Sticking with tradition (2023, 2022, 2021, 2020, 2019, etc), it’s time for my annual column summarizing the best and worst things that happened during the year.
Let’s start with the good developments. And it should be obvious what will be my first item.
Milei’s policy and economic success – The election of Javier Milei as president of Argentina was shocking. Sort of like if New York elected Rand Paul as governor.
What’s not shocking, though, is that President Milei’s policies have been successful.
The reason this is great news is that everyone (including me) surely thought a few years ago that Argentina was a hopeless case. After all, voters had been hopelessly corrupted by decades of statism, making the country an example of the 17th Theorem of Government.
Instead, Argentina is now going to be a role model for reformers in other nations.
Kamala Harris lost – I don’t know if the Vice President is actually a lightweight and I don’t care.
What I do know is that she is a doctrinaire statist with a terrible policy agenda. If she has won last month and Democrats won control of Congress, we may have been victimized by her version of Biden’s awful Build Back Better agenda.
Or worse, such as her absurd plan to tax unrealized capital gains.
The country was spared.
Louisiana flat tax – In recent years, we’ve had very good news at the state level with regards to school choice.
We’ve also had good news regarding lower tax rates and tax reform at the state level.
But you would be wrong. The clowns on Capitol Hill recently voted to expand Social Security benefits for state and local bureaucrats, thus allowing that group to have a special ability to double-dip at taxpayer expense.
So I suppose I should be grateful that Norway’s politicians are helping to confirm my arguments. They imposed a big increase in their wealth tax that is backfiring in a spectacular fashion.
I’m sort of cheating with this item. The wealth tax increase was not enacted this year. Instead, what we’ve seen is the disastrous impact of that change.
Not exactly encouraging news for libertarians, classical liberals, and small-government conservatives. But maybe, just maybe, there’s another Reagan in our future (or a Javier Milei).
Today let’s consider the track record of the just-deceased Jimmy Carter.
On net, he was not a good president. As you can see from this table, his statist policies outweighed his good policies (though, unlike Biden, he actually had some good policies).
Here are a few additional thoughts.
Inflation was so bad under Carter that it gets a double-weighting. It would have been triple-weighted, but Carter belatedly realized he screwed up and eventually replaced his bad Federal Reserve Chairman with a good Federal Reserve Chairman.
Creating new bureaucracies is a very bad step, though it’s important to understand that the federal government was already involved in education and energy. By creating two new departments, Carter was mostly making a symbolic mistake rather than a substantive mistake.
There’s also no mention of trade for the same reason. Carter didn’t do anything good, but he also didn’t do anything bad.
Carter’s biggest positive accomplishment was transportation deregulation. I probably should have double-weighted it.
Carter was a somewhat incoherent mess on energy regulation.
Since I mentioned that Carter’s biggest accomplishment was transportation regulation, let’s look at some excerpts from a column earlier this year in the Wall Street Journal.
Authored by former Texas Senator Phil Gramm (who was a Democratic member of the House of Representatives during the Carter Administration, the column elaborates on Carter’s good work on reducing intervention.
Jimmy Carter…doesn’t get enough credit for the quarter-century economic boom from 1983 to 2008 and the underlying resilience of the economy since. Without Mr. Carter’s deregulation of airlines, trucking, railroads, energy and communications, America might not have had the ability to diversify its economy and lead the world in high-tech development… The Carter deregulation helped fuel the Reagan economic renaissance and continues to make possible the powerful innovations that remake our world. The Airlines Deregulation Act of 1978, the Motor Carrier Act of 1980 and the Staggers Rail Act of 1980 unleashed competition and spawned the invention and innovation that gave America the world’s most efficient transportation and distribution system. The cost of flying a mile declined by half and air travel became a mainstay of American life. The logistical cost of moving goods shrank as a share of gross domestic product by 50%. …analysis based on hard facts showing that government policies harm the country are repeatedly crushed in Washington by the power of vested interest. It was Mr. Carter who took on the “Iron Triangle” of established business interests, unions and government and carried the political scars he suffered in defeating them. …Mr. Carter…gets too little credit for making our country more competitive.
Finally, I can’t resist mentioned Carter’s best accomplishment. He paved the way for Ronald Reagan.
Six years ago, I showed that the United States would be as poor as Mexico if there had been 1-percentage point less annual growth over the past 125 years.
The entire video is worth watching, but if you don’t have 40 minutes of spare time, I set the timer to start at 30:42 because that’s when Stossel and Norberg begin a 5-minute discussion of why economic growth is important.
And if you’re very limited in your time, advance the video to 33:28. That’s when Norberg points out that Sweden today would be as poor as Albania if there had been 1-percentage point slower growth during the free-market period (I assume beginning in 1870) when Sweden began to get rich.
To confirm this assertion, I went to the Maddison database and did the calculations. As expected, Johan was correct.
I can’t resist making a few other observations about the chart.
Notice the big drop in Swedish per-capita GDP about 1990. If you watch the full video. Johan explains that this was the culmination of Sweden’s post-WWII experiment with big government.
…we don’t need perfect policy to get more prosperity. The economy simply needs “breathing room,” which will exist so long as politicians don’t get too crazy about over-taxing, over-spending, and over-regulating. After all, even small differences in annual economic growth compound into big changes in living standards.
I followed last year with my Sixteenth Theorem of Government, which said the same thing but hopefully in a more pithy and memorable way.
Today, I want to show that the economy actually is innovating faster than government is suffocating. I already did this in 2021, but let’s look at some new data.
We’ll start with this chart from Professor Chris Freiman of West Virginia University. As you can see, data from the St. Louis Federal Reserve shows that average inflation-adjusted income in the United States has been rising over time.
In other words, the hockey stick is still heading in the right direction.
By the way, the above chart shows “median” income rather than “mean” income, which means the numbers are not influenced by very high incomes for a handful of rich people.
Now that we’ve looked at income, let’s shift to wealth.
Here’s a chart from Professor Jeremy Horpedahl at the University of Central Arkansas. He uses Federal Reserve data to show that average net worth has reached record levels for every segment of the population.
All of this data confirms that the economy is not a fixed pie. Our friends on the left who think that poverty is caused by rich people being rich suffer from the zero-sum fallacy.
The first chart today shows that it is possible for everyone to earn more income at the same time.
And the second one shows it is possible for everyone to accumulate more wealth at the same time.
At this point, folks on the left sometimes shift their argument. They’ll grudgingly admit that a growing economic pie enables everyone to have a bigger slice, but they’ll complain that it’s somehow wrong for a segment of the population to have a lot of income or a lot of wealth.
In other words, they’re motivated by resentment. And oftentimes that resentment leads them to support policies designed to punish success.
All I ask is that they acknowledge and admit that the policies that they want will reduce economic performance.
Interestingly, honest leftists in the tradition of Arthur Okun admit this tradeoff. But what they don’t seem to understand is that their approach will lead to lower incomes for everyone, not just rich people.
P.S. I try to convince my lefty friends (see here, here, here, and here) that they should focus on helping poor people rather than hurting rich people.
Here’s my assessment. Plenty of anti-growth policies over the past four years, but absolutely nothing in the pro-growth column.
This is embarrassing. Even Barack Obama, FDR, George W. Bush, and Woodrow Wilson managed at least one good policy during their tenure (even if it happened in spite of them).
By contrast, there’s nothing positive to say about Biden’s time in office.
If I wanted to make Biden look less worse, I would remove inflation since the bad monetary policy started under Trump. But since it continued under Biden, I think it belongs as one of his anti-accomplishments.
I also could remove Trump’s protectionism from the list since that was, obviously, Trump’s fault. But Biden and his people made a deliberate decision to continue those bad policies, so that counts as an anti-accomplishment.
By the way, I was going to wait until January 20 of next year to write this column, but I couldn’t resist addressing the issue today because I got agitated reading a column in the Washington Post by Eduardo Porter.
He wrote that Biden had good policies and that it’s a mystery how Trump won. I’m not joking. Here are some excerpts.
The $1.9 trillion American Rescue Plan at the dawn of Joe Biden’s presidency…looked like exactly the right bet… The burst of industrial policy that followed (the Chips and Science Act, the bipartisan infrastructure law, the Inflation Reduction Act) appeared equally adroit… His administration’s pugilistic approach to antitrust enforcement was a sensible way to build Biden’s credibility as a champion of the working stiff, ready to take on the Man. Even the language about rebuilding the economy, “from the bottom up and the middle out,” had a promising ring, befitting the sense of grievance directed at Washington’s long embrace of the trickle down. …a week before the election, the White House released a report congratulating itself for the economy’s stellar growth… And yet it all came to naught. Only 18 percent of voters who identified the economy as their most important concern chose Kamala Harris, according to exit polls. More than two-thirds of voters deemed the state of the economy to be not good or poor, and 70 percent of them picked Trump.
Porter wants readers to conclude that Biden delivered good policies, but he conveniently fails to provide compelling evidence.
He claims voters should be happy that inflation came down while ignoring the fact that it went up in the first place.
He claims voters should be happy about the unemployment rate, but he ignores the equally important employment rate.
Most important, he fails to address the elephant in the room, which is the fact that families, at best, were on a treadmill during the Biden years. There was little of no increase in household income after adjusting for inflation.
P.S. There must be mass delusion at the Washington Post. One of the paper’s reporters claimed earlier this year that Biden produced a “booming” economy. And the New York Timesisn’tanybetter.
P.P.S. Regarding presidential rankings on economic policy, only Ronald Reagan and Bill Clinton had unambiguously good records, while Trump’s first term was an incoherent mix of good and bad. I didn’t do an official ranking of the Bush 41 (George H.W. Bush), but he would have a dismal score (like his son).
But those countries do have big welfare states. And that means stifling tax burdens.
And those harsh taxes don’t just apply to rich taxpayers. Lower-income and middle-class people also get pillaged.
I’ve already explained that punitive value-added taxes are a major burden for ordinary people in Europe, and residents of Scandinavian nations get hit especially hard.
Today, let’s look at how they also get hit hard by taxes on income.
We’ll start by looking at a report from the Tax Foundation, which includes this chart showing top tax rates in Denmark, Norway, Sweden, and the United States.
As you can see, the United States has an advantage over Denmark and Sweden, while oil-rich Norway actually has a lower top tax rate.
Overall, a modest win for the United States.
Now let’s look at a different chart from the Tax Foundation’s report. As you can see, there’s a huge advantage for America when we compared the income levels where top tax rates take effect.
In the United States, you have to earn a lot of income to be hit by the top rate, but people with incomes only slightly above the average pay top tax rates in Denmark, Norway, and Sweden.
Here are some excerpts from the report.
…tax rates are not necessarily the most revealing feature of Scandinavian income tax systems. …Scandinavian countries tend to levy top personal income tax rates on (upper) middle-class earners, not just high-income taxpayers. For example, Denmark’s top statutory personal income tax rate of 55.9 percent applies to all income over 1.3 times the average income. From a U.S. perspective, this means that all income over $82,000 (1.3 times the average U.S. income of about $63,000) would be taxed at 55.9 percent. …Norway’s top personal tax rate of 38.2 percent applies to all income over 1.5 times the average Norwegian income. Sweden’s top personal tax rate of 52.3 percent applies to all income over 1.1 times the average national income. In comparison, the United States levies its top personal income tax rate of 43.7 percent (federal and state combined) at 8.5 times the average U.S. income (at around $530,000). Thus, a comparatively smaller share of taxpayers faces the top rate.
I could end the column at this point and unambiguously state that the American tax system is better (or, to be more accurate, less worse).
But there’s another chart that’s worth considering.
Here’s OECD data on Average annual wages. As you can see, the United States has a non-trivial advantage over the three Scandinavian nations featured in the Tax Foundation’s report.
This means that if Scandinavian tax rates were imposed on equivalent income levels in America, the top tax rates would hit people making average incomes.
One final point. Norway and Sweden also pillage their ordinary citizens with onerous social insurance taxes (akin to FICA payroll taxes in the United States.
Both Norway and Sweden levy high social security contributions, raising revenue amounting to approximately 9 percent of GDP in 2021. In the United States, social security contributions (payroll taxes) raise revenue of about 6 percent of GDP. In Norway and Sweden, social security contributions—employer and employee side combined—account for 18.8 percent and 29.2 percent of the total labor costs of a single worker with no children earning an average wage, respectively. This compares to 14.6 percent in the U.S. Only Denmark does not impose social security contributions to fund its social programs. Instead, it uses a share of its individual income tax revenue for these programs.
The bottom line is that a big welfare state means big taxes on ordinary people.
Let’s start with a red vs. blue greeting that is very similar to something I shared in 2009.
Next, here’s an excerpt from a Babylon Beecolumn about a Christmas present from Joe Biden.
IRS agents kicked off a new holiday tradition this week as they began nationwide canvassing of taxpayers’ homes, sliding down their chimneys in search of undeclared gifts worth $600 or more. Terrence Poole, Special Agent in Charge of Joy-Quashing, explained the agency’s actions, saying, “We understand that people get caught up in the spirit of the season and all that. But we want to be a constant reminder that celebrating the birth of the Savior of the universe is not more important than giving an account to the government for every single thing you have.” …Agents will be searching homes during the entire holiday season. Agent Poole continued, “We’ll usually be entering through the chimney. For homes that don’t have a chimney, we’ll either be sending a magic elf through the keyhole or else using an armored personnel carrier equipped with a battering ram to breach a convenient wall. Yeah, one of those. Probably the second one.”
Here’s something for the rabid libertarians reading today’s column.
Let’s now look at two ways showing how taxes play an unexpected but important role.
First, it may be that taxes determined where Jesus was born. Here are some excerpts from an article by Steven Chung.
Chapter 2 of the Gospel of Luke states that Caesar Augustus issued a decree that the world should be taxed based on their ancestral lineage. So Joseph and Mary traveled from Nazareth to Bethlehem because Joseph was descended from King David. There, Mary gave birth to Jesus in a manger. …Assuming a census existed at the time of Jesus’s birth, how would it help with taxation? The Roman Empire’s tax revenue mainly came from property taxes, poll taxes, tribute from conquered lands, and various sales taxes and duties from ships. …It is not clear as to what information had to be disclosed in the census. If only the bare minimum was needed, then the census was probably useful for poll tax purposes while a thorough disclosure of financial information suggests it would be used for income or wealth taxes.
Second, Alex Muresianu of the Tax Foundation reminds us of the subtle role of taxes in Die Hard.
It’s Christmas time, and for millions of families around the country, that means revisiting some classic holiday movies. For some, that…includes Die Hard. …So, what could Die Hard have to do with taxes? …For those in need of a refresher, it’s 1988, and Hans Gruber develops a cover as a German extremist and takes several employees of the Nakatomi Corporation hostage. …Of course, Gruber is not really an ideologue—he’s a common thief… Gruber will use various aspects of the government’s response to access the Nakatomi Corporation’s vault—and its $640 million in bearer bonds—abscond with the loot, destroy the building, and disappear, knowing he will be presumed dead in the rubble. …What is a bearer bond? …Historically, bonds were sold with a physical certificate that came with physical coupons representing interest payments owed. Bearer bonds included these physical coupons, which…were effectively anonymous. The issuer kept no record of who owned the bond; the coupon holder would just take coupons to a bank location to cash out.
And because bearer bonds were anonymous, governments had a hard time levying taxes on them, and the article explains that some tax changes in 1982 basically eliminated such bonds.
Which means, of course, that a modern-day Hans Gruber would have to figure out how to steal something else.
I’ll close with a libertarian twist on the story. Politicians demonized bearer bonds because they get upset if people have ways of escaping onerous taxes.
Well, there’s another financial instrument that also is anonymous. It’s called cash.
All of that is impressive, albeit in a bad way. Combine her hypocrisy with her statism (and her fraudulent career climb in academia) and she could be a poster child for oleaginous politicians. Not just for one year. For an entire century!
But I just saw a story about an elected official in Texas that makes me think the 2024 award is not a done deal.
Here are some jaw-dropping excerpts from a report by KTRK in Houston.
Serious questions are coming to light about Harris County Tax Collector Ann Harris Bennett’s job performance following a Houston Chronicle report showing the two-time elected official may not have shown up to work for years. Bennett’s office collects property taxes, processes vehicle registrations, and manages voter registration and records for Harris County’s more than 2.5 million registered voters. However, public information requests from The Chronicle show she hasn’t swiped her badge to enter the office or any county facility since 2020. …Bennett has not been active online, sending a total of 18 emails since January. …Bennett earned a little over $171,000 in salary last year. …Experts and former holders of the office…criticize Bennett for not leading in public during times of turmoil and say voters should be concerned an elected official making a county salary may not be coming to work.
I imagine Ms. Bennett would claim she was “working from home,” but 18 emails in one year hardly sounds like she was active.
In Part III, let’s look at the degree to which state taxpayers are exposed to big unfunded liabilities for “Other Post-Employment Benefits” such as health care and life insurance.
The American Legislative Exchange Council issued a report earlier this year that calculated the state-by-state burdens. Hawaii is the worst of the worst, followed by New Jersey and Alaska. South Dakota and Nebraska do the best job of protecting taxpayers, followed by Kansas.
But what does is mean to be the “worst of the worst”?
The ALEC report calculated that the burden for taxpayers in Hawaii, New Jersey, and Alaska is nearly $20,000 for every man, woman, and child in those states.
That compares to zero burden in Nebraska and South Dakota and almost zero in Kansas.
The nationwide burden of OPEB is now over $1 trillion according to the report.
Here are some highlights (lowlights would be a better term) from ALEC.
Other post-employment benefits (OPEB), also known as the “trillion-dollar acronym,” covers all the benefits a retired public employee is eligible to receive in retirement that are not a pension. These benefits include health insurance, life insurance, Medicare Supplement Insurance, and other benefits. …unfunded OPEB liabilities, now totaling over $1.14 trillion, just under $3,500 for every man, woman, and child in the United States. …State OPEB plans face many of the same problems as public sector pension plans. Without real reforms, defined benefit OPEB plans will place a severe burden on taxpayers. By offering a range of defined contribution options as well as implicit subsidies by pooling retirees together with active employees, states can keep the promises made to both public employees and taxpayers.
The solution (both for pensions and OPEB) is for states to shift to systems based on “defined contribution” rather than “defined benefit.”
By definition, DC systems don’t have unfunded liabilities. Here’s a summary of the difference between the two approaches put together by the South Carolina-based Palmetto Promise.
The ALEC report notes that the two states with no unfunded liabilities use the DC approach.
Nebraska and South Dakota are the ideal models for state retiree health plans. Plan structures in both states now require current employees and retirees to purchase an HSA, where employees and retirees make tax-free contributions and the states match contributions up to a certain amount as well.
The report also praises Iowa, Indiana, and North Carolina for reforms moving in the right direction.
I’ll conclude by warning that columns about state and local unfunded liabilities may not be overly exciting, but there are big implications. At some point, reckless states such as Illinois and New Jersey are going to suffer a fiscal crisis and some politicians in Washington are going to want to provide bailouts.
Today, courtesy of the good work of Geoffrey Lawrence, Jordan Campbell and Mariana Trujillo at Reason, let’s look at which cities in America have dug very deep holes for taxpayers.
The Reason experts put together the numbers for America’s 100-largest cities. On a per-capita basis, Chicago is far and away the most irresponsible big city (hardly a surprise), followed by Portland and New York City.
By the way, both today’s column and yesterday’s column are focusing only on pension debt. Many state and local governments also have significant unfunded liabilities for other fringe benefits such as health care for retired bureaucrats and I’ll write on that topic, perhaps as early as tomorrow.
Sticking with the topic of pension debt, there are three points to consider. The first two are simple and straightforward.
First, it is a form of fraud to promise future benefits without also providing the revenue to meet those promises.
Second, this is why states should migrate to defined-contribution retirement systems rather than defined-benefit schemes.
But here’s the issue that most people don’t fully appreciate.
Third, politicians are making long-term spending commitments while simultaneously driving away the taxpayers needed to pay for those promises.
Let’s use the worst state and the worst city as an example. Migration data shows that people are escaping Illinois (including lots of people escaping from the Windy City).
But what matters most is who is leaving. IRS data on migration shows that it is the people paying taxes who are leaving. And that’s true for Illinois and its true for Chicago.
So what’s going to happen 1o or 20 years from now when Chicago’s pension bills are piling up and there are lots of takers but not enough makers?
Margaret Thatcher already told us the answer to that question.
One advantage of that approach is that, by definition, there are no unfunded liabilities with “DC” accounts. Your retirement income is based on how much money you save and how wisely the money is invested.
Many state and local bureaucrats, however, have defined-benefit pension systems. These “DB” systems are prone to systemic risk because politicians can promise lots of future benefits without setting aside the money to finance those goodies.
And that is a common problem, as shown by this map from the Tax Foundation based on 2019 data. No state at that time had a fully-funded system (based on how much money is set aside compared to have much pension benefits that have been promised).
Dark blue states are at least close to being fully funded. The worst states are red, followed by pink and purple.
It’s no surprise to see that Illinois and New Jersey are the worst of the worst for unfunded liabilities.
Some readers may be surprised, though, to see that Kentucky and Indiana have a significant problem.
One thing this map does not do, however, is to measure the overall fiscal burden of unfunded liabilities. And that matters since it might be better for taxpayers to be in a state with a larger share of unfunded liabilities but a less extravagant pension system (I’d rather owe someone 50% of $10 instead of 10% of $100).
So here’s a visual from the folks at Reason showing per-capita net pension liabilities as of 2022. On this basis, Illinois is the worst of the worst, followed by Connecticut and New Jersey.
Kentucky also is very bad, though Indiana doesn’t look nearly as bad when using this measure.
It’s also important to consider a state’s ability to finance it’s unfunded liabilities. For instance, per-capita income in New Jersey is higher than it is in Kentucky, so the relative fiscal burden in Kentucky may be higher.
The good news is that the vast majority of states have relatively low unfunded liabilities – less than $2,000 per resident. It’s also good news that some states now have fully funded pensions, meaning more money is now set aside than is owed (largely because the stock market has increased in value since the Tax Foundation put together a map based on 2019 data).
That good news can quickly become bad news, though, if there is a recession and the stock market declines. Which is why DC systems are better than DB systems from the perspective of taxpayers.
P.S. Back in 2018, I conducted a poll asking readers which state would be the first to go bankrupt. Based on the data in today’s column, readers may have been wrong to vote California as the second-most likely state to go belly up. Though pension liabilities are not the only reason a state might go bankrupt. Perhaps readers think the exodus of businesses and taxpayers is going to saddle California with too many takers and not enough makers.
Well, he’s not even president yet and we already have a very worrisome sign.
But before telling you what is worrisome, let me share two pieces of background information.
First, state and local government bureaucrats enjoy much higher levels of compensation than workers in the productive sector of the economy.
I’ve documented the difference in the past, but here’s a chart based on the latest numbers. And notice that the biggest advantage for state and local bureaucrats is their benefits.
Regarding their benefits, some state and local bureaucrats are exempt from participating in Social Security because they get very generous pensions from their government jobs.
That’s the first bit of background info. The second bit of background info is that America’s Social Security system faces a giant long-run shortfall.
Failure to address the problem will mean either massive tax increases, big benefits cuts, or ever-larger levels of red ink.
Now let’s connect the dots regarding Trump and these two bits of background information.
Both the House and the Senate are pushing to expand an already-bankrupt Social Security program by giving extra money to retired state and local bureaucrats.
I’m not joking. Here are some excerpts from a column by Andrew Biggs of the American Enterprise Institute.
The United States Senate is approaching a vote on the so-called “Social Security Fairness Act,” legislation that would eliminate adjustments to Social Security benefits for a select of public sector employees who are not covered by Social Security but instead participate in alternate government pension systems… The Social Security Fairness Act overwhelmingly passed the House in early December and on December 18 cleared a key Senate procedural vote by 73 to 27. …half a century ago, Congress realized that Social Security benefit windfalls for public sector employees were costly, unnecessary and unmerited. And so in 1983 Congress established a Social Security benefit rule called the Government Pension Offset (GPO). The GPO reduces the Social Security spousal supplement paid to a retiree with a non-covered pension by two thirds of the pension’s amount. …the Social Security Fairness Act would repeal the Government Pension Offset and restore the full quarter-million dollar lifetime windfall… It is one thing for Congressional Democrats to vote to repeal the Government Pension Offset. Public sector employees are core supporters of the Democratic Party and such transactional politics, while wrong, aren’t exactly unexpected. But for Republicans to restore potentially massive Social Security windfalls to retired public employees who may not have paid a penny into Social Security and who already have high-quality government pension plans, at the cost of nearly $200 billion over 10 years…, fund is a travesty of both fairness and fiscal conservatism.
Eric Boehm of Reason has a similarly hostile assessment. Here are some excerpts from his article.
The Senate is reportedly set to vote on a bill boosting Social Security payouts to public sector workers who receive pensions and did not pay taxes to support Social Security while working in the public sector… If it passes, the proposal will cost nearly $200 billion… That’s because this change will obligate the payment of more Social Security benefits to people who are not paying into the system. …Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said in a press release. “…it just restores windfalls for folks who have other government pensions. What an incredulous set of events.” …In short: By allowing public workers to double-dip into retirement benefits they did not contribute towards, this bill will make everyone who did pay for Social Security worse off.
Last but not least, here are some passages from the Wall Street Journal‘s editorial on the topic.
Republicans claim to want to reduce the budget deficit, but then why are they joining Democrats in raiding Social Security for nearly $200 billion in extra benefits for government workers? The House last month passed the misnamed Social Security Fairness Act, 327-75. Senate Majority Leader Chuck Schumer vowed at a rally with union leaders last week to hold a vote on the bill this week. …What’s unfair is rewarding high-paid government workers with larger Social Security benefits than they earned. That’s essentially what the bill would do. …Many state and local government employees who receive pensions don’t pay into Social Security. Instead they earn pensions that are far more generous than the average Social Security benefit. …We know Republicans are phonies on spending restraint, but handing a huge victory to unions like the teachers and Afscme that back Democrats takes a special kind of political masochism. Please spare us any future whining about debt and deficits.
At this point, you’re hopefully thinking this is very bad policy. But you may also be wondering what this has to do with Trump.
The connection with Trump is that he has – or at least had – the power to stop this massive giveaway. All he had to do is say this is a ridiculous waste of money that enriches an already over-compensated group of bureaucrats and Republicans in the Senate almost surely would have voted no.
Instead, Trump said nothing and these 24 Republicans – including the soon-to-be Vice President! – voted to make America more like Europe.
By the way, House Republicans also behaved recklessly, with an even-greater percentage of them voting for this giveaway.
Trump also could have told them to vote no and they presumably would have obeyed.
The bottom line is that America’s grim fiscal outlook got worse during Trump’s first term and this latest episode of fiscal profligacy suggests it will also get worse during his second term.
Even though the Peronists still control the legislature, Milei has been somewhat successful in pushing his laissez-faire agenda. Over the past month, I’ve assessed his performance.
In Part 1 of this series, I showed how Javier Milei has done a great job shrinking the burden of government spending.
In Part III, I shared central government spending data to reveal that Milei has been outstanding rather than merely impressive.
In Part IV, I reviewed two of the major structural obstacles to Milei’s agenda of economic reform and national revival.
In Part V, I examined Milei’s efforts to reduce the suffocating impact of excessive regulation on Argentina’s economy.
In Part VI, I shared a video on his impact as part of a look at the country on the one-year anniversary of his inauguration.
Today, let’s look at what has happened to the economic status of poor people since Milei took office.
This is supposed to be his weakness. A web search generates dozens and dozens of stories about Milei’s budget cuts ostensibly causing a big spike in poverty.
And poverty did jump at first, as shown in this chart based on data from the Universidad Catolica Argentina (UCA). Especially between the final quarter of 2023 and the first quarter of 2024 (“pobreza” is regular poverty and “indigencia” is even worse).
Here’s some analysis of the data from Charles Lajoie.
…let’s see the UCA’s projections for the third trimester of 2024 (average of July, August and September) and the month of October 2024. …its microsimulations have projected a 46.8% poverty rate for the first period and a 44.6% poverty rate for October. We can also observe that the poverty rate for the fourth trimester of 2023 (average of October, November and December) was 45.2%, a higher rate than their latest projection. However, even this number is a bit misleading if used as the pre-Milei data point, since the poverty rate of the month Milei took office stood at 49.5%, according to the same university… Therefore, if these projections are accurate, the poverty rate was already 5.3 percentage points lower 2 months ago than at the beginning of Javier Milei’s presidency.
I’m not a big believer in drawing sweeping conclusions based on less than a year’s worth of data, but I will say that these numbers are much better than I would have predicted.
Milei is making radical changes and people losing government jobs and/or welfare benefits won’t necessarily have immediate success transitioning to the productive sector of the economy.
Especially since there’s also usually some short-run pain when an economy is weaned off the sugar high of easy money and inflation.
So I expected at least one year of bad economic news from Argentina before a rebound. Yet it seems the good news is already beginning to materialize.
Let’s now dig into some more numbers, this time from the Universidad Torcuato Di Tella.
Once again, there was an increase in poverty immediately after Milei took office. But now the trend is very positive.
Now let’s look at some more analysis from Charles Lajoie.
The Universidad Torcuato Di Tella has also projected a reduction of the poverty rate since December of 2023, their latest number indicating that the poverty rate for the bimester of October and November stood at 45.7%… Putting this together with the findings of the UCA, taking into account the fact that the latest estimate we have is a bimester starting 2 months ago and considering that nominal wage growth has outpaced inflation every single month from April to September according to official INDEC data (likely during the last 2-3 months as well since inflation has hit record lows and the economy is growing substantially again), I think it’s fair to say that it would be a quasi-impossibility for poverty to be higher than 49.5% at the moment. Poverty is almost undoubtedly lower today than when Milei first entered the Casa Rosada.
I’ll conclude with two observations.
First, Lagoie makes a persuasive case that poverty is lower today that when Milei took office. That’s very impressive, but what really matters is that he has changed the direction. Poverty was on an upward trajectory when he took office and now it’s declining.
Here’s an analogy that I used in an e-mail exchange about Milei with some leftist friends yesterday, I asked, “If you’re a copilot in a plane and the pilot has you hurtling toward a crash landing at 300 miles per hour and you decide to take the controls, will you instantaneously be climbing? Or will it take some time to arrest the fall and begin to ascend (especially if the pilot is still trying to crash the plane)?”
Just in case my point isn’t obvious, the Peronists (who still control the legislature and used to hold the presidency as well) are the suicidal pilot and Milei is the copilot trying to avert disaster.
My second observation is that we obviously will be able to more confidently assess Milei’s performance when we’re looking at several years of data. I hope he is able to make the changes Argentina needs. And if that happens, there’s no question we’ll have great results.
The new Human Freedom Index has been released and – just like last year – the “sensible nation” of Switzerland wins the gold medal as the jurisdiction with the highest level of economic and personal freedom.
Here are the world’s 20-freest nations (out of a total of 165 jurisdictions), with New Zealand and Denmark winning the silver and bronze medals. The United States ranks #17, tied with the United Kingdom, which is decent but not great.
The three worst nations for human freedom are all in the Middle East. Syria is last, followed by Yemen and Iran. Though hellholes such as Cuba and North Korea almost surely are worse, but they are not in the rankings because of inadequate data.
Before offering my observations on some of the findings, here are some passages from the report’s executive summary.
Human freedom deteriorated severely in the wake of the coronavirus pandemic. Most areas of freedom fell, including significant declines through 2022 in freedom of movement, expression, and association and assembly; and in sound money. After having fallen significantly in 2020 and further in 2021, human freedom increased in 2022 but remained well below its pre-pandemic level… On a scale of 0 to 10, where 10 represents more freedom, the average human freedom rating for 165 jurisdictions fell from 6.98 in 2019 to 6.76 in 2020 and to 6.73 in 2021, and then increased in 2022 to 6.82. On the basis of that coverage, 87.4 percent of the world’s population saw a fall in human freedom from 2019 to 2022, with many more jurisdictions decreasing (130) than increasing (28) their ratings and 7 remaining unchanged. …Jurisdictions in the top quartile of freedom enjoy a significantly higher average per capita income ($56,366) than those in other quartiles; the average per capita income in the least free quartile is $15,826. The HFI also finds a strong, positive relationship between human freedom and democracy, and between human freedom and a range of human well-being indicators including tolerance, charitable giving, life expectancy, and environmental health, among other measures.
I’ll now draw attention to three things from the report, two of them depressing.
The first depressing observation is that overall human freedom has declined in recent decades, as depicted by Figure 1 from the report.
For what it’s worth, the decline is due to an erosion in personal freedom. Average economic freedom scores have increased over time (to be more specific, declines in the western world have been more than offset by improvements in less-developed countries).
The second depressing observation is about Hong Kong.
As you can see from this next chart, that jurisdiction’s relative ranking has precipitously declined. It used to rank in the top 10 and now it has fallen to #50. Some of the decline is economic policy, but the big problem is a decline in personal liberty.
Now for an observation that is neither cheerful nor depressing. Here’s what the report said about how governments normally having a similar approach to both personal and economic liberty.
But normally is not always.
The correlation between the personal and economic freedom ratings is high (0.73). …Some countries ranked consistently high in both personal and economic freedom. …By contrast, some countries that ranked high on personal freedom ranked significantly lower in economic freedom. For example, Suriname ranked 41st in personal freedom but fell to 141st in economic freedom, and Argentina ranked 40th in personal freedom but 159th in economic freedom. Similarly, some countries that ranked high in economic freedom found themselves significantly lower in personal freedom. For example, Singapore ranked 2nd in economic freedom while ranking 79th in personal freedom; Bahrain ranked 34th in economic freedom but 156th in personal freedom.
Figure 3 shows the relationship between the two types of freedom.
P.S. I wrote last month that I’m looking forward to seeing Argentina enjoy a stunning increase in its future rankings for economic liberty. That will naturally boost its ranking for overall liberty as well.
P.P.S. I’m not expecting any meaningful changes in the score for the United States following Trump’s election. There may be positive changes in some areas, but those improvements will be offset by restrictions on freedom in other areas.
Some people say the Laffer Curve is the economic version of Goldilocks.
But instead of being a story about whether the porridge is too hot, too cold, or just right, it’s a story about whether tax rates are too high, too low, or just right.
But I’ve never liked that analogy because it implies the revenue-maximizing tax rate is “just right.”
The goal should be to set tax rates at the growth-maximizing level (raising the small amount of revenue needed to finance the legitimate and proper functions of government).
That being said, it is very instructive to examine research on the topic because even our leftist friends hopefully don’t want tax rates set so high that the government loses revenue.
As such, if the goal is revenue maximization, there’s a fascinating new study that has been published by the Scandinavian Journal of Economics.
The authors, Marie-Noëlle Lefebvre, Etienne Lehmann, and Michaël Sicsic, wrote a summary of their study for VoxEU. Here’s the issue they addressed.
Capital income taxation has re-emerged as a pressing issue, particularly with rising income inequality. …However, capital income taxation also induces more behavioural responses than labour income taxation, thereby diminishing its efficiency. …In a recent paper…, we contribute to a deeper understanding of capital income taxation, both theoretically and empirically, by estimating the ‘Laffer rate’ on capital income tax for France. The Laffer rate is the tax rate above which increasing the rate further would compress tax bases enough to reduce government revenue. We express the Laffer tax rate on capital income using direct elasticity (capital income response) and cross-elasticity (labour income response) to the net-of-tax rate on capital income. …The Laffer rate on capital income depends not only on the direct elasticity of capital income to its net-of-tax rate but also on the cross-elasticity of labour income to the net-of-tax rate on capital income.
And here are their key findings.
…the 2013 reform provides valuable insights… We therefore go further…by estimating elasticities of capital and labour income with respect to marginal net-of-tax rates (MNTRs) of both labour income and capital incomes. This allows us to estimate sufficient statistics to implement the Laffer formula. …Ignoring cross-response, this estimate leads to a Laffer rate on capital income of approximately 57%. …Moreover, we obtain statistically significant and slightly positive cross elasticities of labour income with respect to marginal net-of-tax rates on capital incomes. …These results suggest that the cross-elasticity is more likely explained by the impact of capital taxation on the incentive to work and save: an increase in the marginal tax rate on capital reduces the benefit of earning additional income from activity in order to save. Accounting for this cross-elasticity reduces the estimated Laffer rate significantly, to about 43%.
For non-wonky readers, what the authors basically found is that the revenue-maximizing tax rate on capital income is lower when you factor in the combined impact of changes in capital income and labor income.
How much lower? It depends on the degree to which taxpayers change their behavior, which is captured in Figure 2 from the VoxEU summary.
This is very interesting research.
I’ll add two points.
First, I’d be interested in how they define capital income. That’s not clear from the VoxEU summary and the actual study is behind an expensive paywall.
Second, I want to emphasize that it is pointlessly destructive to try to set tax rates at or near the revenue-maximizing level. This is because enormous amounts of private sector income are lost in exchange for very small amounts of additional tax revenue.
Regarding that second point, here are some excerpts from a study I summarized about a dozen years ago.
…labor taxes could be approximately doubled before getting to the downward-sloping portion of the curve. But notice that this means that tax revenues only increase by about 10 percent. …this study implies that the government would reduce private-sector taxable income by about $20 for every $1 of new tax revenue. …What about capital taxation? According to the second chart, the government could increase the tax rate from about 40 percent to 70 percent before getting to the revenue-maximizing point. But that 75 percent increase in the tax rate wouldn’t generate much tax revenue, not even a 10 percent increase. So the question then becomes whether it’s good public policy to destroy a large amount of private output in exchange for a small increase in tax revenue.
Here’s an even better explanation of why higher tax rates are a net loser for society, this one involving higher tax rates on labor income.
I’ll close with the observation that U.S. tax rates on capital income already are very high when you measure the tax bias against income that is saved and invested.
P.S. I have a three-part series (here, here, and here) on the prudent case for the Laffer Curve.
The Center for Freedom and Prosperity has a couple of videos (here and here) explaining how government intervention has messed up America’s healthcare system. And I gave a speech a few years ago that echoes those findings.
Now here’s a video making similar points from Professor John Cochrane.
I’ve decided to revisit this issue because Brian Thompson, the CEO of a health insurance company, was recently murdered. And the alleged assailant was a privileged young man who apparently thinks such businesses are greedy.
I’m sure the shareholders of such companies want to see profits, but the industry as a whole is not very successful at gouging consumers. Here’s a screenshot from Noah Smith’s analysis, which shows that neither Brian Thompson’s company nor the other big players earn much money.
If you read Smith’s article (and you should), you will see that he makes lots of interesting international comparisons and concludes that the big problem with U.S. health care is that providers are the ones charging high prices.
Smith then goes off the rails by suggesting the U.S. should have government-run health care, but that’s why I started this column with Prof. Cochrane’s video.
After all, we don’t want to jump out of the frying pan (America’s government-distorted health system) into the fire (anything akin to the awful systems in countries like Canada and the United Kingdom).
P.S. If you like videos that explain how government has screwed up the healthcare system, more are available here, here, here, here, and here.
But I want to focus on the second part of the tweet, which gives one of the possible reasons for why some people reject free enterprise.
Is it true that the haters of capitalism are merely resentful?
That’s obviously the case for some folks on the left, but let’s explore why.
In a column for Law & Liberty, Dominic Pino cites Friedrich Hayek’s hypothesis (which I also wrote about back in 2010) that a preference for redistribution may be a legacy of how human societies evolved.
The better explanation for the seemingly irrational rejection of capitalism comes from Friedrich Hayek, in what he calls the “atavism of social justice.” Hayek said that he spent ten years trying to figure out what “social justice” means and concluded it is “nothing more than an empty formula, conventionally used to assert that a particular claim is justified without giving any reason.” He traces the instinct towards social justice and against the market system to earlier stages of civilizational development, when humans lived in small bands of a few dozen people. In that context, “a unitary purpose, or a common hierarchy of ends, and a deliberate sharing of means according to a common view of individual merits” are beneficial characteristics to survival. In a modern commercial town of thousands of people, to say nothing of a globalized market economy, those characteristics are largely impossible to obtain, given the diversity of human wants and needs and the specialization of production. Commercial society has improved our standard of living far beyond what our ancestors could have ever imagined, but that instinct from primitive societies is still hardwired in us, Hayek argues.
That seems compelling and I’m sure it’s part of the answer.
However, envy is also part of the answer. I think people like Bernie Sanders simply resent success. So I agree with @kiyahwillis.
But I’ll elaborate in a way that maybe links her explanation to Hayek’s explanation. Based on my countless discussions for statists, the big problem is that folks on the left believe in the zero-sum fallacy.
In primitive societies, the zero-sum fallacy wasn’t a fallacy. If the chief took a bigger share of mammoth meat, it did mean less for everyone else.
So maybe there are “hardwired” reasons for people to feel hostility toward people with a lot of wealth. But as explained in the video (and by Hayek), that mentality is wildly wrong in a market economy based on voluntary exchange and wealth creation.
But it’s not just E.U. nations that have private Social Security. Robert O’Quinn and I just authored a study for the Fraser Institute about retirement systems in member states of the Organization for Economic Cooperation and Development (OECD).
As far as I’m concerned, the most valuable information in the study is Table 4, which shows that personal retirement accounts based on private savings also exist in countries such as Australia, Chile, Iceland, Israel, South Korea, Norway, and Switzerland.
What makes this data so useful is that some of our leftist friends like to assert that personal retirement accounts are unworkable and impractical.
Yet the Fraser Institute report shows that such systems already exist and are working very well in nearly half of OECD nations.
Here some of what Robert and I wrote in the study.
Even more dramatic, 16 of 38 OECD member states have shifted at least in part to “funded” plans based on private savings. This approach is automatically immune to demographic changes. …Pension policy has important economic implications. Government retirement systems usually involve tax-and-spending burdens that can undermine economic vitality. And with demographic changes, those burdens in many cases will become more onerous, and are often accompanied by risky levels of government debt. …Funded systems have several economic advantages, most notably because there do not create fiscal burdens. People save, and their savings are invested to create an asset portfolio that will, in time, generate income for their own retirement. Consequently, funded systems generate savings that finance additional business investment and boost long-term real GDP growth.
By the way, we also note that most OECD governments have taken steps to control the fiscal burden of government-run pension systems.
25 of the 38 OECD member states have taken at least some steps to restrain the growing fiscal burdens of government retirement plans. Nineteen OECD member states are implementing—or have implemented—increases in the normal retirement age. Nine OECD member states are implementing— or have implemented—automatic indexation of the normal retirement age for changes in life expectancy. Five OECD member states have replaced government defined-benefit plans with government notional defined-contributions plans with implicit adjustments for changes in life expectancy.
Since America’s Social Security system is wildly out of balance, something big eventually will have to happen.
*I included an asterisk in the title because none of this good news applies in the United States. America’s outgoing president has a head-in-the-sand approach to Social Security and America’s incoming president has a head-in-the-sand approach to Social Security.
This great video from the Fraser Institute provides the answers (if you’re pressed for time, start watching at 4:15).
And if you don’t have time to even watch the last few minutes of the video, the big takeaway is that a majority of people tell pollsters that they want a bigger welfare state, but only if somebody else is paying for it.
Supporters of Bernie Sanders wanted (and presumably still want) to massively expand the welfare state. But only a tiny fraction of them were willing to pay significantly more taxes.
What they want, of course, is class-warfare taxes.
But there’s a tiny, itsy-bitsy, teeny-weeny problem with that approach. Simply stated, there are not enough rich people to finance big government. Not even close to enough.
There are two reason why I know this is true.
First, Brian Riedl’s should-be famous Chartbook has all the detailed numbers showing that this is the case.
Second, if it was possible to finance big government by taxing the rich, some left-leaning country would have already done it.
Indeed, I specifically put together my Twelfth Theorem of Government in hopes of educating folks on the left on this point.
The bottom line is that every nation with a big welfare state also imposes massive tax burdens on lower-income and middle-class households.
P.S. This knowledge has important political implications. In order to have any chance of electing another Ronald Reagan (or, even better, someone like Javier Milei), that candidate will need to frame the debate so that people are choosing between the high-tax/high-spend agenda or the low-tax/low-spend agenda.
In Part I of this series, I showed that there has been a long-run decline of manufacturing employment in the United States, but pointed out that it is silly to blame this drop on trade agreements such as NAFTA or the WTO.
What’s really happened is that there have been significant improvements in manufacturing productivity, so fewer workers are needed. Indeed, that column shows that America’s manufacturing output, measured as a share of GDP, has not declined.
That probably isn’t much solace for people who lost jobs in various industries, but this is why it’s so important to push pro-market policies so that there is a steady stream of new jobs being created to offset the ones that have disappeared.
Unfortunately, Donald Trump is clueless on trade. He wants to impose trade taxes, regardless of how much damage is caused for consumers, workers, exporters, farmers, manufacturers, and other groups.
To make matters worse, thanks to laws such as IEEPA, he has vast unilateral powers to impose those tax increases.
But maybe there’s a way of protecting Americans from Trump’s unilateral tax hikes. In a column for the Los Angeles Times, Kyle Pomerleau of the American Enterprise Institute explains that there should not be any tax increases without congressional approval.
Now that Donald Trump will be headed to the White House, it is all but certain that he will pursue significant new taxes on imported goods. Although a widely criticized policy, there is little stopping him from doing this due to trade powers that Congress has given the executive branch over the years. Before President Biden leaves office, his administration and the current Congress should consider scaling back the president’s power to unilaterally enact tariffs. This restraint would protect households from large tax increases, prevent economic harm… Contrary to what Trump and many of his supporters claim, these taxes would end up placing a significant burden on American households. Just a 10% across-the-board tariff plus a 60% tariff on Chinese imports could raise more than $2.8 trillion over a decade for an average tax increase of $1,820 per household… The current Congress and Biden should step in and enact legislation that ensures that Trump is unable to impose such significant trade measures without congressional approval. They could do this much the same way Congress stepped in to block tariffs proposed by President Carter in 1980. …Congress is currently required to debate and pass legislation to make even small changes to income or payroll taxes. This should be true for tariffs as well.
Senator Rand Paul has legislation that would require congressional approval for any tax hikes on trade. And he introduced that legislation several months ago, so he wanted better rules regardless of who won in November.
For what it’s worth, representatives of several pro-free enterprise groups sent a letter to Congress in favor of reforms that would restore a proper balance between Congress and the White House on trade taxes.
I was happy to lend my name to the effort. Here’s some of what we wrote.
We, the undersigned organizations, representing millions of American taxpayers and consumers, urge you to reclaim congressional authority over import taxes. As supporters of free markets, we recognize that, all else being equal, the laws of economics that make free exchange within the U.S. an engine of prosperity also make international free trade an economic boon to Americans. Global trade is not a zero-sum activity. Both countries become richer from the exchange. The Constitution clearly vests tariff powers in Congress — not the president. Therefore, we urge Congress to restore its control over tariff policy by passing legislation during the lame duck session. … the supposed benefits of protectionism are overstated and generally do not surpass the harms done. A fundamental lesson of economics is that government interventions often do not work as planned, instead introducing unforeseen distortions and costs, which leave businesses and consumers worse off. Tariffs provide a case study in such unintended consequences. …There’s a larger constitutional issue at play here. The president’s immense powers to set tariff rates fly in the face of the Constitution’s clear vesting of such powers in Congress. This is a clear violation of numerous foundational principles upon which our system is based, including the notion that the legislature – the people’s branch – ought to control taxing and spending. …To restore constitutional balance, we urge Congress to enact laws enshrining these principles
I’m not optimistic that this change will be made, so I fear “Tariff Man” will impose a lot more trade taxes next year.
Which confirms my view that almost all issues involving government do not have happy endings (though there is at least one exception).
Those were examples from last decade. Now let’s look at some research from the past couple of years.
In 2022, I shared a chart showing that the burden of government spending in France was projected to climb by about 12 percentage points of GDP over the next four decades.
That sounds terrible, and it is terrible.
But it’s especially horrible news since France already has an excessive burden of spending.
Indeed, I shared another chart in 2023 that revealed that France had the worst spending burden in Europe.
So France starts in the very worst position and is among the worst when looking at future fiscal decay.
Sadly, very few French politicians have any interest in addressing the problem of excessive spending.
There’s been so much turmoil that France now is in the midst of a crisis, as reported by Chris Pope for the Manhattan Institute’s City Journal. Here are some excerpts.
Famously expensive, France’s welfare state imposes some of the world’s most punishing taxes on workers. …To rein in these costs, French president Emmanuel Macron recently pushed through a package of reforms increasing France’s full-retirement age from 62 to 64. …Now, mass protests have caused major disruptions in cities across the country. …In 2021, government spending accounted for 59 percent of GDP in France, compared with 45 percent in the United States. Spending on public pensions accounts for much of that gap: it’s 15 percent of GDP in France, but only 7 percent in the U.S. This greatly inflates associated payroll taxes, which alone took 28 percent of workers’ incomes in France, compared with just 11 percent in the U.S. …Whereas workers’ incomes in 1975 were 46 percent higher than those of retirees, by 2016 they were 2 percent lower. …The bulk of France’s public-pension spending goes to the middle class. Unlike in the United States, where Social Security’s benefit formula is designed to redistribute wealth to the poor, France’s pension system pays retirees a similar proportion of their prior earnings every month, regardless of income levels. …Such an arrangement might have been more sustainable if the ratio of contributing workers to retired beneficiaries had stayed constant. But as life expectancy has risen and birth rates have fallen, the ratio of residents aged 20–64 to those 65 and over declined from 5.1–1 in 1950 to 3.7–1 in 2020, and it is projected to fall to 2.7–1 in 2050. …That burden could be avoided if individuals simply set aside savings for their own retirements, but French workers are trapped by the need also to provide for older generations who were not expected to do so.
I have two main reactions to Pope’s column.
First, he is right that it would be better to have personal retirement accounts (such as the ones that exist in nearby nations such as Switzerland and the Netherlands). But, just as is the case in the United States, that would involve a substantial “transition cost” because a new source of revenue would be needed to finance current benefits if younger workers are allowed to shift their payroll taxes to personal retirement accounts. That’s not impossible, but it’s also not easy.
Second, France needs more than pension reform. As I noted in 2019, France has the highest burden of social welfare spending among developed nation. But if you break down the numbers into various categories, the biggest problem is health spending. Fixing the pension system is a necessary but not sufficient reform to restore fiscal sanity.
Sadly, the political pressure in France is to make a bad situation even worse. Both the hard-left socialists and the right-wing populists are normally enemies, but they share a common desire for more freebies from the government.
Today is the one-year anniversary of Javier Milei’s inauguration as President of Argentina. Let’s start our celebration with this video from Reason.
To grasp the challenge Milei faced upon taking office, I recommend you watch every second of the video.
But if you don’t have time for a 45-minute video, all you need to know is that Argentina was an utter economic disaster (see this graph from the Financial Times, this chart from the Economist, and this timeline from Human Progress).
Milei took office last December and immediately started slashing spending and red tape, and he’s achieved amazingly quick results.
Dramatic spending cuts (real cuts, not phony Washington “budget cuts”) leading to a balanced budget.
Milei warned upon taking office that Argentina would suffer some short-run pain before there was a recovery.
The good news is that there’s already evidence of economic improvement. As you can see from this chart, private-sector wages have begun to rebound after a lengthy period of decline.
The chart comes from a report in the Financial Times.
Here are some excerpts from that analysis.
Having taken over an economy on the brink of hyperinflation, Milei slashed the monthly inflation rate from 26 per cent last December to 2.7 per cent in October. The chronically depreciating peso — which Milei compared to “excrement” last year — has strengthened significantly against the black market dollar over the past six months. Since his election, Argentina’s long-distressed sovereign bond prices have roughly tripled. …Milei has used executive powers to get around his lack of a majority in Congress, enacting hundreds of deregulation measures… He has also slashed public spending to deliver a primary fiscal surplus every month this year — after more than a decade of uninterrupted deficits… Milei has prioritised tackling Argentina’s inflation rate above all else. His main strategy has been “taking a chainsaw to the state”, as his catchphrase goes, cutting spending from 44 per cent to 32 per cent of GDP. …salaries in the public sector, which employs a fifth of workers, remain 17.5 per cent down. …Investors are bullish… Argentina’s country risk — the premium over US Treasuries that investors demand to hold its bonds — has dropped from more than 2,000 basis points to about 750 since Milei took office.
Since the FT is a center-left establishment outlet, this is a remarkably positive summary of Milei’s achievements.
The people of Argentina seem to understand that things are getting better.
Here is some polling data from Gallup. Look at the uptick in optimism since Milei took over.
But here are the results that are even more impressive.
Even the poorest part of the population gives Milei higher approval rankings that his leftist predecessor.
Let’s conclude our one-year anniversary celebration with some passages from Mary Anastasia O’Grady’s recent column in the Wall Street Journal.
Mr. Milei begins his second year in office on Tuesday. He inherited a large fiscal deficit, swelling debt and a 2023 inflation rate of more than 200% from Peronist former President Alberto Fernández. At his inauguration Mr. Milei was careful to warn the nation that recovery would be painful. …Even so the president’s public approval is above 50%. He scores higher in public trust than any of the past three presidents after 12 months in office. …The recession is probably over and next year the economy might grow 4% to 5%. Country risk has fallen sharply. Inflation still isn’t whipped…but relative to recent history it’s tame. For now he can boast a softer-than-expected landing and some stability, which a year ago seemed out of reach. …Where deregulation happens, prices decline in the range of 30%.
For his first year in office, Milei passes with flying colors. He is showing the world that free markets are the recipe for growth and prosperity.
P.S. Here are previous columns in this series.
In Part 1 of this series, I showed how Javier Milei has done a great job shrinking the burden of government spending.
Fifteen years ago, I explained that the bailout of Greece (by the IMF-EC-ECB “troika“) was a mistake because the net effect was a much bigger tax burden and no reduction in the spending burden.
The OECD just released its Country Survey about Greece. Amazingly, the bureaucrats are suggesting even-higher taxes. I’m not joking. Here are some excerpts.
…more domestic resources will be needed to maintain high rates of public investment. …Tax revenue has increased from 33.4% of GDP in 2000 to 41% in 2022, above the OECD average. …Previous Economic Surveys pointed to the need to simplify the tax system by reducing the use of tax expenditures including tax allowances, credits, exemptions and reduced tax rates. …Continuing the government’s efforts to make tax compliance easier can boost collection… The effectiveness of the value added tax (VAT) remains also hampered by a wide range of goods and services that are exempt or taxed at reduced rates. …Greece also has room to raise excise taxes… The introduction of ETS2 also provides an opportunity to revise fuel excise taxes and phase out fossil fuel subsidies to harmonise and raise effective carbon prices.
By the way, the Survey generally has sensible observations about the economic impact of various taxes.
The part that is troubling is that the OECD thinks the Greek government should be bigger and that is should have more money.
Here’s a table summarizing the recommendations and I’ve highlighted which ones raises tax burden and which ones raise the spending burden.
At the risk of over-simplifying, the OECD thinks Greece should move in the wrong direction, but in a way that minimizes economic damage.
I have a different view. Move in the right direction.
P.S. Just in case anyone thinks there is anything deceptive about the chart at the beginning of this column, here’s a look at the long-run data on taxes and spending in Greece.
The bottom line is that the tax burden and spending burden have increased in the past 15 years, but the numbers over the past 45 years are far more depressing.
P.P.S. The political appointees are the reason why the OECD produces rubbish. But, to be fair, they don’t discriminate. The bureaucrats push for higher taxes and bigger government in every region of the world (China, Central America, Africa, Asia, Northern Europe, the United States, etc).
P.P.P.S. The Greek government has had interesting and unusual ways of moving in the wrong direction.
If you click on this link and watch Senator Paul grill the guy from the Postal Service, you’ll see that it’s mostly a discussion about the degree to which is better to utilize contractors (who are a much better deal for taxpayers since government employees are grossly overcompensated).
But I want to zoom out and consider the big picture. Actually, two big pictures.
Second, there should be no more taxpayer bailouts for the Postal Service. If the bureaucrats want big paychecks, massive pensions, and lavish benefits, they need to somehow earn them.
Take a look at this chart showing ever-higher spending and ever-lower academic outcomes.
That’s terrible data for an entire city.
But when you look at specific schools, the terrible numbers become horrific.
Here are some grim details from a report from the Illinois Policy Institute.
Douglass Academy High School spends the most per student compared to any other school in CPS, according to the Illinois State Board of Education’s 2023 Report Card. With that kind of spending, one would expect academic proficiency to soar, but that’s not the case. The most recent test data available shows no 11th grade students could read or perform math at grade level on the SAT in the 2021-2022 school year, and 86% of tested students scored in the lowest proficiency level for reading. …The last school year in which any 11th-grade Douglass students could read or perform math at grade level was the 2016-2017 school year. Just 2.4% of students could read or perform math proficiently then. …As of March 2024, Douglass Academy High School had 23 full-time staff members for its 35 enrolled students, according to CPS’ employee position files. CTU wants to add at least eight staff members to the school’s roster, a nearly 35% increase.
The horrible education outcomes are part of the story (even worse than some terrible New Jersey cities).
But notice the shameless demands of the teacher union. They want to be rewarded with more dues-paying bureaucrats even though (as is so often the case) they deliver awful results.
While there are plenty of reasons to be depressed about public policy (particularly the growing burden of government spending), there are a few reasons to feel optimistic.
Back in 2018, I created a ranking of states based on tax policy, with the best having no income taxes and the worst having high-rate, class-warfare tax regimes.
Back then (just six years ago), about 60 percent of states were in the worst two categories.
Now it’s less than 50 percent.
And, thanks to Louisiana, there’s even more progress. The Pelican State has joined the flat tax club. Here are some excerpts from a report in the Louisiana Illuminator by Julie O’Donoghue and Wesley Muller.
Gov. Jeff Landry scored one of the biggest victories of his political career Friday when he managed to push major corporate and personal income tax cuts through the Louisiana Legislature… A flat rate of 3% will replace all three personal income tax brackets that top out at a high rate of 4.25%. The current sales tax rate of 4.45% will move to 5% for five years, and then lower to 4.75% in 2030. A state corporate franchise tax has been eliminated, and the corporate income tax rate – which now tops out at 7.5% – has been moved to a flat rate of 5.5%. …“We’re more competitive now. We’ve lowered our rates to stay in line with our Southeastern neighboring states, and we’re just excited with hopefully bringing our people home and bringing more business to this state,” Rep. Julie Emerson, R-Carencro, who carried the bulk of the bills for Landry’s tax package.
To see the improvements, here’s an updated version of state tax rankings.
The big change is the number of flat tax jurisdictions. There are now a dozen flat tax states, a big jump from 2018 (and since the flat taxes in Kentucky, North Carolina, and Utah were enacted relatively recently, the 20-year shift is even more impressive).
P.P.S. While there has been progress in many states, Massachusetts voters made a terrible choice in 2022 and moved their state from the flat tax column to the class-warfare column.
Almost every year (2023, 2022, 2021, 2020, 2019, etc), I review the Fraser Institute’s annual report on Economic Freedom of North America.
The 2024 version has just been released, so let’s look at some key findings.
Since three-fourths of my readers are from the U.S., I’ll start with the subnational ranking of American states. New Hampshire is in first place (a common occurrence), followed by South Dakota and Florida.
It’s worth noting that the five best states have no income tax (followed by several states with flat taxes).
I’m sure readers are hardly surprised to see that New York is the worst state, followed by California.
Now let’s look at all of North America, which means measuring economic liberty in American states, Canadian provinces, and Mexican states.
New Hampshire is the freest jurisdiction in North America, though the order of other states changes a bit.
What I find interesting is that only one Canadian province (circled in red) is in the top quartile.
And even when you include the second quartile, only one other Canadian province (also circled in red) appears.
The bottom line is that Prime Minister Pierre Trudeau’s tax-and-spend agenda has been very bad news for Canadians.
Now let’s look at the third quartile.
Except instead of calling attention to Canadian provinces that are above average, I’ve circled in red the American states (and Puerto Rico) that rank way below average.
In this case, Delaware is the worst state (which may explain something about Joe Biden), though New York and California continue to get poor scores.
I’m not going to bother showing the fourth quartile because it is nothing but Mexican states.
Though I will point out that the worst place for economic liberty in all of North America is Mexico City. So it’s probably not good news for Mexico that the country’s new president, Claudia Sheinbaum, is the former mayor of that benighted locality.
Let’s close by sharing some important information from executive summary of the 2024 report.
Among those North American jurisdictions that were in the bottom 25% for all-government economic freedom (averaged from 2013 to 2022) income per person in 2022 was US$2,997. But among those jurisdictions that were in the top 25% on all-government economic freedom, income per person was US$62,184. In other words, incomes in the freest North American jurisdictions were 21 times higher than in the least-free jurisdictions. Incomes are not only higher in economically free places, but they tend to grow faster in these places as well. From 2013 to 2022 total income in the freest 25% of North American jurisdictions grew 29% after adjusting for inflation. In the least-free jurisdictions, however, inflation-adjusted income fell 13%. The same patterns hold when we compare jurisdictions within countries. In those places that were the most-free relative to the rest of their country, incomes were, on average, about 3% higher than in the rest of the country. But among those places that were the least-free relative to the rest of their country, incomes were 6.8% below the country average. Among the freest US states, population grew 10 times faster than it did in the least-free from 2013 to 2022. Total employment in these states also grew about three times faster than in the least-free states over this time.
At the start of this 2022 video, I openly stated that trade destroys jobs.
But since I didn’t want anyone to jump to the wrong conclusion, I quickly explained that all trade destroys jobs, whether trade between North Carolina and Missouri or trade between the United States and Europe.
And I then shifted to the real message of the video, which is that jobs are routinely destroyed by “creative destruction.”
That’s the bad news.
The good news is that creative destruction is the dynamic force that leads to the creation of new jobs, while also producing higher living standards.
Having established these facts, let’s now look at two charts.
The first one shows that neither NAFTA nor China had any effect on the overall long-run trend in manufacturing employment.
This does not mean that some manufacturing jobs were not destroyed by those trade agreements (or that others were not created).
But it does suggest that those trade deals did not have a measurable impact on overall manufacturing employment.
Let’s now consider whether we should worry about the decline in manufacturing jobs. In other words, even if the loss of those jobs is not because of trade, is it something that requires government intervention?
According to the second chart, the answer is no. As you can see, the economic footprint of manufacturing has stayed remarkably constant since the end of World War II.
These charts seem contradictory until you realize that the manufacturing sector has enjoyed big increases in productivity. As noted back in 2017, fewer workers are needed to build cars or produce steel.
Donald Trump was a big spender during his first term in office. Even if you don’t count the orgy of pandemic-related spending, he spent more and spent faster than Barack Obama.
But maybe his second term will be different. One positive sign is that Elon Musk and Vivek Ramaswamy are spearheading a Department of Government Efficiency (DOGE), which is a private effort to identify ways of saving money and streamlining government.
In a triumph of hope over experience, let’s make some suggestions for DOGE.
We’ll start with fiscal federalism.
Under current law, politicians in Washington send hundreds of billions of dollars every year to state and local governments. Every single penny of this spending is in areas where the federal government should have no involvement.
As part of a federalism agenda, it is time to eliminate all these transfers.
The savings for taxpayers could be enormous. Here’s a list of federal handouts compiled by my former colleague, Chris Edwards.
Nearly $1.3 trillion last year!
Most of these grants can and should be immediately eliminated.
In a few cases (such as Medicaid reform), the changes would take several years.
In all cases, however, the ultimate goal should be to get Washington out of the business of subsidizing activities that should be solely the responsibility of state and local government (or, in most cases, activities that should be left entirely to the private sector).
For further background on this topic, here are some excerpts from a column in the Wall Street Journal by John Cogan of Stanford University’s Hoover Institution.
Excessive spending has been a way of life for lawmakers in Washington for more than half a century. …Elon Musk and Vivek Ramaswamy’s Department of Government Efficiency will attempt to put an end to this fiscal profligacy. Both men will soon discover that the root cause of this problem lies with the federal government’s abandonment of federalism in fiscal matters. …It is difficult to think of a single activity that state and local governments spend money on that isn’t also financed by Washington’s check-writing machine. The feds spend on local roads, social services, police and fire protection and education. Washington also appropriates funds for building and maintaining municipal parks and playgrounds, bike paths and hiking trails, city sidewalks, bus stops, railroad crossings, traffic signs and stop lights, and beautification projects. …The Founders believed that, among its benefits, federalism would serve as an effective constraint on federal spending… Fiscal federalism started to erode more seriously around World War I. …Policymakers finally abandoned fiscal federalism during the Great Depression. …Following World War II, and especially during the peak years of the Great Society (1965-74), the federal government greatly expanded its spending on activities that were traditionally regarded as state and local affairs. …The federal government needs to…return…state and local affairs to their proper place. Sorting out which programs should go first could be a natural starting point for Messrs. Musk and Ramaswamy.
Very good suggestions (just like Cogan has provided good analysis and good advice on entitlement programs).
P.S. As a general rule, DOGE should be bold. Here’s some of what I wrote when giving Trump’s people advice on inauguration day in 2017.
…don’t cut programs by 10 percent, 20 percent, or even 50 percent. If you do that, it’s like cutting off a weed at ground level. If the root system is still there, it’s just a matter of time before it regrows and begins to suffocate the good plants (i.e., the private sector). Instead, shut them down. Eliminate them. Raze the buildings. And pour a foot of salt on the ground so nothing can regrow. Simply stated, it’s very easy to restore a budget cut at some point in the future. But if a part of government is totally wiped out, then special interests have to go through all the effort of recreating that function. And that’s not overly easy given the separation-of-powers system that the Founding Fathers wisely created.
To elaborate, special interests are going to squawk and complain even if Trump merely proposes to freeze spending. So why not actually go bold and actually solve some problems?
P.P.S. Every suggestion I make to DOGE over the next few weeks will be accompanied by a recommendation to enact a spending cap, much like the very successful “debt brake” in Switzerland.
Trump imposed significant tariffs during his first term, and many businesses applied for exemptions. Who got them? A recently published statistical analysis found that companies with Republican ties, as measured by their 2016 campaign contributions, were significantly more likely (and those with Democratic ties less likely) to have their applications approved. But that was only a small-scale rehearsal for what could be coming. …the tariff proposals Trump floated during the campaign were far wider in scope and, in the case of China, far higher than anything we saw the first time around; the potential for political favoritism will be an order of magnitude greater. …tariffs create more potential for cronyism than other taxes…our laws offers so much room for discretionary enforcement. …a system that rewards businesses based on their political connections will surely exert a drag on economic growth. Many attempts to explain Italy’s dismal economic record over the past generation attribute poor performance in part to pervasive cronyism. One recent study found that populist regimes, whether of the left or the right — regimes that are generally crony capitalist as well — tend to suffer a long-run growth penalty of about one percentage point each year.
By the way, I wrote about the study that Krugman references in the final sentence, so I’m glad he gave it more publicity.
And I’m glad he warned about how Trump’s protectionism will facilitate more corruption.
He’s exactly right.
It’s frustrating, though, that he failed to apply this analysis to other recent examples of corruption-enabling intervention, all of which involved the White House having the power to provide favorable treatment to campaign contributors.
So it appears that Paul Krugman is sometimes right (as I noted in 2016 and 2018), but in this case he is right because it fits with his partisan preferences.
What’s not shocking, though, is that President Milei’s policies have been successful.
So I suppose I should be grateful that Norway’s politicians are helping to confirm my arguments. They imposed a big increase in their wealth tax that is backfiring in a spectacular fashion.
International Liberty 