Topic: International Economics and Development

Let America Benefit from Brain Drain

In a globalized economy, it is very easy for capital to cross national borders. This provides an excellent way for the market to punish governments that over-tax, over-spend, and over-regulate since capital will flow to jurisdictions with less statism. It also is increasingly easy for skilled labor to shift from less competitive nations to those with more opportunity. The United States often is at the top of the list of desired destinations for the world’s best-and-brightest. Unfortunately, even though these skilled workers and entrepreneurs would generate more wealth for America, they often are unable to overcome restrictive immigration laws. Investors’ Business Daily explains how this policy hurts the United States:

America has it all backward. Our country’s doors are open to the low-skilled while we keep out the talent that’s crucial to our competitiveness. …The global economy is a brain game, and the nations with the best-educated work forces are the ones that win. …there’s a talent gap that can be filled only by relaxing restrictions on foreign computer scientists, software engineers and other highly trained workers who want jobs in the U.S. …Much of the work in fields such as software development might still get done offshore. But that would not produce jobs here. More critically in the long run, it would deny America a stream of capable, creative people. For many visa holders, the temporary permit is a step toward permanent residency. Allowed to stay, they may do more than just work here. They may start their own businesses and create work for others. …The issue here isn’t America’s failure to control its borders. It’s that America does too good a job of excluding some of the people it most needs.

Iceland’s Laffer Curve

The Wall Street Journal notes that corporate tax revenue has jumped dramatically in Iceland, even though the corporate tax rate has been slashed to 18 percent. That sentence actually should say that revenues jumped because of the lower tax rate. Iceland is a clear example of the Laffer Curve. As the rate fell, companies had less reason to avoid taxes. The low rate also encouraged additional economic activity. Iceland’s workers are the biggest winners, of course, since they now enjoy higher incomes and more prosperity:

The benefits of low taxes are on full display in Iceland, which provides an almost perfect demonstration of the Laffer Curve. From 1991 to 2001, as the corporate-tax rate fell gradually to 18% from 45%, tax revenues tripled to 9.1 billion kronas ($134 million in today’s exchange rate) from just above 3 billion kronas. Since 2001, revenues more than tripled again to an estimated 33 billion kronas last year. Personal income-tax rates were cut gradually as well, to a flat rate of 22.75% this year from 33% in 1995. Meanwhile, the economy averaged annual growth rates of about 4% over the past decade.

The editorial also notes that tax competition is encouraging good policy in other European jurisdictions. It is not surprising that Swiss cantons are lowering tax rates, but it is noteworthy that even the tax-loving German politicians are being forced to reduce the tax burden:

In addition to Eastern Europe’s flat-tax movement, there is healthy rivalry from Switzerland, where the individual cantons can set their rates independently. Obwalden just lowered its corporate-tax rate to 6.6%, drawing criticism from the European Union, which called it an illegal subsidy. One of the biggest critics, Germany, recently announced that it will cut its corporate-tax rate to just below 30% next year from the current rate of about 38%.

U.S. Economic Misery — or Delusion?

Opponents of trade liberalization are painting themselves into a corner. They repeat endlessly that rising imports and trade deficits are bad for the U.S. economy and American workers. Imports and the trade deficits they fuel supposedly reduce U.S. employment and wages and impoverish American households as we borrow more and more and sell off the family jewels to support consumption. And since imports and trade deficits keep expanding, our economy must be getting worse, right?

Wrong. This morning the Labor Department reported that the U.S. unemployment rate fell again last month, to 4.5 percent, which must be full employment by anybody’s definition. Almost 100,000 net jobs were added in February, despite cold weather that crimped construction. Those job gains come on top of a revised net gain of 372,000 jobs in December and January, bringing net employment growth in the past four years to 6.5 million. Today’s report also confirms that real wages continue to rise for American workers.

Adding to the favorable picture, the Federal Reserve Board reported yesterday that the net household wealth of American families in the last quarter of 2006 reached a record $55.6 trillion. And that is net wealth: what we own after subtracting mortgage, consumer and other debts. Our net wealth is up 43 percent in the past four years, driven by increases not only in home values but also stock prices.

Granted, our infinitely complex, $13.5 trillion economy will have its ups and downs, but the current reality simply does not square with the politically tainted picture of economic misery and hopelessness being portrayed by certain critics of trade.

Swedish Pension Reform

Sweden is widely considered a cradle-to-grave welfare state, but that is somewhat misleading. The burden of government is significant, to be sure, but there have been some impressive market-oriented reforms. Sweden, for instance, has eliminated its death tax and implemented school choice.

Perhaps most surprising, Sweden has partially privatized its Social Security system. The amount going into private accounts is small — just 2.5 percent of earnings, so the system is not nearly as good as Chile’s, but it is much better than the American system.

In addition to small private accounts, Sweden also has created a direct link between taxes paid and benefits received. This shift to a “notional” defined contribution system represents a significant departure from traditional Social Security systems, which are akin to defined benefit schemes containing widespread redistribution.

The Wall Street Journal reports that the Swedish reform is inspiring other nations to move in a similar direction:

By pegging public pensions to individual earnings and overall life-expectancy rates, Sweden has given its citizens incentives to be more productive and retire later — and sidestepped the political paralysis that has stymied change elsewhere.

Some Eastern European nations have already ditched their struggling post-Communist systems and gone Swedish. Steps taken in countries as diverse as Brazil and Russia boast some Swedish elements. A World Bank book based on the Swedish model has been translated into Chinese.

…[C]alculating payouts according to salaries and aging projections gives [the Swedish system] the flexibility to accommodate revenue and population shifts. If the economy does poorly, the thinking goes, future pension payments will go down. And the longer people in a particular age group are projected to live, the smaller their pension payouts will be.

…The bottom line of the Swedish model: Most people will have to work harder to reap the kinds of pensions their grandparents could take for granted. “It puts the cost of aging onto the individual, rather than onto society,” says Sarah Brooks, an Ohio State University political-science professor who has studied the plan.

Skyscraper Signals

The boldest skyscraper project the world has seen in 75 years is currently being contructed in Dubai. The Burj Dubai will apparently top 2,600 feet, which would be 56% taller than the current tallest building (in Taipei) and more than twice as tall as the Empire State Building.

The American has a good cover story this month on the current tall building boom.

And Wikipedia has some construction shots of the Dubai project.

If privately financed, skyscraper projects are an interesting indicator of business sentiment in a city or a nation and investor bullishness on growth. If you want to know what business and investors in Chicago, Paris, London, Hong Kong, or Sao Paulo think about growth prospects in those cities, check out the skyscraper construction market. You can do that at this amazing site.  

Even Ayn Rand would be impressed with the current explosion in cloud-topping building projects.

Europe is Falling Further behind the United States

Although some politicians argue that America should emulate Europe, that choice would mean lower living standards and less prosperity. A new study from Eurochambres reveals that Europe is decades behind the US in important measures of competitiveness. The study also calculates how long it would take Europe to catch up to America, but that assumes the US becomes stagnant. In reality, as the EU Observer reports, America is growing faster than Europe and the gap between the two is widening rather than shrinking:

The EU is 22 years behind the US on economic growth according to a new study, with several other economic indicators showing further gaps despite Europe’s ambitious reform agenda to be praised by leaders at this week’s summit.

A report by Eurochambers, the Brussels-based business lobby, published on Monday (5 March) argues that the US reached the current EU rate of GDP per capita in 1985 and its levels in employment and research investment almost 30 years ago.

…according to the Eurochambers study, the EU time lag behind the US has expanded further since 2003 when the group published its first report comparing the economic indicators on both sides of the Atlantic. …Authors of the study point out that if calculations included the latest newcomers of Bulgaria and Romania, the gap between the EU and US would be even larger… in a bid to start catching up with the US on key Lisbon indicators, Europe would have to perform better than the States, according to the Eurochambers study, while the latest results show the opposite: in 2006, the US registered an average GDP growth of 3.3 percent and the EU about 2.9 percent, the highest since 2000.

Russia Examining Corporate Tax Rate Reduction

Lower tax rates are not a solution to all Russia’s problems, but tax policy is moving in the right direction. Tax-news.com reports that the government wants to reduce the corporate tax rate to 20 percent. Even more impressive, policy makers seemingly understand that lower corporate tax rates will have a larger supply-side effect than a reduction in the value-added tax, demonstrating a better grasp of economics than nine-tenths of the US Congress. The story also notes that Russia has taken other positive steps, though it does not mention the 13 percent flat tax implemented in 2001: 

Russia may cut its corporate profit tax rate to 20% from 24% as part of a three-year tax policy plan, Deputy Finance Minister Sergei Shatalov stated last week. The government had previously been considering a further reduction in value added tax, currently 18%, to as low as 13%, but Shatalov said that a cut in corporate profit tax would be more likely to stimulate economic growth and boost levels of investment. …Putin has stated many times that while the government remains committed both to simplifying tax legislation and reducing the tax burden, tax reform must be balanced against needs of business, which requires certainty in the tax code. Since 2002, the Putin administration has reduced or abolished a number of taxes, including turnover tax, payroll taxes, sales tax, and value added tax. According to Putin, in 2005 Russia’s tax burden eased to 27.4% of GDP, from 28.7% in 2004.