Very Little Sympathy for Russian Oligarchs

I enjoy defending rich people. In part, that’s because I appreciate how rich entrepreneurs make life better for me and everybody else.

But I also defend rich people because of my deep disdain for the policy agenda of empty-suit politicians and envy-wracked demagogues.

If we want outcomes that are better for society and the economy, I’m 100-percent confident that Jeff Bezos and Elon Musk can spend their wealth better than the hacks and clowns in Washington.

But what if rich people get money from government cronyism? What if they became wealthy because of special favors from politicians?

Greg Ip of the Wall Street Journal wrote about this issue a couple of years ago and included this chart showing that cronyism is a small problem in the United States but a big problem in Russia.

Here’s some of what Mr. Ip wrote about Russia’s cronyism.

How a billionaire earns his or her fortune matters, of course. Some are “rent seekers,” meaning they skim off the productive efforts of others via corruption, royal prerogative or control of some valuable market or resource. That’s why Russia is an outlier in Ms. Freund’s research: lots of oligarchs, with not much economic benefit to show for it.

Since he wrote that article well before Russia’s invasion of Ukraine, he wasn’t focused on the geopolitical considerations that are dominating the discussion today.

So now let’s look at a very recent report from the U.K.-based Economist. Here are some key excerpts.

…the sanctions levied at Russian oligarchs have intensified scrutiny on the origins of tycoons’ wealth. …Rent-seeking entrepreneurs tend to use their relationships with the state to maximise profits. …Our index uses 25 years of data from Forbes’s annual stock-take of the world’s billionaires. …We have classified the main source of each billionaire’s wealth into crony and non-crony sectors. …Russia’s crony economy sticks out like a blinged-up Muscovite… Some 70% of the 120 Russian billionaires, who together hold 80% of its billionaire wealth, fall within our crony-capitalist definition. Wealth equivalent to 28% of Russia’s gdp in 2021 came from crony sectors, up from 18% in 2016.

The bottom line is that Russia’s “oligarchs” are not like the self-made billionaires that we’re fortunate to have in the United States.

Here’s the accompanying chart from the article. Russia does stand out…in a very bad way. If the numbers are accurate, getting in bed with politicians is the way to get rich.

Now that we’ve established that Russian billionaires generally don’t earn their money, this leads us to the more challenging issue of whether nations such as the United States should freeze and/or expropriate the wealth of the oligarchs in response to Putin’s invasion of Ukraine?

Since I’m not a lawyer or an expert on foreign and defense issues, I don’t pretend to know the best approach. I want Putin and his cronies to suffer, but I also have some qualms about the current approach.

• Is the “rule of law” being overlooked and “due process” getting trampled in the rush to go after the assets of wealthy Russians, some of whom may have emigrated because of their opposition to Putin?
• Are people being targeted simply because of their Russian ethnicity, just as an awful president targeted Americans of Japanese descent during World War II?
• If getting rich through cronyism is a sufficient pretext to confiscate wealth, does that mean it’s okay to seize the assets of ethanol producers and stockholders of Fannie Mae and Freddie Mac?

P.S. For what it’s worth, my gut instinct is that cronyism is a much bigger problem in China’s economy that we see in the data from the WSJ and the Economist.

P.P.S. Click here to learn more about “rent seeking.”

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Which Nations Do Best at Providing Rule of Law…and Why It Matters

Back in 2014, I shared a video explaining why the “rule of law” is important for a just and free society.

Here’s another video on the same point.

When I discuss rule of law (generally when explaining the various components that are used to calculate rankings of economic freedom), I often use a shortcut definition – namely that rule of law exists when government officials don’t have arbitrary power.

In other words, rule of law is present when even politicians and bureaucrats have to adhere to laws and rules.

Where is the rule of law strongest?

According to the World Justice Project, Scandinavian nations are at the top, led by Denmark.

Other European nations – and European offshoot nations – dominate the rankings (there is a benefit to Western Civilization).

A handful of East Asian jurisdictions also get good scores.

And you’ll notice I had to include 27 nations in order to see where the United States ranks.

That’s depressing, especially considering that the U.S. ranked #19 when I first wrote about this report back in 2014.

But at least we’re not Venezuela (gee, what a surprise), which is in last place of the 139 nations included in the rankings.

Readers also should note that the dismal rankings of some other major nations, most notably China (#98) and Russia (#101).

Now let’s consider the economic implications.

In a new working paper from the University of Rome, Esther Acquah, Lorenzo Carbonari, Alessio Farcomeni, and Giovanni Trovato estimate the impact of rule of law on economic outcomes.

We estimate the impact that our measures of institutional quality have on the level and the growth rate of per capita GDP, using a large sample of countries over the period 1980-2015. …Institutions matter especially in low and middle-income countries, and not all institutions are alike for economic development. For this group of countries, we find: i) a positive correlation between our main institutional index and the GDP growth and ii) that improvement in the reliability and fairness of the legal system leads to a higher long-run per capita GDP level. We also document non-linearities in the causal effects that different institutions have on growth, and the presence of threshold effects.

For what it’s worth, I sometimes state in my speeches that rule of law is akin to the foundation of a building.

It needs to be solid in order for the rest of the building (fiscal policy, trade policy, regulatory policy, and monetary policy) to be livable.

One final point is that you don’t necessarily get more rule of law by enacting additional laws. Indeed, that may actually reduce the rule of law because politicians and bureaucrats then can engage in capricious enforcement.

As pointed out back in the 1800s by the great Frederic Bastiat.

Simply stated, over-criminalization is not a good thing.

P.S. In the are of economic development, there’s a big discussion over whether there needs to be more “state capacity” if we want more growth.

I’ve criticized some advocates because they use “state capacity” as an excuse to push for bigger government.

But it is true that very weak and incompetent governments do a poor job of providing rule of law, so it’s also true that there are instances where it would be good to boost state capacity. Assuming the term is properly defined.

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Class Warfare and Traffic Fines

One of the best political cartoons I’ve ever seen was this gem from Glenn McCoy.

It very effectively captures how greedy local governments breed resentment and create conflict by using the law to fleece residents (and it definitely will be featured if I ever do another political cartoonist contest).

This is not a trivial topic. I’ve previously written about how fees, fines and charges can wreck the lives of the less fortunate.

So how do we solve this problem?

Alec Schierenbeck, in a column for the New York Times, argues we should impose much higher fines on rich people.

For people living on the economic margins, even minor offenses can impose crushing financial obligations, trapping them in a cycle of debt and incarceration for nonpayment. …Across America, one-size-fits-all fines are the norm… Other places have saner methods. Finland and Argentina, for example, have tailored fines to income for almost 100 years. The most common model, the “day fine,” scales sanctions to a person’s daily wage. A small offense like littering might cost a fraction of a day’s pay. A serious crime might swallow a month’s paycheck. Everyone pays the same proportion of their income. …Finland…handed a businessman a $67,000 speeding ticket for going 14 miles per hour above the limit.

He argues this is a matter of fairness.

…scaling fines to income is a matter of basic fairness. …The flat fine threatens poor people with financial ruin while letting rich people break the law without meaningful repercussions. Equity requires punishment that is equally felt. …while punishment is supposed to prevent undesirable conduct from happening in the first place, flat fines deter the wealthy less than everyone else. …That’s particularly true in cities like Ferguson that went easy on wealthier residents but treated poor people like cash cows. After all, the city would get more bang for its buck pulling over a rich driver with a blown blinker.

I think Schierenbeck is both right and wrong.

He’s correct that his approach would be more fair. An income-based speeding ticket would be akin to a flat tax – i.e., take the same proportion of everyone’s income. For what it’s worth, I made this argument with regard to traffic offenses back in 2015.

But that approach won’t do anything to help poor people (to be fair, the author doesn’t claim it would).

If we want to protect low-income people from greedy governments, that are several options.

• Have fewer nuisance laws that lead to fines, fees, and charges.
• Have income-based fines, but at a low level for rich and poor alike.
• Perhaps most important, control government spending so politicians have less incentive to grab more money from people.

The bottom line is that I don’t want government to screw over poor people, just as I don’t want government to screw over middle-class people or rich people.

P.S. My point about higher fines on the rich not helping the poor is the same an my argument that class-warfare taxes on upper-income taxpayers don’t do anything to help the less fortunate. Indeed, poor people actually suffer collateral damage because of diminished prosperity.

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If We Want Better Policing, Eliminate Qualified Immunity

Yesterday’s column focused on how police unions protect the bad apples who misbehave and therefore cause some people to resent law enforcement, especially in the minority community.

Curtailing the role of those unions would be an important step to create better bonds between the police and the citizenry.

Today’s column will explain the need to repeal or substantially curtail the doctrine of “qualified immunity,” which was created by courts to protect cops who trample on people’s rights.

It’s not a complete answer, just as fixing the union problem isn’t a complete answer. But getting rid of the doctrine at least will give citizens the opportunity to bring lawsuits when cops disregard their civil liberties. This tweet is a good summary for those who don’t have time to dig into the topic.

But hopefully you do have time to investigate this issue.

Here are excerpts from four articles about problems with qualified immunity.

This is not a new issue for libertarians and principled conservatives. Glenn Reynolds pointed out the injustice of the doctrine back in 2013 in a column for USA Today.

And David French condemned the practice in a piece for National Review in 2018.

Judges created qualified immunity, and they can end it. It’s past time to impose true accountability on public servants who violate citizens’ constitutional rights. First, some background. Since 1871, federal law has permitted Americans to file lawsuits against public officials who violate their constitutional rights. It’s a powerful tool that essentially deputizes members of the public to defend their own liberties. …However, after generations of judges have interpreted the statute, the phrase “shall be liable” has come to mean “may occasionally be liable.” …In 1982, …the law changed. In a case called Harlow v. Fitzgerald, the Supreme Court concocted the modern doctrine of qualified immunity. …As the doctrine developed, to prove that a right is clearly established, the plaintiff generally had to find and cite a remarkably similar case, with nearly identical facts, decided by a court of controlling jurisdiction. …the entire notion of “clearly established law” rests on a series of absurd, fantastical premises. Are we really to believe that a police officer doesn’t know he shouldn’t pound on the wrong door and blow away the innocent occupant unless a court said so in a case, say, five years before?

Writing for Reason, Professor Ilya Somin explains how fixing this bad bit of judge-made law could improve policing.

…there is much that can be done to curb police abuses. …The problem is not that police officers are unusually bad people. It’s that they have bad incentives, under which they are rarely held accountable for abuses. Those incentives can and should be altered. An important first step would be to get rid of the legal doctrine of “qualified immunity,” under which law enforcement officers are immune from suits for violating citizens’ constitutional rights… The Supreme Court interprets the term “clearly established” so narrowly that officers routinely get away with horrendous abuses… Qualified immunity is not required by the Constitution or even by a federal statute. It is a purely judge-made doctrine made up by the Supreme Court itself in a misguided effort to protect law enforcement officers from excessive litigation. …Both Justice Clarence Thomas, the Court’s most conservative member, and Justice Sonia Sotomayor, the most liberal, have been severely critical of qualified immunity. There is a real chance they can persuade at least three of their colleagues to take the same view. …state and local governments might respond by indemnifying police officers for the damages they have to pay in such cases. But even if that happens, it would still be a step in the right direction. Indemnification costs money that many local governments will be loathe to pay. They will therefore have an incentive to crack down on abusive officers, particularly repeat offenders who routinely force authorities to pay out large sums…

Thank goodness for Clarence Thomas. Not only is he one of the leaders in trying to address qualified immunity, he’s also a leader in the campaign to get rid of the odious practice of asset forfeiture, which effectively creates an incentive for government to steal private property.

Writing for the Bulwark, Clark Neilly adds his two cents to the discussion.

In determining the relationship between government and governed, one of the most important decisions a society can make is how accountable those who wield official power must be to those against whom that power is wielded. Congress made a clear choice in that regard when it passed the Enforcement Act of 1871, which we now call “Section 1983”… Simply put, Section 1983 creates a standard of strict liability by providing that state actors “shall be liable to the party injured” for “the deprivation of any rights.” Thus, if a police officer walks up to your house and peeks inside one of your windows without a warrant—a clear violation of your Fourth Amendment right against unreasonable searches—he is liable to you for the violation of that right. …many conservatives…abandon their stated commitment to textualism and embrace an “interpretation” of Section 1983 that is utterly divorced from its text. The vehicle for this…“living statutory interpretivism” is the Supreme Court’s qualified immunity doctrine, which judicially amends Section 1983 to provide that the standard for liability will no longer be the deprivation of “any rights”—as Congress expressly provided—but rather the deprivation of any “clearly established” rights. …the only avenue of accountability for most victims of police misconduct is a civil rights lawsuit that they themselves can initiate without the largesse of some prosecutor or citizen review board.

Last but not least, in a new column for USA Today, Patrick Jaicomo and Anya Bidwell of the Institute for Justice explain some of the legal issues.

The Supreme Court created qualified immunity in 1982. With that novel invention, the court granted all government officials immunity for violating constitutional and civil rights… Although innocuous sounding, the clearly established test is a legal obstacle nearly impossible to overcome. It requires a victim to identify an earlier decision by the Supreme Court, or a federal appeals court in the same jurisdiction holding that precisely the same conduct under the same circumstances is illegal or unconstitutional. If none exists, the official is immune. …When the Supreme Court conceived qualified immunity, it promised that the rule would not provide a “license to lawless conduct” for government officials. Plainly, it has.

And here are some examples they cite.

And let’s not forget the examples of misbehavior I’ve cited in the past (examples here, here, here, here, here, and here).

The point of this column is not to criticize or condemn cops as a group, but to highlight a bad policy that causes citizens to feel hostility against (what I assume to be) the vast majority of cops who do their jobs the right way.

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The History of Human Progress in Just Five Minutes

Back in 2014, I shared two videos – one narrated by Deirdre McCloskey and the other narrated by Don Boudreaux – explaining how the world went from near-universal poverty to mass prosperity (at least in the nations that embraced free markets and the rule of law).

Here’s a video with a similar theme, narrated by Dan Hannan, a British member of the European Parliament (hopefully not for long).

I like this video because it goes back 10,000 years to the invention of agriculture.

Hannan explains how this led to the creation of governments, basically acting as “stationary bandits.”

And for thousands of years, a tiny elite of kings and nobles basically acted as dictators while 99 percent of people endured horrid lives of slavery, oppression, poverty, and misery.

But then, as Hannan discusses (and also explained in the McCloskey and Bourdreaux videos), arbitrary power eventually was replaced by the rule of law and government control was replaced by economic liberty.

Not completely, of course, but to a sufficient degree that there was enough “breathing room” for a private economy to develop. And, in some cases, to flourish.

The result? Massive, amazing, and unthinkable prosperity for ordinary people.

Which gives me a good excuse to share this quote from Joseph Schumpeter, one of the economists from the Austrian School.

Yes, capitalism does wonderful things…assuming politicians don’t get too greedy and saddle us with “goldfish government.”

At times, I’m not overly optimistic. Given the growth of dependency, the expansion of government, and demographic decline, I fear there may be 22nd-century videos discussing how the United States reached a “tipping point” and went downhill.

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Mirror, Mirror, on the Wall, What Nations Protect Property Rights Best of All?

My favorite annual publication is the Fraser Institute’s Economic Freedom of the World, which measures the amount of economic liberty that exists in 159 nations. The rankings are based on five equally weighted categories, though I’ve always viewed “Legal System and Property Rights” as being the most important because even low taxes and light regulation won’t produce much growth if investors and entrepreneurs have no faith in the rule of law or the quality of governance.

This is why the annual International Property Rights Index is another one of my favorite publications. It provides a detailed look at why the right to own, utilize, and trade property is essential to a free society.

Property rights are accepted as a linchpin for human beings’ liberty, acting as a catalyst for economic and societal growth , and as a defense against authoritarian temptations. …Property is the basis of the freedom to contract, which is simply liberty in action. Without freedom to exchange, a third party, generally the government, intervenes through the political-bureaucratic ruling class. Freedom is more than the right to own property or the right to make transactions, to exchange, to buy and sell. Once citizens lose the right to own, they lose the ability to control their own lives. …This Index was developed to serve as a barometer of the state of property rights in all countries of the world.

Here’s the methodology of the Index. There are three main categories, each of which is comprised of several indices.

Now let’s get to the rankings.

As you might expect, Nordic nations and Anglosphere jurisdictions dominate, along with a smattering of other European countries.

…the top 15 countries for this year’s IPRI edition. Finland leads the 2018 IPRI (8.6924)… New Zealand ranks second (8.6322)… Next come Switzerland (8.6183), Norway (8.4504), Singapore (8.4049), Sweden (8.3970), Australia (8.3295), Netherlands (8.3252), Luxembourg (8.2978), Canada (8.2947), Japan (8.2315), Denmark (8.1640), United Kingdom (8.1413), United States of America (8.1243), and Austria (8.0050).

Congratulations to Finland, New Zealand, and Switzerland for winning the gold, silver, and bronze medals.

If you peruse the full rankings below, you’ll see that the United States is #14 (the same as last year).

Haiti is in last place, below even Venezuela.

It’s also worth noting that Chile is the highest-ranked Latin American nation.

Now let’s look at the nations with the biggest movement in the right direction and wrong direction. It’s easy to make a big jump for nations that are ranked very low, so Cyprus (which is now near the top of the 3rd quintile) probably deserves the most applause.

This year, five countries show the highest absolute improvement in their IPRI score: Azerbaijan (1.09), Ukraine (0.86), Russia (0.85), Moldova (0.82), and Cyprus (0.79); while the ones with highest decreases in their 2018 IPRI scores were South Africa (-0.65), Ethiopia (-0.3), Liberia (-0.27), Uganda (-0.25), and Uruguay (-0.22).

And South Africa’s decline is very tragic since it historically has been one of the best African nations.

By the way, if you want to know why property rights are so important, this chart is all the evidence you need.

And we’ll close today’s column with a bit of good news.

We don’t have decades of data, but the numbers that do exist show continuous improvement.

And since we also have evidence that overall global economic liberty is increasing, there are reasons for optimism.

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The Importance of Property Rights – with South Africa as a Sad Example of What Not to Do

There’s an easy way to judge whether countries have good economic policy or bad economic policy. Simply look at the Fraser Institute’s Economic Freedom of the World and check out a nation’s absolute score as well as how it ranks relative to other nations.

The EFW report even allows readers to see how nations score in the five major policy areas the are used to produce the overall grade. These categories are:

• Size of Government – A measure of the burden of taxes and spending.
• Regulation – A measure of intervention and red tape.
• Sound Money – A measure of monetary stability and financial freedom.
• Freedom to Trade Internationally – A measure of liberty to engage in cross-border commerce.
• Legal System and Property Rights – A measure of the quality of governance.

This last category sometimes doesn’t get enough attention. I sometimes refer to it as the rule-of-law measure. It’s basically a way of trying to estimate whether government is doing a good job with institutional public goods. The variables used include 1) Judicial independence, 2) Impartial courts, 3) Protection of property rights, 4) Military interference in rule of law and politics, 5) Integrity of the legal system, 6) Legal enforcement of contracts, 7) Regulatory costs of the sale of real property 8) Reliability of police, and 9) Business costs of crime.

Let’s look today at property rights. And I’m motivated to address this issue because of some horrifying news from South Africa. The Wall Street Journal opined on the issue this morning.

No country ever became rich through its government’s seizure of private property (exhibit A: the Soviet Union), but politicians in South Africa want to give it another go. That’s the disheartening news from Cape Town this week, where the National Assembly voted 241-83 on Tuesday to start a process to amend the constitution and allow land expropriation without compensation.

When I saw the headline and read the opening paragraph, my initial instinct was “so what?” After all, the whites probably stole the land from the blacks in the first place.

But then I found out that issue already has been handled.

Post-apartheid, the government bought land and offered compensation to South Africans whose property had been forcibly seized after 1913. Many of those claims are now settled… According to a 2016 Institute of Race Relations survey, less than 1% of South Africans think land is one of the country’s “serious unresolved problems.” Unemployment, public services, housing and crime rank far higher.

What’s actually happening is hard-core leftist populism. And it may turn South Africa into another Zimbabwe.

Julius Malema of the far-left Economic Freedom Fighters party…believes the state should be the “custodian” of the nation’s property… His party says the expropriation “should apply to all South Africans, black and white.”

Huh? Stealing property from everybody, regardless of race, while calling your party Economic Freedom Fighters?!?

I guess their idea of freedom means freedom to loot, which is sometimes called – rather perversely – positive liberty. But I shouldn’t laugh too hard because the United States actually had a president with the same twisted mindset.

In any event, the WSJ reminds us that this won’t produce good results.

The idea is likely to duplicate the awful experience of Zimbabwe during the Robert Mugabe era, a case study in the reality that bureaucrats can’t distribute resources more efficiently or productively than private markets. Mugabe’s confiscations spooked investors, the agricultural industry collapsed, and a once prosperous country became known for hyperinflation and poverty. …the ruling African National Congress is supporting the measure to distract attention from its own failed statist economic policies, which have produced subpar growth and denied opportunity to poor South Africans. …South Africa needs more capital, more investment and a favorable business environment. Seizing private property has produced misery everywhere it has been tried.

This is very troubling, especially since South Africa, compared to other nations on the continent, maintained semi-decent policies after dismantling the racist apartheid regime.

I wrote back in 2014 about South African economic policy and shared data about the nation’s EFW score. I was worried about the trend, and I’m now even more pessimistic.

Since today’s topic is property rights, let’s look at the global scores from the International Property Rights Index, which is published each year by the Property Rights Alliance.

As you can see, South Africa currently is in the second quintile. Best score of any African country, and above some European nations as well.

But if the South African constitution is changed and land expropriation is allowed, it’s a foregone conclusion that the country will suffer a precipitous fall in the rankings.

And here’s the map accompanying the study. The bottom line is that blue is good and purple/maroon (or whatever that color is…mauve?) is bad.

Switching to other nations, notice that all the Nordic nations are highly ranked. Indeed, they hold three of the top five slots. No wonder they score highly in that part of Economic Freedom of the World. Moreover, they also get very good scores for monetary policy, regulatory policy, and trade policy. Which explains why their economies get decent performance notwithstanding very bad fiscal policy.

And I’m certainly not surprised that New Zealand has the top spot.

The United States also does reasonably well. Not in the top 10, but at least in the top quintile.

P.S. In addition to moving in the wrong direction on property rights, South African politicians are making the tax code more destructive.

P.P.S. There is a country in sub-Saharan Africa to emulate.

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A Libertarian Quandary on Pot, Federalism, and the Rule of Law

Here are two statements that seem in conflict.

• I don’t like marijuana.
• I want marijuana legalized.

But there’s actually no conflict because we can decide that some things are distasteful without wanting to infringe on the freedom of others to partake. And you can make that decision for moral reasons or utilitarian reasons.

Now let’s consider two more statements.

• The rule of law is a bulwark of a civilized society and government officials should not engage in arbitrary enforcement.
• Attorney General Jeff Sessions is wrong to enforce federal drug laws in states that have decriminalized marijuana.

I’m tempted to agree with both sentences. The rule of law is vital, after all, and I definitely don’t like (and not for the first time) when Sessions uses the Justice Department to hassle people for victimless crimes.

But here’s my quandary: Should we applaud if government officials ignore laws, even laws we don’t like? That approach has some distasteful implications. If you’re on the right, would you want a left-leaning government to have the leeway to ignore criminal behavior by, say, union bosses? If you’re a leftist, would you want a libertarian-leaning government to have the ability to decide that tax laws can be ignored?

Charles C. W. Cooke of National Review hits the nail on the head.

There’s no question that the right approach is for the federal government to eliminate drug laws. Heck, even people who support the War on Drugs should favor this approach since criminal justice (other than a few select areas such as treason) should be a matter for state and local governments.

And a broader point is that we simply have too many laws. Harvey Silverglate estimates that the average person unknowingly commits three felonies per day.

This means that government officials could probably indict, convict, and imprison almost all of us. Needless to say, that’s not how a free and just society should work.

Our Byzantine tax code is an example. Many of us probably unintentionally violate the law because of needless complexity. Or even if we haven’t violated the law, I’m guessing a prosecutor could convince a grand jury that we should be indicted. And who knows what would happen after that.

So while I mostly argue for tax reform because I want more growth, I also think there’s a moral argument for a simple and fair system.

And there are other laws that shouldn’t exist at all. I obviously put drug laws on that list, but I’d also add anti-money laundering laws and civil asset forfeiture laws.

All that being said, I obviously don’t want the Justice Department in Washington to waste law enforcement resources in a campaign to undermine states that have decriminalized pot. But there’s a right way and a wrong way to solve this problem.

P.S. You can click here for other libertarian quandaries.

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100 Years of Communism, 100 Million Deaths, and the Economic Performance of Nations that Escaped Soviet Tyranny

Over the past few weeks, I’ve written several columns about the 100th anniversary of communism. I’ve looked at that evil ideology’s death toll, and I’ve written about the knaves and fools who defended and promoted communism in the west (included, sad to say, some economists). And I’ve even shared some anti-communist humor to offset the dour material in the other columns.

Let’s continue that series today by looking at the very practical question of what happens when a nation breaks free from communist enslavement?

Professor James Gwartney and Hugo Montesinos from Florida State University analyzed the economic performance of former Soviet Bloc nations (they refer to them as formerly centrally planned – or FCP – countries) over the past 20 years.

The good news is that these countries have been growing, especially if they get decent scores from Economic Freedom of the World.

The economic record of the FCP countries during 1995-2015 was impressive. This was particularly true for the seven FCP countries that moved the most toward economic liberalization. The average growth of real per capita GDP of these seven countries exceeded 5 percent during 1995-2015. Real per capita GDP more than doubled in six of the seven countries during the two decades. …While the real GDP growth of the middle group was slower, it was still impressive. The population weighted annual real growth of per capita GDP of the middle group was 3.78 percent.

And to elaborate on the good news, growth rates in FCP nations has been faster than growth rates in rich countries.

But that’s to be expected. Convergence theory tells us that poorer places should grow faster than richer places (at least in the absence of unusual circumstances).

But government policy can be a wild card. As you can see from Table 14 of the report, Gwartney and Montesinos parsed the data and found that the FCP nations that adopted the most pro-market reforms have enjoyed the fastest growth rates, while growth rates were less impressive in the FCP countries with lesser amounts of economic liberalization (relative growth rates highlighted in red below).

The goal, of course, is for FCP nations to catch up with rich nations.

And there has been a decent amount of convergence.

…the relative income increases are impressive. The ratio of the mean per capita GDP of the most economically free group compared to the high-income economies more than doubled, soaring from 19.9 percent in 1995 to 40.6 percent in 2015. The parallel ratio for the middle group increased by approximately 50 percent from 36.9 percent in 1995 to 53.0 percent in 2015. Finally, the ratio for the bottom group increased from 13.0 percent in 1995 to 24.6 percent in 2015, an increase of 90 percent. The largest increases in relative income were registered by Georgia, Lithuania, Latvia, Armenia, Albania, Kazakhstan, Azerbaijan, and Bosnia and Herzegovina. The ratio for each of these countries more than doubled between 1995 and 2015. Note that five of these eight countries are in the group with the highest 2015 EFW ratings.

There’s country-specific data in Table 13 of the report.

And you can see, once again, that the nations with the most economic freedom and enjoying the fastest convergence rates. From the top group, I’ve highlighted both Georgia and the Baltic countries for their impressive results. And I also highlighted Poland and Slovakia from the second group because both countries have converged at a rapid pace thanks to some good policies.

Looking at the bottom group, it’s sad to see Ukraine doing so poorly, but that’s a predictable result given the near-total absence of economic freedom in that unfortunate country.

The obvious moral of the story is that nations will grow faster and generate more prosperity if they follow the recipe of free markets and limited government.

So let’s take a look at that recipe by examining how FCP nations have performed when looking at the various ingredients. More specifically, Economic Freedom of the World looks at five major policy areas: fiscal, trade, money, regulation, and legal.

And it’s that final category (which measures factors such as property rights, the rule of law, and government corruption) where these countries have not done a good job.

…the FCP countries…have a major shortcoming: their legal systems are weak and little progress has been made in this area. Given their historic background, this is not surprising. Under socialism, legal systems are designed to serve the interests of the government. Judges, lawyers, and other judicial officials are trained and rewarded for serving governmental interests. Protection of the rights of individuals and private businesses and organizations is unimportant under socialism.

Here’s some fascinating data from Table 17, which shows how scores for the five major categories have changed over time in both FCP nations and countries from Western Europe. You’ll see that FCP countries have liberalized policy and closed the gap in Area 3 (money), Area 4 (trade), and Area 5 (regulation). And you’ll also see how the FCP nations do a better job in Area 1 (fiscal), which I’ve highlighted in red. But the most startling – and depressing – result in the absence of progress in Area 2 (legal), which is also highlighted in red.

These results, for all intents and purposes, are a much more detailed version of an article I wrote for the Alliance of Conservatives and Reformers in Europe earlier this year.

Unfortunately, even though we have the same diagnosis, we don’t really have an easy solution. In this final excerpt, the authors explain that it’s not that easy to change the culture of a nation’s political class.

It is a major challenge to convert a socialist legal system into one that enforces contracts in an unbiased manner, protects property rights, permits markets to direct economic activity, and operates under rule of law principles. …Economists have provided policy-makers with step by step directions about how to achieve monetary and price stability, liberalized trade regimes, and adopt tax structures more consistent with growth and prosperity. …But, a recipe for developing a sound legal system is largely absent. We know what a sound legal system looks like, but we have failed to explain how it can be achieved.

I don’t even thank socialism deserves the full blame (though it deserves the blame for many bad things). There are many nations in many regions of the world that get very bad scores because of inadequate rule of law and weak property rights. But I fully agree that it’s not easy to fix.

But I’ll close with a very upbeat observation that all of the FCP nations are better off because the Soviet Union collapsed and communism is fading from the world. Liberal socialism may not be good for an economy, but it’s paradise compared to Marxist socialism.

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In my Fantasies, Here’s How Donald Trump Wins on Obamacare

In the eight years of writing this column, I’ve periodically confessed to certain fantasies. But you’ll notice that these fantasies don’t involve supermodels from Victoria’s Secret (though they did make a cameo appearance in one column).

Instead, either because I’m getting old or because I’m a dorky libertarian, my fantasies involve public policy. Here are imaginary things that have caused my pulse to quicken.

• George H.W. Bush telling someone to grow up and not expect the government to be his mommy and daddy.
• The private sector replacing the government in the business of building and operating roads.
• A public sector that is so small that the income tax can be totally abolished and not replaced with anything.
• Though I paradoxically confess that I’m troubled that this no-income-tax fantasy is partially happening.
• A Texas governor mocking U.N. bureaucrats who are trying to erode American sovereignty.
• When I’m not fantasizing about no income tax, I indulge in the more modest fantasy of a flat tax.

I now have a new fantasy. It involves Donald Trump. But the fantasy doesn’t involve the size of his hands, or any other body part.

Instead, I want President Trump to use his existing power to create irresistible pressure for Obamacare repeal.

Simply stated, I’m fantasizing that this tweet becomes reality.

If a new HealthCare Bill is not approved quickly, BAILOUTS for Insurance Companies and BAILOUTS for Members of Congress will end very soon!

— Donald J. Trump (@realDonaldTrump) July 29, 2017

Michael Cannon, my prescient colleague at the Cato Institute, has been urging this approach since the beginning of the year.

Here’s some of what he wrote for National Review.

Trump…can restore the Constitution’s limits on executive power, provide relief to Americans suffering under Obamacare, and hasten repeal.

Michael has a 14-point list, but here are the ones that matter for our purposes today.

First, put pressure on Congress.

1. End Congress’s illegal Obamacare exemption. Obamacare threw members of Congress and congressional staff out of their health plans and in effect cut their pay by up to $12,000 per year. Obama ignored the law and made illegal payments to private insurance companies on behalf of members of Congress and their staff for six years — all to prevent Congress from reopening the law. Trump should announce that he will end those illegal payments immediately, and that he will veto any bill restoring the pay cut that Obamacare dealt Congress, until Congress earns that money by repealing and replacing the law. Congress shouldn’t get an exemption from Obamacare until the American people do. Democrats who actually voted for Obamacare especially should have to live under it.

Second, put pressure on insurance companies.

2. End Obamacare’s unconstitutional cost-sharing subsidies. In House v. Burwell, a federal judge ruled that the Obama administration “violate[d] the Constitution” by paying billions of dollars in “cost-sharing” subsidies to private insurance companies without a congressional appropriation. Trump should immediately drop the Obama administration’s appeal of that decision, stop the unconstitutional payments, and prevent insurers from canceling Obamacare plans until 2018.

3. End Obamacare’s illegal “reinsurance” payments. The Government Accountability Office found that the Obama administration illegally diverted additional billions of dollars in “reinsurance” payments from the Treasury to private insurance companies. Trump should immediately stop the diversion of those funds and demand that insurers repay the more than $3 billion in unlawful payments they have received.

4. Block Big Insurance’s “risk-corridor” raid on the Treasury. The Obama administration tried to circumvent a statutory cap on “risk-corridor” payments to private insurance companies by offering to settle lawsuits filed by the insurers. Trump should immediately announce that his administration will not settle but will instead vigorously defend taxpayers’ interests in all such lawsuits.

Needless to say, the combination of angst-ridden folks on Capitol Hill and angst-ridden bigwigs from insurance companies would probably be more than enough to get weak-kneed Republicans to climb on board for repeal.

Indeed, in my fantasy, Trump uses his bully pulpit (and Twitter account) to specifically pressure those callow Republicans who voted for major repeal in 2015 and then flip-flopped and voted against various (usually partial) repeal proposals earlier this month.

Various media sources certainly agree that Trump has a huge amount of leverage.

Here are excerpts from a Bloomberg story.

Ending the CSR subsidies, paid monthly to insurers, is one way that Trump could hasten Obamacare’s demise without legislation, by prompting more companies to raise premiums in the individual market or stop offering coverage. …health-care analyst Spencer Perlman at Veda Partners LLC said in a research note that there’s a 30 percent chance Trump will end CSR payments, which may “immediately destabilize the exchanges, perhaps fatally.” …Many insurers have already dropped out of Obamacare markets in the face of mounting losses, and blamed the uncertainty over the future of the cost-sharing subsidies and the individual mandate as one of the reasons behind this year’s premium increases.

The Blaze has a similar report.

President Donald Trump announced on Saturday that if Congress doesn’t act soon on health care, he could end federal “BAILOUTS” for insurance companies, which could effectively force Congress to act or else put health insurance companies in the difficult position of having to raise rates on people who can’t afford to pay them or to leave Obamacare exchanges entirely. …The “BAILOUTS” to insurance companies Trump referred to in his tweet are “cost sharing reduction” payments… If Trump were to withhold these funds from health insurance companies, it would likely result in many insurers choosing to leave the Obamacare health insurance exchanges… If health insurance companies choose to leave the insurance exchanges, which is the most likely response, it could catalyze the collapse of the Obamacare exchange system, making it more difficult for members of Congress to wait on implementing a repeal and replace bill.

And here are passages from a Wall Street Journal story.

President Donald Trump made one of his most explicit threats to cut off payments to insurance companies to force senators and lobbyists back to the bargaining table for a GOP health-care bill, and saying, for the first time, that he was also willing to cancel some of lawmakers’ health-care benefits. …Those payments have been challenged in court by House Republicans, who argue the funds were never authorized by Congress. A federal judge has sided with the House but allowed the payments to continue until the litigation concludes. Democrats have said that cutting off the payments would be tantamount to sabotaging the insurance markets… Mr. Trump’s Saturday tweet…also the first to mention that he was open to another idea proposed by conservative activists to pull lawmakers back to the task of a health-care bill: cutting off their existing health benefits. …some lawmakers contending that it is an end-run around a provision in the 2010 health law that requires members of Congress to get their health coverage like other Americans.

Keep in mind, by the way, that this isn’t just a matter of political brinksmanship. The various payments to insurance companies are either not authorized by the law, or they were authorized and Congress has declined to appropriate funds. In other words, these payments make a mockery of the rule of law. They are illegal and/or unconstitutional.

Moreover, my former Heritage colleague Mike Needham has a good explanation of how the Obama Administration preposterously decided to classify Congress as a small business in order to enable subsidies that were not part of the Obamacare legislation. Once again, throwing the rule of law overboard for political convenience (which was a pattern with the previous Administration).

So even if Trump didn’t want to get rid of Obamacare, these payments should end.

But we may as well make a policy virtue out of legal necessity by getting rid of these payments as part of a campaign to pressure Capitol Hill to do what’s right and get rid of the disastrous Obamacare legislation.

P.S. Never forget that we wouldn’t be in this mess if John Roberts had upheld his oath and ruled that Obamacare was unconstitutional.

P.P.S. From the moment he emerged on the national stage, I’ve been worried that Donald Trump would preside over an expansion in the burden of government. But if there’s a libertarian bone in his body, it becomes apparent when he tweets. Not only did he tweet a very appropriate and effective threat against Obamacare yesterday, he also tweeted a very appropriate and effective threat about a government shutdown back in May.

P.P.S. It wasn’t one of my fantasies, but here’s something from 2013 about a libertarian fantasy dealing with ammo and sex.

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The Transition from Communism in the Soviet Bloc and Lessons for Cuba, North Korea, and Venezuela

It appears that Venezuela is on the brink of collapse as it enters the fourth circle of statist hell.

And the death of Cuba’s long-time dictator gives hope that the people of that island nation may soon escape communist tyranny.

Moreover, one certainly hopes that the lunatic leadership of North Korea’s brutal regime won’t last forever.

Let’s cross our fingers that these evil governments will soon lose power. But that’s only the first step. We also need to think about the policies that would enable these nations to undo the damage of pervasive socialism.

We can learn some lessons by looking at the experience of post-communist nations in Eastern Europe, which is a topic I addressed in the latest edition of The Conservative, which is the quarterly magazine published by the Alliance of Conservatives and Reformers in Europe.

I started the article with some broad observations about grim political and economic impact of communism.

Communism was an awful system for people trapped behind the Iron Curtain. The political cost was enormous. Personal rights and individual liberties were sacrificed to protect the power of the state. Human rights were abused, dissidents were imprisoned, and some were even killed. Communism also imposed huge economic costs. Collectivized agriculture, central planning, price controls, and government-run industries were among the policies that resulted in a debilitating misallocation of resources. And because labor and capital were poorly utilized, living standards lagged far behind western nations.

That was the bad news.

The good news is that the Soviet Empire collapsed, the Berlin Wall was dismantled, and democratic forms of government are now the norm in Eastern Europe.

But good news isn’t perfect news. Nations that emerged from the Soviet Bloc are still economic laggards. And if you dig into the latest version of Economic Freedom of the World, a big problem is that post-communist nations have not been very successful in defending property rights and implementing the rule of law.

Establishing genuine capitalism, though, has been a bigger challenge. Part of the problem is policy. And to be more specific, data from the Fraser’s Institute’s Economic Freedom of the World shows that the major difference today between Western Europe and Eastern Europe (nations that were part of the Soviet Bloc) is that the former get much better scores for “Legal System and Property Rights.” Indeed, the average ranking of Western European nations is 20.6 (with 1 being the best) while the average ranking of Eastern European countries is 67.1 (Economic Freedom of the World ranks 159 jurisdictions).

Here’s a graph comparing Western European nations with Eastern European nations.

As you can see, this is an area where Western Europe leads the world. Nordic nations tend to be at the very top of the rankings (thus helping to offset bad fiscal policy in those countries), and other countries in the region also are highly ranked (though a few countries in the region, such as Italy and Greece, don’t get good scores).

Eastern European countries, by contrast, don’t do well. There’s a significant gap when looking at average scores. Indeed, only Estonia ranks in the top 25.

And bad scores in this category are akin to putting a house on a foundation of sand. Other policies may create a house that looks very nice, but it probably won’t last very long on the unstable foundation.

And speaking of other policies, post-communist nations have better fiscal policy than the countries from Western Europe. Or, to be more accurate, they have less-worse fiscal policy.

If you examine the overall ratings for “Size of Government,” Eastern European nations actually are ranked significantly better, with an average ranking of 89.2 compared to 129.2 for Western European countries. This is because tax rates tend to be lower (many former Soviet Bloc nations have flat tax regimes, for instance) and welfare states aren’t as burdensome.

As I already hinted, doing “significantly better” on fiscal policy than Western Europe does not mean Eastern Europe has good fiscal policy.

Indeed, an average ranking of 89 means that most Eastern European nations are in the bottom half of the world.

So while it’s good that some Eastern European nations have flat taxes, that’s not an economic elixir if there are very high payroll taxes, stifling value-added taxes, and onerous energy taxes.

And since the burden of government spending is extremely onerous in Western Europe, it’s hardly an impressive achievement that Eastern Europe ranks slightly higher.

Though there’s one aspect of fiscal policy where the post-communist countries are lagging their neighbors to the west.

…if you dig into the details and examine the various components that determine “Size of Government,” there’s one area where Eastern Europe lags. The numbers for “Government Enterprises and Investment” are better in Western Europe. …In other words, politicians play too large a role in the allocation of capital in former communist nations.

To put that message in blunter terms, there’s too much cronyism in Eastern Europe.

So long as politicians can directly (state-owned enterprises) or indirectly (handouts, subsidies, and bailouts) provide favors and tilt the playing field, the enriching forces of private markets will be stunted.

Which is why I shared this conclusion in my article.

The bottom line is that post-communist nations need to choose genuine capitalism if they want a brighter future for their citizens.

If you want to close with some good news, I did point out in the article that there are some bright spots in the region, especially Estonia, though Poland also has made big progress.

P.S. Courtesy of Reddit‘s libertarian page, here’s an amusing cartoon strip.

It doesn’t quite meet the requirement for getting added to my “Government in Cartoons” page, but it definitely could be part of this collection of anti-politician jokes.

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As Confirmed by New Global Rankings, Rule of Law Is Why Western Civilization Is Superior

The great contribution of western civilization is the notion that the power of government must be constrained by laws.

This doesn’t mean that all laws (or even most laws) are good. But, as explained in this video, if the choice is between the “rule of man” (the arbitrary and capricious exercise of power) and the “rule of law,” there’s no contest.

This is why issues related to the rule of law account for 20 percent of a nation’s grade in the rankings from Economic Freedom of the World.

And it’s why some people get very upset when, for instance, the Obama Administration chooses to unilaterally change – or simply chooses to not enforce – certain laws that are inconvenient to the President’s agenda.

But while the rule of law has been eroding in the United States, the good news is that we still rank in the top 20 in a new ranking from the World Justice Project.

Here’s how the WJP describes the importance of the rule of law.

Effective rule of law reduces corruption, combats poverty and disease, and protects people from injustices large and small. It is the foundation for communities of peace, opportunity, and equity – underpinning development, accountable government, and respect for fundamental rights. …The Index is the world’s most comprehensive data set of its kind and the only to rely solely on primary data, measuring a nation’s adherence to the rule of law from the perspective of how ordinary people experience it. These features make the Index a powerful tool that can help identify strengths and weaknesses in each country, and help to inform policy debates, both within and across countries, that advance the rule of law

And here’s a map showing the 113 nations that are included in the rankings.

All you need to know is that it’s good to be light-colored and bad to be dark-colored (though the map is a bit confusing since nations that aren’t ranked – much of Africa, for instance – also appear as light-colored).

One of the obvious conclusions is that the western world (Europe, North America, some nations in the Pacific Rim) does the best on protecting, observing, and maintaining the rule of law.

Simply stated, western civilization is superior.

But what can we learn by specifically examining the rule of law in developed nations?

What’s immediately apparent, if you look at the ranking of high-income nations, is that Nordic nations score very well. This is one of the reasons, I’ve explained, that they have a higher ability to tolerate and endure a large welfare state.

Germanic and Anglo-Saxon nations win the proverbial silver and bronze medals.

Looking at the rest of the world, I’m also not surprised to see strong scores for free-market success stories such as Singapore, Estonia, Hong Kong, and Chile.

Let’s close by taking a closer look at the data for the United States.

Among high-income nations, America gets a decent score, but it’s nothing to celebrate. Indeed, we actually do poorly when compared to other Anglo-Saxon jurisdictions.

In the above excerpt, I included the list of eight categories that are used to rank nations. Now let’s look at how America scores in those areas.

At the risk of oversimplifying, we do well in two areas. There are reasonably strong constraints on government powers and a reasonable degree of openness and transparency.

On the other hand, we don’t do very well (particularly when compared to other high-income nations)  for areas related to the judicial system.

Though I shudder to contemplate the scores America will receive after four or eight years of Hillary Clinton.

P.S. Is anybody surprised that Venezuela is in last place? Though I suppose I should repeat my caveat from earlier in the month that hellholes such as Cuba and North Korea would probably rank lower if they were included in the rankings.

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If We’re Going to Trust Governments to Enforce Law, then Governments Should Obey Law (and Limit Law)

One of the big challenges for libertarians is that we understand “public choice theory.” In other words, we know that people attracted to government will have both the incentive and the power to do bad things, so our quandary is how to give government the authority to provide so-called public goods without sowing the seeds for an oppressive Leviathan state.

Our Founding Fathers thought they solved this problem by drafting and ratifying a constitution that placed firm limits on the power of government. Sadly, that system largely broke down in the 1930s and 1940s as the Supreme Court ceded its role of protecting economic liberty (with John Roberts a few years ago providing the icing on the cake of untrammeled government power).

That’s the bad news.

The good news is that the judicial branch has done a somewhat better job of protecting personal liberty. Indeed, with the courts leading the way on certain issues (such as whether governments can persecute people for being gay), we may even have more personal liberty than the Founders intended.

Speaking of personal liberty, one of the thorniest challenges is that we want government to fight crime, but we also want to make sure that it doesn’t have the power and authority to trample individual rights.

That’s one of the reasons the Founding Fathers gave us a Bill of Rights that protects our right to a speedy trial, protects us from double jeopardy, and gives us the right to remain silent. And the Bill of Rights also protects us by requiring governments to get judicial approval (search warrants) before snooping into out private property. And that’s the focus of today’s column.

And the case study for our discussion will be the way government is seeking to access electronic data without following proper procedures. Veronique de Rugy provides the background in her column for Reason.

The Electronic Communications Privacy Act was passed in 1986, when data storage was considerably more expensive and primitive. At the time, it was not common for data to be kept online for very long. As such, the ECPA considers emails held online by a third party for more than 180 days to be abandoned and thus open to access by law enforcement without a normal warrant. …Now that free online email hosts are commonplace and terabytes of cloud storage are available at little cost, the ECPA is a troubling anachronism. Today’s internet users expect their data to be protected from prying government eyes for as long as they choose to store it.

Amazingly, some politicians actually want to fix this problem.

There is a bill making its way through Congress that attempts to address these issues. It’s the International Communications Privacy Act. The bipartisan bill—introduced by Sens. Orrin Hatch, R-Utah, Chris Coons, D-Del., and Dean Heller, R-Nev.—…would codify into law a simple and clear standard: A warrant should always be required to access private information from a third party. The reforms in the ICPA would move us away from the current ’80s drama. It also seems that the package could even move through Congress during a contentious election season because it safeguards consumer data while also acknowledging that there must be legitimate and accessible law enforcement tools to pursue digital evidence across borders.

By the way, this has become an issue in part because the courts have intervened to slap down overzealous law enforcement in a cross-border investigation,

…the 2nd U.S. Circuit Court of Appeals rebuked the Justice Department after a three-year legal battle with Microsoft, which hosted data for an Irish citizen being pursued by U.S. authorities. The data was being kept in a server located in Ireland, yet the U.S. government insisted it had jurisdiction to demand access just because the company that held it is a subsidiary of Microsoft, an American corporation. …ECPA…provides no authority for access to data held overseas. The government officials most likely made this overreach rather than go through the mutual legal assistance treaty, or MLAT, process—which would have enabled them to work with the appropriate overseas authority—because of the fact that MLAT procedures are also cumbersome and outdated.

The Hatch-Coons-Heller legislation deals with these issues by both requiring warrants but also improving the MLAT process, which is a win-win situation. Innocent people have their rights protected and governments have a better system for investigating potential bad guys.

Which helps to explain why a coalition of taxpayer organizations and free-market groups have embraced the proposed legislation.

The bill contains provisions that would protect the privacy of American citizens, promote cross-border data flow, provide adequate tools for law enforcement, and enhance the nation’s global trade agenda. …S. 2986/H.R. 5323 would require U.S. law enforcement agencies to obtain a warrant for the content of electronic communications stored with electronic communications service providers and remote computing service providers.  The legal framework will allow authorities to obtain the electronic communications of U.S. persons, regardless of where those communications are located.  …S. 2986/H.R. 5323 reforms the MLAT process and provides greater accessibility, transparency, and accountability by requiring the attorney general to create an online docketing system for MLAT requests and publish new statistics on the number of such requests. …ICPA strikes the right balance between the legitimate needs of law enforcement and the privacy of American citizens, while enhancing international agreements.

Having looked at a specific example of how to enable effective law enforcement while also protecting civil liberties, let’s now zoom out and consider the big picture.

One of the problems in our system is that there are too many laws. Not just too many laws, but laws that are capricious and impossible to understand.

This is why Harvey Silverglate wrote Three Felonies a Day to describe how normal, law-abiding people unintentionally commit crimes (that shouldn’t be crimes).

Here’s a video interview from Reason with Mr. Silverglate.

The bottom line is that when you mix capricious and impossible-to-understand laws with capricious and vindictive bureaucrats, you get horrifying examples of government thuggery.

We can start by getting rid of drug laws, anti-money laundering laws, and civil asset forfeiture laws.

Remember, if we want to fight genuine crime, it’s a good idea to have just laws.

P.S. And if we have fewer bad and needless laws, we’ll have less police abuse.

P.P.S. To close on a humorous note, President Obama’s approach to the Bill of Rights leaves much to be desired.

P.P.P.S. In reference to the public-goods/Leviathan-state quandary discussed at the start of this column, the anarcho-capitalists say the solution is to abolish all government and to allow markets to provide public goods. I’m glad there are scholars pushing this idea (and I certainly had lots of interesting discussions about this concept while in grad school), but given what’s been happening over the past 100 years, I doubt this will be a practical option in my lifetime.

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The Obama Administration’s Assault on the Rule of Law

What’s the worst development in economic policy of the Obama years?

• The faux stimulus scheme?
• The Obamacare boondoggle?
• The fiscal cliff tax hike?
• The Dodd-Frank bailout bill?

Those are all good answers, but if you look at the data from Economic Freedom of the World, a major reason for the decline in America’s score is that the rule of law has eroded.

In other words, the United States is becoming a place where clear and neutral rules are being replaced by arbitrary and capricious government power. And this is not a trivial matter. Issues related to the rule of law account for 20 percent of a nation’s grade – the same level of importance as fiscal policy.

In another worrisome development, the United States only ranked #19 as of 2014 in a global ranking of how well nations maintain the rule of law.

There are several reasons why America’s ranking is going down. To cite just a few: The arbitrary rewrites of Obamacare. The Operation Chokepoint fiasco. IRS regulations that overturn existing law.

And it appears the Obama Administration wants to go out with a bang.

The Wall Street Journal opines on a new regulatory scheme from the Treasury Department to boost the death tax burden by arbitrarily inflating the value of certain assets.

…before President Obama leaves office, his Treasury Department is rushing to implement a de facto increase in the federal estate tax. Since Congress does not agree that the Internal Revenue Service should suck more cash out of family firms, Treasury Secretary Jack Lew is up to his usual tricks, trashing established interpretations of tax law to bypass the legislative branch. Not even Mr. Lew has the gall to claim he can raise the federal death-tax rate of 40% without congressional approval. So the game here is to contrive ways to expose more of the value—or imagined value—of an estate to IRS revenue collectors. Last month Mr. Lew’s Treasury announced a proposed rule to close what it calls an estate and gift tax “loophole.” Until now, the IRS permitted realistic values for portions of closely held corporations and partnerships. …consider a minority stake with limited rights in a family business. While the business as a whole may have considerable value, how much would an investor be willing to pay for a small, illiquid piece of a private business that she can’t control? The typical answer is not much. On the other hand, the investor might pay handsomely for a controlling interest. The IRS has long recognized this reality and has allowed the discounting of interests in closely held businesses to more closely reflect what they could fetch on the open market, rather than simply assigning a percentage of a firm’s overall estimated value.

In other words, Obama’s Treasury Department wants to force heirs to pay tax on what they think an asset is worth rather than what it would fetch on the open market.

This regulatory scheme – if ultimately successful – will make a bad tax even worse.

And it also will be bad for the economy.

…what seems like a reasonable interpretation to some looks like a wasted revenue opportunity to the Obama Treasury. …As always, Mr. Lew and Treasury are happy to seize more wealth from the private economy. …But voters may ask how much economic destruction is acceptable in the name of such fairness. …the tax clearly encourages people to consume now rather than invest in the future. This means lower GDP over time and fewer opportunities for the poor, some of whom might want to work for family businesses. The Tax Foundation reckons that the economy would be 0.8% larger over a decade without the estate tax.

Here’s another example.

The Obama Administration has been shaking down banks for money because of supposed misdeeds leading up the government-caused financial crisis.

The various fines may of may not be legitimate, but what’s really troubling is that a big chunk of the money is then being steered to left-wing groups. Many of which are seeking to impact the political process.

Andy Koenig of Freedom Partners has a column in the Wall Street Journal with some of the unseemly details.

The administration’s multiyear campaign against the banking industry has quietly steered money to organizations and politicians who are working to ensure liberal policy and political victories at every level of government. The conduit for this funding is the Residential Mortgage-Backed Securities Working Group, a coalition of federal and state regulators and prosecutors created in 2012 to “identify, investigate, and prosecute instances of wrongdoing” in the residential mortgage-backed securities market. In conjunction with the Justice Department, the RMBS Working Group has reached multibillion-dollar settlements with essentially every major bank in America. …Combined, the banks must divert well over $11 billion into “consumer relief,” which is supposed to benefit homeowners harmed during the Great Recession. …a substantial portion is allocated to private, nonprofit organizations drawn from a federally approved list. Some groups on the list—Catholic Charities, for instance—are relatively nonpolitical. Others—La Raza, the National Urban League, the National Community Reinvestment Coalition and more—are anything but. This is a handout to the administration’s allies. Many of these groups engage in voter registration, community organizing and lobbying on liberal policy priorities at every level of government. They also provide grants to other liberal groups not eligible for payouts under the settlements. …The settlements also give banks a financial incentive to fund these groups. Most of the deals give double credit or more against the settlement amount for every dollar in “donations.”

Needless to say, diverting money to political allies sounds like the kind of chicanery you’d find in a banana republic, not an advanced western society.

But it gets worse.

Here’s another Wall Street Journal editorial on an additional bit of regulatory/tax overreach by the Treasury Department. It deals with the Obama Administration trying to stop “inversions” by unilaterally changing the rules in ways that will hamper sensible business practices for all multinational companies.

The Treasury Secretary…wants to prevent “earnings stripping,” in which companies allegedly make loans from their overseas businesses to their U.S. subsidiaries to minimize taxes. The feds succeeded in destroying the proposed merger of Pfizer and Allergan. But we warned in April that the Treasury plan would be “ugly for everybody,” imposing new costs and paperwork burdens on companies that never had any intention of moving overseas or stripping earnings. And sure enough, from small S corps all the way to Exxon, the afflicted have been explaining how the new rules will make it more expensive and difficult to do even routine business functions like cash management. …the banks hate this rule too. By limiting their ability to move money across borders to meet customer demand and respond to market stress, it could force them to violate other regulations, or worse. A July letter from Citigroup, Bank of America and J.P. Morgan Chase to Treasury officials warned the rules could make “financial services groups more fragile in times of financial stress, thereby creating risk to the financial stability of the United States.” …If Mr. Lew were reasonable, he’d drop this misguided assault on American business and work with lawmakers to craft a corporate tax reform that ensures U.S. companies never want to leave the U.S.

A report in the New York Times highlighted some of the legal issues involved in this issue.

The U.S. Chamber of Commerce filed a lawsuit on Thursday to block new rules issued by the Obama administration that prevent American corporations from merging with foreign-based companies and moving their headquarters abroad to save on taxes. The business group, along with the Texas Association of Business, filed the lawsuit in federal court in Austin, Tex., saying the administration was overstepping its authority in issuing the rules. …“If the defendants’ rule is permitted to stand, it is not just mergers that will suffer — it is the rule of law, and the certainty and stability required for effective commerce, markets and economic growth, that are truly threatened by the defendants’ unauthorized and unlawful action,” the plaintiffs said in their filing. …“Although it might seem esoteric, this action is a clear case of federal executive branch officers and agencies bypassing Congress and short-circuiting legislative debate over a hotly contested issue,” the lawsuit says.

Ugh. At least Hillary Clinton is proposing to change the law in pursuit of bad policy on inversions. Obama just waves his magic wand.

Let’s wrap up by refocusing on why the rule of law is a fundamental building block of a free society. Back in 2014, I shared a very good video from Learn Liberty about the importance of the rule of law.

That video is a compelling explanation of why it is good to have clear rules, along with limits on the arbitrary power of government officials.

Indeed, it’s probably no exaggeration to assert that rule of law is the greatest contribution of western civilization.

Here’s a movie clip (courtesy of FEE) that makes this point.

Based on the Obama Administration’s unilateral and capricious actions, maybe a new movie should be made about the rise and decline of western civilization.

P.S. On the topic of Obama and movies, here’s some humor to offset today’s dismal topic.

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Economic Freedom in America Is Declining Mostly Because of Creeping Protectionism and the Loss of Rule of Law and Property Rights

This century has not been good news for economic liberty in the United States.

According to Economic Freedom of the World, America has dropped from being the 3rd-freest economy of the world in 2001 to the 12th-freest economy in the most recent rankings.

Perhaps more important, our aggregate score has fallen from 8.20 to 7.81 over the same period.

So why has the U.S. score dropped? Was it Bush’s spending binge? Obama’s stimulus boondoggle? All the spending and taxes in Obamacare? The fiscal cliff tax hike?

I certainly think all those policies were mistaken, but if you dig into the annual data, America’s score on “size of government” only fell from 7.1 to 7.0 between 2001 and 2012.

Which means economic freedom in the United States mostly declined for reasons other than fiscal policy. In other words, our score dropped because of what happened to our scores for trade policy, monetary policy, regulatory policy, and property rights and rule of law.

That triggered my curiosity. If America is #12 in the overall rankings, how would we rank if fiscal policy was removed from the equation?

Here are the results, showing the top 25 jurisdictions based on the four non-fiscal policy factors. As you can see, the United States drops from #12 to #24, which means we trail 14 European nations in these important measures of economic freedom.

If you look in the second column, you’ll notice how many of those European nations have double-digit increases when you look at their non-fiscal rankings compared to their overall rankings.

This is for two reasons.

First, their fiscal scores are terrible because of high tax rates and a stifling burden of government spending.

Second, these same nations are hyper-free market on issues such as trade, regulation, money, rule of law and property rights.

In other words, the data back up points I’ve made about policy in nations such as Denmark and Sweden.

In an ideal world, countries should have free markets and small government. In Northern Europe, they manage to get the first part right. Which is important since non-fiscal factors account for 80 percent of a nation’s overall grade.

Now let’s return to the issue of America’s decline.

Here are the non-fiscal rankings from 2001. As you can see, the United States was #5 at the time, scoring higher than even Singapore and Hong Kong. And the U.S. was behind only three European nations back in 2001.

For what it’s worth, America’s score has fallen primarily because of a significant drop in the trade category (from 8.7 to 7.7) and a huge drop for rule of law and property rights (from 8.7 to 7.0).

In other words, it’s not good for prosperity when a nation begins to have problems such as protectionism and politicized courts.

P.S. The erosion of America’s score for non-fiscal factors is particularly disappointing since improvements in those factors have played a big role in protecting the world from the negative economic consequences of more spending and taxes.

P.P.S. I think this is an example of correlation rather than causation, but the above rankings for non-fiscal economic liberty seem somewhat similar to the rankings I shared last week looking at overall societal freedom.

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You Be the Judge: Traffic Enforcement, Predatory Government, and Legitimate Class Warfare

One of the most important bulwarks of a just society is equal justice under law.

That principle is even etched in stone above the entrance to the Supreme Court.

My belief in equal treatment is one of the reasons I support the flat tax. As an economist, I like the pro-growth impact of tax reform. But as someone who believes in justice, I also support the flat tax because I don’t like class-warfare policies that punish some taxpayers and corrupt loopholes that give preferential status to other taxpayers.

Indeed, my support for equality of law is so strong that I even object to policies that benefit me, such as special TSA lines in airports for frequent flyers.

But sometimes it’s not clear how a principle should be applied. So let’s revive the “you be the judge” series, which asks thorny questions about the workings of a free society, and explore the case of income-based traffic fines.

Check out these excerpts from a BBC story.

Finland’s speeding fines are linked to income, with penalties calculated on daily earnings, meaning high earners get hit with bigger penalties for breaking the law. So, when businessman Reima Kuisla was caught doing 103km/h (64mph) in an area where the speed limit is 80km/h (50mph), authorities turned to his 2013 tax return, the Iltalehti newspaper reports. He earned 6.5m euros (£4.72m) that year, so was told to hand over 54,000 euros. …Mr Kuisla might be grateful he doesn’t earn more. In 2002, an executive at Nokia was slapped with a 116,000-euro fine for speeding on his Harley Davidson motorbike. His penalty was based on a salary of 14m euros.

So is this a case of greedy government targeting people for the sin of success?

Well, I’m sure the government is greedy, but what about the morality of income-based fines?

The driver isn’t happy, but others argue that deterrence doesn’t work unless the actual impact of the fine is the same for rich and poor alike.

The scale of the fine hasn’t gone down well with Mr Kuisla. “Ten years ago I wouldn’t have believed that I would seriously consider moving abroad,” he says on his Facebook page. “Finland is impossible to live in for certain kinds of people who have high incomes and wealth.” There’s little sympathy from his fellow Finns on social media. …person says: “Small fines won’t deter the rich – fines have to ‘bite’ everyone the same way.”

At the risk of sounding like a soft-headed leftist, I’m not overly sympathetic to Mr. Kuisla’s position.

Simply stated, if the goal of traffic fines is deterrence, then the penalties should vary with income.

I remember when I was young, living on a paycheck-to-paycheck basis, a traffic fine sometimes would chew up a non-trivial part of my disposable income. That affected my behavior.

Now that I’m older and making more money (and especially since my kids are mostly done with their schooling!), a traffic fine is just a nuisance (though I still sometimes get very upset).

Though this discussion wouldn’t be complete without also considering the fact that traffic laws and enforcement oftentimes are motivated by revenue rather than safety.

The most compelling evidence comes from Ferguson, Missouri. It seems that what’s driving the mistreatment of black people is government greed.

Here’s some of what Ian Tuttle wrote on the topic for National Review.

The Department of Justice’s “Investigation of the Ferguson Police Department,” released this week…what the material in the report reveals is less a culture of racial animus than one of predatory government: “Ferguson’s law enforcement practices,” states the report, “are shaped by the City’s focus on revenue rather than by public safety needs.” …myriad municipal regulations that, rigorously enforced, nickel-and-dime the citizenry to the local government’s benefit. This is the injustice on which the Justice Department has stumbled, which helps to explain the city’s racial tensions — and which merits urgent correction.

I fully understand why many blacks in Ferguson are angry.

Imagine if you had a modest income and you were constantly being hit with $50 and $100 fines (oftentimes then made much larger thanks to the scam of “court fees”).

This can wreck a family’s budget when it doesn’t have much money. So wouldn’t you be upset?

Particularly since “predatory government” is a very good description of the Ferguson bureaucracy.

In 2010, the city’s finance director encouraged Ferguson police chief Thomas Jackson to “ramp up” ticket-writing to help mitigate an anticipated sales-tax shortfall. …One stop can yield six or eight citations, and officers have been known to compete to set single-stop records. Indeed, within Ferguson Police Department, because opportunities for promotion have been tied to “productivity” — that is, enthusiasm for ticket-writing — officers have perverse incentives to issue citations, and in concert with police and prosecutors, municipal courts regularly enforce the payment of fines in a way that compounds what a single defendant owes.

Now let’s connect Ferguson with Finland.

Our Finnish driver is upset by his giant fine, but at least he probably can relate to the poor people of Ferguson.

But the more successful people of Ferguson, to the extent that they are even targeted by the local cops, have almost nothing to worry about.

…this practice — of police and prosecutors and courts together — disproportionately affects black communities not because they are black, but because they are poor. They do not have the means to escape the justice apparatus, unlike the comparatively wealthy, who can pay a fine and be done with the matter — or hire an attorney, and inconvenience courts that prefer the ease of collecting fees to the challenge of arbitrating cases.

Here’s the bottom line.

If we want a just society, there should be few laws and they should be enforced on the basis of protecting public safety rather than enriching the bureaucracy.

In such a system, income-based fines and penalties are a reasonable way of making sure deterrence applies equally to rich and poor.

Unfortunately, we have far too many laws and they are used as back-door taxes on the citizenry.

So if we adopt income-based fines, the politicians will simply have more money to spend and even less incentive to scale back excessive and thuggish government.

Heck, just look at how asset-forfeiture laws and money-laundering laws have turned into revenue scams for Leviathan.

P.S. Since today’s post ended with a depressing conclusion, let’s share some a bit of offsetting good news.

As reported by The Hill, the spirit of civil disobedience lives even in Washington!

From sledding to snowball fights, dozens of children and their parents took to Capitol Hill Thursday afternoon to protest a controversial sledding ban. Capitol Police have refused to lift the sledding ban, but some parents organized a “sled in” on the west lawn of the Capitol to put a spotlight on the unpopular rule. …Capitol Police pointed out that more than 20,000 sledding injuries occur in the U.S. each year…, but officers on the ground also refused to enforce it. …It’s turning into a public relations nightmare for those who oppose sledding and support the ban.

You’ll doubtlessly be horrified to learn that illegal sledding is – gasp! – a gateway crime to other forms of misbehavior.

…the children were not only sledding but also climbing trees, building snowmen and throwing snowballs at one another.

Oh My God, unlicensed snowmen, unregistered tree climbing, and illegal snowballs! Freedom is obviously too dangerous.

Next thing you know, these kids will grow up to engage in other forms of civil disobedience, just like Arizona drivers and Connecticut gun owners.

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Now the White House Wants to Raise Taxes without Congressional Approval?!?

I’m not reflexively opposed to executive orders and other unilateral actions by the White House. A president and his appointees, after all, have a lot of regulatory authority.

This is because, for better or worse, many of the laws approved in Washington basically express a goal and identify some tools. It’s then up to the relevant agency or agencies to promulgate regulations to enforce and implement those tools in order to supposedly achieve those goals.

But here’s the catch. The executive branch has to make at least a semi-plausible case that any given action is consistent with the law.

And the problem with this White House is that it has been using regulations and executive orders to change laws, thwart laws, and ignore laws.

There have been several instances of the White House arbitrarily deciding to ignore or alter major parts of Obamacare.

The Obama Administration has decided a law giving the federal government authority over the “navigable waterways” of the United States also means the federal government can regulate ponds on private land.

President Obama’s Treasury Department not only used a regulation to force American banks to put foreign law above American law, it also dealt with the unworkability of FATCA by creating an intergovernmental agreement mechanism that isn’t even mentioned in the law.

And don’t forget, regardless of what you think about immigration, the President also unilaterally decided to grant amnesty to millions of illegal aliens.

And that issue served as a springboard for a discussion with Fox News about a possible White House scheme to unilaterally impose big tax hikes on the business sector.

I’m surprised that I didn’t splutter with outrage during the interview. You don’t need to be a constitutional scholar, or even a lawyer, to be able to read Article 1, Section 7, of the Constitution.

And while Obama may not have a problem with the notion of America becoming a banana republic, we actually have co-equal branches of government, each with specific roles and powers.

Here’s the relevant text from the Constitution, as contained in the official repository at the National Archives.

All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills. Every Bill which shall have passed the House of Representatives and the Senate, shall, before it become a Law, be presented to the President of the United States.

Maybe I’m not very careful reader, but I don’t see anything in that passage about “unless President Obama feels otherwise” or “with the exception of unilateral tax hikes on companies.”

Though I imagine Ruth Bader Ginsburg could rationalize that such hidden clauses actually exist.

For additional background, here’s some of what The Hill has reported.

The Obama administration is not ruling out using executive powers to also address the tax code. With Senate Democrats openly pushing the administration to take its own action on the tax front, the White House is not shooting down the idea. …Earnest noted that the president has told lawmakers what he is interested in on taxes — closing loopholes for the wealthy and corporations… Earnest said he was not “ruling anything in or out,” when it came to specific executive steps. “This is related to the president’s ability to use his executive authority to do what he thinks is the right thing for the country,” he said.

By the way, my opposition to unilateral changes is based on principle.

So I’d be opposed even if a pro-freedom President wanted to suspend bad parts of the tax code or use “prosecutorial discretion” to provide de facto amnesty to taxpayers who refused to comply with an immoral part of the tax code, such as the death tax.

Though you won’t be surprised to learn that Obama isn’t contemplating any good unilateral changes. Instead, the policies being examined would exacerbate double taxation and extend worldwide taxation.

So we may get the worst of all worlds. Unilateral action on taxes that makes a mockery of our Constitution and rule of law while also making an already terrible business tax system even worse.

P.S. The United States only ranks #19 in an international comparison of what nations do a good job of upholding the rule of law. Makes you wonder where we’ll rank by the time Obama leaves office.

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The Constitution, Rule of Law, and the Power of the Political Class

Why are so many people upset that the Obama White House keeps arbitrarily changing parts of Obamacare – even when bad provisions are being suspended or certain groups are being exempted from bad policy?

Well, some of them may simply dislike Obama or government-run healthcare, and there’s nothing wrong with being against a politician or rejecting bigger government.

But the most important reason to be upset is that the White House is making a mockery of the rule of law.

But what exactly is the rule of law? Why, for instance, does it have such a large impact on a nation’s grade in the Economic Freedom of the World Index?

This Learn Liberty video explains that the rule of law is critical because it creates a framework for honest exchange and it limits the power of politicians and government.

As Professor Bell states, the rule of law provides “a necessary framework for civil society” and enables “tolerance, liberty, and free trade.”

I also like that the video highlights the importance of having laws that are easy to understand, which means that Byzantine schemes like Obamacare are contrary to the rule of law – even if they are administered honestly.

Which explains why the tax code also is an affront to the rule of law, whether we’re looking at incomprehensible policy, illegal regulations, or extraterritorial application.

And the corrupt TARP bailout obviously is contrary to the rule of law as well.

Let’s now step back and take a big-picture look at the issue. Perhaps the best example of the rule of law is the United States Constitution. That sacred document was written precisely to limit the power of the state in hopes or preventing the capricious rule of men.

This Thomas Jefferson quote gets to the heart of the matter.

It’s embarrassing that the United States only ranks #19 in an international comparison of the rule of law. Particularly when the presence of the rule of law is the biggest factor that separates advanced nations from the developing world.

P.S. It’s discouraging that the Constitution’s protections of individual liberty have eroded, so let’s share a bit of good news.

I’ve written before about the threat posed by international bureaucrats who want to cartelize business taxation in order to enable higher tax rates.

Well, at least some American lawmakers are not on board with this scheme, as reported by Reuters.

Republican tax law writers in the U.S. Congress and multinational businesses on Monday said international talks aimed at preventing companies from moving profits to low-tax countries could hurt the United States. Representative Dave Camp and Senator Orrin Hatch of Utah warned of the effect on U.S. taxpayers from the Organisation for Economic Co-operation and Development’s (OECD) work to develop multilateral tax rules. Known as the Base Erosion and Profit Shifting (BEPS) project, the OECD effort calls for revising tax treaties, tightening rules and more government tax information sharing.

The Wall Street Journal also has criticized the OECD’s “global revenue grab.”

Let’s hope this is a sign that this leftist campaign for higher taxes has hit a brick wall.

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Global Trends in Economic Freedom

I’m in Vancouver, Canada, for the biennial meeting of the World Taxpayers Associations.

I gave a speech on why tax competition is a valuable force to constrain the greed of the political class, but warned the audience that high-tax governments and international bureaucracies are using financial protectionism to coerce low-tax jurisdictions into weakening their good policies.

But regular readers know that I pontificate far too often on that topic, so today’s column is instead about a presentation by Michael Walker, who was the founding Executive Director at Canada’s Fraser Institute.

Michael’s great contribution to the world was the creation of the Economic Freedom of the World Index, which he developed working with scholars such as Milton Friedman.

I’ve cited the EFW Index many times, particularly to bemoan how America’s score has deteriorated during the Bush-Obama years.

Today, though, we’re going to look at global trends in economic freedom, using some of the slides from Michael’s presentation. And the good news, as you can see from the green line in this first chart, is that there was a significant increase in economic freedom between 1980 and 2010.

The blue line, by the way, shows how much nations differed. A higher blue line means more variation (in other words, some nations with very good scores and some with very bad scores), while a lower blue lines means that nations are converging.

To really understand what’s happening, however, it’s important to look at the component parts of the EFW Index. As I wrote back in 2012:

…a country’s economic performance is governed by a wide range of policies.

Indeed, the research suggests that there are five big factors that determine prosperity, and they’re all equally important.

Rule of law and property rights

Sound money

Fiscal policy

Trade policy

Regulatory policy

So let’s look at what’s been happening in each of these areas. Keep in mind, as we look at the following charts, that 10 is the best score.

We’ll start with fiscal policy. As you can see, policy was moving in the wrong direction from 1970 to 1985, then we got two decades of pro-growth changes, but now policy is again trending in the wrong direction.

We’re still better off than we were 30 years ago, but I’m afraid scores will continue to decline because tax rates are now heading in the wrong direction and the burden of government spending is rising in many nations.

Now let’s look at the regulatory data. The trend may not be dramatic, but it is positive. The green line is gradually rising, showing that governments are easing red tape and reducing intervention.

Moreover, there’s no sign that policy is moving in the wrong direction, at least on a global basis.

Shifting to trade, we have perhaps the biggest success story in global economic policy. Between 1980 and 2010, there was a dramatic increase in the freedom to trade.

We also see some progress on monetary policy, both in that it stopped moving in the wrong direction in 1975 and then moved in the right direction beginning in 1995.

Though I confess some skepticism about this measure. Central banks have created a lot of problems with excess liquidity, but they generally escape blame so long as easy-money policies don’t result in higher consumer prices.

This brings us to our final category. Property rights and the rule of law are very important for market economies, but unfortunately we’ve seen no long-run improvement in these key measures. Positive change between 1975 and 1995 is offset by movement in the wrong direction at other times.

Indeed, if we look at this next chart, which measures the distribution of scores for each category in 2010, you’ll see that nations get their lowest scores on rule of law and property rights.

This aggregate data, while very useful, does not tell the entire story. If you look at various regions, you’ll discover that “first world” nations tend to get decent scores on rule of law and property rights while developing nations get poor scores.

Indeed, this is why the blue line in the rule of law/property rights chart is so much higher than it is for other categories. Simply stated, this is one area where there hasn’t been much convergence.

Which is a big reason why many developing nations are economic laggards, even if they get reasonably good scores in other categories.

Here’s a final chart that emphasizes that point. It shows nations that get the best scores on the size of government (left column), but then shows that many of them get very poor scores for rule of law and property rights (right column).

The fiscal burden of government is very low in nations such as Lebanon and Bangladesh, for instance, but these jurisdictions don’t attract a lot of investment or enjoy much growth because government fails to provide the right environment.

All of which shows why Hong Kong, Singapore, and Switzerland deserve special praise. They have strong rule of law and property rights while simultaneously maintaining reasonable limits on the fiscal burden of the public sector. No wonder they are ranked first, second, and fourth in overall economic freedom.

And it’s worth noting that a few other nations deserve honorable mention for getting good fiscal policy scores while doing a decent job on the rule of law and property rights, specifically Bahamas (#39), Chile (#11), Mauritius (#6), and United Arab Emirates (#5).

By the way, the United States only got a 6.4 for size of government and a 7.1 for rule of law and property rights. No wonder America is only #17 in the overall rankings.

Back in 2000, when the United States ranked #3, we got a 7.0 for size of government and a 9.2 for rule of law and property rights.

So now you now know why I complain so much about Bush and Obama. And you especially know why I’m so concerned about the erosion of the rule of law under Obama.

P.S. A Spanish academic has developed some fascinating historical data on non-fiscal economic freedom, which is very helpful in understanding how the western world has managed to remain somewhat prosperous even though the fiscal burden of government increased dramatically in the 20th Century.

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Mirror, Mirror, on the Wall, Which Nations Maintain the Rule of Law Best of All?

If you look at measures (such as the Fraser Institute’s Economic Freedom of the World index) of what makes a nation competitive and prosperous, you’ll find some obvious variables such as fiscal policy, trade openness, regulatory burden, and monetary policy.

But in addition to those policy levers, you’ll find that it’s equally important that a nation does a good job of protecting and maintaining the rule of law.

This is not something easy to define or measure. It includes all sorts of characteristics such as protection of property rights, absence of corruption, honest courts, government transparency, and non-discriminatory application of laws.

But one thing is clear. Nations that don’t have good rule of law are not going to enjoy much prosperity, even if they have ostensibly good policies.

So it was with considerable interest that I saw that a Rule of Law Index has been released by the World Justice Project.

This is the first I’ve heard of the WJP, and I don’t pretend to be an expert in this area, but the Index is interesting and impressive.

And I’m a bit dismayed – but not surprised – to see that the United States only ranks #19 in their comprehensive measure of the rule of law. Here are the top 52 nations.

If you look at the detailed data for the 8 major categories in the Index, you’ll see that the United States was fairly consistent, with a high score of 17 and low scores of 27.

To use a classroom analogy, America is akin to a decent student, with grades of B+ in some classes and B- in other classes.

Other nations display more variety. They may have a higher overall GPA (like #10 Singapore) or lower overall GPA (like #50 Belarus), but their grades for specific categories may deviate substantially.

Looking at the places with the strongest rule of law, the good performance of the Nordic nations is not surprising. Countries such as Denmark and Sweden may have big welfare states, but they have very laissez-faire policies in other areas.

And let’s give a special shout-out to the nation that produced the PotL. Lebanon made it into the top 50.

Interestingly, the WJP must have previous editions, or at least historical data, because they also show whether countries are getting better or worse.

The good news is that America apparently has more order and security. The bad news is that we’re moving in the wrong direction with regards to constraints on government power.

I don’t know why the U.S. score deteriorated, but the Obama Administration’s abuse of the IRS and its lawless behavior on Obamacare might be good guesses.

Let’s now look at the slow students in the class.

Is anybody surprised to learn that Venezuela is in last place of the 99 nations in the Index?

And if you’re interested in other nations that are in the news, the low rankings for Ukraine and Russia help to explain why these countries are under-performing (even though they both have a flat tax, which is one of my favorite policies).

Now that I’ve shared this data, it’s time to acknowledge that there’s no obvious way to improve the rule of law.

In my humble opinion, the rule of law is a form of social capital. And like other examples of social capital (work ethic, honesty, etc), it’s part of a nation’s culture.

That being said, let’s look at some polling data from Europe that captures one aspect of the rule of law. These numbers show the extent of corruption.

The moral of the story is that it would be a good thing to reduce the burden of government in countries such as Germany and Denmark, but that it’s absolutely critical to reduce the size and scope of the state in nations such as Greece, Italy, and Spain.

Simply stated, a smaller public sector would reduce opportunities to abuse the rule of law.

P.S. Since we just showed some data on Europe, let’s share some European humor. I don’t know if this is an example of someone from Europe mocking America, or someone from Europe engaging in some self-mockery of European stereotypes about America. In either case, this image is amusing.

Well done, though maybe the carbs should be excluded.

And also long overdue.

I’ve shared some cartoons about Europe (here and here), and this Dave Barry satire about Europe is very funny, but I don’t often see political humor produced by Europeans.

The Brits occasionally step forward, as you can see from this terror alert humor and this jab at France and Germany. And this comedian definitely seems to be Greek, but that’s about it.

Though it’s possible someone from Europe put together these maps about European stereotypes. Or perhaps this video about a German-Greek romantic breakup.

P.P.S. There is a global ranking that puts Venezuela ahead of the United States. I’ll let you decide whether it has any merit.

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On Second Thought (and as a Second-Best Proposal), David Gregory Should Be Arrested and Prosecuted

I’ve never watched Meet the Press, so I obviously didn’t see David Gregory’s pathetic attempt to play gotcha by unveiling a magazine while interviewing someone from the National Rifle Association.

And even when it was revealed that Gregory had broken D.C. law by possessing this supposedly dangerous object (basically a metal box with a spring), I didn’t care.

After all, gun control is a foolish policy (as even some leftists and foreigners are slowly beginning to realize). And surely cops have better things to do, after all, than arrest a callow journalist for something that shouldn’t be against the law in the first place.

But I’m now beginning to change my mind. One of the core principles of a just society is that the law applies equally to all people. Heck, that principle is even etched above the entrance to the Supreme Court.

…unless you’re a member of the beltway elite

If misguided laws were never enforced, I wouldn’t want to target Gregory for discriminatory treatment. But I get very irritated when ordinary folks with no power or connections are persecuted while those with political connections get a free pass.

And that’s exactly what’s happening. Here’s an excerpt from a Washington Times report about a member of the non-elite who ran afoul of the same stupid law that Gregory broke.

Metropolitan Police Chief Cathy L. Lanier’s spokesman refused Monday to respond to whether Mr. Gregory had even been interviewed yet. This is a rather curious departure for a city that has been ruthless in enforcing this particular firearms statute against law-abiding citizens who made an honest mistake. In July, The Washington Times highlighted the plight of former Army Spc. Adam Meckler, who was arrested and jailed for having a few long-forgotten rounds of ordinary ammunition — but no gun — in his backpack in Washington. Mr. Meckler, a veteran of the wars in Afghanistan and Iraq, says he had no idea it was illegal to possess unregistered ammunition in the city. He violated the same section of D.C. law as Mr. Gregory allegedly did, and both offenses carry the same maximum penalty of a $1,000 fine and a year in jail. Mr. Meckler was charged with the crime and was forced to accept a plea deal to avoid the cost and time of a protracted legal fight.

After reading this outrageous story, my first reaction is to want the law repealed. My second reaction is to hope for a judicious and appropriate application of tar and feathers to certain D.C. officials.

But I’m also thinking that the high and mighty – including influential journalists – should be subject to the same bad laws as the rest of us.

Mark Steyn also has some reprehensible examples of government run amok. He starts with some sage comments on our over-legislated society.

…in today’s America there are laws against everything, and any one of us at any time is unknowingly in breach of dozens of them. And in this case NBC were informed by the D.C. police that it would be illegal to show the thing on TV, and they went ahead and did it anyway… David Gregory intended to demonstrate what he regards as the absurdity of America’s lax gun laws. Instead, he’s demonstrating the ever greater absurdity of America’s non-lax laws.

And then he lists examples of innocent people caught in the chainsaw of government harassment and persecution.

Not far away from David Gregory, across the Virginia border, eleven-year-old Skylar Capo made the mistake of rescuing a woodpecker from the jaws of a cat and nursing him back to health for a couple of days. For her pains, a federal Fish & Wildlife gauleiter accompanied by state troopers descended on her house, charged her with illegal transportation of a protected species, issued her a $535 fine, and made her cry.

Or how about this one.

Daniel Brown was detained at LAX while connecting to a Minneapolis flight because traces of gunpowder were found on his footwear. His footwear was combat boots. As the name suggests, the combat boots were returning from combat — eight months of it, in Iraq’s bloody and violent al-Anbar province. Above the boots he was wearing the uniform of a staff sergeant in the USMC Reserve Military Police and was accompanied by all 26 members of his unit, also in uniform. Staff Sergeant Brown doesn’t sound like an “obvious” terrorist. But the TSA put him on the no-fly list anyway. If it’s not “obvious” to the government that a serving member of the military has any legitimate reason for being around ammunition, why should it be “obvious” that a TV host has?

Here’s another outrageous example.

Three days after scofflaw Gregory committed his crime, a bail hearing was held in Massachusetts for Andrew Despres, 20, who’s charged with trespassing and possession of ammunition without a firearms license. Mr. Despres was recently expelled from Fitchburg State University and was returning to campus to pick up his stuff. Hence the trespassing charge. At the time of his arrest, he was wearing a “military-style ammunition belt.” Hence, the firearms charge. …He had no gun.

This next story is amusing, until you think about how the coercive power of government is making life difficult for normal people.

Ernest Hemingway had a six-toed cat. …descendants of his six-toed cat still live at the Hemingway home in Key West. Tourists visit the property. Thus, the Department of Agriculture is insisting that the six-toed cats are an “animal exhibit” like the tigers at the zoo, and therefore come under federal regulation requiring each to be housed in an individual compound with “elevated resting surfaces,” “electric wire,” and a night watchman.

So what’s going to happen with this David Gregory kerfuffle? Well, what should happen is that bad laws should be repealed.

In the corrupt world of Washington, though, we know that Gregory hasn’t been arrested even though he clearly broke the law and there’s obvious evidence of his “criminal” behavior.

My guess is that the matter will get quietly dropped, and Steyn also assumes something like this will happen.

Gregory can call in a favor from some Obama consigliere who’ll lean on the cops to disappear the whole thing. If he does that, he’ll be contributing to the remorseless assault on a bedrock principle of free societies — equality before the law. Laws either apply to all of us or none of us. If they apply only to some, they’re not laws but caprices — and all tyranny is capricious.

The moral of the story (though “immoral” is a better word) is simple.

Laws are for the little people — and little people need lots of little laws, ensnaring them at every turn.

That’s a good description of our corrupt tax code. That’s a good description of America’s regulatory morass. That’s a good description of much of what government now does.

If you want to be further depressed, peruse these horror stories of government in action.

• A story of vicious IRS persecution.
• A women jailed overnight because she let her kids play outside.
• Cops legally stole $17,000 from a man who committed no crime.
• Threatening to send a woman to jail because someone whistled at a whale.
• Two stories of innocent people who were victimized by the idiotic Drug War.
• A video about how the EPA tried – and fortunately failed – to destroy a family.
• A story about the Justice Department’s discriminatory attack on a hapless homeowner.
• The government treating child molesters more leniently than people who accidentally omit irrelevant info from forms.

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Obama Administration Supports Rogue IRS Regulation in Order to Please Europeans, even though It Will Undermine American Banks and Hurt the U.S. Economy

I’ve written several times about a proposed IRS regulation that would force American banks to put foreign law above U.S. law. I’ve repeatedly warned that the scheme, which would force financial institutions to report the deposit interest they pay to foreigners, is bad economic policy, bad regulatory policy, and bad banking policy.

My arguments have included:

• Explaining that this onerous regulatory scheme will result in capital fleeing to other nations, needlessly harming the financial sector and putting American banks at risk.
• Explaining why the proposal is a threat to human rights since many foreigners keep money in the United States because they live in nations with unstable and/or repressive governments.
• Explaining that the IRS action is a gross abuse of the regulatory process since an executive branch agency does not have the authority to overturn laws enacted as part of the democratic process.
• Explaining that this proposed regulation is just the beginning, and that proponents hope to issue follow-up rules that would cripple policies making America a haven for global capital.

But these points don’t seem to matter to the Obama Administration, which is ideologically committed to the anti-tax competition agenda of Europe’s welfare states. This is why the White House supports all sorts of destructive policies, including not only this misguided regulation, but also the creation of something akin to a world tax organization that will have power to block free-market tax policy.

A new article in the Weekly Standard explains what’s at stake.

Early last year the Treasury Department published its “Guidance on Reporting Interest Paid to Nonresident Aliens,” which would require banks to report to the Internal Revenue Service the interest paid to foreign depositors with a U.S. bank account. While the Treasury and the regulatory apparatus insist that the cost and inconvenience of adhering to this regulation is next to nothing, the rule may cost the U.S. banking system hundreds of billions of dollars in lost deposits, in turn costing our economy billions of dollars, while providing no discernible benefit to banks, depositors, taxpayers, or the U.S. economy. …a much bigger problem—for banks and the economy—than the compliance costs is the threat of a massive capital flight. The United States is a very popular place for foreigners to park their savings, for a variety of reasons. For starters, we offer a stable government that can be trusted to keep its hands off deposits—something that appeals greatly to residents of Venezuela, Argentina, Ecuador, and any number of other unstable countries. …As a result, a staggeringly large amount of savings from abroad is currently held in U.S banks. While the Treasury asserts that “deposits held by nonresident alien individuals are a very small percentage of the [total] deposits held by U.S. financial institutions,” that very small percentage amounts to more than $3.7 trillion, according to a 2011 Bureau of Economic Analysis report, hardly a pittance. The massive amount of foreign savings here is a boon to the U.S. economy. Banks lend against these deposits, mainly to companies here in the United States. Jay Cochran, an economist at George Mason University, studied the impact that the more limited 2002 reporting requirements would have had on the banking system, estimating that it would have resulted in nearly $100 billion in deposits leaving the U.S. banking system. A reporting regulation that covers all foreign accounts would likely result in two to three times more capital flight. The impact would be harmful not just for the banks but for the broader economy. The decline in profits in the banking sector alone from a roughly quarter-trillion-dollar capital flight would be in the range of $5-10 billion—which makes a mockery of the notion that the costs of the regulation are under $100,000.

For more information about this wretched proposal, here’s a video I narrated on the topic.

To put it bluntly, the Obama Administration is pushing this regulation because it thinks the anti-tax competition agenda of Europe’s welfare states is so important that it is willing to risk the health of the American economy, undermine the soundness of U.S. financial institutions, disregard the rule of law, and abuse the regulatory process.

Indeed, this proposal is even worse than the increasingly infamous Foreign Account Tax Compliance Act.

And that’s saying something, because with each passing day, it is more and more obvious that FATCA is a destructive law that will significantly harm the American economy. But at least it’s a law, one that was approved by Congress and signed by the President. And the costly FATCA regulations being developed by the IRS are for the purpose of enforcing the law.

The interest-reporting IRS regulation is also costly and destructive, to be sure, but what makes it so perverse is that it is – at best – completely gratuitous. It is being advanced solely for reasons of ideology, regardless of the law and consequences be damned.

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Growing Opposition to Obama’s IRS Proposal to Make Banks Put Foreign Tax Law above U.S. Tax Law

Earlier this year, President Obama’s IRS proposed a regulation that would force banks in America to report any interest they pay to accounts owned by non-resident aliens (that’s the technical term for foreigners who don’t live in the U.S.).

What made this regulation so bizarre, however, is that Congress specifically has exempted these account from taxation for the rather obvious reason that they want to attract this mobile capital to the American economy. Indeed, Congress repeatedly has ratified this policy ever since it was first implemented 90 years ago.

So why, you may be asking, would the IRS propose such a regulation? After all, why impose a regulatory burden on a weakened banking sector when it has nothing to do with enforcing American tax law?

The answer, if you can believe it, is that they want American banks to help enforce foreign tax law. And the bureaucrats at the IRS want to impose this burden even though the regulation is completely contrary to existing U.S. law.

Not surprisingly, this rogue behavior by the IRS already has generated considerable opposition. Senator Rubio has been a leader on the issue, being the first to condemn the proposed regulation.

Both Senators from Texas also have announced their opposition, and the entire Florida congressional delegation came out against the IRS’s regulatory overreach.

And now we have two more important voices against the IRS’s rogue regulation.

The Chairman of the Oversight Subcommittee in charge of the IRS, Congressman Charles Boustany of Louisiana, just sent a very critical letter to Treasury Secretary Geithner, and these are some of his chief concerns.

If the regulation were to take effect, it would not only run counter to the will of the Congress, but would potentially drive foreign investments out of our economy, hurting individuals and small businesses by reducing access to capital.  I write to request that IRS suspend the proposed regulation. …As the Internal Revenue Code imposes no taxation or reporting requirements on this deposit interest, the proposed regulation serves no compelling tax collection purpose.  Instead, it is my understanding that the IRS seeks this new authority to help foreign governments collect their own taxes abroad.  …It is disappointing to see the IRS once again try to impose unnecessary regulations and costs on U.S. banks. To attract investment of foreign dollars into the U.S. economy, the Internal Revenue Code generally exempts these deposits from taxation and reporting requirements.  These foreign investments in turn help to finance a variety of products essential to economic growth, such as small business loans and home mortgages.  Imposing reporting requirements on these deposits through regulatory fiat threatens to drive significant investments out of our economy by undermining the rules Congress has set in place specifically to attract it, and at exactly the time when our economy can least afford it.

But criticism is not limited to Capitol Hill. The Center for Freedom and Prosperity has spearheaded opposition from think tanks, taxpayer organizations, and public policy groups.

And now the business community has become involved. Here’s some of what the Chamber of Commerce recently said, and you can click this PDF file (USCC S1506) to read the entire letter.

Given the fragile state of America’s economic recovery, it is disturbing to see actions by the Treasury that could jeopardize deposits at U.S. banks and credit unions held by nonresident aliens. These deposits, which are not subject to U.S. taxes, are at risk of being abruptly withdrawn and future deposits deterred, which could lead to a reallocation of deposits out of the U.S. banking system and, thus, reduce lending to businesses. Furthermore, complying with the proposed regulation places additional reporting requirements and expenses upon financial firms. Without any real benefit stemming from the collection of this information, imposition of this reporting requirement seems to be a solution in search of a problem.

This may seem like an arcane issue and international tax matters often are not terribly exciting, but a couple of minutes of watching this video will make you realize there are some very important principles at stake.

Only the IRS could manage to combine bad tax policy, bad regulatory policy, bad human rights policy, and bad sovereignty policy into one regulation.

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Reckless IRS Regulation Would Put Foreign Tax Law over American Tax Law and Drive Investment out of the United States

I’m not a big fan of the IRS, but usually I blame politicians for America’s corrupt, unfair, and punitive tax system. Sometimes, though, the tax bureaucrats run amok and earn their reputation as America’s most despised bureaucracy.

Here’s an example. Earlier this year, the Internal Revenue Service proposed a regulation that would force American banks to become deputy tax collectors for foreign governments. Specifically, they would be required to report any interest they pay to accounts held by nonresident aliens (a term used for foreigners who live abroad).

The IRS issued this proposal, even though Congress repeatedly has voted not to tax this income because of an understandable desire to attract job-creating capital to the U.S. economy. In other words, the IRS is acting like a rogue bureaucracy, seeking to overturn laws enacted through the democratic process.

But that’s just the tip of the iceberg. The IRS’s interest-reporting regulation also threatens the stability of the American banking system, makes America less attractive for foreign investors, and weakens the human rights of people who live under corrupt and tyrannical governments.

This Center for Freedom and Prosperity video outlines five specific reason why the IRS regulation is bad news and should be withdrawn.

I’m not sure what upsets me most. As a believer in honest and lawful government, it is outrageous that the IRS is abusing the regulatory process to pursue an ideological agenda that is contrary to 90 years of congressional law. But I guess we shouldn’t be surprised to see this kind of policy from the IRS with Obama in the White House. After all, this Administration already is using the EPA in a dubious scheme to impose costly global warming rules even though Congress decided not to approve Obama’s misguided legislation.

As an economist, however, I worry about the impact on the U.S. banking sector and the risks for the overall economy. Foreigners invest lots of money in the American economy, more than $10 trillion according to Commerce Department data. This money boosts our financial markets and creates untold numbers of jobs. We don’t know how much of the capital will leave if the regulation is implemented, but even the loss of a couple of hundred billion dollars would be bad news considering the weak recovery and shaky financial sector.

As a decent human being, I’m also angry that Obama’s IRS is undermining the human rights of foreigners who use the American financial system as a safe haven. Countless people protect their assets in America because of corruption, expropriation, instability, persecution, discrimination, and crime in their home countries. The only silver lining is that these people will simply move their money to safer jurisdictions, such as Panama, the Cayman Islands, Hong Kong, or Switzerland, if the regulation is implemented. That’s great news for them, but bad news for the U.S. economy.

In pushing this regulation, the IRS even disregarded rule-making procedures adopted during the Clinton Administration. But all this is explained in the video, so let’s close this post with a link to a somewhat naughty – but very appropriate – joke about the IRS.

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