Lower-Income and Middle-Class Households Benefit from Smaller Government

June 4, 2024 by Dan Mitchell @ International Liberty

The main argument for smaller government – from an economic perspective – is that more resources are left in the productive sector of the economy and this leads to faster growth and higher living standards.

This is a reason why the United States, with a medium-sized welfare state, out-performs Europe, which is saddled with large-sized welfare states.*

And it is why lower-income households in the United States have living standards akin to middle-class households in Europe.

Lower-income and middle-class household in America also benefit because they enjoy lower tax burdens.

Here’s a chart from the Tax Foundation showing the tax wedge (the difference between pre-tax income and post-tax consumption) in various OECD member nations. As you can see, the tax burden on average households is lower in the United States (highlighted in red) than in any European nation other than Switzerland.

Since I mentioned that Switzerland is the only European nation with a smaller tax wedge than the United States, I’ll also share a map comparing taxes in Europe.

As you can see Switzerland (in yellow) stands out in a very positive way. Some nations (Belgium, Austria, Germany, and France) have tax burdens on middle-class households that are 100 percent higher than in Switzerland.

The bottom line is that spending restraint and modest-sized government is paying big dividends for Switzerland.

Lower-income and middle-class households are benefiting directly (lower tax burdens) and indirectly (faster growth and higher living standards).

A definite role model.

P.S. This column has focused on tax burdens for average households. You can peruse the original OECD data to see that this analysis is equally true for lower-income households.

*This is also the reason places with small-sized welfare states, such as Singapore, out-perform the United States.

Small Government Is Good Policy…and Good Politics

August 11, 2022 by Dan Mitchell @ International Liberty

I’m a policy wonk rather than a political pundit.

But since part of my job is educating politicians, I can’t simply rely on arguments about what’s best for the country.

 

I also have to convince them that they can enact good policy while also keeping their jobs.

And that’s why I developed my Fourth Theorem of Government back in 2017.

The simple message is that ordinary people enjoy more income if and when politicians make wise policy choices.

And that’s a very effective strategy for winning reelection.

The obvious example is Ronald Reagan, who won a landslide in 1984 even though (or, actually, because) he aggressively fought to reduce the burden of federal spending.

But not everybody agrees with me.

In a column for the Washington Post, Henry Olsen argues that the Republican Party needs to ignore libertarian ideas and embrace activist government.

Many conservatives recognize that attracting a new, diverse, working-class voter base also entails a new, non-libertarian approach to economics. …Liberty-minded intellectuals might rail against widespread government involvement in the economy, but voters like free public education, subsidized health care and generous pensions. …voters…prefer the Scylla of tax increases to the Charybdis of entitlement cuts as aging populations put fiscal pressure on health-care and retirement programs. …The Chips package should serve as a symbol of what government will need to do to reinvigorate an economy that builds things.

I’ll make my main points about taxes and entitlements at the end of the column, but I can’t resist some editorializing on two things from the above excerpt.

First, Henry says voters like free public education. Maybe that’s true, but they seem to like the ultra-libertarian idea of school choice even better.

Second, he argues that the recently enacted Chips law is a role model. But if industrial policy was a good idea, why did Japan stagnate? Why has China’s growth slowed?

Let’s now look at more of the column.

Past Republican efforts to limit the growth of entitlement spending after GOP landslides in 1994 and 2010 backfired politically, helping to reelect presidents Bill Clinton and Barack Obama. The fact is that 63 percent of Trump voters care more about keeping Social Security benefits than preventing tax hikes, and 45 percent care more about giving seniors on Medicare what they need than about controlling program costs. …Any serious effort to retain these largely working-class voters — and attract more in the future — must come to grips with these views. …Modern conservatism needs to refine Reagan’s insights and explicitly adopt a theory of when government should act to enhance people’s lives.

My first instinct is to ask for examples of how and when government enhances people’s lives. Or to provide examples of where Reagan thought government did a good job.

That certainly does not seems to fit with Reagan’s message in this video, this video, or the second video from this collection.

Or this video!

But maybe Reagan’s own words were insincere. That seems to be what Olsen thinks since he wrote that “the conservative idol implicitly sanctioned government action if it helped people live dignified lives of their own choosing.”

So let’s forget about words and look at the track record.

What we find is that Reagan was remarkably effective in fighting big government. Indeed, what separates Reagan from every other Republican in recent history is that he successfully fought to constrain the burden of government spending.

 

But don’t believe me. The data from the Historical Tables of the Budget unambiguously show that Reagan was far better than any other president in the past 50-plus years.

I’ll close by questioning Olsen’s claim that voters prefer tax increases over spending restraint.

I very much suspect that is only the case if they think someone else’s taxes are being increased.

If you don’t believe me, I invite you to look at this polling data from left-wing supporters of Bernie Sanders. And if hard-left voters are not willing to pay more to finance European-sized government, what are the odds that Republican voters are willing to pay more?

Free Markets and the Chilean Miracle

November 24, 2021 by Dan Mitchell @ International Liberty

There are certain topics that seem to be slam-dunk wins for those who favor free markets and limited government, and one reason I make this assertion is that folks on the left don’t even bother to make counter-arguments. 

Here are just a few examples:

• Nobody on the left ever tries to produce an alternative explanation for the IRS data showing that rich people paid a lot more tax after Ronald Reagan lowered the top income tax rate from 70 percent to 28 percent.
• Nobody on the left ever tries to produce an alternative explanation for the success of Switzerland’s spending cap.
• Nobody on the left ever tries to produce an alternative explanation for why there’s much-faster long-run growth in market-oriented nations.

Prior to today, I also would have included this example:

• Nobody on the left ever tries to produce an alternative explanation for Chile’s amazing jump from poverty to prosperity after the country shifted to pro-market policies such as private social security.

But now I can no longer include Chile’s economic renaissance because I finally found someone who concocted an alternative explanation.

As part of a column in today’s Washington Post about Chile’s upcoming presidential election, Anthony Faiola made this claim about that nation’s economic performance.

After Pinochet’s ruthless rule came to an end in 1990, the newly democratic nation witnessed a historic period of economic growth. Gross domestic product growth between 1990 and 2018 averaged 4.7 percent annually, well above the Latin American average. Over that same period, democratic governments increased social spending. Extreme poverty (below $1.5 per day) was virtually wiped out.

But now let’s consider whether this alternative explanation is accurate.

Mr. Faiola wants readers to believe that the positive developments in Chile (“historic period of growth” and “extreme poverty…was virtually wiped out”) occurred after 1990.

But if that’s the case, why did per-capita living standards begin to climb much earlier?

As shown by these two charts, it’s far more likely that the dramatic rise in per-capita economic performance around 1980 is the result of a big increase in economic liberty (as measured by Economic Freedom of the World) that also was occurring around that time.

(There is a separate measure of economic freedom for the years before 1970, so the orange and blue lines are discontinuous.)

One should always be careful about interpreting numbers. For instance, national economic data at a given moment in time will be affected when there are periods of global recession, such as the early 1980s and 2008.

 

Which is why it is important to look at longer periods of time. And when looking at decades of data for Chile, the big jump in prosperity clearly began after the economy was liberalized, not after Pinochet ceded power in 1990.

We’ll close with some bad news and good news.

The bad news, as captured by the bottom-half of the stacked charts abvoe, is that there hasn’t been much pro-market reform in recent decades.

But the good news is that Chile hasn’t deteriorated. The nation has endured some left-leaning governments, but economic freedom has remained high by world standards. Which means the economy continues to grow.

P.S. I’ll add some worrisome news. The left in Chile wants a new constitution that would give politicians more power over the economy. If that effort is successful, I fear the country will suffer Argentinian–style decline.

P.P.S. I suppose Mr. Faiola deserves some credit for cleverness. Some leftists have tried to argue Chile is a failed “neoliberal experiment.” Given the nation’s superior performance, that’s obviously an absurd strategy. So Faiola came up with a new hypothesis that acknowledges the growth, but tries to convince readers that it’s all the result of things that happened after 1990. He’s wildly wrong, but at least he tried.

P.P.P.S. I have a three-part series (here, here, and here) on how low-income people have been big winners as a result of Chile’s shift to free enterprise.

P.P.P.P.S. Here’s a column on Milton Friedman’s indirect contribution to Chilean prosperity.

Australia, Donald Trump, and Limited Government: Part II

June 5, 2019 by Dan Mitchell @ International Liberty

My Take - Once again, Dan presents sound advice to avoid the pitfalls and consquences of leftist insanity.  But one again, I find it difficult to agree with Dan on some of his points.  But, that's the problem with Libertarians, they mix great ideas that have sound historical foundations with delusions about trade and negotiations.  They believe in free trade, as do I, but the problem is the rest of the world only wants free trade with the United States as a one-way street.  Those who believe otherwise are delusional.  I agree with Trump's negotiations over tariffs and trade.  It's clear to me Trump understands the Bretton Woods era is over!  It's also clear to me the rest of the world needs a good smack in the mouth.  Then, and only then, will we come a lot closer to free trade. 

We have to get this.  In the coming worldwide economic crisis the only country that will remain stable is the United States.  Not Australia, Europe, China or Russia.  Many South American countries and backward nations in Africa and Asia won't feel much because they don't have or need much.  The fact of the matter is America is the only natural capital generating nation in the world because we have the resources, and geography.  America is the only advanced nation in the world that can feed itself, fuel itself, arm itself, defend itself and create it's own internal market without help or support from anyone else.  If the world wants to play on our economic game - they'll play by our rules or they won't play.     RK  

I had a chance to write about several interesting topics (Australian politics and policy, the economics of government spending, the structure of taxation) on my recent trip Down Under.

 

I also appeared on The Outsiders, one of Australia’s most popular political programs.

 

 

Here are a few links for those who want more information on some of the topics that were discussed.

Societal capital – I fear that there is a tipping point and that nations are doomed once people decide that it’s morally acceptable to use government coercion to live off the effort of others.

Demographics – Many nations face a built-in crisis because their redistribution programs are unaffordable now that people are living longer and having fewer children.

Social Security reform – It’s not pure libertarianism, but Australia’s system of private retirement accounts is vastly superior to America’s bankrupt tax-and-transfer Social Security system.

Socialism – It’s very troubling that many young people support the poisonous ideology of socialism, but I offered an optimistic spin that this doesn’t necessarily mean support for coercive statism.

Tax reform – Citing globalization as a driving factor, I couldn’t resist the temptation to spread the supply-side gospel of lower marginal tax rates on productive economic activity.

Donald Trump – As I’ve repeatedly pointed out, America’s president is an incoherent mix of good policies on tax and regulation mixed with bad policies on spending and trade.

Trade and protectionism – Speaking of trade, I argued that the trade deficit doesn’t matter and also suggested a sensible approach for dealing with China.

P.S. This interview was an encore performance. I also appeared on The Outsiders in 2017. Part of my plan to curry favor so that I can escape to Australia if (when?) America suffers Greek-style chaos.