Posts Tagged ‘Hong Kong’

The internal revenue code is a reprehensible mess that torments taxpayers and undermines American competitiveness.

The good news is that Americans don’t like the tax system.

The bad news is that they don’t dislike it nearly as much as they should. At least in my humble opinion.

There are two reasons for the inadequate level of disdain.

  • First, nearly half of all households are no longer are subject to the income tax. Indeed, the system is actually a revenue generator for some households since the EITC wage subsidy is a redistribution program laundered through the tax code.
  • Second, many people get a warm and fuzzy feeling when they file their taxes because of the expectation that they will get a sizable refund, even though that payment from the IRS is simply a reflection of having paid too much tax during the prior year.

For those of us who want to scrap the tax system, this is a challenge.

And I’m not shy about admitting the problem.

About three-quarters typically get money back, with refunds so far this year averaging almost $3,000. For many, it will be the single biggest payment they receive all year. …the fact that so many people are getting paid by the IRS, and not the other way around, takes some of the edge off a day when they’re trying to stoke public anger at the tax system. “The fact that people are looking forward to tax time rubs me the wrong way,” said Dan Mitchell, a tax expert at the libertarian Cato Institute. “I would like them to be upset.”

I also have a good idea of why the problem exists.

It’s withholding. And it started back during World War II. Here’s some background.

During the war, tax rates went up, and a broader number of people were expected to pay them. Professor Anuj Desai from the University of Wisconsin Law School said there was a saying that income tax went from “a class tax to a mass tax.” …“The thought was that if we withhold a little bit every bit every paycheck, people won’t have to worry about the problem of coming up with a huge chunk of money,” Desai said. But withholding is also a remarkably efficient way for the government to raise money, and policymakers knew that. …“You could never have the taxes that were levied during World War II without withholding. It was absolutely essential for that purpose,” economist Milton Friedman said in an interview… Friedman worked with the Treasury Department at the time withholding was introduced. Withholding stuck around after the war, much to Friedman’s chagrin. “Unfortunately, once you got it installed, it’s almost impossible to get rid of it,”  Friedman said. “It’s too useful to the people in power.”

Jeffrey Tucker of the Foundation for Economic Education elaborates.

The problem is…the withholding tax. Instead of being collected directly from the payer, the government  collects them “at the source,” which is to say that they are collected from the institution that pays wages and salaries — on behalf of the taxpayer. …one of the most amazingly brilliant innovations of the modern state. This tinkering with the system — the creation of the institution called withholding — has created an illusion that paying taxes is really about getting free money! When the check arrives from the government a month or so later, the taxpayer is actually tempted to think: wow, this is really great! A pillaging has been spun to look like a gift. …Withholding dramatically changed the psychology of paying taxes. It almost feels like you aren’t paying any at all. The worker gets used to how much after-tax income she makes and adapts to it quickly. Then when tax time arrives, there is no more to pay. Instead you file and find yourself on the receiving end of what seems like an unexpected gift of a check from government. Yet in reality your refund is nothing more than the belated return of a zero-interest loan you were forced to provide the government.


Every time I talk to somehow who is happy about a refund, I ask them whether they will give me an interest free loan instead. After all, I’d be happy to collect money from them all year long and then return it the following April.

But I’m digressing.

Jeffrey points out how the political dynamics of tax day would change in the absence of withholding.

If we really wanted to make a wonderful change in favor of transparency and decency, one that would mark a shift in people’s perceptions of the costs of government, the withholding tax could just be repealed completely. …every taxpayer would pay the full amount owed to the government every April 15 and otherwise receive full compensation the rest of the year. Such a seemingly small change would have a dramatic effect on public perceptions of taxation and government. Even from the age of 16, every citizen would have a more pungent reminder of the costs of government. We would no longer live the illusion that we can all get something for nothing and that government isn’t really expensive after all.

Ben Domenech of the Federalist agrees.

The overwhelming majority of Americans pay their taxes by having them extracted from their paychecks before they ever see the money. Operating under the fiction that the government is giving you money as opposed to returning what it has already taken is damaging to the psyche of the nation’s taxpayers. …Withholding was originally mandated as a wartime step, but its continuation since then disguises the property rights involved, essentially offers the government an interest free loan, and shields taxpayers from the ramifications of federal spending. The country would be better off if everyone experienced what entrepreneurs and business owners do: writing the most sizable checks every year to the government, and watching that hard-earned money walk out the door.

By the way, this isn’t merely impractical libertarian fantasy.

There’s a real-world example of a tax system where people actually write checks to the government and are much more aware of the cost of the public sector. It’s called Hong Kong, which is – not coincidentally – an economic success story in large part because of a good fiscal system.

And I would argue that good fiscal system exists because taxpayers are directly sensitive to the cost of government (it also helps that there’s a spending cap in Hong Kong).

Let’s close with some government propaganda. This Disney cartoon was produced before withholding. As you can see the government basically had to make the case that people should set aside money out of their paychecks so they would have enough money to make periodic tax payments.

This was a plausible case when seeking to finance a war against National Socialism and Japanese imperialism. It wouldn’t be nearly as persuasive today when the government seems to specialize in financing waste, fraud, and abuse.

P.S. At the bottom of this column, you can watch a much better cartoon from the 1940s.

Read Full Post »

I’ve looked at some of the grim fiscal implications of demographic changes the United States and Europe.

Now let’s look at what’s happening in Asia.

The International Monetary Fund has a recent study that looks at shortfalls in government-run pension schemes and various policies that could address the long-run imbalances in the region. Here are the main points from the abstract.

Asian economies are aging fast, with significant implications for their pension system finances. While some countries already have high dependency ratios (Japan), others are expected to experience a sharp increase in the next couple of decades (China, Korea, Singapore). …This has…implications. …pension system deficits can increase very quickly, limiting room for policy action and hampering fiscal sustainability. …This paper explores how incorporating Automatic Adjustment Mechanisms (AAMs)—rules ensuring that certain characteristics of a pension system respond to demographic, macroeconomic and financial developments, in a predetermined fashion and without the need for additional intervention— can be part of pension reforms in Asia.

More succinctly, AAMs are built-in rules that automatically make changes to government pension systems based on various criteria.

Incidentally, we already have AAMs in the United States. Annual Social Security cost of living adjustments (COLAs) and increases in the wage base cap are examples of automatic changes that occur on a regular basis. And such policies exist in many other nations.

But those are AAMs that generally are designed to give more money to beneficiaries. The IMF study is talking about AAMs that are designed to deal with looming shortfalls caused by demographic changes. In other words, AAMs that result in seniors getting lower-than-promised benefits in the future. Here’s how the IMF study describes this development.

More recently, AAMs have come to the forefront to help address financial sustainability concerns of public pension systems. Social insurance pension systems are dominated by defined benefit schemes, pay-as-you-go financed, with liabilities explicitly underwritten by the government. …these systems, under their previous contribution and benefit rules, are unprepared for population aging and need to implement parametric reform or structural reforms in order to reduce the level or growth rate of their unfunded pension liabilities. …Automatic adjustments can theoretically make the reform process politically less painful and more likely to succeed.

Here’s a chart from the study that underscores the need for some sort of reform. It shows the age-dependency ratio on the left and the projected increase in the burden of pension spending on the right.

I’m surprised that the future burden of pension spending in Japan will only be slightly higher than it is today.

And I’m shocked by the awful long-run outlook in Mongolia (the bad numbers for China are New Zealand are also noteworthy, though not as surprising).

To address these grim numbers, the study considers various AAMs that might make government systems fiscally sustainable.

Especially automatic increases in the retirement age based on life expectancy.

One attractive option is to link statutory retirement ages—which seem relatively low in the region—to longevity or other sustainability indicators. This would at the very least help ameliorate the impact of life expectancy improvements in the finances of public pension systems. … While some countries have already raised the retirement age over time (Japan, Korea), pension systems in Asia do not yet feature automatic links between retirement age and life expectancy. …The case studies for Korea and China (section IV) suggest that automatic indexation of retirement age to life expectancy can indeed help reduce the pension system’s financial imbalances.

Here’s a table showing the AAMs that already exist.

Notice that the United States is on this list with an “ex-post trigger” based on “current deficits.”

This is because when the make-believe Trust Fund runs out of IOUs in the 2030s, there’s an automatic reduction in benefits. For what it’s worth, I fully expect future politicians to simply pass a law stating that promised benefits get paid regardless.

It’s also worth noting that Germany and Canada have “ex-ante triggers” for “contribution rates.” I’m assuming that means automatic tax hikes, which is a horrid idea. Heck, even the study acknowledges a problem with that approach.

…raising contribution rates can have important effects on the labor market and growth, it would be important to prioritize other adjustments.

From my perspective, the main – albeit unintended – lesson from the IMF study is that private retirement accounts are the best approach. These defined contribution (DC) systems avoid all the problems associated with pay-as-you-go, tax-and-transfer regimes, generally known as defined benefit (DB) systems.

The larger role played by defined contribution schemes in Asia reduce the scope for using AAMs for financial sustainability purposes. Many Asian economies (Hong Kong, Singapore, Australia, Malaysia and Indonesia) have defined contribution systems, …under which system sustainability is typically inherent.

Here are the types of pension systems in Asia, with Australia and New Zealand added to the mix..

For what it’s worth, I would put Australia in the “defined contribution” grouping. Yes, there is still a government age pension that serves as a safety net, but there also are safety nets in Singapore and Hong Kong as well.

But I’m nitpicking.

Here’s another table from the study showing that it’s much simpler to deal with “DC” systems compared with “DB” systems. About the only reforms that are ever needed revolve around the question of how much private savings should be required.

By the way, even though the information in the IMF study shows the superiority of DC plans, that’s only an implicit message.

To the extent the bureaucracy has an explicit message, it’s mostly about indexing the retirement age to changes in life expectancy.

That’s probably better than doing nothing, but there’s an unaddressed problem with that approach. It forces people to spend more years working and paying into systems, and then leaves them fewer years to collect benefits in retirement.

That idea periodically gets floated in the United States. Here’s some of what I wrote in 2011.

Think of this as the pay-for-a-steak-and-get-a-hamburger plan. Social Security already is a bad deal for workers, forcing them to pay a lot of money in exchange for relatively meager retirement benefits.

I made a related observation about this approach back in 2012.

…it focuses on the government’s finances and overlooks the implications for households. It is possible, at least on paper, to “save” Social Security by cutting benefits and raising taxes. But such “reforms” force people to pay more and get less – even though Social Security already is a very bad deal, particularly for younger workers.

The bottom line is that the implicit message should be explicit. Other nations should copy jurisdictions such as Chile, Australia, and Hong Kong by shifting to personal retirement accounts

P.S. Speaking of which, here’s the case for U.S. reform, as captured by cartoons. And you can enjoy other Social Security cartoons here, here, and here, along with a Social Security joke if you appreciate grim humor.

Read Full Post »

The Index of Economic Freedom is my favorite annual publication from the Heritage Foundation. It’s a rich source of information, using dozens of data sources, about economic liberty around the world.

I first wrote about the Index back in 2010 and shared the bad news that the U.S. score dropped dramatically in Obama’s first year.

Well, the new Index lets us see the net effect of Obama’s entire tenure. The worse news is that the U.S. score has dropped to 75.1 on a 0-100 scale. And the worst news is that this represents America’s lowest score in the twenty-plus years that the Index has been published.

The United States is ranked #17 in the latest Index. We’re only in the “Mostly Free” category, behind Luxembourg and the Netherlands and tied with Denmark.

The top-ranked jurisdiction, once again, is Hong Kong. And what’s really amazing is that Hong Kong actually increased it score. Indeed, all five nations in the “Free” category managed to increase overall economic freedom.

So congratulations also to Singapore, New Zealand, Switzerland, and Australia.

Here’s a map showing the entire world. The worst nations are in red, with North Korea at the very bottom, followed by Venezuela and Cuba.

By the way, Cuba jumped 4.1 points last year, so maybe Fidel’s death is the beginning of some much-needed liberalization.

For more information on the United States, here’s the breakdown of America’s score. As you can see, our worst category is “government size.” In other words, we tax too much and spend too much.

America’s best score is for “regulatory efficiency,” which helps to explain why the U.S. gets a top-10 score from the World Bank’s Doing Business.

Let’s close by comparing the United States with Hong Kong. This charts shows how our scores have changes over time, and also shows the average score for the entire world.

The biggest takeaway is that the U.S. basically is halfway between Hong Kong and the world average.

The great unknown, of course, is whether America’s score will go up or down under Trump.

Read Full Post »

At the risk of oversimplifying, libertarians want to minimize the level of government coercion is society. That’s why we favor both economic liberty and personal liberty. Simply stated, you should have the right to control your own life and make your own decisions so long as you’re not harming others or interfering with their rights.

That’s a philosophical or moral argument.

There’s also the utilitarian argument for liberty, and that largely revolves around the fact societies with more freedom tend to be considerably more prosperous than societies with lots of government.

I’ve repeatedly made this argument by comparing the economic performance of market-oriented jurisdictions and statist ones.

Let’s look at some new evidence. Based in Lausanne, Switzerland, the Institute for Management Development is a highly regarded educational institution that publishes an annual World Competitiveness Yearbook that basically measures whether a nation is a good place to do business.

So it’s not a measure of economic liberty, at least not directly. And the quality of governance matters for the IMD rankings (presumably based on something akin to the European Central Bank’s measure of “public sector efficiency“).

But you’ll notice a clear link between economic liberty and competitiveness.

Here are the top-10 nations. (you can look at the rankings for all nations by clicking here).

As you might suspect, there’s a strong correlation between the nations that are competitive and those that have smaller governments and free markets.

Indeed, three out of the top four jurisdictions (Hong Kong, Singapore, and Switzerland) rank in the top four for economic liberty according to Economic Freedom of the World.

And I’m happy to see that the United States also scores very highly, even if we only rank 17 out of 157 for economic freedom.

Indeed, every country in IMD’s top 10 other than Sweden is ranked in the top quartile of EFW.

You also probably won’t be surprised by the countries getting the worst scores from IMD.

Congratulations to Venezuela for being the world’s least competitive nation. Though that might be an overstatement since IMD only ranks 61 jurisdictions. If all the world’s countries were included, Venezuela presumably would beat out North Korea. And maybe a couple of other squalid outposts of statism, such as Cuba.

It’s also worth noting that Greece gets consistently bad scores. And I’m not surprised that Argentina is near the bottom as well (though it has improved since last year, so hopefully the new government will continue to move in the right direction).

By the way, it’s worth noting that economic freedom is a necessary but not sufficient condition for competitiveness. Jordan, for instance, ranks in the top 10 for economic freedom but gets a low score from IMD, presumably because the advantages of good policy don’t compensate for exogenous factors such as geopolitical risk and access to markets.

The moral of the story, though, is that free markets and small government are the recipe for more prosperity. And those policies are probably even more important for nations that face exogenous challenges.

Read Full Post »

Hong Kong is a truly remarkable jurisdiction.

Can you name, after all, another government in the world that brags about how little it spends on redistribution programs and how few people are dependent on government?

And how many jurisdictions adopt private Social Security systems to help make sure the burden of government spending doesn’t climb above 20 percent of GDP?

No wonder Hong Kong routinely is at the top of the rankings in both Economic Freedom of the World and the Index of Economic Freedom.

Here is some additional evidence of Hong Kong’s sensible approach. Below is a slide from a presentation by Hong Kong government officials, quoting the current Financial Secretary and all his predecessors, covering both the period of Chinese sovereignty and British sovereignty. As you can see, the one constant theme is free markets and small government.

For additional background, let’s enjoy the insight of one of these men.

In a column for Reason, my Cato Institute colleague Marian Tupy reminisces on his meeting with John Cowperthwaite, one of the British-appointed economic advisers.

…a young Scottish civil servant named John Cowperthwaite arrived in the colony to oversee its economic development. Some 50 years later, I met Cowperthwaite in St Andrews, Scotland, where I was a student and he was enjoying his retirement. As he told me, “I came to Hong Kong and found the economy working just fine. So, I left it that way.” …Of all the policies that we discussed, one stands out in my mind. I asked him to name the one reform that he was most proud of. “I abolished the collection of statistics,” he replied. Cowperthwaite believed that statistics are dangerous, because they enable social engineers of all stripes to justify state intervention in the economy. At some point during our first conversation I managed to irk him by suggesting that he was chiefly known “for doing nothing.” In fact, he pointed out, keeping the British political busy-bodies from interfering in Hong Kong’s economic affairs took up a large portion of his time.

I especially like Cowperthwaite’s insight about the downside risk of letting governments collect a lot of data.

Something that’s worth considering in a world where governments want to engage in massive data collection and data sharing for purposes of imposing and enforcing bad global tax policy.

But let’s not get sidetracked. Economic freedom in Hong Kong is today’s topic. With that in mind, here’s a chart from Marian’s column. It shows that Hong Kong used to be much poorer than the United Kingdom. But after decades of faster growth (thanks to good policy), Hong Kong is now more prosperous than its former colonial master.

In other words, Hong Kong didn’t just converge with one of the world’s richest countries, which by itself would be a remarkable and unusual achievement. It actually became richer.

This is tremendous evidence on the benefits of good policy and the importance of strong, long-run growth.

Let’s close by looking at this issue of growth and development. Here’s a video from Marginal Revolution, narrated by Professor Alex Tabarrok of George Mason University. You should watch it from start to finish, but if you’re pressed for time, make sure to at least watch the first 2:10.

There are two things that are worth emphasizing from the video.

The productivity of workers (and therefore the pay of workers) is dependent on the quantity and quality of capital.

Entrepreneurs play a key role in figuring out the best ways of mixing labor and capital and this innovation boosts productivity.

By the way, there are two sins of omission in the video. If you watch the whole thing, you’ll notice it mentions that strong economic performance is linked to the rule of law, property rights, free trade, and sensible regulation.

All that is true. But what about a stable monetary system? And what about a reasonable tax regime and a modest burden of government spending?

But I’m nitpicking. Let’s close with another video from Marginal Revolution. You should once again watch the entire video, but for those in a rush, I adjusted the settings so it starts at the most important part.

The video uses GDP data that is adjusted for both inflation and population, which is a very useful approach. But the key lesson, as Professor Tabarrok explained, is that even small sustained changes in growth have enormous implications for long-run prosperity.

Indeed, that’s why Hong Kong is now richer than the United Kingdom. And it’s also worth noting that Hong Kong (and Singapore) are passing the United States.

Read Full Post »

I’m in Hong Kong for series of meeting and briefings on various economic and policy issues.

As you can imagine, I’m a huge fan of the jurisdiction’s simple 15 percent flat tax. It’s basically about as close to a pure flat tax as anyplace in the world. There is zero double taxation of income that is saved and invested.

That’s not an exaggeration. You don’t get double taxed on the interest you earn on your bank balances and other financial accounts. There’s no capital gains tax. There’s no death tax. And there’s no double taxation of dividends.

There are only a few deviations from a pure flat tax that even merit a mention. First, taxpayers with modest amounts of income don’t have to use the flat tax system. Instead, they can opt for a “progressive” tax system that has a top rate of 17 percent, but also has tax rates of 2 percent and 7 percent, and 12 percent.

Imagine, taxpayers getting to choose the system that works best for them, instead of the government forcing them into the system that requires the highest payment!

The other deviations are that businesses are not always allowed full expensing of business investment, and there also are a handful of deductions.

All things considered, though, Hong Kong gets almost everything right on tax policy, whereas the United States gets a majority of things wrong.

Oh, and I should mention that there are no payroll taxes in Hong Kong. Nor is there a value-added tax.

That’s all very impressive, but let’s actually focus on something that may be even more remarkable about Hong Kong.

It currently has a modest-sized government, with spending consuming less than 20 percent of economic output. That’s not as good as the United States 100 years ago, but it’s far better than where America is today.

That being said, Hong Kong has some major challenges. I’ve explained before that demographic changes will put pressure on fiscal policy in America, but demographic change is far more profound in Hong Kong.

As you can see from this data, it has the seventh-highest level of life expectancy in the world.

That’s good news, of course, but it does mean a lot of fiscal pressure, even for a jurisdiction that is justly famous for its very small welfare state.

But then you have to consider the fact that Hong Kong also has the fourth-lowest birthrate in the entire world.

In other words, Hong Kong faces a perfect storm of demographics. More and more non-working elderly over time, combined with fewer and fewer taxpayers to pull the wagon.

Given these unfriendly numbers, the Hong Kong government put together a working group to look at long-run fiscal issues.

In its recent report, the group presented a fiscal forecast that shows how the burden of government spending will slowly climb to nearly 24 percent of GDP over the next 25 years.

Here’s a chart showing actual data starting in the late 1990s and then projections until 2042.

To those of us from North America and Western Europe, where the overall burden of government spending, on average, consumes more than 40 percent of economic output, it seems like Hong Kong has a trivial problem.

But it’s still a problem and something has to change. Hong Kong could finance a bigger public sector by dipping into its large reserves (currently the jurisdiction has saved enough money to finance about two years of government spending) or by increasing the tax burden.

But hopefully Hong Kong will abide by Article 107 of its Basic Law (its constitution) and limit government spending so that it doesn’t grow faster than the private economy.

And there are some positive signs.

About 15 years ago, Hong Kong set up a system of private retirement accounts in order to create a self-funded source of retirement income.

Based on a recent government report on retirement income, here are some key features of this Mandatory Provident Fund (MPF) system.

The MPF System is an employment-based, privately-managed mandatory defined contribution system. …Employers are required under the Mandatory Provident Fund Schemes Ordinance (Cap. 485) to arrange for their employees aged 18 or above but under 65 to join… The MPF System has been implemented for 15 years only. …about 2.55 million employees are enrolled in MPF schemes, representing 100% of the employees required by law to join the schemes. This is a very high rate by international standards. In addition, another 210 000 self-employed persons are also scheme members. …An employer and an employee are each required to contribute 5% of the relevant employee’s income… As at end October 2015, MPF assets had increased to $594.2 billion, of which about $123.1 billion were investment returns.

Here’s a chart from the report, showing the cumulative growth of assets, based on both contributions and investment returns.

Keep in mind, though, that it takes 7.8 Hong Kong dollars to equal 1 U.S. dollar, so $594.2 billion is not nearly as large as it sounds.

In part, this is because the system isn’t yet mature. Workers have only been making contributions from 15 years, while a working lifetime is 40-45 years.

But there also are concerns that the level of mandatory saving is insufficient. Here’s additional language from the report, which cites the private retirement systems in Australia and Denmark.

There are views that the contribution rate or the maximum relevant income level should be raised to strengthen the retirement protection function of the MPF System. Take the privately-managed mandatory occupational contributory pension plans in Denmark and Australia as examples. In Denmark, employers and employees generally contribute a total of 9% to 17%. In Australia, only employers make contributions and the contribution rate will be raised progressively from 9% in 2013 to the present 9.5% and further to 12% in 2025.

I’m personally agnostic on the precise level of mandatory savings. My goal is simply to shrink tax-and-transfer entitlement programs, particularly before demographic changes lead to a larger burden of government spending.

And since I have great fondness for Hong Kong (how can you not get a thrill up your leg about a jurisdiction that routinely gets the highest score in Economic Freedom of the World?), I want it to remain a beacon for advocates of economic liberty.

P.S. Lest anyone think I’m being too fawning, Hong Kong has several policies that are misguided. Public housing is pervasive, there’s government-run healthcare, and one peculiar legacy of British rule is that only one piece of land is privately owned. Fixing these warts would make Hong Kong even more vibrant.

P.P.S. Another quirky feature of Hong Kong policy is that currency is issued by private banks. If you pull a $20 bill from your wallet, you’ll see that it was printed by HSBC, Standard Chartered, or Bank of China. Unfortunately, this isn’t because Hong Kong has a market-driven system of competing currencies. But it does have a currency board, which – by standards of government-controlled monetary systems – is one of the least-worst options. Of course, that means Hong Kong’s money is only as good as the currency to which it’s linked. And since the Hong Kong dollar is pegged to the U.S. dollar, that might be a cause for long-run concern.

Read Full Post »

Two days ago, I contrasted the views of Pope Francis and Walter Williams about capitalism and morality.

I explained that Walter had the upper hand because free markets are a positive-sum game based on voluntary exchange while redistribution (at best) is a zero-sum game based on coercion.

That’s the theoretical argument. Now let’s look at the empirical data, specifically focusing on which approach is best for the less fortunate.

Thomas Sowell, the great economist at Stanford University’s Hoover Institution, is not impressed by the Pope’s analysis. Here some of what Prof. Sowell wrote for Investor’s Business Daily.

Pope Francis has created political controversy…by blaming capitalism for many of the problems of the poor. …putting aside religious or philosophical questions, we have more than two centuries of historical evidence… Any serious look at the history of human beings over the millennia shows that the species began in poverty. It is not poverty, but prosperity, that needs explaining. …which has a better track record of helping the less fortunate — fighting for a bigger slice of the economic pie, or producing a bigger pie? …the official poverty level in the U.S. is the upper middle class in Mexico. The much criticized market economy of the U.S. has done far more for the poor than the ideology of the left. Pope Francis’ own native Argentina was once among the leading economies of the world, before it was ruined by the kind of ideological notions he is now promoting around the world.

I briefly discussed the failure of the Peronist Argentinian model last month, but let’s take a closer look at Professor Sowell’s assertions about the U.S. and Argentina.

My colleague at the Cato Institute, Marian Tupy, has put together a great fact-filled website called Human Progress, and it allows users to access all sorts of databases to produce their own charts and tables.

And here’s what the data shows about per-capita economic output in Argentina and the United States.

Not exactly a ringing endorsement of the supposedly more compassionate system in Argentina.

As you can see from this table, Argentina actually was slightly richer than the U.S. back in 1896. But that nation’s shift to statism, particularly after World War II, hindered Argentina’s growth rates.

And seemingly modest differences in growth, compounded over decades, have a huge impact on living standards for ordinary people (i.e., inflation-adjusted GDP per person climbing nearly $27,000 in the U.S. vs an increase of less than $6,700 in Argentina).

By the way, this is not an endorsement of America’s economic policy. We have far too much statism in the United States.

But compared to Argentina, which generally has ranked in the bottom quartile for economic freedom, the United States has a more market-friendly track record.

To help make the bigger point about the importance of economic liberty, let’s now compare the United States with a jurisdiction that consistently has been ranked as the world’s freest economy.

Look at changes in economic output in America and Hong Kong from 1950 to the present. As you can see, Hong Kong started the period as a very poor jurisdiction, with per-capita output only about one-fourth of American levels.

But thanks to better policy, which led to faster growth compounding over several decades, Hong Kong has now caught up to the United States.

What’s most remarkable, if you look at the table, is that per-capita output over the past 65 years has soared by more than 1,275 percent in Hong Kong.

Needless to say, if the U.S. is out-performing Argentina and Hong Kong is out-performing the U.S., then a comparison of Hong Kong and Argentina would yield ever starker results.

I actually did something like that back in 2011 and the results further underscore that there’s a very powerful relationship between economic policy and economic performance.

Which brings us back to the fundamental issue of what system is best for the less fortunate in society?

I suppose that’s a judgement call, but poor people obviously have higher incomes and more opportunity when there’s strong economic growth.

But as Margaret Thatcher famously explained, some people are so consumed by disdain for success that they’re willing to accept more suffering for poor people if they can simultaneously lower the incomes of rich people.

Read Full Post »

Older Posts »

%d bloggers like this: