Topic: International Economics and Development

Conservative Big Spending Goes Global

By now it’s old hat that President Bush, who remains inexplicably popular with conservatives, is the biggest spender since LBJ. Now it turns out that the Conservative government elected two years ago in Canada is trying to match him.

John Williamson of the Canadian Taxpayers Federation notes in the National Post that “the Conservatives’ two budgets boosted spending by $24.4 billion over two years.” OK, it’s not Bush’s trillion dollars. But Canada is a smaller country, and “as a result the size of the federal government has grown by 14%.”

It looks like Patrick Basham was all too prescient when he predicted, to much consternation in Canada, that Harper would become “Bush’s new best friend.” 

Pandering to the Protectionists

Given the audience, one could have expected a goodly amount of protectionist rhetoric from the Democratic presidential candidates in their debate last night at an AFL-CIO forum. But at times it seemed as though they were battling to see who among them could pander the most.

Dennis Kucinich has never been a promoter of open trade and markets, so it is hardly surprising that he said withdrawing from NAFTA and the WTO would be a “first week in office” priority. Thank goodness he’s not a serious candidate. What is worrisome is the cheers his pledge elicited. Do the members of the AFL-CIO truly believe that if two of our largest trade partners (Canada and Mexico) increased their tariffs on American goods, that would somehow benefit them? Is the WTO seen as such a negative force overall that withdrawing from its forums and its legal protections is perceived as wise?

The other candidates, to their credit, did not match Mr Kucinich’s pledge. But that is to damn them with faint praise, however, as most of them did undertake to “revise” trade agreements, including NAFTA, (presumably by putting in more stringent rules on labor and environmental provisions) and to put more emphasis on enforcement of trade agreements. None of them, not even Senator Clinton, whose husband showed a commendable commitment to trade during his time in office, stood up and defended the benefits of trade.

Senator Obama, given the chance to acknowledge the positive effect of trade on working families – i.e., cheap goods – demurred, making an emotive, if economically illiterate, point about how a cheap T-shirt is useless if one doesn’t have a job. As though the U.S. economy was not demonstrating that consumers can have access to cheaper goods as well as record employment.

Perhaps the next Democratic presidential candidates debate should be held at a consumer- or taxpayer-group forum.

Brother, Can You Spare a Z$200,000 Note?

Hyperinflations would be almost comic if it were not for the misery they inflict on the people they affect. In the misruled African country of Zimbabwe, the inflation rate of the Zimbabwean dollar has reached an annualized rate of 13,000 percent. According to a story Thursday in the Financial Times, an IMF official predicts the annual rate could be heading towards an incredible 100,000 percent.

One sure sign of a hyperinflation is that the central bank must issue new currency notes in ever higher denominations so that people won’t have to carry bags or wheelbarrows of money around to make everyday purchases. Sure enough, the government of Zimbabwe is now wrestling with that very question. According to the FT story:

The launch yesterday of a new large-denomination bank note of Z$200,000—worth [US$13] at the official exchange rate and [US$1.30] at the more realistic parallel rate—underlines the disarray. The central bank had wanted to issue a Z$500,000 note, but a bank official said this was vetoed by the finance ministry because senior staff thought such a large denomination would have reinforced an impression that inflation was out of control.

At a 13,000 percent rate, that cat is probably already out of the bag.

Life without Farm Subsidies

When the House passed a massive farm bill last month, supporters justified ongoing subsidies as a “safety net” for family farmers. But a story in the New York Times this morning on the New Zealand dairy industry shows that farmers can survive and thrive in a free market without subsidies.

The story begins by describing how technologically sophisticated the country’s export-oriented dairy industry has had to become to meet global competition.

Dairy farming in New Zealand was not always this sophisticated. But ever since a liberal but free-market government swept to power in 1984 and essentially canceled handouts to farmers — something that just about every other government in an advanced industrial nation has considered both politically and economically impossible — agriculture here has never been the same.

The farming community was devastated — but not for long. Today, agriculture remains the lifeblood of New Zealand’s economy. There are still more sheep and cows here than people, their meat, milk and wool providing the country with its biggest source of export earnings. Most farms are still owned by families, but their incomes have recovered and output has soared.

For more on the lessons we should learn from New Zealand’s successful reforms, check out a Free Trade Bulletin we published in 2005 titled, “Miracle Down Under: How New Zealand Farmers Prosper without Subsidies or Protection.” The Kiwi example also featured prominently in an online debate I had in May with the chief economist of the American Farm Bureau.

The New Zealand dairy industry and our own fruit and vegetable sectors prove that farmers can thrive without government subsidies and trade protection. Yet it looks like we will be saddled for another five years with an expensive and anti-market farm bill.

A Correction

In my post last week on the House farm bill, I quoted a Congressional Quarterly article that said that “[chairman of the Agriculture Committee, Representative Collin] Peterson also worked to stave off a last-minute revolt by Congressional Black Caucus (CBC) members by dedicating $1 million [sic] in extra funding for historically black universities and for black farmers.” (link requires subscription).

Further reporting has disclosed that the figure dedicated to those causes was $100 million (see here). Apologies.

Japanese Voters Send Anti-Tax Signal

Elections in Japan do not have much ideological or philosophical content, but the recent defeat for the Prime Minister’s party in upper-house elections was a clear sign that voters do not want higher taxes. As reported by Tax-news.com, Prime Minister Abe has been advocating a big hike in the value-added tax to finance more transfer spending, but the election results mean that Japanese voters may be spared this irresponsible outcome. The one distasteful element of the story is that the reporter refers to Abe’s commitment to reform. In the real world, raising taxes to finance more spending is a way of dodging reform:

Japanese Prime Minister Shinzo Abe’s plans for fiscal and tax reform have been dealt a blow after the opposition Democratic Party, which opposes a hike in consumption tax, won a substantial majority in Upper House parliamentary elections on Sunday. While the Democrat Party’s victory does not give it control over the government, analysts expect their influence in the upper house to raise a barrier to an early rise in consumption tax - thought to be central to the ruling Liberal Democrat’s plans to raise the revenue it needs to meet growing spending requirements and balance the budget. It was thought the government would legislate to increase the tax in 2008, with the hike going into effect in 2009, but this is now an increasingly distant prospect. … However, despite the electoral setback, Abe resolved to forge ahead with fiscal reforms.

Bulgaria Announces 10 Percent Flat Tax

According to Bulgarian news sources, the coalition government in Bulgaria has agreed to implement a low-rate flat tax starting next January. This is good news for Bulgaria, but also good news for the rest of Europe since it means further pressure for tax-rate reductions and tax reforms. The global flat tax revolution is picking up so much steam that the time has come to propose a theme song. I realize I’m showing my age, but Another One Bites the Dust seems appropriate. Perhaps the song could be piped into the European Commission and the Organization for Economic Cooperation and Development, adding to their angst about the market-based reforms sweeping the world?

At an operative cabinet meeting Sunday attended by the top brass from the three parties it was decided to retire the current three-bracket personal income tax rate system and replace it with a flat rate of 10%. …The government also decided on a 10% pension increase from October 2007, enabled by a 20% budget revenue overperformance by end-July, and a 3% cut in the social security burden.