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Posts Tagged ‘Government Spending’

President Trump’s new budget is getting attacked by politicians and interest groups in Washington. These critics say the budget cuts are too severe and draconian.

My main reaction is to wonder whether these people are illiterate and/or innumerate. After all, even a cursory examination of Trump’s proposal shows that the federal government will expand over the next decade by an average of 3.46 percent every year, considerably faster than inflation.

For what it’s worth, I’m sure most of the critics actually do understand that government will continue growing under Trump’s budget. But they find it politically advantageous to engage in “Washington math,” which is when you get to claim a program is being cut if it doesn’t get a sufficiently large increase. I’m not joking.

That being said, while the overall federal budget will get bigger, there are some very good proposals in the President’s budget to terminate or reduce a few specific programs. I don’t know if the White House is actually serious about any of these ideas, but some of them are very desirable.

  • Shutting down the wasteful National Endowment for the Arts.
  • Defunding National Public Radio and the Corporation for Public Broadcasting.
  • Terminating the scandal-plagued Community Development Block Grant program.
  • Block-granting Medicaid and reducing central government funding and control.

Today, let’s add a fifth idea to our list. The Trump budget proposes a substantial reduction in foreign aid (for numbers, see line 18 of this OMB excel file).

I hope these cuts are implemented.

In part, I want to save money for American taxpayers, but I’m even more motivated by a desire to help the rest of the world. Simply stated, foreign aid is counterproductive.

The great paradox of government-to-government aid transfers is that they won’t work if recipient nations have bad policy. Yet we also know that nations with good policy don’t need handouts.

In other words, there’s no substitute for free markets and small government. That recipe works wherever it’s tried.

My colleague at the Cato Institute, Marian Tupy, embraces the idea of less foreign aid in a Reason column.

President Donald Trump is said to be considering large cuts to foreign aid. Those cuts cannot come soon enough.

And he explains why in the article. Here’s the passage that caught my eye.

Graham Hancock’s 1994 book, The Lords of Poverty: The Power, Prestige, and Corruption of the International Aid Business, is still worth reading. As the author explains, much of foreign aid is used to subsidize opulent lifestyles within the aid establishment. “Only a small portion of [aid money],” Hancock writes, “is ever translated into direct assistance. Thanks to bureaucratic inefficiency, misguided policies, large executive salaries, political corruption, and the self-perpetuating ‘overhead’ of the administrative agencies, much of this tremendous wealth is frittered away.”

The problems are not specific to the United States. Foreign aid also is used as a scam to line the pockets of contractors in the United Kingdom.

The British aid contracting industry has more than doubled in value from £540 million in 2012 to £1.34 billion last year. The proportion of every pound of taxpayers’ aid money that is spent on consultants has risen from 12p in 2011 to 22p. …Budget breakdowns showed the public being charged twice the going rate for workers. One contractor on a project had a margin of 141 per cent between staffing costs charged to Dfid and the cost at market rates.

By the way, one study even found that foreign aid undermines democracy.

Foreign aid provides a windfall of resources to recipient countries and may result in the same rent seeking behavior as documented in the “curse of natural resources” literature. …Using data for 108 recipient countries in the period 1960 to 1999, we find that foreign aid has a negative impact on democracy. In particular, if the foreign aid over GDP that a country receives over a period of five years reaches the 75th percentile in the sample, then a 10-point index of democracy is reduced between 0.6 and one point, a large effect.

Last but not least, Professor William Easterly explains in the Washington Post that foreign aid does not fight terrorism.

President Trump’s proposed budget includes steep cuts in foreign assistance. Aid proponents such as Bill Gates are eloquently fighting back. …The counter-terrorism argument for foreign aid after 9/11 indeed succeeded for a long time at increasing and then sustaining the U.S. foreign aid budget. …the link from aid to counter-terrorism never had any evidence behind it. As it became ever less plausible as terrorism continued, it set up aid for a fall. …the evidence for a link from poverty to terrorism never showed up. …studies since 9/11 have consistently shown that terrorists tend to have above-average income and education. Even if there had been a link from poverty to terrorism, the “aid as counter-terrorism” argument also required the assumption that aid has a dramatic effect on the poverty of entire aid-receiving nations. Today’s proponents of aid no longer make the grandiose claims of aid lifting whole societies out of poverty.

Heck, foreign aid keeps societies in poverty by enabling bigger government.

Yet international bureaucracies such as the United Nations keep peddling the discredited notion that developing nations should have more money to finance ever-bigger government.

The bottom line is that people who care about the world’s poor people should be advocating for freedom rather than handouts.

P.S. If you’re still skeptical, I invite you to try to come up with an example that answers either of these two questions.

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It’s both amusing and frustrating to observe the reaction to President Trump’s budget.

I’m amused that it is generating wild-eyed hysterics from interest groups who want us to believe the world is about to end.

But I’m frustrated because I’m reminded of the terribly dishonest way that budgets are debated and discussed in Washington. Simply stated, almost everyone starts with a “baseline” of big, pre-determined annual spending increases and they whine and wail about “cuts” if spending doesn’t climb as fast as previously assumed.

Here are the three most important things to understand about what the President has proposed.

First, the budget isn’t being cut. Indeed, Trump is proposing that federal spending increase from $4.06 trillion this year to $5.71 trillion in 2027.

Second, government spending will grow by an average of almost 3.5 percent per year over the next 10 years.

Third, because the private economy is projected to grow by an average of about 5 percent per year (in nominal terms), Trump’s budget complies with the Golden Rule of fiscal policy.

Now that we’ve established a few basic facts, let’s shift to analysis.

From a libertarian perspective, you can argue that Trump’s budget is a big disappointment. Why isn’t he proposing to get rid of the Department of Housing and Urban Development? What about shutting down the Department of Education? Or the Department of Energy? How about the Department of Agriculture, or Department of Transportation?

And why is he leaving Social Security basically untouched when taxpayers and retirees would both be better off with a system of personal retirement accounts? And why is Medicare not being fundamentally reformed when the program is an ever-expanding budgetary burden?

In other words, if you want the federal government to reflect the vision of America’s Founders, the Trump budget is rather disappointing. It’s far from a Liberland-style dream.

But for those who prefer to see the glass as half-full, here are a couple of additional takeaways from the budget.

Fourth, as I wrote yesterday, there is real Medicaid reform that will restore federalism and save money.

Fifth, domestic discretionary spending will be curtailed.

But not just curtailed. Spending in the future for this category will actually be lower if Trump’s budget is approved. In other words, a genuine rather than fake budget cut.

I’ll close with my standard caveat that it’s easy to put good ideas (or bad ideas) in a budget. The real test is whether an Administration will devote the energy necessary to move fiscal reforms through Congress.

Based on how Trump was defeated in the battle over the final spending bill for the current fiscal year, there are good reasons to be worried that good reforms in his budget won’t be implemented. Simply stated, if Trump isn’t willing to use his veto power, Congress will probably ignore his proposals.

P.S. You may have noticed that I didn’t include any discussion of deficits and debt. And I also didn’t address the Administration’s assertion that the budget will be balanced in 10 years if Trump’s budget is approved. That’s because a fixation on red ink is a distraction. What really matters is whether the burden of spending is falling relative to the private sector’s output. In other words, the entire focus should be on policies that generate spending restraint and policies that facilitate private sector growth. If those two goals are achieved, the burden of red ink is sure to fall. Whether it happens fast enough to balance the budget in 2027 is of little concern.

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When President Trump released his so-called “skinny budget” back in March (dealing with the parts of Leviathan that are annually appropriated), I applauded several of the specific recommendations.

  • Shutting down the wasteful National Endowment for the Arts.
  • Defunding National Public Radio and the Corporation for Public Broadcasting.
  • Terminating the scandal-plagued Community Development Block Grant program.

The only problem is that I didn’t sense – and still don’t see – any serious effort to push through these much-needed fiscal reforms (and the same is true for his proposed tax cut).

The bottom line is that Trump has the power to achieve the bulk of his agenda, but only if he is willing to veto pork-filled bills and force a partial government shutdown. But he’s already blinked once in this type of battle, so the spending lobbies feel confident that he can be rolled again.

But let’s set that aside. The White House is about to release the President’s full budget and there already is considerable angst about potential reforms to Medicaid. Here are some excerpts from a report in the Washington Post.

President Trump’s first major budget proposal on Tuesday will include massive cuts to Medicaid…more than $800 billion over 10 years. …Trump’s decision to include the Medicaid cuts is significant because it shows he is rejecting calls from a number of Senate Republicans not to reverse the expansion of Medicaid that President Barack Obama achieved as part of the Affordable Care Act. The House has voted to cut the Medicaid funding… The proposed changes will be a central feature of Trump’s first comprehensive budget plan…it will seek changes to entitlements — programs that are essentially on auto­pilot and don’t need annual authorization from Congress.

I have two reactions to this story.

First, the Washington Post is lying (and not for the first time). There will be no Medicaid cuts in Trump’s budget. Contrary to the headline, there aren’t “big cuts” and there won’t be any “slashing.” We won’t see the actual numbers until tomorrow, but I can state with complete certainty that the Trump Administration is merely going to propose a reduction in how fast the program’s budget increases.

Second, it’s a very good idea to slow down the growth of Medicaid spending.

Here is some background information on the program, starting with an article in The Week by Shikha Dalmia

Medicaid is arguably the civilized world’s worst health insurance program. …This joint federal and state program has historically allowed the feds to give states 50 cents for every dollar they spent on purchasing health coverage for the poor. Because of this federal largesse, Medicaid has grown astronomically, becoming the single biggest ticket item on virtually every state budget. …President Obama essentially money-bombed states into expanding it even further. He told states that Uncle Sam would pick up 100 percent of the tab for the first three years for every additional person they covered up to 138 percent of the poverty level. …Medicaid now covers almost 75 million Americans. And even before ObamaCare took effect, Medicaid paid for almost half of all births in America. …The combined annual cost of the program now exceeds half a trillion dollars (with the feds’ share at 63 percent and states’ at 37 percent) — which adds up to roughly $7,000 for every man, woman, and child covered by the program. …Several reputable studies have found that Medicaid patients experience no better health outcomes than uninsured people, and arguably even slightly worse outcomes. …ObamaCare is like a Rube Goldberg contraption. Taking it apart and reassembling it is easier said than done — even if it’s the right and smart thing to do. And if Republicans can’t figure out a way to do so, American patients and taxpayers will be the big losers.

And here are some excerpts from a Wall Street Journal editorial.

The…important goal is to change the incentives over the long term and eliminate the perverse formulas that discount the welfare of the truly needy. …A helpful revolution in Medicaid would be to end the match rate that rewards higher spending and move to block grants. States would get some fixed pot of money annually, determined by how many people are enrolled. The pots might be expensive in the early years, but states would become accountable for marginal per capita spending growth over time. Governors can be assuaged by ending Medicaid’s command-and-control regulatory model, freeing them to use new tools to control costs.

James Capretta of the American Enterprise has additional details, particularly showing how the “federal medical assistance percentage” encourages higher spending.

In 1965, the authors of Medicaid thought they were creating a program that would provide federal structure, uniformity, and some funding for the many state programs that were already providing relatively inexpensive “indigent care” services to low-income households. …Medicaid has grown into the largest health care program in the country by enrollment, with 66 million participants and with annual federal and state costs of more than $550 billion. …Medicaid spending has increased rapidly nearly every year since the program was enacted, creating significant pressure in federal and state budgets. …The Medicaid FMAP is the fundamental flaw in the program’s current design and the main reason it is so costly. States can initiate new spending in Medicaid—spending that often will boost economic activity in the state—and federal taxpayers pay for at least half the cost. At the same time, savings from state-initiated Medicaid-spending cuts are also shared with federal taxpayers. For instance, in a state where the FMAP is 60 percent, the governor and state legislators face the unattractive prospect of keeping only $1.00 of every $2.50 in Medicaid savings they can identify and implement. The other $1.50 goes to the federal treasury. Put another way, governors and state legislators are reluctant to impose $2.50 in budgetary pain for a $1.00 gain to their bottom line.

The solution to this rigged system, he explains, is block grants or per-capita caps.

The…important structural change would be the switch to some form of fixed federal funding to states. The federal government would continue to heavily support the Medicaid program, but the commitment would have a limit, which would give states a strong incentive to manage the program for efficiency and cost control. One approach would be a block grant. Under a block grant, the federal government would make fixed, aggregate payments to the states based on historical spending patterns. Cost overruns at the state level would require the state to find additional resources within the state budget. Conversely, states that were able to control costs would enjoy the full benefits of their efforts. …Under per capita caps, the federal government would establish for each state a per-person payment for each of the main eligibility categories in the Medicaid program: the elderly, the blind and disabled, nondisabled adults, and children. The federal government would then make payments to the states based on the number of Medicaid enrollees in each of these categories. The per capita payment would be based on historical spending rates for the various categories of beneficiaries in each state and, again, would be indexed to a predetermined growth rate.

By the way, I previously shared two very depressing charts from Jim’s article.

In a 2012 column for Forbes, Avik Roy explains why reform will produce good results.

People on Medicaid have far worse health outcomes than those with private insurance, and in many cases those with no insurance at all. …there are…substantial efficiencies that can be gained by giving states broad flexibility in the way they care for the poor. Indeed, this is what made block-granting welfare in 1996 such a spectacular success. …three states—Rhode Island, Indiana, and New York—have taken advantage of more flexibility to save money while delivering better care. …Rhode Island was able to save $100 million, and slow the growth of Medicaid from 8 percent per year to 3 percent, by making a few tweaks to their program that they couldn’t before…under a block-grant system, states can identify ways to save money while improving care, and other states can adopt best practices.

Writing for the Wall Street Journal, Professor Regina Herzlinger and Dr. Richard Boxer elaborate on how a new system would work.

Republicans should combine two ideas popular in their party: block grants and health savings accounts. The former would let states tailor their Medicaid policies to their local communities, while the latter would give enrollees the ability to choose their own insurers and providers. In essence, Washington could give the states Medicaid block grants, allocated per capita, to provide beneficiaries with high-deductible insurance and health savings accounts. …Health savings accounts, which force medical providers to compete for consumers who pay out of their own pocket, also reduce overall costs. When employers introduce such accounts, health-care costs are reduced by about 5% for each of the next three years, according to a 2015 study from the National Bureau of Economic Research.

Nicholas Eberstadt, in an article for Commentary, points out the Medicaid is an employment killer.

21st-century America has witnessed a dreadful collapse of work. …According to the Census Bureau’s SIPP survey (Survey of Income and Program Participation), as of 2013, over one-fifth (21 percent) of all civilian men between 25 and 55 years of age were Medicaid beneficiaries. For prime-age people not in the labor force, the share was over half (53 percent). …means-tested benefits cannot support a lavish lifestyle. But they can offer a permanent alternative to paid employment, and for growing numbers of American men, they do. The rise of these programs has coincided with the death of work for larger and larger numbers of American men not yet of retirement age.

And the icing on the cake is that Medicaid finances much of the opioid problem in America.

[The Medicaid card] pays for medicine—whatever pills a doctor deems that the insured patient needs. …For a three-dollar Medicaid co-pay, therefore, addicts got pills priced at thousands of dollars, with the difference paid for by U.S. and state taxpayers. A user could turn around and sell those pills, obtained for that three-dollar co-pay, for as much as ten thousand dollars on the street. …Medicaid inadvertently helped finance America’s immense and increasing appetite for opioids in our new century.

And if we want a cherry on top of the icing, Medicaid also is a cesspool of fraud, as reported by Reason.

Every year, the Government Accountability Office (GAO) releases a report putting a dollar figure on the amount of improper payments in Medicaid. …it shows that the program…spends a substantial portion of its annual budget…On fraud, on waste, on services not rendered, not medically necessary, or incorrectly billed. Last year, for example, the GAO found that about 9.8 percent of federal Medicaid expenditures, or about $29 billion, was spent improperly. …This year, the total has risen once again. About 10.5 percent, or $36 billion, of federal spending on the program isn’t up to snuff, according to a GAO report released this morning.

On that issue, my “favorite” example of Medicaid fraud was perpetrated by Russian diplomats.

Last but not least, Charlie Katebi discusses Medicaid problems in a column for the Federalist.

Trump advisor Kellyanne Conway said Trump wants to “block-grant Medicaid to the states” to ensure “those who are closest to the people in need will be administering.” …Block grants would cap federal Medicaid funding and let states decide how to use those dollars. It would introduce flexibility and budget discipline to a program that sorely needs both. …Medicaid’s funding formula incentivizes policymakers to expand the program at the expense of core state government functions. …Medicaid’s structure also hurts its beneficiaries. …Washington bars reformers from making meaningful changes without going through a lengthy and restrictive approval process. This forces states to control costs the only way they can: paying doctors less. States have cut Medicaid’s reimbursement so low that many providers simply refuse to treat its beneficiaries. …Block grants promise to break Medicaid’s vicious cycle of rising costs and declining care. Spendthrift politicians would no longer be able to expand Medicaid and expect the federal government to foot the bill. But state-level reformers will enjoy greater authority to streamline and improve the program.

I may as well close with the video I narrated for the Center for Freedom and Prosperity.

The video was released in 2011, but nothing has changed…except that the numbers today are far worse, in part because of Obama’s Medicaid expansion.

P.S. Based on CBO’s long-run forecast, Trump also should reconsider his views on old-age entitlements and support Medicare reform and Social Security reform.

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It’s not that much fun to be a libertarian, at least if you work in public policy.

You spend your days hoping that “Public Choice” can be overcome, which means you’re laboring to fulfill Sisyphean tasks.

  • Trying to convince politicians and bureaucrats to voluntary give up power and control over the economy. Good luck with that.
  • Trying to convince voters that it’s not right use government coercion to steal other people’s money. An increasingly hard task.

Needless to say, these are not easy tasks, which is why most of my time is spent playing defense. In other words, I’m trying to prevent government from getting even bigger.

But what if there was an opportunity to wipe the slate clean and start all over? Imagine a libertarian fantasy world, where proponents of freedom decide the proper size and scope of government?

Well, that fantasy world exists, sort of. It’s called Liberland, an island in the Danube River that isn’t claimed by either Serbia or Croatia. So a group of libertarians, led by Vít Jedlička, claimed the island and announced the creation of the Free Republic of Liberland.

That’s the good news. The bad news is that neither Serbia nor Croatia recognize Vit’s claim. Indeed, Croatian police arrest people who set foot on the island, which is rather strange since Croatia says the island isn’t Croatian territory (Wikipedia has the details on Liberland’s status).

Notwithstanding these obstacles, the Liberland community is relentlessly hopeful of a good outcome. Indeed, they just held a conference to mark Liberland’s second anniversary.

And I was asked to speak about the ideal fiscal policy for this new country. Here’s my speech, which begins with a discussion of government as a “stationary bandit” and then explores some of the theoretical issues of setting up a freedom-oriented society.

Yes, I realize I’m talking about the theoretical nature of a theoretical state, but I very much enjoyed this opportunity to engage in a Walter Mitty-style dream about how Liberland might operate.

And I even had Liberland’s president as an assistant for my talk.

After spending the first part of my speech contemplating the theoretical nature of a Liberland government (or private governance), I spend the last part of the speech explaining that the public sector should be very small because there are very few genuine “public goods.”

I discussed the Rahn Curve and cited the data showing that the federal government was a very tiny burden for much of America’s history.

I also pointed out that the burden of government was similarly modest in other western nations during the 1800s and early 1900s, which was when those countries went from agricultural poverty to middle-class prosperity.

And I pointed out that taxation would be a trivial issue if Liberland came into existence and has a very small government.

For those interested in the idea of new libertarian societies, there’s “seasteading.”

Seasteading, the concept of building freer societies upon unincorporated parts of the world’s oceans, is one of those so-crazy-it-just-might-work ideas within liberty/stateless circles. Long discussed, presented, talked about, mulled over, most cranks like myself mentally pocketed the idea years ago. Compelling enough, definitely, but it seemed wishful, immediately impractical. …The concept of seasteading really begins in earnest with Patri Friedman, grandson of Nobel Laureate Milton Friedman. The third generation Friedman doesn’t shy away from his famous lineage, which also includes anarcho-capitalist philosopher father David Friedman. …Mr Friedman vowed to take theory into practice. Real world. Right now. He, along with gadfly investor Peter Thiel, founded The Seasteading Institute. …The Seasteading Institute has inked a deal with French Polynesia for a trial city off their shores. It’s happening.

And “special economic zones” are another example of libertarian-style governance.

…two kinds of special jurisdictions — private communities and “Special Economic Zones” — are quietly taking over functions and providing options that traditional polities cannot or will not. This gentle revolution has already brought comparative wealth and better living to millions of people… In a Special Economic Zone (SEZ), a government creates exceptions to its own rules — a select haven from the status quo that prevails elsewhere in the national territory. The goal, says the World Bank, is to create a “business environment that is intended to be more liberal from a policy perspective and more effective from an administrative perspective than that of the national territory.” …The antecedents of modern SEZs date from 166 BCE, when Roman authorities made the island of Delos a free port, exempting traders from the usual taxes in order to stimulate local commerce. …The astonishing growth in SEZs qualifies as a revolution of sorts, but not the usual, political kind. Instead of being imposed by domestic or foreign enemies, this revolution has come from within, allowed or even encouraged by existing authorities.

And here’s a video about Liberland for those interested.

Let’s close with some wonkiness by looking at some academic research about fiscal policy and the evolution of government.

We’ll start with some excerpts from Tanzi and Schuknecht’s analysis of Public Spending in the 20th Century.

Classical economists thought that the government’s role should be limited to national defense, police, and administration because government “cannot have any other rational function but the legitimate defense of individual rights” (Bastiat, 1944–5). …For classical economists, the government role should be small… The countries’ institutional frameworks, such as the U.S. Constitution, did not specify any other economic role for the state. Consequently, in the last century, public spending was minimal in a number of industrialized countries for which data for 1870 could be found… In the United States, government expenditure was about 7 percent of GDP, and, in most newly industrialized European countries of the period, such as Germany, the United Kingdom, or the Netherlands, expenditure did not exceed 10 percent of GDP. A leading French economist of the time, Paul Leroy-Beaulieu (1888), addressing the question of the proper share of taxes in the economy, suggested that a share of 5–6 percent was moderate while a share beyond 12 percent had to be considered “exorbitant” and would damage the growth prospects of an economy.

Hmmm, I though Bastiat was the only good French economist. But Monsieur Leroy-Beaulieu obviously is a very sensible person.

Now let’s look at historical estimates of tax revenue, as presented in a study from two academics published by the London School of Economics.

…it was states in Europe that were the first to permanently break cycles of gains and losses in centralized fiscal and coercive capacity and build towards the modern state system. …we divide the annual per capita central tax revenues in silver by the daily wages of unskilled workers in silver. …The daily wages of unskilled urban workers in grams of silver…are available annually for most polities and in the absence of reliable estimates for per capita income, are frequently used by economic historians as a proxy for per capita income for this period. …During the first half of the sixteenth century, annual tax revenues per capita did not exceed 5 days of unskilled urban wages in most European countries. The only exceptions were the small and highly urbanized entities such as Venice and Holland. By the end of the eighteenth century, however, …many others had reached the 10 to 15 daily wages range and annual per capita revenues of the central administration in the Dutch Republic exceeded 20 days of urban wages. It is worth noting that the middle group where annual per capita revenues reached 10 to 15 daily wages included not only the more urbanized western European countries such as England, France, Spain and Venice but also the more rural and agricultural countries in central and eastern Europe such as Austria

Here’s a chart from the study that gives an idea of the tax burden in various nations from 1500-1800.

Last but not least, we have a very detailed study about the evolution of the state from economists at George Mason University. I’ve culled some of the key passages.

Recent scholarship in both political economy and development economics has emphasized the importance of state capacity in explaining why some countries have succeeded in achieving economic development whereas others have not. This literature points to the role of state capacity in explaining the durability of institutions that are both conducive to markets and to economic growth. …This literature recognizes both that predatory behavior by states is frequently a cause of economic stagnation and that well-functioning states can provide the institutional framework necessary for sustained economic growth. … Economies governed by strong, cohesive, and constrained states are better able to overcome vested interests and avoid disastrous economic policies, while societies ruled by weak states are prone to rentseeking, corruption and civil war. State capacity, therefore, can complement market-supporting institutions in providing a conducive setting for economic development. This insight was understood by Adam Smith who noted the importance of the provision of peace, justice, and easy taxation (Smith, 1763). …Economic growth in the absence of sufficient state capacity was not self-sustaining precisely because economically successful societies attracted predators. …Greater state capacity enabled the states of western Europe to escape from this violence trap in the eighteenth and nineteenth centuries. …Well functioning markets are not only required for allocative economic efficiency, they also provide the necessary conditions for sustained economic growth over time. But markets cannot operate in an institutional vacuum. They require property rights that are well defined and enforced and rely on governance institutions that can arbitrate claims and disputes. Governance institutions do not have to be provided by a state—that is by an organization that claims a monopoly on the legitimate use of force within a circumscribed territory. Historically there are many instances of market actors developing their own governance mechanisms in the absence of state enforcement through private-order arrangements… The state is certainly not required for either impersonal trade or for the emergence of rules of behavior and the rule of law. What the historical record suggests, however, is that during the relevant centuries prior to the industrial revolution, commerce and trade came increasingly under the purview of the public-order institutions. …State capacity, as we have noted, need not promote economic growth. States with high capacity can pursue destructive economic policies. Rather the point is that state capacity can be beneficial for growth when the state is constrained by law. One of the reasons for this is that high capacity states have the ability to enforce general rules. This ability is closely linked to what social scientists typically mean by rule of law. …What enables some societies to build effective states—states that are able to provide basic public goods but which are constrained and limited in scope and scale? …The origins of modern economic growth are to be found in the expansion of market exchange and trade that gave rise to a more sophisticated and complex division of labor that rewarded innovation and to the cultural and potentially non-economic factors that helped spur innovation (Howes, 2016; McCloskey, 2016; Mokyr, 2016). The importance of the rise of high capacity states to this story is that these states helped to provide the institutional conditions that either enabled growth and innovation to take place or at least prevented their destruction through warfare or rent-seeking. The emergence of sustained economic growth in the nineteenth century was associated with strong but limited states. Twentieth century ambitions to use state power to remold societies either ended in failure or were at least partially reversed. We have focused on the recent literature linking the rise of the modern state to positive economic outcomes, but do not want to give the impression that we are neglecting how easy it is for governments to destroy economies (e.g., Shleifer and Vishny, 1998; Easterly, 2001).

The core message is that the key to prosperity is having a state strong enough and effective enough to provide rule of law, but to somehow constrain that state so that it doesn’t venture into destructive redistribution policies.

This is why competition between governments played a key role in the economic development of the western world. When governments have to worry about productive resources escaping, that forces them to focus on things that help an economy (i.e., rule of law) while minimizing the policies that hinder prosperity (i.e., high taxes and spending).

P.S. I got a nice surprise at the conference. I was made a citizens of Liberland.

P.P.S. America’s Founding Fathers dealt with the same issues that I discussed at the Liberland conference. Their solution was a constitution that explicitly limited the size and scope of the federal government. As I noted in my speech, that system worked reasonably well until the 1930s. Now we’ve gone so far in the other direction that the Supreme Court says Washington can compel us to buy things from cronyist companies.

Avoiding the same fate will be a major challenge for Liberland. Assuming, of course, it gets off the ground.

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A couple of weeks ago, I reviewed the four major candidates running in the French presidential election and expressed general pessimism.

This Sunday, Emmanuel Macron and Marine Le Pen will face each other in the runoff election.

That’s a rather depressing choice. Macron is a former official in the disastrous big-government Hollande Administration and Le Pen is a big-government nativist who wants to preserve the welfare state (though not for immigrants).

Like choosing between Tweedledee and Tweedledum.

Not encouraging since the country needs a Ronald Reagan or Margaret Thatcher.

A column in the Wall Street Journal explains France’s untenable position.

The deeper question is whether French voters accommodate themselves to reality or cling tighter to their economic illusions. …“The French try to erase historical experience,” Pascal Bruckner tells me. The literary journalist is one of a very few classical liberals among French public intellectuals. He says his compatriots “have forgotten the experience of 1989 and only see the bad aspects of capitalism and liberal democracy.” The tragedy of France, Mr. Bruckner says, is that the country never had a Margaret Thatcher or Gerhard Schröder to implement a dramatic pro-growth program. …it wasn’t shadowy globalists who in 1999 imposed a 35-hour workweek to make overtime labor prohibitively expensive. The law was meant to encourage firms to hire more workers, but like most efforts to subjugate markets to politics, it ended up doing more harm than good. Now it’s the main barrier to hiring in a country where the unemployment rate is stuck north of 10%. Nor was it global markets that levied a corporate tax rate of 33% (plus surcharges for larger firms), a top personal rate of 45%, and a wealth tax and other “social fees” that repelled investors and forced the country’s best and brightest to seek refuge in places like London, New York and Silicon Valley. Nor did globalization build a behemoth French bureaucracy that crowds out the private economy.

Yes, France is in a mess because of statism. Hard to argue with that.

The question is whether Macron or Le Pen will make things better or worse.

With pervasive lack of enthusiasm, I suppose Macron is the preferable choice. There’s at least a chance he’ll be a reformer. Let’s look at how some observers view him.

We’ll start with George Will, who is not overly impressed by Macron.

The French…might confer their presidency on a Gallic Barack Obama. …Emmanuel Macron, 39, is a former Paris investment banker, untainted by electoral experience, and a virtuoso of vagueness. …This self-styled centrist is a former minister for the incumbent president, Socialist François Hollande, who in a recent poll enjoyed 4 percent approval. …In 1977, France’s gross domestic product was about 60 percent larger than Britain’s; today it is smaller than Britain’s. In the interval, Britain had Margaret Thatcher, and France resisted (see above: keeping foreigners’ ideas at bay) “neoliberalism.” It would mean dismantling the heavy-handed state direction of the economy known as “dirigisme,” which is French for sclerosis. France’s unemployment rate is 10 percent, and more than twice that for the young. Public-sector spending is more than 56 percent of France’s GDP, higher than any other European nation’s. Macron promises only to nibble at statism’s ragged edges. He will not receive what he is not seeking — a specific mandate to challenge retirement at age 62 or the 35-hour workweek and the rest of France’s 3,500 pages of labor regulations that make it an ordeal to fire a worker and thus make businesses wary about hiring. Instead, he wants a more muscular European Union , which, with its democracy deficit, embodies regulatory arrogance.

Joseph Sternberg of the Wall Street Journal is a bit more optimistic.

Optimistic pundits hope the impending victory of a fresh-faced reformer signals that France’s economy at last can be fixed. But for at least the past decade, France’s problem hasn’t been a lack of understanding in the political class of what the French economy needs. Mr. Macron is not so much a radical change-agent as a photogenic tribune for a political class that is increasingly, albeit belatedly, uniting behind the need for economic overhauls. Formerly of the center left, he won Sunday’s first round on a revitalization platform different more in degree than in kind from that of the main center-right candidate, François Fillon, on matters such as government spending cuts and labor-law reform. The global case of the vapors over Ms. Le Pen obscures how remarkable this pro-reform convergence is. …Margaret Thatcher and Ronald Reagan…remade British and American politics for a generation not through the workings of their legislative programs but through their capacity to shape public opinion. They created a coalition of the optimistic…. If the Macron program is to stick, he’ll have to do the same. He isn’t off to an auspicious start. …His message to those workers—“Take the hit for the good of the country”—lacks a certain Reaganesque resonance.

A columnist for the New York Times offers the most positive spin, portraying Macron as a Reaganite reformer.

Emmanuel Macron…attributes the nation’s woes not to outsiders — European officials and immigrants — but on France’s own “sclerotic” and unsustainable welfare state. …Mr. Macron would work to slim down one of the world’s fattest welfare states, rather than build it up as Ms. Le Pen would do. Of course France has attempted welfare state reform before, without success. The latest effort came last year, when Mr. Macron was a minister in the Socialist government, and wrote the Macron laws, opening regulated industries to competition. Those plans set off mass protests, and were watered down, but Mr. Macron says there is a big difference now: Earlier governments were not elected with a mandate to downsize the welfare state, while his could be. …the case for change has grown more urgent. …Georges Clemenceau, who served twice as prime minister between 1906 and 1920, cracked that his country was very fertile: “You plant bureaucrats and taxes grow.” Over the last decade state spending has grown even more… It’s tough to say how much state spending is too much, but France has clearly fallen out of balance, and Mr. Macron is right that the trend is “no longer sustainable.” The public payroll is similarly bloated, and Mr. Macron aims to rebalance the economy by cutting 120,000 public sector jobs, streamlining the pension system and dropping state spending back to 52 percent of G.D.P. Mr. Macron leads an emerging centrist consensus that recognizes that — more than immigrants or the euro — the main obstacle retarding France’s economy is its attachment to a welfare state culture of short workweeks and generous benefits. …In recent years France’s high income taxes have been chasing artists, executives and entrepreneurs out of the country. Last year, 12,000 millionaires emigrated — the largest millionaire exodus from any country by far. Mr. Macron — who once said that stifling taxes threaten to turn France into “Cuba without the sun” — has strong support among young, professional urban voters who would prefer opportunity at home to an expat life in London.

I hope this last column is accurate.

And the chance of Macron being good are greater than zero.

After all, it was the left-wing parties that started the process of pro-market reforms in Australia and New Zealand.

And it was a Social Democrat government in Germany that enacted the labor-market reforms that have been so beneficial for that nation.

Heck, policy even moved in the right direction when Bill Clinton was in the White House in the 1990s.

So I guess we can keep our fingers cross that Macron plays a similar role in France.

By the way, I can’t resist citing Paul Krugman’s assessment. He actually thinks France is in fairly good shape.

…what’s going on. …how did things get to this point? …France gets an amazing amount of bad press — much of it coming from ideologues who insist that generous welfare states must have disastrous effects — it’s actually a fairly successful economy. …It’s true that the French over all produce about a quarter less per person then we do — but that’s mainly because they take more vacations and retire younger… France offers a social safety net beyond the wildest dreams of U.S. progressives: guaranteed high-quality health care for all, generous paid leave for new parents, universal pre-K, and much more.

That’s an interesting spin, but maybe French people would like to earn more, but don’t have the opportunity because of bad policy?

And if things are so good in France, why are so many French people escaping to other nations?

Moreover, to the extent there are problems, Krugman says the blame belongs to the supposed pro-austerity crowd in Brussels and Berlin.

Even though Brussels and Berlin were wrong again and again about the economics — even though the austerity they imposed was every bit as economically disastrous as critics warned — they continued to act as if they knew all the answers

Yet the nations that actually cut spending – such as the Baltics – have recovered strongly. It’s the big spenders in Europe who are dragging down the continent.

And since Macron’s supposed reform agenda would only reduce the burden of government spending to 52 percent of economic output (from about 57 percent today), that’s not exactly an example of vigorous budget cutting anyway.

But it would be nice to add France to my list of nations that have – for a last a couple of years – restrained the growth of the public sector.

P.S. I have a good track record in France. The candidate I “endorsed” in 2012 won the race.

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Republicans control the House, the Senate, and the White House.

In theory, that means a long-overdue opportunity to eliminate wasteful programs and cut pork-barrel spending.

In reality, it mostly means business as usual.

Politicians in Washington just reached a deal to fund the government for the rest of the current fiscal year. As reported by the Washington Post, it’s not exactly a victory for libertarians or small-government conservatives.

Democrats are surprised by just how many concessions they extracted in the trillion-dollar deal, considering that Republicans have unified control of government. …Non-defense domestic spending will go up, despite the Trump team’s insistence he wouldn’t let that happen. The president called for $18 billion in cuts. Instead, he’s going to sign a budget with lots of sweeteners that grow the size of government. …the NIH will get a $2 billion boost — on top of the huge increase it got last year. …Planned Parenthood…will continue to receive funding at current levels. …after the deal was reached…, Chuck Schumer and Nancy Pelosi quickly put out celebratory statements. …“Overall, the compromise resembles more of an Obama administration-era budget than a Trump one,” Bloomberg reports. …Reuters: “While Republicans control the House, Senate and White House, Democrats scored … significant victories in the deal.” …Vox: “Conservatives got almost nothing they wanted.”

I guess you could call this a triumph of “public choice” over campaign rhetoric. Politicians did what’s in the best interest of politicians rather than what would be best for the nation.

I’m disappointed, as you might expect. But as I say in this interview, there are far more important battles. I’ll gladly accept a bit of pork and profligacy in the 2017 budget if that clears the decks for much-needed repeal of Obamacare and long-overdue reform of the tax code.

But here’s the catch. I don’t expect that these reforms will actually happen. Yes, the deck has been cleared, but I don’t think Republicans will take advantage of the opportunity.

The fundamental problem, which I pointed out in a different interview, is that there’s not a governing majority for smaller government. And that has some very grim implications.

Even more depressing, I point out that only Trump has the power to turn things around. Yet I see very little evidence that he, a) believes in smaller government, or b) is willing to expend any political capital to achieve smaller government.

To make matters worse, Republicans have convinced themselves that they lose the spin battle whenever there is a shutdown or some other high-stakes fiscal fight with Democrats.

For what it’s worth, I’m trying to remind Republicans that it is in their long-run political interests to do the right thing (as Reagan demonstrated). That’s why, in the first interview, I said they need to gut Obamacare and lower taxes if they want to do well in the 2018 and 2020 elections.

But don’t hold your breath waiting for the “stupid party” to behave intelligently.

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I want tax cuts. I support tax cuts. I relish tax cuts.

  • I like tax cuts because I’m a curmudgeonly libertarian and I think people should have the first claim on the money they earn.
  • I like tax cuts because I’m an economist and we’ll get more growth if penalties on productive behavior are reduced.
  • I like tax cuts because the academic research supports the “starve-the-beast” theory of less revenue leading to less spending.

This is why I wrote favorably about Trump’s campaign tax plan, and this is why I like Trump’s new tax plan (with a few exceptions).

But I confess that my heart’s not in it. Simply stated, I don’t think the new plan is serious.

If Trump really wanted a big tax cut, he would have a comprehensive plan to restrain the growth of government spending. He doesn’t.

If Trump genuinely wanted lower taxes, he would be aggressively pushing for genuine entitlement reform. He isn’t.

And Congress isn’t much better. At least in the absence of leadership from the White House.

It’s not merely that I’m concerned lawmakers won’t put the brakes on spending. And it’s not just that I fear they won’t enact much-needed entitlement reform. I worry they’ll actually increase the burden of federal spending. Just look what’s happening as Congress and the White House negotiate a spending bill for the remainder of the 2017 fiscal year. The pending deal would trade more defense spending for more Obamacare subsidies. Everyone wins…except taxpayers.

In this profligate environment, it’s hard to be optimistic about tax cuts.

By the way, I fully agree we would get more growth if Trump’s tax plan was enacted. But the Laffer Curve doesn’t say that all tax cuts pay for themselves with faster growth. That only happens in rather rare circumstances.

Yes, the lower corporate tax rate would have a big supply-side impact (and there’s plenty of evidence from overseas to support that notion), but many of the other provisions of his plan are sure to reduce revenue.

Again, I don’t lose sleep about the prospect of less money going to Washington. But you can be sure that politicians pay attention to that issue.

Which is why I’m pessimistic. I don’t think Congress is willing to approve a big tax cut.

The bottom line is that there are three possible outcomes.

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

Ultimately, I want to completely junk our corrupt system and replace it with a simple and fair flat tax. But for 2017, I’ll be happy if we simply slash the corporate rate.

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