A Lesson from China about Growth and Shared Prosperity

I’ve just finished up a week of teaching at Northeastern University in Shenyang, China.

I mostly taught public finance and explained issues such as marginal tax rates, double taxation, the Rahn Curve, the Laffer Curve, and the fiscal implications of demographic change.

I also gave a lecture on comparative economics and looked at nations that converged or diverged over several decades. And this lecture included some material on China’s impressive (but still incomplete) reforms and subsequent growth.

The goal of the classes was to make the students aware of key issues rather than to proselytize.

But one thing I noticed in the class discussions is that students were under the impression that capitalism was mostly for the benefit of the rich.

I tried to preemptively deal with that question by recycling my charts showing how poverty fell dramatically after China shifted toward free markets.

That’s very compelling data, as far as I’m concerned, but I’m not overly confident the students were similarly impressed.

So in future years, I think I’m going to steal some data from Professor Ken Schoolland, who was also part of the faculty.

It’s from a xerox, so the resolution isn’t the best, but This data showing changes in income distribution between 1980 and 2008 is very powerful.

As you can see, almost everybody was very poor back in 1980, which was about when China began liberalizing its economy.

By 1995, a significant share of the population climbed out of poverty.

And the 2008 numbers show that a majority of the population was middle class or above.

Very impressive. It seems a rising tide does lift all boats.

To be sure, China hasn’t turned into a mainland version of Hong Kong. It’s not even close to Taiwan.

But you don’t need perfection. Chinese data confirms that partial reforms (what I call giving an economy “breathing room“) can generate significant benefits.

P.S. There’s also data on how incomes have expanded over time for both the United States and the entire world.

P.P.S. Much to my dismay, I forgot to inform the student about how the IMF and the OECD want to sabotage China’s economy.

Addendum: Thanks to @Mike Mendyke for a much cleaner version of the visual.

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Critical Charts about the Future of the American Economy and the 2016 Election?

James Pethokoukis of the American Enterprise Institute has an intriguing idea. Instead of a regular debate, he would like presidential candidates to respond to a handful of charts from the recent Economic Report of the President that supposedly highlight very important issues.

We’d quickly find out — I hope — who has real deep knowledge on key economic issues and challenges facing America.

I don’t always agree with Pethokoukis’ views (see here, here, and here), but he has a very good idea. He may not have picked the charts I would rank as most important, but I think 5 of the 6 charts he shared are worthy of discussion (I’m not persuaded that the one about government R&D spending has much meaning).

Let’s look at them and elaborate on why they are important.

We’ll start with the chart of labor productivity growth, which has been declining over time.

I think this is a very important chart since productivity growth is a good proxy for the growth in living standards (workers, especially in the long run, get paid on the basis of what they produce).

So what should we think about the depressing trend of declining productivity numbers?

First, some of it is unavoidable. The United States has an advanced economy and we don’t have a lot of “low-hanging fruit” to exploit. Simply stated, it’s much easier to boost labor productivity in a poor country.

Second, to the degree we want to boost labor productivity, more investment is the best option. That’s why I’m so critical of class-warfare policies that penalize capital formation. When politicians go after the “evil” and “bad” rich people who save and invest, workers wind up being victimized because there’s less saving and investment.

But this isn’t just an issue of machines, equipment, and technology. We also should consider human capital, which is why it is a horrible scandal that America spends more on education – on a per-capita basis – than any other nation, yet we get very mediocre results because of a government monopoly school system that – at least in practice – seems designed to protect the privileges of teacher unions.

The next chart looks at the number of companies entering and exiting the economy. As you can see, the number of businesses that are disappearing is relatively stable, but there’s been a disturbing decline in the rate of new-company formation.

As with the first chart, some of this may simply be an inevitable trend. In a mature economy, perhaps the rate of entrepreneurship declines?

But that’s not intuitively obvious, and I certainly haven’t seen any evidence to suggest why that should be the case.

So this chart presumably isn’t good news.

Some of the bad news is probably because of bad government policy (capital gains taxes, regulatory barriers, licensing mandates, etc) and some of it may reflect undesirable cultural trends (less entrepreneurship, more risk-aversion, more dependency).

Speaking of which, the next chart looks at the share of the workforce that is regulated by licensing laws.

This is a very disturbing trend.

Licensing rules basically act as government-created barriers to entry and they are especially harmful to poor people who often lack the time and money to jump through the hoops necessary to get some sort of government-mandated certification.

By the way, this is one area where the federal government is not the problem. These are mostly restrictions imposed by state governments.

The next chart looks at how much money is earned by the rich in each country.

I think this chart is very important, but only in the sense that any intelligent candidate should know enough to say that it’s almost completely irrelevant and misleading.

The economy is not a fixed pie. Income earned by the “rich” is not at the expense of the rest of us (assuming honest markets rather than government cronyism). It doesn’t matter if the rich are earning more money. What matters is whether there’s growth and mobility for people on the lower rungs of the economic ladder.

A good candidate should say the chart should be replaced by far more important variables, such as what’s happening to median household income.

Lastly, here’s a chart comparing construction costs with housing prices.

This data is important because you might expect there to be a close link between construction costs and home prices, yet that hasn’t been the case in recent years.

There may be perfectly reasonable explanations for the lack of a link (increased demand and/or changing demographics, for instance).

But in all likelihood, there may be some undesirable reasons for this data, such as Fannie-Freddie subsidies and restrictionist zoning policies.

As with the licensing chart, this is an area where the federal government doesn’t deserve all the blame. Bad zoning policies exist because local governments are catering to the desires of existing property owners.

By the way, while I think Pethokoukis shared some worthwhile charts, I would have augmented his list with charts on the rising burden of government spending, the tax code’s discrimination against income that is saved and invested, declining labor-force participation, changes in economic freedom, and the ever-expanding regulatory burden.

If candidates didn’t understand those charts and/or didn’t offer good solutions, they would be disqualifying themselves (at least for voters who want a better future).

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Inequality, Redistribution, and Class Warfare

I’ve spent a lot of time debunking class-warfare tax policy, and I’ve certainly explained ’til I’m blue in the face that big government facilitates a pernicious form of corruption that enriches powerful and well-connected insiders.

But I haven’t spent much time addressing the topic of income inequality, which is connected to those two other issues.

U.S. News & World Report just weighed in on this issue, citing a leftist video designed to build support for redistributionist policies.

Occupy is by now forgotten (if not gone), but the top 1 percent came roaring back into view this week with a viral video that has been seemingly inescapable for anyone on Facebook or Twitter. The slick, graph-heavy animation shows the results of a 2011 study that found not only that Americans vastly underestimate wealth inequality in the U.S. but that current inequality is very far from what most Americans see as ideal.

I contribute to the discussion, making the point that people should focus on the source of inequality.

…some would argue that not all inequality is created equal. According to one expert, the problem is far worse when it’s a function of bad government than when it’s a function of private industry growth. “If you’re a very corrupt, cronyist type economy like Argentina or Mexico, you have a huge degree of income inequality and it’s driven by the fact that the elites control the levers of power,” says Dan Mitchell, a senior fellow at the Cato Institute, a libertarian think tank. Meanwhile, a less-corrupt, high-inequality, but fast-growing economy–Mitchell uses the example of Hong Kong–might be healthier, more stable, and more likely to have a rising tide of growth lifting all boats, even if it’s lifting some boats more than others. In other words, as long as everyone is benefiting, albeit to different degrees, he says, that’s one key test of whether inequality is “good” or “bad.” …As for the question of where U.S. inequality is coming from, Mitchell says he fears that corporate influence in Washington may be creating inequality of what he might call the Mexican or Argentinian type. That is, he believes that big banks and healthcare companies are skewing the system in their own favor via legislation like Dodd-Frank and healthcare reform.

To get an idea of what I’m talking about, check out this chart comparing economic performance in a nation with capitalism, a nation with cronyism, and a nation with statism.

And since I specifically cited Hong Kong, check out this chart. And click here to see how Argentina has fared with a system where government picks winners and losers.

The article then follows with a sentence that may be true as a political prediction, but completely misreads the point I was trying to make.

If that’s true–that those at the top are able to entrench their places at the top, at the expense of others–it is reason to angrily hit the share button.

NO!!! What I’m pointing out is that we should repeal laws such as Obamacare that promote cronyism and corruption.

But that’s not the only argument against the leftist argument for redistribution. My former grad school colleague, Steve Horwitz, makes the key argument that it is shoddy to compare changes over time for income quintiles without also measuring income mobility.

And you can click this link to hear what one of my professors from grad school, Don Boudreaux, had to say about the notion that wages have stagnated.

if you want even more, here’s something I wrote on income inequality and here’s a debate I did on income mobility. Even better, here’s what Margaret Thatcher said about these topics.

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Don Boudreaux Debunks Robert Reich

I’ve debated Robert Reich on issues such as tax havens, class warfare, and oil companies.

Those interactions apparently aren’t enough, though, since several people have asked me to debunk this Reich video.

But I had no desire to address Reich’s demagoguery, in part because I’ve already put together videos that deal with most of his basic points.

He wants higher taxes on investors, entrepreneurs, small business owners, and other “rich” taxpayers, but I’ve explained why he’s wrong on that issue in this video.

He claims to want a stronger middle class, but I’ve explained the keys to economic growth and Reich is on the wrong side of almost all of them.

He argues that spending has been cut back, but that’s factually wrong – and a strange argument since Reich was in the cabinet of the last President who actually did reduce the burden of federal spending.

So I hope you can understand why I didn’t want to spend time countering Reich’s video. But he has attracted more than 1 million views, which means it would be a good idea for someone to specifically debunk what he said.

Fortunately, Don Boudreaux of George Mason University has stepped up to the plate with this excellent video.

And if you want even more, here’s something I wrote on income inequality and here’s a debate I did on income mobility. Even better, here’s what Margaret Thatcher said about these topics.

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