Topic: Tax and Budget Policy

Peru May Become Latin America’s Next Success Story

The Senate passed the free trade agreement with Peru on Tuesday and it could not have come at a better time. That’s because Peru is increasingly distinguishing itself in the region as a successful market democracy. More than five years of sustained high growth (Peru grew 8 percent last year) are transforming the economy and spreading development to regions of the country that have traditionally benefited little from past progress. Unlike other countries in the region such as Argentina or Venezuela that are also experiencing rapid growth, Peru’s growth is characterized by widespread investment and wealth creation as opposed to redistribution or the mere effects of high world commodity prices.

Why is Peru succeeding? Again, unlike various other South American countries, it has sustained the far-reaching market reforms of the early to mid 1990s, has deepened some of them, and maintained sound macro-economic polices. The policies of openness and stability are paying off. Anybody who has been visiting Peru during the past 15 years as I have has noticed vast improvements in countless areas of national and everyday life, including notable progress in the past several years. The center of Lima, notoriously crime-ridden and dirty, has become safe and attractive. That kind of revitalization has occurred throughout the city and in major cities and towns of Peru. Consumer goods and services—cell phones, household appliances, and private education, for example—previously unavailable or in short supply have proliferated and serve all markets, rich and poor.

A change in values more oriented to a modern society may also slowly be taking place. The majority of Peruvians supported the FTA with the United States. The quality of service and attention to detail seems to have improved among Peruvian workers and management across a broad array of businesses. Peruvian writer Mario Vargas Llosa recently noted that he was now much more hopeful about Peru, not because of Peru’s positive economic indicators, but rather because “something profound seems to have changed in the culture of the country. One would have to be blind not to see that.”

In his excellent and new book, La Revolución Capitalista en el Perú (The Capitalist Revolution in Peru), leading Peruvian journalist Jaime de Althaus carefully details some of the changes in Peruvian society.

Traditional and non-traditional exports have boomed, with the latter experiencing higher growth. Peru has now become an exporter of software, to the tune of $20 million last year and growing at a rate of 25 percent.

The middle class is growing. The gap between the rich and the poor and between Lima and the rest of the country has also shrunk. Income gains have been proportionately greater for the poor than for the rich.

Peruvian companies—many of them new—have become successful nationally and internationally, not only exporting abroad, but setting up plants and offices abroad in areas as diverse as textiles, soft drinks, mining, milk products, clothing, banking and detergents. Some Peruvian companies have seen their businesses nationalized in Evo Morales’s Bolivia.

Vast areas of the Peruvian coast that have long been desert have turned green as a result of the “silent agroindustrial revolution” that has also taken place in some parts of the interior. Peru’s produce is now diverse, ranging from sugar cane to paprika to asparagus.

Personal credit as a share of total credit has tripled in the past ten years and now accounts for about 24 percent of total credit.

Department stores and other businesses now regularly cater to the “popular” classes. Enormous malls have been built and are now thriving in some of the poorest sections of Lima.

President Alan Garcia, whose first term in office during the second half of the 1980s was a disaster, is building on this progress and—I never thought I would say this—is so far turning out to be pretty good. In recent weeks he has written two articles in El Comercio, the country’s leading newspaper, in which he sets out a bold vision of promoting growth that has set off an intense national debate and spurred the leading news magazine, Caretas, to put “The Turn to the Right” on a recent cover.

Garcia has called for Peru to grow at Asian levels for years to come. He has accused bureaucrats, NGOs, environmentalists and special interests of blocking important policy changes that would increase growth and reduce poverty. He has made specific proposals to allow private investment in large parts of the jungle so as to export wood and to better protect the region from those who illegally log it; he has called on the private titling of large areas of land so that those with resources can exploit that land; he has called on dramatically increasing private investment in mining and other natural resources in Peru; he has called for allowing more private investment in the fishing industry; he has called for hydro-electric dams to built throughout Peru by private capital, rather than the state; he has called for the state to give up property that it does not use and give up functions that are better performed by others. And so on.

Peru is experiencing market success and may still see more of it. Thus also it has become an embarrassment for Hugo Chavez, who has neighboring Bolivia and Ecuador as client states and is pouring a lot of resources into the Peruvian countryside in a campaign to promote his anti-capitalist ideology. Peru has become a key country in Latin America’s ideological battle between the modernizers and the populists.

A lot still needs to be done in Peru before it can be declared a success story. For example, property and land still needs to be titled in the mountains, taxes are still very high, bureaucratic regulations remain onerous, labor laws are extremely rigid, the educational system is terrible. But the free trade agreement will help because it will give permanence to trade policy; and policy stability and competition have been key to Peru’s success thus far. If Alan Garcia can complete Peru’s unfinished agenda, he will have finally pushed the country into modernity and would go down not only as one of the greatest presidents of Peru, but also of Latin America at a critical time in the region’s history.

Independence in 1776 to Dependence on 1776

I recently updated data I presented last year on the total number of federal subsidy programs.

It turns out that the federal government currently operates 1,776 subsidy programs. These include subsidies for states, cities, individuals, non-profit groups, and businesses.

As the chart shows, the number of subsidy programs has increased 25 percent since 2000. 

George W. Bush: He’s no Thomas Jefferson.

Taxes in 2009

All the Democratic presidential candidates appear to agree that taxes must go up.

We have been here before. Bill Clinton promised tax cuts in 1992 and then supported increases. Democrats in Congress supported Clinton’s tax hikes just as they had voted for the 1990 tax increases.

The result? Democrats lost almost one-quarter (63 seats) of their House caucus in the elections for the 103rd and 104th Congress. The Republican president that proposed the 1990 increases lost two years later.

The current group of Democratic presidential contenders may have forgotten this history lesson. I suspect congressional Democrats running next year will remember it.

The High Price of Too-Low Administrative Costs

Supporters of “Medicare-for-All” (and other reforms that would give the U.S. government primary responsibility for purchasing everyone’s medical care) boast that Medicare demonstrates that government can reduce administrative costs below those in America’s bloated, inefficient private sector.  They’re wrong, as Ben Zycher ably demonstrates.

But even if Medicare’s administrative costs are lower, that’s not a virtue

Why?  As David Hyman wryly argues in Medicare Meets Mephistopheles, Medicare keeps administrative costs down by shoveling money out the door with very little oversight.  Similarly, Tyler Cowen argues that administrative costs are efficient if they pay for themselves by reducing unnecessary spending.

Today’s New York Times offers an illustration of how Medicare’s too-low administrative costs leads to waste:

Medicare spends billions of dollars each year on products and services that are available at far lower prices from retail pharmacies and online stores, according to an analysis of federal data by The New York Times. The government agency has paid above-market costs for dozens of items, a comparison of Medicare figures with retail catalogs finds.

For example, last year Medicare spent more than $21 million on pumps to help older and disabled men attain erections, paying about $450 for the same device that is available online for as little as $108. Even for a simple walking cane, which can be purchased online for about $11, the government pays $20, according to government data.

These widespread price discrepancies, including those for oxygen services, have been noted in dozens of regulatory reports.

Private insurers incur administrative costs to make sure they (and their customers) aren’t getting ripped off.  Medicare doesn’t.  The Times article also illustrates why Medicare usually can’t:

[W]hen officials and politicians have tried to cut these costs, they have often encountered a powerful foe: the companies that sell these devices, who ask their elderly customers to serve, in effect, as unpaid lobbyists, calling and writing to their representatives in Congress, protesting at rallies, and even participating in political attacks against individual lawmakers who take on the issue.

“These industries rely on a basic threat: If you mess with us, we can turn the seniors against you,” said former Senator Alan K. Simpson, Republican of Wyoming, who tried cutting Medicare payments while he was in Congress…

Many of those battles focus on the $427 billion Medicare program. Because of fierce patient and corporate lobbying, for instance, Medicare still pays prices for many items that are based on rates established in the early 1980s, when devices were often much more expensive than they are now.

Even as the actual cost of many machines and services has fallen, Medicare has only occasionally lowered what it pays.

To argue for single-payer on the basis of Medicare’s administrative costs is the equivalent of arguing that, because I can set fire to a pallet of $100 bills with a cigarette lighter and a can of gasoline, I should be entrusted with even more pallets of cash because my administrative costs are such a small share of the money involved.

So staggeringly efficient, this Medicare.

Why Do European Politicians Want Tax Harmonization?

While it is possible that European politicians have a genetic predisposition for statist policies, I’ve never thought this is why they support tax harmonization. Self interest is a far more reasonable answer. More specifically, European nations generally have high fiscal burdens. For instance, government spending consumes nearly half of economic output in EU countries, compared to one-third of GDP in the United States.

Not surprisingly, this translates into a higher tax burden, which means jobs and investment generally flee Europe. Tax harmonization is an attempt to stop labor and capital from escaping by creating, for all intents and purposes, a “fiscal fence.” But European politicians also want to undermine tax competition because they know the situation is going to get worse. According to a new report, demographic changes almost certainly are going to result in an even bigger welfare state in the future. This means increasingly harsh tax rates on the remaining productive people - which means politicians will try even harder to prevent taxpayers from escaping. The EU Observer reports on the key statistic that is causing angst for Europe’s political class:

According to demographic predictions, the EU’s population will not only shrink by almost 20 million people by 2050, but its make-up will also change dramatically. While there are currently about four working people of working age for each person of pension age in the EU’s 27 member states, there will be fewer than two people to support every elderly person by 2050, with the population gradually ageing.

Should the Government Have a Monopoly on Money?

Writing for the New Republic, Alvaro Vargas Llosa asks the fundamental question of whether the Federal Reserve has been a net plus or a net minus for the American economy. Looking at the Fed’s track record, which includes disasters like the Great Depression and serious mistakes like the more recent high-tech and housing bubbles, Llosa astutely wonders whether money is too important to be left in the control of government:

Some of the country’s greatest economists, including Nobel Prize winners, have been saying for years that the Federal Reserve has probably caused more problems than it has solved since its creation in 1913. Its role in the last century’s boom and bust cycles is a matter of record; it looks as though it played a similar role in the current housing market crisis too. While the creation of the Federal Reserve was essentially a response to a series of bank runs, those crises were mild compared to the ones that were to follow. … All in all, financial instability has been far greater since the creation of the Federal Reserve. What did the Great Depression teach us? Essentially that even with the best of intentions, it is impossible for the authorities to manage the supply of money in accordance with the exact needs of the economy. A country’s economy is the sum of millions of people making decisions that no single individual is in a position to anticipate. … The current housing market and debt market crises are in good part the children of the Federal Reserve. By cutting rates 13 times between 2001 and 2003, and then keeping them very low for years, monetary policy contributed to the housing bubble. …once again, the Fed has turned out to be a factor of financial instability.

Edwards vs. Edwards on Hunger

My prior post on hunger in the United States attracted some comments in the blogosphere regarding what presidential candidate John Edwards has been saying about the issue.

Candidate Edwards has been claiming that 35 million Americans are going hungry. For example, in recent Thanksgiving comments he said: “More than 35 million Americans went hungry last year.”

That is not true. The U.S. Department of Agriculture is the official source for such statistics. Here is what the agency says:

“USDA does not have a measure of hunger or the number of hungry people. Prior to 2006, USDA described households with very low food security as ‘food insecure with hunger,’ and characterized them as households in which one or more people were hungry at times during the year because they could not afford enough food … In 2006, USDA introduced the new description “very low food security” to replace “food insecurity with hunger.”

O.K., well how big is the group called “very low food security?” If you look at the chart here, you see it is at most about 3% of the population (about 9 million people), or those with an episode of “very low food security” even a single time during a year.

In sum, this appears to be a good topic for a Washington Post’s Pinocchio analysis.