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What’s the best economic news of the past 40 years?

Those are all good choices, but let’s not overlook Israel.

This chart from Economic Freedom of the World shows that economic freedom dramatically expanded in that nation between 1980 and 2000 (and has since gradually risen).

Israel’s shift away from the voluntary socialism of the kibbutz has paid big dividends. The nation has become far more prosperous.

I’ve already written how Israel benefited from supply-side reduction in tax rates.

Today, let’s learn about the country’s shift to private social security.

To find out what happened, let’s look at some excerpts from an article in Economics and Business Review. Authored by Moshe Manor and Joanna Ratajczak, it starts by observing there’s been a global shift to private social security systems.

The first paradigmatic shift towards a private pension system was performed in Chile in 1981 and had its followers in Latin America… The Chilean example inspired the World Bank to propose that such a shift should become a key element of the pension reform for postsocialist countries… The shift towards private pension schemes was assumed to meet demographic challenges and the secondary goals of the pension system, especially economic growth accomplished thanks to an acceleration of domestic savings.

This has been a very positive development for the countries that made the shift, by the way.

But let’s focus specifically on the reform in Israel. Here’s some of what the authors wrote.

Israel…abandoned a controlled economy and introduced the market economy only in the last three decades. …In the last 30 years Israel has faced many reforms of the pension system as part of broader economic reforms. …the stabilization programme allowed the Ministry of Finance (MOF) to start a series of structural changes, including pension reforms… The reasons for the reforms were not strictly economic but they also were based on neoliberal economic beliefs, political motives and international relations. …The USA feared Israel’s possible economic collapse and requested that the Israelis execute reforms designed according to Milton Friedman’s neoliberal principles in order to gain American economic support.

For what it’s worth, I’m in favor of “neoliberalism” when it’s defined as pro-market (which seems to be the case in many parts of the world).

Here’s a description of how the reform moved the country from a defined benefit model (often unfunded) to a funded defined contribution model.

The pension reforms were intended to stabilize the system and prepare it for the future difficulties such as ageing and poverty relief; they were also meant to develop the capital market and reduce the burden on the state budget. The main steps included introduction of the mandatory private pension pillar.. The reforms also eliminated PAYG for new joiners and turned the system from actuarially imbalanced, DB…to actuarially balanced, DC, privately managed and invested in capital markets. …The comparison of the reforms in Israel and those in Chile…shows a large similarity: shutting down the PAYG system to new joiners; a shift to funds which are privately managed, DC type, invested in capital markets system; a mandatory pension in the second pillar; development of the local capital markets using the pension accumulation; reduction of government involvement in pensions and of the burden on the state budget.. The main differences encompass low contribution rates in Chile that led to low net replacement rates, while in Israel the contribution rates and net replacement rates are high.

Oddly, the article never states how much of a worker’s paycheck goes to mandatory savings (i.e., the contribution rate).

So here’s a blurb from a recent report by the Organization for Economic Cooperation and Development.

Since January 2008, mandatory contributions have applied to earnings up to the national average wage for all employees… Initially the rates were modest with a total contribution of 2.5% but increased to 15% (5% from employees and 10% from employers) by 2013. In 2014 the contribution rate increased further to 17.5% (5.5% from employees and 12% from employers)and since January 2018 increased to 18.5% (6% from employees and 12.5% from employers). Six percentage points out of the employers’ contribution provides severance insurance which, if utilised, diminishes the pension.

That is a significantly higher level of mandated private savings when compared to countries such as Australia and Chile.

Sadly, the United States isn’t part of that conversation since we’re still stuck with our actuarially bankrupt Social Security scheme.

P.S. While researching this column, I read the OECD’s recent Survey about Israel’s economy. The bureaucrats in Paris groused that there’s a lot of inequality and poverty in that country.

This set of data perfectly illustrates why the OECD is an untrustworthy and biased bureaucracy.

As noted by my Eighth Theorem of Government, it should focus on economic growth to reduce poverty rather than fixating on whether some people are getting richer faster than others are getting richer.

Speaking of which, the supposed poverty data doesn’t actually measure poverty. Instead, “relative poverty” is simply the share of people are below “50% of median household income,” which the OECD then dishonestly characterizes as a measure of poverty (this is how the OECD came up with the absurd claim that there’s more poverty in the United States than in comparatively poor countries such as Turkey and Portugal).

Ironically, the same OECD report admits that Israel is out-performing other developed nations.

Israel is growing faster, as you can see, while also reducing government debt at a time when it’s going up in other countries (I’m sure coronavirus has since wreaked havoc with the Israeli economy, but that’s also true for other OECD countries).

Yet the OECD can’t resist grousing about inequality and lying about poverty.

P.P.S. Shifting back to social security reform, here are some of the other nations (beside Israel, Chile, and Australia) that now benefit from private savings instead of empty political promises: DenmarkSwitzerlandHong KongNetherlandsFaroe Islands, and Sweden.

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Since I’m a big fan of the Laffer Curve, I’m always interested in real-world examples showing good results when governments reduce marginal tax rates on productive activity.

Heck, I’m equally interested in real-world results when governments do the wrong thing and increase tax burdens on work, saving, investment, and entrepreneurship (and, sadly, these examples are more common).

My goal, to be sure, isn’t to maximize revenue for politicians. Instead, I prefer the growth-maximizing point on the Laffer Curve.

In any event, my modest hope is that politicians will learn that higher tax rates lead to less taxable income. Whether taxable income falls by a lot or a little obviously depends on the specific circumstance. But in either case, I want policy makers to understand that there are negative economic effects.

Writing for Forbes, Jeremy Scott of Tax Notes analyzes the supply-side policies of Israel’s Benjamin Netanyahu.

Netanyahu…argued that the Laffer curve worked, and that his 2003 tax cuts had transformed Israel into a market economy and an engine of growth. …He pushed through controversial reforms… The top individual tax rate was cut from 64 percent to 44 percent, while corporate taxes were slashed from 36 percent to 18 percent. …Netanyahu credits these reforms for making Israel’s high-tech boom of the last few years possible. …tax receipts did rise after Netanyahu’s tax cuts. In fact, they were sharply higher in 2007 than in 2003, before falling for several years because of the global recession. …His tax cuts did pay for themselves. And he has transformed Israel into more of a market economy…In fact, the prime minister recently announced plans for more cuts to taxes, this time to the VAT and corporate levies.

Pretty impressive.

Though I have to say that rising revenues doesn’t necessarily mean that the tax cuts were completely self-financing. To answer that question, you have to know what would have happened in the absence of the tax cut. And since that information never will be available, all we can do is speculate.

That being said, I have no doubt there was a strong Laffer Curve response in Israel. Simply stated, dropping the top tax rate on personal income by 20 percentage points creates a much more conducive environment for investment and entrepreneurship.

And cutting the corporate tax rate in half is also a sure-fire recipe for improved investment and job creation.

I’m also impressed that there’s been some progress on the spending side of the fiscal ledger.

Netanyahu explained that the public sector had become a fat man resting on a thin man’s back. If Israel were to be successful, it would have to reverse the roles. The private sector would need to become the fat man, something that would be possible only with tax cuts and a trimming of public spending. …Government spending was capped for three years.

The article doesn’t specify the years during which spending was capped, but the IMF data shows a de facto spending freeze between 2002 and 2005. And the same data, along with OECD data, shows that the burden of government spending has dropped by about 10 percentage points of GDP since that period of spending restraint early last decade.

Here’s the big picture from the Fraser Institute’s Economic Freedom of the World. As you can see from the data on Israel, the nation moved dramatically in the right direction after 1980. And there’s also been an upward bump in recent years.

Since I’m not an expert on Israeli economic policy, I don’t know the degree to which Netanyahu deserves a lot of credit or a little credit, but it’s good to see a country actually moving in the right direction.

Let’s close by touching on two other points. First, there was one passage in the Forbes column that rubbed me the wrong way. Mr. Scott claimed that Netanyahu’s tax cuts worked and Reagan’s didn’t.

Netanyahu might have succeeded where President Reagan failed.

I think this is completely wrong. While it’s possible that the tax cuts in Israel has a bigger Laffer-Curve effect than the tax cuts in the United States, the IRS data clearly shows that Reagan’s lower tax rates led to more revenue from the rich.

Second, the U.S. phased out economic aid to Israel last decade. I suspect that step helped encourage better economic policy since Israeli policy makers knew that American taxpayers no longer would subsidize statism. Maybe, just maybe, there’s a lesson there for other nations?

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I rarely delve into foreign policy and defense issues. And when I do, such as my post about the conflict in Ukraine, it’s usually because it gives me an opportunity to draw attention to a topic that is in my bailiwick (in the case of Ukraine, it gave me an excuse to write about federalism).

With this caveat in mind, let’s turn our attention to the Middle East. Unless you’re a hermit living in a remote cave, you presumably know that Israel is locked in another fight with Hamas.

I’ve previously explained that I’m very sympathetic to the notion that Israel has a right to defend itself.

But supporting Israel’s right to self defense doesn’t mean I should foot the bill. Yet that’s what’s happening. According to Wikipedia, Washington sends about $3 billion per year to subsidize Israel’s military.

And now that amount will be even larger because Congress just approved another $225 million to help finance Israel’s missle-defense system.

Congress approved a $225 million package to replenish Israel’s missile defenses with its last order of business before a five-week recess… The House’s 395-8 vote in favor late Friday followed Senate adoption of the legislation by voice vote earlier in the day. The money is directed toward restocking Israel’s Iron Dome, which has been credited with shooting down dozens of incoming rockets fired by Palestinian militants over 3½ weeks of war. …Iron Dome has enjoyed strong U.S. technological and financial support. Throughout its history, the U.S. has provided more than $700 million to help Israel cover costs for batteries, interceptors, production costs and maintenance, the Congressional Research Service said. The total already appeared set to climb above $1 billion after Senate appropriators doubled the Obama administration’s request for Iron Dome funding for fiscal 2015. Now it seems likely to rise even further.

But this doesn’t mean everyone is happy about all this spending.

Some libertarian-leaning fiscal conservatives opposed the added subsidies, or at least wanted Congress to come up with offsetting cuts.

Despite almost universal support for Israel in Congress, the Iron Dome money appeared in doubt only a day ago as Senate efforts stalled after an effort by Republican Sen. Tom Coburn of Oklahoma to find cuts elsewhere in the budget to pay for the aid.  …Voting against the measure in the House were…Republicans Justin Amash of Michigan, Walter Jones of North Carolina, Thomas Massie of Kentucky and Mark Sanford of South Carolina.

For what it’s worth, I applaud those four House Republicans.

I’m motivated in part by a desire to limit the burden of government spending in America, but I also think that Israel easily could afford more military outlays if it pared back its overly generous welfare state.

If you look at the IMF data, government spending consumes about 43.8 percent of Israel’s economic output. And according to the CIA Factbook, Israel’s military budget amounts to about 5.7 percent of GDP.

I’m not a math genius, but that certainly suggests to me that Israel’s government is diverting about 38 percent of economic output for non-military spending.

If national defense is important and worthwhile (and it is), then Israel should prioritize and reduce domestic outlays.

Heck, that’s what Roosevelt did during World War II and what Truman did during the Korean War. If you don’t believe me, look at lines 31-34 of this OMB spreadsheet.

By the way, some people accuse these GOPers of being anti-Israel, but I think that charge is grossly unfair. I’m not personally close to any of the Republicans who voted against the Iron Dome funding, but I’ve met and talked to all of them and I’ve followed their careers. Suffice to say that I’ve never heard even the slightest hint that any of them harbor any anti-Israel or anti-Jewish sentiments.

Indeed, here’s some of what Justin Amash wrote back in 2012.

Israel is our closest friend in a very troubled region. Our national defense benefits from Israel’s ability to defend itself and to serve as a check against neighboring authoritarian regimes and extremists. Assisting with training and the development of Israel’s military capacity allows the U.S. to take a less interventionist role in the region. I am hopeful that American troops soon can leave the region and Israel and its neighbors can live in peace without U.S. aid or involvement.

The last sentence is a pretty good description of libertarian foreign policy: Be prepared to defend ourselves, but don’t look for trouble outside our borders.

P.S. The government of Israel pays for people who do nothing but pray. Which means that my tax dollars are picking up part of the tab. Prayer is presumably a good thing. Just don’t ask me to pay for it.

P.P.S. While Israel’s government does dumb things, the governments opposing Israel sometime engage in truly evil acts.

P.P.P.S. If you want to learn more about the libertarian approach to foreign policy, my Cato colleagues are the real experts. I also call your attention to these thoughts from Mark Steyn, George Will, and Steve Chapman.

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The title of this post doesn’t quite roll off the tongue like “It was the best of times, it was the worst of times.” But what can you expect when you compare politicians to the opening line of Charles Dickens’ A Tale of Two Cities.

That’s what came to my mind, though, when I noticed two stories next to each other on the Washington Post website. The first story was about a new lawmaker, infused with the spirit of the Tea Party, seeking to shrink the size and scope of Washington. The other story was about a career politician trying to expand the power of the federal government.

Let’s start with the good news. Here’s an excerpt from the Washington Post report about Senator Rand Paul’s bold plan to reduce the burden of government spending, including an attack on one of Washington’s sacred cows – subsidies for Israel.

The freshman Kentucky lawmaker unveiled his budget proposal this week that would make significant cuts in education, housing and energy while reducing money for wars in Afghanistan and Iraq by $16 billion. Paul’s plan also would cut some $20 billion in overseas aid, and he said he wants to eliminate the $3 billion the United States provides to Israel annually in foreign military assistance. “The overwhelming majority of Americans agree with Senator Paul – our current fiscal crisis makes it impossible to continue the spending policies of the past,” Paul spokesman Gary Howard said in a statement responding to the criticism. “We simply cannot afford to give money away, even to our allies, with so much debt mounting on a daily basis.” The latest economic forecast puts the deficit at a record $1.5 trillion. Paul explained his position in an interview with CNN on Wednesday, saying he respects Israel as a Democratic nation but feared funding an arms race in the Mideast.

Now, for the business-as-usual story, we have a story about the latest antics of Senator Charles Schumer, who has discovered a new “crisis” that requires action by Washington. Here’s a blurb from the Washington post.

U.S. Sen. Charles Schumer of New York says he wants the federal government to ban new designer drugs known as bath salts that pack as much punch as cocaine or methamphetamines. The small, inexpensive packets of powder are meant to be snorted for a hallucination-inducing high, but they are often marketed with a wink on the Internet or in convenience stores as bathing salts. The Democratic senator is announcing a bill Sunday that would add those chemicals to the list of federally controlled substances. …Schumer says the bath salts “contain ingredients that are nothing more than legally sanctioned narcotics.”

I confess total ignorance about “narcotic” bath salts, but even in the unlikely case that they should be banned, that is a decision for state governments. Last time I checked, the enumerated powers of Congress did not include authority to tell us what we can put in our baths or up our noses.

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In general, I don’t pay too much attention to issues in the Middle East. I know we squander $billions on foreign aid to prop up socialist policies in Egypt and Israel, and I obviously would like to see an end to that wasteful spending. But I’ve never had strong opinions on the foreign policy issues in the region that get most of the attention. That being said, I found myself somewhat sympathetic to Charles Krauthammer’s column on the topic. There’s no question that there is a campaign to end Israel’s blockade. And there’s no question that an end to the blockade will lead to shipments of weapons that would be used to attack Israel. So unless one wants Israel to be wiped out (or at least endlessly attacked), doesn’t Israel have no choice but to maintain a blockade? If your answer is no, what’s the alternative?

…the blockade is not just perfectly rational, it is perfectly legal. Gaza under Hamas is a self-declared enemy of Israel — a declaration backed up by more than 4,000 rockets fired at Israeli civilian territory. Yet having pledged itself to unceasing belligerency, Hamas claims victimhood when Israel imposes a blockade to prevent Hamas from arming itself with still more rockets. In World War II, with full international legality, the United States blockaded Germany and Japan. And during the October 1962 missile crisis, we blockaded (“quarantined”) Cuba. Arms-bearing Russian ships headed to Cuba turned back because the Soviets knew that the U.S. Navy would either board them or sink them. Yet Israel is accused of international criminality for doing precisely what John Kennedy did: impose a naval blockade to prevent a hostile state from acquiring lethal weaponry. Oh, but weren’t the Gaza-bound ships on a mission of humanitarian relief? No. Otherwise they would have accepted Israel’s offer to bring their supplies to an Israeli port, be inspected for military materiel and have the rest trucked by Israel into Gaza — as every week 10,000 tons of food, medicine and other humanitarian supplies are sent by Israel to Gaza. Why was the offer refused? Because, as organizer Greta Berlin admitted, the flotilla was not about humanitarian relief but about breaking the blockade, i.e., ending Israel’s inspection regime, which would mean unlimited shipping into Gaza and thus the unlimited arming of Hamas. … The whole point of this relentless international campaign is to deprive Israel of any legitimate form of self-defense.

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I continue to be amazed at the creative ways that politicians buy votes with other people’s money. Here’s an article from the LA Times discussing the warnings of an Israeli economist about the long-term fiscal crisis his country faces because – at least in part – the government gives people welfare payments to pray and engage in religious study. An astounding 65 percent of ultra-orthodox Jews have decided this dependency option is better than working. I suppose I should go out of my way to say that I have nothing against prayer, but I do have a problem with people thinking that it is morally acceptable to pray at someone else’s expense:

Weaning itself off socialist-influenced policies that once brought 400% inflation and 60% income-tax brackets, Israel’s economy is now growing despite the international financial slowdown. Debt is manageable, the currency is strong; Israel’s high-tech sector is admired worldwide. But one Israeli economist is warning that beneath Israel’s back-patting lurks a hidden peril — fueled by demographic trends and political choices — that could eventually mean an end to the country. …According to Ben-David, nearly one in five Israeli men between the ages of 35 and 54 — a group that he believes has “no excuse” for not working — are not part of the labor force. …Officially, Israel’s unemployment rate is about 8%. But that doesn’t include Israeli citizens who are not trying to find work, either because they feel disenfranchised, such as many Arab Israelis, or because they’ve chosen a life of state-subsidized religious study, such as many ultra-Orthodox Jews. Nearly 27% of Arab men and 65% of ultra-Orthodox Jews don’t work, government figures show. The non-employment rate for ultra-Orthodox men has tripled since 1970, Ben-David said. …What worries Ben-David most is that the nonproductive part of Israel’s population, which survives largely on welfare, is also the fastest growing. Today Arabs and the ultra-Orthodox together make up less than 30% of the population, but they account for nearly half of school-age children. With heavy lobbying from ultra-Orthodox parties that often prove crucial in forming government coalitions, Israel has increased welfare payments fivefold since 1970… Over the last 30 years, the percentage of working ultra-Orthodox men has decreased because of government programs that subsidize their religious study, experts say. Such programs are now facing a backlash from Israel’s secular and non-Orthodox citizens. A radio talk-show host recently described ultra-Orthodox Jews as “parasites.”

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