocracy of administrators who would decide which communities and economic sectors should receive “well”-allocated resources. Furthermore, national conservatism is paternalistic populism. This might seem oxymoronic, but so did “Elizabeth Warren conservatives” until national conservatives emerged as such.

Since Nixon and FDR were two of America’s worst presidents, Will is drawing a very harsh comparison.

To give the other side, here are excerpts from a New York Times column by Oren Cass.

…a labor market in which workers can support strong families and communities is the central determinant of long-term prosperity and should be the central focus of public policy. Genuine prosperity depends upon people working as productive contributors to their society, through which they can achieve self-sufficiency, support their families, participate in their communities, and raise children prepared to do the same.

None of this sounds bad.

Heck, it sounds good. I’m in favor of strong families and strong communities.

But what does this rhetoric mean? Here’s where I start to worry.

Crucially, while a labor market left alone will seek an efficient equilibrium, economic theory never promises that the equilibrium will be a socially desirable, inclusive one. A genuine conservatism values markets as powerful mechanisms that foster choice, promote competition and deliver growth, but always in service to the larger end of a cohesive society in which people can thrive. …In some cases, …conservatives will head in new directions or even reverse course. …an insistence that workers throughout the labor market share in productivity growth……longstanding hostility toward organized labor will give way to an emphasis on reform. …new forms of organizing through which workers can support one another, engage with management and contribute to civil society should be a conservative priority.

And my worry turns to unfettered angst when I read some of the specific ideas that Cass mentions.

…a wage subsidy delivered directly into each low-wage paycheck…skepticism of unfettered international trade…legislation that would require the Federal Reserve to close the trade deficit by taxing foreign purchases of American assets.

To put it mildly, more redistribution, more protectionism, and taxes on investment is not a Reaganite agenda.

I’ll close with a political observation. Defenders of national conservatism have told me that the Reagan message is old and stale. It supposedly doesn’t apply to new problems in a new era.

Yet non-conservative Republicans lost twice to Obama while a hypothetical poll in 2013 showed Reagan would trounce Obama.

Some national conservatives point to Trump’s victory as an alternative, but I think that had more to do with Hillary Clinton. In any event, I very much doubt Trumpism is a long-term model for political success. Or economic success.

Maybe the real lesson is that good policy is good politics?

Read Full Post »

For libertarians, there aren’t many good role models in the world. There are a few small jurisdictions such as Bermuda, Monaco, and the Cayman Islands that are worth highlighting because of strong rule of law and good fiscal policy. There are also a few medium-sized nations that are – by modern standards – very market-oriented, such as Switzerland, Singapore, and New Zealand.

But Hong Kong generally gets top rankings for economic liberty. Which helps to explain why I’m so worried about a potential crackdown by China.

As I noted in the interview, intervention by Chinese security would not be good news for Hong Kong.

But it also would be bad news for China’s economy. Especially since it already is dealing with the adverse consequences of both internal statism and external protectionism.

Indeed, the only reason I’m not totally pessimistic is that the power elite in China doubtlessly would experience a big loss in personal wealth if there is a crackdown.

That being said, I can’t imagine President Xi will allow China’s implicit control over Hong Kong to diminish. So I’m reluctant to make any prediction.

But I very much hope that Hong Kong will emerge unscathed, in part because I don’t want to lose a very good example of the link between economic liberty and national prosperity.

Marian Tupy, writing for CapX, explains that Hong Kong is a great role model.

In 1950, …compared to the advanced countries of the West, Hong Kong was still a relative backwater. …the average resident of the colony earned 35 per cent and 25 per cent compared to British and American citizens respectively. Today, average income in Hong Kong is 37 per cent and 3 per cent higher than that in the United Kingdom and America. …Unlike some British ex-colonies and the United Kingdom itself, Hong Kong never experimented with socialism. Historically, the government played only a minor role in the economy… The territory kept taxes flat and low… The territory followed a policy of unilateral trade liberalisation, which is to say that the colony allowed other countries to export to Hong Kong tariff-free, regardless of whether other countries reciprocated or not. …In 1755, the great Scottish economist Adam Smith…wrote, “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice…” Hong Kong prospered because it followed Smith’s recommendations.

Here’s his chart showing how Hong Kong has surpassed both the United Kingdom and United States in terms of per-capita economic output.

In a column for the Wall Street Journal, Jairaj Devadiga explains a key factor in Hong Kong’s success.

Sir John Cowperthwaite was Hong Kong’s financial secretary from 1961-71 and is widely credited for the prosperity Hong Kong enjoys today. An ardent free-marketeer, Cowperthwaite believed that government should not try to manage the economy. One salient feature of Cowperthwaite’s policies: His administration didn’t collect any economic data during his tenure. Not even gross domestic product was calculated. When the American economist Milton Friedman asked why, Cowperthwaite replied that once the data were made available, officials would invariably use them to make the case for government intervention in the economy. …Without data, busybody bureaucrats had no way of justifying interference in the economy. In Cowperthwaite’s Hong Kong, the government did only the bare minimum necessary, such as maintaining law and order… The rest was left to the private sector. …When asked what poor countries should do to emulate Hong Kong’s success, he replied, “They should abolish the office of national statistics.”

Amen.

When you give data to politicians and bureaucrats, they generally find something they don’t like and then can’t resist the temptation to intervene.

Now that we’ve looked at some of the factors that enabled Hong Kong’s prosperity, let’s consider what may happen if there’s a crackdown by China.

Professor Tyler Cowen shares a pessimistic assessment in his Bloomberg column.

Hong Kong has been a kind of bellwether for the state of freedom in the wider world. …By 1980, Milton Friedman’s “Free to Choose” series was on television, portraying Hong Kong as a free economy experiencing huge gains in living standards. The skyline was impressive, and you could get all the necessary permits to start a business in Hong Kong in just a few days. The territory showed how Friedman’s theories worked in the real world. Hong Kong stood as a symbol of a new age of freer markets and growing globalization. …Hong Kong still ranks near or at the top of several indices of economic freedom. But…[n]ot only is there the specter of Chinese intervention, but there is also a broader understanding that the rules of the game can change at any time… Meanwhile, many Hong Kong residents know their behavior is being monitored and graded, and they know the role of the Chinese government will only grow. …Freedom is not merely the ability to buy and sell goods at minimum regulation and a low tax rate, variables that are readily picked up by economic freedom indices. Freedom is also about the…legitimacy and durability of their political institutions. …Circa 2019, Hong Kong is a study in the creeping power and increasing sophistication of autocracy. While it is possible there could be a Tiananmen-like massacre in the streets of Hong Kong, it is more likely that its mainland overlords will opt for more subtle ways of choking off Hong Kong’s remaining autonomy and freedoms. …right now, I would bet on the Chinese Communist Party over the protesters.

If Cowen is right, one thing that surely will happen is that money will flee.

And that may already be happening. Here are some excerpts from a Bloomberg report.

Private bankers are being flooded with inquiries from investors in Hong Kong…wealthy investors are setting up ways to move their money out of the former British colony more quickly, bankers and wealth managers said. A major Asian wealth manager said it has received a large flow of new money in Singapore from Hong Kong over recent weeks, requesting not to be identified due to the sensitivity of the issue. One Hong Kong private banker said the majority of the new queries he receives aren’t coming from the super-rich, most of whom already have alternative destinations for their money, but from individuals with assets in the $10 million to $20 million range. …The extradition fight reinforced concerns among Hong Kong investors and democracy advocates alike that the Beijing-backed government is eroding the legal wall separating the local judicial system from the mainland’s. …The recent demonstrations are the latest trigger in a long process of Chinese money flowing to Singapore, London, New York and other centers outside Beijing’s reach. …“Hong Kong has shot itself in the foot,” said Chong, a Malaysian who has permanent residency in both Hong Kong and Singapore. “Can you imagine Singapore allowing this?”

And keep in mind that big money is involved. Here’s a chart that accompanied the analysis.

Looking at these numbers, I want to emphasize again that China also will suffer if a crackdown causes money to flee Hong Kong.

Which is President Xi should resist the urge to intervene.

I’ll close with this visual depiction of Hong Kong’s amazing growth.

Let’s hope Beijing doesn’t try to reverse this progress.

P.S. You’ll notice that I didn’t advocate for democracy, either in this column or in the interview. That’s because I’m more concerned with protecting and promoting liberty. Yes, it’s good to have a democratic form of government. If I understand correctly, there’s also an empirical link between political freedom and economic freedom. But sometimes democracy simply means the ability to take other people’s money, using government as the middleman. That’s why the people of not-very-democratic Hong Kong are much better off than the people of democratic Greece.

Read Full Post »

Back in 2014, I shared two videos – one narrated by Deirdre McCloskey and the other narrated by Don Boudreaux – explaining how the world went from near-universal poverty to mass prosperity (at least in the nations that embraced free markets and the rule of law).

Here’s a video with a similar theme, narrated by Dan Hannan, a British member of the European Parliament (hopefully not for long).

I like this video because it goes back 10,000 years to the invention of agriculture.

Hannan explains how this led to the creation of governments, basically acting as “stationary bandits.”

And for thousands of years, a tiny elite of kings and nobles basically acted as dictators while 99 percent of people endured horrid lives of slavery, oppression, poverty, and misery.

But then, as Hannan discusses (and also explained in the McCloskey and Bourdreaux videos), arbitrary power eventually was replaced by the rule of law and government control was replaced by economic liberty.

Not completely, of course, but to a sufficient degree that there was enough “breathing room” for a private economy to develop. And, in some cases, to flourish.

The result? Massive, amazing, and unthinkable prosperity for ordinary people.

Which gives me a good excuse to share this quote from Joseph Schumpeter, one of the economists from the Austrian School.

Yes, capitalism does wonderful things…assuming politicians don’t get too greedy and saddle us with “goldfish government.”

At times, I’m not overly optimistic. Given the growth of dependency, the expansion of government, and demographic decline, I fear there may be 22nd-century videos discussing how the United States reached a “tipping point” and went downhill.

Read Full Post »

I’ve applauded China’s economic progress.

It’s economic liberty score jumped from 3.64 in 1980 to 6.46 in the most recent edition of Economic Freedom of the World.

That shift toward markets (which started in a village) helped to dramatically reduce poverty and turn China into a middle-income nation.

That’s the good news.

The bad news is that most of China’s economic liberalization (from 3.64 to 6.15) occurred between 1980 and 2003.

Since that time, China’s score has improved at a glacial pace. Moreover, because other nations have been more aggressive about reducing the burden of government, China’s relative ranking has actually dropped (from #88 to #107) since 2003.

Which is why I’ve warned that China needs another burst of pro-market reform if it wants to become a rich country.

Regarding this issue, the Wall Street Journal has a very interesting report about how China is under-performing.

The country’s state-led growth model is running out of gas. A recession or crisis may not be imminent, but the long-run implications are just as serious. Absent a change in direction, China may never become rich. …First, official statistics probably paint too flattering a picture. Per-capita income may be a quarter lower than reported, based on a study of nighttime light co-authored by Yingyao Hu of Johns Hopkins University. …Second, it doesn’t measure up to the economies China seeks to emulate. Taiwan, South Korea and Japan all opened their economies to global trade and investment, enjoyed superfast growth for several decades… In fact, China seems to be slowing sooner than the others.

Why is China underperforming?

Too much statism. Simply stated, the government has too much control over the allocation of labor and capital.

For 30 years the Communist Party opened ever more of the economy to private enterprise, trade, foreign investment and market forces. Yet it never relinquished its commitment to socialism and Mr. Brandt says that since the mid-2000s the government has tightened control over sectors… An inefficient state sector matters less if the private sector grows fast enough. But in recent years, private firms in China have faced multiple headwinds. State-controlled banks prefer to lend to state-owned enterprises… The domestic private sector’s share of total sales has dropped about 5 percentage points since 2016, according to Goldman, while the state sector’s share has risen roughly as much.

By the way, many observers (from the American Enterprise Institute, Peterson Institute for International Economics, the New York Times, the New York Post, and Investor’s Business Daily) echo the concern about China becoming more statist in recent years.

I’ll make a more restrained point.

I’ll start by sharing this very interesting chart from the WSJ story. It shows how China’s growth, while impressive, has not been as rapid as the growth enjoyed by other Asian economies.

If you look below, you’ll see I’ve now augmented the chart to explain why China has under-performed.

On the right side, I’ve added the historical rankings from Economic Freedom of the World. As you can see (and just as theory and evidence teaches us), the other nations on the chart enjoyed more growth because they had more economic freedom.

These numbers reinforce my argument that China needs more pro-market reform. Though I should add the caveat that EFW has added more nations over time, so this comparison overstates the degree to which China is lagging.

But it is lagging. The bottom line is that China needs to copy Hong Kong and Singapore if it wants to become a rich nation. Or even Taiwan, which is an under-appreciated success story.

P.S. Keep in mind that China also faces demographic decline, which makes good policy even more necessary and important.

P.P.S. Amazingly, both the OECD and IMF are trying to sabotage China’s economy.

P.P.P.S. The WSJ story is an example of good reporting. If you want an example of bad reporting about China, check out this bizarre story from the New York Times.

Read Full Post »

The candidates for the 2020 Democratic nomination are competing to offer the most statist agenda, with Crazy Bernie, Elizabeth Sanders, and Kamala Harris being obvious examples.

But let’s not overlook Mayor Pete Buttigieg. He has a moderate demeanor, but he’s been advocating hard-left policies.

And he justifies his class-warfare agenda by arguing against Reaganomics and claiming that incomes have been stagnant since the 1980s.

South Bend Mayor Pete Buttigieg, a 2020 Democratic presidential hopeful, said the governing philosophy of Republicans such as former President Ronald Reagan, who signed across-the-board tax rate cuts to grow the economy, should not be repeated in the future. “What we’ve seen is that the rising tide rose, right? GDP went up. Growth went up. Productivity went up — big numbers went up and most of our boats didn’t budge. For 90 percent of Americans, you start the clock right around the time I’m born. Income didn’t move at all — so lower to middle income, really, almost all of us,” Buttigieg said.

Is this true? Have Americans been on a treadmill?

We can easily answer that question because I was at “FEEcon” this past weekend, an annual conference organized by the Foundation for Economic Education.

There were plenty of great presentations (including, I hope, my remarks on the economics of protectionism).

I was most impressed, however, by Professor Antony Davies, who gave some upbeat remarks about living standards.

Here’s one of his slides, which shows some headlines that echo the pessimistic view of Mayor Pete.

But do those headlines reflect reality?

If we look at cash wages since 1979, it seems that there hasn’t been much growth.

But cash is only part of total compensation.

Professor Davies showed that total compensation is up by a significantly greater amount.

By the way, I don’t think this is unalloyed good news.

A big reason for the difference between cash income and total compensation is that we have an exclusion in the tax code that encourages the over-provision of fringe benefits (which, in turn, contributes to the third-party payer problem).

But I don’t want to digress too much. The key point is that workers have seen healthy increases in compensation, notwithstanding the fact that I wish it was more in the form of wages.

Now let’s look at some more headlines from Davies’ presentation.

According to many news sources, the middle class is in trouble.

Is that true?

Professor Davies goes back to 1970 and (after adjusting for inflation) shows the distribution of households in America by income.

And then he shares the same data for every five-year period since 1970 to show that the middle class has shrunk.

But it shrank because a greater share of the population became rich.

Let’s close with two more slides, both of which look at 100 years of data.

This chart shows take-home pay for three types of workers.

And, more importantly, here’s a chart showing how much those three workers could buy based on hours of work.

As you can see, even a minimum-wage worker is much better off today than an average worker 100 years ago (with the exception of movie tickets).

Since we just looked at long-run data, let’s close today’s column with some short-run numbers.

In a column for the U.K.-based Guardian, Michael Strain of the American Enterprise Institute explains that capitalism currently is delivering some very positive results for ordinary people.

This is a strange time to be debating whether capitalism is broken, at least in the United States. The economy has added jobs every month since October 2010 for a total of over 20m net new payroll jobs. The unemployment rate is below 4%, lower than it has been since 1969. Wage growth is finally accelerating, clocking in at a rate well above 3% a year for typical workers. The workforce participation rate for people ages 25 to 54 has increased by 1.6 percentage points since 2015, wiping out half a decade of decline. There are more job openings than unemployed workers in the US. …So much for a stagnant economy. …Since 2016, weekly earnings for the bottom 10% of full-time workers have grown more than 50% faster than for workers at the median. The unemployment rate for adults without a high school degree is further below its long-term average than the rate for college-educated workers.

By the way, I’m not trying to be a Pollyanna with rose-colored glasses.

We have numerous bad policies that are hindering prosperity. If we reduced the size and scope of Washington, we could enjoy even greater levels of prosperity.

But we shouldn’t make the perfect the enemy of the good. The United States is one of the world’s most market-oriented nations.

This tweet nicely captures the choice we face in the real world. We have “almost capitalism,” which has made the U.S. a rich nation.

Some politicians, such as Mayor Pete and Crazy Bernie, would prefer to move the nation toward “almost socialism.”

They don’t intend (I hope!) to go too far in that direction, but incremental moves in the wrong direction will cause incremental weakening of American prosperity.

And they’re dead wrong on the issue of income growth.

P.S. Many of the Democrats say we should copy the statist policies of various European nations. I wish a journalist would ask them why we should copy the policies of nations that have lower living standards.

Read Full Post »

I wrote yesterday about the debate among leftists, which is partly a contest between Bernie Sanders-style socialists and Elizabeth Warren-style corporatists.

Now let’s look at the debate on the right.

There’s an ongoing argument over what it means to be conservative, especially when thinking about the role of the federal government.

You can view this debate – if you peruse this “political compass test” – as being a battle over whether it is best for conservatism to be represented by Friedrich Hayek or Angela Merkel? By Donald Trump or Gary Johnson?

As far as I’m concerned, it’s a debate between whether the right believes in the principles of small-state classical liberalism or whether it thinks government should have the power to steer society.

Representing the latter view, here’s some of what Henry Olsen wrote for the Washington Post.

…libertarian-minded opinion leaders have criticized Trump… For these people, Trump was…an apostate whose heresies had to be cast out of the conservative church. Trump’s overwhelming victory in the primaries should have shocked them out of their ideological slumber. …the market fundamentalists seem to see nothing— absolutely nothing — about today’s capitalism to dislike. …National Review’s founder, William F. Buckley, famously wrote that…the federal government’s proper peacetime duties are solely to “protect its citizens’ lives, liberty, and property.” With respect to its efforts to do anything else, “we are, without reservation, on the libertarian side.” But that dog don’t hunt politically. ..libertarian-conservatives remain oblivious or intentionally in denial… The New Deal’s intellectual core, that the federal government should vigorously act to correct market failures, remains at the center of what Americans expect from Washington. Trump’s nomination and election proved beyond a shadow of a doubt that even a majority of Republicans agree. Less doctrinaire conservative thinkers understand this. Ramesh Ponnuru noted in his National Review essay that…capitalism “require[s] invigoration” as a result. The American Enterprise Institute’s Yuval Levin goes further, noting that “sometimes our economic policy has to be determined by more than purely economic considerations.” Other factors, such as social order and family formation, are also worthy goals to which pure economic efficiency or growth must bend at times. …this debate is fundamental to the future of conservatism and perhaps of the United States itself.

And here’s the beginning of a history-filled article by Joshua Tait in the National Interest.

When FOX television host Tucker Carlson recently attacked conservative faith in free market economics, he probably surprised a number of his viewers. For too long, Carlson charged, libertarians and social conservatives have ignored the fundamental part economic structures play in undermining communities. Families are crushed beneath market forces. Disposable goods—fueled by consumer culture—provide little salve for drug addiction and suicide. Markets are a “tool,” Carlson said, not a “religion.” “You’d have to be a fool to worship” them. Carlson put a primetime spin on an argument that has been brewing for some time on the right. Just as the 2008 economic collapse and the national prominence of Bernie Sanders have begun to shift the Democratic Party’s stance toward socialism, so the long effects of the downturn and Trump’s election have caused a rethinking of conservative commitment to free markets.

Last but not least, Jonah Goldberg examines a slice of this divide in a column for National Review.

The idea holding together the conservative movement since the 1960s was called “fusionism.” The concept…was that freedom and virtue were inextricably linked. …Today, conservative forces concerned with freedom and virtue are pulling apart. The catalyst is a sprawling coalition of self-described nationalists, Catholic integralists, protectionists, economic planners, and others who are increasingly rallying around something called “post-liberal” conservativism. By “liberal,” they…mean classical liberalism, the Enlightenment worldview held by the Founding Fathers. What the post-liberals want is hard to summarize beyond generalities. They seek a federal government that cares more about pursuing the “highest good” than protecting the “libertarian” (their word) system of individual rights and free markets. …On the other side are…conservatives who…still rally to the banner of classical liberalism and its philosophy of natural rights and equality under the law. …this intellectual mudfight really is…about what conservatism will mean after Trump is gone from the scene. …the so-called post-liberals now want Washington to dictate how we should all pursue happiness, just so long as it’s from the right. …Where the post-liberals have a point is that humans are happiest in communities, families and institutions of faith. The solution to the culture wars is to allow more freedom for these “little platoons” of civil society… What America needs is less talk of national unity — from the left or the right — and more freedom to let people live the way they want to live, not just as individuals, but as members of local communities. We don’t need to move past liberalism, we need to return to it.

For what it’s worth, I prefer Jonah’s analysis.

But I’ll also make three additional points.

First, if we care about maximizing freedom and prosperity, there’s no substitute for classical liberalism.

In my lifetime, there have been various alternatives to free markets. There was pre-Reagan Rockefeller Republicanism, post-Reagan “kinder and gentler,” George W. Bush’s so-called compassionate conservatism, reform conservatism, and now various strains of Trumpism and populism.

It may very well be true that some of these alternatives are more politically palatable (though I’m skeptical given the GOP’s unparalleled electoral success with an anti-big government message in 1980, 1994, 2010, and 2014).

But even if some alternatives are more popular, the associated policies will hurt people in the long run. That’s a point I made when arguing for supply-side tax cuts over family-friendly tax cuts.

In other words, you demonstrate compassion by giving people opportunity to prosper, not by giving them other people’s money.

Second, there’s nothing about classical liberalism or capitalism that suggests people should be selfish and atomistic.

Indeed, I pointed out, starting at the 3:36 point of this interview, that a libertarian society is what allows family, neighborhood, and community to flourish.

And, as Jonah explained, the “platoons” of “civil society” are more likely to thrive in an environment where the central government is constrained.

My third and final point is that I’m pessimistic.

The debate on the left is basically about how to make government bigger and how fast that process should occur.

Unfortunately, there isn’t a similar debate on the right, featuring different theories of how to shrink the size and scope of government.

Instead, the Reaganite-oriented classical liberals are the only ones who want America to become more like Hong Kong, while all the competing approaches basically envision government getting bigger, albeit at a slower rate than preferred by folks on the left.

In other words, we’re in a political environment where everyone on the left is debating how quickly to become Mexico and many people on the right are debating how quickly to become France.

No wonder I’ve identified an escape option if America goes down the wrong path.

Read Full Post »

I’m in Sydney, Australia, but not because I’m confirming that this country will be my escape option if (when?) the United States suffers a Greek-style fiscal collapse.

Instead, I’m Down Under for the annual Friedman Conference.

This gives me an excuse to write about Australia, especially since national elections just took place this past weekend. Interestingly, the incumbent, right-of-center government retained power in an upset, winning 77 or 78 seats (out of a possible 151).

Here’s the breakdown.

The folks at Slate lean to the left, so their article is understandably riddled with anguish.

Australia’s dysfunctional, unpopular, conservative government…held onto power for a third term in Saturday’s national election. This happened despite the fact that most analysts expected it to lose a large number of seats; despite being (seemingly) out of step with the nation’s emerging consensus on climate change.. A Labor Party win had been anticipated for three years, with the opposition winning every single poll of the last term. …Expected swings against the coalition in several regions of the country didn’t materialize, while there was a crucial 4 percent swing against Labor in the state of Queensland (alternately described as Australia’s Alabama or Florida). …Progressive Australians are—to understate things—“hurting,”…(only they’re threatening to move to New Zealand instead of Canada). …Labor’s environmental stance, while not actually all that bold, hurt it in coal-friendly Queensland and among voters worried about the costs of acting on climate change… Progressive Australians are reeling because any lingering illusions that we were a “fair” nation have been shattered. Whatever Labor’s political shortcomings, Australians in general voted against a detailed platform that aimed to seriously address climate change, raise wages, increase cancer funding, make child care free or significantly cheaper, close tax loopholes for corporations and the wealthy, fund the arts, fund the underfunded public broadcaster… Instead, they voted for … not much of anything (other than some tax cuts).

Since I’m a wonk, I’m much more interested in the policy implications rather than the political machinations.

The good news is that Labor’s defeat means Australia will be spared some costly tax increases and some expensive green intervention.

But it’s unclear whether there will be many pro-growth reforms.

The right-of-center Liberal-National Coalition has promised some tax relief, but I don’t know if it will be supply-side rate reductions or merely the distribution of favors using the tax code.

For what it’s worth, Australia needs to lower its top tax rate on households, which is nearly 50 percent. European-type tax rates are always a bad idea, and they are especially senseless for a country that has to compete with Hong Kong and Singapore.

It would also be nice if the newly reelected government chooses to fix some of the housing policies that have made Australian cities very unfriendly to families.

Joel Kotkin explains why this is a problem in an article for City Journal.

Few places on earth are better suited for middle-class prosperity than Australia. From early in its history, …the vast, resource-rich country has provided an ideal environment for upward mobility… Over the last decade, though, Australia’s luck has changed… Despite being highly dependent on resource sales to China—largely coal, gas, oil, and iron ore—Australia has embraced green domestic politics more associated with Manhattan liberals or Silicon Valley oligarchs than the prototypical unpretentious Aussie… Historically, the Australian Labor Party, like its counterpart in Britain, was a party of the working class. …These views seem almost quaint today, particularly for a Labor Party increasingly dominated by those operating outside the tangible economy, as part of the professional class—media, finance, public service—and concentrated in the largely family-free urban cores. …Australia’s commitment to renewable energy dwarfs that of even the most committed green-leaning countries. Per capita, Australia has installed roughly five times as many renewable-energy installations as the E.U., the U.S., or China, and even two-and-a-half times more than climate-obsessed Germany. …The most pernicious assault on Australia’s middle class comes from regulation of land and expenditures to promote urban density. …In Australia, only 0.3 percent of the country is urban. As in major cities in Great Britain, Australia, the U.S., and Canada, “smart growth” has helped turn Australia’s once-affordable cities into some of the world’s costliest. …Sydney’s planning regulations, according to a Reserve Bank study, add 55 percent to the price of a home. In Perth, Melbourne, and Brisbane, the impact exceeds $100,000 per house. Australian cities once filled with family-friendly neighborhoods are becoming dominated by dense apartments. …Today, many Australians face an uncharacteristically bleak future. Urged to settle where the planners and pundits prefer, they’re stuck in places both unaffordable and inhospitable, as part of a needless governmental drive to make life there more like that of the more congested, socially riven metropoles of Britain.

For all intents and purposes, I want Australian lawmakers to rekindle their reformist zeal.

If you look at the historical data from Economic Freedom of the World, you can see that Australia enjoyed a big jump in economic liberty between 1975-2000.

Basically climbing from 6 to 8 on a 0-10 scale.

Sadly, there hasn’t been much reform this century. That being said, Australia’s era of liberalization last century is still paying dividends. The country is routinely ranked in the top-10 for economic liberty.

Interestingly, many of the changes between 1975-2000 happened when the Labor Party was led by reformers such as Bob Hawke and Paul Keating.

Mr. Hawke, incidentally, just passed away. His obituary in the New York Times acknowledges that he liberalized the economy.

Bob Hawke, Australia’s hugely popular prime minister from 1983 to 1991, who presided over wrenching changes that integrated his nation into the global economy…, died on Thursday… Rising to power as a trade union leader, Mr. Hawke led his center-left Australian Labor Party to four consecutive election victories in a tenure of nearly nine years, in which Australia emerged dramatically from relative isolation… Confronting chronic strikes, soaring inflation, high unemployment and trade deficits, Mr. Hawke revolutionized the economy. He cut protective tariffs, privatized state-owned industries…reined in powerful unions… “We are now living in a tough, new competitive world in which we have got to make it on our own merits,” Mr. Hawke told The New York Times in 1985.

I’m irked, though, that the article doesn’t mention that Hawke (in power from 1983-91) began Australia’s system of personal retirement accounts.

That excellent reform, which was expanded by the Keating government (in power from 1991-96), is paying big dividends to Australia.

Indeed, let’s wrap up today’s column with some excerpts from a laudatory article in the Economist.

The last time Australia suffered a recession, the Soviet Union still existed and the worldwide web did not. …No other rich country has ever managed to grow so steadily for so long. …Public debt amounts to just 41% of GDP—one of the lowest levels in the rich world. That, in turn, is a function not just of Australia’s enviable record in terms of growth, but also of a history of shrewd policymaking. Nearly 30 years ago, the government of the day overhauled the pension system. Since then workers have been obliged to save for their retirement through private investment funds.

It’s noteworthy that the system of personal accounts, known as superannuation, manages to attract praise from unlikely quarters.

And it is one of the reasons for the country’s success. Here’s an accompanying chart showing that Australia has enjoyed more growth, higher wages, and less debt than other major nations.

Is Australian policy perfect? Of course not.

But does the data from Australia show that better policy leads to better results? Definitely.

P.S. The Aussies also reaped big benefits by unilaterally reducing trade barriers (it would be nice if a certain person residing at 1600 Pennsylvania Avenue learned from that experience).

Read Full Post »

Just last month, I wrote about Argentina’s grim economic outlook and criticized the supposed right-of-center President, Mauricio Macri, for failing to deliver any meaningful economic liberalization.

And reform is desperately needed.

According to Economic Freedom of the World, Argentina is one of the most statist nations on the planet (the only nations that do worse are Libya and Venezuela).

For all intents and purposes, Argentina is suffering from decades of bad policy.

Argentina is a sobering example of how statist policies can turn a rich nation into a poor nation. …After World War II, Argentina was one of the world’s 10-richest nations. But then Juan Peron took power and initiated Argentina’s slide toward big government, which eroded the nation’s competitiveness and hampered growth.

To put it mildly, the country is an economic tragedy and it should be a lesson for all countries about the importance of good policy.

Yet why am I writing again about Argentina after last month’s analysis?

Because a story in the New York Times discusses the nation’s upcoming presidential election and manages to paint a grotesquely inaccurate picture of what’s been happening in the country. We’re supposed to believe that Macri has been a hard-charging free-market fundamentalist.

Since taking office more than three years ago, President Mauricio Macri has broken with the budget-busting populism that has dominated Argentina for much of the past century, embracing the grim arithmetic of economic orthodoxy. Mr. Macri has slashed subsidies… “It’s a neoliberal government…It’s a government that does not favor the people.” …tribulations playing out under the disintegrating roofs of the poor are a predictable dimension of Mr. Macri’s turn away from left-wing populism. He vowed to shrink Argentina’s monumental deficits by diminishing the largess of the state. …Mr. Macri’s…presidency was supposed to offer an escape from the wreckage of profligate spending.

And we’re also supposed to believe that his failed free-market policies are paving the way for a return to left-wing populism.

As the October election approaches, Mr. Macri is contending with the growing prospect of a challenge from the president he succeeded, Cristina Fernández de Kirchner… Her return would resonate as a rebuke of his market-oriented reforms while potentially yanking Argentina back to its accustomed preserve: left-wing populism.

For what it’s worth, I suspect that Kirchner will win the next election. So that part of the article is correct.

But the part about free-market reforms is laughably inaccurate.

You don’t have to believe me. Let’s look at the Argentinian data from Economic Freedom of the World. Maybe I’m being dogmatic, but I hardly think a tiny improvement in 2015 followed by backsliding in 2016 qualifies as “diminishing the largess of the state.”

The bottom line is that Macri should have been bold and made sweeping changes once he was in charge. Like Chile after Allende’s Marxist regime was deposed.

Those reforms doubtlessly would have triggered protests. But if they became law, they would have produced tangible results.

Instead, Macri chose a timid approach and the economy has remained stagnant. Yet because many voters think he adopted reforms, they blame him and they blame free markets.

The net result is that they will probably vote for Kirchner, which presumably will mean even more statism for the long-suffering people of Argentina.

P.S. What’s happening in Argentina is not an isolated example. It’s very common for supposed right-wing politicians to choose bad policies, which then paves the way for left-wing election victories. Look at how Bush’s statist policies created the conditions for an Obama victory. Or how Sarkozy set the stage for Hollande in France. Or how Theresa May’s fecklessness in the United Kingdom may lead to a win for Jeremy Corbyn.

P.P.S. I’m tempted to also warn that Trump’s risky protectionism may lead to a victory for Crazy Bernie or some other Democrat in 2020. But Trump does have some good policies as well, so it’s hard to know whether the economy will be a net plus or net minus in the election.

Read Full Post »

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

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

And economic craziness exists in other nations as well.

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

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

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

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

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

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

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

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

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

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

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

Sleifer has two tables that are worth sharing.

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

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

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

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

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

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

Here’s the situation in the capitalist part.

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

Here’s what he saw in the communist part.

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

The lessons, he explained, should be quite obvious.

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

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

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

It wasn’t just Ludwig Erhard.

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

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

Indeed, they exacerbated West Germany’s economic problems.

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

But at least there was a happy ending.

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

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

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

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

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

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

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

Read Full Post »

I’ve repeatedly dealt with the argument over Denmark’s supposed socialism.

My core argument is that Denmark is very bad on fiscal policy, but very laissez-faire on other issues such as regulation. The net effect is that Danes have about the same amount of economic liberty as Americans.

The bottom line is that Denmark isn’t socialist. At least not if we use the technical definition. There’s plenty of bad policy, but no government ownership, no central planning, and no price controls.

Which is basically the message in this Prager University video by Otto Brøns-Petersen from the CEPOS think tank in Denmark.

This is a great video.

Basically everything you need to know about Danish economic policy.

To augment Otto’s video, let’s review a report from some of his CEPOS colleagues.

The entire report is worth reading, but I want to focus on one excerpt and some key visuals.

First, notice that Denmark and the United States have similar levels of economic freedom.

Since I’m a public finance economist, I was very interested in some observations in the report about fiscal policy.

This excerpt notes that Denmark has a much more onerous tax burden, and it points out that the value-added tax is the main reason for the gap.

…the tax burden (taxes to GDP) is the second-highest in the OECD and 70 percent higher than in the US (46 vs. 27 per cent of GDP). …The biggest difference between the Danish and the American tax systems is that consumption taxes are much higher in Denmark. VAT is 25 per cent in Denmark while the average sales tax is 6 per cent in the US. …Including the effect of consumption taxes, the top marginal tax rate on labor income is 67 per cent in Denmark. For low and middle-income workers, it is 55 per cent. This is significantly higher than in the USA. It’s important to include consumption taxes when you calculate the effective marginal tax rate. High consumption taxes means that you can buy fewer goods for one extra working hour.

My first takeaway is that this explains why blocking the VAT is absolutely necessary for advocates of limited government in the United States.

And the second takeaway is that big government means big burdens on lower-income and middle-class taxpayers, which is what we seen in this next chart.

Last but not least, here are two charts comparing taxes and labor supply in the United States and Denmark.

In the tax chart, you can see that the two countries were very similar from the 1930s to the 1960s. But then the tax burden in Denmark got much worse (coinciding with the imposition of the VAT).

Now take a look at hours worked in both nations.

We were very similar back in 1970. But as the Danish tax burden grew, people responded by working less and less.

In other words, more evidence to support the core insight of supply-side economics. The more you tax of something, the less you get of it.

The Philoso-raptor surely would agree.

Read Full Post »

Singapore is routinely ranked as the world’s 2nd-freest economy, trailing only Hong Kong.

The nation’s laissez-faire approach has yielded big dividends. Singapore is now über prosperous, richer than both the United States and United Kingdom.

But there are problems in paradise.

Advocates of class-warfare policy (see here and here) are urging higher tax burdens. And even though there’s no reason to raise taxes (Singapore has a huge budget surplus), politicians have catered to this noisy clique in recent years (see here and here).

In a column for the Straits Times that I co-wrote with Donovan Choy of Singapore’s Adam Smith Centre, we explain why the government should slam the door on all tax hikes, especially proposals targeting entrepreneurs and investors.

Singapore has shown that conventional theories about economic growth need to be updated to reflect that growth doesn’t necessarily need to weaken once a nation becomes prosperous. Singaporeans should be thankful for the sensible governance that has made the nation a role model. Unfortunately, some people are willing to threaten the country’s prosperity by urging higher tax burdens on the wealthy. They risk national competitiveness by advocating additional layers of tax on income that is saved and invested. This “class warfare” approach is deeply misguided, especially in a globalised economy.

We list six specific guidelines for sensible policy.

Two of them are worth highlighting, starting with the fact that Singapore so far has avoided the trap of “Wagner’s Law.”

What makes Singapore special is that it avoided the mistakes other nations made when they became rich. Countries in North America and Western Europe created costly welfare states once they became relatively prosperous. This is known to academics as Wagner’s Law, and it has serious consequences since larger public sectors reduce competitiveness and lead to less growth.

We also explain that discriminatory taxes on saving and investment are the most destructive method of collecting revenue.

Proponents assert that dividend and capital gains taxes are needed so that upper-income people pay tax. But this line of thinking is misguided. Such income is already subject to 17 per cent corporate income taxation in Singapore. Imposing dividend and capital gains taxes would mean such income is subject to increasing layers of discriminatory taxation. The result is to discourage capital formation (savings and investment) – the very essence of entrepreneurship. And that approach is economically foolish, since all economic theories – even Marxism and socialism – agree that saving and investment are key to long-run growth and rising living standards.

Since today’s topic is Singapore, let’s look at some additional material.

We’ll start with two articles that Donovan wrote for the Foundation for Economic Education.

The first column explains a bit of the history.

The country’s first Prime Minister, Lee Kuan Yew, is often recognized as the father of Singapore. If that is so, then the grandfathers of Singapore would rightfully be three men: Sir Stamford Raffles, who founded the trade settlement, William Farquhar, whom Raffles put at the helm of Singapore in his periodic years of absences, and John Crawfurd, whom Raffles appointed to succeed Farquhar. …Raffles’s intentions were plain as he wrote in a letter in June 1819: “Our object is not territory but trade; a great commercial emporium…,” and to develop “the utmost possible freedom of trade and equal rights to all, with protection of property and person”. …Like Farquhar, Crawfurd shared Raffles’s strong free-market beliefs and pushed his laissez-faire policies even harder… The common denominator of the grandfathers of Singapore was their economic philosophies – capitalism and free enterprise were at the root of their beliefs. The first leaders of colonial Singapore were staunch classical liberals who professed strong beliefs in economic freedoms

You probably won’t be surprised to learn that this is somewhat similar to Hong Kong’s economic history.

Donovan’s next column looks at how Singapore has wisely limited redistribution.

The Singapore welfare system is considered one of the most successful by first-world standards. World Bank data shows that Singapore’s government health expenditure in 2015 is only 4.3 percent of GDP, a small fraction in comparison to other first-world countries…while achieving comparatively equal or better health outcomes… While most of Europe, Scandinavia, and North America spend 30-40 percent of GDP on social welfare programs, Singapore spends less than half as much… qualifying for welfare is notoriously difficult by the standards of most of the developed Western world. The Singapore government’s position on welfare handouts is undergirded by a staunch economic philosophy of self-reliance and self-responsibility where the first lines of welfare should be derived from one’s individual savings, the family unit, and local communities before turning to the government. …This philosophy of self-reliance and responsibility is prominent not only in social welfare but is also replicated in the Singapore government’s approach to retirement savings, health care, education, and housing. For instance, the state’s preferred policy of ensuring individuals have sufficient resources for a rainy day is via the Central Provident Fund, a government-mandated savings account.

Again, much like Hong Kong.

Singapore also has what is probably the most market-oriented healthcare system in the world.

Here are some excerpts from a story in the New York Times.

…it achieves some outcomes Americans would find remarkable. Life expectancy at birth is two to three years longer than in Britain or the United States. Its infant mortality rate is among the lowest in the world, about half that of the United States…about two-thirds of health care spending is private, and about one-third is public. It’s just about the opposite in the United States. …What also sets Singapore apart, and what makes it beloved among many conservative policy analysts, is its reliance on health savings accounts. All workers are mandated to put a decent percentage of their earnings into savings for the future. …why is Singapore so cheap? Some think that it’s the strong use of health savings accounts and cost-sharing. People who have to use their own money usually spend less.

The country is also remarkably free of crime, as noted by CNBC.

Singapore was recently ranked second on the Economist Intelligence Unit’s Safe Cities Index for 2017, coming in just behind Tokyo. In 2016, the island nation’s police reported 135 total days without any crimes including snatch-theft, house break-ins and robbery. That low crime rate means many small businesses enjoy little concern about shoplifting. …local businesses take few precautions when closing shop at night. For instance, in the ground floor lobby of a mixed-use building in the downtown business district, many shops don’t have windows, locks — or even doors.

Though it is not a total libertarian paradise.

A column in Bloomberg warns the Brexit crowd that there are statist components to Singapore’s regime.

Over 80 percent of the population lives in public housing… In industrial policy, the government oversees a plethora of schemes targeting mostly off-budget public funding to particular sectors such as biopharma and aerospace, as well as activities such as R&D and skills training. Government-linked companies, whose controlling shareholder is the sovereign wealth fund Temasek Holdings Pte. Ltd., are the dominant players in transport, communications, real estate and media.

Let’s close with a column Professor Steve Hanke authored for Forbes.

Singapore validates Adam Smith’s counsel on economic development: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice.” …Singapore, Hong Kong, and even the Cayman Islands exemplify commerce-oriented city-states. How can such a small player, like Singapore, achieve prominence on the world’s stage? …acting as a commercial republic and embracing a regime of entrepreneurial public finance. …the culture of an entrepreneurial inclined city-state – like Singapore – differs significantly from that of a parasitical state that feeds on tax extractions.

Here’s his comparison of a predatory government compared to a pro-market government.

Singapore is a successful example of the right column.

Sounds like a model the United States should follow.

Assuming, of course, Singapore retains good policy.

P.S. I’ve also had to explain why the Cayman Islands should retain good policy.

P.P.S. Regular readers won’t be surprised to learn that the OECD tries very hard to overlook the success of Singapore’s low-tax model.

P.P.P.S. Singapore is in first place in my “laissez-faire index.”

Read Full Post »

International development experts often write about a “middle-income trap.”

According to this theory, it’s not that challenging for nations to climb out of poverty, but it’s difficult for them to take the next step and become rich countries.

The theory makes sense to many people because it describes much of what we see in the real world.

We even see the trap at higher levels of income. European nations were catching up with the United States after World War II, but then the convergence process stalled.

But I don’t think there’s actually a “middle-income trap.” Instead, nations don’t enjoy full convergence because they are hamstrung by bad policy.

And Hong Kong and Singapore are the best evidence for my hypothesis. These two jurisdictions have routinely ranked #1 and #2 for economic freedom.

And their solid track record of free markets and small government has paid big dividends. Here a chart, for Our World in Data, which shows how they have fully converged with the United States after starting way behind.

The performance of Hong Kong and Singapore is particularly impressive because the United States historically has been a top-10 nation for economic liberty (notwithstanding all my grousing about bad policy in America, we’ve been fairly good compared to the rest of the world).

So it takes extraordinarily good performance to catch up.

But it can happen.

P.S. By the way, one thing I noticed in the above chart is that Singapore has surpassed Hong Kong in the past couple of decades. This could just be a statistical blip, though I wonder if this is a result of the transfer of Hong Kong from British control to Chinese control. Yes, China has wisely chosen not to interfere with Hong Kong’s domestic policy, but perhaps investors and entrepreneurs don’t fully trust that this economic autonomy will continue.

P.P.S. Don’t forget that comparatively rich nations can de-converge if they adopt bad policy.

Read Full Post »

Time for the final installment in my four-part video series on trade-related topics.

  • Part I focused on the irrelevance of trade balances.
  • Part II looked at specialization and comparative advantage.
  • Part III explained trade and creative destruction.

Here’s Part IV, which looks at the very positive role of the World Trade Organization.

My basic argument is that it is a good idea to get other nations to reduce trade barriers, but tit-for-tat protectionism is not the right approach.

As I explained when writing about Chinese mercantilism, the U.S. would have far more success by using the WTO.

Let’s look at what experts have said.

Writing for the Wall Street Journal, Greg Rushford explained why the WTO is good for the United States.

President Harry S. Truman and Secretary of State George Marshall successfully pressed America’s war allies to create the General Agreement on Tariffs and Trade more than 70 years ago. Leaders across the globe, mindful of how economic nationalism in the 1930s had contributed to the devastation of World War II, wanted to open the world up again. The agreement focused on slashing of tariffs and other barriers to trade—bringing unprecedented prosperity to hundreds of millions of people. The GATT, which evolved into the World Trade Organization in 1995, became the world’s most successful international economic experiment. …Despite Mr. Trump’s assertion that the WTO has been “a disaster” for the U.S., Washington has won 85% of the 117 WTO cases it has brought against foreign trading partners. Japan complained in 2003 that WTO jurists had stretched the law by determining that Japanese health officials used phony science to ban American apples. The real U.S. gripe is that foreign governments have won most of the 145 cases that they have brought against American protectionist policies. …Both political parties would be well-advised to consider the wisdom of Truman and Marshall. They understood that true national-security imperatives meant resisting protectionism.

And here’s some more background information from a column in the WSJ by James Bacchus, who served as both a Member of Congress and as a Chief Judge at the WTO.

…let’s say Mr. Trump managed to get his way and pull the U.S. out of the WTO. The consequences for the world and U.S. economies would be immense. Among them: diminished trade growth, costly market and supply-chain disruptions, and the destruction of jobs and profits, especially in import- and export-dependent U.S. industries. The resulting trade barriers would compel some American companies either to downsize or move offshore. The global economic spiral set in motion by Mr. Trump’s reckless trade actions on steel, aluminum, Canada, Mexico, China, and Europe would accelerate. …WTO membership provides goods and services produced in the U.S. with protection against discrimination in foreign markets. Nondiscrimination rules are the heart of the WTO trading system, which currently applies in 164 countries and to 98% of all global commerce. …Instead of waging war on the WTO, the U.S. should help modernize it by making it more effective in addressing digital trade, services, subsidies, sustainability and intellectual property. Internationally agreed rules for international trade—and a process for resolving disputes about those rules—are an indispensable pillar of national prosperity.

I agree with everything in both columns.

And I’ll add one very simple – and hopefully very powerful – point.

Here’s a chart from the WTO showing that the United States is one of the world’s most pro-trade nations, with average tariffs of only 3.48 percent. Not as good as Hong Kong (0.0 percent) or Singapore (0.1 percent), but definitely good compared to most other nations.

In other words, it would be good if we could convince other nations to lower their trade barriers to our level.

Yet that’s exactly what’s been happening thanks to the WTO (and GATT, the predecessor pact). Here’s a chart prepared by the Confederation of British Industry, which shows how trade barriers have been continuously dropping. And dropping most rapidly in other nations, which is something Trump should be happy about.

The bottom line is that the WTO unambiguously advances U.S. interests, as I noted in the conclusion of the video.

But it actually advances the interests of all nations by gradually reducing global barriers to trade.

Is it as good as unilateral free trade? No, but it is a big win-win for America and the rest of the world.

Which is why, despite my usual disdain for international bureaucracies, I’m a big fan of the WTO.

Read Full Post »

I’m currently in Chile, enjoying the warm sun and doing research on the nation’s impressive economic performance.

I met yesterday with Jose Pinera, the former minister who created Chile’s incredibly successful system of personal retirement accounts (he’s also one of the people Gary Johnson should have mentioned when he was asked to identify an admirable foreign leader).

Back in 2013, I shared some of Jose’s data showing how the economy took off after Chile enacted pro-market reforms.

I was especially impressed by the stunning reduction in the poverty rate, which had dropped from 50 percent to 11 percent (it’s now down to 7.8 percent).

In other words, capitalism has been great news for poor Chileans. Simply stated, when given more freedom and opportunity, most of them escape poverty.

Interestingly, Reuters reports that even the IMF recognizes Chile’s superior performance.

The International Monetary Fund (IMF) hailed Chile’s strengthening economy in a report published on Friday while encouraging President Sebastian Pinera to push forward with promised structural reforms. In a statement following its annual consultation with Chile, the IMF praised Pinera’s proposed reform drive… Conservative billionaire Pinera took office in March with a strong mandate to make changes to the country’s pension system and labor laws and simplify the tax code. …The bank praised his early efforts, which it said were aimed at “re-invigorating investment and economic growth.”

Hmmm…, makes me wonder if the IMF (given its dismal track record) actually understands why Chile has become so prosperous.

Though the World Bank has praised the country’s pro-market reforms, so international bureaucracies sometimes stumble on the right answer.

But let’s not get distracted. Today, I want to share further evidence about how pro-market reforms produce big benefits for the less fortunate.

Here’s a chart from an article in the latest edition Economia y Sociedad. The article is in Spanish, but a translation of the relevant passage tells us that, “in Chile, the income of the poorest 20% of the population has risen at a rate (8.2% per year) that is 50% higher than that to which the income of the richest 20% has risen ( 5.3% per year).”

In other words, a rising tide lifts all boats (just as in the U.S.), but the bottom quintile is enjoying the biggest increases.

Sounds like great news. And it is great news. But some people put on blinders.

My left-leaning friends loudly assure me that they are motivated by a desire to help poor people. Yet if that’s true, why aren’t they falling over themselves to praise Chile? Why are they instead susceptible to waxing rhapsodic about the hellhole of Venezuela or bending over backwards to defend Cuba’s miserable regime?

And why do some anti-capitalist economists engage in absurd examples of cherry picking in failed efforts to discredit Chile’s accomplishments?

The bottom line is that Chile became the Latin Tiger thanks to economic liberty. That’s great news for the country, but especially good for the less fortunate.

Read Full Post »

President Trump’s view of global trade is so bizarre, risky, uninformed, misguided, and self-destructive that I periodically try to maintain my sanity by reviewing the wisdom of one of America’s greatest presidents.

  • Ronald Reagan’s remarks in 1985 about the self-destructive impact of trade barriers.
  • Ronald Reagan’s remarks in 1988 about the economic benefits of trade liberalization.

Today, let’s travel back to 1982 for more wisdom from the Gipper.

What’s especially remarkable is that Reagan boldly defended free and open trade at the tail end of the 1980-82 double-dip recession that he inherited.

Many politicians, facing an unemployment rate above 10 percent, would have succumbed to the temptation for short-run barriers.

But just as Reagan did the right thing on inflation, even though it was temporarily painful, he also advocated good long-run policy on trade. He understood Bastiat’s wise insight about “seen” benefits vs “unseen” costs.

Trump, by contrast, has a very cramped and limited understanding of trade. Which is why almost all economists disagree with his approach.

…on Trump’s other point — that protectionism offers Americans the road to riches — most specialists in international trade would beg to differ. “Even by Washington standards, Trump’s tweet was profoundly wrong,” said Daniel J. Mitchell, a conservative economist. In a recent column criticizing Trump’s tweet, Mitchell wrote, “The last time the United States made a big push for protectionism was in the 1930s. At the risk of understatement, that was not an era of prosperity.” …said Lawrence White, a professor at New York University’s Stern School of Business…”tariffs, like any tax, generally introduce an inefficiency and makes the two sides of the trading relationship poorer — not richer.”

I appreciated the chance to be quoted in the story, and I also was happy that a link to one of my columns was included.

Though I gladly would have traded that bit of publicity if Politifact instead had shared my “edits” to Trump’s infamous “Tariff Man” tweet.

I’ll conclude by noting that Reagan’s record didn’t always live up to his rhetoric.

P.S. I winced when Reagan positively cited the International Monetary Fund in his remarks. Though maybe the IMF in the early 1980s wasn’t the pro-tax, anti-market, bailout-dispensing bureaucracy that it is today.

P.P.S. I noted that Reagan was one of America’s great presidents. I also include Calvin Coolidge and Grover Cleveland on that list.

Read Full Post »

I wrote a column earlier this month about the “world’s most depressing tweet,” which came from the Census Bureau and noted that the suburbs of Washington, DC, are the richest parts of America.

To be sure, I was engaging in a bit of hyperbole since a tweet about famine, war, or genocide surely would be more depressing. Nonetheless, I think it is a very bad sign that so many undeserving people are making so much money thanks to a bloated and cronyist central government.

Today I want to share another tweet that deserves some sort of special accolade.

I thought about calling it the “world’s best-ever tweet,” but I’m going to be more restrained and simply assert that it is the best tweet about socialism and capitalism.

This is spot on.

I’ve dealt with countless leftists who claim that the failure of places such as Venezuela, Cuba, North Korea, Greece, Zimbabwe, and the Soviet Union don’t count because they weren’t “real socialism” or “real communism.”

Indeed, that’s even become a humorous theme (see here, here, and here from my collection of socialism/communism humor).

But shouldn’t we learn something from the fact that “almost socialism” invariably produces awful results?

Similarly, there has never been a society that is 100 percent capitalist. The world’s freest nations today, such as Hong Kong and Singapore, have state sectors that consume about 20 percent of economic output. Likewise, government consumed 10 percent of GDP during the height of the western world’s supposedly laissez-faire period in the 1800s.

That being said, shouldn’t we learn something from the fact that “almost capitalism” created the amazing hockey stick of human progress? Shouldn’t we learn something from the fact that “some capitalism” is capable of dramatically reducing global poverty?

P.S. If there was a prize for the most short-sighted, naive, and anti-empirical tweet, this example would win the prize.

P.P.S. And this tweet wins the prize for the best comeback. Consider it a case of tweet-on-tweet violence.

P.P.P.S. Last but not least, here’s a tweet that sums up the essential difference between libertarians and statists.

Read Full Post »

I have a four-part video series on trade-related topics.

  • Part I focused on the irrelevance of trade balances.
  • Part II looked at specialization and comparative advantage.

Here’s Part III, which explains how trade (whether domestic or international) leads to creative destruction, which results in some painful short-run costs but also yields immense long-run benefits.

I recently argued that creative destruction is the best part and worst part of capitalism.

It’s bad if you’re a worker in a company that loses out (or if you’re an investor in that company). but it’s also what enables us to become more prosperous over time.

I’m not alone. Writing for CapX, Oliver Wiseman reviewed Capitalism in America, a new book by Alan Greenspan and Adrian Wooldridge. Here are some key observations.

…there was nothing predictable about America’s rise from colonial backwater to world-beating economy. …The fight for independence began a year before the publication of Adam Smith’s The Wealth of Nations; “the new country was conceived in a revolt against a mercantilist regime that believes a nation’s economic success was measured by the size of its stock of gold.” …The Constitution’s limits on the power of the majority set America apart from the rest of the world and “did far more than anything else to guarantee America’s future prosperity…” On top of this fortuitous start is the country’s “greatest comparative advantage”: its “talent for creative destruction”, the driving force of innovation, growth and prosperity that “disequilibriates every equilibrium and discombobulates every combobulation”. Americans realised that “destruction is more than an unfortunate side effect of creation. It is part and parcel of the same thing”. …The result is a system that has squeezed more productive energy out of its human capital than other countries, and generated unparalleled prosperity.

For those interested in economic history, Joseph Schumpeter gets most of the credit for developing the concept of creative destruction.

This Powerpoint slide is a nice summary of Schumpeter’s contribution.

And here’s a Tweet showing that Schumpeter was under no illusions about the folly of socialism.

The bottom line is that creative destruction is what gives us churning, and churning is what dethrones rich and powerful incumbents. My friends on the left should be cheering for it.

Instead, they push for regulations and taxes that hinder creative destruction. And that means less long-run prosperity for all of us.

Read Full Post »

I periodically ask my left-leaning friends to identify a nation that became rich with statist policies.

They usually point to Sweden or Denmark, but I point out that Sweden and Denmark became rich in the 1800s and early 1900s, when government was very small.

At that point, they don’t really have any other response.

That’s because, as I pointed out in this clip from a recent debate at Pomona College in California, there is no example of a poor nation becoming rich with big-government policies (though we have tragic examples of rich nations becoming poor with statism).

So if statism isn’t the right approach to achieve prosperity, how can poor nations become rich nations.

I’ve offered my recipe for growth and prosperity, but let’s look at the wise words of Professor Deirdre McCloskey in the New York Times.

The Great Enrichment began in 17th-century Holland. By the 18th century, it had moved to England, Scotland and the American colonies, and now it has spread to much of the rest of the world. Economists and historians agree on its startling magnitude: By 2010, the average daily income in a wide range of countries, including Japan, the United States, Botswana and Brazil, had soared 1,000 to 3,000 percent over the levels of 1800. People moved from tents and mud huts to split-levels and city condominiums, from waterborne diseases to 80-year life spans, from ignorance to literacy. …50 years ago, four billion out of five billion people lived in…miserable conditions. In 1800, it was 95 percent of one billion.

Deirdre then explains that classical liberalism produced this economic miracle.

What…caused this Great Enrichment? Not exploitation of the poor, …but a mere idea, which the philosopher and economist Adam Smith called “the liberal plan of equality, liberty and justice.” In a word, it was liberalism, in the free-market European sense. Give masses of ordinary people equality before the law and equality of social dignity, and leave them alone, and it turns out that they become extraordinarily creative and energetic. …we eventually need capital and institutions to embody the ideas, such as a marble building with central heating and cooling to house the Supreme Court. But the intermediate and dependent causes like capital and institutions have not been the root cause. The root cause of enrichment was and is the liberal idea, spawning the university, the railway, the high-rise, the internet and, most important, our liberties.

In other words, the right ideas are the building blocks that enable the accumulation of capital and the development of institutions.

Deirdre’s analysis is critical. She reminds us that investment doesn’t merely depend on good tax policy and rule of law doesn’t magically materialize. You need a form of societal capital as the foundation.

Anyhow, to show how good ideas changed the world, this chart show how classical liberalism is the key that unlocked modern prosperity.

You may have already seen a chart that looks just like this. It was in a video Deirdre narrated. And Don Boudreaux shared a similar chart in one of his videos.

Circling back to the point I made at the start of this column, socialism (or any other form of statism) has never produced this type of economic miracle.

Read Full Post »

I periodically explain that labor and capital are the two factors of production and that our prosperity depends on how efficiently they are allocated.

But I probably don’t spend enough time highlighting how they are complementary, meaning that workers and capitalists both benefit when the two factors are combined. Simply stated, workers become more productive and earn more when investors buy machines and improve technology.

In other words, the Marxists and socialists are wrong when they argue that workers and capitalists are enemies. Heck, look around the world and compare the prosperity of workers in market-oriented nations with the deprivation of workers in statist economies.

This becomes painfully clear when you read this Wall Street Journal story on the statist hellhole of Venezuela.

Irish packaging giant Smurfit Kappa recently joined other multinational companies abandoning Venezuela…President Nicolás Maduro’s socialist government. But this case comes with a twist. Hundreds of employees, who counted on the Irish company for transport, education, housing and food, continue to show up at work. They take turns protecting idled heavy machinery from looting that has become rampant as Venezuela plunges into hyperinflation and economic chaos. …“Help, we need a boss here. We’re desperate,” said Ramón Mendoza, a Smurfit forestry division worker for 17 years. “We’re so scared because we now know that all the government does is destroy everything, every business.” Their plight underscores the devastation that rural Venezuelan communities face as private companies pull out of a country that was once Latin America’s richest. The economy has shrunk by half over the past four years.

Wow, Mr. Mendoza hit the nail on the head when he explained that “all the government does in destroy everything.”

Maybe he can replace Obama as Libertarian Man of the year. Except he would get the award on merit rather than satire.

But let’s not digress. Here’s more bad news from the article.

Workers who live in the surrounding area had received interest-free loans from Smurfit for their houses. Residents said they no longer can count on the four ambulances that the company paid for to serve communities of tin-roofed shacks. At the Agricultural Technical School in the nearby town of Acarigua, which was entirely financed by Smurfit, nearly 200 children living in extreme poverty used to receive an education, lodging, as well as hot meals that have become a luxury as public schools collapse. Over two decades, many of its graduates had gone on to work for Smurfit. The academic year was supposed to start on Oct. 1. But with no money to feed and transport students, there’s silence in the halls… “It’s like poof,” Ms. Sequera said, snapping her fingers. “Our whole future was taken away.”

Needless to say, the thuggish government of Venezuela has no idea how to fix the mess it has caused.

In recent days, the cash-strapped Maduro administration said it had come up with a solution for the Smurfit plant: That the workers would run it themselves. The government said it wouldn’t nationalize it but named a temporary board to help restart operations. The Labor Ministry offered no details over how it would replace Smurfit’s distribution network through which the company supplied its own subsidiaries abroad. But the workers say they can’t run the plant on their own and insist they want bosses—just not from the government. “We know how to move the lumber from here to the plants. What do we know about finances and marketing?” said Mr. Mendoza.

My heart goes out to the former Smurfit workers.

They simply want to do honest work in exchange for honest pay. But the wretched policies of the Venezuelan socialists have made that impossible.

By the way, I’m not implying that employers are motivated by love for workers. Nor am I implying that workers are motivated to create profits for companies. The two sides are in a constant tug of war over how to slice the pie.

But the key thing to understand is that the pie grows when markets are allowed to function.

Which is why this old British political cartoon is a powerfully accurate depiction of real-world economics.

Indeed, I’ll have to add it to my collection of images that teach economics.

Read Full Post »

My favorite publication every year is Economic Freedom of the World.

It’s filled with data on fiscal policy, regulatory policy, trade policy, monetary policy, and quality of governance for 162 jurisdictions, and it provides an unbiased way of gauging the degree to which they allow economic liberty.

It also allows readers to slice and dice data, which is very helpful for doing analysis.

For instance, as illustrated by this 2×2 matrix, I claimed in 2016 that nations with small fiscal burdens aren’t necessarily pro-free market (meaning they would belong in the top-right quadrant) and countries with large fiscal burdens aren’t necessarily in favor of intervention and planning (so they would belong in the lower-left quadrant).

But that matrix was speculative.

Which is why I downloaded the EFW dataset. I then removed the fiscal policy variable and created new rankings so I could see which nations relied most on unfettered markets.

As you can see, Singapore barely edges out Hong Kong for first place in this “Laissez-Faire Index,” with New Zealand in third place. In other words, the top three nations in the overall EFW rankings stay the same, though Hong Kong and Singapore trade places (in the far-right column, I compare each nation’s rank to its EFW score for overall economic liberty).

The most dramatic results are for some of the welfare states in Northern and Western Europe. Denmark jumps 12 spots to #4 and the Netherlands soars 18 spots to #5. Other nations with big increases include Finland (up 14 spots to #8), Luxembourg (the world’s freest economy as recently as 1985, moves up 14 spots to #11), Sweden (up 30 spots to #13), Norway (up 11 spots to #14), and Belgium (up 32 spots to #20).

Looking at this list, it’s easy to understand why the combination of big government and free markets is sometimes called the “Nordic Model” (defined by Wikipedia as “a comprehensive welfare state…on the economic foundations of free market capitalism”).

And Japan could be considered an honorary member since it jumps 22 spots in the Laissez-Faire Index, up to #19.

I’ve argued that such nations compensate for the damage of high taxes and big welfare states by being very market-oriented in other ways. And the EFW data supports that assertion.

Though it’s worth noting that their large fiscal burdens do have a negative impact.

P.S. Looking at other nations in the Laissez-Faire Index, Switzerland, the United Kingdom, Ireland and Canada all remain in the top 10, though the United States falls six spots to #12. Georgia, Mauritius, Taiwan, and Lithuania all drop by double-digit amounts.

P.P.S. I did a version of the Laissez-Faire Index in 2015.

Read Full Post »

Over the years, I’ve felt compelled to “debunk” various articles, columns, and speeches that fundamentally misrepresented and/or misunderstood key economic issues.

A partial list includes Keynesian economics, the Laffer Curve, Obama tax propaganda, Elizabeth Warren’s class warfare, sequester hysteria, export subsidies, libertarianism, carried interest, government size, inequality, Scandinavia, and the value-added tax.

It’s time to add to that list. In a column for the Washington Post, Steven Pearlstein claims to have identified “Five myths about capitalism.” He’s not necessarily attacking free enterprise, but he does make several points that rub me the wrong way and/or should be addressed. Here’s his introduction.

Thirty years ago, in the face of a serious economic challenge from Japan and Europe, the United States embraced a form of free-market capitalism that was less regulated, less equal, more prone to booms and busts. Driving that shift was a set of useful myths about motivation, fairness and economic growth that helped restore American competitiveness. …Here are five of the most persistent ones.

Before we get to his myths, I can’t resist questioning his assertion that markets lead to “more booms and busts,” in part because we had very long and strong expansions during the market-oriented Reagan and Clinton years and in part because the big 2008 recession was largely a result of bad government policy.

But let’s set that aside and look at Pearlstein’s myths. Here’s his first assertion.

Adam Smith, the father of economics, first pointed out in his most famous work, “The Wealth of Nations ,” that in vigorously pursuing our own selfish interests in a market system, we are led “as if by an invisible hand” to promote the prosperity of others. …Smith, however, was never the prophet of greed that free-market cheerleaders have made him out to be. In other passages from “The Wealth of Nations,” and in his earlier work, “The Theory of Moral Sentiments,” Smith makes clear that for capitalism to succeed, selfishness must be tempered by an equally powerful inclination toward cooperation, empathy and trust — traits that are hard-wired into our nature and reinforced by our moral instincts. …An economy organized around the cynical presumption that everyone is greedy is likely to be no more successful than one organized around the utopian assumption that everyone will act out of altruism.

This isn’t really a myth as much as a misrepresentation. What “free-market cheerleaders” extol Smith as a “prophet of greed”?

I self-identify as one of those cheerleaders, and I simply point to Smith’s famous observation about how self-interest is what drives merchants to improve our lives.

Do some people go crazy with greed? Of course.

But that’s true in any system (look at how Chavez’s family members lined their pockets).

What makes capitalism a preferable system is that greedy people have to cater to consumers if they want more money.

Here’s Pearlstein’s second myth.

This is an almost universal belief among corporate executives and directors — that it is their principal mission and legal obligation to deliver the highest possible return to their shareholders. The economist Milton Friedman first declared in the 1970s that the “one social responsibility of business [is] . . . to increase its profits,” but the corporate raiders of the 1980s were the ones who forced that view on executives and directors, threatening to take their companies or fire them if they didn’t go along. …“maximizing shareholder value”…is now widely taught by business schools, ruthlessly demanded by Wall Street’s analysts and “activist” investors, and lavishly reinforced by executive pay packages tied to profits and share prices. In fact, corporations are free to balance the interests of shareholders with those of customers, workers or the public… Legally, corporations can be formed for any purpose. …The only time a corporation is obligated to maximize its share price is when it puts itself up for sale.

I’m not sure what point he’s making. Does he think companies shouldn’t try to make profits? Does he not understand the purpose of profits? Does he want to put corporate governance under the control of politicians, like Elizabeth Warren?

For what it’s worth, he’s correct that corporations can be set up for reasons other than profit, though I’m not sure that’s any sort of stunning revelation.

Here’s the third supposed myth.

The theory of “marginal productivity” holds that a worker’s wage or salary reflects the “amount of output the worker can produce,” according to Harvard’s Greg Mankiw, author of a best-selling economics textbook. This idea is useful in constructing economic models, but Mankiw and others have also relied on it to justify widening income inequality and to oppose proposals to redistribute income… In reality, however, the pay set by markets is also subjective, reflecting the laws and social norms under which markets operate. The incomes earned by workers who planted tobacco — and those who owned tobacco plantations — changed considerably after slavery was abolished, and again after laws protecting sharecroppers were enacted, and again when minimum-wage laws were passed… While it is probably better to rely on markets rather than government to set pay levels, that doesn’t mean that the way the markets set pay is a purely objective assessment of economic contribution or that redistribution is theft.

I’m glad he acknowledges that it is “probably better” for markets to set wages, but this section is largely incoherent.

He writes about slavery, but that has nothing to do with capitalism. After all, slavery was government-sanctioned and government-enforced involuntary labor, whereas a defining feature of capitalism is voluntary exchange.

Now for the fourth myth.

The reason Americans tolerate higher levels of income inequality is because of our faith that we all have a fair chance at achieving the American Dream or becoming the next Bill Gates. “In America we stand for equality,” writes Arthur Brooks of the American Enterprise Institute, a leading defender of the morality of capitalism. “But for the large majority of us, this means equality of opportunity, not equality of outcome.” …But while the United States has made great strides in removing legal barriers to equal opportunity, at least half the difference in income between any two people is determined by their parents, either through inherited traits like intelligence, good looks, ambition and reliability (nature), or through the quality and circumstances of their upbringing and education (nurture). …Unless we are prepared to engage in extensive genetic reengineering, or require that all children be brought up in state-run boarding schools, we must acknowledge that we can never achieve full equality of opportunity.

This section actually makes some sense. Some people do have better parents and better genes, and that does put them in a better position to succeed.

In any event, I very much hope that Pearlstein doesn’t think that government-imposed “genetic reengineering” and/or “state-run boarding schools” are good ideas.

Here’s the final myth, and also the one that got me most agitated.

Economists have long believed that there is an unavoidable trade-off between equality and growth — having more of one means having less of the other. Arthur Okun’s book about it, “Equality and Efficiency: The Big Tradeoff,” remains a classic. The implosion of communism and the decisions of socialist countries like Sweden to reduce taxes and welfare are widely seen as acknowledgments of the failure of overly egalitarian systems to produce adequate economic growth. But evidence suggests that there is also a point at which high levels of inequality begin to deliver less economic growth, not more — and that the United States has passed that point, according to research by the International Monetary Fund. …rising income inequality erodes the trust people have in one another and their willingness to cooperate.

I’m glad he cited Okun, and it’s also good that he cited Sweden’s turn in the right direction.

But it’s very disappointing that he called attention to the IMF’s incredibly shoddy research on inequality.

As I’ve repeatedly explained, inequality that results from voluntary exchange is fine and inequality that results from Cronyism is bad. Studies that fail to distinguish between the two are either deliberately dishonest or breathtakingly shoddy.

I’ll close by asking critics of capitalism to give just one accurate answer to my two-question challenge. Or, if that’s too difficult, create the left-wing version of this chart.

I won’t be holding my breath.

Read Full Post »

« Newer Posts - Older Posts »

<span>%d</span> bloggers like this: