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Socialism in the Modern World, Part V: With 162+ Choices, How Many Nations Qualify?

Sun, 02/17/2019 - 12:05pm

Over the past four days, I’ve looked at the supposed socialism of Venezuela, the Nordic nationsGreece, and France.

And I chose those nations deliberately because I used them as examples in this clip from a recent interview.

All of them are sometimes labeled as socialist countries, but if you look at the rankings from Economic Freedom of the World, you notice that this analysis doesn’t make much sense.

For example, the Nordic nations have a lot of economic liberty and are only slightly behind to the United States, which is why I explained last year that if those nations are socialist, then so is America.

And there is a big gap between the Nordic nations and France. And then another big gap before getting to Greece, and also a big gap before reaching Venezuela at the bottom. Should all of those nations get the same label?

So where do we draw the line to separate socialist nations from non-socialist nations?

I confess that I don’t have an answer because (as I’ve noted many times) we don’t have a good definition of socialism.

If socialism is central planning, government-determined prices, and government ownership of the means of production, then the only nations that really qualify are probably Cuba and North Korea. And they aren’t even part of the rankings because of inadequate economic data.

But if having a welfare state is socialism, then every jurisdiction other than Hong Kong and Singapore presumably qualifies.

Given this imprecision, I’m very curious to see where people think the line should be drawn.

P.S. This is why I usually just refer to statism or statists.

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Image credit: Pixy.org, licensed under CC0 Public Domain.

Socialism in the Modern World, Part IV: French Dirigisme

Sat, 02/16/2019 - 12:46pm

My multi-part series on Socialism in the Modern World has featured Venezuela, the Nordic nations, and Greece.

But no discussion of dirigiste policy would be complete without a look at France.

After all, not only does France have a history of imposing 100-percent-plus tax rates, it also hold the dubious honor of being Europe’s biggest welfare state.

And it has the highest overall burden of government spending.

These are not good numbers, especially when you consider the demographic changes that are happening in Europe.

Sadly, there’s a long history of French statism. Andras Toth of the Carl Menger Institute explained some of the France’s grim economic history.

If there is an example of a dirigiste, interventionist state, then that is France in Europe. France was the birthplace of the mercantilist, absolutist monarchy in the early modern period. …the practice of mercantilist protection and monopolization of key industries, including the state-mandated “industrial development policies” …Under the rule of the famous finance minister, Jean-Baptiste Colbert… France sank into a series of crises and lost her preeminent position in Europe. …The modern French state is the stepchild of the political culture of the Bourbons. It is the prime example of dirigisme. It redistributes as much as 56 percent of annual GDP and imposes the highest tax burden in Europe. The French state directly manages key industries and sustains one of the largest welfare states in Europe. It also imposes complicated bureaucratic red tape on economic actors, trailing way behind the Scandinavian states and Germany as far as ease of business is concerned.

Though he also explains that the current president seems to understand that France needs less government and more economic freedom.

Macron was the first French politician to build his election campaign on reform and competitiveness in order to keep up France’s position in the world. Those who voted for him knew what to expect. As a member of Hollande’s team, he proposed increasing the work week from 35 to 37 hours to lessen the tax burden on higher incomes, and the competitiveness package he developed aimed to lessen the protection of workers and companies in order to promote growth. …France is again at a crossroads: She has to choose between the policies of Jean-Baptiste Colbert and those of Anne-Robert-Jacques Turgot, the great French liberal economist who was the economic minister of France between 1774 and 1776 and who argued for free trade, less taxation, and less regulation.

I also sympathize with what Macron is trying to achieve (at least with regard to domestic reforms).

But I fear it may be too little and too late.

Especially since the New York Times reports that Macron is increasingly unpopular.

…attacks…that Mr. Macron is a self-seeking servant of society’s fortunate… The undisguised hostility has made clear that, less than a year into this new presidency, anti-Macron sentiment is emerging as a potent force. It is being fueled by a pervasive sense that Mr. Macron is pushing too far, too fast in too many areas — nicking at the benefits of pensioners and low earners, giving dollops to the well-off and slashing sacred worker privileges.

Though he does deserve some of his unpopularity. He imposed green taxes late last year that triggered nationwide riots from motorists and other unhappy citizens.

But he’s also unpopular for some of his good policies, which leads me to fear that France may be past the tipping point, meaning that genuine and meaningful reform no longer is possible because too many voters are on the government teat.

I hope that’s not the case. France used to be one of the most wealthy and powerful nations in the world. But now its living standards are barely average according to the OECD’s AIC numbers.

Because of the ongoing debate about what the term actually means, it’s unclear whether France’s tepid economic performance can be blamed on socialism.

But we shouldn’t doubt that the country is paying a considerable price for having too much government.

P.S. My favorite cartoon about French socialism actually features Barack Obama.

P.P.S. One of the world’s greatest economists was French, but politicians in France obviously ignored Bastiat just like they ignored Turgot.

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Image credit: Kremlin.ru, licensed under CC BY 4.0.

Socialism in the Modern World, Part III: The Tragedy of Greece in Five Charts

Fri, 02/15/2019 - 12:14pm

In Part I of this series, we examined the horrific tragedy of Venezuelan statism, and in Part II of this series, we looked at the Scandinavian “free-market welfare state.”

Today, Part III will look at the ongoing deterioration of Greece.

I’ve written many times about how the mess in Greece was caused by an ever-rising fiscal burden.

Let’s look at two charts, drawing from the government spending section of Our World in Data, that confirm my argument.

This first chart shows the overall burden of government spending starting in 1880. As you can see, spending generally consumed a bit more than 20 percent of the nation’s economy (other than during wars) all the way from 1880 to the mid-1960s.

And then the spending burden exploded.

What drove that unfortunate increase in the spending burden?

We get that answer in our next chart, which shows that redistribution outlays have skyrocketed in recent years.

In other words, the welfare state is 100-percent responsible for the Greek fiscal crisis, whether you look at short-run data or these long-run numbers.

Has all this additional spending generated any good results?

Hardly.

As government has become larger and crowded out the private sector, that has dampened hopes for the Greek people. As reported by the Washington Post, they are responding with fewer children and more emigration.

During the country’s deep and prolonged crash, which began in late 2009 and worsened in 2011 and beyond, an already low birthrate ticked down further, as happened throughout the troubled economies of southern Europe. Greece was also hit by a second factor, with half a million people fleeing the country, many of them young potential parents. …Greece’s fertility rate, of about 1.35 births per woman, is among the lowest in Europe, and well below the rate of 2.1 needed for a stable population… In 2009, just before the fiercest parts of the crisis, there were 117,933 births in Greece. The number has since fallen steadily, becoming well eclipsed by the number of deaths. The birth total in 2017, 88,553, was the lowest on record.

This chart from the story is amazing, though in a very grim way.

This demographic implosion might not be a big problem if Greece was like Hong Kong and had a privatized system for Social Security.

But that’s obviously not the case. Instead, Greece is a morass of expensive entitlements.

Notwithstanding all the bad news, special interests in Greece continue to lobby for more spending and favors.

And they have allies in Europe, as indicated by this report in the EU Observer.

Dunja Mijatovic, the CoE’s commissioner for human rights, told EUobserver that Greeks are still suffering from the aftermath of international bailouts and imposed economic structural reforms. …Her comments follow the publication of her 30-page report on the impact of austerity measures in Greece, which says the fallout has violated people’s right to health, enshrined in the European Social Charter, and eroded the quality of schools. …Mijatovic, who toured Greece over the summer, says she was struck at the large cuts in areas like maternal and child health services.

Though I want to be fair.

There is occasional progress in the country, as indicated by another story from the EU Observer.

Greece has taken one step closer to the separation of church and state by removing 10,000 church employees off the public payroll. A deal agreed between prime minister Alexis Tsipras and archbishop Ieronymos II also includes a settlement of a decade-old property dispute between the Greek state and the Orthodox Church – which is one of the country’s largest real estate owners.

I consider this a small step in the right direction.

The Israeli government may even want to learn something from this reform.

And there are other hopeful signs, as illustrated by this story from Der Spiegel.

Olga Gerovasili, …administrative reform minister…is overseeing an administrative overhaul that could transform the country like nothing else has since Greece joined the EU. She wants to abolish Greek clientelism. …For centuries, the Greek administration was little morethan an excuse for legal nepotism. …Relationships were more important than skills for filling official positions. …Job appointments are no longer to be in the hands of powerful local politicians… The aim of the system is also to use it to remove incompetent officials. …Another revolution. The Greek administration was legendarily labyrinthian. Files could travel for years through dozens of official offices. When bureaucrats aren’t hired for their skills, they need to justify their existence by signing as many things as possible. …Much like the nepotism, this is also to become a thing of the past.

I hope these reforms are real and permanent.

After all, a bloated and inefficient bureaucracy is one of the primary causes of excessive spending in Greece. But time will tell.

After all, it’s not easy taking away goodies from an entitled population.

“Greece finally needs to open its markets — that’s the most important thing,” says Aristides Hatzis, 51, a law professor at the University of Athens. Hatzis has written one of Greece’s most surprising bestsellers of the past few years: an introduction to laissez-faire thinking. It’s surprising because economic liberalism doesn’t have any deep roots in Greece. …”In the past decades, the governments have so overwhelmingly failed that Greeks blame everything that goes wrong on the state,” says Hatzis. …”It’s difficult to take away the privileges of influential lobby groups.” As long as that doesn’t happen, he says, the country won’t recover.

Having looked at the evolution of Greece’s economy, let’s now look at how the nation’s politicians have been responding to the crisis.

Are they liberalizing, or are they digger the hole deeper? In other words, are the good reforms larger than the backsliding, or vice-versa?

Naomi Klein will be happy with the answer. Here are two more charts, based on numbers from Economic Freedom of the World, both of which show that Greece is moving in the wrong direction.

First, we see that Greece’s score has dropped over the past 10 years.

And why has economic freedom declined?

The main cause is that fiscal policy has become much worse, thanks in large partto the IMF and various bailouts (which actually were designed to bail out irresponsible banks in nations such as France and Germany).

In any event, the nation’s politicians gladly accepted bad advice and used bailout money as an excuse to impose higher taxes, followed by higher taxes, and then decided to push taxes even higher.

The bottom line is that it is difficult to be optimistic about Greece.

Yes, there are some signs of hope. More and more people realize that big government has been bad for Greece.

But it’s not easy to get good reforms in a nation where most voting-age adults are directly or indirectly mooching off taxpayers.

P.S. Democratic socialism is better than totalitarian socialism, but it doesn’t produce good results.

P.P.S. Folks on the left argue that Greece is not a good example of socialism. They say it’s a cronyist economy rather than a socialist economy. Given the various definitions of socialism, they’re both right and wrong. I’ll simply note that there are many state-owned enterprises in Greece and the government has been dragging its feet about auctioning them to the private sector. So Greece is definitely closer to socialism than Sweden.

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Image by Tjeerd Wiersma, licensed under CC BY 2.0.

Socialism in the Modern World, Part II: The Nordic Model

Thu, 02/14/2019 - 12:09pm

In Part I of our series on Socialism in the Modern World, we looked at the tragic story of Venezuela.

Today, we’re going to look at what we can learn from the Nordic nations. And the first thing to understand, as I explain in this interview, is that these nations are only socialist if the definition is watered down.

As I noted in the interview, real socialism is based on government ownership and control of the “means of production.” But Nordic countries don’t have government-owned factories, government-controlled allocation of resources, or government regulation of prices.

In other words, those nations are not socialist (government ownership), they’re not fascist (government control), and they’re not even corporatist (cronyism).

So what are they?

In a column for the Washington Post, Max Boot accurately describes them as free-market welfare states.

…rigging elections and locking up or killing political opponents. This is one model of socialism — the same approach that has been applied in Cuba and the Soviet Union. But there are many other varieties that are far more benign. …the Scandinavian model. …Denmark, Norway and Sweden…show that a “free-market welfare state” isn’t an oxymoron. …By some measures, moreover, they are freer, economically…than the United States.

That last sentence isn’t a typo. The United States has more overall economic freedom than the Nordic nations, but both Denmark and Finland actually rank above America when looking at factors other than fiscal policy.

And Sweden and Norway only trail the United States by 0.03 and 0.06 points, respectively.

That being said, a big lesson to learn is that fiscal policy is a mess in the Scandinavian countries.

…there is nothing sinister about wanting to emulate the Scandinavian example. But that doesn’t necessarily mean it’s practical. The Scandinavians have lower corporate tax rates than the United States but much higher individual taxes. …The Scandinavian countries also charge hefty value-added taxes of 25 percent on consumption. The United States doesn’t have a national sales tax, and the average rate for state sales taxes is only 7 percent. In all, Scandinavians pay $25,488 a head in taxes compared with $14,793 a head in the United States — 72 percent more. This is what it takes to finance a Scandinavian-style social welfare state. It can’t be done simply by raising marginal tax rates on the wealthiest taxpayers to 70 percent, as Ocasio-Cortez suggests, because few taxpayers pay the top rate. It requires a massive tax hike on the middle class.

Amen. This is a point I have frequently made, most recently when writing about Alexandria Ocasio-Cortez’s statist agenda. Ordinary taxpayers will pick up most of the tab if the left’s agenda is adopted.

But I’m digressing. Let’s return to today’s main issue, which is the Nordic nations and socialism.

Technically, there’s no connection. As I said in the interview, those countries have never been socialist. Heck, if those nations are socialist, then so is the United States.

There is a lesson to be learned, however, and that lesson is relevant whether one uses the technical or common definition of socialism.

Simply stated, the relative success of those nations is due to free markets and a history of small government, but the imposition of big welfare states starting in the 1960s has weakened the region’s economic vitality.

This chart tells you everything you need to know.

P.S.  Actually, there is more your should know. Nima Sanandaji’s data on how Americans of Nordic descent are richer than residents of Nordic nations is very illuminating.

P.P.S. And we have specific data from Sweden showing how that nation lost ground after it adopted the big welfare state (and has subsequently gained ground thanks to pro-market reforms such as nationwide school choice and partial pension privatization).

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Image by Hansjorn, licensed under CC BY-SA 3.0.

Socialism in the Modern World, Part I: The Collapse of Venezuela

Wed, 02/13/2019 - 12:19pm

With the surprising success of Senator Bernie Sanders in the last presidential race and the more-recent instant-celebrity status of Representative Alexandria Ocasio-Cortez, some are wondering if the United States is about to enter a “socialist era”.

I’ve criticized some of the proposals that are part of this movement, such as confiscatory tax rates and the so-called Green New Deal, so it goes with saying that I’m not a fan.

To learn more about the implications of socialism, let’s look around the world.

We’ll start with Venezuela, which is the focus of a very interesting article in the Washington Post. Here are some excerpts.

Did socialism kill Venezuela? Blessed with the world’s largest oil reserves, this South American nation was once the region’s richest per capita. Twenty years after the launch of the late Hugo Chávez’s Bolivarian Revolution, it is now one of the poorest. …In Washington…Republicans are seizing on Venezuela to score points against those Democrats who have newly embraced the term… But socialism’s role in Venezuela’s collapse, observers say, is not as clear as either side likes to think. At least fleetingly, socialist policies propped up by state petrodollars helped bolster the country’s status as one of the Western Hemisphere’s most equitable societies. But state-heavy policies that distorted prices and exchange rates, coupled with corruption, mismanagement and official repression, turned Venezuela’s economic landscape into scorched earth. …But it is also not communist Cuba or North Korea, where foreign investment and private ownership are strictly limited. …wealthy Venezuelans still own private companies and high-walled mansions in elite neighborhoods. They play golf at country clubs and are taxed at a relatively manageable 34 percent.

This is very fair reporting.

All the main points are accurate: Living standards have plummeted in Venezuela, oil money complicates the analysis, and the economy isn’t quite as statist as Cuba and North Korea.

The article goes on to cite the views of several Venezuelans.

“All the wrongs were created under Chávez,” said Henkel Garcia, head of Econometrica, a Caracas-based financial analysis firm. “The economy only survived as long as it did because of high oil prices.” …Today, roughly a third of the nation, pollsters say, still appears to back socialism — although only half that many remain loyal to Maduro. …With hyperinflation causing acute shortages of food and medicine, more and more former Chavistas, or adherents of Chávez’s ideals, are saying mea culpas and increasingly turning out against Maduro. “Before I die, I want socialism gone from Venezuela,” said Yessid Merlano, a 50-year-old waiter. …Scarcities of food and medicine first surfaced years ago but are now so chronic that he and millions of other Venezuelans have shed pounds and sought work abroad. Before returning to Caracas last year, he spent 10 months working as a laborer in neighboring Colombia, “where all I saw were Venezuelans begging in the streets,” he said. “I feel guilty that I was a Chavista,” he said. “It’s all my fault, all the suffering.”

I’m glad that many Venezuelans now realize that socialism is misguided.

Though I wonder if they will support the reforms that will be necessary once the current regime is deposed (and given the perverse incentives of politicians, I’m even more worried whether a new government will implement those reforms).

The article concludes with some damning data on the country’s economic decay.

State health care, once a pride of the socialists, collapsed as hyperinflation and shrinking resources left hospitals with shortages of syringes and antibiotics, as well as broken equipment too expensive to repair. …Chávez purged skilled managers, engineers and technicians from the state-owned oil giant PDVSA, stocking it with government loyalists. That set it up for a catastrophic failure as global prices fell from record highs. Venezuelan oil output is now at its lowest levels since the 1950s. Industries nationalized by Chávez, who expropriated 1,500 companies, collapsed as regulated prices distorted markets. In two decades, the government seized nearly 5 million acres of productive farmland that has now been largely abandoned. In 1999, there were 490,000 private companies in Venezuela. By last June — the most recent count available — that number had fallen to 280,000.

None of this is a surprise. Venezuela is a basket case.

But that’s not our topic today. We’re focusing instead on whether there are any lessons that the United States can learn from the Venezuelan debacle.

Or, to be more accurate, I think the key question is whether advocates of democratic socialism in America have learned anything from Venezuela’s miserable performance.

Plenty of leftists, including Sen. Sanders, praised the awful policies of Chavez and Maduro.

Now that the chickens have come home to roost and Venezuela’s economy has tanked, have any of them apologized? Or tried to rationalize what happened? Or even expressed second thoughts about the supposed wisdom of socialism?

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Image by ZiaLater, licensed under CC BY-SA 3.0.

Proper Understanding of Socialism is Necessary to Fight It

Tue, 02/12/2019 - 10:09am

As the new young radical Democrats in Congress ramp up their efforts to advance their ideology, Republicans have started labeling their ideas “socialism”. From this, one could easily get the impression that the 2020 election is shaping up to be an ideological showdown.

In reality, the ideological gap between Democrats and Republicans is nowhere near the chasm that that current political rhetoric suggests. One of the best clues to this was hidden in plain view in President Trump’s State of the Union speech. On the one hand, Trump made a passing reference to socialism and pledged that America will never go down that path:

We stand with the Venezuelan people in their noble quest for freedom — and we condemn the brutality of the Maduro regime, whose socialist policies have turned that nation from being the wealthiest in South America into a state of abject poverty and despair. Here, in the United States, we are alarmed by new calls to adopt socialism in our country. America was founded on liberty and independence — not government coercion, domination, and control. We are born free, and we will stay free. Tonight, we renew our resolve that America will never be a socialist country.

On the other hand, the president said:

 I am also proud to be the first President to include in my budget a plan for nationwide paid family leave — so that every new parent has the chance to bond with their newborn child.

In other words, the president pledges to advance a new entitlement program that the left has sought after for a long time. In 2010 I pointed to this as a rising issue in liberal circles; as recently as in 2017 I explained that paid family leave, when expanded to European proportions, could cost American taxpayers $370-$500 billion per year.

However, perhaps even more damning than the fiscal cost is the fact that paid family leave – or general income security as it is called in more formal parlance – is indeed a reform that advances socialism. It is, in other words, impossible for President Trump to refute socialism and at the same time grow America’s welfare state.

Undoubtedly, Trump’s speech writers saw no contradiction here – to them, paid family leave has nothing to do with socialism. In fact, it is a widespread notion that the welfare state itself is not a socialist project. One of the vocal proponents of this view is Johan Norberg, a Swedish libertarian and senior fellow with the Cato Institute. In his defense of the Swedish welfare state, Norberg opines that socialism is about government ownership of the means of production – corporations, for short.

It is not clear how President Trump defines socialism, but his State of the Union Address suggests that he shares Norberg’s view. If so, it is likely that Trump will help advance socialism in America while thinking he is keeping us safe from it.

The problem, namely, is that socialism is not about government taking over the means of production. Socialism is about full-fledged egalitarianism.

Or, to be blunt, the complete eradication of economic differences between individual citizens. The core idea of socialism is, namely, that all differences in economic outcomes are the result of a power struggle over corporate profits. Business owners – capitalists – deprive workers of most of what Karl Marx defined as the full value of their labor.

Over the 150 years that Marx’s followers have roamed the Earth, they have pursued two paths to eliminate this alleged injustice. Some have chosen a reformist path where they tax the rich – capitalists and people with high incomes – and give the money to the working class (typically defined as the poor, the needy and those “at risk of poverty”).

The system that redistributes income and wealth is known as the welfare state. The technical term for its policy ambition is “egalitarianism”, but its ideological roots are openly socialist, on display for anyone to see.

While the welfare state began its modern journey in Europe, we have imported a good chunk of it to America over the years. In fact, today’s American welfare state is more similar to than different from its Scandinavian brethren. There are, essentially, only three pieces missing before we have a fully-fledged socialist welfare state:

All these entitlement programs are redistributive in nature: they are paid for with progressive income taxes and dispense services (health care, child care) and money (paid-leave checks) that benefit lower-income citizens more than those making a lot of money.

The goal with the reformist, welfare-state strategy for advancing socialism is to gradually eliminate differences between citizens in area after area of the economy. While people can still own property, the economic meaning of doing so, and of accumulating wealth in general, is gradually eroded until one day it is completely eliminated. At the other end of the redistributive pipeline, the incentives to hard work, education and entrepreneurship are gradually eliminated by increasingly generous entitlements, covering increasingly comprehensive areas of people’s lives.

Reformist socialists have been remarkably successful at advancing their redistributive agenda. They have suffered setbacks, such as the economic disaster in Greece where the welfare state collapsed under its own weight. That, however has not deterred them, especially not those who have now formed the largest Democrat voting block in the House of Representatives.

To continue to draw the line for socialism at government ownership of businesses, is to fail to see how the socialist agenda progresses over time. Eventually, socialists run out of other people’s money; the welfare state brings the economy it lives on, to a grinding halt. To continue to pay for their welfare state, socialists therefore escalate their political agenda to the revolutionary level where they begin taking over private property. It starts with big corporations – the end result of we know as Venezuela – and ends with unmitigated totalitarianism.

Rather than taking an almost aloof attitude to socialism, President Trump, GOP Conference Chair Liz Cheney and other leading Republicans need to study up and learn how to fight this ideology. If they don’t, they will be sleepwalking our country down the path from the Swedish welfare state, through the Greek macroeconomic disaster to the Venezuelan end station.

Can’t happen? Consider the fact that six out of ten Americans actually think favorably of socialism as a concept. Then consider what that implies for the 2020 election.

The Unworkable Paradox of Voluntary Socialism

Mon, 02/11/2019 - 12:00pm

As an economic system for a nation, socialism is a miserable failure. Especially real socialism (government ownership of the means of productions, government-dictated prices, etc).

But that doesn’t stop some people from defending socialism. They claim the theory is noble since it is based on sharing and equality.

And they even say that many things we like in society – such as the family, neighborhoods, community groups – are based on socialist principles.

I think it would be more accurate to say those institutions are based on non-market principles rather than socialist principles, but that raises an interesting question.

Would socialism be okay if it was voluntary?

In a column for FEE, Tim Worstall explains that we shouldn’t object to socialism – so long as it isn’t coercive.

…voluntary socialism does work sometimes, and it’s habitual now to mention Mondragon as an example of industrial companies that succeed as worker-owned organizations. But the two important words there are voluntary and sometimes.…worker ownership works better sometimes and that more capitalist organizational forms work better elsewhere. What we need is a method of sorting through what works best when—and that’s where the market comes in. …an interesting observation to make about that claimed superiority, of performance at least, of the socialist form. If it were truly more productive always and everywhere, then it would have taken over the economy already.

In the real world, though, it’s hard to find examples of successful socialist entities.

Consider what just happened to Panera Cares.

…after nine years of being in business, Panera Bread’s socialist pay-what-you-want restaurant, Panera Cares, will officially be closing shop on February 15 due to the business model’s unsustainability. …Panera tried to create a socialist system in which meals were offered at a suggested donation price. That means some people would pay more while others would pay less based on what they felt like or could afford. …Panera completely removed any incentive for patrons to meet even the lowest standards of consumer/retailer exchange. The result: some people paid their fair share while others enjoyed a “free lunch.” …company founder Ron Shaich said the cafe was designed as a quasi-test on human sensibility… “In many ways, this whole experiment is ultimately a test of humanity.”

If it was “a test of humanity,” then we failed.

None of the restaurants were self-sustaining, with some locations reportedly being “mobbed” by students along with homeless people looking for a free meal. “The Portland-based Panera Cares was reportedly only recouping between 60 and 70 percent of its total costs,” reports Eater. “The losses were attributed to students who ‘mobbed’ the restaurant and ate without paying, as well as homeless patrons who visited the restaurant for every meal of the week…” Though Shaich said the restaurants tried to educate people about “sharing responsibly, people ultimately came to the locations for a handout.” …As with every socialist experiment, the natural harmony between the commoners and the power-brokers devolved into hostility. “Patrons reported security guards roaming the entrance and ‘glaring at customers,’”… Shaich stepped down as CEO in 2017. He admitted to the St. Louis Post-Dispatch in 2018 that “the nature of the economics did not make sense.”

Interesting confession by Shaich. I wonder if we’ll ever see Bernie Sanders or Alexandria Ocasio-Cortez admit socialism doesn’t make sense.

The Kibbutz in Israel were perhaps the most famous example of voluntary socialism. The late Gary Becker explained their collectivist structure.

…nowhere is the failure of socialism clearer than in the radical transformation of the Israeli kibbutz. …Kibbutzniks, as they were called, replaced those fundamental featuresof modern societies and set up agricultural collectives in which all property was owned by the kibbutz, adults were treated equally regardless of productivity… The kibbutz movement was motivated in part by the Marxist dictum of “from each according to his abilities, to each according to his needs.”

But this system has basically disappeared.

By abolishing capitalistic organization, the founders expected members to live in contentment and harmony and to work for the common good. From what I was told and could observe during my brief visit, there was little harmony. Jealousy abounded, directed at those who were only a little better off… Kibbutzniks were also angry at slackers who appeared to be living off the labor of others. …the socialist zeal that propelled the kibbutz movement in its early days has now largely disappeared. …Many were forced into bankruptcy… Self-interest and family orientation are products not of capitalism but of a human nature developed under evolutionary pressure over eons. They will outlive any utopian experiment. …Utopian socialistic experiments like the kibbutz movement, and countries that tried to create large-scale efficient socialism, all failed for the same reasons.

Indeed, not only have the Kibbutz faded away, but the entire nation of Israel has moved significantly in the direction of free markets. Some stories do have happy endings.

I’ll close with this cartoon, which perfectly illustrates why socialism doesn’t work, regardless of the level of coercion.

P.S. I can’t resist sharing an unrelated excerpt from Tim Worstall’s column.

One of the primary objections to capitalism is the boilerplate insistence that in a capitalist system, the worker doesn’t gain the full value of her labor. This is exploitation, and something must be done about it. The argument has a major logical fault: It is a two-way street, for the capitalist doesn’t gain the full product of the use of their capital, either, meaning the capitalist is equally exploited.

Amen.

Labor and capital are complementary factors of production. Labor helps capital generate a return, and capital helps labor generate income.

Which is why it is in the best interest of workers to get rid of capital gains taxes, lower the corporate tax rate, eliminate the death tax. The more investment we have, the more productivity goes up, and the more wages increase.

Hong Kong, Singapore, and Using Good Policy to Bust the Middle-Income Trap

Sun, 02/10/2019 - 12:37pm

International development experts often write about a “middle-income trap.”

According to this theory, it’s not that challenging for nations to climb out of povertybut it’s difficult for them to take the next step and become rich countries.

The theory makes sense to many people because it describes much of what we see in the real world.

We even see the trap at higher levels of income. European nations were catching up with the United States after World War II, but then the convergence process stalled.

But I don’t think there’s actually a “middle-income trap.” Instead, nations don’t enjoy full convergence because they are hamstrung by bad policy.

And Hong Kong and Singapore are the best evidence for my hypothesis. These two jurisdictions have routinely ranked #1 and #2 for economic freedom.

And their solid track record of free markets and small government has paid big dividends. Here a chart, for Our World in Data, which shows how they have fully converged with the United States after starting way behind.

The performance of Hong Kong and Singapore is particularly impressive because the United States historically has been a top-10 nation for economic liberty (notwithstanding all my grousing about bad policy in America, we’ve been fairly good compared to the rest of the world).

So it takes extraordinarily good performance to catch up.

But it can happen.

P.S. By the way, one thing I noticed in the above chart is that Singapore has surpassed Hong Kong in the past couple of decades. This could just be a statistical blip, though I wonder if this is a result of the transfer of Hong Kong from British control to Chinese control. Yes, China has wisely chosen not to interfere with Hong Kong’s domestic policy, but perhaps investors and entrepreneurs don’t fully trust that this economic autonomy will continue.

P.P.S. Don’t forget that comparatively rich nations can de-converge if they adopt bad policy.

New Jersey’s Message to Taxpayers: Move or We Will Tax You to Death

Sat, 02/09/2019 - 12:03pm

According to Freedom in the 50 States, which we reviewed a couple of days ago, New Jersey is in the bottom 10 and has been moving in the wrong direction.

This dismal ranking is not an anomaly. New Jersey also is in the bottom 10 of states according to Economic Freedom of North America, and the Garden State is dead last according the State Business Tax Climate Index and State Fiscal Condition.

In a perverse way, I admire New Jersey’s politicians. They’re not satisfied with the state’s low scores. They want to become even less competitive. If that’s even possible.

As I noted in the interview, the latest proposal for a “rain tax” isn’t necessarily objectionable if examined in isolation.

But in the context of New Jersey’s fiscal deterioration, it’s almost as if politicians are writing another passage in a very long suicide note for the state.

Consider what happened recently with the gas tax, as explained by the Wall Street Journal.

…a silver lining used to be the Garden State’s relatively low gasoline tax of 14.5 cents a gallon—second lowest in the U.S. No more, and therein lies a tale of why taxing the rich to finance government is an illusion. In October 2016, then-Gov. Chris Christie signed a bill raising the gas tax by 22.6 cents to 37.1 cents a gallon…the bill also included a clause that automatically raises the gas tax if it doesn’t produce the expected revenue each year. This is a self-fulfilling economic prophesy. A higher gas tax causes people to drive less, which in turn has meant that revenues have fallen short of the expected $2 billion target. So on Oct. 1 the gas tax will rise another 4.3 cents to 41.4 cents per gallon, which will be the ninth highest in the U.S. …This will be the state’s third tax increase in four months, following June’s increase in income and corporate tax rates. …The larger lesson is that sooner or later the middle class always gets the bill for bigger government. Higher income and corporate taxes drive the affluent out of the state, which means less revenue. That leaves the middle class to pay in higher sales, property and now gasoline taxes.

Needless to say, New Jersey’s taxaholic lawmakers want even more revenue.

Here are some excerpts from a report by Politico.

Gov. Phil Murphy said Wednesday he may propose new tax increases when he unveils his budget in March, saying he’s worried that the state has not done enough to achieve what he called “tax fairness.” …The governor…had sought some $1.7 billion in new taxes… Murphy was met with fierce resistance from fellow Democrats in the Legislature… Murphy ultimately agreed to…$1.6 billion in annual revenue. …Murphy, speaking at a church in Newark where he delivered a speech on his first-year accomplishments, said he needs to leave his options open as he starts to prepare a budget… “I would say everything is on the table. Period, full stop,” he added when pressed again about the idea of new tax increases.

If all this sound worrisome, that’s because it is.

But it gets even worse. As I warned at the end of the interview, the 2017 tax law restricts the ability of federal taxpayers to deduct taxes paid to state and local governments.

And that means the full burden of those taxes is now much more explicit, which means more and more taxpayers in high tax rates are going to “vote with their feet” and move to states with less onerous fiscal regimes.

In other words, New Jersey politicians are making their tax system worse at precisely the moment that the geese with the golden eggs have more incentive to fly away.

Insane.

P.S. Given this grim news, I’m surprised that fewer than 9 percent of people picked New Jersey to be the first state that will suffer fiscal collapse.

P.P.S. What’s really remarkable – albeit in a very sad and tragic sense – is that New Jersey in my lifetime used to be like New Hampshire, with no state income tax and no state sales tax.

P.P.P.S. There is a Jersey with good tax policy, but it’s far away from the American version.

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Image by alex grichenko, licensed under CC0 Public Domain.

The War on Wealth

Fri, 02/08/2019 - 12:46pm

I did not like Bill Clinton’s 1993 class-warfare tax hike, and I also opposed Barack Obama’s 2012 fiscal-cliff tax increase on the so-called rich.

But those were incremental measures.

Today’s leftist politicians have much more grandiose schemes, such as 70 percent tax rateswealth taxes, and extortionary death taxes.

And even those proposals may not be enough.

In a column for the New York Times, Farhad Manjoo actually suggests that billionaires should be taxed out of existence. Literally, not just figuratively.

…if we aimed, through public and social policy, simply to discourage people from attaining and possessing more than a billion in lucre, just about everyone would be better off. …Bernie Sanders and Elizabeth Warren are floating new taxes aimed at the superrich, including special rates for billionaires. Representative Alexandria Ocasio-Cortez, who also favors higher taxes on the wealthy, has been making a moral case against the existence of billionaires. …the question is getting so much attention because the answer is obvious: Nope. Billionaires should not exist… Abolishing billionaires might not sound like a practical idea, but if you think about it as a long-term goal in light of today’s deepest economic ills, it feels anything but radical. …Billionaire abolishment could take many forms. It could mean preventing people from keeping more than a billion in booty, but more likely it would mean higher marginal taxes on income, wealth and estates for billionaires and people on the way to becoming billionaires. …But abolishment does not involve only economic policy. It might also take the form of social and political opprobrium. …Why should anyone have a billion dollars, why should anyone be proud to brandish their billions, when there is so much suffering in the world? …When American capitalism sends us its billionaires, it’s not sending its best. It’s sending us people who have lots of problems, and they’re bringing those problems with them. They’re bringing inequality. They’re bringing injustice.

Wow, I’m not even sure how to respond to this demonization of success. Should I focus on the vicious populism? The economic ignorance?

Maybe I should joke about how Mr. Manjoo wants to turn David Azerrad’s satire into reality?

Fortunately, I don’t have to come up with a response. I can simply rely on Allister Heath of the U.K.-based Daily Telegraph.

He explains, in his latest column, that these crazy ideas are a real threat.

Hard-Left ideas are uber-trendy: they are making a catastrophic comeback in the world’s most powerful universities, capturing many young minds, and are now being proposed by a new generation of supposedly modern politicians around the world. …pro-capitalist arguments…are met with derision by this new generation of intellectuals. Higher taxes bad for the economy? Hilarious! Nationalisation doesn’t work? Laughable! Venezuela? Nothing to do with actual socialism, all America’s fault. It’s a dialogue of the deaf… The old Left used to argue (falsely) that entrepreneurs, investors and executives aren’t really put off by high tax, which means that rates can be jacked up safely, raising lots to “redistribute”, without discouraging work and investment. The new Left has turned the argument on its head. It now admits the “rich” would work less if they were highly taxed – but claim this would be a good thing, as it would make society less unequal… As Harvard’s Greg Mankiw puts it, the Left now believes that “we can no longer afford the rich”.

If such policies were ever enacted, the results would be catastrophic.

The impact would be Venezuelan-style: it would lead to a collapse in GDP… Only the richest are being targeted at first: but everybody will suffer when the economy tanks, and such taxes are always eventually extended to the prosperous middle classes. …We could thus be on the cusp of a new socialist era, where even zero GDP growth will be seen as a good year. …we are on the brink of a new war on wealth.

Here’s what worries me.

Allister’s warning about terrible economic consequences is accurate, but I’m not sure that matters.

When I talk to hard-core leftists, I usually make the following three points.

In the past, leftists would disagree. Maybe they would claim government could make investments. Or perhaps they would assert that government could somehow compel employers to pay higher wages.

But it’s now quite common for my leftist friends to simply assert that lower living standards are an acceptable result. For all intents and purposes, hurting the rich is more important than helping the poor.

You may think I’m joking, or that only a small handful of crazies actually want this outcome.

But the establishment left also advocates for lower living standards. The International Monetary Fund has financed and publicized research that explicitly embraces the twisted notion that it would be ideal to reduce everyone’s living standards so long as rich people suffered the bigger declines.

Margaret Thatcher is spinning in her grave.

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Image by Gage Skidmore, licensed under CC BY-SA 2.0.

Separate the Baby from the Bathwater to Defend the Rules-Based Postwar Order

Thu, 02/07/2019 - 12:08pm

Donald Trump and other populist leaders frequently are condemned for undermining the “rules-based system” that is the basis of the “postwar order.”

What exactly is meant by this criticism? In the case of Trump, is it disapproval of his protectionism?

Yes, but that’s just the tip of the iceberg.

The broader accusation is that Trump and the others are insufficiently supportive of the so-called “international architecture” of treaties and organizations (the United NationsInternational Monetary Fund, World Trade Organization, World Bank, G-7, Organization for Economic Cooperation and Development, NATO, etc) that western nations created after World War II.

And the critics are right, in my humble opinion.

But that’s besides the point. What’s really needed is a case-by-case analysis to determine whether the aforementioned treaties and organizations are making the world a better place.

To help understand this topic, let’s look at some excerpts from an anonymously authored article in the latest issue of Cayman Financial Review.

What is the oft-cited “postwar order” that ostensibly is being threatened by populism? …begin with some history. There have beenthree major attempts to create an international architecture in hopes of discouraging war and encouraging peaceful commerce among world’s countries. The first occurred after the Napoleonic wars, the second occurred after World War I, and the third occurred after World War II.

The article explains that first postwar order was a big success, with 100 years of relative peace and prosperity between 1815 and 1914.

But the second postwar order, which followed World War I, was a miserable failure.

…the urgent economic problems that World War I had created – the need for demobilization, the restoration of the gold standard, the resumption of international trade flows, and the reconstruction of war-ravaged areas. Reparations burdened Germany and contributed to hyperinflation. …Germany depended on American loans to make its reparations payments to France and the United Kingdom. In turn, France and the United Kingdom depended on German reparations to repay their wartime loans from the United States. This financial merry-go-round was inherently unstable. …In the 1930s, many countries tried economic nationalism to escape from the Great Depression. Abandonment of the interwar gold standard, high tariffs to discourage imports, and competitive devaluations to boost exports became widespread. However, these “beggar-thy-neighbor” failed economically, caused the collapse of international trade, and contributed to rising international tensions.

And this grim experience was in the minds of policymakers as they sought to restore a system based on peace and open commerce.

…neither Churchill nor Roosevelt wanted to punish ordinary Germans, Italians or Japanese. Instead of the postwar harshness of Clemenceau, Churchill and Roosevelt favored the postwar magnanimity of Metternich, in which Germany, Italy, and Japan would be reconstructed as democratic capitalist countries. …both Churchill and Roosevelt thought that other new international organizations would be needed to help finance postwar reconstruction, provide stable exchange rates, and promote the progressive liberalization of international trade. …At the risk of oversimplifying, there are four major pieces of what is now loosely though of as the postwar order.

1. The United Nations and other multilateral bodies
2. The International Monetary Fund and World Bank
3. The World Trade Organization and affiliated trade pacts
4. NATO and other military/security alliances

The article is filled with details on how these various institutions evolved.

But for our purposes, let’s focus on ostensible threats to this order. Here’s what “Hamilton” wrote.

All four components of the current international architecture have critics, but they should be examined separately.

  1. The United Nations is routinely condemned for being ineffective, wasteful and anti-Western. However, the UN part of the post-war order is not under serious threat. However, the OECD is subject to considerable attacks because of its statist policy agenda.
  2. The IMF and World Bank are routinely condemned for being wasteful and anti-market. The IMF also is singled out for bailout policies that are said to encourage profligacy in developing nation and to reward sloppy lending practices by big western banks. Notwithstanding the instability than many say is caused by the IMF, this part of the postwar order is not under serious threat.
  3. The WTO and regional FTAs are under threat from a populist backlash in the United States and Europe, driven in large part by angst over financial prospects for lower-skilled workers. This part of the postwar order is under serious threat, especially because U.S. laws give the president significant unilateral powers over trade policy.
  4. NATO and other security arrangements are being questioned for both cost and changing geopolitical factors (e.g., the rise of China, Islamic terrorism). While unlikely at this point, dramatic policy changes from the United States could substantially alter the structure and/or operation of these military alliances.

How depressing. The part I like is the part that is under assault.

Here are the key points from the article’s conclusion.

The so-called postwar order is not a monolithic entity. …Some have been very successful. Consider, for instance, the sweeping reduction in trade barriers and the concomitant rise in cross-border commerce. …But other parts of the post-war order do not have very strong track records. Bureaucracies such as the IMF and OECD arguably deserve some hostile attention because of their support for anti-market policies. Policymakers who want to preserve the best parts of the post-war order may want to consider whether it is time to jettison or reform the harmful parts.

This is spot on.

Parts of the “postwar order” should be preserved. The World Trade Organization definitely belongs on that list. And presumably nobody wants to disrupt or eliminate the parts of the “international architecture” that facilitate things such as cross-border air travel, international shipping, and global telecommunications.

But the helpful work of those entities doesn’t change the fact that other entities engage in activities that are counterproductive. A “rules-based order” is only good, after all, if it advancing good rules.

Needless to say, the answer to all of these questions is no.

Which brings to mind the old saying about “Don’t throw the baby out with the bathwater.”

As “Hamilton” wrote, the bad parts of the postwar order should be jettisoned to preserve the good parts.

For those interested in this topic, Adam Tooze of Columbia University has a very interesting article on the same topic.

Published in Foreign Policy, his article basically applies a “public choice” description of how the current postwar order evolved. And he says it initially was not very successful

For true liberals in both the United States and Europe, who hankered after the golden age of globalization in the late 19th century, the resulting Cold War economic order was a profound disappointment. The U.S. Treasury and the first generation of neoliberals in Europe fretted against the U.S. State Department and its interventionist economic tendencies. Mavericks such as the young Milton Friedman—true advocates of free markets in the way we take for granted today—demanded a bonfire of all regulations. …The reality of the liberal order that supposedly came into existence in the postwar moment was the more or less haphazard continuation of wartime controls. It would take until 1958 before the Bretton Woods vision was finally implemented. Even then it was not a “liberal” order by the standard of the gilded age of the 19th century or in the sense that Davos understands it today. International mobility of capital for anything other than long-term investment was strictly limited.

Tooze argues that genuine liberalism (i.e., open markets and trade) didn’t really take hold until the 1980s, with the market-based revolution of Thatcher and Reagan, the “Washington Consensus,” and the collapse of communism.

The stakeholders in the 1970s were obstreperous trade unions, and that kind of consultation was precisely the bad habit that the neoliberal revolutionaries set out to break. …the global victory of the liberal order required a more far-reaching struggle. …the market revolution of the 1980s…  the aftermath of the Cold War, the moment of Western triumph. …the defeat of inflation, this was the age of the Washington Consensus.

For those not familiar with this particular piece of jargon, the “Washington Consensus” refers to the 1980s-era acceptance of free markets as the ideal route for economic development.

And “neoliberal” refers to classical liberalism, not the modern dirigiste version of liberalism found in the United States.

I’ll close by recycling this visual, which attempts to distinguish between good globalism and bad globalism.

The image uses the example of trade and jurisdictional competition, so I don’t pretend it captures all the issues and controversies that we discussed today.

But it reinforces why it is wrong to blindly accept and support the anti-market components of the postwar order simply because there are other parts that deserve our support. The goal is more global prosperity, not less.

———
Image by Basil D Soufi, licensed under CC BY-SA 3.0.

America’s Most Libertarian State Is…?

Wed, 02/06/2019 - 12:03pm

wrote a couple of days ago about America’s best and worst cities for pro-market policy, and I noted that there are several rankings of economic liberty for statesand nations.

But what if you want to know the place with the most overall freedom? In other words, what is the most libertarian place to live based on both economic liberty and personal liberty?

If you don’t mind a bit of travel, the answer is New Zealand.

For those who prefer to stay in the United States, Will Ruger and Jason Sorens periodically crunch numbers to calculate Freedom in the 50 States.

Their previous edition had New Hampshire in first place, so let’s take a look at the newest version.

This 2018 edition of Freedom in the 50 States presents a completely revised and updated ranking of the American states on the basis of how their policies promote freedom in the fiscal, regulatory, and personal realms. …More than 230 policy variables and their sources are now available to the public on a new website for the study. …the 2018 edition provides annual data on economic and personal freedom and their components back to 2000. …Freedom in the 50 States is an essential desk reference for anyone interested in state policy and in advancing a better understanding of a free society.

The publication is loaded with data, as you’ll see from the following charts.

To put all this data in context, the report separately calculates fiscal freedom, regulatory freedom, and personal freedom.

We’ll start with the fiscal section, which includes variables about taxes and spending, as well as other measures such as debt and government employment.

For those interested, the report has plenty of analysis and explanation about the variables that are used and the weights that are assigned.

Most of us, though, simply want to see which states get good scores and which ones get bad scores.

I’m not surprised to see that zero-income-tax states – led by Florida – are at the top. And I’m also not surprised that flat-tax states – led by Pennsylvania – also are well represented.

I assume nobody is surprised to see New York in last place.

Now let’s shift to regulatory policy and see where the burden of red is most onerous.

This part of the ranking covers a range of issues, most notably controls on land use and restrictions on the use of markets in health care.

But there are other important variables, including the extent and burden of occupational licensing.

Indeed, before getting to the overall rankings for regulation, I want to share those scores because it is so galling and upsetting that politicians impose barriers that limit the freedom of people to earn income.

Colorado deserves hearty applause for being at the top, edging out Idaho by a narrow margin. And even though Vermont was near the bottom of the fiscal rankings, it merits a mention for being good on the issue of occupational licensing.

California deserves hearty condemnation for being in last place. And I’m not surprised to see states like Illinois and New Jersey near the bottom.

I’m very disappointed, however, that Texas and Florida have such a dismal record.

But let’s not fixate on just one of the variables. If we look at the rankings for all regulatory issues, Kansas is in first place, followed by Nebraska and Idaho.

The worst states (hardly a surprise) are New York, New Jersey, and California.

Now let’s combine fiscal policy and regulatory policy and see the report’s ranking for overall economic freedom.

Florida is in first place by a comfortable margin, followed by three other zero-income-tax states (though the absence of a state income tax does not guarantee a good score, as you can see from the poor performance of Alaska, Wyoming, and Washington).

New York wins the Booby Prize by a large margin.

Hawaii and California also stand out in a bad way.

The above table tells us which state enjoys the most economic liberty, but that doesn’t tell us where to live if you want the maximum amount of overall freedom.

To identify the nation’s most libertarian state, we also need to look at rankings for personal liberty.

This means, in part, whether people are harassed and persecuted for victimless crimes, but it also includes measures of educational freedom and gun rights.

Speaking of which, I can’t resist sharing the data on which states most respect the 2nd Amendment.

Kansas gets the best score, followed by Vermont(!), Arizona, Idaho, and Mississippi.

Hawaii is the worst state by a significant margin and we (again) find California near the bottom.

Another issue which is near and dear to my heart is asset forfeiture.

I am nauseated and disgusted that governments are allowed to steal property from people who have not been convicted of any wrongdoing.

So let’s applaud New Mexico, Nebraska, and New Hampshire for putting limits on this awful practice.

And let’s heap unending score on Rhode Island for having the nation’s worst track record on this issue.

But what happens when we combine all issue relating to personal freedom?

Well, that’s exactly what the authors did, which means we get a comprehensive ranking for personal freedom. I’m not surprised that Nevada, Colorado, and New Hampshire are in the top 5, but I’m surprised to see that Maine leads the pack.

Likewise, I guess I’m not too surprised that Texas and other bible-belt states are socially conservative.

But Hawaii next to last?!?

In any event, the report combines economic freedom and personal freedom and tells us which state could be considered the most libertarian.

And the winner is the Sunshine State of Florida, followed by New Hampshire, Indiana, Colorado, and Nevada. I’m surprised that Florida does so well, though some of the other high-scoring states make sense (especially when I look at data on who reads these columns).

By contrast, the most dirigiste state is New York. That doesn’t surprise me, and I’m also not shocked by some of the other bottom dwellers.

I’m tempted to end here since we’ve already surveyed so much information.

But there’s one final chart which hopefully should be very fascinating.

We just looked at the data on how states currently rank for overall liberty.

This final selection tells us which ones have been moving in the right direction and wrong direction since the turn of the century.

Kudos to Oklahoma for adopting a lot of good reform. Same for New Mexico. And it’s also interesting to see that several states from the Great Lakes region boosted their scores (with Illinois being a laggard, of course).

Vermont has the dismal distinction of having moved the fastest in the wrong direction (No wonder it’s the Moocher State).

Hawaii also deserves an unfavorable mention, while the deterioration of New Jersey and New York is hardly a surprise.

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Image by SiBr4, licensed under CC BY-SA 3.0.

The Rich Pay More with Lower Tax Rates

Tue, 02/05/2019 - 12:27pm

Mark Perry of the American Enterprise Institute is most famous for his Venn diagrams that expose hypocrisy and inconsistency.

But he also is famous for his charts.

And since I’m a big fan of sensible tax policy and the Laffer Curve, we’re going to share Mark’s new chart looking at the inverse relationship between the top tax rate and the share of taxes paid by the richest Americans.

Examining the chart, it quickly becomes evident that upper-income taxpayers started paying a much greater share of the tax burden after the Reagan tax cuts.

My left-leaning friends sometimes look at this data and complain that the rich are paying more of the tax burden only because they have grabbed a larger share of national income. And this means we should impose punitive tax rates.

But this argument is flawed for three reasons.

First, there is not a fixed amount of income. The success of a rich entrepreneur does not mean less income for the rest of us. Instead, it’s quite likely that all of us are better off because the entrepreneur created some product of service that we value. Indeed, data from the Census Bureau confirms that all income classes tend to rise and fall simultaneously.

Second, it’s not even accurate to say that the rich are getting richer faster than the poor are getting richer.

Third, one of the big fiscal lessons of the 1980s is that punitive tax rates on upper-income taxpayers backfire because investors, entrepreneurs, and business owners will choose to earn and report less taxable income.

For my contribution to this discussion, I want to elaborate on this final point.

When I give speeches, I sometimes discover that audiences don’t understand why rich taxpayers can easily control the amount of their taxable income.

And I greatly sympathize since I didn’t appreciate this point earlier in my career.

That’s because the vast majority of us get the lion’s share of our income from our employers. And when we get this so-called W-2 income, we don’t have much control over how much tax we pay. And we assume that this must be true for others.

But rich people are different. If you go the IRS’s Statistics of Income website and click on the latest data in Table 1.4, you’ll find that wages and salaries are only a small fraction of the income earned by wealthy taxpayers.

These high-income taxpayers may be tempting targets for Alexandria Ocasio-Cortez, Elizabeth Warren, Bernie Sanders and the other peddlers of resentment, but they’re also very elusive targets.

That’s because it’s relatively easy – and completely legal – for them to control the timing, level, and composition of business and investment income.

When tax rates are low, this type of tax planning doesn’t make much sense. But as tax rates increase, rich people have an ever-growing incentive to reduce their taxable income and that creates a bonanza for lawyers, accountants, and financial planners.

Needless to say, there are many loopholes to exploit in a 75,000-page tax code.

P.S. There’s some very good evidence from Sweden confirming my point.

The Best and Worst Cities in the United States

Mon, 02/04/2019 - 12:06pm

There are several options if you want to measure economic freedom and competitiveness among nations (rankings from the Fraser InstituteHeritage Foundation, and World Economic Forum).

You also have many choices if you want to measure economic freedom and competitiveness among states (rankings from the Tax FoundationMercatus Center, and Fraser Institute).

But there’s never been a good source if you want to know which local jurisdiction is best.

Dean Stansel of Southern Methodist University is helping to fill this gap with a report looking at the relative quality of government policy in various metropolitan statistical areas (MSAs encompass not just a city, but also economically relevant suburbs).

…the level of economic freedom can vary across subnational jurisdictions within the same country (e.g., Texas and Florida have less-burdensome economic policies and therefore much greater economic freedom than New York and California). However, levels of economic freedom can also vary within those subnational jurisdictions. For example, the San Jose metro area has substantially higher economic freedom than Los Angeles. The same is true for Nashville compared to Memphis. In some places, metropolitan areas straddle state borders, skewing state-level economic data. This report quantifies those intra-state disparities by providing a local-level version of the EFNA, ranking 382 metropolitan areas by their economic freedom levels.

So who wins this contest?

Here are the five most-free MSAs. It’s worth noting that all of them are in states with no income tax, which shows that good state policy helps.

What if we limit ourselves to large cities?

Here are the five most-free MSAs with population over 1 million. As you can see, Houston is in first place and zero-income-tax Texas and Florida are well represented.

Now let’s shift to the localities on the bottom of the rankings.

Which MSA is the worst place for economic freedom in America?

Congratulations to El Centro in California for winning this booby prize. As you can see, jurisdictions in New York and California dominate.

What if we look are larger jurisdictions, those with over 1 million people?

In this case, Riverside-San Bernardino-Ontario is the worst place to live.

Though if you want to focus on big cities, the NYC metro area deserves special mention.

Now let’s consider why economic freedom matters.

I’ve shared charts showing how more economic freedom leads to more prosperity in nations.

The same thing is true for states.

So you shouldn’t be surprised to discover that it also is true for metro areas.

Last but not least, here’s a map showing freedom in all MSAs.

I’m not surprised to see so much red in California and New York, but I didn’t realize that Ohio (thanks for nothing, Kasich), Oregon, and West Virginia were so bad.

And the good results for Texas and Florida are predictable, but I didn’t think Virginia would look so good.

———
Image by Mapswire, licensed under CC BY 4.0.

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Our core values are:

  • Defend the Constitution
  • Fiscal Responsibility
  • Limited Government
  • Free Markets
  • God and Country

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