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.

Sweden and Germany are among the three nations that have reduced the burden of government spending as a share of GDP, and both of those nations are doing better than their European neighbors.

Switzerland isn’t an EU nation, so it’s not included in Constantin’s chart, but government spending as a share of economic output also has been reduced in that nation over the same period, and the Swiss economy also is doing comparatively well.

The moral of the story is that reducing the burden of government spending is the right recipe for sustainable and strong growth. Growth also is far more likely if lawmakers refrain from class-warfare tax policy and instead seek to collect revenue in ways that minimize the damage to prosperity.

Unfortunately, that’s not happening in Europe…and it’s not happening in the United States.

A few countries are moving in the right direction, such as Canada, but with still a long way to travel.

The best role models are still Hong Kong and Singapore, and it’s no coincidence that those two jurisdictions regularly dominate the top two spots in the Economic Freedom of the World rankings.

My recent observations on Hoover’s Defining Ideas about the relationship of civil liberties to national security have drawn a stern response from Cato’s own Jim Harper, whose central claim is that I have sounded “needless anti-privacy notes” in my attack on the privacy protective policies that have been championed by Massachusetts Republican State Senator Robert Hedlund, whom I criticized for being too squeamish on aggressive and targeted government action to counter the threats that became all too visible on April 15, 2013. 

Harper’s initial parry is to stress a proposition that no one should care to deny, namely, that the Fourth Amendment imposes a bar against unreasonable searches and seizures, which in turn requires an examination of the purported relationship between the restriction that government seeks to impose and the evil that it seeks to defend against. But in his choice of example and articulation of principle, Harper is guilty of grievous non sequiturs that add needless confusion to a problem that is already difficult enough to handle.

To examine the relationship between privacy and security, it is always a mistake to start with an example that the author describes as “an illustration ad absurdum,” which is just what Harper does when he bravely denounces a rule that allows for “100% crotch checks at street corners in major cities.” The simple response is that this kind of action is under current law regarded as per se illegal even in connection with the so-called Terry stopswhich allow a police officer “to stop and frisk” individual on the public street if he or she has “reasonable suspicion” to think that the targeted person has engaged in illegal activity. 

That example has absolutely nothing to do with the design of a workable surveillance system. It also falsely calibrates the relevant choices by dismissing the current cries for increased surveillance as a “closer” question, when the two situations are worlds apart. The Fourth Amendment treatment of unreasonable searches and seizures rests on a critical distinction between investigation of particular suspects and the stopping of dangers from unknown quarters. There is a lot more information in the first case, so that a dragnet search makes no sense, which is why particularized evidence is required. But general surveillance at unknown targets has to spread its net far wider. It is both less intrusive and more comprehensive, and it can and does work. It was painfully clear from the pattern of events in Boston that the private surveillance cameras that were trained on the Boston Marathon provided indispensable information toward identifying and apprehending the Tsarnaev brothers. What makes their use unreasonable, when there is not the slightest evidence that the information so acquired was used for improper purposes unrelated to the search?

It may be “worth discussing,” as Harper suggests, whether the use of surveillance will help deter some crimes and stop others. But, if so, the only useful discussion is one that asks the means-ends question of how, in light of cost and privacy concerns, one can construct the best cost-effective surveillance system available, which can then be coordinated with the activities of police officers and volunteers on the ground, especially at any public event that presents a soft target.

But to dismiss these efforts on the unsupported speculation that “the possibility of apprehension seems not have occurred to the Tsarnaev brothers” can only be described as blinding error, especially in light of their frantic efforts to escape capture so they could strike again. Nor does it make the slightest sense to tie general surveillance policy to some dubious account of the psychological make-up of two individuals. It is far wiser to develop policies that improve the ability to track and identify dangerous suspects. Of course it is possible to construct a “surveillance architecture” that so dense as to be useless. But once again, the sensible case for beefing up Boston’s public surveillance does not require that system designers leap from one indispensable extreme to another. The real question is how to identify the comprehensive policies that do make sense.

Harper is equally off target about the potential gains from racial or ethnic profiling. No one accepts the extreme proposition that all terrorists come from the same ethnic stock or practice the same religion. But that observation offers absolutely no reason to ignore valuable information that could help tweak the design of surveillance systems of searches. The question here is not whether sensible protocols and profiles can narrow the search down to one-fifth the world’s population, most of which does not live in Boston anyhow. It is the question of whether one can winnow the list of potential suspects from 100 to 20 people, which, if done reliably, gives law enforcement a huge leg up in conducting its investigations.

In sum, Harper would have a stronger case if he had tried to comment constructively on serious proposals that are put forward. But to take an ill-advised a priori position that does nothing to advance either the protection of human life and human property, both private and public, is inconsistent with any sound libertarian position. Remember that libertarians like myself, and I hope Harper, regard the protection of both as the primary function of the state. Harper’s careless and imprecise invocation of the Fourth Amendment cannot conceal this fundamental truth.

A lot of people are writing about the Oregon Health Insurance Experiment results, released yesterday, which found zero evidence that expanding Medicaid to the most vulnerable people targeted by ObamaCare’s Medicaid expansion improves their physical health. Here’s my take on the study and its implications. Megan McArdle, Shikha Dalmia, Avik Roy, and Peter Suderman are making solid contributions to the debate. Zeke Emanuel gets points for making an admission against interest (“It’s disappointing”). Points also to Jennifer Rubin for her take on what the OHIE says about ObamaCare’s Medicaid expansion: “If there had been a giant trial of a heart medication with lousy results we wouldn’t proceed in mass-marketing the drug; we might even take it off the shelves.” Not a bad idea. Ezra Klein and Evan Soltas call for more such experiments. Yes! Let’s have more randomized, controlled trials of the effects of Medicaid, on pre-ObamaCare populations, in big states like California, New York, Texas, Florida, and Illinois, where we can harnass even more statistical power. The only unethical thing would be to keep spending trillions on this program without knowing whether it’s even effective (much less cost-effective).

Others are making less-solid contributions. Here’s a question for them.

Since the OHIE shows that Medicaid makes no difference in the diagnosis or use of medication to treat high blood pressure or high cholesterol, and has no effect on blood-sugar levels despite increasing diabetes diagnoses and medication use, would you support eliminating Medicaid coverage for these screenings and medications?

If not, why not?

I often argue that we need to preserve tax competition and tax havens in order to limit the greed of the political class.

Without some sort of external constraint, they will over-tax and over-spend, creating the kind of downward economic spiral already happening in some European nations.

Speaking of which, new evidence from Europe bolsters my case.

Back in 2009, facing pressure from the big G‑20 nations, all of the world’s major low-tax jurisdictions — even Switzerland — acquiesced to the notion that human rights laws protecting financial privacy no longer would apply to foreign investors.

In other words, high-tax governments now have much greater ability to track — and tax — flight capital.

So how have they responded since that time? Well, look at this chart from the European Union’s new report on taxation trends. Tax rates have begun to increase, reversing a very positive trend (which began with the Reagan and Thatcher tax cuts, though this chart only shows data since 1995).

We can’t say, of course, that the increase in tax rates since 2009 is because tax competition was eroded. Just like we can’t say the reduction of tax rates in the preceding years was because of tax competition.

But we do know that simple economic theory tells us that monopolists are more likely to raise prices than firms in competitive markets. Likewise, governments are more likely to raise tax rates if they think taxpayers don’t have escape options.

And we also know that the proponents of higher tax rates, such as the statist bureaucrats at the Paris-based OECD, are also the biggest opponents of tax competition. The OECD even complained in one of its reports that tax competition “may hamper the application of progressive tax rates.”

Well, those international bureaucrats (who, by the way, get tax-free salaries) are getting their wish. Tax rates are increasing.

However, you can’t make an omelet without breaking a few eggs. As a past representative of Europe’s political elite once remarked, “let them eat cake.”

Marie Antoinette eventually may have regretted her choice of words, but Europe’s current politicians are probably more clever and have contingency plans. When the you-know-what hits the fan and Europe descends into social disarray and economic chaos, ordinary people will be the ones at risk.

Unfortunately, the United States is on the same path, as shown by these sobering charts from the Bank for International Settlements (and also as illustrated by these very funny Michael Ramirez and Bob Gorrell cartoons).

For more information on the important liberalizing impact of tax competition, here’s the video I narrated for the Center for Freedom and Prosperity.

But remember that restraining fiscal burdens is not the only reason to preserve tax competition and tax havens. There also are very important moral reasons to support low-tax jurisdictions.

Well, it seems that Free​bank​ing​.org may be having its own little Bitcoin bubble, what with all the recent posting on the topic by Brad, Kurt, and myself. Still I can’t help adding one more, having planned to do so since my last post on the topic, and having as well a selfish motive in mind, to wit, that of supplying myself with some materials with which to revise and expand my paper on “Synthetic Commodity Money.”

I wish to accomplish that end by challenging Bitcoin fans to propose means by which one might combine the same advantages as Bitcoin presently offers with a mining or production protocol that, instead of adjusting mining rewards so as to achieve some predetermined output rate and limit, adjusts them so as to automatically alter the rate of coin production as needed to achieve some other objective. For example, the objectives might be that of achieving a steady rate of cybercurrency appreciation (as measured by the cybercurrency-equivalent CPI), or a steady level or growth rate for the total value of cybercurrency payments. But there are many others also worth contemplating. The general question is whether it is possible to have a more “elastic” or otherwise macroeconomically friendly alternative to Bitcoin. (Even the output of gold, after all, tended in the long run to respond to changes in that metal’s relative price, thereby ruling-out both persistent inflation and persistent (or sharp) deflation.)

In putting forward this challenge I don’t mean to endorse any particular monetary or macroeconomic policy ideal. I’m only interested in exploring the extent to which it may be possible to have mining protocols other than those calling for a steady (or steadily declining) rate of coin output. If there are, then the question whether any of them would in fact supply the basis for a “better” cybercurrency is one that would then be worth taking up.

As food for thought to those pondering the challenge, here are a few of the very interesting suggestions I received concerning it in the comments to my original Bitcoin post:

(Peter Surda): you cannot design a synthetic commodity whose supply mirrors macroeconomic aggregates, because these aggregate variables are exogenous to the network (whereas the hashing parameter of networks like Bitcoin only depends on time and the number of blocks in the blockchain, which from a perspective of the network are endogenous), so they cannot be unambigiously measured.

(Derka): Yes you can certainly base altcoin production (supply inflation) on any parameter (nominal or real GDP, employment, etc.), the tricky part is doing it without centralizing trust. For the sake of demonstration, call the parameter of interest X.

Option 1) Centralize authority. Give the WSJ authority (via public/​private key encryption) to report the value of X to the altcoin network. The altcoin network responds algorithmically to this news. Perhaps if X is NGDP and is down, increase production!

Option 2) Give the authority to the miners. Every miner could record the current value of X in the blocks they produce. Problematically, the miners will collude and devalue the currency to reap the hyperinflated rewards.

(Koen): but would it not be possible for the network to respond to patterns that occur in the network but that are reliably associated with (e.g. being the effect of or having the same cause as) certain (macro-)economic phenomena? I mean, for example, contractions in the money supply seem to have both a (macro-)economic reality outside of the network and specific effects within the network

(Justin Reitz): Off the cuff, it might be possible to use the Federal Reserve’s FRED API to automatically pull data on a chosen economic aggregate. Of course there are all sort of issues: timeliness of Fed data, data updates, security of the the FRED API, how to reduce the virtual currency in circulation, etc.

(tdbtdb): Perhaps this is what you mean when you mention the security of FRED, but clearly having such a system depend on FRED would put it under the control of whoever controls FRED, nagating the whole point. So there are 2 risks, one that unauthorized hackers could compromise FRED, the other that the people feeding data to FRED might feel tempted to lie.

I wish I could offer some real prize for more thoughts like those above, let alone for any more substantial answer to my challenge. But as I am no fatcat but only a humble college professor, I can offer nothing save my gratitude, and the modest reward of doing whatever I can to credit those responsible for their contributions to one component of what H. G. Wells (himself no mean futurist) considered the “permanently effective task before Mankind,” namely, that of “working out and applying…a Science of Currency.”

It’s to be expected that privacy will suffer a bear market after a terrorist attack or attempt. I’ve seen worse, of course, but was concerned this week to read a piece by Richard Epstein on the Hoover Institution web site that I think sounds needless anti-privacy notes. Professor Epstein is not only an important public intellectual, but a Cato adjunct scholar of which we’re proud, and a friendly professional colleague (to whose defense I’ll leap when he’s wronged).

The issue is what policies governments might adopt toward the end of terrorism prevention. Professor Epstein finds the statement of Massachusetts state senator Robert Hedlund (R‑Weymouth) to be a bridge too far. Hedlund says:

It’s not surprising that you have law enforcement agencies rushing out to use [the Boston bombing and subsequent manhunt] as pretext to secure additional powers but I think we have to maintain perspective and realize that civil liberties and the protections we’re granted under the Constitution and our rights to privacy, to a degree, are nonnegotiable…

You don’t want to let a couple of young punks beat us and allow our civil liberties to be completely eroded. I don’t fall into the trap that, because of the hysteria, we need to kiss our civil liberties away.

Professor Epstein calls that “dead wrong,” saying, “the last thing needed in these difficult circumstances is a squeamishness about aggressive government action.” Given the importance of preventing terrorism, claims of right against increased surveillance and racial or other profiling should be “stoutly resisted,” he says.

I agree with Professor Epstein that flat claims about a “right to privacy” shouldn’t limit surveillance. “Concern” with racial or ethnic profiling is not a sound basis for desisting from the practice. But I don’t take Hedlund’s statement to be a product of squeamishness, and I think it is in the main correct.

Where I think Professor Epstein goes wrong insofar as he wants law enforcement to have its way is in setting aside “technical difficulties” and “means-ends” questions as peripheral. For me, the Fourth Amendment’s bar on unreasonable searches and seizures demands coordination between means and ends in light of the technological situation (both in terms of doing harm and discovering it). It is not a given that government action is reasonable, and no amount of priority given to a threat makes an incoherent response reasonable and constitutional.

An illustration ad absurdum may help: Say the United States is credibly threatened with the possibility that a North Korean agent has snuck a nuclear weapon into the country. In response, the government institutes a program of 100% crotch checks at street corners in major cities. There is essentially no relationship between checking crotches and finding a nuclear weapon (which at its smallest is something like the size of a steamer trunk) or evidence of its whereabouts. It is unreasonable, even given the huge threat, to look for a North Korean nuke where it can’t be found. Searching the crotches of innocents is unreasonable. Affecting the persons of individuals as it does, due to the Fourth Amendment, it is unconstitutional.

The issues in terrorism prevention and punishment are closer, obviously, but it is at least worth discussing whether greater surveillance–greater-than-Boston-Marathon surveillance–would deter terrorists or make them easier to apprehend. Many terrorists are not concerned with worldly justice, and we have in the recent example two brothers who walked right through one of Boston’s most watched and filmed events to deposit their bombs on the street. The possibility of apprehension seems not to have deterred them.

The question raised by the Boston bombing seems not to be whether there should be surveillance, but rather whether the government should supplant civil society’s image-collection–dozens of private actors collecting data for pleasure and (all of our) security–with its own, watchful government net.

One can imagine a network of government cameras so dense, with special surveillance drones scrambled for any large event, that every visage is captured a number of times. If the vagaries of light and angle can be overcome, perhaps the dragnet includes facial recognition software and target tracking that passably identifies the whereabouts of everyone at all times they are in public.

I think it takes not just millions, but billions of dollars to deploy this surveillance architecture everywhere a terrorist act might occur. And for all this spending and cost in obscurity lost to law-abiding people, apprehension of suspects might improve by a few hours.

Such a program fails cost-benefit analysis. It is bad policy on the merits—unreasonable, in a word. And to the extent it is a search of things protected by the Fourth Amendment (not a given, though I’ve been toying with privacy in public since August 2001), it is unconstitutional.

The latest attack makes no case for racial or ethnic profiling. It has added literal Caucasians to the list of ethnicities involved in U.S. terror attacks, according to public consciousness. What profile algorithm turns up two Kazakhs and an American as abettors after-the-fact? Of course, terrorists come in all hues, including some of the most pale.

Most recent terror attacks in the United States have come from people claiming Islam as their religion. This fact is as undeniable as it is unhelpful in discovering terrorists. Knowing the correlation narrows the search for (our current, most concerning) terrorists down to one-fifth of the world’s population.

Profiling based on ethnicity or religion is a rather obvious statistical error that wastes the time and resources of law enforcement while it invades the interests, and sometimes rights, of the law-abiding. Even without considering equal protection or the right to practice one’s religion, the unreasoned nature of racial or religious profiling makes it a candidate for unconstitutionality if it results in a constitutional search or seizure. Claims of religious motivation can complete the picture, of course, when they inform an otherwise well-founded investigation and prosecution.

The right to have means and ends matched up in at least a plausible way is a right under the Fourth Amendment when it affects Americans’ security from government in their persons, houses, papers, and effects. That’s just a different expression of the right against unreasonable searches and seizures. This right is nonnegotiable, I think, and it is not a product of timidity about addressing terrorism. The government should not act incoherently in reaction to threats against the public, and I don’t think Professor Epstein would want it to.