Topic: International Economics and Development

Ending the Year on a Positive Note

Throughout the year, we are constantly bombarded by bad news. Stories about hunger, violence, oppression and illness flow from our television sets and radios, and fill the pages of our newspapers. And true enough, for far too many people, 2013 was not a good year. We must, however, distinguish between stories of individual unhappiness and disaster, and long term trends – which are, on the whole, positive. Over the last couple of weeks a number of stories pointed to these positive developments and I include them below:

NPR Morning Edition “Tired of Doom And Gloom? Here’s the Best Good News of 2013”

Cracked.com “5 Amazing Pieces of Good News Nobody is Reporting”

Washington Times “Most Things are Better Now”

TheAtlantic.com “Is the Pope Right About the World?”

China Grapples with Mao Zedong’s Legacy at His 120th Birthday

December 26 is the 120th anniversary of Mao Zedong’s birth, typically a date of great celebration in China. But this year the Chinese government seems somewhat ambivalent about celebrating Mao’s disastrous achievements. It’s about time. 

Many countries have a founding myth that inspires and sustains a national culture. We’ve just seen South Africa and the world celebrate the accomplishments of Nelson Mandela, the founder of that nation’s modern, multi-racial democracy. In the United States we look to the American Revolution and especially to the ideas in the Declaration of Independence of July 4, 1776. 

The Declaration of Independence, written by Thomas Jefferson, is the most eloquent libertarian essay in history, especially its philosophical core:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.–That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, –That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

The ideas of the Declaration, given legal form in the Constitution, took the United States of America from a small frontier outpost on the edge of the developed world to the richest country in the world in scarcely a century. The country failed in many ways to live up to the vision of the Declaration, notably in the institution of chattel slavery. But over the next two centuries that vision inspired Americans to extend the promises of the Declaration—life, liberty, and the pursuit of happiness—to more and more people.

China of course followed a different vision, the vision of Mao Zedong. Take Mao’s speech on July 1, 1949, as his Communist armies neared victory. The speech was titled, “On the People’s Democratic Dictatorship.” Instead of life, liberty, and the pursuit of happiness, it spoke of “the extinction of classes, state power and parties,” of “a socialist and communist society,” of the nationalization of private enterprise and the socialization of agriculture, of a “great and splendid socialist state” in Russia, and especially of “a powerful state apparatus” in the hands of a “people’s democratic dictatorship.”

Tragically, unbelievably, this vision appealed not only to many Chinese but even to Americans and Europeans, some of them prominent. But from the beginning it went terribly wrong, as really should have been predicted. Communism created desperate poverty in China. The “Great Leap Forward” led to mass starvation. The Cultural Revolution unleashed “an extended paroxysm of revolutionary madness”  in which “tens of millions of innocent victims were persecuted, professionally ruined, mentally deranged, physically maimed and even killed.” Estimates of the number of unnatural deaths during Mao’s tenure range from 15 million to 80 million. This is so monstrous that we can’t really comprehend it. What inspired many American and European leftists was that Mao really seemed to believe in the communist vision. And the attempt to actually implement communism leads to disaster and death.

Scientific Breakthroughs of the Year 2013

I hope that many of you had a chance to check out Cato’s new website: www.humanprogress.org.

In the same vein, here is a just-released video put together by the folks at Science Magazine summing up the greatest scientific advances of 2013:

As G.K. Chesterton put it, ”The world will never starve for want of wonders; but only for want of wonder.”

Vigilantes in Mexico: Another Reason to Repudiate Drug Prohibition

A relatively new development in Mexico’s ongoing drug wars is the increasingly active role of vigilante groups.  That is especially true in Michoacán and other states in the western portion of the country.  I discuss that development in a new article over at the National Interest Online.

The initial temptation might be to cheer on the vigilantes.  After all, the rise of “self defense militias” indicates that a growing number of Mexicans are now willing to resist the power of the brutal cartels and fight back, if necessary.  But for two reasons one ought to resist the temptation to applaud.  First, the nature of many of the militias is exceedingly murky.  Some of them may even be front groups for rival trafficking organizations seeking to displace the dominant cartel in a particular region.

Second, even in cases where the vigilante groups are genuine anti-cartel forces, the growth of vigilantism is a worrisome sign.  It is an emphatic vote of “no confidence” in the government’s ability to maintain order and the rule of law.  That is similar to what occurred in Colombia from the late 1980s through the early years of the 21st century.  As the power of drug gangs and their radical leftist guerrilla allies surged, frightened and angry Colombians formed right-wing militias in many rural areas.  But some of those groups soon became little more than death squads, and for a time, Colombia seemed to be heading down the path toward becoming a failed state.  We certainly do not want to see a comparable trend in our next door neighbor.

The rise of vigilantism in Mexico is yet another reminder of the disastrous consequences of drug prohibition.  That strategy greatly raises the retail price of a product that a large number of consumers insist on using.  Creating such a lucrative black market premium fills the coffers of those willing to defy the law to traffic in that product.  And the vast majority of individuals and groups willing to take that path are ruthless criminal elements.  Prohibition, in short, empowers and enriches thugs.

Washington’s enthusiasm for and insistence upon preserving an international drug prohibition policy has caused enormous problems for Mexico and other drug-source countries. As the leading consumer of illegal drugs and the most powerful member of the international community, the United States largely determines the direction of policy on this issue.  Fortunately, there are signs of changing attitudes on both the domestic and international fronts.  Public opinion surveys show that a majority of Americans are now in favor of legalizing marijuana, the mildest of illegal drugs, and such states as Colorado and Washington have already adopted modest legalization measures.  Uruguay has gone even further, legalizing not only the possession and use of marijuana but also commerce in that drug.

Uruguay’s course is the correct one.  It’s not enough to legalize drug possession—the trade itself needs to be taken out of the hands of criminal syndicates.  And if we wish to defund the cartels, abolishing prohibition must apply to all currently illegal drugs, not just marijuana.  Our policy makers need to internalize the lesson that prohibition not only does not work, it causes horrific unintended consequences.  That was true of America’s foolish crusade against alcohol in the 1920s and early 1930s, and it is true in spades of the current crusade against illegal drugs.  The surge of vigilantism in Mexico and the threat of chaos it embodies should spur policy makers to finally recognize that reality.

Once Again, Pope Francis

This is not the first time I’ve commented on the socioeconomic ideas of the current Pontiff of the Catholic Church. However, Time’s newly named Person of the Year Pope Francis unfortunately insists once again on statist ideas that go against an open society based on free markets.

No doubt this has a clear moral dimension given that the tradition of classical liberalism (and its modern advocacy) is based on mutual respect and the allocation of property rights as moral support of its philosophical, legal and economic proposals. Hence Adam Smith’s first book in 1759 was titled The Theory of Moral Sentiments – a concern held by the leading exponents of that noble tradition.

I do not want to repeat here arguments that I’ve already stated in my previous pieces. Rather, I will restrict my comments to the most salient socioeconomic aspects of the Pope’s new document.

Progress on the Laffer Curve*

The title of this piece has an asterisk because, unfortunately, we’re not talking about progress on the Laffer Curve in the United States.

Instead, we’re discussing today how lawmakers in other nations are beginning to recognize that it’s absurdly inaccurate to predict the revenue impact of changes in tax rates without also trying to measure what happens to taxable income (if you want a short tutorial on the Laffer Curve, click here).

But I’m a firm believer that policies in other nations (for better or worse) are a very persuasive form of real-world evidence. Simply stated, if you’re trying to convince a politician that a certain policy is worth pursuing, you’ll have a much greater chance of success if you can point to tangible examples of how it has been successful.

That’s why I cite Hong Kong and Singapore as examples of why free markets and small government are the best recipe for prosperity. It’s also why I use nations such as New Zealand, Canada, and Estonia when arguing for a lower burden of government spending.

And it’s why I’m quite encouraged that even the squishy Tory-Liberal coalition government in the United Kingdom has begun to acknowledge that the Laffer Curve should be part of the analysis when making major changes in taxation.

UK Laffer CurveI don’t know whether that’s because they learned a lesson from the disastrous failure of Gordon Brown’s class-warfare tax hike, or whether they feel they should do something good to compensate for bad tax policies they’re pursuing in other areas, but I’m not going to quibble when politicians finally begin to move in the right direction.

 

The Wall Street Journal opines that this is a very worthwhile development.

Chancellor of the Exchequer George Osborne has cut Britain’s corporate tax rate to 22% from 28% since taking office in 2010, with a further cut to 20% due in 2015. On paper, these tax cuts were predicted to “cost” Her Majesty’s Treasury some £7.8 billion a year when fully phased in. But Mr. Osborne asked his department to figure out how much additional revenue would be generated by the higher investment, wages and productivity made possible by leaving that money in private hands.

By the way, I can’t resist a bit of nit-picking at this point. The increases in investment, wages, and productivity all occur because the marginal corporate tax rate is reduced, not because more money is in private hands.

I’m all in favor of leaving more money in private hands, but you get more growth when you change relative prices to make productive behavior more rewarding. And this happens when you reduce the tax code’s penalty on work compared to leisure and when you lower the tax on saving and investment compared to consumption.

Another Misguided Plan to Burden America with a Value-Added Tax

It’s no secret that I dislike the value-added tax.

But this isn’t because of its design. The VAT, after all, would be (presumably) a single-rate, consumption-based system, just like the flat tax and national sales tax. And that’s a much less destructive way of raising revenue compared to America’s corrupt and punitive internal revenue code.

But not all roads lead to Rome. Proponents of the flat tax and sales tax want to replace the income tax. That would be a very positive step.

Advocates of the VAT, by contrast, want to keep the income tax and give politicians another big source of revenue. That’s a catastrophically bad idea.

To understand what I mean, let’s look at a Bloomberg column by Al Hunt. He starts with a look at the political appetite for reform.

There is broad consensus that the U.S. tax system is inefficient, inequitable and hopelessly complex. …a 1986-style tax reform – broadening the base and lowering the rates – isn’t politically achievable today. …the conservative dream of starving government by slashing taxes and the liberal idea of paying for new initiatives by closing loopholes for the rich are nonstarters.

I agree with everything in those excerpts.

So does this mean Al Hunt and I are on the same wavelength?

Not exactly. I think we have to wait until 2017 to have any hope of tax reform (even then, only if we’re very lucky), whereas Hunt thinks the current logjam can be broken by adopting a VAT and modifying the income tax. More specifically, he’s talking about a proposal from a Columbia University Law Professor that would impose a 12.9 percent VAT while simultaneously creating a much bigger family allowance (sometimes referred to as the zero-bracket amount) so that millions of additional Americans no longer have to pay income tax.