Ted Galen Carpenter
U.S. officials scarcely miss any opportunity to denounce Russia for severing Crimea from Ukraine and then annexing the peninsula. Yet Washington’s own track record regarding respect for the sovereignty and territorial integrity of countries is inconsistent, to say the least. Critics have noted that the position the United States and its NATO allies adopted toward the issue of Kosovo is at sharp variance with the current denunciation of Moscow’s conduct in Crimea. Not only did NATO launch an air war against Serbia to detach one of its provinces in 1999, but it proceeded to encourage and defend Kosovo’s subsequent unilateral declaration of independence in 2008 from what had become a fully democratic Serbia.
The insistence of U.S. officials that the Kosovo situation was unique and, therefore, did not set any precedent, barely passed the laugh test. Russia explicitly cited Western policy in Kosovo for its own actions in Georgia, detaching two of that country’s secessionist-minded territories, South Ossetia and Abkhazia, later in 2008. More recent efforts by staunch critics of Russia’s amputation of Crimea to argue that Western actions in Kosovo were entirely different are scarcely more credible than Washington’s original justifications. The reality is that the Kosovo, Georgia, and Crimea episodes were all acts of aggression.
Cyprus is another case that undermines Washington’s professed reverence for the territorial integrity of nations. NATO ally Turkey invaded the island in 1974 and proceeded to occupy the northern 37 percent of Cypriot territory. At the very least, the U.S. government looked the other way while its ally committed a blatant act of territorial theft. And a provocative new book, Kissinger and Cyprus: A Study in Lawlessness, by former Nixon Administration official Eugene Rossides, makes a solid case that the administration aided and abetted Ankara’s aggression.
The Turkish government certainly has never paid a significant price for invading and partitioning its neighbor. Nor has it done so for later establishing a secessionist entity, the Turkish Republic of Northern Cyprus, in the occupied territory and bringing in tens of thousands of settlers from the Turkish mainland.
It would be charitable to describe Washington’s response to these repeated violations of international law as anemic. Although an angry Congress imposed sanctions against Turkey following the invasion, the executive branch did everything possible to evade and undermine those restrictions. That was doubly true of subsequent administrations. There was not even an effort to exclude Turkey temporarily from its role in NATO. United States policy in the succeeding decades has been more critical of the victims of Ankara’s ongoing aggression than it has of Turkey’s conduct. Indeed, Washington’s primary goal has been to pressure the Cypriot government and public into signing an agreement that would accept the Turkish Republic of Northern Cyprus in all but name and legitimize the continued presence of Turkish occupation troops in the north.
Given that record, it is difficult to regard the U.S. opposition to Russia’s actions in Crimea as based on sincere respect for international law. There appears to be a disturbing double standard. Washington certainly has not held itself or its allies to the behavioral standards that it demands of other countries.
The state of Maryland has doled out more than $26 million in tax-credit subsidies to the hit Netflix series House of Cards, which films in the state. Last month in this space, my colleague David Boaz compared the arrangement itself to a House of Cards plot line: “It’s hard to imagine a better example of rent-seeking, crony capitalism, and conspiracy between the rich, the famous, and the powerful against the unorganized taxpayers.”
Shortly after he wrote, the plot began taking further twists reminiscent of fiction. In response to demands from the show’s producers for even steeper subsidies as the price of staying to film more seasons, some lawmakers decided to remind the Hollywood crowd who held the guns in the relationship:
Responding to a threat that the “House of Cards” television series may leave Maryland if it doesn’t get more tax credits, the House of Delegates adopted budget language … requiring the state to seize the production company’s property if it stops filming in the state. …
Del. William Frick, a Montgomery County Democrat, proposed the provision, which orders the state to use the right of eminent domain to buy or condemn the property of any company that has claimed $10 million or more credits against the state income tax. The provision would appear to apply only to the Netflix series, which has gotten the bulk of the state credits.
This smash-‘n’-grab approach to the use of eminent domain power is something of a local specialty in the Old Line State. In 1984, a bill was introduced in the Maryland legislature authorizing an eminent domain takeover of the Baltimore Colts, which had been eyeing the exits. In reaction, the owner packed the team into vans at night and moved to Indianapolis. In 2009, Gov. Martin O’Malley threatened eminent domain to keep the famed Preakness Stakes horse race, including its trademarks, copyrights, and contracts, from leaving Baltimore. (It stayed.)
On one level, it might seem like poetic justice for businesses that profit at taxpayer expense to come to grief through gross abuse of government power. But we should fear letting the power of eminent domain, dangerous enough when applied to land and rights of way, be asserted over intangible and movable assets. Once the state gets used to flexing that power, it will assuredly think of using it to seize enterprises whose entanglement with subsidies is less blatant and perhaps nonexistent. (Part of the answer, of course, is to stop the subsidy giveaways in the first place. And if the state can show that the producers somehow violated the terms applied heretofore to the deal, it would have a claim against them in more conventional litigation anyway.)
Cato adjunct scholar Ilya Somin discussed eminent domain over moveable and intangible assets in this 2009 post. He writes, “condemning mobile assets is a losing proposition for state and local governments – even if courts will let them do it,” noting that “businesses would quickly flee any jurisdiction that started using eminent domain in this way. … Moreover, other firms would forego the opportunity to move into the area in the first place.”
But on to the sequel: Legislators in Annapolis killed the eminent domain proposal in conference committee, and then frantic negotiations on extending the subsidies failed to reach agreement as to a final $3.5 million before the end of the legislative session last week, which means the state’s taxpayers may save that money (or save even more, if the show decides to leave).
Isn’t it nice when negotiations between two sets of rogues to fleece the rest of us break down? And it’s a credit to the structure of our constitutional system that it often succeeds in blocking such negotiations.
Congress passed the misnamed Patient Protection and Affordable Care Act four years ago. It was a signal political achievement. Alas, ObamaCare is proving to be a policy bust as Kathleen Sebelius leaves her job as Secretary of Health and Human Services.
For instance, health insurance premiums are rising dramatically, especially for the young. The federal government now mandates expensive “benefits” that many people do not need or desire.
Even more dramatic is the reverse Robin Hood redistribution from the generally lower-income young to the mostly wealthier old. As I point out in my new Forbes online article: “By requiring coverage irrespective of health status and limiting risk-based premium differentials ObamaCare shifted costs from gray-haired investment bankers to newbie sales associates. Despite the administration’s faux shock at the huge premium increases for the young, the legislation is working precisely as intended.”
Along with higher premiums came the destruction of existing plans. The president’s promise that if people liked their policies they could keep them was a calculated and cynical deception. The legislation explicitly overrode private choice to impose Washington’s preferred “benefit” mix.
Another impact of the ACA, discussed in a new report from the American Health Policy Institute, is to increase business costs through new taxes, mandated benefits, and administrative costs. Moreover, companies ultimately will end up paying indirect costs, such as a share of new taxes on others, such as for medical devices.
In 2012 large employers spent about $580 billion to cover employees and their dependents. AHPI figured these companies would have to spend an extra $4800 to $5900 per employee.
Some amount of this new expense will be shifted onto customers. How much depends on consumer demand and industry competitiveness. Moreover, companies will lose revenue as higher prices reduce sales.
Firms also will more aggressively shift costs onto employees. Between 1999 and 2013 the cost of employer-provided health insurance trebled, causing business to look for ways to cut corporate outlays. That effort will continue.
The third consequence of the ACA’s cost increases is to raise the price of hiring workers, which will reduce the number of jobs. The principle is simple: the more expensive government makes it for companies to add workers, the fewer workers companies will add.
Unfortunately, the administration is hiking business costs in more areas than just health care. Last year the Heritage Foundation’s James Gattuso and Diane Katz estimated that annual regulatory costs jumped roughly $70 billion during President Obama’s first term.
Explained Gattuso and Katz: “While historical records are incomplete, that magnitude of regulation is likely unmatched by any administration in the nation’s history.” In its fourth year alone the administration issued 2605 new rules, with annual regulatory costs jumping more than $23.5 billion. On top of that was another $4.6 billion in one-time implementation costs.
Unfortunately, there are thousands more proposed rules in the federal pipeline. Obviously, regulations have benefits as well as costs. However, public choice economics warns of perverse public incentives, with government agencies acting to advance their own interests—in particular, their influence, workforce, and budget—even if contrary to the public interest.
At a time of slow economic growth and high unemployment, the most painful consequence of hyper-regulation may be lost jobs. ObamaCare has a particularly pernicious impact because it directly raises the costs of hiring additional workers. And the president wants to inflate that burden still further by, for instance, raising the minimum wage and expanding regulations covering overtime pay.
The Affordable Care Act is many things, but it certainly is not affordable. “Vote for ObamaCare so people can find out what is in it,” declared then-House Speaker Nancy Pelosi. Now we know and most people are appalled at what they discovered. Higher costs, fewer choices, and lost jobs. Heckuva job, Barack!
Yonah Freemark, a writer over at Atlantic Cities–which normally loves any transit boondoggle–somewhat sheepishly admits that light rail hasn’t lived up to all of its expectations. Despite its popularity among transit agencies seeking federal grants, light rail “neither rescued the center cities of their respective regions nor resulted in higher transit use.”
Not to worry, however; Atlantic Cities still hates automobiles, or at least individually owned automobiles. Another article by writer Robin Chase suggests that driverless cars will create a “world of hell” if people are allowed to own their own cars. Instead, driverless cars should be welcomed only if they are collectively owned and shared.
The hell that would result from individually owned driverless cars would happen because people would soon discover they could send their cars places without anyone in them. As Chase says, “If single-occupancy vehicles are the bane of our congested highways and cities right now, imagine the congestion when we pour in unfettered zero-occupancy vehicles.” Never mind the fact that driverless cars will greatly reduce congestion by tripling roadway capacities and avoid congestion by consulting on-line congestion reports.
Chase’s motives are obvious: as the co-founder of several carsharing programs, including ZipCar and BuzzCar, she stands to make enormous profits if everyone adopts her model. Just why Atlantic Cities buys into her vision is less clear, but the love Atlantic Cities writers seem to have for transit and car sharing suggests a collectivist mentality, while the hatred they have for individually owned cars implies a dislike of giving other people freedom.
Of course, Chase has an explanation for why single- or zero-occupant vehicles are to be abhorred. “People consider the cost of individual car trips to be just the cost of gas,” she says, “and we won’t think twice about asking a driverless robot car to do our bidding.” In other words, people are too stupid to own their own cars; it would be much better to have a sharing system that forces people to see the “full cost” of driving (including profit for the owners of ZipCar).
Personally, I happily imagine sending my dog to a vet without me accompanying it. Even more likely, I look forward to sending my car in for servicing or to take an appliance to a shop for repair without wasting my time. People could be more productive if they didn’t have to be stuck behind the wheel of a car all the time, and everyone would be better off. But to Chase, such people would somehow pose a burden on everyone else.
Her solutions are, first, to make sure that “the cost for autonomous vehicles be high enough that each vehicle will need to be used well.” In other words, keep them out of the hands of ordinary people who might “misuse” them.
Second, she wants highway agencies to charge an extra per-mile fee to people whose cars run around without an occupant. Why? Zero-occupant cars impose no more costs on society than multi-occupant cars. The people who own the cars should get to decide when and where they go and how many people they will carry, not some central planner who hates cars and the freedom they offer.
There’s nothing wrong with car sharing if people want to do it, but it shouldn’t be imposed on people. The great thing about mass-produced automobiles is that nearly every household in American can afford one. Collectivists would send us back to the nineteenth-century two-class society in which a few wealthy people have freedom and mobility and everyone else is dependent on some collective form of transport–then they’ll demonize the people with freedom. That’s the wrong way for America to go.
The Dodd-Frank requirement that over-the-counter derivatives be centrally cleared is one of the (slightly) less controversial provisions of the Act, at least in spirit if perhaps not always in substance. But for a time, a few observers have worried - myself included - that concentrating derivatives clearing activities in one or two single-purpose entities may increase, rather than reduce, the risk to the broader economy posed by the default of a counterparty.
As it turns out, we skeptics are not alone. In yesterday’s Wall Street Journal, the good folks at BlackRock are cited as having raised concerns in a recent study about the lack of clarity regarding where the risk ultimately falls in the event of default by a large counterparty. Banks and investors want the clearinghouses themselves to backstop some of this risk. The BlackRock study notes that “post-crisis rules have forced a large swath of risky trades… and this risk needs to be addressed.”
It is perhaps, therefore, a good time to hark back to Craig Pirrong’s Cato Policy Analysis from 2010, released on the day the Act was signed into law. In it, Mr. Pirrong argues that central clearing leads to better and more efficient risk pricing ONLY if the clearinghouse has perfect information. He notes the risk sharing that occurs through the clearinghouse mechanism encourages excessive risk taking, which creates moral hazard. Pirrong also highlights that “if the clearinghouse has imprecise information, the margin levels it chooses will sometimes overly constrain the trading of its members and sometimes constrain them too little…all of these factors mean that it is costly for the clearinghouse to control moral hazard.” As Pirrong notes, a clearing mandate reduces market efficiency and poses “its own systemic risks in a world where information is costly.”
One of the major criticisms of the previous or “bilateral” approach to derivatives clearing was that banks and investors could not adequately monitor their own risk exposure to counterparties (with some side complaints about banks mispricing risk etc.). However, as the BlackRock study notes, it is not clear that the central clearing approach addresses this concern, especially since the rules governing outcomes in the event of a major default have yet to be finalized. In particular, if a major counterparty defaults and the clearinghouse is not holding sufficient collateral to cover that counterparty’s trades, who loses out? Is it the members? The Federal Reserve? (Remember, one of the Board’s first actions under Dodd-Frank was to allow clearinghouses to borrow at the discount window in the same way that commercial banks do). Will the clearinghouse perhaps declare bankruptcy (and, if so, what impact will the failure of a major utility have on operational stability)?
More importantly, just when counterparties have realized these products must be treated with caution, the system is incentivizing the market participants with the best information (the members) to pool and therefore increase the riskiness of their activities. Derivatives are an important economic tool and vital to most companies’ (financial or otherwise) risk management. But we should not assume that the framework created by Dodd-Frank will eliminate risk in the derivatives trade, real or perceived.
From the Washington Post:
For the parents of children with intractable epilepsy, the stream of constant seizures, emergency-room visits and powerful medications can become a demoralizing blur. Beth Collins of Fairfax County said her teenage daughter suffered as many as 300 epileptic seizures per day.
“There were days when I just laid in bed with her and prayed,” Collins said, “and watched her because I wasn’t sure what would happen.”
Now, the seizures have all but stopped. Each day, Collins gives her daughter Jennifer a dose of medical marijuana oil from a syringe, as any parent might administer liquid medicine to a child.
But Collins can’t offer the cannabis extract from her kitchen in Fairfax, where she raised Jennifer for 14 years. Instead, she does so in a small two-bedroom apartment in Colorado Springs….
“I feel a lot better,” Jennifer said of the treatment, which is scientifically untested. “I can focus more, I’m doing better on tests in school. My memory’s improved a lot.” Her seizures are “not completely gone,” but her mother said that “we’ve had days where I’ve seen very few, maybe one or two. That’s a major decrease.”
Another Virginia parent, Dara Lightle, says her daughter started having seizures at age 6. Nothing seemed to work. When doctors suggested removing part of her brain, Ms. Lightle put aside her earlier reservations about marijuana, and moved to Colorado. Daughter is doing much better. Instead of five seizures a day, she has had three seizures over the past 13 weeks.
Colorado and 19 other states have an medical exception to their laws banning marijuana. There is no exception in the federal law. To repeat, in the eyes of federal law, anyone who possesses marijuana is guilty of a crime. One more snippet from the Post:
Officials with the FDA, the Drug Enforcement Administration, the National Institute on Drug Abuse, and the Office of National Drug Control Policy all declined to discuss the government’s position on marijuana oil or relaxing restrictions on marijuana for research purposes.
Last week, former Justice John Paul Stevens penned an op-ed for the Washington Post on “The Five Words that Can Fix the Second Amendment.” The piece is actually an excerpt from his new book Six Amendments: How and Why We Should Change the Constitution. In the book, Stevens suggests some changes that would ratify his view of cases in which he stridently dissented, such as Citizens United and Heller.
Stevens’s dissent in Heller, the case in which a 5-4 Court held that the Second Amendment conveys an individual right to own guns even for those not part of a militia, is largely re-hashed in his Washington Post op-ed. In addition, there is, or was, a glaring error that the Post has since corrected sub rosa, that is, without acknowledging at the bottom that the piece was edited. As Josh Blackman originally reported, and thankfully preserved by excerpting, the first version contained this error:
Following the massacre of grammar-school children in Newtown, Conn., in December 2012, high-powered automatic weapons have been used to kill innocent victims in more senseless public incidents.
As Josh and others noted, not only were automatic weapons were not used at any recent high-profile mass shooting, they’ve been essentially illegal in the U.S. since 1934 and since 1986 they’ve been almost impossible to come by. Justice Stevens also repeated his error a few paragraphs down:
Thus, even as generously construed in Heller, the Second Amendment provides no obstacle to regulations prohibiting the ownership or use of the sorts of automatic weapons used in the tragic multiple killings in Virginia, Colorado and Arizona in recent years.
When you view the piece now, however, the words have magically disappeared. But they have not, apparently, disappeared from Justice Stevens’s book, which went to press with those errors. I don’t have a copy, but I checked by searching the inside of the book on Amazon for the word “automatic.”
Why is this omission important? Well, for one it is part of a long series of mistaken statements by many gun-controllers, including President Obama, who made a similar statement in a speech last spring. More generally, the gun control crowd often shows a pronounced ignorance of how guns work and which guns are actually illegal, which certainly doesn’t help when they try to make their case for more strict controls. For just two famous examples, Rep. Carolyn McCarthy (D-NY) once described a barrel shroud as the “shoulder thing that goes up” (it’s not), and Rep. Diana Degette (D-CO) once remarked that after high-capacity magazines are emptied they would not be reusable (they are).
It seems reasonable to conclude that, based on the prevalence of these errors by people who should know better, they don’t care too much whether their statements are accurate. To them, the fact that someone used a weapon to commit a mass shooting is enough to ban that weapon. Unfortunately for them, there is nothing about the weapons used in those atrocious crimes that meaningfully distinguishes them from weapons used every day by responsible, law-abiding Americans. The AR-15, for example, used by the shooter at Newtown, is the most popular rifle in the U.S. Ninety-nine point nine percent of the time it is used responsibly, including for self-defense. Ipso facto, it is not just for “spraying death.”
A better argument can be made that actual automatic machine guns “spray death.” And if those are what Justice Stevens believes were used at Newtown, then that seems relevant to his position on guns. I imagine, however, that his views wouldn’t change if he understood the truth. At the very least, however, the Washington Post should make clear that the piece was edited.
The Government Accountability Office’s annual duplication report is out. This year, the report highlights 30 ways that the federal government can save money. One way is to terminate the Advanced Technology Vehicles Manufacturing (ATVM) program, which provides government-subsidized loans to companies that make fuel-efficient cars. The program has been a failure, and it has cost taxpayers millions of dollars.
Established by the Energy Independence and Security Act of 2007, ATVM was authorized to provide a total of $25 billion in loans for projects that “support the production of fuel-efficient, advanced technology vehicles and components in the United States.” Companies that participated in the program could borrow funds directly from the government with very little out-of-pocket expenses—participants only had to pay some upfront borrowing costs. But Congress made the program even more lucrative in 2009 by provided $7.5 billion to help offset those borrowing costs.
The Department of Energy (DOE) has issued five ATVM loans totaling $8.4 billion so far—with an additional $3.3 billion in borrowing costs. In its promotional material for the program, DOE highlights three of the recipients: Ford Motor Company, Nissan North America, and Tesla Motors.
However, these DOE materials don’t mention loans to two other companies, Fisker Automotive and Vehicle Production Group (VPG). I think I know why: taxpayers lost almost $200 million on those two loans.
Fisker Automotive borrowed $529 million from the federal government to produce its luxury car, Karma. The loan was touted by the administration, including by Vice President Biden. Biden said “the story of Fisker is a story of ingenuity of an American company, a commitment to innovation by the U.S. government and the perseverance of the American auto industry.”
The car was a flop from the beginning. It was recalled, and it received poor performance ratings. Fisker lost an estimated $35,000 on each vehicle sold. A year after issuing the loan, DOE halted Fisker’s borrowing authority after the company had already borrowed $192 million. Fisker filed for bankruptcy shortly thereafter. Only $50 million of the $192 million has been recovered for taxpayers.
Vehicle Production Group had financial and production problems as well. In addition, its loan was questioned due to the political connection between its adviser and the White House. The adviser was a fundraiser for the White House and “headed Obama’s vice presidential selection committee in 2008.” The company quietly folded costing taxpayers the full $50 million loan.
The taxpayer losses from Fisker and VPG were in addition to the losses from other federal energy loans to companies such as Solyndra and Abound Solar. After all the bad press from these failed energy subsidies, demand for the loans dried up. According to a March 2013 report from GAO, DOE was no longer considering applications for the remaining $16.6 billion in loan authority and $4.2 billion in borrowing cost subsidies. Auto companies told GAO that the “costs of participating outweigh the benefits.”
However, Congress still has not rescinded ATVM’s loan authority. DOE could start reissuing loans under the failed program at any point, and it is re-launching its promotional efforts. Closing the program would not only save taxpayers money, it would reduce government interventions in the energy and automobile markets. For reformers in Congress, this change should be a no-brainer.
Political scientist Matt Grossmann discussed the results of his research on federal government growth in the Washington Post last week.
I combed through hundreds of history books covering American public policy since 1945, tracking the most significant domestic policy changes that made it into law and the actors that historians credit for those changes. Of the 509 most significant domestic policies passed by Congress, only one in five were conservative, in that they contracted the scope of government funding, regulation or responsibility. More than 60 percent were liberal: They clearly expanded government. The others offered a mix of liberal or conservative components or took no clear ideological direction.
Grossman mentioned one of the structural reasons why this has happened:
Liberal policies are self-reinforcing because they create beneficiaries who act as constituencies for their continuation and expansion. Policy debates center on what additional actions government should take, not whether to discontinue existing roles.
Grossman is essentially saying that not only has the size of the federal government expanded, but so has the scope. The problem is not just that programs such as Medicare keep growing, but also that Congress keeps adding new programs.
The following chart shows an official count of the number of federal benefit, subsidy, and aid programs—Medicare, farm subsidies, food stamps, and more than 2,000 others. The source is the CFDA website for recent years and hard copy CFDA catalogs for the older years.
There are many problems with The Washington Post’s recent article, “More College Students Battle Hunger as Education and Living Costs Rise.” Instead of discussing each problem—such as the claim that a college education is necessary for a good career—I’ll stick to research on quality of life.
When it comes to the claim that college students are going hungry, the article appears to be misleading sensationalism. The article argues that American college students are increasingly “food insecure” (i.e., they go hungry or lack access to nutritional food). This is supposedly a problem in part because students increasingly focus on obtaining food rather than studying.
In reality, Americans have never been more food secure. Over time, agricultural productivity has risen as food prices have dropped. (See Figure 1, below.) As incomes have increase, Americans use less of their total budget to purchase food (Figure 2). Today, calorie consumption in the United States is well above the recommended amount, even as we eat healthier foods more frequently (Figure 3).
While the figures deal with the population as a whole and do not isolate students as a group, neither does the article itself. The author only offers evidence that could imply students are hungrier than the rest of the population. In fact, the data on student hunger do not exist, which the author admits.
Of course, some college students aren’t eating a proper diet or are not eating enough. But I suspect that in a vast majority of cases, it’s not because they lack access to food or to nutritional food. Even the food budget examples that the author offers as insufficient for college students—$100 per month, $50 per week, or $10 per day—can purchase a filling and nutritional diet. Some healthy foods—black beans, oatmeal, bananas—are also some of the cheapest. And as someone who volunteers to feed the homeless with a private organization, I know there are plenty of charities that provide free food for the truly needy.
Perhaps universities should take this “news story” as a signal to offer courses that teach skills valuable in the real world, like budgeting. Instead of suggesting as much, the author mentions students’ inability to access food stamps, thus implying that yet another expansion of government could fix the problem. Ironically, the author also acknowledges that many private organizations already offer students free food, but claims that students are too proud to accept it. The author fails to take this opportunity to admit that much of the problem lies in poor budgeting and failure to take advantage of social structures, such as family and private charities, not lack of access to food. Then again, a news story about college students acting as college students tend to act—not sticking to a budget, eating unhealthily, being too proud to ask for help—would not sell many papers.
If you’d like an accurate take on food access and many other quality of life indicators, visit Cato’s new site, HumanProgress.org.
Why Did Western Nations Continue to Prosper in the 20th Century even though Fiscal Burdens Increased?
Daniel J. Mitchell
In the pre-World War I era, the fiscal burden of government was very modest in North America and Western Europe. Total government spending consumed only about 10 percent of economic output, most nations were free from the plague of the income tax, and the value-added tax hadn’t even been invented.
Today, by contrast, every major nation has an onerous income tax and the VAT is ubiquitous. Those punitive tax systems exist largely because—on average—the burden of government spending now consumes more than 40 percent of GDP.
To be blunt, fiscal policy has moved dramatically in the wrong direction over the past 100-plus years. And thanks to demographic change and poorly designed entitlement programs, things are going to get much worse, according to Bank of International Settlements, Organization for Economic Cooperation and Development, and International Monetary Fund projections.
While those numbers, both past and future, are a bit depressing, they also present a challenge to advocates of small government. If taxes and spending are bad for growth, why did the United States (and other nations in the Western world) enjoy considerable prosperity all through the 20th century? I sometimes get asked that question after speeches or panel discussions on fiscal policy. In some cases, the person making the inquiry is genuinely curious. In other cases, it’s a leftist asking a “gotcha” question.
I’ve generally had two responses.
1. The private economy can withstand a lot of bad policy, but there is a tipping point at which big government leads to massive societal damage. Or, to cite a specific example, the European fiscal crisis shows that the chickens have finally come home to roost.
2. Bad fiscal policy has been offset by good reforms in other areas. I explain that there are five major policy factors that determine economic performance and I assert that bad developments in fiscal policy have been offset by improvements in trade policy, regulatory policy, monetary policy, and rule of law/property rights.
I think the first response is reasonably effective. It’s hard for statists to deny that big government has created a fiscal and economic nightmare in many European nations.
But I’ve never been satisfied with the second response because I haven’t had the necessary data to prove my assertion.
However, thanks to Professor Leandro Prados de la Escosura in Madrid, that’s no longer the case. He’s put together some fascinating data measuring economic freedom in North America and Western Europe from 1850 to the present. Since he doesn’t include fiscal policy, we can see the degree to which there have been improvements in other areas that might offset the rising burden of taxes and spending.
Below is one of his charts, which shows the growth of economic freedom over time. For obvious reasons, he doesn’t include the periods surrounding World War I and World War II, but those gaps don’t make much of a difference. You can clearly see that nonfiscal economic freedom has improved significantly over the past 150-plus years. Most of the improvement took place in two stages, before 1910 and after 1980.
It’s worth noting that things got much worse during the 1930s, so it appears the developed world suffered from the same bad policies that Hoover and FDR were imposing in the United States.
Below is another chart, which highlights various periods and shows which policies were moving in the right direction or wrong direction. As you can see, the West enjoyed the biggest improvements between 1850 and 1880, and after 1980 (let’s give thanks to Reagan and Thatcher).
There also were modest improvements in 1880-1910 and 1950-1960. But there was a big drop in freedom between the World War I and World War II, and you can see policy stagnation in the 1960s and 1970s.
By the way, I wonder what we would see if we had data from 2007-2014. Based on the statist policies of Bush and Obama, as well as bad policy in other major nations such as France and Japan, it’s quite likely that the line would be heading in the wrong direction. But I’m digressing. Let’s get back to the main topic.
The moral of the story is that we’ve been lucky. Bad fiscal policy has been offset by better policy in other areas. We’re suffering from bigger government, but at least we’ve moved in the direction of free markets. That said, we may now be in an era when bad fiscal policy augments bad policy in other areas.
For further information, this video explains the components of economic success:Free Markets and Small Government Produce Prosperity