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The Economics of a Toddler and the Ethics of a Thug by Donald J. Boudreaux

Reflecting on the recent Democratic debate, Dan Henninger reports that Bernie Sanders said that he would fund his plan to make college free for students “through a tax on Wall Street speculation” (“Bernie Loves Hillary,” Oct. 15).

This statement reveals the frivolousness of Mr. Sanders’s economics. If such speculation is as economically destructive as Mr. Sanders regularly proclaims it to be, the tax on speculation should be set high enough to drastically reduce it.

But if — as Mr. Sanders presumably wishes — speculation is drastically reduced, very little will remain of it to be taxed and, thus, such a tax will not generate enough revenue to pay for Mr. Sanders’s scheme of making all public colleges and universities “tuition-free.”

That Mr. Sanders sees no conflict between using taxation to discourage (allegedly) harmful activities and using taxation as a source of revenue proves that he ponders with insufficient sobriety the economic matters on which he pontificates so sternly.

Excerpted from Cafe Hayek.

Donald J. Boudreaux

Donald J. Boudreaux

Donald Boudreaux is a professor of economics at George Mason University, a former FEE president, and the author of Hypocrites and Half-Wits.

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Bernie Sanders Wants Us to Be Like Denmark by Marian L. Tupy

For those of you who did not watch the Democratic Party presidential debate last night, Senator Bernie Sanders says he wants America to be more like Denmark.

In some ways, that is an excellent idea. Denmark, it turns out, has freer trade and better business environment than the United States. Its overall economic freedom is almost identical to that of the United States, as is its well-being index.

But don’t take my word for it. Look at the United Nations and World Bank data brought to you courtesy of HumanProgress.org.

The one area where the United States might not want to copy Denmark is the size of government, which is a proxy measure of taxation and redistribution.

1. Free trade

2. Business environment

3. Overall economic freedom

4. Human development index

5. Size of government

This post first appeared at Cato.org.

Marian L. Tupy
Marian L. Tupy

Marian L. Tupy is the editor of HumanProgress.org and a senior policy analyst at the Center for Global Liberty and Prosperity.

RELATED ARTICLE: No, Bernie Sanders, Scandinavia is not a socialist utopia

Pope Francis’s Graph of the Day by Ian Vásquez

As the Argentine Pope, ever critical of capitalism, visits the United States, my colleagues at HumanProgress.org have posted this graph.

pope graph

It shows that in 1896, income per person in the United States and Argentina, two of the richest countries in the world, was about identical. Argentina subsequently eschewed the free market, replacing it with trade protectionism and other corporatist policies intended to help the poor by redistributing wealth. By 2010, Argentine income was a third of that of the United States.

Perhaps Pope Francis doesn’t endorse Argentine economic policies, but having just arrived from Cuba, he missed an opportunity to denounce the lack of freedoms that have kept that island and other Latin American countries poor and repressed. He met with none of the many admirable Cuban dissidents, in or out of prison, who have been peacefully advocating basic rights. Nor did he mention the plight of the Cuban people they represent, even as authorities arrested or detained 250 Cuban activists during his visit.

The Cuban Forum for Rights and Liberties (Foro por los Derechos y Libertades), an independent group of dissidents in Cuba, summed up how it felt about, and experienced, the Pope’s visit. It read, in part:

We human rights activists, regime opponents and independent journalists have experienced days full of threats, harassment, telephone connections being cut off, homes besieged by the authorities, and violent, arbitrary arrests.

The behavior of the regime was expected. However, the position of the church has been surprising.

The exaggerated and repeated shows of approval of the dictatorship, the silence toward its excesses, and the refusal to hear dissident voices have created broad discontent among Cuban believers and non-believers both within and outside of the island.

The group might have added that the disappointment has spread more widely in the Americas.

This post first appeared at Cato.org.

Ian Vásquez

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The Speech Pope Francis Should Have Given by Lawrence W. Reed

Pope Francis, Address to the United States Congress — September 24, 2015:

Members of the U.S. Congress and the American people:

I come before you in glowing admiration for the historic accomplishments of your spirit of enterprise. In the pursuit of personal gain — the desire to improve your lives while serving others in the process — you Americans have fed, clothed and housed more people at higher levels than all the combined efforts of humanitarians worldwide throughout history.

In my profession, we speak of “collecting” money. Americans practically coined the phrase, “making money.” After 36 hours in the United States, I now realize that we can’t collect it until you first make it, and while both activities are motivated at least in part by a shared desire to “do good,” the one that your risk-taking, visionary entrepreneurs, investors, builders, inventors and job creators do so well is by far the bigger challenge.

I’ve said some things lately that gave you reason to think I was hostile to the dynamic spirit of enterprise that made this country a beacon for the world and the most generous society in history. I’ve spoken about excessive greed in the capitalist system, but now I realize that no variant of socialism ever does away with greed. It simply ensures that the only way a person can satisfy it is by using his political connections to steal what he wants, to pillage hapless value-creators while condemning the poor to a life of politicized dependency. I’m a little ashamed now that I fell for such nonsense, but I am happy to be here to begin my education in economics and politics in earnest.

One of the beautiful things about your country is the intellectual diversity. One example is my conversations with American Christians who have spent much time in thought and prayer on the question of Jesus’s views on property and politics. In my conversations, we have discussed how Jesus, the man whose teachings I regard as sacred and divine, never once argued for redistribution of income by political power.

While he disdained the worship of money, he never disparaged the crucial role of money as a medium of exchange or as a wealth-creating motivator. I had apparently forgotten Jesus’s advice (in the Book of Luke) to a man who asked him to redistribute some wealth. “Who made me a judge or divider over you?” he asked. I think as legislators, you should ask that very question of yourselves.

So rather than read a stock speech of clichés and finger-wagging, I’m simply going to implore you to keep learning, as I have dedicated my life to doing. And before any of us are quick to jump to policy prescriptions on things about which we know so little, let’s all remember what the Austrian economist Murray Rothbard advised:

It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a “dismal science.” But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.

Thank you.

Unfortunately, this was not the speech the Pope delivered to Congress today.

The good news is that you don’t have to wait for the Pope’s next encyclical to benefit from the insights on property, economics, and Jesus’s teachings on them that the Pope is no doubt gleaning on his American tour.

You can order a copy of Rendering Unto Caesar: Was Jesus a Socialist?yourself. In fact, you can even order multiple copies, get a bulk discount, and start informing others of the important principles the pamphlet champions! What are you waiting for?

Lawrence W. Reed
Lawrence W. Reed

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s.

The Pope Is Morally and Factually Wrong about Capitalism by Daniel J. Mitchell

The biggest mistake of well-meaning leftists is that they place too much value on good intentions and don’t seem to care nearly as much about good results.

Pope Francis is an example of this unfortunate tendency. His concern for the poor presumably is genuine, but he puts ideology above evidence when he argues against capitalism and in favor of coercive government.

Here are some passages from a CNN report on the Pope’s bias.

Pope Francis makes his first official visit to the United States this week. There’s a lot of angst about what he might say, especially when he addresses Congress Thursday morning. …

He’ll probably discuss American capitalism’s flaws, a theme he has hit on since the 1990s. Pope Francis wrote a book in 1998 with an entire chapter focused on “the limits of capitalism.” …

Francis argued that … capitalism lacks morals and promotes selfish behavior. …

He has been especially critical of how capitalism has increased inequality… He’s tweeted: “inequality is the root of all evil.” …

He’s a major critic of greed and excessive wealth. …”Capitalism has been the cause of many sufferings…”

Wow, I almost don’t know how to respond. So many bad ideas crammed in so few words.

If you want to know why Pope Francis is wrong about capitalism and human well-being, these videos narrated by Don Boudreaux and Deirdre McCloskey will explain how free markets have generated unimaginable prosperity for ordinary people.

But the Pope isn’t just wrong on facts. He’s also wrong on morality. This video by Walter Williams explains why voluntary exchange in a free-market system is far more ethical than a regime based on government coercion.

Very well stated. And I especially like how Walter explains that markets are a positive-sum game, whereas government-coerced redistribution is a zero-sum game (actually a negative-sum game when you include the negative economic impact of taxes and spending).

Professor Williams wasn’t specifically seeking to counter the muddled economic views of Pope Francis, but others have taken up that challenge.

Writing for the Washington Post, George Will specifically addresses the Pope’s moral preening.

Pope Francis embodies sanctity but comes trailing clouds of sanctimony. With a convert’s indiscriminate zeal, he embraces ideas impeccably fashionable, demonstrably false and deeply reactionary.

They would devastate the poor on whose behalf he purports to speak… Francis deplores “compulsive consumerism,” a sin to which the 1.3 billion persons without even electricity can only aspire.

He specifically explains that people with genuine concern for the poor should celebrate industrialization and utilization of natural resources.

Poverty has probably decreased more in the past two centuries than in the preceding three millennia because of industrialization powered by fossil fuels.

Only economic growth has ever produced broad amelioration of poverty, and since growth began in the late 18th century, it has depended on such fuels. …

The capitalist commerce that Francis disdains is the reason the portion of the planet’s population living in “absolute poverty” ($1.25 a day) declined from 53 percent to 17 percent in three decades after 1981.

So why doesn’t Pope Francis understand economics?

Perhaps because he learned the wrong lesson from his nation’s disastrous experiment with an especially corrupt and cronyist version of statism.

Francis grew up around the rancid political culture of Peronist populism, the sterile redistributionism that has reduced his Argentina from the world’s 14th highest per-capita gross domestic product in 1900 to 63rd today.

Francis’s agenda for the planet — “global regulatory norms” — would globalize Argentina’s downward mobility.

Amen (no pun intended).

George Will is right that Argentina is not a good role model.

And he’s even more right about the dangers of “global norms” that inevitably would pressure all nations to impose equally bad levels of taxation and regulation.

Returning to the economic views of Pope Francis, the BBC asked for my thoughts back in 2013 and everything I said still applies today.

This first ran at Cato.org.

Daniel J. Mitchell

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How Do You Define Destructive?

Recently, on one of the rare and I truly mean rare occasions of watching an episode of Extra, the television gab fest that regularly expounds upon the likes of liberal/progressive luminaries like Kim Kardashian, Kanye West and Miley Cyrus.  However, this particular episode they were extolling about the virtues of Hillary Clinton, which is why I bothered to watch it.  I was able to tolerate that program because every so-often we must pay attention to what the enemy has to say or what they are up to.

So on this particular Hillary appearance she boldly labeled republican presidential candidate Donald Trump as destructive.  Now before I go any further in regards to the Hillary situation I will elaborate on the definition of destructive as defined in the 1828 American Dictionary of The English Language by Noah Webster.  Destructive: Causing destruction; having the quality of destroying; ruinous; mischievous; pernicious; with of or to; as a destructive to the morals of youth.  I’ll add destructive to an economy; destructive to the family structure; destructive to the military or even an embassy staff.

So when Hillary Clinton yelped about how destructive Donald Trump is, believe it or not I kind of agree, to a point.  For decades Mrs. Clinton has promoted the wicked concepts of big government and so-called nanny goat solutions to all facets of life.  She honestly believes or more accurately, has fooled millions of Americans into believing that government health care, high taxes and government deficit spending are actual paths to prosperity or good living.

However, there is much evidence to the contrary.  For example Texas, Florida, Indiana, Ohio along with several other states have proven that actually, the opposite to be the truth.  Those states all have growing economies, with budget surpluses which fully demonstrates the false nature of Hillary’s thinking.  In fact, Donald Trump along with many other mega business tycoons have demonstrated how the policies that Hillary supports are not good for business by taking a lot of their business dealings to other nations where laws are not nearly as oppressive as those here in this onetime land of opportunity.

Whether it’s the American corporate tax (the highest in the world) or extreme environmental regulations that have so damaged our nation’s economy that she no longer has one of the top ten living standards among nations.  Also, before Obamacare the United States was blessed with the overall best medical care in the world, but now that is no longer the case.  Those destructive policies are fully supported by one Hillary Clinton, of course.

By all means, Hillary’s proclamation that Donald Trump being destructive is as insanely stupid as her handling of emails.  Whether you like Donald Trump or not, it cannot be denied that he has definitely invigorated the presidential campaign process by bringing to the forefront issues of most importance that could potentially soon harm our Republic beyond the ability to repair her.  Even now, it seems as though, that without a direct intervention from God, the United States may soon be one nation gone under.

Perhaps when Hillary Clinton squawks about Trump being destructive, she might be thinking about when the Donald called her the worst secretary of state in our nation’s history.  His point is well taken because under her watch, along with the worst president of all time, Barack Hussein Obama the United States needlessly lost embassy personnel at the hands of murdering muslims in Benghazi.

The only thing she was concerned about was shifting the blame to a supposed video defaming Mohamed, the pedophile founder of the muslim political movement masquerading as a religion.  The woman has no discernable conscience.  Also the mere fact that millions of Americans still want her to be president illustrates the moral depravity of our times.

It is my hope and desire that as light destroys darkness that truth from whatever source, whether it is Trump, Dr. Carson or Jesus Christ will continue to be brought forth and enlighten those who have eyes to see and ears to hear.  Then together, “We the People” can re-establish America as that shining city on a hill republic under God with liberty and justice for all.

Bernie Sanders Is Wrong: Trade Is Awesome for the Poor and for America by Corey Iacono

Sen. Bernie Sanders, the Democratic presidential hopeful, is no fan of free trade. In an interview with Vox, Sanders’ made his anti-trade position clear: “Unfettered free trade has been a disaster for the American people.”

He also noted that he voted against all the free trade agreements that were proposed during his time in Congress and that if elected President he would “radically transform trade policies” in favor of protectionism.

Sanders and his ilk accuse their intellectual opponents of promoting “trickle-down economics,” but that is precisely what he is advocating when it comes to trade. The argument for protectionism ultimately relies on the belief that protecting domestic corporations from foreign competition and keeping consumer prices high will somehow benefit society as whole.

However, the real effect of protectionism is to increase monopoly and consequently reduce overall economic welfare. In fact, according to a paper by economists at the Federal Reserve Bank of Minneapolis, “Government policies…such as tariffs and other forms of protection are an important source of monopoly” that lead to “significant welfare losses.”

In contrast to Sanders’ assertion that the expansion of free trade has been a disaster for the American people, there is a near unanimous consensus among economists that the opposite is true.

An IGM Poll of dozens of the most renowned academic economists found that, weighted for each respondent’s confidence in their answer, 96 percent of economists agreed, “Freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment.”

When the vast majority of economists of all sorts of ideological stripes agree that free trade is a good thing, maybe, just maybe, they’re onto something.

In fact, they surely are. Using four different methods, economists at the Petersen Institute for International Economics estimated the economic benefits from the expansion of technology that facilitates international trade (such as container ships), as well as the removal of government imposed barriers to international trade (such as tariffs). Since the end of World War II, they generated “an increase in US income of roughly $1 trillion a year,” which translates into an increase in “annual income of about $10,000 per household.”

This result is mostly driven by the fact that foreign businesses produce many goods which are used in the production process at a lower cost than their domestic competitors. Access to these low-cost foreign inputs allows American businesses to decrease their production costs and consequently increase their total output, making the nation as a whole much wealthier than it otherwise would have been.

Moreover, contrary to common conjecture, the benefits of international trade haven’t simply accrued to the wealthy alone. Low and middle income individuals tend to spend a greater share of their income on cheap imported consumer goods than those with higher incomes. As a result, international trade tends to benefit these income groups more so than the wealthy.

Indeed, according to the President’s Council of Economic Advisers, middle income consumers have about 29 percent greater purchasing power as a result of international trade.

In other words, middle income consumers can buy 29 percent more goods and services as a result of the access to low-cost imports from foreign countries.

Low income consumers see even greater gains with 62 percent higher purchasing power as a result of trade. In contrast, the top 10 percent of income earners only saw an increase in purchasing power of 3 percent as a result of trade.

On top of that, international trade has provided benefits by bringing new and innovative products to American consumers.

According seminal research by Christian Broda of the University of Chicago and David E. Weinstein of Colombia University, the variety of imported goods increased three-fold from 1972 to 2001. The value to American consumers of this import induced expanded product variety is estimated to be equivalent to 2.6 percent of national income, about $450 billion as of 2014. That’s not exactly small change.

The spread of free trade has also made considerable contributions to environmental protection, gender equality, and global poverty reduction. As a result of the spread of clean technology facilitated by freer trade, “every 1 percent increase in income as a result of trade liberalization (the removal of government imposed barriers to trade), pollution concentrations fall by 1 percent,” according to the Council of Economic Advisers.

The CEA also has found that “industries with larger tariff declines saw greater reductions in the [gender] wage gap,” suggesting that facilitating foreign competition through trade liberalization reduces the ability of employers to discriminate against women.

In regards to global poverty reduction, research has shown that in response to US import tariff cuts, developing countries, such as Vietnam, export more to the US, leading to higher incomes and less poverty.

Despite the large gains from trade America has already reaped, there is still room for improvement (contrary to Sen. Sanders’ accusations of “unfettered” free trade). The PIIE economists estimate that further trade liberalization would increase “US household income between $4,000 and $5,300 annually,” leading the them to conclude that, “in the future as in the past, free trade can significantly raise income — and quality of life — in the United States.”

Ultimately, the conclusion that most economists seem to reach is that, from being a disaster, the expansion of free trade has been a tremendous success, and that further trade liberalization would most likely make Americans, and the rest of the world, considerably better off.

Don’t let fear-mongering about foreigners and China scare you: free trade benefits everyone, especially the poor, while protectionism benefits only the politically powerful.

Corey Iacono

Corey Iacono is a student at the University of Rhode Island majoring in pharmaceutical science and minoring in economics.

The Pope’s Misplaced Focus

Pope John Francis’ upcoming visit to the U.S. is generating quite a bit of excitement here, especially among his Catholic faithful.  But for me and many others, his visit is generating consternation, not excitement.

Usually, most people tend to have great respect and affection for the Pope.  He is usually viewed by the public as a beacon of moral guidance, even for those who are non-Catholics.  This is definitely a view I once had of previous Popes.

But I must admit that my respect for this current Pope, John Francis is somewhat diminished.

I am totally confused by his constant advocating for policies that goes against the Catholic Church’s own teachings.  On the issue of homosexuality his position is, “Who are we to judge?”  Though church doctrine is very clear on this issue.

He is a fanatical supporter of open borders; in his view people have an inherent right to enter illegally into any country they choose as long as the ends justify the means.

He rabidly promotes theories in support of global warming, despite the fact that he is one of the biggest contributors to it.  When the Pope travels, he normally charters an Alitalia A320 jet.  It is estimated that the pope travels about 100,000 miles per year.  So this means based on the type of plane the Pope flies, he emits 20 pounds of CO2 for every mile of flight which is 2,000,000 pounds a year.

Every denomination has their own precepts that their members must abide by.  Likewise, nations have laws that their citizens or visitors must abide by.

Poverty or wanting a better life is not sufficient reason for people to break our laws to enter into our country.  The Pope expects Catholics to abide by the rules of Catholicism; so why should America expect anything less from those who seek entry into our country?

So, by the Pope’s standard I, as a Baptist, should still be able to participate in all things Catholic; even though I don’t adhere to Catholicism.

The Pope, in many ways, is operating just like Obama is in the U.S.  They both are picking and choosing which rules and laws they want to abide by.

Forgive me for not being able to get beyond the fact that the Pope has spent very little time dealing with the child abuse that has taken place in his church; but yet he seems to have plenty of time to meet with illegals, homosexuals and promote global warming

Am I the only one who finds it offensive that the Pope will be meeting with some of those in the U.S. illegally, but will not be meeting with families that have had family members killed, raped, or maimed by illegals?

Am I the only one who finds it offensive that the Pope will not be meeting with any of the victims of sexual abuse from within the Catholic Church?

Am I the only one who finds it offensive that the Pope constantly talks about income inequality and the need for employers to pay their employees more money; but he has never discussed what is the obligation of employees to their employers (more productivity and more efficiency, etc.)?

The Pope should not be aligned to a political agenda, but rather what is right or wrong.

America has no moral obligation to allow those who enter our country illegally to stay in our country no more so than the Pope allowing someone who refuses to abide by the rules of Catholicism should be allowed to say they are a member of the Catholic Church.

Furthermore, the Bible is very clear, a man’s first responsibility is for the well being of his family, not his neighbor’s family.

The Pope seems to be on a global tour to promote an entitlement agenda as opposed to being a beacon for right and wrong.  Even if you are poor and downtrodden, you still are responsible for being responsible.

Many of the illegals coming to the U.S. are having children that they can’t afford to provide for.  How many speeches has the Pope given on individual responsibility?

How many speeches has the Pope given on the need to fire and prosecute every priest that has molested or covered up sexual abuse of kids in the Catholic Church?

How many speeches has the Pope given about what are an employee’s obligations to his employer?

I really believe the Pope’s heart is in the right place, but the issues he is focusing on should be subservient to the more critical issues listed above.

I definitely think the church can and should play a constructive role in our society, especially to those who are in need.  In many respects, I think the faith community is better equipped to deal with a lot of the social ills of our society than our government is.

But the Pope cannot shine the light on my darkness until he is first willing to shine the light on his on darkness.  Until then, the Pope’s moral compass is pointing in the wrong direction.

Capitalists Have a Better Plan: Why Decentralized Planning Is Superior to Bureaucracy and Socialism by Robert P. Murphy

To early 20th-century intellectuals, capitalism looked like anarchy. Why, they wondered, would we trust deliberative, conscious guidance when building a house but not when building an economy?

It was fashionable among these socialist intellectuals to espouse “planning” as a much more rational way to organize economic activity. (F.A. Hayek wrote a famous essay on the phenomenon.) But this emphasis on central planning was utterly confused both conceptually and empirically.

Ludwig von Mises made the most obvious rejoinder, pointing out that there is “planning” in the market economy, too. The difference is that the planning isdecentralized in a market, spread out among millions of entrepreneurs and resource owners, including workers. Thus, in the debate between socialism and capitalism, the question isn’t, “Should there be economic planning?” Rather, the question is, “Should we restrict the plan design to a few supposed experts put in place through the political process, or should we throw open the floodgates and receive input from millions of people who may know something vital?”

This second question came to be known as the “knowledge problem.” Hayek pointed out that in the real world, information is dispersed among myriad individuals. For example, a factory manager in Boise might know very particular facts about the machines on his assembly line, which socialist planners in DC could not possibly take into account when directing the nation’s productive resources. Hayek argued that the price system in a market economy could be viewed as a giant “system of telecommunications,” rapidly transmitting just the essential bits of knowledge from one localized node to the others. Such a “web” arrangement (my term) avoided a bureaucratic hierarchy in which every bit of information had to flow up through the chain of command, be processed by the expert leaders, and then flow back down to the subordinates.

Complementary to Hayek’s now-better-known problem of dispersed knowledge, Mises stressed the calculation problem of socialist planning. Even if we conceded for the sake of argument that the socialist planners had access to all of the latest technical information regarding the resources and engineering know-how at their disposal, they still couldn’t rationally “plan” their society’s economic activities. They would be “groping in the dark.”

By definition, under socialism, one group (the people running the state, if we are talking about a political manifestation) owns all of the important productive resources — the factories, forests, farmland, oil deposits, cargo ships, railroads, warehouses, utilities, and so on. Thus, there can be no truly competitive markets in the “means of production” (to use Karl Marx’s term), meaning that there are no genuine prices for these items.

Because of these unavoidable facts, Mises argued, no socialist ruler could evaluate the efficiency of his economic plan, even after the fact. He would have a list of the inputs into a certain process — so many tons of steel, rubber, wood, and man-hours of various types of labor. He could contrast the inputs with the outputs they produced — so many houses or cars or bottles of soda. But how would the socialist planner know if this transformation made sense? How would the socialist planner know if he should continue with this operation in the future, rather than expanding it or shrinking it? Would a different use of those same resources produce a better result? The simple answer is that he would have no idea. Without market prices, there is no nonarbitrary way of comparing the resources used up in a particular process with the goods or services produced.

In contrast, the profit-and-loss test provides critical feedback in the market economy. The entrepreneur can ask accountants to attach money prices to the resources used up, and the goods and services produced, by a particular process. Although not perfect, such a method at least provides guidance. Loosely speaking, a profitable enterprise is one that directs scarce resources into the channel that the consumers value the most, as demonstrated through their spending decisions.

In contrast, what does it mean if a particular business operation isunprofitable? It means that its customers are not willing to spend enough money on the output to recoup the monetary expenses (including interest) necessary to buy the inputs. But the reason those inputs had certain market prices attached to them is that other operations were bidding on them, too. Thus, in Mises’s interpretation, an unprofitable business enterprise is siphoning away resources from channels where consumers would prefer (indirectly and implicitly) that the resources be deployed.

We must never forget that the economic problem is not to ask, “Will devoting these scarce resources to project X make at least some people better off, compared to doing nothing with these resources?” Rather, the true economic problem is to ask, “Will devoting these scarce resources to project X make people better off compared to using the resources in some other project Y?”

To answer this question, we need a way of reducing heterogeneous inputs and outputs into a common denominator: money prices. This is why Mises stressed the primacy of private property and the use of sound money as pillars of rational resource allocation.

Robert P. Murphy
Robert P. Murphy

Robert P. Murphy has a PhD in economics from NYU. He is the author of The Politically Incorrect Guide to Capitalism and The Politically Incorrect Guide to The Great Depression and the New Deal.

Scandinavian Myths: High Taxes and Big Spending Are Popular by Nima Sanandaji

As I have explained in previous columns for CapX, there are a number of myths surrounding the Nordic countries that don’t stand up to scrutiny. These include the notion that long life span in Nordic nations arose as the public sector expanded, the idea that generous public programs alone explain low levels of Nordic poverty and the myth that Nordic countries are bumblebees that defy gravity by not being adversely affected by high taxes.

But surely the Nordic countries do show one leftist theory to be correct: that social democrat policies can be popular with the electorate.

Although the Social Democrats have recently lost much of their previous support, they did manage to dominate Nordic policies for long. Sweden was sometimes referred to as a one-party state, since the Social Democrats ruled it almost consecutively from 1932 till 2006 (interrupted by two short spells of centre-right rule during 1976-1982 and 1991-1994).

It is sometimes puzzling to the outsider why the Nordic public repeatedly have elected tax-raising governments to power. The obvious answer is ideological support for welfare state policies.

However, there is also another reason worth examining in greater detail: the general public has not been fully aware of the price tag, in terms of higher taxes, attached to expanding public sectors. Politicians have created a fiscal illusion which has resulted in higher levels of taxation that the population would otherwise have accepted as feasible had taxes been levied in a transparent way.

Before policies radicalised in the late 1960s, the tax levels in Nordic nations were around 30 percent  of GDP – quite typical of other developed nations. At the time, the tax burdens were quite visible. Most taxation occurred through direct taxes, which showed up on employees’ payslips.

Over time, an increasing share of taxation has been raised through indirect taxes. The latter are less visible to those paying them, since they are either levied before the wage is formally given to the employee or are included in the listed price of goods.

Finland is worth considering as an example. The country’s tax level was 30 percent of GDP in 1965. Indirect taxes in the form of VAT and mandatory social security contributions amounted to a quarter of total taxation. In 2013, the total tax take had increased to 44 percent of GDP, half of which was hidden taxes.

As shown below, Finnish governments have funded the expansion of the public sector by raising the hidden, but not the visible, tax burden. Denmark has followed a route wherein both hidden and visible taxes have been hiked.

Hidden and visible taxes in Finland (percentage of GDP)

Source: OECD tax database and own calculations.

Hidden and visible taxes in Denmark (percentage of GDP)

In Norway and Sweden, visible taxes are today lower than in the 1960s, although the true taxation is considerably higher. As can be seen below, it is clear that governments in both countries have followed a strategy based on replacing visible tax income with hidden tax incomes.

Thus, whilst the average worker has paid progressively more to the government, the payslips of the same worker have misleadingly shown a reduction in taxation.

Hidden and visible taxes in Norway (percentage of GDP)

Hidden and visible taxes in Sweden (percentage of GDP)

In other words, except in Denmark, the rise in taxation has occurred fully through an increase in hidden taxation.

This is in line with the predictions of fiscal illusion made by Italian economist Amilcare Puviani in 1903. Puviani explained that politicians would have incentives to hide the cost of government by levying indirect rather than direct taxes, so that the public would under-estimate the cost of policies.

The illusion can thus be created that an expanding state benefits individuals and families and yet costs less than it actually does. Nobel laureate James Buchanan and other researchers have expanded on the idea that it is easier for politicians to raise hidden, indirect taxes rather than visible ones.

Perhaps it comes as no surprise that those who believe in a higher tax rate in other parts of the world have followed a similar strategy as the Nordic nations. The American left-liberal think tank the Roosevelt Institute openly recommends “less-visible taxes that Americans are more likely to support.”

The Obamacare system launched in the US represents a form of indirect taxation – through an overly complex system – that is even more difficult to comprehend for the average taxpayer than in the Nordic systems.

I don’t doubt that less visible taxes in the US, the UK or other parts of the world would prove an easier route to raise the tax burden than visible taxes. This is indeed a lesson that the left can learn from the Nordics.

But the question remains if this is a good route to venture on. Shouldn’t politicians strive for systems where people are aware of how much they are paying for the government?


Nima Sanandaji

Dr. Nima Sanandaji is a research fellow at CPS, and the author of Scandinavian Unexceptionalism available from the Institute of Economic Affairs.

EDITORS NOTE: This article was originally published at CapX.

Oh What Times We Live In

Throughout the annals of history, these are most certainly times that not only try men’s souls but are also rendering everything that is good to the back of the bus.  It is bad enough that people do wrong.  Human beings have been committing evil deeds ever since Eve was duped by Satan and then convinced Adam (who knew better) to partake in an activity they should not have.  Thus the ongoing war between good and evil was on and the rest is history.

When Arab Islamic Muslims first enslaved Africans hundreds of years before the first European explorers began to purchase African slaves from the Muslims, there was an equal and opposite effort that eventually arose.  The brutality of slavery was eventually seen by millions of British and United States citizens as an evil that had to be extinguished.

When the church and the king of England both became obsessed with power over the people, some British subjects said enough is enough and sought to find land where they could worship the God of Abraham, Issac and Jacob in peace and tranquility.  Out of their disdain for the ongoing abuses in the land of the Union Jack was born the Christian based belief in Life, Liberty, and the Pursuit of Happiness.

There are many including yours truly, who believes that the United States was meant to be the supreme opposite of what has been an ongoing system of survival of the fittest enduring the brutal boot heel of tyrannical governments.  America once stood out, because she was refreshingly different. Her numerous foundational documents ranging from The Articles of Confederation to the Bill of rights paved an inspired path toward greatness.  That path benefited both individuals who sought to engage in the bountiful opportunities availing themselves and the government that built into it’s foundational doctrines the recognition of the God given unalienable rights that come from him.

In more recent times, the late great President Ronald Reagan represented a stunning and invigorating contrast to the malaise of his inept predecessor, President Jimmy Carter.  Reagan refused to appease our republic’s adversaries.  He also fought to roll back the economy stifling regulations that had beaten our economy into submission.

As “We the People” prepare to choose the next leader of the free world, let us take into consideration the importance of picking someone who represents being different.  In other words,  America can no longer thrive as a great nation with leadership that is hell bent on dragging her down a path that not only inhibits economic prosperity, but also places her in mortal danger.  Let us not forget there are many who would like nothing more than to rid the world of the one nation that has been an impediment to global despots who believe that forcing people to live as they say to exist or suffer the consequences.

Millions of Christians, black Africans and many others have been murdered by Muslim groups like the Islamic Stat for the sport of it, primarily because of the accommodating (or worse) approach of the current United States administration.  One of the things that New Zealand author and orator Trevor Loudon has been doing for quite some time is crisscrossing the United States for a number of years reminding Americans of our nations place of greatness and how much the world (including his nation) of New Zealand depends on this beacon of light republic.  We are at an absolute crossroads.  The time has arrived for us to return America to our God ordained position of greatness and beacon of hope to the world.  Or we can slink away into oblivion on our nation’s current slide toward second tier status, leaving the world including our allies to try and do their best to overcome challenges posed by dedicated Muslims and traditional tyrannical enemies like China and Russia.   While these are certainly the times that try men’s souls that is no reason why we as Americans have to give in or give up, because of the horrific challenges.  I challenge everyone who cares about America to join in the fight for the future generations of this republic.  If we don’t act now, it will soon be too late.  Do you want to have to tell your children and grandchildren that our nation ended up on the ash heap of history because you didn’t want to make waves or stand for the proven principles that made our nation the envy of the world?

Yes these are trying times, but with God’s leadership and help they can become the best of times.  Dear reader, either you shall choose life or we shall choose death.  America’s future is in the balance.

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The Man Who Sowed the Seeds of Puerto Rico’s Collapse by Lawrence W. Reed

Is there anything more tragically monotonous than a failing welfare state? From ancient Rome to modern Greece, the story is one of the most repetitive in history. It goes like this:

People increasingly decide they’d rather vote for a living than work for one. An academic and intellectual class, dependent on subsidies and anxious to command the economy, advises the people that this is a really good thing. Politicians cater to them with high-sounding rhetoric (“We’ll take care of you”) and low-balling promises (“We can afford it. It won’t cost much. We’ll just take it from the rich”).

Responsibility, self-reliance, and enterprise give way to an entitlement mentality. Power concentrates and corruption ensues. Taxes and debt rise. The government debases the money. Crisis leads to more government, which leads to more crisis. What was always bankrupt morally finally goes bankrupt economically. Goodbye economy, liberty, and often even civilization itself. The barbarians take over. What else is new?

Now it’s Puerto Rico’s turn.

The Commonwealth of Puerto Rico is a US territory in the northeastern Caribbean. Its governor, Alejandro García Padilla, startled the world back in June when he announced that the island cannot pay back its $72 billion public debt.

“The debt is not payable,” García Padilla said. “There is no other option. I would love to have an easier option. This is not politics; this is math.”

He called the situation a “death spiral.” Suddenly, millions of Americans were learning what a basket case the Puerto Rican economy has become. It is indeed a crisis but one that was, to an embarrassing extent, made right here in America.

It was foisted on Puerto Ricans by one lousy New Dealer in particular. His name was Rexford Guy Tugwell.

More on the egghead Tugwell in a moment, but let me bring everybody up to date on just how bad things are down there. Be sure to read to the end because there’s a silver lining in this very dark cloud.

Puerto Rico has been in a funk for a good while. Its stubbornly high, double-digit unemployment rate is more than twice that of the United States. In fact, it hasn’t been below 9.7 percent in 40 years.

The island’s debt is higher on a per capita basis than that of any US state and four times that of Detroit, which went bankrupt two years ago. Businesses are collapsing. People are fleeing (200,000 have left since 2005). Almost half of the island’s 3.7 million residents earn incomes under the US federal poverty line. Nearly 40 percent of all households get food stamps. Until recently, the retirement age for government school teachers was as low as 47, prompting underfunded pension fund crisis so endemic to welfare states. (The retirement age has lately been raised to at least 55 for current teachers, and 62 for new teachers.)

As Tyler Durden explains at ZeroHedge.com, policies imposed from Washington must shoulder a big part of the blame for this mess: the wizards on the Potomac encouraged debt and deficit spending, priced hundreds of thousands of Puerto Ricans out of entry-level jobs with a punishing minimum wage, taxed and regulated commerce and investment to a crawl, and showered the island with debilitating welfare. The place would be a showcase of government-induced prosperity except for one sticking point: government.

All of this has been decades in the making, which brings me to the character named Tugwell. I’ve long had a distaste for this pompous meddler. The more I learn about his role as Puerto Rico’s appointed governor (1941–1946), the more I’m ashamed that a US president was dumb enough to put him in charge of anything.

I first heard of Tugwell as an undergraduate economics major at Grove City College in the early 1970s. Fascinated by what my econ prof, Dr. Hans Sennholz, had said in class about America’s 22nd and 24th president, Grover Cleveland, I checked out a biography of him. It carried the imaginative title, GroverCleveland, and included a revealing subtitle, A Biography of the President Whose Uncompromising Honesty and Integrity Failed America in a Time of Crisis.

The author was Rexford Guy Tugwell, widely regarded as the most influential ideologue of economic planning during Roosevelt’s New Deal. The Cleveland terms were largely wasted opportunities, according to Tugwell, because Cleveland would not turn the economy into his personal plaything. If only he had trashed his honesty and integrity, Cleveland could have been the scientist and the rest of us the lab rats.

Tugwell was the Jonathan Gruber of his day. (Recall the smug academic who admitted that deception was employed to fool stupid Americans into supporting Obamacare.) He went straight from academia as a student (the Wharton School at U-Penn, then Columbia) to academia as a professor (University of Washington, American University in Paris, and Columbia University). His intellectual mentors were socialists like Upton Sinclair and Edward Bellamy. Woodrow Wilson’s wartime administration gave him his first real glimpse of the glorious fun of central planning, and he loved it even when it flopped.

In 1932, President-elect Franklin Roosevelt invited Professor Tugwell to join the first White House “brain trust.” These were the whiz kids — the social scientists and experimenters of the administration. Blessed with power and attention, they were ready to “transform” America and “plan” our way out of the Great Depression.

H.L. Mencken was less charitable in his description. He called them “an astonishing rabble of impudent nobodies,” “a gang of half-educated pedagogues, starry-eyed uplifters and other such sorry wizards.” Along with FDR, they “planned” the Depression into the longest slump in American history.

Tugwell loved to set up and run what came to be known as “boondoggles.” He was an architect of the Agricultural Adjustment Act and later director of its Agricultural Adjustment Administration (AAA), which taxed agricultural processors and used the revenue to destroy crops and cattle to raise prices. It was declared unconstitutional by the Supreme Court and ridiculously destructive by clear thinkers.

From its inception in 1935, he directed the Resettlement Administration (RA), which relocated the rural unemployed to new, planned communities in suburbs. Urban authority Jane Jacobs, in her classic The Death and Life of Great American Cities, showed that his program simply displaced people and ruined neighborhoods. The RA was also thrown out as unconstitutional. True to the statist stereotype, Tugwell learned nothing from either experience. “Planning” was his religion and he was going to be its high priest, come hell or high water.

In 1936, Tugwell left Washington and two years later showed up as the first director of the New York City Planning Commission. He tried retroactively to enforce nonconforming land uses with almost no legal or public support. He proved too much an ideologue even for the polarizing Robert Moses, who killed Tugwell’s 50-year, pie-in-the-sky master plan for public housing.

Now let’s get back to Puerto Rico.

By 1941, Rexford Guy Tugwell had behind him a 20-year career of pontificating for big government and managing expensive government flops. Somehow that gave Franklin Roosevelt the idea of naming him governor of Puerto Rico. What Tugwell did for the mainland, he could now do for an island. Maybe this central planning stuff works better if you work small, right?

Nope.

So for five years, Professor Tugwell became Governor Tugwell. One of the first things he did was to create, with the legislature’s approval, the Puerto Rico Planning, Urbanization, and Zoning Board in 1942. If only he had done what John Copperthwaite did later in Hong Kong or what Ludwig Erhard did in postwar Germany or what inspired free marketers have done in freeing their cities, Puerto Rico might today be a beacon of liberty and prosperity. But Tugwell wanted to plan, plan, plan.

Pedro Serra is president of a new organization in Puerto Rico, the Alliance for the Protection of Liberties. He is a businessman from San Juan whose interest in free-market economics led him to work with the 2012 Ron Paul campaign. Looking back on the Tugwell period, he observes,

When President Roosevelt appointed Rexford G. Tugwell governor of Puerto Rico, it was in keeping with the same economic attitude that characterized the New Deal — that the government can solve an economy’s woes. Our government has since taken as an axiom that economic stagnation results from too little government, not too much. If this were the case, then today’s Puerto Rico should be paradise on earth. Instead our economy is depressed, our people jobless, and our government bankrupt.

Climate would seem to have blessed Puerto Rico for agricultural pursuits. Tugwell’s infinite wisdom suggested it should opt for industry instead, so he directed public policy against farming and toward manufacturing. He lobbied for all the aid and welfare from the mainland he could get. He set the tone for decades of a top-down welfare state. Joe Milligan, a colleague of Serra’s, is originally from Rochester, Michigan, and now brings his passion for free markets to San Juan, Puerto Rico, as the director of development for the Alliance for the Protection of Liberties. Here is how Milligan sums it up:

Governor Tugwell’s legacy is alive and apparent on the island. His tenure in office was characterized by central planning, government growth, and expansion of the welfare state. He stamped out the thriving sugar cane and coffee industries in favor of manufacturing. The result is that now we have neither. Today in Puerto Rico our government is the island’s largest employer and half of all residents require government financial assistance to subsist. In this sense Governor Tugwell truly left his mark.

Indeed, for many years after Governor Tugwell left Puerto Rico for academia back in the United States (where failure is celebrated as long as you worship the state and have good intentions), other New Dealers sojourned to the island to offer more of the same.

One of them was Hugh Barton, who had directed the US State Department’s Office of Strategic Services until he was fired for his knowledge of the communist affiliations of some of his top staff. Barton set up shop with the Puerto Rico Planning Board and the Office of Economic Research. If you had a college degree and a penchant for planning the economy of other people, you could get a government job in Puerto Rico in the 1950s and ’60s. Except for a brief retrenchment under one-term Governor Luis Fortuño, Puerto Rico has been run for decades as Tugwell first envisioned it, exacerbated by Washington’s poor policies to boot.

As I promised early in this article, there’s some good news in this bleak course of events. Puerto Rico now has a nascent libertarian movement and an organization devoted to spreading ideas of liberty as an antidote to the Tugwell legacy — the Alianza para la Protección de Libertades (Alliance for the Protection of Liberties) that Pedro Serra and Joe Milligan have launched.

The Alliance seeks to improve the lives of Puerto Ricans by building a new consensus around this proposition: a free society — not a centrally planned, politicized one — is a more prosperous and tolerant society. It works to build public support for smaller government and advise policy makers in choosing the proven path toward prosperity. The Alliance’s programs include developing a college campus lecture circuit, starting a YouTube channel specific to Puerto Rico’s issues, and disseminating compelling literature to legislators.

Never let a crisis go to waste, as the saying goes. Puerto Rico represents a unique opportunity to undo a painful, statist history. I hope readers will want to help.

To support the efforts of the Alliance, email Pedro Serra, the director, at pedro@protecciondelibertades.org.

“The curious task of economics,” Austrian economist F.A. Hayek taught us, “is to demonstrate to men how little they really know about what they imagine they can design.”

Rexford Guy Tugwell never understood that. With the help of the Alliance for the Protection of Liberties, Puerto Ricans may yet embrace Hayek’s wisdom and thereby shake the curse of Tugwell.


Lawrence W. Reed

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s.

Bernie Sanders Thinks the Middle Class Is Deteriorating: He’s Wrong! by Corey Iacono

Sen. Bernie Sanders is a democratic socialist running for President of the United States, and his passionate populist message has won him many admirers on the left. His willingness to push for radical progressive policies (such as top income tax rates of 90 percent), which mainstream Democrats are too moderate to embrace, is steadily eroding Hillary Clinton’s dominance of the Democratic primary field.

There are several “facts” upon which Sanders has built his campaign. Probably the most important is the claim that the American middle class has been declining for quite some time. According to Sanders’s website:

The long-term deterioration of the middle class, accelerated by the Wall Street crash of 2008, has not been pretty…

Since 1999, the median middle-class family has seen its income go down by almost $5,000 after adjusting for inflation, now earning less than it did 25 years ago.

The situation is clearly dire, and the right man for the momentous job of saving the middle class is Sen. Sanders. Well, at least that’s [the] message his campaign seeks to convey.

But what if the middle class isn’t becoming worse off over time? What if the American middle class is actually doing as well as ever? Would Sanders’s supporters be as likely to endorse his more radical ideas if they weren’t convinced that the middle was becoming poorer over time — and that only progressive policies could reverse this trend?

It’s worth taking the time to examine Sanders’s claim that the middle class is worse off now than in the past. He doesn’t cite a source for his statistic, but it seems to rely on looking at the median household income over time and adjusting for inflation using the Consumer Price Index (CPI).

This is a problematic methodology because it does not control for the well-known fact that the median household has itself grown smaller over time. Even if median income stayed the same over time, a decline in the number of people in the median household over time would lead to an increase in income per household member.

Additionally, Sanders’s statistic looks at income before taxes and transfers. Transfer payments and tax credits (like the Earned Income Tax Credit) make up a significant portion of income for many lower-income families. Not controlling for these factors understates their true economic well-being.

The figures cited by Sanders also fail to take into account the fact that a larger proportion of worker compensation comes in the form of non-cash benefits (such as health insurance) now than in the past.

According to research published by the National Tax Journal, “Broadening the income definition to post-tax, post-transfer, size-adjusted household cash income, middle class Americans are found to have made substantial gains,” amounting to a 37 percent increase in income over the 1979-2007 period.

Similarly, in 2014, the Congressional Budget Office found that adjusting for changing household size and looking at income after taxes and transfers, households in all income quintiles are much better off than they were a few decades ago.

The incomes of households in the three middle income quintiles grew 40 percent between 1979 and 2011. Somewhat surprisingly, given the histrionics about the state of America’s poor, income in households in the lowest quintile was 48 percent higher in 2011 than it was in 1979.

Research from the Federal Reserve Bank of Minneapolis comes to even more optimistic conclusions.

The Consumer Price Index is widely understood to overstate inflation — among other reasons, by failing to accurately account for improvements in quality and consumer substitutions for newer or cheaper goods — which is why the Federal Open Market Committee uses an alternative measurement for inflation, the Personal Consumption Expenditures (PCE) price index, which includes more comprehensive coverage of goods and services than the CPI.

If the CPI does, in fact, overstate the extent to which prices rise over time, then it also consequently understates the growth in real, inflation-adjusted incomes over time.

Indexing median household income (post taxes and transfers) to inflation using the PCE, rather than the CPI, and adjusting for the long-run decline in household size shows that median incomes have “increased by roughly 44 percent to 62 percent from 1976 to 2006.”

Moreover, the focus on statistical categories ignores what is happening at the level of individuals and households, which may move up or down the income ladder, through different income quintiles. And studies have consistently shown that this income mobility has not changed in decades.

While the rate of growth for some income categories in recent years has been sluggish, the claim that middle incomes are declining precipitously is false. Based on these findings, it seems appropriate to conclude that Sanders’ claim that there exists a “long-term deterioration of the middle class” is patently untrue.

Learn more about wage “stagnation” from former FEE president Don Boudreaux:

Corey Iacono

Corey Iacono is a student at the University of Rhode Island majoring in pharmaceutical science and minoring in economics.

Europe Needs Regime Change in Greece: They Won’t Get It by Stephen Davies

It seems the saga of negotiations between the Greek Government and its creditors has arrived at a denouement but almost certainly not a final conclusion, and we may expect this show to return to the stage at some point, probably in the near future. The reason for this is the real nature of the ultimate problem facing both parties, something of which the creditors are still unaware.

The negotiations over the last few months have been marked by a remarkable degree of acrimony. Most of the other eurozone governments have become increasingly (and publicly) exasperated with the Greeks, and the expressions of hostility towards the Greek government from members of national parliaments have grown ever more outspoken.

Some of the reasons for this are well known — above all, the lack of a true European demos: there simply is not the kind of solidarity or shared interest in Europe that one finds in, for example, the United States.

However, there is another reason for the acrimony that has not received much attention. The creditors misunderstand what it is they are asking the Greek government and society to do. This lack of understanding is why any deal made now is likely to prove a disappointment.

The impression given by media reports is that this is all about debt, specifically the debts run up by the Greek state before 2009. Certainly there is a problem, but it is one that is soluble and does not require the kind of fraught negotiations we have seen.

The difficulty is that the fiscal state of Greece before the first bailout in 2010, and the underlying state of the Greek economy, are symptoms of a much more serious underlying problem. This is one not of debt but of competitiveness.

Quite simply the Greek economy is not productive enough to support the levels of income and public spending that it now has, without significant capital inflows from outside Greece. Before 2008 these came in the form of private loans, since then by government bailouts (even if much of this has been recycled back to private creditors).

Greek firms and labour are simply not competitive with their counterparts elsewhere in Europe, above all in Germany. Being in the euro means that they cannot adopt the traditional way of regaining at least some competitiveness by devaluing their currency. Instead, they have to deflate internally, and the attempt to do this has devastated economic life in Greece.

This is all well known. It is the reason why the creditors are demanding that, in return for a third bailout, the Greek government introduce a series of reforms to public spending, the tax system, and the machinery of the Greek state, particularly it’s tax collecting apparatus. Successive Greek government have either refused to do this or promised to do it and then failed. This is why the rest of the eurozone is becoming ever more exasperated. It here however that the misunderstanding comes in to play.

What the creditors think they are asking for is a major shift in public policy. They recognise that the shift they are asking for is radical, and many also realise that what would be involved would be a shift in the general ideological basis of Greek politics, towards a more market liberal direction. However, they are actually, without realising it, asking for something much more fundamental and drastic.

One question that should be asked is why Greece got into a position that was so much worse than that of other “peripheral” economies. Also, why has the performance of the Greek economy been so much worse than that of other countries that have had bailouts and austerity, such as Spain, Portugal, and Ireland? The answer lies in the fundamental nature of the Greek state and the political economy of Greece.

Greek political culture is dominated by practices and institutions that certainly exist elsewhere in Europe but are not as dominant. The state has a narrow tax base, with powerful interests such as the Orthodox Church effectively exempt. The revenue collection apparatus is completely ineffective so that tax evasion is endemic at every level of income.

This means that simply raising or extending VAT for instance is not enough because so many transactions are off the books. At the same time, the Greek state provides generous pensions and other benefits, which it cannot fund.

The political system appears to be a modern democracy but is in fact a much older model. The key institution is clientelism, in which political actors give out rewards to their clients in the shape of handouts and sinecures in the very large public sector. This is done much more directly than with the kind of interest group politics that we find in most democratic countries, and it is central to the whole way that politics works.

The extent of patronage means that the Greek government (whoever they are) does not have a modern, Weberian, bureaucracy to call on. Instead, most of the people in the public service owe their positions to networks of patronage and these command their loyalty.

The economy is highly regulated in ways that entrench settled interests and inhibit innovation. In particular, a very wide range of occupations are subject to rules that make it very difficult for new entrants into those sectors. Because of the inefficiency and the existence of a plethora of rules that are irksome but ultimately unenforceable, corruption is endemic and widespread throughout Greek society.

This system cannot maintain anything like the standard of living to which most Greeks aspire and as such it means that, via membership of the euro, we have seen the development of an economy that depends upon inward transfers — to a much greater degree than is the case in countries such as Spain and Ireland.

Given all this, it becomes clear that what the creditors are asking for is much more than a shift in policy, no matter how sharp and dramatic. Policy shifts of that kind are part of the normal or regular political process that take place infrequently, but still regularly, in most polities. The shift brought about by Margaret Thatcher’s election in 1979 is an example.

What is needed in Greece, and what the creditors are asking for without realising it, is something more fundamental, a change in the very nature of the political system and in the entire nature of politics and government, rather than a change of policy within a system. This is a regime change in the original and correct use of that term.

The point of course is that changes of this kind are extremely difficult and only happen extremely rarely. Sometimes it requires a revolution, as in France; on other occasions, it takes place in the context of a fundamental crisis such as defeat in a major war. Very rarely it can happen when there is a near consensus in a society over what to do, as in Japan in the 1870s.

The current Greek government is almost certainly aware of this, but, apart from ideological objections to part of the list of reforms, they are quite simply unable, rather than unwilling, to do what is asked because a change in the political order is simply very, very hard.

So the creditors are likely to be disappointed and will then become even more enraged. Moreover, being in the euro makes any attempt at systemic change in Greece even more difficult than it would be already, because if removes a range of policy options that could alleviate some of the transition costs.

As most economists of all persuasions now think, the best option is a managed Greek exit from the euro. If this does not happen (as seems likely) then this farce is a production that will run for some time.


Stephen Davies

Stephen Davies is a program officer at the Institute for Humane Studies and the education director at the Institute for Economics Affairs in London.

What Greek “Austerity”? by Steve H. Hanke

greek president

Greek Prime Minister Alexis Tsipras

It’s hard to find anything written or spoken about Greece that doesn’t contain a great deal of hand-wringing about the alleged austerity — brutal fiscal austerity — that the Greek government has been forced to endure at the hands of the so-called troika (the European Central Bank, the European Commission, and the International Monetary Fund).

This is Alice in Wonderland economics. It supports my 95% rule: 95% of what you read about economics and finance is either wrong or irrelevant.

The following chart contains the facts courtesy of Eurostat.

Social security spending as a percentage of GDP in Greece is clearly bloated relative to the average European Union country — even more so if you only consider the 16 countries that joined the EU after the Maastricht Treaty was signed in 1993.*

To bring the government in Athens into line with Europe, a serious diet would be necessary — much more serious than anything prescribed by the troika.

* Ed. note: The treaty created the EU and the euro and also obligated EU members to keep “sound fiscal policies, with debt limited to 60% of GDP and annual deficits no greater than 3% of GDP.” Ha!

Steve H. Hanke

Steve H. Hanke is a Professor of Applied Economics and Co-Director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins University in Baltimore.