Tag: growth

Trade Delivers Peace and Bargain Prices

Mad about tradeFor a fair and authoritative (and did I mention favorable?) assessment of my new Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization, you can read William H. Peterson’s review in today’s Washington Times.

Dr. Peterson is an adjunct scholar with the Heritage Foundation and the Ludwig von Mises Institute who holds a Ph.D. in economics from New York City University. In his review he writes:

Daniel Griswold’s tour de force explores, reasons and documents how import competition benefits the American consumer, seeing him move ahead toward greater peace incentives, lower real prices, more choices, better quality. Mr. Griswold also tracks how the big-box retailers such as Wal-Mart, Home Depot and Best Buy deliver the world’s goods mostly by sea via millions of big, truckload-size containers. …

So Mr. Griswold would have the United States adopt or maintain trade policies best for most Americans, especially the poor and middle class, no matter what other nations do. Says the author: Let’s drop the remaining barriers separating us from ongoing growth and peace policies enhancing the global marketplace. Bully for him.

Information at the beginning of the review should have given the list price of the book as $21.95, and it is available with a nice discount at Amazon.com.

Information at the beginning of the review should have given the cover price of the book as $21.95. It is available with a nice discount at Amazon.com along with a peek inside at the table of contents and selected pages.

Why Chile Is More Economically Free Than the United States

42-16335429In the 2009 Economic Freedom of the World Report, Chile is now #5, one place ahead of the United States.

In 1975, of 72 countries, Chile was No 71. How did this happen? The explanation lies in what I call the “Chilean Revolution,” because it was as important and transformative to my country as the celebrated American Revolution that gave birth to the United States.

The exceptional political circumstances of this period have obscured the fact that from 1975 to 1989 a true revolution took place in Chile, involving a radical, comprehensive, and sustained move toward economic and political freedom (from a starting point where there was neither one nor the other). This revolution not only doubled Chile’s historic rate of economic growth (to an average of 7% a year, 84-98),  drastically reduced poverty (from 45% to 15%), and introduced several radical libertarian reforms that set the country on a path toward rapid development; but it also brought democracy, restored limited government, and established the rule of law.

In 1998, The Los Angeles Times described the importance of the Chilean Revolution to the world:

In a sense, it all began in Chile. In the early 1970s, Chile was one of the first economies in the developing world to test such concepts as deregulation of industries, privatization of state companies, freeing of prices from government control, and opening of the home market to imports. In 1981, Chile privatized its social-security system. Many of those ideas ultimately spread throughout Latin America and to the rest of the world. They are behind the reformation of Eastern Europe and the states of the former Soviet Union today… which demonstrates, once again, the awesome power of ideas.

The role and achievements of Chile’s team of classical liberal economists is well known. They were the ones who in 1975, once the quasi-civil war was over, decided to carry out a principled, “friendly takeover” of the military government that had arisen from the breakdown of democracy in 1973 (here is my essay, published in “Society”, on that drama). Much less well-known, however, is that they were also the foremost proponents of a gradual and constitutional return to a limited democracy.

In fact, on August 8, 1980, a new Constitution, containing both a bill of rights and a timeline for the restoration of full political freedom, was proposed and approved in a referendum. In the period 1981-1989, what Fareed Zakaria has called the “institutions of liberty” were created—an  independent Central Bank, a Constitutional Court, private television and universities, voting registration laws, etc—since they were crucial for having not only elections but a democracy at the service of freedom. Then on March 11, 1990, an extraordinary event happened: the governing military Junta surrendered its power to a democratically elected government in strict accordance to the 1980 Constitution (here is my note on the restoration of democracy in Chile).

Since 1990, Chile has had four moderate center-left governments and, despite minor setbacks on tax, labor and regulation policies, the essence of the free-market reforms are still intact. The 1980 Constitution is the law of the land, and has been amended by consensual agreements among all parties represented in Congress. Not only is Chile now at the top of rankings on free trade (number 3 in the world after Hong Kong and Singapore) and transparency (less corruption that in most western European countries), but it is expected to be a developed country by 2018, the first in Latin America.

Nobel Laureate Friedrich Hayek proved, again, to have been a visionary when he stated in 1981: “Chile is now a great success. The world shall come to regard the recovery of Chile as one of the great economic miracles of our time.”

‘No Child Left a Dime’

That’s my favorite placard from the Washington tea party protests on Saturday. No Child Left a Dime underlines perhaps the central concern of the protesters – the ongoing massive fiscal irresponsibility in Washington by both parties.

We’ve got deficits of more more than $1 trillion for years to come. Federal debt will approach World War Two levels within a decade. Even so, the Democrats are trying to ram through a $1 trillion health care expansion, and the head of the Republican National Committee, Michael Steele, is defending against any cuts to Medicare, the program that is the single biggest threat to taxpayers. People are marching not just because Obama and the Democrats are scaring their pants off, but because most Republicans in positions of power are spendthrifts as well.

The chart illustrates that no child will be left a dime because the government will have it all. This is the CBO’s “alternative fiscal scenario,” which essentially means the business-as-usual scenario if Congress doesn’t cut anything in coming years.

Note that the most rapidly growing box, the white box, is the program that Michael Steele doesn’t want to touch. The program is expected to grow by 6.3 percent of GDP by 2050. In today’s money, 6.3 percent of GDP is about $900 billion a year in added spending. So it’s like Steele doesn’t see anything wrong with tomorrow’s young families forking over an additional $900 billion a year in taxes on this one program, or about $7,700 a year for every American household.

It’s worse than that. The biggest box on the chart by 2050 is interest on the government debt, and by far the biggest contributor to the growth in interest is Medicare. So including interest, Michael Steele’s (ridiculous) Medicare position is sort of like supporting a more than $10,000 tax hike on every young family for this one program.

Come on Republicans, you can do better than that. How about starting simply by proposing some of CBO’s modest and commonsense Medicare reforms like raising deductibles?

(By the way, interest costs rise in coming years because of an excess of spending, not a shortage of revenues. Under this CBO scenario, all current tax cuts are extended, and yet federal revenues still rise as a share of GDP over time above the historical norm of recent decades).

A Picture Is Worth $300 Billion

I blogged this morning that the research shows higher public school spending slows the economy, and explained that this is because spending more on public schools doesn’t increase students’ academic performance. Some readers no doubt find that hard to accept. With them in mind, I present the following chart:

Spending vs. AchievementSpending vs. Achievement

If public schools had merely maintained the level of productivity they exhibited in 1970, Americans would enjoy a permanent $300 billion annual tax cut. Now THAT would stimulate economic growth.

Research Shows $100 Billion Ed. Stimulus Likely Hurting Economy

Tomorrow morning, the president’s Council of Economic Advisers will release a report assessing the short and long-term effects of the stimulus bill on the U.S. economy. As with previous iterations, this report will attempt to forecast overall effects of the stimulus across its many different components and the different economic sectors it targets. In doing so, it ignores the clearest research findings available pertaining to a key portion of the stimulus: k-12 education.

The president has committed $100 billion in new money to the nation’s public school systems, and required that states accepting the funds promise not to reduce their own k-12 spending. The official argument for this measure is that higher school spending will accelerate U.S. economic growth. But a July 2008 study in the Journal of Policy Sciences finds that, to the authors’ own surprise, higher spending on public schooling is associated with lower subsequent economic growth. Spending more on public schools hurts the U.S. economy.

How is that possible? There is little debate in academic circles that raising human capital – improving the skills and knowledge of workers – boosts productivity. So an obvious interpretation of the JPS study is that raising public school spending must not increase human capital. While this possibility surprised study authors Norman Baldwin and Stephen Borrelli, it is consistent with the data on U.S. educational productivity over the past two generations.

Since 1970, inflation adjusted public school spending has more than doubled. Over the same period, achievement of students at the end of high school has stagnated according to the Department of Education’s own long term National Assessment of Educational Progress. Meanwhile, the high school graduation rate has declined by 4 or 5%, according to Nobel laureate economist James Heckman. So the only thing higher public school spending has accomplished is to raise taxes by about $300 billion annually, without improving outcomes.

The fact that more schooling without more learning is not a recipe for economic growth is confirmed by the independent empirical work of economists Eric Hanushek and Ludger Woessmann. Their key finding is that academic achievement, not schooling per se, is what matters to economic growth.

Based on this body of research, the president’s decision to pump $100 billion into existing public school systems is likely slowing the U.S. economic recovery.

Deficits, Spending, and Taxes

The White House and the CBO announced this week that:

The nation’s fiscal outlook is even bleaker than the government forecast earlier this year because the recession turned out to be deeper than widely expected, the budget offices of the White House and Congress agreed in separate updates on Tuesday.

The Obama administration’s Office of Management and Budget raised its 10-year tally of deficits expected through 2019 to $9.05 trillion, nearly $2 trillion more than it projected in February. That would represent 5.1 percent of the economy’s estimated gross domestic product for the decade, a higher level than is generally considered healthy.

What is the right response to these deficits?

One view holds that most current expenditure is desirable — indeed, that expenditure should ideally be much higher — so the United States should raise taxes to balance the budget. Taxes are a drag on economic growth, however, and unpopular with many voters, so this view presents politicians with an unhappy tradeoff.

The alternative view holds that a substantial fraction of current expenditure is undesirable and should be eliminated, even if the revenue to pay for it could be manufactured out of thin air. To be concrete:

  • Medicare and Medicaid encourage excessive spending on health care.
  • The invasions of Iraq and Afghanistan encourage hostility to the U.S. and thereby increase the risk of terrorism.
  • Drug prohibition generates crime and corruption.
  • Agricultural subsidies distort decisions about which crops to grow, and where.
  • And much, much more.

So, under this view, the United States can have its cake and eat it too: improve the economy and reduce the deficit without the need to raise taxes.

This approach is not, of course, politically trivial, since existing expenditure programs have constituencies that will fight their elimination.

But thinking about these two views of the deficits is nevertheless useful: it shows that discussion should really be about which aspects of government are truly beneficial, not just about the deficits per se.

C/P Libertarianism, A to Z

Have Mexican Dishwashers Brought California to Its Knees?

workerAn article published this week by National Review magazine blames the many problems of California on—take a guess—high taxes, over-regulation of business, runaway state spending, an expansive welfare state? Try none of the above. The article, by Alex Alexiev of the Hudson Institute, puts the blame on the backs of low-skilled, illegal immigrants from Mexico and the federal government for not keeping them out.

Titled “Catching Up to Mexico: Illegal immigration is depleting California’s human capital and ravaging its economy,” the article endorses high-skilled immigration to the state while rejecting the influx of “the poorly educated, the unskilled, and the illiterate” immigrants that enter illegally from Mexico and elsewhere in Latin America.

Before swallowing the article’s thesis, consider two thoughts:

One, if low-skilled, illegal immigration is the single greatest cause of California’s woes, how does the author explain the relative success of Texas? As a survey in the July 11 issue of The Economist magazine explained, smaller-government Texas has avoided many of the problems of California while outperforming most of the rest of the country in job creation and economic growth. And Texas has managed to do this with an illegal immigrant population that rivals California’s as a share of its population.

Two, low-skilled immigrants actually enhance the human capital of native-born Americans by allowing us to move up the occupational ladder to jobs that are more productive and better paying. In a new study from the Cato Institute, titled “Restriction or Legalization? Measuring the Economic Benefits of Immigration Reform,” this phenomenon is called the “occupational mix effect” and it translates into tens of billions of dollars of benefits to U.S. households.

Our new study, authored by economists Peter Dixon and Maureen Rimmer, found that legalization of low-skilled immigration would boost the incomes of American households by $180 billion, while further restricting such immigration would reduce the incomes of U.S. families by $80 billion.

That is a quarter of a trillion dollar difference between following the policy advice of National Review and that of the Cato Institute. Last time I checked, that is still real money, even in Washington.