At the European Resource Bank conference earlier this month, Pierre Bessard from Switzerland's Institut Liberal spoke on a panel investigating "The Link between the Weight of the State and Economic prosperity."
His presentation included two slides that definitely are worth sharing.
The first slide, which is based on research from the Boston Consulting Group, looks at which jurisdictions have the most households with more than $1 million of wealth.
Switzerland is the easy winner, and you probably won't be surprised to see Hong Kong and Singapore also do very well.
Gee, I wonder if the fact that Switzerland (#4), Hong Kong (#1), and Singapore (#2) score highly on the Economic Freedom of the World index has any connection with their comparative prosperity?
That's a rhetorical question, of course.
Most sensible people already understand that countries with free markets and small government out-perform nations with big welfare states and lots of intervention.
Speaking of which, let's look at Pierre's slide that compares Swiss public finances with the dismal numbers from Eurozone nations.
The most impressive part of this data is the way Switzerland has maintained a much smaller burden of government spending.
One reason for this superior outcome is the Swiss "Debt Brake," a voter-imposed spending cap that basically prevents politicians from increasing spending faster than inflation plus population.
Now let's compare Switzerland and France, which is what I did last Saturday at the Free Market Road Show conference in Paris.
As part of my remarks, I asked the audience whether they thought that their government, which consumes 57 percent of GDP, gives them better services than Germany's government, which consumes 45 percent of GDP.
They said no.
I then asked if they got better government than citizens of Canada, where government consumes 41 percent of GDP.
They said no.
And I concluded by asking them whether they got better government than the people of Switzerland, where government is only 34 percent of economic output (I used OECD data for my comparisons, which is why my numbers are not identical to Pierre's numbers).
Once again, they said no.
The fundamental question, then, is why French politicians impose such a heavy burden of government spending - with a very high cost to the economy - when citizens don't get better services?
Or maybe the real question is why French voters elect politicians that pursue such senseless policies?
But to be fair, we should ask why American voters elected Bush and Obama, both of whom have made America more like France?
I'm not reluctant to criticize my friends at the Heritage Foundation. In some cases, it is good-natured ribbing because of the Cato-Heritage softball rivalry, but there are also real policy disagreements.
For instance, even though it is much better than current policy, I don't like parts of Heritage's "Saving the American Dream" budget plan. It's largely designed to prop up the existing Social Security system rather than replace the existing tax-and-transfer entitlement system with personal retirement accounts. And while the plan contains a flat tax, it's not the pure Hall-Rabushka version. One of the most alarming deviations, to cite just one example, is that it creates a tax preference for higher education that would enable higher tuition costs and more bureaucratic featherbedding.
That being said, I'm also willing to defend Heritage if the organization is being wrongly attacked. The specific issue we'll review today is "austerity" in Europe and whether Senator Sheldon Whitehouse of Rhode Island is right to accuse Heritage of "meretricious" testimony.
Let's look at the details.
Earlier this month, Paul Krugman wrote that, "a Heritage Foundation economist has been accused of presenting false, deliberately misleading data and analysis to the Senate Budget Committee." Krugman was too clever to assert that the Heritage economist "did present" dishonest data, but if you read his short post, he clearly wants readers to believe that an unambiguous falsehood has been exposed.
Krugman, meanwhile, was simply linking to the Washington Post, which was the source of a more detailed critique. The disagreement revolves around whether Europeans have cut spending or raised taxes, and by how much. The Heritage economist cited one set of OECD data, while critics have cited another set of data.
So who is right?
Conn Carroll of the Washington Examiner explains that the Heritage economist was looking at OECD data for 2007-2012 while critics are relying on an OECD survey of what politicians in various countries say they've done since 2009 as well as what they plan to do between now and 2015.
Whitehouse believed he had caught Furth and The Heritage Foundation in a bald face lie. ...There is just one problem with Whitehouse's big gotcha moment: The staffer who spoon-fed Whitehouse his OECD numbers on "the actual balance between spending cuts and tax increases" failed to also show Whitehouse the front page of the OECD report from which those numbers came. That report is titled: "Fiscal consolidation targets, plans and measures in OECD countries." Turns out, the numbers Whitehouse used to attack Furth for misreporting "what took place in Europe" were actually mostly projections of what governments said they were planning to do in the future (the report was written in December 2011 and looked at data from 2009 and projections through 2015). At no point in Furth's testimony did he ever claim to be reporting about what governments were going to do in the future. He very plainly said his analysis was of actual spending and taxing data "to date." Odds are that Whitehouse made an honest mistake. Senators can't be expected actually to read the title page of every report from which they quote. But, considering he was the one who was very clearly in error, and not Furth, he owes Furth, and The Heritage Foundation an apology. Krugman and Matthews would be well advised to revisit the facts as well.
In other words, critics of Heritage are relying largely on speculative data about what politicians might (or might not) do in the future to imply that the Heritage economist was wrong in his presentation of what's actually happened over the past six years.
So far, we've simply addressed whether Heritage was unfairly attacked. The answer, quite clearly, is yes. If you don't believe me, peruse the OECD data or peruse the IMF data.
Now let's briefly touch on the underlying policy debate. Keynesians such as Krugman assert that there have been too many spending cuts in Europe. The "austerity" crowd, by contrast, argues that strong steps are needed to deal with deficits and debt, though they are agnostic about whether to rely on spending reforms or tax increases.
I've repeatedly explained that Europe's real problem is an excessive burden of government spending. I want politicians to cut spending (or at least make sure it grows slower than the productive sector of the economy). And rather than increasing the tax burden, I want them to lower rates and reform punitive tax systems.
The bad news is that Europeans have raised taxes. A lot. The semi-good news is that spending no longer is growing as fast as it was before the fiscal crisis.
In the grand scheme of things, however, I think Europe is still headed down the wrong path. Here's what I wrote back in January and it's still true today.
I don’t sense any commitment to smaller government. I fear governments will let the spending genie out of the bottle at the first opportunity. And we’re talking about a scary genie, not Barbara Eden. And to make matters worse, Europe faces a demographic nightmare. These charts, reproduced from a Bank for International Settlements study, show that even the supposedly responsible nations in Europe face a tsunami of spending and debt over the next 25-plus years. So you can understand why I don’t express a lot of optimism about European economic policy.
By the way, I'm not optimistic about the long-term fiscal outlook for the United States either. In the absence of genuine entitlement reform, we'll sooner or later have our own fiscal crisis.
The 13th Doha Forum has convened, with your loyal correspondent in attendance. It is an impressive gathering, filling the luxurious Ritz‐Carlton. Cars are checked for bombs before approaching the hotel. Guests have to go through a metal detector both entering the hotel and inside heading to the conference. The meeting room was full, with just about every citizen of Qatar (who only make up something like 15 percent of the population) seeming to line the hallway before the Emir arrived.
There are few more tragic figures than onetime national leaders who have fallen away from the centers of power. For instance, after the Qatar royals, who still do matter, opened the gathering, to the stage strode a frustrated former British prime minister trying to remain relevant. The Right Honorable Gordon Brown, who finally grabbed the premiership from his frenemy Tony Blair only to lose it in the 2010 election, twice quoted John F. Kennedy while chattering on about the importance of interdependence.
Brown also urged the creation of a North African‐Middle Eastern development bank to promote economic growth in such nations as Egypt — which, he failed to note, has been buried in foreign aid for years without generating economic growth. The former PM was introduced as preventing a new Great Depression (who knew!) and later lauded for his “profound” ideas (apparently defined as previously advanced by his hosts in Qatar).
Francois Fillon, a former prime minister of France, followed, telling us that we needed to solve the Syrian conflict, create a Middle Eastern financial institution, and “defend European civilization,” whatever that means. The moderator declared his ideas to be “fascinating” and his mention of Europe to be an example of “self‐reflection.”
Amadou Bondou, the vice president of Argentina — which has made a practice of looting the productive and stealing people’s retirement savings — denounced austerity. These policies are having “negative repercussions” on poor people, he complained. No doubt, they are. However, if you have a wild party, you can’t very well expect everyone else to pay the clean‐up costs. Next time countries, especially his own, should think before blowing their budgets to enrich favored interests and win votes.
Wolfgang Ischinger, chairman of the Munich Security Conference, concluded the first session with a discussion about the importance of solving the Syrian conflict. He suggested a comprehensive conference to end the fighting and conduct of proxy wars in the region. Alas, what evidence is there that the parties are prepared to settle or that their backers are prepared to stay out? He also urged more humanitarian assistance for Syrians. He worried that if the Europeans fail to give more aid they may be left with no friends at all in Syria. Given the way that conflict is going, why would that be such a bad thing? Trying to make friends is about the dumbest reason one can imagine for getting involved in such a war.
Well, that’s the start here in Doha. I just can’t wait for additional “fascinating” observations from more “profound” thinkers like Messrs. Brown, Fillon, Bondou, and Ischinger!
The most important, powerful, and relevant argument against the value-added tax in the short run is that we can balance the budget in just five years by capping spending so it grows at the rate of inflation, a very modest level of fiscal restraint.
The most important, powerful, and relevant argument against the value-added tax in the long run is that more than 100 percent of America's long-term fiscal problem is too much spending.
So why even consider giving politicians a new source of revenue such as the VAT, particularly since this hidden form of national sales tax helped cause the European fiscal crisis by facilitating a bigger welfare state?*
And now Europeans are doubling down on that failed approach, thus confirming that politicians will rarely make necessary spending reforms if they think more revenue can be squeezed from taxpayers.
Here's a chart taken from the recent European Commission report on taxation trends in the EU. As you can see, the average VAT rate in Europe has jumped by nearly 2 percentage points in just five years.
As I explained last week, European politicians also have been increasing income tax rates, so taxpayers are getting punished when they earn their income and they're getting punished when they spend their income.
Which helps to explain why much of Europe is suffering from economic stagnation. Given the perverse incentives created by redistributionist fiscal policy, it makes more sense to climb in the wagon of government dependency.
For more information, here's my video that describes the VAT and explains why it's a bad idea.
*The same thing is now happening in Japan.
P.S. I don't know if you'll want to laugh or cry, but the tax-free bureaucrats at the Organization for Economic Cooperation and Development actually argue that the VAT is good for jobs and growth.
Paul Krugman recently tried to declare victory for Keynesian economics over so-called austerity, but all he really accomplished was to show that tax-financed government spending is bad for prosperity.
More specifically, he presented a decent case against the European-IMF version of "austerity," which has produced big tax increases.
But what happens if nations adopt the libertarian approach, which means "austerity" is imposed on the government, rather than on taxpayers?
In the past, Krugman has also tried to argue that European nations have erred by cutting spending, but this has led to some embarrassing mistakes.
- He asserted that "British growth has stalled" because of "spending cuts," but he overlooked the elementary fact that government spending in the U.K. was growing twice as fast as inflation.
- And in the case of Estonia, where there actually were genuine spending cuts, he wanted people to somehow think that those cuts in 2009 were responsible for an economic downturn that occurred in 2008.
Now we have some additional evidence about the absence of spending austerity in Europe. A leading public finance economist from Ireland, Constantin Gurdgiev, reviewed the IMF data and had a hard time finding any spending cuts:
...in celebration of that great [May 1] socialist holiday, "In Spain, Portugal, Greece, Italy and France tens of thousands of people took to the streets to demand jobs and an end to years of belt-tightening". Except, no one really asked them what did the mean by 'belt-tightening'. ...let's check out expenditure side of Europe's 'savage austerity' story... The picture hardly shows much of any 'savage cuts' anywhere in sight.
As seen in his chart, Constantin compared government spending burdens in 2012 to the average for the pre-recession period, thus allowing an accurate assessment of what's happened to the size of the public sector over a multi-year period.
Here are some of his conclusions from reviewing the data:
Of the three countries that experienced reductions in Government spending as % of GDP compared to the pre-crisis period, Germany posted a decline of 1.26 percentage points (from 46.261% of GDP average for 2003-2007 period to 45.005% for 2012), Malta posted a reduction of just 0.349 ppt and Sweden posted a reduction of 1.37 ppt.
No peripheral country - where protests are the loudest - or France et al have posted a reduction. In France, Government spending rose 3.44 ppt on pre-crisis level as % of GDP, in Greece by 4.76 ppt, in Ireland by 7.74 ppt, in Italy by 2.773 ppt, in Portugal by 0.562 ppt, and in Spain by 8.0 ppt.
Average Government spending in the sample in the pre-crisis period run at 44.36% of GDP and in 2012 this number was 48.05% of GDP. In other words: it went up, not down.
...All in, there is no 'savage austerity' in spending levels or as % of GDP.
I'll add a few additional observations.
With the death of Margaret Thatcher, and the ensuing profusion of commentary on her legacy, it is worth looking back at an overlooked chapter in the Thatcher story. I am referring to her 1981 showdown with the Keynesian establishment — a showdown that the Iron Lady won handily. Before getting caught up with the phony “austerity vs. fiscal stimulus” debate, the chattering classes should take note of how Mrs. Thatcher debunked the Keynesian “fiscal factoid.”
According to the Oxford English Dictionary, a factoid is “an item of unreliable information that is reported and repeated so often that it becomes accepted as fact.” The standard Keynesian fiscal policy prescription for the maintenance of non‐inflationary full employment is a fiscal factoid. The chattering classes can repeat this factoid on cue: to stimulate the economy, expand the government’s deficit (or shrink its surplus); and to rein in an overheated economy, shrink the government’s deficit (or expand its surplus).
Even the economic oracles embrace the fiscal factoid. That, of course, is one reason that the Keynesians’ fiscal mantra has become a factoid. No less than Nobelist Paul Krugman repeats it ad nauseam. Now, the new secretary of the treasury, Jack Lew (who claims no economic expertise), is in Europe peddling the fiscal factoid.
Unfortunately, the grim reaper finally caught up with Margaret Thatcher — but not before she laid waste to 364 wrong‐headed British Keynesians.
In 1981, Prime Minister Thatcher made a dash for confidence and growth via a fiscal squeeze. To restart the economy, Mrs. Thatcher instituted a fierce attack on the British fiscal deficit, coupled with an expansionary monetary policy. Her moves were immediately condemned by 364 distinguished economists. In a letter to The Times, they wrote a knee‐jerk Keynesian response: “Present policies will deepen the depression, erode the industrial base of our economy and threaten its social and political stability.”
Mrs. Thatcher was quickly vindicated. No sooner had the 364 affixed their signatures to that letter than the economy boomed. Confidence in the British economy was restored, and Mrs. Thatcher was able to introduce a long series of deep, free‐market reforms.
As for the 364 economists (who included seventy‐six present or past professors, a majority of the Chief Economic Advisors to the Government in the post‐WWII period, and the president, as well as nine present or past vice‐presidents, and the secretary general of the Royal Economic Society), they were not only wrong, but also came to look ridiculous.
In the United States, the peddlers of the fiscal factoid have never suffered the intellectual humiliation of their British counterparts. In consequence, American Keynesians can continue to peddle snake oil with reckless abandon and continue to influence policy in Washington, D.C., and elsewhere.
The confirmation hearings on Chuck Hagel’s nomination to head the Pentagon are mercifully over. His wobbly performance earned derision among neoconservatives, but he responded as they intended to an interrogation that was all about politics, not policy.
As I have noted before, Hagel is under fire because he disputed neoconservative nostrums to speak unpleasant truths to the Republican Party. He was an orthodox conservative, including on foreign policy. However, he was an Eisenhower, not a Dubya, Republican: Hagel criticized the debacle in Iraq, urged negotiation to forestall Iran from developing nuclear weapons, and backed reductions in today’s bloated military budget. General turned President Dwight Eisenhower could not have put it better.
But this enraged a GOP that has turned perpetual war into its most important foreign policy plank. Hence the ludicrous attempt to paint him as an anti‐Semite. Only slightly less dishonest was the performance of Hagel’s Republican interlocutors in the Senate, who asked the sort of questions which could not be honestly answered without wrecking the political façade behind which legislators on both sides of the aisle hide. His performance was disappointing, but far more striking is the fact that the uber‐hawks who badgered him over every past statement exhibited little interest in exploring the most important challenges facing America.
Consider the analysis of questions from Rosie Gray and Andrew Kaczynski at Buzzfeed. They counted 166 questions about Israel — an important ally, but more important than every other ally combined? There were 144 questions about Iran. No one wants Tehran to build nukes, but U.S. intelligence does not believe Iran has an active weapons program and there is no evidence that the Iranian government cannot be deterred, as were Joseph Stalin and Mao Zedong. Surely there are options short of war. And is Iran that much more important than Afghanistan, where Americans continue to die, which rated only 20 questions? Sen. John McCain (R‑AZ) fixated on Iraq, an invasion that should never have been launched, irrespective of the impact of the “surge.” And from which, if he hadn’t noticed, U.S. troops have been withdrawn.
Nothing else received serious attention at the hearings. Not how to adjust America’s foreign policy to reflect inevitable Pentagon budget cuts, since Washington no longer can afford to police the globe. Not China, including the worrisome possibility of war between Japan and China over worthless islands in the Sea of Japan. Not North Korea and the enduring challenge of dealing with the world’s most malign actor.
Not Europe, which continues to under‐invest in the military while relying on America for its defense. Not Africa, where the U.S. is steadily being drawn into more conflicts. Not Russia, which, despite the difficult bilateral relationship, has been helpful in Afghanistan and Iran. Not Venezuela, where the possible death of Hugo Chavez could open up opportunities for reform and engagement with America.
And the neoconservatives claim to be serious about international issues and military capabilities.
Chuck Hagel is eminently qualified to be Secretary of Defense. As my colleague Chris Preble has noted, Hagel’s thinking is mainstream and noncontroversial. Obviously, one can disagree with him on particular issues, such as the possibility of nuclear disarmament. However, the president still will make the ultimate decisions. Hagel will bring a fresh perspective to administration discussions of foreign and military policy. That is reason enough to welcome him to the Pentagon.