Topic: International Economics and Development

The Golden Rule of Spending Restraint

My tireless (and probably annoying) campaign to promote my Golden Rule of spending restraint is bearing fruit.

The good folks at the editorial page of the Wall Street Journal allowed me to explain the fiscal and economic benefits that accrue when nations limit the growth of government.

Here are some excerpts from my column, starting with a proper definition of the problem.

What matters, as Milton Friedman taught us, is the size of government. That’s the measure of how much national income is being redistributed and reallocated by Washington. Spending often is wasteful and counterproductive whether it’s financed by taxes or borrowing.

So how do we deal with this problem?

I’m sure you’ll be totally shocked to discover that I think the answer is spending restraint.

More specifically, governments should be bound by my Golden Rule.

Ensure that government spending, over time, grows more slowly than the private economy. …Even if the federal budget grew 2% each year, about the rate of projected inflation, that would reduce the relative size of government and enable better economic performance by allowing more resources to be allocated by markets rather than government officials.

I list several reasons why Mitchell’s Golden Rule is the only sensible approach to fiscal policy.

A golden rule has several advantages over fiscal proposals based on balanced budgets, deficits or debt control. First, it correctly focuses on the underlying problem of excessive government rather than the symptom of red ink. Second, lawmakers have the power to control the growth of government spending. Deficit targets and balanced-budget requirements put lawmakers at the mercy of economic fluctuations that can cause large and unpredictable swings in tax revenue. Third, spending can still grow by 2% even during a downturn, making the proposal more politically sustainable.

The last point, by the way, is important because it may appeal to reasonable Keynesians. And, in any event, it means the Rule is more politically sustainable.

I then provide lots of examples of nations that enjoyed great success by restraining spending. But rather than regurgitate several paragraphs from the column, here’s a table I prepared that wasn’t included in the column because of space constraints.

It shows the countries that restrained spending and the years that they followed the Golden Rule. Then I include three columns of data. First, I show how fast spending grew during the period, followed by numbers showing what happened to the overall burden of government spending and the change to annual government borrowing.

Golden Rule Examples

Last but not least, I deal with the one weakness of Mitchell’s Golden Rule. How do you convince politicians to maintain fiscal discipline over time?

I suggest that Switzerland’s “debt brake” may be a good model.

Can any government maintain the spending restraint required by a fiscal golden rule? Perhaps the best model is Switzerland, where spending has climbed by less than 2% per year ever since a voter-imposed spending cap went into effect early last decade. And because economic output has increased at a faster pace, the Swiss have satisfied the golden rule and enjoyed reductions in the burden of government and consistent budget surpluses.

In other words, don’t bother with balanced budget requirements that might backfire by giving politicians an excuse to raise taxes.

If the problem is properly defined as being too much government, then the only logical answer is to shrink the burden of government spending.

Last but not least, I point out that Congressman Kevin Brady of Texas has legislation, the MAP Act, that is somewhat similar to the Swiss Debt Brake.

We know what works and we know how to get there. The real challenge is convincing politicians to bind their own hands.

Hungary’s Slide Towards Authoritarianism

Yesterday’s general election in Hungary has given Viktor Orbán’s party, Fidesz, a very comfortable majority in the Hungarian Parliament, while strengthening the openly racist Jobbik party, which earned over 21 percent of the popular vote. Neither of this is good news for Hungarians or for Central Europe as a whole.

In the 1990s, Hungary was among the most successful of transitional economies of Central and Eastern Europe. With a significant exposure to markets in the final years of the Cold War and a political establishment committed to reforms, it was often singled out as an example of how a successful, sustained transition towards market and democracy should look like.

In 2014, the situation could not be more different. Hungary’s economic policies have become increasingly populist and haphazard, as the government has confiscated the assets of private pension funds, undermined the independence of the central bank, and botched the consolidation of the country’s public finances (p. 77). Worse yet, Hungary has seen a growth of nationalist and anti-Semitic sentiments which have not been adequately countered by the country’s political elites. In a recent column, I wrote about Mr. Orbán’s personal responsibility for the disconcerting political and economic developments in Hungary:

Mr. Orbán’s catering to petty nationalism often borders on selective amnesia about certain parts of Hungarian history. Recently the Federation of Hungarian Jewish Communities, the Mazsihisz, announced it would not take part in the Orbán government’s Holocaust commemorations. According to the Mazsihisz, the framing of the ceremonies whitewashes the role that the Hungarian government played and focuses exclusively on the crimes perpetrated by the Germans—despite the fact that Hungary adopted its first anti-Jewish laws as early as 1938.

Mr. Orbán’s tone-deafness when it comes to historical symbols goes hand in hand with a concerted effort to undermine the foundations of liberal democracy and rule of law in Hungary. Since Mr. Orbán came to office four years ago, Fidesz has consolidated its political power and used it to pass controversial legislation tightening media oversight, as well as constitutional changes that curb judicial power and restrict political advertising, among other measures.

The Whistleblower Versus Robert Mugabe and the United Nations

Zimbabwe’s Robert Mugabe is a corrupt authoritarian.  The United Nations is a wasteful, inefficient organization that tolerates corrupt authoritarians.  Unfortunately, the two don’t make beautiful music together.

Not everyone at the UN is corrupt.  One hero is Georges Tadonki, a Cameroonian who for a time headed the UN Office for the Coordination of Humanitarian Affairs (OCHA) in Zimbabwe.  The others are three judges in a United Nations Dispute Tribunal who last year ruled for Tadonki in a suit against the international organization.

Soon we will find if members of a UN appeals panel possess equal courage.  That ruling is expected soon with rumors circulating that these judges might reverse course and absolve the organization of misconduct.

In 2008 President Robert Mugabe, who took power in 1980, and ZANU-PF, the ruling party, used violent intimidation to preserve their control.  At the time Tadonki had been on station for six years and predicted epidemics of both cholera and violence. 

Unfortunately, UN country chief Agostinho Zacarias dismissed Tadonki’s warnings.  By the end of the year 100,000 people had been infected with cholera and thousands had died.  During the election campaigns hundreds also had been killed by government thugs, who succeeded in derailing democracy. 

Naturally, no good deed went unpunished.  After extended discord between the two UN officials, Tadonki was fired in January 2009.  There was little doubt that the action was retaliation for being right and embarrassing Zacarias—who now serves the UN in South Africa. 

The controversy demonstrates that something is very wrong with the UN system.  Tadonki decided to fight, though he had to ask the international law firm Amsterdam & Peroff to handle the litigation on a pro bono basis.  Last year the UN Dispute Tribunal based in Kenya heard his case and Judges Vinod Boolell, Nkemdilim Izuako, and Goolam Merran issued their 104-page judgment. 

They concluded “that the Applicant was not, at all material times, treated fairly and in accordance with due process, equity and the core values of the Charter of the Organization” and that OCHA management ignored the UN’s “humanitarian values.”  The tribunal ordered the UN to apologize for its misbehavior, investigate the mistreatment of Tadonki, hold his superiors accountable for their misconduct, cover Tadonki’s litigation costs, pay past salary through the judgment date, and provide $50,000 in “moral damages for the extreme emotional distress and physical harm suffered by the Applicant.”

Authoritarian Governments Use Old Smears to Tear Down Their Opponents

Anne Applebaum reports on how old smears are still used to support illiberal ideas and authoritarian government:

Halfway through an otherwise coherent conversation with a Georgian lawyer here — the topics included judges, the court system, the police — I was startled by a comment he made about his country’s former government, led by then-president Mikheil Saakashvili. “They were LGBT,” he said, conspiratorially.

What did that mean, I asked, surprised. Were they for lesbian, gay, bisexual and transgender rights? For gay marriage? Were they actually gay? He couldn’t really define it, though the conversation meandered in that direction for a few more minutes, also touching on the subject of the former president’s alleged marital infidelity, his promotion of female politicians, his lack of respect for the church.

Afterward, I worked it out. The lawyer meant to say that Saakashvili — who drove his country hard in the direction of Europe, pulled Georgia as close to NATO as possible and used rough tactics to fight the ­post-Soviet mafia that dominated his country — was “too Western.” Not conservative enough. Not traditional enough. Too much of a modernizer, a reformer, a European. In the past, such a critic might have called Saakashvili a “rootless cosmopolitan.” But today the insulting code word for that sort of person in the former Soviet space — regardless of what he or she thinks about homosexuals — is LGBT.

None of this is new, as Applebaum notes. We’ve seen it recently in Venezuela. In 2012, as soon as Henrique Capriles won a primary to become the candidate of the democratic opposition against Venezuelan strongman Hugo Chavez, the Wall Street Journal reported that he

was vilified in a campaign in Venezuela’s state-run media, which insinuated he was, among other things, a homosexual and a Zionist agent.

Homosexual and Jewish, I thought. When they attack him for being rich, they’ll have the trifecta of populist prejudices.

And sure enough, they did. Chavez himself declared:

The bourgeoisie have their candidate – the candidate of the anti-fatherland, of capitalism, of the Yankees. We are going to thrash that bourgeoisie.

Chavez, of course, also threw in “the candidate of the Yankees,” that is, the Americans. German democrats used to say that “anti-semitism is the socialism of fools.” Now in many countries we could say that anti-Americanism is the new anti-semitism. They’re often found in tandem.

The authoritarian government of Malaysia calls its chief opponent, Anwar Ibrahim, a homosexual and a gay propagandist, and has even prosecuted and jailed him on trumped-up sodomy charges.

All of these epithets – homosexual, Jewish, bourgeoisie, and more recently, “American” – have been staples of illiberal rhetoric for centuries. Liberals – advocates of democracy, free speech, religious freedom, and market freedoms – have been tarred as “cosmopolitan” and somehow alien to the people, the Volk, the faithful, the fatherland, the heartland.

Authoritarians such as Putin and Chavez’s successor Nicolas Maduro also like to denounce their opponents as “fascists,” even though they themselves fit most of the textbook definition of fascism – nationalism, anti-liberalism, a charismatic leader as the embodiment of the nation, and an economy controlled indirectly by the state, typically through nominally private owners

Liberals should denounce these sorts of vile and illiberal attacks, whether they stem from the American far right or far left, Vladimir Putin, the ruling party in Malaysia, or the Venezuelan socialists. 

Slovakia’s Strongman Heading for a Defeat?

A presidential election in Slovakia is usually a dull affair. The head of state plays a largely ceremonial role and, since 1993, the post has been occupied by fairly pedestrian, aging figures whose footprint on either domestic politics or on Slovakia’s reputation abroad has been negligible. 

Nevertheless, the stakes are higher in the second round of this year’s presidential election that will take place on Saturday. The leading candidate is the current prime minister, Robert Fico, whose party, Smer, has enjoyed a comfortable majority in the Slovak Parliament since the election in 2012. Fico, who has led Smer since its birth in 1999, served one term as prime minister between 2006 and 2010 and has traditionally enjoyed significant public support. A former member of the Communist Party, he once said that he “had not noticed” the Velvet Revolution of 1989, insinuating that free markets and an open political system have brought little good for ordinary people.

While presenting himself as a social democrat, Fico has successfully courted Slovak nationalists. For example, he has been a vocal opponent of recognizing Kosovo’s independence, for fears that the Hungarian-majority areas of southern Slovakia could follow the Kosovar example. While such concerns are baseless, as Slovak Hungarians display very little interest in secessionism, the rhetoric was successful in attracting Slovak voters that had previously supported fringe nationalist parties.

Fico’s cabinets have adopted several controversial policies, including the 2008 press law, which enabled politicians and companies to file successful lawsuits against newspapers. That has resulted in grossly disproportionate sanctions against Slovak media. One Slovak weekly was recently ordered to print a 54-page apology to a former member of parliament. In 2009, the weekly published an article about the parliamentarian’s company that allegedly received large payments from the European Union’s structural funds. Another weekly is currently being sued over another piece of investigative journalism. The €20 million in damages sought exceed, by an order of magnitude, the earnings of the magazine.

According to some, the presidency is an attractive exit option for Fico, whose two years in government have not produced the results that his electoral base hoped for. The country’s chronically high unemployment, especially among young people, shows no signs of receding, and many of the measures adopted by the government—including the repeal of the flat tax or the re-regulation of labor markets—have done little to foster economic growth and sound public finances.

Obama Meets the Pope

President Obama met with Pope Francis at the Vatican yesterday. After the meeting, Obama said that he was “was grateful to have the opportunity to speak with him [the Pope] about the responsibilities that we all share to care for the least of these, the poor, the excluded… And I was extremely moved by his insights about the importance of us all having a moral perspective on world problems and not simply thinking in terms of our own narrow self-interests.”

Later, in an interview with the Italian newspaper Corriere della Sera, “Obama pointed to the Pope’s concern for income inequality, saying … ‘Given his great moral authority, when the Pope speaks it carries enormous weight.’ Continuing to focus on income inequality, Obama said, ‘And it isn’t just an economic issue, it’s a moral issue. I think the Pope was speaking to the danger that over time we grow accustomed to this kind of inequality and accept it as normal. But we can’t.’”

Writing in The Atlantic last December, I took issue with some of Pope Francis’ assertions about the state of the world, including income inequality:

Academic researchers—from Xavier Sala-i-Martin of Columbia University, to Surjit Bhalla, formerly of the Brookings Institution and RAND Corporation, to Paolo Liberati of the University of Rome—all agree that global inequality is declining. That is because 2.6 billion people in China and India are richer than they used to be. Their economies are growing much faster than those of their Western counterparts, thus shrinking the income gap that opened at the dawn of industrialization in the 19th century, when the West took off and left much of the rest of the world behind.

Similarly, in a recent ReasonTV video, I explained why more—rather than less—capitalism is good for the poor. Simply put, poor people in countries with more economic freedom earn a higher share of the national income and have higher per capita incomes than poor people in countries with less economic freedom.

If Pope Francis and President Obama want to help the world’s poorest people, they should advocate for:

  • Free trade, so that African farmers and Asian tailors can sell their goods in Europe and America free of tariffs and quotas.
  • Ending agricultural (and other) subsidies, which are the products of modern crony capitalism and benefit agricultural conglomerates and large corporations at the expense of everyone else.
  • Property rights, so that poor people can gain title to their land and use it as collateral for borrowing.
  • Privatization of education, water supply, health care and other supposedly public goods, which the corrupt and unaccountable governments in poor countries have underdelivered for decades.

Visiting Nigeria: Tragic Failure, Greater Potential

ABUJA, NIGERIA—Arriving in Abuja, Nigeria results in an almost simultaneous impression of poverty and potential.  After decades of economic disappointment, even collapse, much of Africa is growing. Yet even its leading states, such as Nigeria, remain locked in an impoverished past and fail to live up to their extraordinary potential.

I’ve arrived with a journalist group organized by SLOK Holding Co., chaired by former Gov. Orji Uzor Kalu, a potential presidential contender. Although cities such as Abuja (Nigeria’s capital), Lagos (Nigeria’s most populous urban area), and Port Harcourt (dominated by the nation’s oil industry) enjoy significant development, poverty is never far away. 

In Lagos, wealth has created a genuine skyline on Victoria Island. Yet crowded streets filled with poor street vendors sit in the shadows of these fine structures. Electrical outages are constant, requiring any serious enterprise to maintain a generator. 

Rural Nigeria is much poorer. Even the main highways are in desperate need of minimal maintenance, while burned and rusted wrecks, stripped of anything useful, litter the sides and medians.

Trash is tossed alongside or piled in medians. Roads off the main drag are dirt, always rutted, often muddy, and barely adequate. Most shops are shacks built on dirt just feet from traffic. 

Still, hope remains. Every where in Nigeria I saw enterprise. Open-air markets, which seem to occur every couple miles, are bustling, with people dashing hither-and-yon selling most everything you can find in a department store or supermarket. At major intersections and along busy streets, people sit in the median and walk into traffic hawking most anything, including triangular hazard signs (quite appropriate given Nigeria’s roads!). 

Intellectual capital also is growing. Citizens of this former British colony typically speak English, the global commercial language. I visited a university filled with bright and engaging students hoping to make better lives for themselves and their country.