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Posts Tagged ‘Jurisdictional Competition’

I’m for free trade because I want more jobs and more prosperity for the United States.

Indeed, I’ve argued we should copy that incredible economic success of Hong Kong and Singapore by unilaterally eliminating all trade barriers.

But some people complain this is akin to disarmament in a hostile world. I reject that analogy. If my neighbor shoots himself in the foot, I’ve never thought I should “level the playing field” by also shooting my foot.

That being said, we all should agree that the ideal scenario is for nations to adopt free trade agreements in order the maximize the economic benefits for all consumers and businesses.

And the good news is that nations have been building on the multilateral success of the WTO by also adopting free trade agreements.

The United States, for instance, has 14 FTAs that govern trade with 20 nations, most notably NAFTA. And while I grouse about some of the E.U.’s statist tendencies, there is genuine free trade among member nations.

But there is some bad news. Politicians and bureaucrats are slowly but surely hijacking FTAs and undermining their pro-growth impact with red tape.

It’s become so much of a problem that some free traders are questioning whether the current approach is worthwhile. For example, Iain Murray of the Competitive Enterprise Institute explains why he isn’t losing any sleep about America backing out of the Trans-Pacific Partnership.

The Trans-Pacific Partnership is an example of why free trade came to have such a bad reputation with the American public. Rather than a simple agreement to lower tariffs for mutual benefit, it morphed into a massive international regulatory regime over 5,000 pages long. It was weighed down by numerous non-trade provisions aimed at appeasing non-trade special interests. …the TPP went down the road of regulatory harmonization.

He makes sure to point out that the TPP may still have been worthwhile when using cost-benefit analysis.

This is not to say that…the TPP’s tariff reductions would not have outweighed the regulatory burden.

But he argues that a much better approach is FTAs based on regulatory competition.

…there is an alternative to 5,000 pages of regulatory harmonization. …regulatory competition may be a better solution than harmonization… Regulatory competition works best by mutual recognition. For instance, Australia and New Zealand have formed a single economic market based around the Trans-Tasman Mutual Recognition Agreement, whereby…Goods legally sold in one country can be sold in the other.  This principle operates regardless of different standards, or other sale-related regulatory requirements between New Zealand and Australia. …Such an agreement would probably work very well between the U.S. and Canada – and, indeed, between the U.S. and both Australia and New Zealand in the Trans-Pacific context. …Australia, New Zealand, Canada, Chile, Singapore, and Hong Kong…A series of mutual recognition agreements with these former TPP countries would effectively form the nucleus of a Global Free Trade Association.

I would add the United Kingdom to Iain’s list (assuming it manages to extricate itself from the European Union).

Indeed, just yesterday I submitted a comment to the United States Trade Representative on a proposed FTA between the U.S. and the U.K.

Here’s some of that analysis.

A trade agreement between the United States and United Kingdom would be a chance to increase prosperity in both nations by eliminating all forms of trade barriers… It’s also an opportunity to refocus trade agreements in ways that recognize sovereignty and promote pro-market policies. More specifically, a free trade pact between the U.S. and U.K. would offer a much-needed opportunity to discard the clutter of exceptions, long phase out periods, and non-trade issues, which has characterized recent agreements, and instead go with a cleaner approach that would allow the simplicity of unfettered commerce. The ideal trade pact should seek to make trade between the U.S. and the U.K. as simple as trade between New York and Pennsylvania. That type of trade agreement doesn’t need to be cumbersome and doesn’t require a detailed thousand-page document.

I give my two cents on the benefits of mutual recognition and the value of reorienting FTAs in a pro-market direction.

…such a pact should be based on the principle of “mutual recognition,” which means that nations can have their own laws governing economic activity inside their borders, but they recognize that other nations have the same right. Most important, they also agree that there should be no restriction on the ability of consumers to buy from producers in the other nation(s). …Under such a regime, a company in the U.S. wouldn’t have to produce separate products for U.K. customers since there would be no policy restricting a consumer in, say, London, from buying a product made in, say, Cleveland. …A pact for free and open trade between the U.S. and U.K. could become a new role model for agreements between industrialized, high-income nations. If based on mutual recognition, such a free trade agreement should reverse the unfortunate trend of deals getting saddled with extraneous and/or harmful provisions.

And explain that FTAs based on mutual recognition produce an added benefit.

This approach respects national sovereignty and also would have the added benefit of encouraging policy competition between nations. If either the U.S. or the U.K. was over-regulating in a certain sector, it would mean a loss of sales to the other country, which surely would create pressure for regulatory relief. Very similar to the way tax competition puts pressure on governments today not to impose excessive tax rates.

By the way, we also shouldn’t have regulatory harmonization since that increases systemic fragility.

In other words, it’s not a good idea to put all your eggs in one basket.

Let’s close with a picture that powerfully captures what’s wrong with the current approach to free trade agreements. Does anybody think the new Singapore-E.U. pact is really about unfettered commerce?

Looks to me like it’s really about politicians and bureaucrats micro-managing economic activity.

My FTA would fit on one page, or a scrap of one page: “There shall be no restrictions on commerce between Country A and Country B.”

Sort of like my version of a tax system compared to the mess we have now.

P.S. It goes without saying, but I’ll say it anyhow, that Switzerland should be high on the list for a pro-market FTA with the United States.

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Back in 2015, I wrote about the scandal involving former House Speaker Dennis Hastert and said we got the right result (legal trouble for Hastert) for the wrong reason (government spying on financial transactions).

Something similar happened over the weekend with the G-7 meeting.

Largely because of his misguided protectionist views, Donald Trump refused to sign a joint statement with the other G-7 leaders (Germany, France, Italy, Canada, Japan, and the United Kingdom).

Trump’s protectionism is deeply troubling. It threatens American prosperity and could lead to tit-for-tat protectionism that caused so much damage to the global economy in the 1930s.

That being said, we shouldn’t shed any tears because a G-7 Summit ended in failure or that Trump didn’t sign the communique.

To be sure, the vast majority of the language in these statements is anodyne boilerplate. Sort of the international equivalent of “motherhood and apple pie.”

But it’s not all fuzzy rhetoric about “inclusive growth” and “clean water.” The bureaucrats who craft these statements for their political masters regularly use the G-7 to endorse statist policies.

It’s all very reminiscent of what Adam Smith wrote about how people in the same profession would like to create some sort of cartel to extract more money from consumers.

But Smith went on to explain that such efforts can’t succeed in the private sector unless there is some sort of government intervention to prohibit competition.

Unfortunately, when politicians meet to craft cartel-type policies to extract more money from their citizens, they rely on the power of government to enforce their anti-market policies.

Let’s look at some of the dirigiste language in the communique from this weekend, starting with the ever-present embrace of class warfare tax policy and support for tax harmonization.

…support international efforts to deliver fair, progressive, effective and efficient tax systems. We will continue to fight tax evasion and avoidance by promoting the global implementation of international standards and addressing base erosion and profit shifting. …We welcome the OECD interim report analyzing the impact of digitalization of the economy on the international tax system.

Keep in mind that “international standards” is their way of stating that low-tax jurisdictions should have to surrender their fiscal sovereignty and agree to help enforce the bad tax laws of uncompetitive nations (such as G-7 countries).

And the BEPS project and the digitalization project are both designed to help other governments skim more money from America’s high-tech companies.

The G-7 communique also endorsed the anti-empirical view that more foreign aid and higher taxes are necessary to generate more prosperity in the developing world.

Public finance, including official development assistance and domestic resource mobilization, is necessary to work towards the achievement of the Sustainable Development Goals of the 2030 Agenda.

The statement also recycled the myth of a big gender wage gap, even though even the female head of Obama’s Council of Economic Advisers admitted the wage gap numbers are nonsense.

Our path forward will promote women’s full economic participation through working to reduce the gender wage gap.

And there was the predictable language favoring more government intervention in energy markets, along with a threat that the hypocritical ideologues at the United Nations should have power over the global economy.

We reaffirm the commitment that we have made to our citizens to reduce air and water pollution and our greenhouse gas emissions to reach a global carbon-neutral economy over the course of the second half of the century. We welcome the adoption by the UN General Assembly of a resolution titled “Towards a Global Pact for the Environment” and look forward to the presentation of a report by the Secretary-General in the next General Assembly.

Given the G-7’s embrace of one-size-fits-all statism and government cartels, let’s look at how Professor Edward Prescott (awarded the Nobel Prize in economics in 2004) modified Adam Smith’s famous quote.

I’ll close by reporting that I asked several experts in international economics, mostly from the establishment (and therefore instinctively sympathetic to the G-7), whether they could tell me a single pro-growth accomplishment since these meetings started in the 1970s.

They couldn’t identify a single concrete achievement (several said it was good for politicians from different countries to develop relationships and some speculated that useful things may get done in so-called side meetings, but all agreed those things could – and would – happen without the G-7).

So why spend lots of money just so a bunch of politicians can have an annual publicity photo? And why give their retinues of hangers-on, grifters, hacks, and bureaucrats a taxpayer-financed annual vacation?

Needless to say, I’d much rather focus on defunding the OECD or defanging the IMF. But if Trump’s nonsensical protectionism somehow leads to the disintegration of annual G-7 schmooze-fests, I’ll view that as a silver lining to an otherwise dark cloud.

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Better economic performance is the most important reason to adopt pro-growth reforms such as the Tax Cuts and Jobs Act of 2017.

Even small increases in economic growth – especially if sustained over time – can translate into meaningful improvements in living standards.

But there are several reasons why it won’t be easy to “prove” that last year’s tax reform boosted the economy.

And there are probably other factors to mention as well.

The takeaway is that the nation will enjoy good results from the 2017 tax changes, but I fully expect that the class-warfare crowd will claim that any good news is for reasons other than tax reform. And if there isn’t good news, they’ll assert this is evidence against “supply-side economics” and totally ignore the harmful effect of offsetting policies such as Trump’s protectionism.

That being said, some of the benefits of tax reform are already evident and difficult to dispute.

Let’s start by looking at what’s happening Down Under, largely driven by American tax reform.

The Australian government announced Monday that the Senate will vote in June on cutting corporate tax rates after an opinion poll suggested the contentious reform had popular public support. …Prime Minister Malcolm Turnbull’s conservative coalition wants to cut the corporate tax rate by 5 percent to 25 percent by 2026-27… Cormann said the need to reduce the tax burden on businesses had become more pressing for future Australian jobs and investment since the 2016 election because the United States had reduced its top corporate tax rate from 35 percent to 21 percent. “Putting businesses in Australia at an ongoing competitive disadvantage deliberately by imposing higher taxes in Australia … puts Australian workers at an oncoming disadvantage and that is clearly the point that more and more Australians are starting to fully appreciate,” Cormann told reporters. Cormann was referring to a poll published in The Australian newspaper on Monday that showed 63 percent of respondents supported company tax cuts.

Wow.

What’s remarkable is not that Australian lawmakers are moving to lower their corporate rate. The government, after all, has known for quite some time that this reform was necessary to boost wages and improve competitiveness.

The amazing takeaway from this article is that ordinary people understand and support the need to engage in tax competition and other nations feel compelled to also cut business tax burdens.

All last year, I kept arguing that this was one of the main reasons to support Trump’s proposal for a lower corporate rate. And now we’re seeing the benefits materializing.

Now let’s look at a positive domestic effect of tax reform, with a feel-good story from New Jersey. It appears that the avarice-driven governor may not get his huge proposed tax hike, even though Democrats dominate the state legislature.

Why? Because the state and local tax deduction has been curtailed, which means the federal government is no longer aiding and abetting bad fiscal policy.

New Jersey’s new Democratic governor is finding that, even with his party in full control of Trenton, raising taxes in one of the country’s highest-taxed states is no day at the beach. Gov. Phil Murphy…has proposed a $37.4 billion budget. He wants to raise $1.7 billion in new taxes and other revenue… But some of his fellow Democrats, who control the state legislature, have balked at the governor’s proposals to raise the state’s sales tax and impose a millionaires tax. State Senate President Steve Sweeney has been particularly vocal. …Mr. Sweeney previously voted for a millionaire’s tax, but said he changed his mind after the federal tax law was passed in December. The law capped previously unlimited annual state and local tax deductions at $10,000 for individual and married filers, and Mr. Sweeney said he is concerned an additional millionaire’s tax could drive people out of the state. “I think that people that have the ability to leave are leaving,” he said.

Of course they’re leaving. New Jersey taxes a lot and it’s the understatement of the century to point out that there’s not a correspondingly high level of quality services from government.

So why not move to Florida or Texas, where you’ll pay much less and government actually works better?

The bottom line is that tax-motivated migration already was occurring and it’s going to become even more important now that federal tax reform is no longer providing a huge de facto subsidy to high-tax states. And that’s going to have a positive effect. New Jersey is just an early example.

This doesn’t mean states won’t ever again impose bad policy. New Jersey probably will adopt some sort of tax hike before the dust settles. But it won’t be as bad as Governor Murphy wanted.

We also may see Illinois undo its flat tax after this November’s election, which would mean the elimination of the only decent feature of the state’s tax system. But I also don’t doubt that there will be some Democrats in the Illinois capital who warn (at least privately) that such a change will hasten the state’s collapse.

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One of the key principles of a free society is that governmental power should be limited by national borders.

Here’s an easy-to-understand example. Gambling is basically illegal (other than government-run lottery scams, of course) in my home state of Virginia. So they can arrest me (or maybe even shoot me) if I gamble in the Old Dominion.

I think that’s bad policy, but it would be far worse if Virginia politicians also asserted extraterritorial powers and said they could arrest me because I put a dollar in a slot machine during my last trip to Las Vegas.

And if Virginia politicians tried to impose such an absurd policy, I certainly would hope and expect that Nevada authorities wouldn’t provide any assistance.

This same principle applies (or should apply) to taxation policy, both globally and nationally.

On a global level, I’m a big supporter of so-called tax havens. I’m glad when places with pro-growth tax policy attract jobs and capital from high-tax nations. This process of tax competition rewards good policy and punishes bad policy. Moreover, I don’t think those low-tax jurisdictions should be under any obligation to enforce the bad tax laws of uncompetitive countries.

There’s a very similar debate inside America. Some states – particularly those with punitive sales taxes – want to force merchants in other states to be deputy tax enforcers.

I’ve written about this topic and I think even my writings from 2009 and 2010 are still completely relevant. But let’s check some other sources, starting with a column in the Wall Street Journal. It’s from 2016, but the issue hasn’t changed.

The state of Alabama is openly defying the U.S. Supreme Court in an effort to squeeze millions of dollars of tax revenue from businesses beyond its borders. …This unconstitutional tax grab cuts to the heart of the Commerce Clause, which gives Congress the power to regulate trade “among the several States.” Alabama’s regulation directly contravenes the Supreme Court’s 1992 ruling in Quill v. North Dakota. In that case, the court held that North Dakota could not require an out-of-state office-supply company to collect sales taxes because the firm had no offices or employees there. …Alabama’s revenue commissioner, Julie Magee, is putting forward an untested and suspect legal theory: The state claims that if its residents buy more than $250,000 a year from a remote business, then the seller has an “economic presence”… There are around 10,000 sales-tax jurisdictions in the U.S., with varying rates, rules and holidays, and different definitions of what is taxable. Keeping track of this ever-changing patchwork is a burden, and forcing retailers to scramble to comply would profoundly hinder interstate commerce in the Internet age.

And here are some excerpts from a column published that same year by Fortune.

When politicians call for “fairness,” it’s important to take a closer look at their definition of fair. See, for example, the nationwide push in state capitols to slap online sales taxes on out-of-state retailers—a simple tax grab… states are constitutionally prohibited from collecting sales taxes from retailers that have no presence within their borders…thanks to the U.S. Supreme Court’s 1992 ruling in Quill Corp. v. North Dakota… Any national online sales-tax system will burden online retailers to a degree never felt by brick-and-mortar businesses. Local businesses only have to deal with a limited number of sales taxes—usually only the state, county, and local levies that apply to specific stores. Online retailers, on the other hand, would have to calculate and apply sales taxes across the entire nation—and roughly 10,000 jurisdictions have such taxes. Complying with this convoluted system would necessarily raise costs for consumers and stifle competition.

And the debate continues this year. The Wall Street Journal editorialized against extraterritorial state taxing last week.

A large faction of House Republicans are pressing GOP leaders to attach legislation to the omnibus spending bill that would let states collect sales tax from remote online retailers. South Dakota Rep. Kristi Noem’s legislation…would let some 12,000 jurisdictions conscript out-of-state retailers into collecting sales and use taxes from their customers. …Contrary to political lore, sales tax revenues have been increasing steadily in states with healthy economies. Over the past five years, Florida’s sales tax revenues have grown 27%. South Dakota’s are up by nearly 30% since 2013. …Twenty or so states have adopted “click-through” taxes to hit remote retailers that have contracts with local businesses. In 2016 South Dakota invited the High Court to revisit Quillby extending its sales tax to out-of-state sellers. …the Court could enable broader taxation and regulation of out-of-state businesses. This is what many states want to happen. …Raising taxes on small business and consumers won’t be a good look for Republicans in November, nor an inducement for investment and growth.

Jeff Jacoby also just wrote on this topic for his column in the Boston Globe.

First, the flow of interstate commerce must not be impeded by one state’s impositions. And second, there should be no taxation without representation; vendors should not be liable for taxes in states where they have no vote or political recourse. The Supreme Court upheld this “physical connection” standard in a 1992 case, Quill v. North Dakota. …the high court should reaffirm it. In the 26 years since the justices rebuffed North Dakota’s claim, the case against allowing states to exert their taxing power over remote sellers has grown even stronger. …there are now 12,000 taxing jurisdictions — not only states, counties, and cities, but also parishes, police districts, and Indian reservations. A lone online seller, unprotected by the Quill rule, could be obliged to remit taxes to any combination of them, with all their multitudinous rules and definitions, tax holidays and filing deadlines. …South Dakota can impose onerous burdens on companies operating within its borders, but not on vendors whose only connection to the state is that some of their customers happen to live there. The court got it right the first time. No merchant — whether selling online, via mail order, or in a traditional shop — is obliged to be a tax collector for states it doesn’t operate in.

And here are some passages from Jessica Melugin’s article for FEE. She makes the key point that extraterritorial tax powers would undermine – if not cripple – the liberalizing impact of tax competition.

…the Remote Transactions Parity Act (RTPA)…seeks to get rid of that physical presence limit on state taxing powers. It would let states reach outside their geographical borders and compel another state’s business to calculate, collect, and remit to that first state. …the long-term effect is that this arrangement will lessen the downward pressure on taxes between jurisdictions. Think of it like this: it’s the difference between driving your car across the D.C. border to Virginia to fill up with lower Virginia gas taxes—that’s how it works now and that’s what keeps at least some downward pressure on D.C. tax rates. If D.C. made the rate high enough, everyone would exit and fill up in Virginia. But if the approach in the RTPA is applied to this thought experiment, it would mean that when you pull into that Virginia gas station, they look at your D.C. plates and charge you the D.C. gas tax rate. …it’s a makeshift tax cartel among the states. …the RTPA is a small-business killer—which is why big box retailers support it. It crushes small competitors with compliance costs. State politicians are for it because they’d rather tax sellers in other states who can’t vote them out of office. Consumers will be left with less money in their pockets and fewer choices.

By the way, there are some pro-market people on the other side. Alex Brill of the American Enterprise Institute has written in favor of extraterritorial taxation.

…lawmakers have proposed legislation to allow (not require) states to collect sales tax on goods purchased from out-of-state sellers. …critics of this legislation…argue that “internet freedom is under attack by politicians willing to distort markets and tilt the playing field toward their favored businesses.” Internet freedom is certainly not being “attacked” by a policy to improve enforcement of existing tax liability. Second, these critics oppose the legislative reform based on the belief that just because the internet benefits people, online retail activities should be advantaged by public policy. If public finance were based on this type of specious logic, we would have a tax code far more unfair and distorted than it currently is.

I actually agree with both of his arguments. Giving states extraterritorial tax powers isn’t an attack on the Internet. And I also agree that tax policy shouldn’t provide special preferences.

But neither of his points address my concern that extraterritorial tax powers give too much power to governments and undermine tax competition.

Unless he’s going to argue that Nevada’s no-income-tax status is “distorted” compared to California’s punitive system. Or unless he’s going to argue that Delaware’s no-sales-tax status is “unfair” compared to New Jersey’s onerous system.

For more information, here’s my speech to congressional staffers from 2012.

P.S. For folks who like technical details, this fight is not about Internet taxation. It’s a battle between “origin-based” taxation (basically territorial taxation) and “destination-based” taxation (basically worldwide or extraterritorial taxation). I favor the former and oppose the latter, which helps to explain my opposition to the border-adjustment tax and the value-added tax.

P.P.S. I was afraid that congressional leaders would attach a provision to the new spending bill that would allow extraterritorial taxation by states. Fortunately, that didn’t happen. So the “omnibus” plan is a pork-filled affront to fiscal sanity, but at least it’s not a state-goverment-empowering, pork-filled affront to fiscal sanity.

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The biggest challenge, when I talk to politicians about the free-market agenda, is convincing them that they should restrain the growth of government. To be more specific, I think they often understand and accept the argument that ever-rising fiscal burdens are bad for a nation’s economic and moral health, but they are afraid that voters and interest groups will kick them out of office if they reduce the size and scope of the public sector.

I have a different challenge when talking to ordinary people about the free-market agenda. They’re quite comfortable (at least in theory) with the notion that it’s good to cap the growth of government spending, but there is a lot of skepticism about trade. And their doubts sometimes persist even after I share my eight questions and five charts showing the folly of protectionism.

In part, I think these skeptics share Trump’s mistaken belief that a trade deficit is a sign of weakness. But I’ve also found in my many conversations that some people simply are not comfortable with globalization.

But what does that concept even mean?

In his latest column for the New York Times, Bret Stephens points out that there’s no clear definition of what it means to be pro-globalist.

I grew up in Mexico City… Since then, I have lived in Chicago, London, Brussels, Jerusalem, New York and Hamburg. I suppose this makes me a “globalist” in certain eyes… To be a globalist means almost nothing — even “Davos Man” has to trundle home somewhere after the annual forum draws to a close. Rex Tillerson is as much a globalist as Samantha Power. Ditto for John Bolton and John Kerry, Charles Koch and George Soros, Mike Pompeo and Julian Assange. A term that embraces opposites has almost no explanatory power.

So he suggests a definition of what it means.

Maybe it’s time now to make “globalist” mean something after all. An earlier generation of globalists — they called themselves internationalists — had learned the lessons of the 1930s and understood that the U.S. could not cut itself off from the world and expect to remain safe from it. Successive generations of Americans — military and foreign-service officers, businessmen and teachers, humanitarians and entertainers — went out into the world and sought to make it a better place.

All of that sounds very appealing.

Especially when compared to what it means to be on the other side.

To be an anti-globalist…does specify something. …In short, anti-globalism is economic illiteracy married to a conspiracy mind-set.

Since I’ve written about the foolishness of protectionism and also explained why it’s silly to believe in conspiracy theories, I obviously agree.

But we have a problem. Globalism (or globalization, or internationalism, or the policies of “Davos Man,”, or whatever you want to call it) increasingly is perceived to be about more than free trade and comity between nations. In the minds of market-oriented people, it is getting linked with other policies that cause considerable angst.

  • Does globalism mean supporting the OECD’s efforts to undermine tax competition so that it’s easier for politicians to impose bad tax policy and more redistribution?
  • Does globalism mean agreeing with the IMF’s support for bailouts and higher taxes, policies which arguably are only for the benefit of politically connected big banks?
  • Does globalism mean adding regulatory harmonization to trade agreements, supplanting the much more market-friendly approach of mutual recognition?
  • Does globalism mean signing onto agreements that give powers to unaccountable and corrupt international bureaucracies such as the United Nations?
  • Does globalism mean siding with the European Commission in imposing one-size-fits-all rules for member nations notwithstanding the subsidiarity principle?

This is why I find this issue so frustrating.

Like Bret Stephens, I consider myself a globalist. To me, it’s a way of saying I want peaceful trade and investment flows between people in different nations. Heck, it’s also a way of saying I like and appreciate other peoples and other cultures.

But many of the other people who self-identify as globalists support policies that increase the power of governments over the private economy.

Here’s my simplified way to looking at this issues. All globalists are in favor of free trade and cross-border investment flows, but there’s then a division based on whether they want governments to compete or collude. And that’s basically a proxy for whether they favor small government or big government.

In this 2×2 matrix, the globalists are on the left side, but they’re divided between “Good Globalism” and “Bad Globalism.” Sort of the difference between Switzerland and Sweden.

I initially identified the bottom-right as “Anti Globalism,” but decided that “Statism” was the better label. After all, there should be a place for those who want global agreements to expand the power of government while also closing borders to trade and investment. Maybe India would be a good example of this bad approach.

But I couldn’t figure out a good label for the top-right. So I put “Irrationality” for the obvious reason that competition and protectionism are mutually exclusive concepts. And I have no idea what country belongs in this box.

P.S. This is my first stab at this issue. I’m open to suggestions on better labels and descriptions for my 2×2 matrix. And I also freely admit that there are aspects of the globalization debate – such as migration and military alliances – that aren’t included in my analysis. I’ll let others figure out how to create and classify a 4-dimensional matrix.

P.P.S. Not all global agreements are bad. Consider international pacts on air traffic control. Or certain anti-pollution treaties.

P.P.P.S. For more information on today’s topic, here’s my explanation of how borders can promote liberty, and here’s my explanation for why protectionism and tax harmonization are two peas in a pod.

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In 2016, here’s some of what I wrote about the economic outlook in Illinois.

There’s a somewhat famous quote from Adam Smith (“there is a great deal of ruin in a nation“) about the ability of a country to survive and withstand lots of bad public policy. I’ve tried to get across the same point by explaining that you don’t need perfect policy, or even good policy. A nation can enjoy a bit of growth so long as policy is merely adequate. Just give the private sector some “breathing room,” I’ve argued.

I subsequently pointed out that politicians in Illinois were doing their best to suffocate the private sector, and also warned that a tax hike would push the state even closer to a day of reckoning.

Let’s apply this same analysis to California.

So here are some excerpts from a column I wrote about the Golden State in 2016

Something doesn’t add up. People like me have been explaining that California is an example of policies to avoid. Depending on my mood, I’ll refer to the state as the France, Italy, or Greece of the United States. But folks on the left are making the opposite argument. … statists…do have a semi-accurate point. There are some statistics showing that California has out-performed many other states over the past couple of years. … California may have enjoyed some decent growth in recent years as it got a bit of a bounce from its deep recession, but it appears that the benefits of that growth have mostly gone to the Hollywood crowd and the Silicon Valley folks. I guess this is the left-wing version of “trickle down” economics.

So what’s happened in California since I wrote that article?

Well, lots of California-type policies.

And where does that leave the state? Is California heading in the wrong direction faster or slower than Illinois?

Victor Davis Hanson’s column in Investor’s Business Daily has a grim assessment. He explains that California residents pay a lot for lousy government.

Some 62% of state roads have been rated poor or mediocre. There were more predictions of huge cost overruns and yearly losses on high-speed rail — before the first mile of track has been laid. One-third of Bay Area residents were polled as hoping to leave the area soon. Such pessimism is daily fare, and for good reason. The basket of California state taxes — sales, income and gasoline — rates among the highest in the U.S. Yet California roads and K-12 education rank near the bottom. …One in three American welfare recipients resides in California. Almost a quarter of the state population lives below or near the poverty line. Yet the state’s gas and electricity prices are among the nation’s highest. One in four state residents was not born in the U.S. Current state-funded pension programs are not sustainable. California depends on a tiny elite class for about half of its income tax revenue. Yet many of these wealthy taxpayers are fleeing the 40-million-person state, angry over paying 12% of their income for lousy public services.

In effect, statist policies have created two states, one for the rich and the other for the poor.

…two antithetical Californias. One is an elite, out-of-touch caste along the fashionable Pacific Ocean corridor that runs the state and has the money to escape the real-life consequences of its own unworkable agendas. The other is a huge underclass in central, rural and foothill California that cannot flee to the coast and suffers the bulk of the fallout from Byzantine state regulations, poor schools and the failure to assimilate recent immigrants from some of the poorest areas in the world. The result is Connecticut and Alabama combined in one state.

Jonah Goldberg is not quite as pessimistic. He opines that the state has certain natural advantages that help it survive bad policy.

California attracts an enormous number of rich people who think it’s worth the high taxes, awful traffic, and even the threat of tectonic annihilation to live there — for reasons that literally have nothing to do with the state’s liberal policies. Indeed, most of the Californians I know live there despite those policies, not because of them. No offense to South Dakota, but if it adopted the California model of heavy regulation, high taxes, and politically correct social engineering, there’d be a caravan of refugees heading to states such as Wyoming and Minnesota. …Wealthy liberal Californians can be quite smug about how they can afford their strict land-use policies, draconian environmental regulations, and high taxes. And wealthy Californians can afford them — but poor Californians are paying the price.

Regarding the state’s outlook, I’m probably in the middle. Goldberg is right that California is a wonderful place to live, at least if you have plenty of money. But Hanson is right about the deteriorating quality of life for the non-rich.

Which may explain why a lot of ordinary people are packing up and leaving.

A columnist from the northern part of the state writes about the exodus of the middle class.

The number of people packing up and moving out of the Bay Area just hit its highest level in more than a decade. …Operators of a San Jose U-Haul business say one of their biggest problems is getting its rental moving vans back because so many are on a one-way ticket out of town. …Nationwide, the cities with the highest inflows, according to Redfin are Phoenix, Las Vegas, Atlanta, and Nashville.

And a columnist from the southern part of the state also is concerned about the middle-class exodus.

All around you, young and old alike are saying goodbye to California. …2016 census figures showed an uptick in the number of people who fled…the state altogether. …Las Vegas is one of the most popular destinations for those who leave California. It’s close, it’s a job center, and the cost of living is much cheaper, with plenty of brand-new houses going for between $200,000 and $300,000. …”There’s no corporate income tax, no personal income tax…and the regulatory environment is much easier to work with,” said Peterson. …Nevada’s gain, our loss.

What could immediately cripple state finances, though, is out-migration by the state’s sliver of rich taxpayers. Especially now that there’s a limit on how much the federal tax system subsidizes California’s profligacy.

Here are some worrisome numbers, as reported by the Sacramento Bee.

Will high taxes lead the state’s wealthiest residents to flee the Golden State for the comparable tax havens of Florida, Nevada and Texas? Republicans reliably raise that alarm when Democrats advocate for tax increases, like the 2012 and 2016 ballot initiatives that levied a new income tax on very high-earning residents. But now, with the federal tax bill cutting off deductions that benefited well-off Californians, the state’s Democrats suddenly are singing the GOP song about a potential millionaire exodus. …Democratic state lawmakers are worried because California relies so heavily on the income taxes it collects from high earners to fund government services. The state’s wealthiest 1 percent, for instance, pay 48 percent of its income tax, and the departure of just a few families could lead to a noticeable hit to state general fund revenue. …Among high-income brackets, about 38 percent of Californians who earn more than $877,560 – the top 1 percent – would see a tax hike. About 25 percent of Californians earning between $130,820 and $304,630, also would see a tax increase… “The new tax law is kind of like icing on the cake for some who were thinking about moving out of the state,” said Fiona Ma, a Democrat on the tax-collecting Board of Equalization who is running for state treasurer. …Joseph Vranich, who leads an Orange County business that advises people on where to locate their businesses, called the tax law “one more nail in the coffin” that would cause small- and middle-size entrepreneurs to leave California.

Politicians and tax collectors get resentful when the sheep move away so they no longer can be fleeced.

This powerful video from Reason should be widely shared. Thankfully it has a (mostly) happy ending.

One of the reasons the state has awful tax policy is that interest groups have stranglehold on the political system. And that leads to ever-higher levels of spending.

Writing for Forbes, for example, Josh Archambault examines the surge of Medicaid spending in the state.

Over the past ten years, Medicaid spending in California has almost tripled, growing from $37 billion per year to a whopping $103 billion per year—including both state and federal funding. And things have only accelerated since the state expanded Medicaid to a new group of able-bodied adults. …nearly 4 million able-bodied adults are now collecting Medicaid, which was once considered a last-resort safety net for poor children, seniors, and individuals with disabilities. …California initially predicted that its ObamaCare expansion would cost roughly $11.6 billion in the first three fiscal years of the program. The actual cost during that time? An astounding $43.7 billion. …Though California represents only 12 percent of the total U.S. population, it receives more than 30 percent of all Medicaid expansion spending.

And the Orange County Register recently opined about the ever-escalating expenses for a gilded class of state bureaucrats.

California’s annual state payroll grew by 6 percent in 2017, an increase of $1 billion and twice the rate of growth of the previous year. …Employee compensation is one of the largest components of the General Fund budget. In 2015-16, salaries and benefits accounted for about 12 percent of expenditures from the General Fund, a total of over $13 billion. …pay increases drive up pension costs. …The administration estimated that the annual cost to the state for the pay raises would be $2 billion by 2020-21, but the LAO said that didn’t take into account the higher overtime costs that would result from higher base pay, or the extra pension costs from that overtime. …if an economic downturn caused state revenues to decline, taxpayers would still have to pay the high and rising salaries for the full length of the contract.

The last sentence is key. I’ve previously pointed out that California has a very unstable boom-bust fiscal cycle. The state looks like it’s in good shape right now, but it’s going to blow up when the next recession hits.

Let’s close by acknowledging that poor residents also pay a harsh price.

Kerry Jackson’s article in National Review is rather depressing.

California — not Mississippi, New Mexico, or West Virginia — has the highest poverty rate in the United States. According to the Census Bureau’s Supplemental Poverty Measure — which accounts for the cost of housing, food, utilities, and clothing, and which includes non-cash government assistance as a form of income — nearly one out of four Californians is poor. …the question arises as to why California has so many poor people… It’s not as if California policymakers have neglected to wage war on poverty. Sacramento and local governments have spent massive amounts in the cause, for decades now. Myriad state and municipal benefit programs overlap with one another; in some cases, individuals with incomes 200 percent above the poverty line receive benefits, according to the California Policy Center. California state and local governments spent nearly $958 billion from 1992 through 2015 on public welfare programs.

That’s probably a partial answer to the question. There’s a lot of poverty in the state because politicians subsidize idleness. In effect, poor people get trapped.

The author agrees.

…welfare reform passed California by, leaving a dependency trap in place. Immigrants are falling into it: Fifty-five percent of immigrant families in the state get some kind of means-tested benefits… Self-interest in the social-services community may be at work here. If California’s poverty rate should ever be substantially reduced by getting the typical welfare client back into the work force, many bureaucrats could lose their jobs. …With 883,000 full-time-equivalent state and local employees in 2014, according to Governing, California has an enormous bureaucracy — a unionized, public-sector work force that exercises tremendous power through voting and lobbying. Many work in social services. …With a permanent majority in the state senate and the assembly, a prolonged dominance in the executive branch, and a weak opposition, California Democrats have long been free to indulge blue-state ideology.

And one consequences of California’s anti-market ideology is that poor people are falling further and further behind.

P.S. If Golden State leftists really do convince their neighbors to secede, I suspect the country would benefit and the state would suffer.

P.P.S. And if California actually chooses to move forward with secession, the good news is that we already have a template (albeit satirical) for a national divorce in the United States.

P.P.P.S. Closing with some California-specific humor, this Chuck Asay cartoon speculates on how future archaeologists will view the state. This Michael Ramirez cartoon looks at the impact of the state’s class-warfare tax policy. And this joke about Texas, California, and a coyote is among my most-viewed blog posts.

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If you’re reading this, you are a very lucky person because you were born at the right time. If you were born 500 years ago, 1000 years ago, or 1500 years ago, the odds are overwhelming that you would have endured a very short and difficult life, one that was characterized by unimaginable poverty.

But then, as explained in short videos by Professors Deirdre McCloskey and Don Boudreaux, the world suddenly became much richer starting a few hundred years ago.

And Western Europe led the way. But why?

In 2012, I shared lots of academic research showing how jurisdictional competition enabled rising levels of prosperity in Europe. And I then augmented that research a few years later by highlighting two very important developments in 1356 that helped set the stage for that competition.

Today, let’s expand on that evidence by looking at some recent analysis.

Here are some excerpts from a fascinating Aeon article by Professor Joel Mokyr.

How and why did the modern world and its unprecedented prosperity begin? …One of the oldest and most persuasive explanations is the long political fragmentation of Europe. …The modern European economic miracle was…neither designed nor planned. …How did this work? In brief, Europe’s political fragmentation spurred productive competition. It meant that European rulers found themselves competing for the best and most productive intellectuals and artisans. …the existence of multiple competing states encouraged scientific and technological innovation. …the rivalries between the states, and their examples to one another, also meliorated some of the worst possibilities of political authoritarianism. …interstate competition was a powerful economic mover. More important, perhaps, the ‘states system’ constrained the ability of political and religious authorities to control intellectual innovation.

Mokyr then explains that the benefits of jurisdictional competition were augmented and enabled by a form of labor mobility.

…political fragmentation was not enough. …more was needed. The size of the ‘market’ that intellectual and technological innovators faced was one element of scientific and technological development that has not perhaps received as much attention it should. …political and religious fragmentation did not mean small audiences for intellectual innovators. Political fragmentation existed alongside a remarkable intellectual and cultural unity. Europe offered a more or less integrated market for ideas, a continent-wide network of learned men and women, in which new ideas were distributed and circulated. …In early modern Europe, national boundaries mattered little in the thin but lively and mobile community of intellectuals in Europe. Despite slow and uncomfortable travel, many of Europe’s leading intellectuals moved back and forth between states. …If Europe’s intellectuals moved with unprecedented frequency and ease, their ideas travelled even faster. …Europe’s unique combination of political fragmentation and its pan-European institutions of learning brought dramatic intellectual changes in the way new ideas circulated. …Europe’s intellectual community enjoyed the best of two worlds, both the advantages of an integrated transnational academic community and a com­petitive states system.

By the way, I don’t consider this the “best of two worlds.” Labor mobility is a feature of jurisdictional competition, so I would say it’s simply one of the benefits. But six of one, half dozen of the other.

Let’s now look at another benefit of capitalism. Here are some passages from a CapX column on how the development of a merchant class constrained militarism. Here’s the thesis.

Although a number of things contributed to the huge decline in violence of the late medieval period, …the development of capitalism, and the rise of a merchant class whose wealth was not won with a sword, played a huge part.

And here’s an example.

This order was first shaken in 1302 when France’s cavalry confidently marched north to suppress a revolt by the Flemish. Flanders is not naturally rich in resources –Vlaanderen means flooded – but its people had turned swamps into sheep pastures and towns, building a cloth industry that made it the wealthiest part of Europe, its GDP per capita 20 per cent greater than France and 25 per cent better than England. …The Flemish were traders, not knights, which is why the French were sure of victory. And yet, with enough money to pay for a large, well-drilled infantry they were able for the first time to destroy the cavalry at the Battle of the Golden Spurs. It was the beginning of the end – no longer could the aristocracy simply push around the bourgeoisie, and as the latter grew in strength so it undermined the violence-obsessed culture of the nobility.

And another example.

European capitalism had begun in northern Italy, chiefly Venice, one of nine Italian cities that had surpassed 50,000 people by this point. …Venice was high in trust, a vital component for the growth of sophisticated markets, and so was the first to develop joint-stock companies and banks. …The Venetians, along with their arch-rivals the Genoese and Pisans, had been involved in the crusades, but despite papal prohibition had continued to trade with the infidel. Indeed, nothing would stop their desire to engage in commerce, and Arab geographer and traveller Ibn Jubayr noted that “It is amazing to see that the fires of discord burn” between Christians and Muslims when it comes to politics but, when trading, travellers “come and go without interference”.

And another case study.

London was behind Italy or Flanders but it was catching up. The city had started to grow as a trading hub in the 12th century, and its mayor, William Hardel, was the only commoner to witness Magna Carta in 1215 and helped secure Clause 41, which stated that all foreign “merchants are to be safe and secure in departing from and coming to England” without “evil exactions”. London expanded rapidly in the later middle ages, increasing its share of England’s wealth from two to nine per cent, and Henry IV (1399-1413) was the first king to invite its merchants on to the royal council, among them Sir Richard Whittington…the merchants purposefully avoided conflict, so that when in the 1380s Richard II tried to raise an army in the city to fight his various internal enemies he was met with apathy

What makes this analysis especially important is that military conflict is one of the putative downsides of political fragmentation. Indeed, Mokyr mentions that in his article.

I confess I don’t know enough to judge that issue. For instance, I’d like to know if there were there more wars in Europe, or were European wars between countries as opposed to an equal amount of civil wars elsewhere in the world?

In any event, at least there is some evidence that the prosperity generated by capitalism produced resistance to militarism.  Sort of brings to mind Bastiat’s famous statement about trade and war.

(Something to keep in mind given Trump’s self-destructive protectionist impulses.)

Let’s close by looking at Europe today and exploring whether jurisdictional competition on the continent. The good news is that the principle of “mutual recognition” has produced a form of competitive federalism, as explained in an article by Professor Michael Greve.

…the principle of reciprocity and “mutual recognition”…allows decentralized political institutions to coexist with a common, open, and efficient economic market. …cross-border trade…must be governed either by the rules of the country where a particular good or service ends up or by the rules of its origin country. The former “destination” principle would compel each company to comply with different and often conflicting regulations in all the member states where its products might end up. The result is not a common market but a collection of regulatory fiefdoms. The solution to this dilemma is the opposite, origin-based rule: so long as a company in a member state complies with the laws of its home state, it may freely sell its goods and services in other member states. …the origin principle…is commonly called the principle of “mutual recognition.” …it is the only principle that is consistent with both a common economic market and political decentralization. Mutual recognition integrates member states without central intervention. …Mutual recognition, then, liberates commerce by eliminating the cost of complying with different, conflicting, and often incomprehensible rules. Beyond that, mutual recognition institutionalizes jurisdictional competition. …The ability of individuals and firms to vote with their feet, modems, and pocketbooks will liberate markets and discipline politicians. …Trade unions, environmental interests, and any other interest group whose agenda rests on redistribution consistently oppose mutual recognition: they cannot rob Peter to pay Paul if Peter is allowed to escape to more hospitable climes.

Incidentally, the “origin principle” is at the core of the battle over the so-called Streamlined Sales Tax Proposal, a scheme by certain state governments to impose destination-based tax laws on out-of-state merchants.

And that principle also was a big reason for my fight against the border-adjustment tax, which was a destination-based levy.

For what it’s worth, Europe generally has been better than the United States about using the origin-based approach.

Europeans [are] ahead of the United States in viewing mutual recognition as an efficient means of harmonizing, as it were, the demands of economic integration and political diversity. Here at home, mutual recognition governs corporate chartering—but almost nothing else. Tort law, insurance and financial regulation, state taxation, product labeling, and most other areas of regulation are either subject to a destination rule or else preempted under federal law. No American legislator or corporate executive has ever heard of mutual recognition, let alone pressed it as a serious policy option.

Insurance regulation is a key example. Many states impose costly mandates that drive up the cost of health insurance. But if consumers had the freedom to buy health insurance from companies based in more market-oriented states, they would be able to save money.

Unfortunately, statists in Europe are moving in the wrong direction, seeking to replace mutual recognition with one-size-fits-all harmonization.

The European political class is bent on establishing pan-European, sovereign political institutions. …As political aspirations begin to dominate the process of European integration, mutual recognition will be jettisoned. …Habermas denounces the premises on which mutual recognition rests as the “building blocks of a neoliberal world view,” and he declares them at odds with “the Europeans’ normative self-understanding.” The European Union must therefore construct a European society of citizens, a pan-European “public sphere,” and a shared European political culture…precisely to confine economic competition and choice to a subordinate sphere. …the Europeans will harmonize their way toward a common constitution and citizenship, with dental care for all.

If the centralizers in Europe succeed (and they’ve already moved policy in the wrong direction), that will not bode well.

Europe already faces severe challenges because of excessive government and bad demographics.

Harmonization will exacerbate the problem of too much government because the “stationary bandit” no longer will face competitive pressure.

So “goldfish government” will become one step closer to reality.

P.S. This helps to explain my support for Brexit.

P.P.S. Speaking of Brexit, here’s a UKIP member of the European Parliament expounding on the benefits of mutual recognition over harmonization.

P.P.P.S. Mutual recognition also allows for regulatory diversity, which reduces systemic risk.

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