New Zealand’s Risky Wage-Rigging Gamble

I’m a big fan of New Zealand because the nation is a great example of how sweeping free-market reforms lead to very good results.

• The Kiwis got rid of all agriculture subsidies and farmers benefited.
• The Kiwis put the clamps on government spending, both in the 1990s and 2010s.
• The Kiwis used private property rights to rescue ocean fisheries.

Perhaps most impressive, New Zealand has very high levels of societal capital, ranking #1 in the new Global Index of Economic Mentality.

And the country also gets very high scores from Economic Freedom of the World and the Index of Economic Freedom.

But that doesn’t mean policy is perfect. The current Primer Minister already has demonstrated she has a very limited understanding of economics, and now she’s proving her lack of knowledge by imposing a version of “comparable worth.”

In a column for the New York Times, Anna Louie Sussman lavishes praise on this misguided scheme, which would give politicians and bureaucrats the power to decide that certain professions are systematically underpaid based on the share of female workers.

…a New Zealand law aimed at eliminating pay discrimination against women in female-dominated occupations…provides a road map for addressing the seemingly intractable gender pay gap. …Instead of “equal pay for equal work,” supporters of pay equity call for “equal pay for work of equal value,” or “comparable worth.” They ask us to consider whether a female-dominated occupation such as nursing home aide, for instance, is really so different from a male-dominated one, such as corrections officer… What is at stake is…a societywide reckoning with the value of “women’s work.” How much do we really think this work is worth? But also: How do we decide? …In effect, New Zealand is engaged in a countrywide effort to…fundamentally rethink the value of the work typically done by women. But where equal pay processes are relatively straightforward, pay equity, when done properly, challenges us to think deeply and objectively about a job and its components. …To negotiate the New Zealand social workers’ settlement, for instance, a working group composed of union officials, delegates from the Ministry of Children, social workers and employer representatives undertook a comprehensive assessment… Unions in New Zealand are currently pursuing over a dozen public sector claims, covering, among others, library assistants, clerical workers and customer-facing roles.

Ms. Sussman writes about an “intractable gender pay gap,” but the academic evidence suggests that this concept is nonsensical.

Simply stated, if women were systematically underpaid, investors and businesses would reap enormous profits by by setting up female-only firms to take advantage of pay differentials.

Heck, it’s worth noting that even a member of Obama’s Council of Economic Advisors refused to support similar arguments in the United States.

For what it’s worth, the New Zealand legislation mostly seems to be a back-door way to funnel more pay to bureaucrats.

New Zealand has, so far, been able to take the steps it has because the government pays for these wages. It’s not yet clear when, or whether, these efforts will work their way into the private sector. The vast majority of New Zealand’s businesses are small, with some 95 percent of firms employing fewer than 20 people. …proponents of pay equity say arguments about affordability miss the point. “Employers are not entitled to make even small profits on the backs of underpaid women,” said Linda Hill, a member of the Coalition for Equal Value, Equal Pay, a group of feminists who have worked in different fields on this issue for years. “Businesses that can’t pay fair wages aren’t viable businesses.”

Wow, Ms. Hill must be the New Zealand version of Hillary Clinton (who, when asked about the potential impact of the 1993 Hillarycare legislation, infamously and dismissively said that “I can’t be responsible for every undercapitalized entrepreneur in America”).

By the way, Ms. Sussman likes the idea of imposing comparable worth in the United States, which she explicitly acknowledges is the opposite of free markets.

In America, where state support for gender equality has never been less robust, pay equity’s financial obligation will likely fall on individuals. Are we willing to pay more, say, at the grocery store, or to the home health aides who look after our elderly? Are we willing to re-examine the assumptions embedded in what we have been told are “free markets” for labor?

The bottom line is that comparable worth is a form of government-imposed price controls, in this case dictating the price of labor.

And, as explained in videos from Marginal Revolution, Learn Liberty, and Russ Roberts, it’s a very bad idea to let politicians interfere with prices.

P.S. For those who want to fully understand the economics of “comparable worth,” read this superb report by one of my colleagues from grad school, Professor Deb Walker.

P.P.S. New Zealand was not included in the study I wrote about last week, so it’s unclear how much bureaucrats already are overpaid.

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Heartwarming Stories of Civil Disobedience

I was delighted to learn in 2013 that an overwhelming majority of Americans would disobey if politicians passed laws to confiscate private firearms.

And we have firsthand evidence from Colorado and Connecticut that gun owners engage in widespread civil disobedience.

But people elsewhere in the world also have a bit of rebelliousness. Here are some excerpts from a column in Reason about what’s been happening in New Zealand.

New Zealand’s government—which also stepped up censorship and domestic surveillance after bloody attacks on two Christchurch mosques earlier this year—is running into stiff resistance to new gun rules from firearms owners who are slow to surrender now-prohibited weapons and will probably never turn them in. Officials should have seen it coming. …As of last week, only around 700 weapons had been turned over. There are an estimated 1.5 million guns—with an unknown number subject to the new prohibition on semiautomatic firearms—in the country overall. Traditionally relaxed in its approach to firearms regulation, and enjoying a low crime rate, New Zealand has no firearms registration rule. That means authorities have no easy way of knowing what guns are in circulation or who owns them. “These weapons are unlikely to be confiscated by police because they don’t know of their existence,” Philippa Yasbek of Gun Control NZ admitted. “These will become black-market weapons if their owners choose not to comply with the law and become criminals instead.”

Congrats to the Kiwis.

The spirit of civil disobedience exists throughout the Antipodes.

That gun owners would, in large numbers, defy restrictions should have been anticipated by anybody who…glanced across the Tasman Sea to Australia. “In Australia it is estimated that only about 20% of all banned self-loading rifles have been given up to the authorities,” wrote Franz Csaszar, professor of criminology at the University of Vienna, after Australia’s 1996 compensated confiscation of firearms following a mass murder in Port Arthur, Tasmania. Csaszar put the number of illegally retained arms in Australia at between two and five million. “Many members of the community still possess grey-market firearms because they did not surrender these during the 1996–97 gun buyback,” the Australian Criminal Intelligence Commission conceded in a 2016 report. “The Australian Criminal Intelligence Commission continues to conservatively estimate that there are more than 260,000 firearms in the illicit firearms market.”

Congrats to the Aussies.

For what it’s worth, the Australian government hasn’t undertaken a big effort to round up guns. And I also don’t think the New Zealand government will mount a big campaign. Maybe they’ve watched this Reason video?

I’ll close with examples of noncompliance in America.

The Old West desert town of Needles, California,…is gaining notoriety… Leaders have declared it a “sanctuary city” for people who believe California’s strict gun laws have encroached too much on their constitutional right to keep and bear arms. The City Council in the town of 5,000 that borders Arizona and is a few miles from the southern tip of Nevada last month unanimously declared Needles a “2nd Amendment Sanctuary City.” …This effort is part of a national trend of officials in more conservative areas resisting tougher state gun laws. In New Mexico, more than two dozen sheriffs in predominantly rural areas vowed to avoid enforcement, equipped with supportive “Second Amendment Sanctuaries” resolutions from county commissions. In Washington, sheriffs in a dozen counties said earlier this year that they won’t enforce the state’s sweeping new restrictions on semi-automatic rifles until the courts decide whether they are constitutional.

P.S. I also shared encouraging polling data on public attitudes about gun control in 2015.

P.P.S. And this polling data from cops in 2013 also gives me a reason to be optimistic.

P.P.P.S. Last but not least, don’t forget that jury nullification is another way for individual Americans to fight bad laws.

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There’s No Galt’s Gulch, but New Zealand, Switzerland, and Hong Kong Are the Next-Best Alternatives

What’s the world’s freest nation?

I’ve suggested that Australia as an option if the United States ever suffers a Greek-style collapse, but my answer wasn’t based solely on that country’s level of freedom.

Another option is to look at Economic Freedom of the World, which is an excellent resource, but it only measures the degree to which a nation allows free markets.

If you want to know the world’s freest nation, the best option is to peruse the Human Freedom Index.  First released in 2013, it combines economic freedom and personal freedom.

The 2018 version has just been published, and, as you can see, New Zealand is the world’s most-libertarian nation, followed by Switzerland and Hong Kong. The United States is tied with Sweden for #17.

If you scan the top-20 list, you’ll notice that North America, Western Europe, and the Antipodes (Australia and New Zealand) dominate.

And that also is apparent on this map (darker is better). So maybe “western civilization” isn’t so bad after all.

Here is an explanation of the report’s guiding methodology. Simply stated, it’s a ranking of “negative liberty,” which is basically freedom from government coercion.

The Human Freedom Index casts a wide net in an attempt to capture as broad a set of freedoms as could be clearly identified and measured. …Freedom in our usage is a social concept that recognizes the dignity of individuals and is defined by the absence of coercive constraint. …Freedom thus implies that individuals have the right to lead their lives as they wish as long as they respect the equal rights of others. Isaiah Berlin best elucidated this notion of freedom, commonly known as negative liberty. In the simplest terms, negative liberty means noninterference by others. …This index is thus an attempt to measure the extent to which the negative rights of individuals are respected in the countries observed. By negative rights, we mean freedom from interference—predominantly by government—in people’s right to choose to do, say, or think anything they want, provided that it does not infringe on the rights of others to do likewise.

Unsurprisingly, there is a correlation between personal freedom and economic freedom.

Though it’s not a perfect correlation. The Index highlights some of the exceptions.

Some countries ranked consistently high in the human freedom subindexes, including Switzerland and New Zealand, which ranked in the top 10 in both personal and economic freedom. By contrast, some countries that ranked high on personal freedom rank significantly lower in economic freedom. For example, Sweden ranked 3rd in personal freedom but 43rd in economic freedom; Slovenia ranked 23rd in personal freedom but 71st in economic freedom; and Argentina ranked in 42nd place in personal freedom but 160th in economic freedom. Similarly, some countries that ranked high on economic freedom found themselves significantly lower in personal freedom. For example, Singapore ranked in 2nd place in economic freedom while ranking 62nd in personal freedom; the United Arab Emirates ranked 37th in economic freedom but 149th in personal freedom; and Qatar ranked 38th in economic freedom but 134th in personal freedom.

This raises an interesting question. If you had to move, and assuming you couldn’t move to a nation that offered both types of freedom, would you prefer a place like Sweden or a place like Singapore?

As an economist, my bias would be to choose Singapore.

But if you look at the nations in the top-10 for personal freedom, they’re all great place to live (and they tend to be very market-oriented other than their big welfare states). So I certainly wouldn’t blame anyone for instead choosing Sweden.

P.S. There are some very attractive micro-states that were not including in the Human Freedom Index, presumably because of inadequate data. I suspect places such as Bermuda, Liechtenstein, Monaco, and the Cayman Islands would all get very high scores if they were included.

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New Rankings for Economic Freedom: The United States Climbs to #6

Since I’ve been writing a column every day since 2010, you can imagine that there are some days where that’s a challenge.

But not today. The Fraser Institute has released a new edition of Economic Freedom of the World, which is like a bible for policy wonks. So just like last year, and the year before, and the year before, and so on (you may sense a pattern), I want to share the findings.

First, here’s what EFW measures.

The cornerstones of economic freedom are personal choice, voluntary exchange, open markets, and clearly defined and enforced property rights. …The EFW measure might be thought of as a measure of the degree to which scarce resources are allocated by personal choices coordinated by markets rather than centralized planning directed by the political process. It might also be thought of as an effort to identify how closely the institutions and policies of a country correspond with the ideal of a limited government, where the government protects property rights and arranges for the provision of a limited set of “public goods” such as national defense and access to money of sound value, but little beyond these core functions.

Now let’s get to the good stuff.

Unsurprisingly, Hong Kong is at the top of the rankings, followed closely by Singapore. Those jurisdictions have been #1 and #2 in the rankings every year this century.

The rest of the top 5 is the same as last year, featuring New Zealand, Switzerland, and Ireland.

The good news for Americans is that we’re back in the top 10, ranking #6.

Here’s what the report says about the United States.

…the United States returned to the top 10 in 2016 after an absence of several years. During the 2009–2016 term of President Obama, the US score initially continued to decline as it had under President Bush. From 2013 to 2016, however, the US rating increased from 7.74 to 8.03. This is still well below the high-water mark of 8.62 in 2000 at the end of the Clinton presidency.

It’s important to understand that the improvement in the U.S. score has nothing to do with Trump. The EFW ranking is based on America’s economic policies as of 2016 (there’s always a lag in getting hard data).

President Trump’s policies may increase America’s score (think taxes and regulation) or they may decrease America’s score (think trade and spending). But we won’t know for sure until we see future editions.

Here’s what’s happened to economic liberty in America between 1970 and 2016.

As you can see from the historical data, the U.S. enjoyed progress through the Reagan and Clinton years, followed by decline during the Bush years and early Obama years. But we’ve trending in the right direction since 2013.

Let’s look at other nations that get decent scores.

Here are the other nations that are in the top quartile.

Canada and Australia were tied for #10, so the rest of the rankings start with the under-appreciated success story of Taiwan at #12.

All the Baltic nations do well, especially Estonia and Lithuania. Chile also remains highly ranked, as is the supposedly socialist nation of Denmark.

Luxembourg, which was ranked #1 as recently as 1985, is now #25.

I also noticed that Rwanda (#40) has eased past Botswana (#44) to become the highest-ranked nation in Sub-Saharan Africa.

By the way, I’m not going to bother showing the bottom nations, but nobody should be surprised to learn that Venezuela is in last place.

Though that may simply be because there’s isn’t adequate data to include North Korea and Cuba.

Let’s close by including a chart that hopefully will show why economic liberty is important.

Simply stated, people enjoy much higher living standards in nations with free markets and small government. Conversely, people living under statist regimes suffer from poverty and deprivation.

The bottom line is that Economic Freedom of the World shows the recipe for growth and prosperity.

Sadly, very few nations follow the instructions because economic liberty is not in the interests of politicians.

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The Evidence-Based Case for Unilateral Free Trade

When President Trump proposed zero trade barriers among major economies, I applauded. Government-imposed barriers to commerce hurt prosperity, whether those restrictions hinder voluntary exchange inside a country or across national borders.

There’s a debate over Trump’s sincerity, and I’m definitely with the skeptics (look at his supposed deal with Mexico, for instance), but let’s set that issue aside and investigate the merits of free trade.

But let’s go one step farther. Instead of looking at whether multiple nations should simultaneously eliminate trade barriers, let’s consider the case for unilateral free trade.

In other words, should the government abolish all tariffs, quotas, and other restrictions so that buying products from Rome, Italy, is as simple as buying products from Rome, Georgia.

The global evidence says yes, regardless of whether other countries do the same thing.

Consider the examples of Singapore, Macau, and Hong Kong. According to the World Trade Organization, trade barriers are virtually nonexistent in these jurisdictions.

Have they suffered?

Hardly. According to the World Bank, all three jurisdictions are among the most prosperous places on the planet. Indeed, if you removed oil sheikdoms and tax havens from the list, they would win the gold, silver, and bronze medals for prosperity.

To be sure, there are many reasons that Singapore, Macau, and Hong Kong are rich. They have low taxes and small government, as well as comparatively little red tape and intervention.

But free trade definitely helps to explain why these jurisdictions have become so rich at such a rapid pace.

Let’s also look at the example of New Zealand. It doesn’t have absolute free trade, but average tariffs are 2.02 percent, which means it is the world’s fifth-most pro-trade nation.

Have the Kiwis suffered from free trade?

Nope. I shared a remarkable video last year that explains the nation’s remarkable turnaround coincided with a period of unilateral trade liberalization.

Today, let’s look at a column on the same topic by Patrick Tyrrell.

New Zealand…is one of the champions of economic freedom around the world. But it wasn’t always so. In the mid-1980s, New Zealand was facing an economic crisis, with its domestic market and international trade both heavily regulated. Unemployment had reached 11 percent… In response, the government of New Zealand began implementing revolutionary economic reforms, most significantly related to trade policy. It announced in 1987 a program that would reduce the tax on imports to under 20 percent by the year 1992. By 1996, that tax was reduced further to under 10 percent, and by the end of 1999, about 95 percent of New Zealand’s tariffs were set at zero.

Was that a successful policy?

Extremely beneficial.

New Zealand’s adoption of less restrictive trade policies has corresponded to its climb up the trade-freedom scale…and with a huge boost in per capita gross domestic product. The United States could take a page out of New Zealand’s trade-policy book and implement the same type of reductions in tariffs… That would enhance innovation and economic freedom—and grow our economy.

Here’s the chart from Patrick’s column.

Once again, the obvious caveat applies. New Zealand has adopted many pro-market policies in recent decades, so trade is just one of the reasons the country has moved in the right direction.

Now let’s go back in history and peruse Professor Peter Cain’s analysis of what happened when the U.K. adopted unilateral free trade in the mid-nineteenth century.

The trend to freer trade began in the late eighteenth century. …it was the 1840s that saw the beginning of a true revolution in policy. Earlier moves towards freer trade had been conditioned by an insistence on reciprocity (i.e. agreements with other states on mutual tariff reductions), but from the 1840s policy was determined unilaterally. The most dramatic instance of this was the Repeal of the Corn Laws in 1846. …It also reflected a growing belief that cheap imports were the key to prosperity because they would benefit the consumer as well as reduce business costs… Free trade certainly became a hugely popular cause in Britain… It was attractive not only because it guaranteed cheap food, but also because it supported the belief, widespread amongst both the business class and their workforce, that the state should be kept out of economic life.

What was the impact of this shift to unilateral free trade?

…free trade, in combination with heavy foreign investment, certainly helped to change the shape of the British economy in the late nineteenth century. …the long run effect of unilateral free trade had been to increase competition for British agriculture and industry, lower profits and stimulate capital exports. …this regime had yielded great benefits. British capital, pouring into foreign railways and other industries overseas, had helped to reduce agricultural commodity prices, shifting the terms of trade in Britain’s favour and raising national income. Dividends and interest payments on foreign investments had also increased greatly and these returns were realised by importing cheap foreign produce freely. Furthermore, …this unilateral free trade-foreign investment system had provided a strong boost to Britain’s commercial and financial sector.

Here’s the Maddison data on per-capita GDP in the United Kingdom between 1800-1914.

Looking at this chart, I’m wondering how anyone can possibly argue that unilateral free trade hurts an economy.

Once again, many caveats apply. Most important, many other policies play a role in determining national prosperity. It’s also worth noting that a handful of tariffs on products like wine and tobacco were maintained. Most troubling, the era of unilateral free trade coincided with the imposition of the income tax (though it didn’t become a money machine for bigger government until the 1900s).

The bottom line is that every example of unilateral free trade (or sweeping unilateral reductions in trade barriers) tells a positive story. Trade liberalization isn’t everything, but it’s definitely a huge plus for growth.

Yes, the best of all worlds is for trade liberalization to happen simultaneously in all countries, and negotiations have produced considerable progress since the end of World War II, so I’m somewhat agnostic about the best strategy.

But there’s no ambiguity about the ultimate goal of ending protectionism.

P.S. Sometimes bad things happen for good reasons. The income tax in the United States also was adopted in part to offset the foregone revenue from lower trade taxes.

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The New Prime Minister of New Zealand: Vacuous, Sinister, Dishonest, or Clueless?

Most politicians are feckless creatures driven by their insecurities to say anything and everything in hopes of getting elected. And, once in power, they will do or say anything and everything in hopes of getting reelected. “Public choice” theory explains how these conventional politicians behave.

But not all politicians fit in that box. There are also evil politicians in the world. Maduro in Venezuela would be a prime example, and you can add the dictators of North Korea, Cuba, and other hellholes to that list.

There are even a few admirable politicians, though that’s a very limited list.

But there’s also another category, at least in my mind. These are the ones who behave conventionally but say things that are really blur the line between foolish and despicable. For lack of a better phrase, these are the morally blind officials.

The politicians who eulogized Cuban dictator Fidel Castro belong in this group.

Another example would be Michael Higgins, the President of Ireland, who urged a return to “collective values” and condemned the “Celtic Tiger” era for being too individualistic and selfish – even though that was the period when the people of Ireland enjoyed both rapid income growth and huge improvement in quality-of-life measures ranging from central heating to infant mortality.

Now I have another politician who belongs in this special category.

The new Prime Minster of New Zealand just demonstrated her profound ignorance of world history and New Zealand history by declaring that capitalism is “a blatant failure.”

New Zealand’s new prime minister called capitalism a “blatant failure”, before citing levels of homelessness and low wages as evidence that “the market has failed” her country’s poor. Jacinda Ardern, who is to become the nation’s youngest leader since 1856, said measures used to gauge economic success “have to change” to take into account “people’s ability to actually have a meaningful life”. …Ms Ardern has pledged her government will increase the minimum wage, write child poverty reduction targets into law, and build thousands of affordable homes. …The Labour leader said her government would judge economic success on more than measures such as GDP.

She sounds like a clueless college student, regurgitating some nonsense she heard in a sociology class. Is she not aware that capitalism is the only successful strategy for reducing poverty? Does she not understand that the entire world was mired in poverty before free markets took hold?

Is she unaware that horrible material deprivation in countries such as China and India only fell after those nations opened themselves to some economic liberalization?

I wish some journalist would ask her a version of my two-question challenge. Or, better yet, have Bono talk with her about how to genuinely help poor people. Heck, let’s sign her up for an economic history class with Deirdre McCloskey.

She reminds me of Pope Francis, who has a knee-jerk view that capitalism is bad. I’ve explained why those views are wrong, though I’d first recommend reading what Walter Williams and Thomas Sowell wrote on the matter.

By the way, I don’t know enough to comment on homelessness and child poverty in New Zealand, but if their welfare state is anything like the mess in the United States, I wouldn’t be surprised to learn that the government is actually subsidizing destitution and dependency.

But even if that’s not the case, Ms. Ardern is condemning capitalism because it doesn’t solve every problem in society. That might be a fair assertion, except the alternatives to capitalism have never solved any problem. Indeed, the various forms of statism are the cause of much misery around the world.

For what it’s worth, I would not be agitated if she simply had made a conventional left-of-center argument about being willing to accept less growth to get additional redistribution because the benefits of capitalism aren’t “equally shared,” or something like that. That’s the standard equity-vs-efficiency debate. But she apparently doesn’t have the depth or knowledge for that discussion.

The bottom line is that New Zealand is now governed by a politician who doesn’t know what she doesn’t know. That doesn’t mean she’ll be any worse than the standard elected official, but I’m not overflowing with optimism that New Zealand will continue to be ranked near the top by Economic Freedom of the World.

By the way, I appeared on New Zealand TV earlier this month while in the country for a speech. But we talked about America’s top politician (and his worrisome protectionist mindset) rather than what’s happening in Kiwi-land.

Though I did mention that New Zealand made great progress because of sweeping economic reforms in the 1980s and 1990s. Hopefully Ms Ardern won’t have much success in moving her country back in the wrong direction.

P.S. Obama came close to joining the morally blind club when he suggested we could learn from communism. And Bernie Sanders deserves to be in that club, but may belong in an even worse category.

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New Zealand’s Road Map for Sweeping Pro-Market Reform

I wrote last September that New Zealand is the unsung success story of the world.

No, it doesn’t rank above Hong Kong and Singapore, which routinely rank as the two jurisdictions with the most economic liberty.

But it deserves praise for rising so far and fast considering how the country was mired in statist misery just three decades ago. That’s the story of this great video, narrated by Johan Norberg, from Free to Choose Media. It’s runs 56 minutes, but it’s very much worth your time.

But just in case you don’t have a spare hour to watch the full video, I can tell you that it explains how New Zealand made a radical shift to free markets in key areas such as agriculture, trade, fisheries, and industry.

I wrote about New Zealand’s shift to a property rights-based fisheries system, which is a remarkable success. But I’m even more impressed that the country, which has a very significant agricultural sector, decided to eliminate all subsidies. I fantasize about similar reforms in the United States.

To give you an idea of New Zealand’s overall deregulatory success, it is now ranked first in the World Bank’s Doing Business.

As a fiscal policy wonk, my one complaint is that the video doesn’t give much attention to tax and budget policy.

Which is an unfortunate oversight because there’s a very positive story to tell. In the early 1990s, the government basically imposed a nominal spending freeze. And during that five-year period, the burden of government spending fell by more than 10-percentage points of GDP.

And because policy makers dealt with the underlying disease of too much spending, that also meant eliminating the symptom of red ink. In other words, a big deficit became a big surplus.

The same thing also has been happening this decade. Outlays have been increasing by an average of less than 2 percent annually. And because this complies with my Golden Rule, that means a shrinking burden of spending.

And there’s also a good story to tell about tax policy. The top income tax rate has been slashed from 66 percent to 33 percent, and the capital gains tax has been abolished.

Let’s close by highlighting what should be the main lesson of the video, namely that any country can rescue itself from economic decline.

As I watched, the first thing that occurred to me is that New Zealand’s reforms are – or at least should be – a road map for Greece to follow.

The Fraser Institute’s Economic Freedom of the World shows the history of economic liberty in the two nations, and you can see that they used to be very similar – in a bad way – back in the 1970s. They began to diverge between 1975 and 1985, mostly because policy got even worse in Greece. Then both adopted better policy started in 1985, but New Zealand went much farther in the right direction.

Policy has been generally stable in both nations this century. That’s acceptable for New Zealand, but it’s basically a recipe for continued misery in Greece.

But the good news is that Greece can simply copy New Zealand to get the same good results.

P.S. Remember when Gary Johnson caught grief for being unable to list any admirable foreign leaders. I defended him by pointing out that there are not any obvious choices in office today, but I did mention that Roger Douglas and Ruth Richardson – both prominently featured in the above video – would be on list if it included former politicians.

P.P.S. New Zealand ranks #3 for total human freedom, trailing only Hong Kong and Switzerland.

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The Unsung Economic Success Story of New Zealand

When writing a few days ago about the newly updated numbers from Economic Freedom of the World, I mentioned in passing that New Zealand deserves praise “for big reforms in the right direction.”

And when I say big reforms, this isn’t exaggeration or puffery.

Back in 1975, New Zealand’s score from EFW was only 5.60. To put that in perspective, Greece’s score today is 6.93 and France is at 7.30. In other words, New Zealand was a statist basket cast 40 years ago, with a degree of economic liberty akin to where Ethiopia is today and below the scores we now see in economically unfree nations such as Ukraine and Pakistan.

But then policy began to move in the right direction, especially between 1985 and 1995, the country became a Mecca for market-oriented reforms. The net result is that New Zealand’s score dramatically improved and it is now comfortably ensconced in the top-5 for economic freedom, usually trailing only Hong Kong and Singapore.

To appreciate what’s happened in New Zealand, let’s look at excerpts from a 2004 speech by Maurice McTigue, who served in the New Zealand parliament and held several ministerial positions.

He starts with a description of the dire situation that existed prior to the big wave of reform.

New Zealand’s per capita income in the period prior to the late 1950s was right around number three in the world, behind the United States and Canada. But by 1984, its per capita income had sunk to 27th in the world, alongside Portugal and Turkey. Not only that, but our unemployment rate was 11.6 percent, we’d had 23 successive years of deficits (sometimes ranging as high as 40 percent of GDP), our debt had grown to 65 percent of GDP, and our credit ratings were continually being downgraded. Government spending was a full 44 percent of GDP, investment capital was exiting in huge quantities, and government controls and micromanagement were pervasive at every level of the economy. We had foreign exchange controls that meant I couldn’t buy a subscription to The Economist magazine without the permission of the Minister of Finance. I couldn’t buy shares in a foreign company without surrendering my citizenship. There were price controls on all goods and services, on all shops and on all service industries. There were wage controls and wage freezes. I couldn’t pay my employees more—or pay them bonuses—if I wanted to. There were import controls on the goods that I could bring into the country. There were massive levels of subsidies on industries in order to keep them viable. Young people were leaving in droves.

Maurice then discusses the various market-oriented reforms that took place, including spending restraint.

What’s especially impressive is that New Zealand dramatically shrank government bureaucracies.

When we started this process with the Department of Transportation, it had 5,600 employees. When we finished, it had 53. When we started with the Forest Service, it had 17,000 employees. When we finished, it had 17. When we applied it to the Ministry of Works, it had 28,000 employees. I used to be Minister of Works, and ended up being the only employee. …if you say to me, “But you killed all those jobs!”—well, that’s just not true. The government stopped employing people in those jobs, but the need for the jobs didn’t disappear. I visited some of the forestry workers some months after they’d lost their government jobs, and they were quite happy. They told me that they were now earning about three times what they used to earn—on top of which, they were surprised to learn that they could do about 60 percent more than they used to!

And there was lots of privatization.

…we sold off telecommunications, airlines, irrigation schemes, computing services, government printing offices, insurance companies, banks, securities, mortgages, railways, bus services, hotels, shipping lines, agricultural advisory services, etc. In the main, when we sold those things off, their productivity went up and the cost of their services went down, translating into major gains for the economy. Furthermore, we decided that other agencies should be run as profit-making and tax-paying enterprises by government. For instance, the air traffic control system was made into a stand-alone company, given instructions that it had to make an acceptable rate of return and pay taxes, and told that it couldn’t get any investment capital from its owner (the government). We did that with about 35 agencies. Together, these used to cost us about one billion dollars per year; now they produced about one billion dollars per year in revenues and taxes.

Equally impressive, New Zealand got rid of all farm subsidies…and got excellent results.

…as we took government support away from industry, it was widely predicted that there would be a massive exodus of people. But that didn’t happen. To give you one example, we lost only about three-quarters of one percent of the farming enterprises—and these were people who shouldn’t have been farming in the first place. In addition, some predicted a major move towards corporate as opposed to family farming. But we’ve seen exactly the reverse. Corporate farming moved out and family farming expanded.

Maurice also has a great segment on education reform, which included school choice.

But since I’m a fiscal policy wonk, I want to highlight this excerpt on the tax reforms.

We lowered the high income tax rate from 66 to 33 percent, and set that flat rate for high-income earners. In addition, we brought the low end down from 38 to 19 percent, which became the flat rate for low-income earners. We then set a consumption tax rate of 10 percent and eliminated all other taxes—capital gains taxes, property taxes, etc. We carefully designed this system to produce exactly the same revenue as we were getting before and presented it to the public as a zero sum game. But what actually happened was that we received 20 percent more revenue than before. Why? We hadn’t allowed for the increase in voluntary compliance.

And I assume revenue also climbed because of Laffer Curve-type economic feedback. When more people hold jobs and earn higher incomes, the government gets a slice of that additional income.

Let’s wrap this up with a look at what New Zealand has done to constrain the burden of government spending. If you review my table of Golden Rule success stories, you’ll see that the nation got great results with a five-year spending freeze in the early 1990s. Government shrank substantially as a share of GDP.

Then, for many years, the spending burden was relatively stable as a share of economic output, before then climbing when the recession hit at the end of last decade.

But look at what’s happened since then. The New Zealand government has imposed genuine spending restraint, with outlays climbing by an average of 1.88 percent annually according to IMF data. And because that complies with my Golden Rule (meaning that government spending is growing slower than the private sector), the net result according to OECD data is that the burden of government spending is shrinking relative to the size of the economy’s productive sector.

P.S. For what it’s worth, the OECD and IMF use different methodologies when calculating the size of government in New Zealand (the IMF says the overall burden of spending is much smaller, closer to 30 percent of GDP). But regardless of which set of numbers is used, the trend line is still positive.

P.P.S. Speaking of statistical quirks, some readers have noticed that there are two sets of data in Economic Freedom of the World, so there are slightly different country scores when looking at chain-weighted data. There’s a boring methodological reason for this, but it doesn’t have any measurable impact when looking at trends for individual nations such as New Zealand.

P.P.P.S. Since the Kiwis in New Zealand are big rugby rivals with their cousins in Australia, one hopes New Zealand’s high score for economic freedom (3rd place) will motivate the Aussies (10th place) to engage in another wave of reform. Australia has some good polices, such as a private Social Security system, but it would become much more competitive if it lowered its punitive top income tax rate (nearly 50 percent!).

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For Sustainable Fisheries, Private Property Rights Work Better than Command-and-Control Regulation

I’ve previously argued that private property rights are a vital component of a pro-environment agenda.

Interestingly, the Washington Post sort of agrees. At least with regards to fisheries. In a recent editorial, it acknowledged that the current communal system doesn’t work.

The world’s fisheries, which feed billions of people, are in serious decline. The authors of a study released Monday in the Proceedings of the National Academy of Sciences examined 4,713 fisheries, accounting for 78 percent of the world’s annual catch, and found that only a third were in decent biological shape.

The editorial then points out that there’s an incentive to over-harvest because the oceans are communal property, which creates a “tragedy-of-the-commons” scenario.

…while the fishing industry as a whole has an interest in sustaining the fisheries that provide it profits and feed the world, individual fishermen have an incentive to take as much as they can as quickly as they can. Over time, they degrade the fisheries on which they rely, but if they want to stay in business, they have little choice.

And the editorial concludes that giving fishermen the property right to a “catch share” would create better incentives.

…governments have extremely effective policy options to eliminate this tragedy of the commons. …governments must give fishermen a stake in the overall health of their fisheries. …require fishermen to hold rights to catch a certain amount of seafood in a certain fishery, which allows governments to manage the total haul and reduces the frenzied competition to scoop up as much as possible as quickly as possible. Ideally, these “catch shares” could be bought and sold so that rights would end up with those who could fish most efficiently.

Some of the language in the editorial rubs me the wrong way, such as “require fishermen” and “allows governments to manage,” but the bottom line is that the new system would be much more akin to a genuine market based on property rights.

To understand, consider the following example. Imagine there’s a communally owned pasture and a bunch of sheep owners. Would there be any incentive for the individual shepherds to properly conserve and manage the pasture? Not really, because any grass that wasn’t eaten by their sheep would be eaten by another shepherd’s sheep. So you wind up with a system where all the shepherds have an incentive to have their sheep consume as much grass as possible as quickly as possible.

That doesn’t end well.

But what if the pasture was divided up so that each shepherd had a plot of land, along with the right to buy and sell that land? With that system, the incentive to practice good husbandry would radically change.

And that’s basically what happens when you create a property rights-based fisheries system.

And the Washington Post believes this kind of approach could be enormously beneficial.

If applied globally, modern management plans could rehabilitate the median fishery in less than a decade. By 2050, nearly every fishery on the planet would be healthy. The resulting benefits would be astonishing. Relative to business as usual, the refreshed catch would grow by an annual 16 million metric tons, and seafood stocks would rise by 619 million metric tons. Fishermen would see an annual $53 billion rise in profit, a jump of 64 percent. The world’s fisheries could feed more people, and the fishing industry could boom, too.

Wow, this is so effusive that it sounds like me describing the benefits of a flat tax.

But just like I rely on real-world evidence for my praise of the flat tax, there’s also real-world evidence for successful fisheries based on property rights.

Consider, for instance, the experience of New Zealand.

By the early 1980s, with dwindling inshore stocks and too many boats, the New Zealand fishing industry and the government realised that a new fisheries management system was needed. Measures such as moratoriums and controlled fisheries failed to work. The common warning that ‘too many boats are chasing too few fish’ was rephrased by one fisherman as, ‘too many boats chasing no fish’. Radical thinking emerged. …In October 1986, after two years of consultation and planning, the Quota Management System was introduced, with widespread industry support. …Under the quota system a sustainable total catch or harvest of fish was set. Individuals or companies were allocated the right to catch certain quantities of particular species. Quotas became like other forms of property – they could be leased, bought, sold or transferred.

And how has this system worked?

It’s been a big success.

New Zealand’s Quota Management System has been viewed internationally as successful. This is particularly in comparison with many of the world’s fisheries… New Zealand has (so far) largely avoided the significant stock collapses that have occurred in fisheries overseas. In the early 2000s the Ministry of Fisheries had records on the status of 60–70% of stocks. Of these, about 80% were at or near target levels for sustainable harvest, and the total allowable catch for some fish had even increased.

The Economist, meanwhile, has written about Iceland’s system.

Central to its policy are the individual transferable quotas given to each fishing boat for each species on the basis of her average catch of that fish over a three-year period. …Subject to certain conditions, quotas can be traded among boats. Bycatch must not be discarded. Instead it must be landed and recorded as part of that boat’s quota. If she has exhausted her quota, she must buy one from another boat… All quota changes, catches and landings are posted on the internet, enabling everybody to see what is going on. The idea is to let fishermen be guided by the market. …Iceland no longer suffers from overcapacity, and the catch per boat is increasing. …Iceland offers lessons for other countries. The essential elements of its policies are to give fishermen rights that offer a reasonable expectation of profitable long-term fishing by encouraging the conservation of stocks. The system is clear, open and fairly simple, and it is well policed. It thus enjoys the respect of fishermen.

And the contrast to the command-and-control system used by the European Union is dramatic.

This contrasts with the common fisheries policy of the EU… For years, the union has simultaneously discouraged and promoted fishing, even as stocks have declined. Overfishing has intensified and the overcapacity of the fleet a few years ago rose to the point where the number of boats was almost twice the number needed for a sustainable harvest. The EU has offered inducements to those who gave up fishing even as it provided subsidies… The EU’s fisheries policy has long been notorious for its destructiveness, epitomised by the practice it either mandates or encourages of chucking back dead fish that are not big enough or not valuable enough, or just the wrong sort. …No wonder the EU’s stocks are 88% overfished, as the European Commission itself now admits. …No minister is present to represent the taxpayer, the consumer or the environment, let alone the fish.

The key, everywhere in the world, is a system of property rights.

Europe could surely learn from Iceland, but how widely could Iceland’s policies be copied? …The solution for Europe, and for other places, lies in a policy with Icelandic features: transferable quotas for all commercial species… Property rights are nearly always crucial in this. The tragedy of the sea is the tragedy of the commons, which is that anyone with access to a common resource has an interest in over-exploiting it because if he does not, someone else will. …Most fish…live fairly close to land, which is where they can, if the political determination exists, be assigned to the ownership of people with an interest in both exploiting and preserving them for a very long time, if not eternity. That this is so has been shown by Christopher Costello, an economist at the University of California, Santa Barbara, and his colleagues, in a study of over 11,000 fisheries. In the 121 with ownership-share systems, he reported in Science last September, the rates of collapse were significantly lower than in the others.

Having “rates of collapse” suggests that the property rights-based systems don’t always work perfectly. But that fact that those rates are “significantly lower” also indicates that they are far more effective than communal fisheries in preserving fish stocks.

P.S. There’s a worrisome analogy between communal fisheries and the welfare state since both involve a tragedy of the commons. In the case of the welfare state, when too many people decide to rely on the “communal property” of government for their existence, this creates a “tipping point” because productive people at some point are either unable or unwilling to continue pulling the wagon.

P.P.S. This is a lesson that the Pilgrims learned very quickly.

P.P.P.S. Unfortunately, larger societies have a tendency to develop “goldfish governments.”

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New CBO Numbers Confirm – Once Again – that Modest Spending Restraint Can Balance the Budget

The Congressional Budget Office has just released the update to its Economic and Budget Outlook.

There are several things from this new report that probably deserve commentary, including a new estimate that unemployment will “remain above 8 percent until 2014.”

This certainly doesn’t reflect well on the Obama White House, which claimed that flushing $800 billion down the Washington rathole would prevent the joblessness rate from ever climbing above 8 percent.

Not that I have any faith in CBO estimates. After all, those bureaucrats still embrace Keynesian economics.

But this post is not about the backwards economics at CBO. Instead, I want to look at the new budget forecast and see what degree of fiscal discipline is necessary to get rid of red ink.

The first thing I did was to look at CBO’s revenue forecast, which can be found in table 1-2. But CBO assumes the 2001 and 2003 tax cuts will expire at the end of 2012, as well as other automatic tax hikes for 2013. So I went to table 1-8 and got the projections for those tax provisions and backed them out of the baseline forecast.

That gave me a no-tax-hike forecast for the next 10 years, which shows that revenues will grow, on average, slightly faster than 6.6 percent annually. Or, for those who like actual numbers, revenues will climb from a bit over $2.3 trillion this year to almost $4.4 trillion in 2021.

Something else we know from CBO’s budget forecast is that spending this year (fiscal year 2011) is projected to be a bit below $3.6 trillion.

So if we know that tax revenues will be $4.4 trillion in 2021 (and that’s without any tax hike), and we know that spending is about $3.6 trillion today, then even those of us who hate math can probably figure out that we can balance the budget by 2021 so long as government spending does not increase by more than $800 billion during the next 10 years.

Yes, you read that correctly. We can increase spending and still balance the budget. This chart shows how quickly the budget can be balanced with varying degrees of fiscal discipline.

The numbers show that a spending freeze balances the budget by 2017. Red ink disappears by 2019 if spending is allowed to grow 1 percent each years. And the deficit disappears by 2021 if spending is limited to 2 percent annual growth.

Not that these numbers are a surprise. I got similar results after last year’s update, and also earlier this year when the Economic and Budget Outlook was published.

Some of you may be thinking this can’t possibly be right. After all, you hear politicians constantly assert that we need tax hikes because that’s the only way to balance the budget without “draconian” and “savage” budget cuts.

But as I’ve explained before, this demagoguery is based on the dishonest Washington practice of assuming that spending should increase every year, and then claiming that a budget cut takes place anytime spending does not rise as fast as previously planned.

In reality, balancing the budget is very simple. Modest spending restraint is all that’s needed. That doesn’t mean it’s easy, particularly in a corrupt town dominated by interest groups, lobbyists, bureaucrats, and politicians.

But if we takes tax hikes off the table and somehow cap the growth of spending, it can be done. This video explains.

And we know other countries have succeeded with fiscal restraint. As is explained in this video.

Or we can acquiesce to the Washington establishment and raise taxes and impose fake spending cuts. But that hasn’t worked so well for Greece and other European welfare states, so I wouldn’t suggest that approach.

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Spending Restraint Works: Examples from Around the World

America faces a fiscal crisis. The burden of federal spending has doubled during the Bush-Obama years, a $2 trillion increase in just 10 years. But that’s just the tip of the proverbial iceberg. Because of demographic changes and poorly designed entitlement programs, the federal budget is going to consume larger and larger shares of America’s economic output in coming decades.

For all intents and purposes, the United States appears doomed to become a bankrupt welfare state like Greece.

But we can save ourselves. A previous video showed how both Ronald Reagan and Bill Clinton achieved positive fiscal changes by limiting the growth of federal spending, with particular emphasis on reductions in the burden of domestic spending. This new video from the Center for Freedom and Prosperity provides examples from other nations to show that good fiscal policy is possible if politicians simply limit the growth of government.

These success stories from Canada, Ireland, Slovakia, and New Zealand share one common characteristic. By freezing or sharply constraining the growth of government outlays, nations were able to rapidly shrinking the economic burden of government, as measured by comparing the size of the budget to overall economic output.

Ireland and New Zealand actually froze spending for multi-year periods, while Canada and Slovakia limited annual spending increases to about 1 percent. By comparison, government spending during the Bush-Obama years has increased by an average of more than 7-1/2 percent. And the burden of domestic spending has exploded during the Bush-Obama years, especially compared to the fiscal discipline of the Reagan years. No wonder the United States is in fiscal trouble.

Heck, even Bill Clinton looks pretty good compared to the miserable fiscal policy of the past 10 years.

The moral of the story is that limiting the growth of spending works. There’s no need for miracles. If politicians act responsibly and restrain spending, that allows the private sector to grow faster than the burden of government. That’s the definition of good fiscal policy. The new video above shows that other nations have been very successful with that approach. And here’s the video showing how Reagan and Clinton limited spending in America.

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