Posts Tagged ‘Social Capital’

Statists occasionally get very angry about some of my views.

My support for “tax havens” periodically seems to touch a raw nerve, for instance, though I guess I shouldn’t be too surprised since some people are so crazy that they have even urged military action against these low-tax jurisdictions.

I also get some angry responses when I praise Ronald Reagan’s achievements. I’ve even had a few leftists get all agitated simply because I occasionally share a hypothetical poll from 2013 showing that Reagan would beat Obama in a landslide.

But what really gets these folks angry is when I argue that recipients of welfare and redistribution should feel shame and embarrassment. As far as they’re concerned, I’m being a heartless jerk who wants to inflict emotional pain on vulnerable people.

Though, to be fair, their anger usually dissipates when I explain that my real goal is to protect people from long-term dependency on government. And it’s also hard for them to stay agitated when I point out that I’m basically making the same argument as Franklin Roosevelt, who famously warned about welfare being “a narcotic” and “a subtle destroyer of the human spirit.”

In other words, I don’t like the welfare state because I care about both the best interests of taxpayers and also about the best interests of poor people. And this is why I repeatedly share data showing how American was making impressive progress against poverty before there was a welfare state. But once the federal government declared a “War on Poverty,” the poverty rate stopped falling.

But that’s only part of my argument. I also think there are very worrisome implications for overall society when people start thinking that they have a “right” to welfare and redistribution. At the risk of sounding like a cranky libertarian, I fear that any nation will face a very grim future once too many people lose the ethic of self-reliance and think it’s morally and ethically acceptable to be moochers.

Indeed, my theory of “Goldfish Government” is based in part on what happens when a sufficient number of voters think it’s okay to steal from their neighbors, using government as a middleman. Short-sighted politicians play a big role in this self-destructive process, of course, along with unfavorable demographic changes.

And when people want examples, I just point to nations such as Greece, Italy, and France. Or states such as California and Illinois.

At this stage, a clever leftist will usually interject and argue I’m being unfair. They’ll say that Nordic nations such as Denmark and Sweden are proof that a big welfare state is compatible with a prosperous and stable society.

Au contraire, as our French friends might say. Yes, the Nordic nations may be relatively successful big-government countries, but there are three very important things to understand.

  1. The Nordic nations became comparatively rich in the 1800s and early 1900s when economic policy was dominated by free markets and small government.
  2. The adoption of high taxes and big welfare states (particularly an explosion in the burden of government spending starting in the 1960s) weakened economic performance.
  3. In recent years, Nordic nations have sought to undo the damage of big government with pro-market reforms and limits on the fiscal burden of government.

But let’s specifically focus today on whether the Nordic nations are somehow an exception to the rule that welfare and redistribution have a pernicious impact on a society. In other words, does welfare in nations such as Denmark and Sweden undermine “social capital”? Is there a negative impact on the work ethic and spirit of self-reliance?

Fortunately, we have some very good data from a new, must-read book by Nima Sanandaji, who grew up in Sweden. Entitled Debunking Utopia: Exposing the Myth of Nordic Socialism, Nima’s book is a comprehensive analysis of public policy in that part of the world, both what’s good and what needs improvement.

One of his 11 chapters is about “The Generous Welfare Trap” and it’s filled with very valuable information about the human and societal cost of the welfare state.

Though I can’t resist pointing out that he starts his analysis by citing President Roosevelt.

Franklin D. Roosevelt…was concerned that the institution he was fostering…might destroy the spirit of self-reliance. Two years into his presidency, he held a speech to Congress…the president warned that…”continued dependence upon relief induces a spiritual and moral disintegration fundamentally destructive to the national fibre. To dole out relief in this way is to administer a narcotic, a subtle destroyer of the human spirit.” …In today’s political climate, Franklin D. Roosevelt’s view on public benefits would seem quite harsh.

Nima then looks at whether the Nordic nations somehow might be proof that FDR was wrong.

Yet there has been a persistent conviction among the modern proponents of welfare states that it is indeed-somehow-possible to create stable systems with generous benefits and high taxes. The main line of reasoning is based on the Nordics. The welfare states in this part of the world seem to, at least at first glance, succeed in providing extensive services and generous cash benefits without eroding personal responsibility. If generous welfare works in Sweden and Denmark, why not also in the rest of the world?

The problem, as Nima points out, is that these policies don’t work in his part of the world.

And not just because of the fiscal burden. His main point is that the welfare state is weakening people’s integrity.

…the World Values Survey shows that erosion of norms is very much a thing in the Nordics. In the beginning of the 1980s, 82 percent of Swedes and 80 percent of Norwegians agreed with the statement “Claiming government benefits to which you are not entitled is never justifiable.” …However, as the population adjusted their behavior to new economic policies, benefit morale dropped steadily. In the survey conducted between 2005 and 2008, only 56 percent of Norwegians and 61 percent of Swedes believed  that it was never right to claim benefits to which they were not entitled. The survey conducted between 2010 and 2015 only included Sweden out of the Nordic countries. It found that benefit morale had continued to fall, as merely 55 percent of Swedes answered that it was never right to overuse benefits. …Over time even the Nordic people have changed their attitudes as social democratic policies have made it less rewarding to work hard and more rewarding to live off the government.

By the way, at the risk of nit-picking, I would have advised Nima to use the term “benefit morality” rather than “benefit morale.” Though I assume almost all readers will understand the point he’s making.

Returning to our topic, Nima also cites some scholarly research that basically echoes my “Theorem of Societal Collapse.”

Martin Halla, Mario Lackner, and Friedrich G. Schneider performed an empirical analysis of the dynamics of the welfare state. They explained that…”the disincentive effects may materialize only with considerable time lags.” ..However, after some time the expansion of welfare programs leads to a deterioration of benefit morale. The three researchers concluded that “the welfare state destroys its own (economic) foundation and we have to approve the hypothesis of the self-destructive welfare state.”

The bottom line, he explains, is that the Nordic nations have been the best possible example of how a welfare state can operate.

But even in these nations, the narcotic of government dependency has slowly but surely done its damage.

Although Nordic welfare states seemed initially able to avoid this moral hazard, today we know beyond doubt that this was not the case. Even the northern European welfare states-founded in societies with exceptionally strong working ethics and emphasis on individual responsibility-have with time caught up to Roosevelt’s harsh predictions.

The good news is that Nordic nations are trying to undo the damage of the welfare state. Many governments in the region are scaling back the generosity of handouts and trying to restore the work ethic.

I don’t want to give away too much information. You need to buy his book to learn more. And the other 10 chapters are just as enlightening.

I’ll close by simply observing that Calvin Coolidge (as quoted by Ronald Reagan) understood today’s topic way back in the 1920s.

P.S. I’ve also cited Nima’s great work on how people of Nordic descent in America are much more productive than their cousins who remained in Scandinavia, as well as his work showing that Nordic nations originally became rich because of Hong Kong-style economic policy. And I’ve also shared some of his fascinating research on the policies that generate super-entrepreneurs.

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I remember feeling like an outlier a few years ago when so many people were waxing rhapsodic about a glowing economic outlook for Brazil, Russia, India, China, and South Africa. These so-called BRICS nations were enjoying some decent growth at the time, but I was not optimistic about their long-run prospects because they all suffered from too much statism according to the rankings from Economic Freedom of the World.

Well, the long run has arrived, at least to some degree. All of these nations have hit some serious speed bumps.

I’ve previously written about the economic challenges now being faced by China and South Africa. Today, let’s focus on Brazil.

Here’s some very dismal but accurate analysis from an article in this week’s Economist (h/t: Tyler Cowen).

By the end of 2016 Brazil’s economy may be 8% smaller than it was in the first quarter of 2014, when it last saw growth; GDP per person could be down by a fifth since its peak in 2010, which is not as bad as the situation in Greece, but not far off. Two ratings agencies have demoted Brazilian debt to junk status. Joaquim Levy, who was appointed as finance minister last January with a mandate to cut the deficit, quit in December. Any country where it is hard to tell the difference between the inflation rate—which has edged into double digits—and the president’s approval rating—currently 12%, having dipped into single figures—has serious problems.

And why is Brazil’s economy is so much trouble?

Two words: Excessive government.

…the federal constitution of 1988… This 70,000-word doorstop of a document crams in as many social, political and economic rights as its drafters could dream up, some of them highly specific: a 44-hour working week; a retirement age of 65 for men and 60 for women. The “purchasing power” of benefits “shall be preserved”, it proclaims, creating a powerful ratchet on public spending. Since the constitution’s enactment, federal outlays have nearly doubled to 18% of GDP; total public spending is over 40%. Some 90% of the federal budget is ring-fenced either by the constitution or by legislation. Constitutionally protected pensions alone now swallow 11.6% of GDP, a higher proportion than in Japan, whose citizens are a great deal older. …government expenditure as a share of output rose in 2015. …Taxes already consume 36% of GDP, up from a quarter in 1991.

Ugh, what a grim set of numbers. Moreover, the pension system is terrible, as we discussed a few months ago.

And here’s some additional analysis from last week’s issue, which also highlights the negative impact of too much government.

Brazil faces political and economic disaster. …Ms Rousseff and her left-wing Workers’ Party (PT) have made a bad situation much worse. During her first term, in 2011-14, she spent extravagantly and unwisely on higher pensions.. The minimum benefit is the same as the minimum wage, which has risen by nearly 90% in real terms over the past decade. Women typically retire when they are 50 and men stop work at 55, nearly a decade earlier than the average in rich countries… A typical manufacturing firm spends 2,600 hours a year complying with the country’s ungainly tax code; the Latin American average is 356. Labour laws modelled on those of Mussolini make it expensive for firms to fire even incompetent employees. ….Because it is so hard to reform, Brazil’s public sector rivals European welfare states for size but emerging ones for inefficiency. Long a drain on economic vitality, Brazil’s overbearing state is now a chief cause of the fiscal crisis.

All this sounds very grim, but I’m going to argue that it’s even worse than it sounds.

In part, the problems are similar to what is found in so many nations facing economic challenges.

First, government is growing faster than the private sector. The fact that government spending now consumes twice as much of the economy’s output today as it did back in 1988 means that politicians have been repeatedly (and vigorously!) violating my Golden Rule.

Second, there’s too much government intervention. A nation that models any of its policies on Mussolini-style fascism obviously is making a big mistake since the net result is an economy burdened by corrupt cronyism (sadly, a common problem in Latin America).

But there’s another reason to be down on Brazil, and it is far more discouraging.

Third, the social capital of the country has been eroded. Simply stated, there are too many people (as data from the 2014 election reveal) who view government as a vehicle for personal (and unearned) enrichment.

And when this third problem develops, it’s all but certain that a nation is doomed. After all, many nations have reversed bad fiscal policy. And many nations have reduced government intervention. But fixing the culture of a people is like putting toothpaste back in a tube.

Indeed, I’m going to augment my list of pithy adages. In addition to Mitchell’s Golden Rule and Mitchell’s Law, we not have Mitchell’s Theorem of Societal Collapse.

Like my other adages, I’m not pretending there’s any original insight. In this case, I’ve simply come up with a different way of saying the line attributed (erroneously, from what I can tell) to either Benjamin Franklin or Alexis de Tocqueville: “A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. ”

P.S. I’m worried about the degree to which America has traveled down the path toward societal decay, but I don’t think we’ve yet reached a tipping point.

P.P.S. While I’m not a fan of Brazilian economic policy, I actually defended that nation when Hillary Clinton applauded Brazil for being more statist than it actually is.

P.P.P.S. Being less statist than Hillary is not exactly something to brag about, so I will note that Brazil deserves credit for moving in the right direction on gun rights and also having some semi-honest left-wing politicians.

P.P.P.P.S. Let’s end, however, with some bad news. Recall from above that Brazil has a very statist constitution. Well, it’s always possible to make a bad thing even worse. And that’s what some Brazilian politicians are trying to do with a proposal to have government somehow create a “right to happiness.”

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It’s no exaggeration to say that a nation’s long-run vitality and prosperity are correlated with the spirit of independence and self-reliance among its people.

Simply stated, if too many people thinks it’s okay to ride in the wagon of government dependency, that a troubling sign that social or cultural capital has eroded.

Government policy obviously plays a role, both because politicians create various redistribution programs and also because they can set rules that help determine whether there is any stigma for relying on taxpayers.

Some lawmakers even think recipients should be publicly identified, in part to weed out fraudsters and also to discourage dependency. Here are some passages from a story in the Washington Post.

If you receive government assistance in the state of Maine, Lewiston Mayor Robert Macdonald thinks the public has a right to know about it. …Macdonald said a bill will be submitted during Maine’s next legislative session “asking that a Web site be created containing the names, addresses, length of time on assistance and the benefits being collected by every individual on the dole.” He added: “After all, the public has a right to know how its money is being spent.” …Macdonald told the Portland Press Herald that …“I hope this makes people think twice about applying for welfare.” …Publicly posting personal information, he said, could encourage people to go after those “gaming the system.”

Needless to say, this approach causes great consternation for some folks on the left.

Here’s some of what Dana Milbank wrote in his Washington Post column.

Rick Brattin, a young Republican state representative in Missouri, has…introduced House Bill 813, making it illegal for food-stamp recipients to use their benefits “to purchase cookies, chips, energy drinks, soft drinks, seafood, or steak.” …This is less about public policy than about demeaning public-benefit recipients. The surf-and-turf bill is one of a flurry of new legislative proposals at the state and local level to dehumanize and even criminalize the poor.

I admit it’s paternalistic, but if taxpayers are paying for someone else’s food, then shouldn’t they have the right to insist that recipients don’t buy junk food?

My view, of course, is that the federal government shouldn’t be in the business of redistributing income, but that’s an issue we discussed a few days ago.

Milbank also is upset that some lawmakers don’t want welfare benefits spent on frivolous things.

…the Kansas legislature passed House Bill 2258, punishing the poor by limiting their cash withdrawals of welfare benefits to $25 per day and forbidding them to use their benefits “in any retail liquor store, casino, gaming establishment, jewelry store, tattoo parlor, massage parlor, body piercing parlor, spa, nail salon, lingerie shop, tobacco paraphernalia store, vapor cigarette store, psychic or fortune telling business, bail bond company, video arcade, movie theater, swimming pool, cruise ship, theme park, dog or horse racing facility, pari-mutuel facility, or sexually oriented business . . . or in any business or retail establishment where minors under age 18 are not permitted.” …another state that prohibits welfare funds for cruise ships is true-blue Massachusetts.

Again, I have to ask why it’s unreasonable for taxpayers to put limits on how welfare funds are spent?

Setting aside my desire to get Washington out of the business of maintaining a welfare state, shouldn’t the people paying the bills have some right to decide whether they want recipients going to massage parlors and casinos?

Let’s now look at a very real-world example of how our friends on the left are trying to make dependency easier and more respectable.

They now want to make it easier and less discomforting for folks to get food stamps. Here are some excerpts from a story in the Daily Caller.

A report from the U.S. Department of Agriculture (USDA) looked at whether it should get rid of in-person interviews for those who apply to receive benefits under the Supplemental Nutrition Assistance Program (SNAP), which is commonly known as food stamps. …the USDA with the Food and Nutrition Service (FNS) conducted a limited real-world test to see if the in-person interviews are needed.

The report looks at test cases in Utah and Oregon to gauge the impact on “client and worker outcomes,” but obviously didn’t consider the impact on taxpayers.

The report says that the increase of participants from 17 million in 2000 to nearly 47 million recipients in 2014 is one reason why the application process should be made easier and less costly, but others have argued that more relaxed entry requirements into the program are the very reason it has expanded so much.

The latter group is correct. If people can sign up for freebies over the phone, with very weak verification procedures, then it should go without saying that the burden on taxpayers will grow even faster.

And for purposes of our discussion today, this proposal would make it even easier for people to become dependents. The government already has turned food stamps into a welfare-state version of a debit card, which means that recipients feel less conspicuous about relying on taxpayers. Now they wouldn’t even have to visit a food stamp office when first signing up for the system!

The bottom line is that it will be very healthy for our nation if most people feel reluctant and/or embarrassed to become wards of the state.

Fortunately, there are some folks who already have this self-reliant streak. Here’s a blurb from some analysis by Angela Rachidi for the American Enterprise Institute.

…research shows that a sizeable number of eligible people do not participate in SNAP because they do not want government assistance. According to a 2003 USDA report on the subject, 27% of eligible non-participants indicated that they would not enroll in the program even if they were assured they were eligible. The report cited the desire to feel independent as the primary driver in not wanting benefits.

Thank goodness there are still a non-trivial number of Americans who don’t want to mooch off taxpayers.

By the way, you may be shocked to learn that the people of California are the least likely to sign up for food stamps.

Too bad the folks in Maine, Oregon, Vermont, and Washington don’t have the same spirit of self reliance.

Heck, Vermont’s already famous for having the top spot in the Moocher Index.

P.S. While Dana Milbank apparently thinks there shouldn’t be any restrictions on food stamps, most taxpayers probably won’t be pleased to see these examples of their money being misspent.

Then Mr. Milbank can start investigating other examples of fraud, starting with Medicaid and the disability program.

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When I wrote last week about “social capital” as a key determinant of long-run prosperity, I didn’t realize I would generate a lot of feedback. Including several requests for more information.

Which creates a small problem since the field is so large that it’s difficult to provide an overview.

If people were asking questions on the flat tax, Laffer Curve, or the economic impact of government spending, I could give succinct and targeted responses. On the topic of social capital, by contrast, I almost don’t know where to start.

The first thing I should say is that scholars have been addressing these issues for centuries, even if in some cases they didn’t use the phrase “social capital” and instead talked about tradition, culture, ethics, morality, or civic attitudes.

Many people know Adam Smith wrote An Inquiry into the Nature and Causes of the Wealth of Nations, but he also wrote The Theory of Moral Sentiments in the 1700s, and that book deals with issues relating to social capital.

Or consider the work of Alexis de Tocqueville, who wrote about social capital in Democracy in America in the 1800s. More recently, in the 1970s, Friedrich Hayek discussed ethics and attitudes as part of his three-volume masterpiece on Law, Legislation, and Liberty.

Moving into the 21st Century, the issue of “culture” and economics also was the subject of an in-depth online symposium at the Cato Institute in 2006. Here’s some of what Lawrence Harrison wrote.

Some economists have confronted culture and found it helpful in understanding economic development. Perhaps the broadest statement comes from the pen of David Landes: “Max Weber was right. If we learn anything from the history of economic development, it is that culture makes almost all the difference.” Elaborating on Landes’s theme, Japanese economist Yoshihara Kunio writes, “One reason Japan developed is that it had a culture suitable for it. The Japanese attached importance to (1) material pursuits; (2) hard work; (3) saving for the future; (4) investment in education; and (5) community values.” …More broadly, the analysis of religions suggests that Protestant, Jewish, and Confucian societies do better than Catholic, Islamic, and Orthodox Christian societies because they substantially share the progress-prone Economic Behavior values of the typology whereas the lagging religions tend toward the progress-resistant values. Symbolic of this divide is the persistent ambivalence of the Catholic Church toward market economics… But religion is not the only source of progress-prone economic behavior: the Basques are highly entrepreneurial and highly Catholic; and Chile, boasting the most successful sustained economic performance in Latin America, is also the most Catholic.

And here are portions of Gregory Clark’s contribution.

The standard economist emphasizes that stability, incentives, and laissez-faire are all the magic needed for riches. …attempts to introduce culture into economic discussions so far have been generally either ad hoc, vacuous, blatantly false, or void of testability. …Weber, as is well known, thought that certain types of Protestant ideology were conducive to economic growth. …The Catholics of modern southern Germany, however, would think they have a thing or two to teach their Protestant compatriots of the north about the virtues of hard work and self-reliance. The dour and thrifty Calvinists of my native Scotland look with envy now at the successes of the Catholic Irish, and ask how they can emulate this.Protestants on average may have values associated with economic growth, but that seems to have nothing to do with their specific theology. Lawrence Harrison may seem to escape some of this problem of identifying cultural variation by using a survey of 25 factors that purports to identify systematically the essential elements of cultures that promote high incomes and growth: universal progress cultures. He divides cultures into the “progress-prone” and the “progress-resistant.” In progress-prone societies, for example, people assert “I can influence my destiny.” In progress-resistant societies “fatalism” rules. Progress-prone societies have better economic performance. …The problem with both the Harrison and McClelland approaches is that the responses may reflect just the realities of the institutional framework people live within, rather than their cultural attitudes. A North Korean who reports “fatalism” or “resignation” is plausibly no different culturally from a South Korean who states “I can influence my destiny.”

My grad school classmate and now Professor Pete Boettke adds his two cents.

…we do need to have market prices to allocate resources efficiently. The “getting the prices right” mantra is not wrong, just incomplete. In order to get market prices, we do need to have private property rights and the enforcement of contracts. The “getting the institutions in place” mantra isn’t wrong either. Many of the significant advances in political economy during the 1990s, when the problems of socialist transition were at the forefront of professional and public policy attention, were related to a change of emphasis from “getting the prices right” to “getting the institutions in place.” …In economic terms, culture is a tool for the self-regulation of behavior, and as such it either lowers or raises the costs of enforcing the rules of the game. A free society works best when the need for policemen is least. If the rules of conduct correlated with high levels of economic well-being are viewed by a culture as illegitimate, then those rules will be violated unless there are strong monitors. The costs of monitoring may be so high that the social order cannot in fact be sustained. …Scholars such as Joel Moykr in The Levers of Riches have documented the great technological innovations that fueled growth during the Industrial Revolution, but Mokyr also documents the underlying belief systems and attitudes that had to be present for those innovations to be discovered, implemented, and put into common practice. Without that underlying cultural commitment to scientific discovery, innovation would have been stifled. We can say the same for beliefs and attitudes that undermine private property, mutually beneficial exchange, and commercial development. …Whatever advantages a culture may have, they will not be realized under bad institutions. And whatever disadvantages a culture may have, they will slowly erode, and the culture will improve, when people get to live under institutions of political and economic freedom. Culture can act as a constraint, but it is also a malleable constraint.

James Robinson uses China and Chile as examples that suggest good policies and institutions are key.

If the Chinese do well in Indonesia because they have such a good culture, then why is China one of the world’s poorest countries?  …surely the culture which supposedly is conducive to prosperity in China is an old one and long predates the acceleration of growth which took place in the late 1970s. …culture was held constant and institutions and policies changed while growth accelerated. From this it seems to follow that the reasons countries are poor has nothing to do with culture but rather policies and institutions that do not create the right incentive environment. …What about Chile, the one Latin American success story? Lawrence Harrison argues that Chile has a unique culture, but then why did it manifest itself so recently? It is only since the mid-1980s that the growth path of Chile has distinguished it from other Latin American countries. …culture might matter, but doubters like me will not be convinced by the evidence here.

But this topic gets attention at places other than libertarian think tanks.

Here are some excerpts from a World Bank study looking at the degree to which culture matters for development.

In the abstract there is no doubt a general acceptance that a particular work ethic, a system of personal values and attitudes must have a role in guiding a population along a particular development path; indeed, how could it be otherwise? …Guiso, Sapienza and Zingales (2006) conducted a regression analysis combining survey and macroeconomic data across 53 countries and found that “a 10 percentage point increase in the share of people who think thriftiness is a value that should be taught to children is linked to a 1.3 percentage point increase in the national saving rate”. Tabellini (2010) also showed that European regions with a stronger belief in individual effort tend to have higher GDP per capita and GDP growth. …Lee Kuan Yew speaks of a set of values—“thrift, hard work, filial piety and loyalty to the extended family, and, most of all, the respect for scholarship and learning”—as having provided a powerful cultural backdrop for the development of East Asian countries… Max Weber famously made the case about the role of culture in development in his essay “The Protestant Ethic and the Spirit of Capitalism,” arguing that Protestantism promoted the rise of modern capitalism “by defining and sanctioning an ethic of everyday behavior that conduced to business success” comprising “hard work, honesty, seriousness, the thrifty use of money and time.

Last but not least, let’s consider some practical applications based on a recently published New York Times column by David Brooks.

Twenty-five years after the fall of the Berlin Wall, the biggest surprise is how badly most of the post-communist nations have done since. …In the bottom group are basket-case nations that haven’t even recovered the level of real income they had in 1990, as measured by real G.D.P. per capita. These failures include Ukraine, Georgia, Bosnia, Serbia and others — about 20 percent of the post-communist world. “Basically,” Milanovic writes, these “are countries with at least three to four wasted generations. …The next group includes those nations that are merely moderate failures, with per capita economic growth rates under 1.7 percent a year. These are nations like Russia and Hungary that continue to fall steadily behind the West — about 40 percent of the post-communist world by population. The third group includes those with growth rates between 1.7 percent and 1.9 percent. These countries, like the Czech Republic and Slovenia, are holding steady with the capitalist world. Finally there are the successes, the nations that are catching up. …There are only five countries that have emerged as successful capitalist economies: Albania, Poland, Belarus, Armenia and Estonia. To put it another way, only 10 percent of the people living in post-communist nations are living in a place that successfully made the transition to capitalism.

I wouldn’t necessarily have listed Albania and Belarus as success stories, but it’s certainly true that the countries that comprised the former Soviet Bloc have seen a lot of divergence.

Heck, check out this graph comparing Ukraine and Poland if you want a remarkable example.

The question is why did they behave differently?

Why did some countries succeed while others failed? First, leaders in some countries simply made better political decisions. Most of these countries enacted economic reforms, like deregulating prices and privatizing nationalized companies. Some nations like Estonia and Poland enacted reforms radically and quickly… The quick and radical group saw a slightly bigger output drop over the near term but much more prosperity over the long run. …Finally, and most important, there is the level of values. A nation’s economy is nestled in its moral ecology. Economic performance is tied to history, culture and psychology. …[Some] countries lacked this cultural brew. Worse, life was marked by fear, by arbitrary power, by suspicion that people are watching you, by distrust. People raised in this atmosphere of distrust have trouble forming companies and associations. They are more likely to be driven by a grab-what-you-can logic — a culture of corruption and appropriation. …The lesson of the past 25 years is that democratic prosperity is built on layers of small achievements 10,000 fathoms deep. Communism ripped at all that bottom-up society-making and damaged the psyches of its victims. Healing from those wounds is gradual.

So what’s the bottom line?

I’m not really sure, other than to assert that we will never triumph over statism if Americans think it is morally acceptable to live off their neighbors via the coercive power of government.

In many of my fiscal policy speeches, I explain that we face a major crisis because of demographics and poorly designed entitlement programs, but then tell audiences that we can solve the problem with structural program reforms.

To wrap things up, I often close with this Powerpoint slide. As you can see, the first two themes are very familiar to regular readers. Our problem is too much government spending and the solution is my Golden Rule of spending restraint.

But the third bullet point is really about social capital.

In other words, we can share all sorts of evidence about how some nations grow faster with small government and free markets.

We can also highlight how statist policies slow growth.

But none of those arguments will mean much in the long run if people prefer to be wards of the state.

P.S. My concern with personal morality helps to explain why I think libertarians and social conservatives should be natural allies.

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When discussing how to boost growth, economists often discuss the importance of human capital and physical capital.

Those are key factors driving economic performance. After all, improvements in human capital mean a more productive workforce. And improvements in physical capital mean greater output per hour worked.

So you can see why I want lower tax rates and less intervention. Simply stated, we’re far more likely to increase – and effectively utilize – human and physical capital when markets allocate resources rather than politicians.

But there’s another form of capital that’s also important. It’s difficult to measure, but I suspect it also plays a huge role in determining a nation’s long-run prosperity.

For lack of a better term, let’s call it social capital, and it refers to the attitudes of a country’s people. I’m not sure how to define social capital, but here are a series of questions that capture what I’m trying to describe: Do the people of a nation believe in the work ethic? Or would they be comfortable as wards of the state, living off others? Are they motivated by the spirit of self-reliance? Would they be ashamed to go on welfare? Do they think the government is obligated to give them things?

The answers to these questions matter a lot because a nation can’t prosper once you reach a tipping point of too many people riding in the wagon and too few people producing.

Here’s what I wrote earlier this year.

…a nation is doomed when a majority of its people decide that it is morally and economically okay to live off the labor of others and want to use the coercive power of government to make it happen. For lack of a better term, we can call this a country’s Dependency Ratio, and it’s a measure of eroding social capital. To what degree, in other words, has the entitlement mentality replaced the work ethic and the spirit of self reliance?

I raise this issue because I want to share two items.

First, here’s some very good news about the United States. According to a new poll from YouGov about attitudes in the United States and United Kingdom, Americans are far more likely to believe they have a moral right to their earnings. Brits, by contrast, overwhelmingly believe that government has a greater moral claim to people’s earnings.

Makes me proud to be American, just as I was back in 2011 when reporting on some Pew research that also showed Americans had a greater spirit of self reliance.

The Brits, by contrast, seem to be moving in the wrong direction. Some of the blame belongs to supposedly right-wing politicians such as David Cameron, George Osborne, and David Gauke, all of whom have argued that people have a moral obligation to pay more to the state than is legally required.

In any event, it’s disturbing to see that people in the United Kingdom have such a warped moral perspective. Which raises the question of whether it’s possible to restore social capital once it’s been eroded?

Or is that a futile task once people have learned a dependency mindset, sort of like trying to put toothpaste back in a tube.

We have some research from Germany that offers guidance on these questions, which is the second item I want to share. Here are excerpts from a story in the Boston Globe.

…If you were a researcher trying to determine how a political system affects people’s values, beliefs, and behavior, you would ideally want to take two identical populations, separate them for a generation or two, and subject them each to two totally different kinds of government. Then you’d want to measure the results… Ethically, such a study would be unthinkable even to propose. But when the Berlin Wall went up in 1961, it created what London School of Economics associate professor Daniel Sturm calls a “perfect experiment.” The two halves of the country were like a pair of identical twins separated at birth and raised by two very different sets of parents.

And what did this experiment produce?

The bad news is that living in a statist regime did erode social capital.

…the researchers didn’t know what to expect. On the one hand, East Germans might be resentful of the system that had constrained their lives; on the other hand, it was also plausible that they had become comfortable with the notion that a government would provide for basic needs at the expense of an open society. Alesina and Fuchs-Schundeln used data from a German survey administered in 1997, and split the respondents into two groups based on where they had lived before reunification. What they found was that, at that point, people from the East still tended to believe in the social-service model. They were also more likely to support a robust government program to help the unemployed…

But the good news is that at least some of the toothpaste of self reliance can be put back in the tube.

It goes the other way too, if slowly: When Alesina and Fuchs-Schundeln looked at survey results from 2002, they found that the two groups of Germans had begun to converge politically. Based on the data, they estimated that it would take between one and two generations—20 to 40 years— for the gap to fully close, and “for an average East German to have the same views on state intervention as an average West German.” …In a separate but related study, it was shown that watching Western TV had actually shaped East Germans’ views about work and chance, making them “more inclined to believe that effort rather than luck determines success in life.”

So what’s the moral of the story?

I guess I’m a tad bit optimistic after learning about this research. I was worried that social capital couldn’t be restored.

So maybe if we force everyone in Greece and Italy to watch my video on free markets and small government, there’s a chance those societies can be salvaged! (But let’s not show it to the French since we’ll always need bad examples.)

P.S. These two cartoons show the dangers of the entitlement mentality.

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Why are some nations rich and other nations poor? What has enabled some nations to escape poverty while others continue to languish?

And if we want to help poor nations prosper, what’s the right recipe?

Since I’m a public finance economist, I’m tempted to say a flat tax and small government are an elixir for prosperity, but those policies are just one piece of a bigger puzzle.

A country also needs sensible monetary policy, open trade, modest regulation, and rule of law. In other words, you need small government AND free markets.

But even that doesn’t really tell us what causes growth.

In the past, I’ve highlighted the importance of capital formation and shared a remarkable chart showing how workers earn more when the capital stock is larger (which is why we should avoid punitive double taxation of income that is saved and invested).

But that also doesn’t really answer the question. After all, if a larger capital stock was all that mattered, doesn’t that imply that we could get prosperity if government simply mandated more saving and investing?

There’s something else that’s necessary. Something perhaps intangible, but critically important.

Deirdre McCloskey, in a video for Learn Liberty, says that ideas and innovation drive growth.

This is a great video for many reasons, but two points strike me as very important.

First, Deirdre is saying that economic liberty matters, but that modern prosperity also was enabled by a change in the culture. People began to appreciate and respect entrepreneurs. You could call this a form of social capital (and I think such cultural norms are critically important for a thriving society).

And entrepreneurs are the innovators who figure out ways of mixing capital and labor in ways that generate ever-larger amounts of economic output, so they play a critical role in boosting prosperity.

Second, she reminds us that poverty is the normal human condition and that the modern era truly is an amazing change. Indeed, I was so shocked by her numbers that I had to investigate to see if she was exaggerating.

She wasn’t. Using the Angus Maddison data set, I looked to see if Deirdre was right about world prosperity resembling a hockey stick.

Sure enough, there was an amazing increase in prosperity beginning about 1800, just as she explained. Indeed, she could have said that people lived on less than $2 per day for much of recorded history.

Here’s the data for world per-capita economic output over the past two thousand years.

Modern Prosperity

Wow. Unlike the make-believe hockey stick used by global warming alarmists, this one is real. And it shows that the economy definitely isn’t a fixed pie if the right policies – and the right attitudes – prevail.

So what’s the moral of the story?

Perhaps the most obvious lesson is that we should respect and appreciate entrepreneurs and other wealth creators.

Unfortunately, we live in an era where politicians would like us to believe that the economic pie is fixed and that it’s the job of government to re-slice the pie with class-warfare tax policy and lots of redistribution.

But when they re-slice the pie, they also change the size of the pie. And not in a good way.

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