The IMF Fights Back

Responding to my post from last week, James Gordon, the Assistant Director of the Asia and Pacific Department at the International Monetary Fund, wrote to complain that I was being unfair in my criticism of the international bureaucracy. The full letter is reprinted below, and he makes two points. First, he argues that I was unfair to criticize the IMF for being quick to recommend higher taxes and currency devaluations. He certainly is correct that the IMF does occasionally propose good policies, but I am quite comfortable with my claim that bad policies generally are “high on the list” of recommendations. For those who want more information, the Policy Handbook chapter by Ian Vasquez of Cato, the Meltzer Report, and various studies by the Joint Economic Committee (here, here, here, and here) make the case that the IMF is too statist in its orientation.

Second, he argues that Japan has been frugal. Looking at the same OECD data (specifically, Annex Table 25), he uses 2005 as the base year to make his point, while I was using 2006 since I wanted to capture the most recent developments. But we both can be accused of cherry-picking the data, which is why I made the point in my original post that the long-run trend clearly shows an expansion in the burden of government spending. The more relevant point, however, is that Japan has a public sector - consuming more than 36 percent of GDP - that is far too large. According to IMF data, government spending consumes only about 16 percent of economic output in Hong Kong. If the bureaucrats really want to give Japan some much-needed advice, they should recommend sweeping and radical expenditure reductions rather than trimming-around-the-edges proposals that merely reduce the size of previously-scheduled spending increases. Mr. Gordon explains that there are “limits” to this approach given the “social objectives” of Japanese politicians. But why should the IMF let Japanese political constraints be a factor? Most important, recommending higher taxes turns the IMF into an enabler for Japan’s irresponsible politicians.

Here’s the full letter from the IMF:

Dear Dr. Mitchell:

I was glad to see in your recent blog (“Typical Bad Advice from the IMF”) that you sometimes wonder whether you are being unfair in characterizing the IMF as peddling snake oil economic advice such as higher taxes and currency devaluation. I encourage you to do more research into whether your prior is justified. On currency devaluation, you will be aware that over the last few years the IMF has been pushing China to do the opposite, namely to allow the exchange rate to appreciate more rapidly because it is undervalued. Certainly, in the past, we have recommended that countries devalue, but this has tended to be in cases where exchange rates were overvalued. On taxes, the IMF does not only recommend increases. Again it depends on the circumstances. For example, we have been supporting tax cuts in Australia and New Zealand of late because strong economic growth was leading to large fiscal surpluses.

In Japan, public debt is already very high and the population is aging rapidly. If left unchecked, social security spending (primarily pensions and medical spending) threatens to balloon over the next twenty years. Contrary to your assertion, the authorities have been making efforts to reform entitlement programs to limit this spending (the 2004 Pension Reform being a case in point). The authorities have also been cutting expenditure elsewhere (notably in public works). In fact, using the OECD figures you cite, general government spending declined (not increased as you say) to 35.8 percent of GDP in 2007 from 38.4 percent of GDP in 2005. There are, however, limits to expenditure cuts, particularly given the Japanese government’s social objectives, hence our view that a consumption tax increase is also likely to be necessary.

Yours sincerely,

James Gordon
Assistant Director
Asia & Pacific Department
International Monetary Fund

WSJ Misses Turkey’s Tax Cuts

A lengthy front-page piece in the Wall Street Journal today (“Muslim Land Joins Ranks of Tigers”) chronicles Turkey’s explosive economic growth since 2001. The nation’s per-capita GDP appears to have more than doubled in the past five years.

The article mentions the free-market orientation of the ruling party, and it rightly points to much better inflation performance in recent years as a factor in reviving business confidence.

But the article completely missed Turkey’s dramatic corporate tax cuts of recent years. According to KPMG, Turkey’s corporate tax rate was reduced in steps from 44 percent in 1998 to just 20 percent today. The Journal notes that “foreign investment has jumped” in recent years, but it apparently didn’t occur to the reporters that taxation might be a factor.

Read about exciting tax cuts in many other nations, including nearby Muslim nation Egypt, in our upcoming Global Tax Revolution.

The Drug War Kills Innocents

How do I command the scales from the eyes of the drug warriors?

Former Catoite Radley Balko continues his coverage of the war on drugs at Reason. He posted yesterday on the Hit and Run blog about the killing of Tarika Wilson by raiding police officers. When one of them shot a dog, another thought it was hostile gunfire and fired blindly into the room where Wilson and her baby cowered. Now she’s dead.

[This case] shows how layer upon layer of flawed arguments can allow something as unjustifiable as the shooting death of an unarmed woman and the near-killing of her infant son to be dismissed as mere collateral damage. The initial argument is that we need to prohibit drugs to protect people from the harm they cause. That’s followed by the argument that we need to use aggressive, paramilitary raids to apprehend drug dealers, because they might dispose of evidence or shoot cops were drug warrants to be served by less confrontational means. That’s followed by the argument that we have to forgive cops who kill innocent people in these raids because the raids themselves are incredibly volatile and dangerous. Never mind that the police created the danger and volatility in the first place.

Put those arguments together and you get the absurd premise that the government’s killing of Tarika Wilson—and all of the drug raid deaths that came before her—is an acceptable consequence of the government’s responsibility to protect her (and all of us) from the effects of illicit drugs.

Day after day, week after week, Radley reports with remarkably controlled outrage on ‘isolated’ incidents like this.

Simple Methods of Deception

Members of the Church of Universal Coverage claim that government health insurance is more efficient than private insurance because, gosh, Medicare’s administrative costs are a mere 3 percent of claims.  I’ve noted before how that’s neither true nor something to brag about: skimping on administration leads to gobs of waste and fraud.

Well, God bless the folks at the Government Accountability Office, because they came up with a wonderful illustration of just how stupid and harmful Medicare’s administrative-costs strategy really is.  The following is from a recent GAO report.  I recommend reading the entire excerpt, especially if you’ve always nurtured the hope of someday defrauding Medicare of millions of dollars:

Why GAO Did This Study

According to the Department of Health and Human Services (HHS), schemes to defraud the Medicare program have grown more elaborate in recent years. In particular, HHS has acknowledged Centers for Medicare & Medicaid Service’s (CMS) oversight of suppliers of durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) is inadequate to prevent fraud and abuse. Specifically, weaknesses in the DMEPOS enrollment and inspection process have allowed sham companies to fraudulently bill Medicare for unnecessary or nonexistent supplies. From April 2006 through March 2007, CMS estimated that Medicare improperly paid $1 billion for DMEPOS supplies—in part due to fraud by suppliers.

Due to the committee’s concern about vulnerabilities in the enrollment process, GAO used publicly available guidance to attempt to create DMEPOS suppliers, obtain Medicare billing numbers, and complete electronic test billing. GAO also reported on closed cases provided by the HHS Inspector General (IG) to illustrate the techniques used by criminals to fraudulently bill Medicare…

What GAO Found

Investigators easily set up two fictitious DMEPOS companies using undercover names and bank accounts. GAO’s fictitious companies were approved for Medicare billing privileges despite having no clients and no inventory. CMS initially denied GAO’s applications in part because of this lack of inventory, but undercover GAO investigators fabricated contracts with nonexistent wholesale suppliers to convince CMS and its contractor, the National Supplier Clearinghouse (NSC), that the companies had access to DMEPOS items. The contact number GAO gave for these phony contracts rang on an unmanned undercover telephone in the GAO building. When NSC left a message looking for further information related to the contracts, a GAO investigator left a vague message in return pretending to be the wholesale supplier. As a result of such simple methods of deception, both fictitious DMEPOS companies obtained Medicare billing numbers…

After requesting an electronic billing enrollment package and obtaining passwords from CMS, GAO investigators were then able to successfully complete Medicare’s test billing process for the Virginia office. GAO could not complete test billing for the Maryland office because CMS has not sent the necessary passwords. However, if real fraudsters had been in charge of the fictitious companies, they would have been clear to bill Medicare from the Virginia office for potentially millions of dollars worth of nonexistent supplies.

Once criminals have similarly created fictitious DMEPOS companies, they typically steal or illegally buy Medicare beneficiary numbers and physician identification numbers and use them to repeatedly submit claims. In one case from HHS IG, a company received $2.2 million in payments from Medicare for supplies and services that were never delivered. The owner submitted these fraudulent claims from March 2006 through July 2006 using real beneficiary numbers and physician identification numbers that he had purchased illegally. The only employee not involved in the scheme was a secretary, who told HHS IG that there was no business activity in the office and that the owner was rarely there. Another case related to an individual who stole beneficiary numbers and physician identification numbers and submitted $5.5 million in claims for three fraudulent offices from October 2006 through March 2007. He operated one of these offices out of a utility closet containing buckets of sand mix, road tar, and a large wrench, but no medical files, office equipment, or telephone.

Simple methods of deception.  That’s all you need to fool Medicare.  Or for the Church of Universal Coverage to fool themselves. 

And they’re hoping that’s all they’ll need to fool you, too.

Freedom in China

As the world media get ready to focus on China for two weeks, there’s lots of discussion of human rights. Will Beijing censor the media and the athletes? Should President Bush attend? Should he meet with Chinese dissidents? Should he raise human rights issues with Chinese leaders?

In all this discussion, we may forget how much progress China has made in the past generation. From 1949 to the death of Mao Tse-tung or the rise of Deng Xiao-ping, there was no discussion of “human rights in China.” China was a totalitarian state, Red China, or Communist China to the less polemical. Its citizens had no rights. And the Western media had very little access to the country, so they couldn’t report any stories about human rights abuses. Were 65 million people killed by Mao’s regime, or something more or less? Questions of “human rights” pale in such a system.

On the eve of the Olympics, it’s refreshing to read a very thorough article in the New York Times titled “Despite Flaws, Rights in China Have Expanded.” Howard W. French reports:

Political change, however gradual and inconsistent, has made China a significantly more open place for average people than it was a generation ago.

Much remains unfree here. The rights of public expression and assembly are sharply limited; minorities, especially in Tibet and Xinjiang Province, are repressed; and the party exercises a nearly complete monopoly on political decision making.

But Chinese people also increasingly live where they want to live. They travel abroad in ever larger numbers. Property rights have found broader support in the courts. Within well-defined limits, people also enjoy the fruits of the technological revolution, from cellphones to the Internet, and can communicate or find information with an ease that has few parallels in authoritarian countries of the past.

It’s still difficult to challenge the party-state directly. Organizing even a study group, much less a tiny political party, can land you in jail.

On the other hand, the definition of what constitutes a political challenge has changed. Individuals are far less likely to run afoul of a system that no longer demands conformity in political views or personal lifestyles.

I’ve made the point in recent writings that wealth gives people a kind of freedom–more options for how to live their lives. French sees that dynamic at work in China:

The speeches of China’s leaders, with their gray imagery and paternalistic phrasings, have changed relatively little, emphasizing unity, harmony and economic growth under party rule. The reality on the ground, though, has been transformed, partly because a more dynamic economy necessitates a more dynamic society, partly because money gives people options they did not have when they were poor.

Way back in 1979, David Ramsay Steele of the Libertarian Alliance in Great Britain wrote about the changes beginning in China. He quoted authors in the official Beijing Review who were explaining that China would adopt the good aspects of the West–technology, innovation, entrepreneurship–without adopting its liberal values. “We should do better than the Japanese,” the authors wrote. “They have learnt from the United States not only computer science but also strip-tease. For us it is a matter of acquiring the best of the developed capitalist countries while rejecting their philosophy.” But, Steele replied, countries like China have a choice. “You play the game of catallaxy, or you do not play it. If you do not play it, you remain wretched. But if you play it, you must play it. You want computer science? Then you have to put up with striptease.”

I don’t know if China has striptease yet. But it has definitely discovered that Western habits accompany Western technology. After protests of a mysterious death in a rural county, the authorities tried to suppress news of the controversy. “But people wielding video cameras uploaded material to YouTube, and some Chinese journalists disputed official accounts that the riots had been put down peacefully.”

Traditionally, authoritarian regimes have been happy to distribute televisions widely, so that the state can disseminate its propaganda to every household. But with the loosening of controls in China and the increasing wealth, many citizens are buying satellite TVs, and that creates an entirely different dynamic:

For others, the impact of information about other countries has been just as great. He Weifang, a professor of law at Peking University, said that before the economic reform era began in 1979, the country was much like North Korea, where people were indoctrinated to believe that Chinese were the better off than people anywhere else.

“Today, even the farmers in remote areas have satellite TVs,” Mr. He said. “So whenever they see an election, such as the one held in Pakistan recently, they may wonder why, even though we have approximately the same economic conditions, they can elect their top leaders, and we can’t even vote for the leader of a small county. I think a consciousness of political rights has increased more than anything.”

And finally, French notes, even the legal system is groping toward the rule of law, including the enforcement of property and contract:

Even China’s party-run legal system is a fulcrum for experimentation, though in an ambiguous way that highlights the uncertainties in the country’s transition.

Judges do not have the power to rule independently in China. Yet the country now has 165,000 registered lawyers, a five-fold increase since 1990, and average people have hired them to press for enforcement of rights inscribed in the Chinese Constitution. The courts today sometimes defend property rights and business contracts even when powerful state interests are on the other side.

The changes in China over the past generation are the greatest story in the world–more than a billion people brought from totalitarianism to a largely capitalist economic system that is eroding the continuing authoritarianism of the political system.

When I read a much less insightful view of China’s development in the Washington Post Sports section–“The largest nation on earth has unexpectedly evolved to the point where it is capitalist in every practical sense, including an entrenched elite every bit as ruthless as America’s robber barons.”–I deeply regret that Howard W. French has just left the New York Times to take up a position teaching journalism. But you can still find his writings on his website, such as this recognition that, as libertarians often say, “capitalism is what happens when you let people alone”: “China’s example shows what kinds of remarkable results can follow when governments stop committing colossal blunders and grossly shackling or preying upon their own people… . This government has stopped making the massive, brutal blunders it committed in the 20th century, which killed or stunted the lives of huge numbers of its citizens. What it needs most now is to get out of the way of ideas and enterprise, and to learn, bit by bit, the virtues of trust.”

For another thoughtful view of China’s evolution, see this week’s Economist.

McCain, Obama, and Clean Coal

After you’ve watched federal policymaking for a number of years, you realize that the actual effectiveness of federal programs has absolutely no bearing on their survival or level of funding. That’s because the purpose of federal programs is not to solve problems, but to provide a menu of levers that politicians can pull to appeal to certain types of voters.  

We see this at play in the 2008 election with “clean coal,” which has attracted the attention of both candidates. Obama wants to “significantly increase the resources devoted to the commercialization and deployment of low-carbon coal technologies.” Meanwhile, McCain has pledged to spend $2 billion a year on clean coal technology if elected.

Since these pledges make for good bullet points in speeches, the campaigns don’t really care about the actual track record of federal subsidies to clean coal. But after the election, the next president should hesitate to increase such corporate welfare. Here is what I noted in Downsizing the Federal Government:

The federal clean coal program funds projects that burn coal in an environmentally friendly way, but the program is not very taxpayer-friendly. The Government Accountability Office found that many clean coal projects have “experienced delays, cost overruns, bankruptcies, and performance problems.” [GAO-01-854T] The agency examined 13 projects and found that “8 had serious delays or financial problems, 6 were behind their original schedules by 2 to 7 years, and 2 projects were bankrupt.”

One clean coal project in Alaska gobbled up $117 million of federal taxpayer money during the 1990s.[Washington Post, April 24, 2005] But the project never worked as planned, it cost too much to operate, and it was finally closed down as a failure. But project failure is not a problem in Washington because costs are benefits to politicians. Thus in 2005 Republican legislators inserted $125 million of taxpayer money into an energy bill to revive the failed Alaska project.