Libertarianism vs. the Welfare State, Round 2

“Freedom is never more than one generation away from extinction.” – President Reagan

More than a quarter century has passed since the Berlin Wall fell. The average American college student was born years after the subsequent reunification of Germany. How many Americans under 30 have a living memory of the “Soviet Union”?

The Soviet empire was a force of evil – its leaders suppressed the most basic rights of its people, namely the rights to life, liberty and property. The only silver lining in the existence of the Communist empire was that it served as a constant, daily update on the reasons why socialism is an all-out economic and moral failure. It was, in other words, relatively easy to stave off onslaughts of socialism in the free world. A finger pointed at the monumental economic failure and the human disaster on the other side of the Iron Curtain could silence most critics of free-market Capitalism.

When the Soviet empire was dissolved many people believed that an era of perennial freedom, peace and prosperity had emerged. Francis Fukuyama was one of the most fervent advocates of the theory of some sort of post-ideological world under the harmony of individual freedom.

That, sadly, turned out to be a historic miscalculation. Socialism did not die in the rubble of the Berlin Wall. It staggered and struggled for a while, bruised by the undeniable defeat in the Cold War, but it slowly found its footing again. Perhaps the most notorious post-Soviet socialist leader was now-defunct Hugo Chavez, whose years as president of Venezuela marked a shocking decline of that country. Having been a well-working, prosperous nation with free markets and relative economic harmony, Venezuela was thrown into a long period of decline, erosion of prosperity, shattered property rights, rampant inflation, corruption, crime and general economic chaos.

All in the name of the new, post-Soviet socialist battle cry: social justice.

Chavez inspired left-leaning political movements in both North America and Europe. Among his most passionate European followers we find rising-star German socialist politician Sahra Wagenknecht, who is on a straight path to be chancellor in the not-so-distant future, and Greek prime minister Alexis Tsipras.

Using the political achievements of Hugo Chavez as their springboard, Europe’s Chavistas have been able to whitewash socialism and remarket it as being all about “social justice”. It is now, together with borderline fascist nationalism, the fastest growing political movement in Europe. Its goal is to transform all of the European Union into one gigantic machine of state control, unrelenting redistribution, entitlements, and an assortment of hate-the-rich measures such as punitive taxation (even worse than today) and property confiscation.

There is a lot to be worried about with this new social-justice driven version of socialism. For one, it makes ignorance a virtue: young college-educated men and women join it without questioning the economic, political, moral and historic credentials of the movement. In a Europe where one in five young men and women are unemployed, and most of the rest live off tax-paid entitlements, the cheap rhetoric of social justice sounds like an opportunity for revenge and resurrection of one’s self esteem.

Another worrisome element is that the notion of social justice is spreading to North America. It is not just president Obama who talks about the need for more economic redistribution – the socialist gospel is preached by a plethora of organizations, blogs and media outlets. Unlike Europe, however, the United States is relatively immune to this ethical virus, especially after six years under the Obama presidency.

But that does not mean we are entirely protected against the lure of “social justice”. The number of authoritative figures broadcasting socialist rhetoric seems to be growing. Pope Francis has added himself to the socialist choir. Consider this excerpt from his Apostolic Exhortation of November 24, 2013:

Just as the commandment “Thou shalt not kill” sets a clear limit in order to safeguard the value of human life, today we also have to say “thou shalt not” to an economy of exclusion and inequality. Such an economy kills. How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points? This is a case of exclusion. Can we continue to stand by when food is thrown away while people are starving? This is a case of inequality. Today everything comes under the laws of competition and the survival of the fittest, where the powerful feed upon the powerless. As a consequence, masses of people find themselves excluded and marginalized: without work, without possibilities, without any means of escape.

This could just as well have been written by a secular advocate of socialism. In a blind test of who said these words, the leader of the rapidly surging, social-justice promoting new movement in Spain – modeled after Tsipras’ Syriza in Greece – would have been a more logical guess than Pope Francis.

The very concept of “inequality” is antithetical to the foundations of a free society. It presumes that all men as not created equal, but created identical. Equality in creation, so to speak, means that we are all individuals with the same right to create, pursue and capitalize on the opportunities that lie before us, or we create for ourselves. We all have the right to live, to be free and to the proceeds of our work – property.

However, the concept of “inequality” that Pope Francis uses has a different meaning. In his view, men are equal only if they achieve the same end results in life. If one man ends up living in a beautiful house in Santa Barbara, enjoying every day the gorgeous views of the Pacific Ocean, and another man lives in a shack in a favela in Sao Paulo, then the Papal principle of “equality” dictates that the man in Santa Barbara has unfairly gained something at the expense of the man in Sao Paulo.

The Pope and other merchants of the same rhetoric propose that “social justice” is the cure for these differences between individuals. But even disregarding the well-documented economic consequences of redistribution of income, consumption and property, the theory behind “inequality” and social justice exercises considerable violence on reality.

Any two human beings compared to one another will always exhibit differences. These are differences in ability, interest, physical and mental strength, endurance, curiosity… A man’s personality has so many dimensions it is almost impossible to find two individuals who come close to being identical. For this reason, every human being will perform differently under given circumstances. There are general trends in human behavior, trends which allow social scientists to explain and with reasonable accuracy make some predictions about how a random person will respond to given conditions. But no two persons will perform identically.

For this reason, we the individuals will always achieve differently. Some will become wealthier than others. Some will reach farther than others in pursuit of wealth, career accomplishment or political influence. Therefore, in order to eliminate “inequality” as defined by the social-justice demagogues, one has to begin by eradicating differences between human individuals.

Herein lies a major problem for anyone who proposes social justice from a theological foundation. Our individual differences are the result of God’s creation. We are all created in God’s image, but we are clones of God. We are imperfect by design – and we are also individually unique by design.

If God meant for us all to accomplish equally, He would have made sure to eradicate any individual differences between us.

When Pope Francis urges the elimination of “inequality” he adopts a secular view of society. That view, riding on the growing global popularity of social justice, may allow the Catholic church to harvest some short-term gains in a worldwide popularity contest, but it will not benefit the future of either the church or our society. Social justice requires an authoritarian government, at least of the caliber known as the “welfare state”, and therefore is directly antithetical to the individual’s right to life, liberty and property.

Put bluntly: by joining the social-justice choir, Pope Francis is giving his nod to continued eradication of the principles and institutions that built our free, prosperous Western Civilization. More frighteningly, the farther one walks out on the limb of social justice, the more authoritarian society has to become. As social justice takes precedence over individual freedom, the expansion of social justice comes at the expense of individual freedom.

With President Reagan’s warning ringing in the background, one is inclined to ask the Pope if he knows any boundary, any limitation, of the pursuit of social justice.

Or, in more modern terms: when is government big enough?

Rethinking Libertarian Success

Yesterday I asked if libertarianism has failed as a political theory. The question is merited: in a world where government is involved in everything from health care and education to “saving” for your retirement, and where government involvement is increasing, one has to wonder why the libertarian movement has not been able to move the needle in the right direction.

Despite this pessimistic review of the lack of libertarian accomplishments, the answer to yesterday’s question is actually: No.

The libertarian movement has not failed. But its list of accomplishments is way too short. If all libertarians share the common goal of saving – and restoring – individual and economic freedom, then our combined efforts thus far have missed the target by a big margin. If we are going to reach the ultimate goal of a minimal state with a maximum of freedom, we need to reboot our operations and get back to work, but do so under two very important conditions.

Before we get to the two conditions, though, let us acknowledge what is actually on the list of libertarian accomplishments. Globally, the movement helped bring down the Soviet empire. It provided moral inspiration to liberty-minded people from Greifswald to the Black Sea. Economic literature on free-market Capitalism were studied behind the Iron Curtain long before the Wall fell in Berlin. Even Robert Nozick, who himself had Polish ancestry, influenced thinkers and inspired people to challenge the prevailing communist order.

Domestically, though, the accomplishments in Thatcher’s Britain and Reagan’s America were more of a temporary nature. They are in fact difficult to see today. The United States reaped the harvests of the Reagan tax cuts all the way through the 1990s, but unrelenting growth in government spending eventually neutralized and overwhelmed the positive effects of the tax cuts.

In retrospect, the Reagan era and its surge in the intellectual, political and economic pursuit of liberty looks less and less like a corner turned in modern American history. In the context of the decades before and after his presidency, Reagan appears to have inspired a temporary halt to, but not a termination of, a very long trend of welfare statism.

The first condition for future success is that libertarians revise their political methodology. the need for revision is well explained by the Niskanen Center, a newly founded libertarian think tank in Washington, DC. In their conspectus, declaring their raison d’etre, the Center explains:

Despite having invested tremendous time, energy, and resources in achieving political change, libertarians have produced little policy change. Of the 509 significant domestic legislative policy changes since World War II, more than half (265) expanded government while only four percent (20) contracted government. When policymakers act, they have, on balance, acted to expand state power.

 They also analyze the “mechanics” of policy change in Washington, DC and how libertarians, despite major investments, thus far have failed to correctly identify and successfully use those mechanics to turn libertarian ideas into legislative practice.

In addition to misunderstanding the legislative mechanics, libertarians have also failed to fully comprehend the nature of government spending. This brings us to the second condition for future success. The Reagan-era tax cuts were accompanied by 7+ percent annual federal spending increases; the George W Bush administration repeated the pattern, combining tax cuts with 6.7-percent annual spending increases. The libertarian movement has failed to fully comprehend the reasons behind, and the complexity of, those spending increases. Therefore, they have lost the debate over government spending to the welfare statists.

This is a general observation; there are bright exceptions to it who pursue actionable reforms to welfare-state entitlement programs. But they are just that – exceptions. Their voices are simply not strong enough to set the tone for the libertarian movement in general. Instead, libertarians tend to fragment their analysis and policy approach, and in too many cases they leave the entitlement sector of our society altogether. Those who do tend to end up fighting the battle of eclectic flea killing, a.k.a., legalization of recreational drugs.

While some libertarians turn on, tune in a and drop out of the fight for economic freedom, the welfare state eats its way deeper into the flesh of the free market. The time to change course is now – and it begins with:

a) following the advice of aforementioned Niskanen Center, i.e., revising the political methodology and learning to master legislative mechanics; and

b) studying and intellectually conquering the welfare state.

I cannot stress enough how important the second condition is. Libertarians in general – again, there are exceptions – dismiss the welfare state by saying either that “just cut spending darn it” and the welfare state will go away; or by refocusing on issues that are not as intellectually intimidating or hard to navigate in terms of policy and actionable reform legislation.

In other words, there is an enormous amount of work to be done. But all is not lost. On the contrary, looking at the young generation in this great country, there are glimmers of hope. A fledgling libertarian grassroots movement has risen as a result of the Tea Party reaction. It consists for the most part of regular Americans whose interest in politics and willingness to become activists are fueled by clearly visible government over-reach.

More specifically, the Obama presidency is actually a gift to the libertarian movement. After having promised “hope” and “change” and rallied millions of young voters and activists, the 44th president burdened job creators with massive regulations that made it very difficult for young workers and professionals to find jobs; he put health insurance out of reach for many of those who got jobs; and he vigorously defended government surveillance programs, invading the electronic integrity of a young generation who takes the privacy of their cell phones as seriously as the privacy of their own pockets.

Young voters turned away from Obama in his re-election bid. Thanks only to an unbelievably out-of-touch Romney campaign, Obama managed to prevail. But this has not made disappointment among the young go away – on the contrary. When today’s 20-somethings look at the career opportunities their parents had, and when they know that the government is intercepting and storing their text messages, their minds are open to arguments on government over-reach, individual freedom – and libertarianism.

The growing interest in individual liberty is a promising platform for a renewed effort to end America’s slow but steady transformation into a European welfare state. High school and college students are flocking in growing numbers to internships and educational offerings by liberty-promoting organizations. Dedicated donors provide financial support, and sharp minds at think tanks and advocacy groups can turn that money into intellectual firepower.

Only two pieces are missing. One of them is the right use of the legislative mechanics. Explains Niskanen Center president Jerry Taylor, whose operational credo “terrain dictates tactics” sets the prelude for his verdict:

The political terrain could not be clearer. Despite our best efforts, America is a center-left nation. Libertarians constitute no more than 5 percent of the public. And if a Republican manages to win the White House in 2016, the recent erosion in the public support for more government will almost certainly reverse.

Europe’s record is even more disappointing. Anyway, Taylor continues:

Until some political tectonic plate shift occurs, radical libertarian policy change is not in the cards. Repealing the Great Society, much less the New Deal, is unlikely. Business regulation of some sort is not going away. The EPA, FCC, SEC, etc. will not be abolished. Less radical improvements in public policy are possible. But to do that, we need to stop making “the better” the enemy of “the best” and cease complaining that the former commits the unpardonable sin of “compromising on principle.” By definition, advocating anything short of the night watchman state “compromises on principle,” and the night watchman state—for now anyway—is a fantasy.

While Taylor unintentionally overlooks the rekindled interest in libertarian ideas during the Obama years, he is correct in that the road from today’s welfare state to the night watchman state is long and littered with road bumps and uphill battles. But if libertarians can intellectually conquer the welfare state, and if they can learn to master the legislative mechanics that Taylor points to, then no road bump or uphill will stand in their way.

Has Libertarianism Failed?

In a four-part series I presented the current state of the U.S. economy. Overall, things look relatively good here: growth is moderately good, private consumption is moderately healthy, business investments are stabilizing at a good rate and government consumption and investment spending is under control.

Generally, the private sector of the U.S. economy is in fairly good shape. So what is there to complain about?

First of all, the growth rates that I refer to as “moderately good” are at least a full percentage point below what we should have at this stage of a recovery, even from a deep recession. There are reasons why we are not at higher growth, one of them being the kind of government spending that does not show up in GDP: entitlements. Another reason is the Obama administration’s affinity for regulations. Without big entitlements and invasive regulations we could easily be growing at 3.5-4 percent per year.

Secondly, the biggest strength of the U.S. economy is relative, not absolute. As I continuously report on this blog, Europe is in a perennial state of stagnation and industrial poverty. The Chinese economy is in what looks like a relatively serious recession; add to that a real estate bubble that they still don’t know how to handle and the growing trend of job migration from China to lower-cost countries like Vietnam. Japan is fledgling but not much more than that.

And third – well, there is always Obamacare… Fortunately it looks like that reform, well-intended as it was, is being reshaped into something more palatable and manageable. It takes time, though, and while the president understandably holds on to his trademark legislative achievement he, too, must come to the conclusion that not all is good in America’s most complicated piece of legislation ever. When that happens, another ball and chain around the ankle of the American economy will fall off and allow free-market Capitalism to grow even bigger.

Bottom line: the U.S. economy is not very impressive when compared to itself a couple of decades ago, but at least from an international perspective it is the best place to be for job seekers, families and businesses.

The big question is why we can’t do better. What is holding us back? As a libertarian my conclusion is “big government”. As an economist my conclusion is “it depends, but big government is a strong candidate”. But that does only begs another question: how is it that the United States, a constitutional republic born from the yearnings of freedom, has fallen for the temptation of the big welfare state?

This is a big question to answer. A good way to start is to ask what has happened to the most freedom-loving movement in recent American history – the libertarian movement – and why it has failed to turn the tide on big government. After all, modern libertarianism is now almost half-a-century old. The intellectual groundwork was laid in part by economists like Milton Friedman and Friedrich von Hayek (who, by the way, allegedly did not get along with one another…) and partly by the great moral philosopher Robert Nozick. In his Anarchy, State and Utopia, originally published in 1971, Nozick challenged the prevailing wisdom of redistributive justice and – by implication – the theoretical foundations of the welfare state. His vision of the minimal state was close in theory to the small government that would be necessary for Hayek’s and Friedman’s free-market Capitalism to work.

The Reagan presidency marked a surge for libertarianism in America. Similarly, the Thatcher era unleashed libertarian thinking and activism in Britain. While its success on continental Europe was more limited, the libertarian movement made its footprints, especially in Scandinavia and eastern Europe, where it helped inspire the liberation from the Soviet empire.

But what looked like a success story back then never translated into policy success. Why?

The question is highly relevant. In a world where government consumes 40 percent or more of GDP; when taxes can take away more than half of a man’s earnings; when government controls or wants to control the education of all children and the health care of all citizens; in that world, libertarianism seems to be little more than a topic for esoteric dinner conversations.

Where are the libertarian victories? Can libertarianism even be saved?

Yes, it can. But only under some very important conditions. For more on this, check in tomorrow.

Libertarians Fail to See Welfare State

While the talks between the EU and the Greek government has bought the euro a little bit more time, there is a growing undercurrent of a debate over the European crisis. More writers are trying to put their finger on where Europe is going and what the continent needs. Arthur Brooks, president of the American Enterprise Institute, looks at demographics and points to some of the deeper social and cultural problems that plague Europe:

[A] country or continent will be in decline if it rejects the culture of family, turns its back on work, and closes itself to strivers from the outside. Europe needs visionary leaders and a social movement to rediscover that people are assets to develop, not liabilities to manage. If it cannot or will not meet this existential challenge, a “lost decade” will look like a walk in the park for Grandma Europe.

There are reasons why a country turns away from family, work and social, demographic and cultural reproduction. Those reasons are closely tied to self determination: when people are demoted from independent individuals to subjects of the welfare state, their desire to assume responsibility for a family weakens accordingly. When government uses economic incentives to steer people toward certain life choices, and away from others, people become less inclined to participate in the reproduction of the society they inherited. They are happy to hand that responsibility over to government – precisely along the lines of the incentives that government has created.

In other words, when government has social-engineering ambitions the consequences of its incursions into the private lives of its citizens reach far beyond what government planners initially would anticipate. Collectivization of people’s daily lives destroys much more than just the economy.

The welfare state is the collectivization vehicle that rolls all over the values that formed the foundation of Western civilization. Proponents of individual and economic freedom chronically under-estimate the destructive force of the welfare state, both short-term and long-term. Brooks represents the view that the welfare state, over its long-term existence, is somehow isolated from the cultural and social traditions and institutions of a society.

The short-term perspective and under-estimation of the welfare state is well represented by former Polish deputy prime minister Leszek Balcerowicz. In the Fall 2014 issue of the Cato Journal, Balcerowicz offers a refreshing explanation of the crisis that caused the Great Recession. After initially attributing the crisis in the so called PIIGS countries to the financial sector, he develops a productive narrative of the crisis where the financial and fiscal sectors interact:

  • In one direction the crisis causality runs from the financial sector to the fiscal sector – “fiscal-to-financial” by Balcerowicz’s terminology – when “sustained budgetary overspending … spills over ito the financial sector, as financial institutions are big buyers of government bonds”;
  • In the other direction the crisis causality runs “financial-to-fiscal”, which Balcerowicz exemplifies with Ireland and Spain: “The spending boom in the housing sector fueled the growth of their economies and created a deceptively positive picture of their fiscal stance”.

While Balcerowicz is theoretically correct about the quality of the financial-to-fiscal causality, it still remains to be proven that there was enough economic activity at stake to cause such a brutal drop in employment and general economic activity as happened in 2008-2009. Balcerowicz does not offer any deeper insight into the causality, but adopts the narrative that has become the official explanation of how the Great Recession started.

Of far more interest is Balcerowicz’s “fiscal-to-financial” argument. Chronically overspending governments pull banks down with them, especially as the credit ratings of the welfare states start tumbling. I pointed to this in two articles last year, one in April and one in December. I also explain the role of the welfare state behind the crisis in my book Industrial Poverty.

The one point where Balcerowicz stumbles is when to explain why governments chronically overspend. He approaches the problem as a question:

What are the root causes of the tendency of modern political systems to systematically overspend, which results in fiscal-to-financial crises or in chronically ill public finances that act as a brake on economic growth?

He then suggests that the answer to this question “belongs to public choice”. This is an analytical mistake: public choice lacks the methodological power to penetrate the complexity of the welfare state.

Clearly, there is a need for libertarians and other friends of economic and individual freedom to learn how to understand, analyze and politically and legislatively dismantle the welfare state. Without such knowledge they will continue to make near-miss contributions such as the ones by Brooks and Balcerowicz.

But fear not. I have another book coming. Stay tuned.

France and Europe’s Economic Future

Europe’s version of austerity has been designed exclusively to save the continent’s big welfare states in very tough economic times. By raising taxes and cutting spending, governments in Greece, Spain, Italy and other EU member states have hoped to make their welfare states more slim-fit and compatible with a smaller tax base. The metric they have used for their austerity policies is not that the private sector would grow as a result – on the contrary, private-sector activity has been of no concern under government-first austerity. Unemployment has skyrocketed, private-sector activity has plummeted and Europe is in worse shape today than it was in 2011, right before the Great Big Austerity Purge of 2012.

The criticism of austerity was massive, but not in the legitimate form we would expect: instead of pointing to the complete neglect of private-sector activity, Europe’s austerity critics have focused entirely on the spending cuts to entitlement programs. While such cuts are necessary for Europe’s future, they cannot be executed in a panic-style fashion – they should be structural and remove, not shrink, spending programs. Furthermore, they cannot be combined with tax hikes: when you take away people’s entitlements you need to cut, not raise, taxes so they can afford to replace the entitlements with private-funded solutions. Tax hikes, needless to say, drain dry the private sector and exacerbate the recession that produced the need for austerity in the first place.

This is a very simple analysis of what is going on in Europe. It is simple yet accurate: my predictions throughout 2012, 2013 and so far through 2014 have been that there will be no recovery in Europe unless and until they replace government-first austerity with private-sector austerity. This means, plain and simple, that you stop using government-saving metrics as measurement of austerity success and instead focus on the growth of the private sector. This will rule out tax hikes and dictate very different types of spending cuts, namely those that permanently terminate government spending programs.

Unfortunately, this aspect of austerity is absent in Europe. All that is heard is criticism from socialists who want to keep the tax hikes but combine them with more government spending. A continuation, in other words, of what originally caused the current economic crisis (that’s right – it was not a financial crisis). These socialists won big in the French elections two years ago, gaining both the Elysee Palace and a majority in the national parliament. However, faced with the harsh economic realities of the Great Recession, they soon found that spending-as-usual was not a very good idea. At the same time, they have rightly seen the problems with the kind of government-first austerity that has been common fiscal practice in Europe. Now that their own agenda is proving to be as destructive as government-first austerity, France’s socialists do not know which way to turn anymore. This has led to a political crisis of surprisingly large proportions. Reports the EU Observer:

French Prime Minister Manuel Valls on Monday (25 August) tendered his government’s resignation after more leftist ministers voiced criticism to what is being perceived as German-imposed austerity. The embattled French President, Francois Hollande, whose popularity ratings are only 17 percent, accepted the resignation and tasked Valls to form a new cabinet by Tuesday, the Elysee palace said in a press release. “The head of state has asked him [Valls] to form a team in line with the orientation he has defined for our country,” the statement added – a reference to further budget cuts needed for France to rein in its public deficit.

From the perspective of the European Union, France has been the bad boy in the classroom, not getting with the government-first austerity programs that have worked so well in Greece (lost one fifth of its GDP) and Spain (second highest youth unemployment in the EU). Hollande’s main problem is that by not getting his economy back growing again he is jeopardizing the future of the euro, in two ways. First, perpetual stagnation with zero GDP growth has forced the European Central Bank into a reckless money-supply policy with negative interest rates on bank deposits and a de facto endless commitment to printing money. This alone is reason for the euro to sink, and the only remedy would be that the economies of the euro zone started growing again. Secondly, by exacerbating the recession in France, and by failing endemically to deliver on his promises of more growth and more jobs, Hollande is setting himself up to lose the 2017 presidential election to Marine Le Pen. First on her agenda is to pull France out of the euro; if the zone loses its second-biggest economy, what reasons are there for smaller economies like Greece to stay?

This is why he has now shifted policy foot, from the spending-as-usual strategy of 2012 to government-first austerity. But since neither is good for the private sector, frustration is rising within the ranks of France’s socialists to a point where it could cause a crippling political crisis. Euractiv again:

The rebel minister, Arnaud Montebourg, who had held the economy portfolio until Monday, over the weekend criticised his Socialist government for being too German-friendly. “France is a free country which shouldn’t be aligning itself with the obsessions of the German right,” he said at a Socialist rally on Sunday, urging a “just and sane resistance”. The day before, he gave an interview to Le Monde in which he claimed that Germany had “imposed” a policy of austerity across Europe and that other countries should speak out against it. Two more ministers, Benoit Hamon in charge of education and culture minister Aurelie Fillipetti, also rallied around Montebourg and said they will not seek a post in the new cabinet. In a resignation letter addressed to Hollande and Valls, Fillipetti accused them of betraying their voters and abandoning left-wing policies, at a time when the populist National Front is gaining ground everywhere. According to Le Parisien, Valls forced Hollande to let go of Montebourg by telling him “it’s either him or me.”

Ironically, the main difference between the socialist economic policies and those of the National Front is that the latter want to reintroduce the franc while the former want to stay with the euro. Other than that, the National Front wants to preserve the welfare state, though significantly cut down on the number of non-Europeans who are allowed to benefit from it. The socialists also want to preserve the welfare state, but also open the door for more non-European immigration.

In short, the differences between socialist and nationalist economic policy is limited to nuances. Needless to say, neither will help France back to growth and prosperity.

Meanwhile, according to the Euractiv story there is mounting pressure from outside France on President Hollande to stick with the government-first austerity program:

[The] government turmoil is also a sign of diverging views on how to tackle the country’s economic woes. French unemployment is at nearly 11 percent and growth in 2014 is forecast to be of only 0.5 percent. Meanwhile, French officials have already said the deficit will again surpass EU’s 3 percent target, and are negotiating another delay with the European Commission. The commission declined to comment on the new developments in France, with a spokeswoman saying they are “aware” and “in contact” with the French government. German chancellor Angela Merkel on Monday during a visit to Spain declined to comment directly about the change in government, but said she wishes “the French president success with his reform agenda.” Both Merkel and Spanish PM Mariano Rajoy defended the need for further austerity and economic reforms, saying this boosted economic growth.

Growth – where? What growth is he talking about? But more important than the erroneous statement that the European economy is benefiting from attempts to save the welfare state, France is now becoming the focal point of more than just the future of the current European version of austerity. The struggle between socialists and competing brands of statism is a concentrate of a more general political trend in Europe. The way France goes, the way Europe will go. While the outcome of the statist competition will make a difference to immigration policy, it won’t change the general course of the economy. Both factions, nationalists and socialists, want to keep the welfare state and therefore  preserve the very cause of Europe’s economic stagnation (which by the way is now in its sixth year).

Europe needs a libertarian renaissance. Its entrepreneurs, investors and workers need to stand up together and say “Laissez-nous faire!” with one voice. Then, and only then, will they elevate Europe back to where she belongs, namely at the top of the world’s prosperity league.

Getting the Freedom Priorities Right

Sometimes, the daily flow of politics and public policy tends to remind us of what really matters in this world. Last week’s Supreme Court ruling that upheld the individual mandate in Obamacare as a tax is a good example. By defining the mandate as a tax, the Supreme Court dealt a serious blow to the economic freedom of the American people: the Court effectively opened for the federal government to remove what remains of our economic freedom by creating new entitlements – and tax us to pay for them.

The road is now open for the remaining parts of the European welfare state to come rolling ashore. If we allow that to happen, then the largest bastion of economic freedom in the world will be gone for the foreseeable future. It is absolutely imperative that all hands are on deck to protect our economic freedom – the fight for almost every other freedom issue must stand back. (Accountable government and freedom of speech excepted.) This means that those among the ranks of libertarians who prioritize social issues over economic issues better think again.

Yes: gay marriage is less important than economic freedom. Not in principle, but in priority.

In principle – in a truly free society – everyone is at liberty to follow his or her own path in life, so long as his or her actions do not inflict harm on others. Government is confined to protecting, not intruding on, people’s lives, liberty and property. By logical consequence, in a free society, built on libertarian principles, people can define themselves as whoever they want to be, whatever they want to be, without having to ask the government for permission to do so. There are no government rules to stipulate how you can and cannot live your life – if you want to drop out of school, you have the right to do so; if you want to never buy health insurance, you have the right to do so. Consenting adults can get married in whatever constellations they want to, and who is a man and who is a woman.

The personal freedoms associated with the most private aspects of our lives are crucial in a free society. Some libertarians join forces with liberals in advancing these issues, the best known being gay marriage. All other things equal I would suggest that this is a worthy cause to fight for,  but as economists put it, ceteris is not always paribus. All other things are not equal. Most of us live in the part of the world where government taxes away one third or more of our income and redistributes it among us private citizens. Most of us are stifled in our economic ambitions by highly progressive taxes (especially those here in America who live in a state with a progressive income tax). And if such laws as the Affordable Care Act survive the 2012 election results, our economic freedom will be infringed on even further. Worse still: if Obama wins a second term, he will advance the welfare state even further, thus removing even more of the economic freedom we still enjoy.

With a government that is increasingly intrusive on our liberty and property, it is a waste of valuable political capital – manpower and money – to fight for gay marriage or the rights of transgender persons to define themselves as whatever gender they want to be.

Every liberal from Sea to Shining Sea will cry foul at this statement, and frankly so will a fair amount of libertarians. In support of my priorities, consider Argentina, where they just used up valuable legislative resources to liberate a small group of citizens from the shackles of having to be either a man or a woman. The Associated Press reports:

Argentina’s president personally delivered the nation’s first identity cards on Monday to people who legally switched their genders under a law that sets a global precedent. President Cristina Fernandez said she’s proud of setting a new global standard with the gender identity law, which overwhelmingly passed congress, enabling anyone to change their gender without first having to win approval from judges or doctors. Argentina is showing the world that equality is just as important as liberty, she said. “What sets us apart is that we care not only about ourselves and our immediate circle, but about others as well,” she said. “Today we’re setting a new standard for equality and legality.” Fernandez handed out the new identity cards to a half-dozen people who were born one sex but now identify as another. She also gave new cards to several children of lesbian parents who couldn’t be properly identified before.

This is the same country that ranks 158th in the Heritage Foundation’s annual Index of Economic Freedom:

Argentina’s economic freedom score is 48, making its economy the 158th freest in the 2012 Index. Its overall score has decreased by 3.7 points, the third worst decline in this year’s Index. With lower scores on six of the 10 economic freedoms, Argentina now ranks only 27th out of 29 countries in the South and Central America/Caribbean region, and its overall score is far below the regional and world averages. Argentina’s foundations of economic freedom have weakened in light of extensive government intrusion into free markets. Aggravated by corruption and political interference, the lack of judicial independence has severely eroded limits on government. Public spending by all levels of government now exceeds one-third of total domestic output. Regulatory encroachment on private businesses has continued to increase, undermining previous years’ structural reforms. Populist spending measures and price controls distort markets and undermine productivity growth, and the financial sector remains hobbled by government interference. Fading confidence in the government’s determination to promote or even sustain open markets has discouraged entrepreneurship and dynamic investment within the private sector.

Again, in a libertarian society all are equally free. But in order to attain such high levels of freedom we have to get our priorities right. Fundamentals such as an accountable government, freedom of speech and economic freedom must all be in place in order to provide an infrastructure of liberty, before we can advance to liberate other areas of society.

The freedom to marry five people of various genders is reduced to eclectic flea-killing if you cannot provide for yourself without asking government for a handout. The freedom of a lesbian couple to adopt is worth nothing if that lesbian couple are forced to rely on government-provided food, health care, education, clothes and housing. (For regular families, that is what the complete absence of economic freedom boils down to.) The freedom of Jack to become Jill, with or without gender surgery, is reduced to mere symbolism if Jill is just as unable to find a job and pay her own bills as Jack was.


Why Do We Want to Cut Government Spending?

My Sunday article where I criticized Veronique de Rugy’s conclusions regarding European government spending inspired a few rather intense conversations. The conversations have been revealing and – hopefully – clarified my points further. I have also gained valuable insights into the views held by other libertarians and fiscal conservatives who side with de Rugy.

I maintain, though, that my libertarian and fiscally conservative friends, primarily on the East Coast, do indeed belong to an unhealthy consensus circuit on what to do with government spending. Their view can be summarized – perhaps a bit harshly – as “just cut spending, damn it”. In this article I would like to elaborate on why I believe that this view would have bad consequences if it was ever translated into fiscal policy.

My disagreement with the consensus circuit centers in on one critical question: why do we want to cut government spending in the first place? There are two answers to this question, a principled and an economic answer. The principled answer places a goal post on the horizon, showing us where we want to take our country. The economic answer tells us how we want to get there.

As for the principled answer, my goal post is Robert Nozick’s minimal state. As is well known, this state is strictly limited to the protection of life, liberty and property; there is absolutely no government-forced redistribution of resources between citizens. Almost every kind of government spending we know of is banned, from public education to the Earned Income Tax Credit. Even Social Security must go, of course, though its redistributive properties are a bit different from those of, say, Medicaid or unemployment benefits.

I have no doubt that I share this goal post with every other libertarian. (Conservatives tend to disagree, wanting a limited government-provided “social protection” system.) The disagreement between me and the consensus circuit is instead in the answer to the economic question – How do we get to the goal post? – and the disagreement lies first and foremost in how the circuit thinks about government spending.

While the prevailing view among fiscal conservatives is that all government spending is the same, and while I agree that all government spending – except what fits inside the minimal state – must eventually be cut to zero, it is a grave mistake to treat all government spending the same way in the process of cutting spending.

In other words: not all government spending is the same. This is a statement of fact, not a value statement. In order to understand why it is not a good idea to “just cut spending, damn it”, we need to separate government spending into the following categories:

  • Service production;
  • Permanent financial entitlements;
  • Temporary financial entitlements.

Financial entitlements (explained in detail in a moment) are always redistributive in nature: they take money from one citizen and give to another. Service production, on the other hand, is only partly redistributive. Services that protect life, liberty and property are not redistributive in nature, while services such as public education, health care and and child care are.

[The astute student of Nozick would qualify this distinction by adding that even services that protect life, liberty and property can be redistributive according to the definition of the ultra-minimal state. I disagree with this statement, but I will give you a chance to convince me that I am wrong!]

The overwhelming majority of government spending is redistributive in nature, i.e., must eventually go away. The question is: what happens if we decide to cut all redistributive government spending overnight? (This is the pointed meaning of “just cut spending, damn it.”)

To answer this, we need to get back to the financial entitlements. In short, they are cash handouts: any kind of check you get from government that does not pay you for work or for a product you sell to government, is a cash handout. People qualify for financial entitlements because they belong to a distinct group that government has identified as deserving of redistribution. Some cash handouts are permanent, or open-ended, in the sense that there is no distinct cut-off date when you disqualify. America does not have a whole lot of these programs, though there is a long-term, disturbing trend where some of the temporary programs are taking on the role of permanent financial entitlements. Programs like TANF, WIC, unemployment benefits and food stamps belong in this category (though food stamps have a limited cash value as they can only be used to buy food).

Because a financial entitlement does not pay for a job, but “simply” puts cash in a person’s pockets, the consequences of spending cuts are different than if we cut services production. If a person loses parts or all of a cash handout, the theory is that he or she is incentivized to go out and find a way to support him- or herself.  Therefore, if we cut financial entitlements we will create more labor supply, which in turn will fill a lot of vacant jobs and inspire people to start new businesses.

I generally view this reasoning as over-simplifying a complex issue, but the underlying incentives structure is correct. If there are a lot of jobs waiting to be filled and we can motivate people to take them by cutting or eliminating financial entitlements, then by all means, let’s do it. Most of the research on the 1990s welfare reform seems to agree that with the proper implementation, cash-handout cuts is a way to self sufficiency.

The problem comes when we already have a recession with high unemployment. The ’90s reform took place during a time when unemployment was trending down below four percent. It is an entirely different matter to cut welfare to encourage self sufficiency at a time when unemployment is persistently in the 8.5-9.5 percent bracket. If we “just cut spending, damn it” today in our cash handout programs we will leave a lot of people without any means to put food on the table.

[If anyone wants to make the case that an elimination of the minimum wage could help here, I am all ears. The minimum wage law is economically stupid and morally objectionable. But please don’t just suggest that it will solve our welfare cost problems here and now. Provide some analytical backup. We need solutions, not rhetoric.]

Generally, therefore, it is unwise to cut temporary financial entitlements in times of a deep recession. But what about permanent entitlements? Well, we don’t have a whole lot of those in America. Social Security is one, and its eligibility structure is different than that of other entitlements. Furthermore, in order to have any effect on the budget, cuts in Social Security would have to come with structural changes to the funding of the program, and be pretty darn significant. I strongly encourage Social Security reform, but it should be done separately from any attempts to cut government spending here and now.

So what about services production? The simple answer to this question is: government is selling us services for tax money – making us offers we can’t refuse – and by doing so is effectively monopolizing markets that otherwise would be in the hands of the private sector. “Just cutting spending, damn it” on services has two consequences that we need to recognize:

  1. It lays off people who get a paycheck that they spend – no matter how inefficient they are at what they do at work;
  2. People still pay for those services, which means that they have no more money to spend on a replacement for what government cut away; government takes as much but gives less back.

So long as government keeps taxes unchanged when it cuts services, the cuts will have a business-cycle style negative effect on the economy. One consequence is a drop in consumer spending, and it comes from two sources: laid off workers getting welfare and unemployment, and families redirecting spending to buy compensate for what government no longer provides. This leads to an increase in financial entitlement spending that counters the cut in spending on services.

In short: if you close a school to reduce government spending, the teachers and janitors are going to get cash handouts from government, and some parents will reduce their work hours and try to homeschool their kids instead. Less earnings means less spending in the local community. More job losses, more cash handout spending.

So, says the consensus circuit member, are you against cutting government spending entirely?

Of course not. Let’s remember what I said about the principled answer to the question why we cut government spending. The point here is to once again consider the question: Why do we want to cut government spending?

The economic answer to this question – or at least the policy we design based on our economic answer – is conditioned by what the intermediate, economic goal is with the spending cuts. If our goal is to reach that principled goal post, then “just cut spending, damn it” is a counter-productive strategy. However we go about it, we will create more problems than we solve. The reason is that spending cuts lopsidedly drain the economy for resources. No matter how inefficient government is at what it does, it still provides services and entitlements that feed back into the economy. In the areas of redistribution the output from government is always inefficient compared to what the private sector would produce, but the output nevertheless exists, and people adjust their lives to it. (They have no choice.)

A far more productive approach to reaching the goal post is to structurally reform away government, program by program, with a package of supply and demand side reforms. On the supply side:

  • Deregulations that allow private entrepreneurs to replace government on private-market terms; and
  • Tax cuts that make it cheaper to set up and operate a business.

On the demand side, we cut taxes and make other reforms that put more money in consumers’ pockets.  That way entrepreneurs will have reason to believe that there is a market for the products they are going to sell. In terms of public education reform, the demand-side measures would, e.g., include property tax cuts, a voucher system and the creation of private, charitable scholarship programs for private schools.

I don’t think the libertarians and fiscal conservtives on the consensus circuit disagree with this model for long-term, structural reforms to eliminate the welfare state. I believe instead that their mistake lies in that they confuse two answers to the question why we want to cut government spending.

While aiming for the minimal-state goal post, they adopt an attitude toward spending cuts that is embraced by people who have a different goal post in mind. The “just cut spending, damn it” approach is common among those whose goal post is a balanced budget. If your goal is to eliminate a budget deficit with spending cuts, then your primary concern will be spending cuts – not to reform away the spending programs themselves. Politicians who want to close the budget deficit use the across-the-board approach to reduced spending, not realizing that they are re-creating the very same problem they are trying to solve.

To sum up, then: I do believe that libertarians on the consensus circuit share the principled goal of eliminating the welfare state, but I also believe that they have confused the method for getting there with the method for balancing the budget. The two are incompatible: you cannot “just cut spending” to eliminate the welfare state. Across the board cuts are not designed, and not macroeconomically suitable, for such reforms. Only a structural elimination of the welfare state can reach that goal post.

Bad Austerity Analysis: Response to Veronique de Rugy

I am only allergic to two things: taxes and bad analysis. I can cope with my tax allergy because I live in a state with no income tax and no wealth tax; and I live in America where taxes overall are still relatively low.

I have a much harder time coping with my allergy to bad analysis. When the bad analysis comes from statists, it does not itch as bad; in fact, I make my living analyzing statism and producing research that explains the alternatives.

When the bad analysis comes from people who are on the side of economic freedom, I find it harder to deal with my allergy. The only remedy is an extensive analysis of where my fellow traveler has gone wrong. Today’s article, which belongs to this category, has its origin in a contribution to the debate over austerity from Veronique de Rugy, senior research fellow with the Mercatus Center at George Mason University.

In a recent piece on government spending and austerity in Europe, Ms. de Rugy tried to explain that: a) austerity has not caused any drop in government spending in Europe, and b) austerity is not all that bad. Superficially, de Rugy’s arguments seem to come full circle. However, a closer look gives the impression that her analysis has fallen victim to the twittered information fracturing that is so common these days.

Here is what de Rugy said a couple of weeks ago in her “analysis” of European government spending:

Austerity is destroying Europe, we are told. In fact, this “anti-austerity” slogan was a big reason for the victory of newly elected socialist François Hollande to the presidency of France. Interviewed in The Economista few weeks ago, Hollande’s campaign director said “We are not disciples of savage spending cuts.” But then, I look at the data and I am asking: What “savage” spending cuts? Following years of large spending increases, Spain, the United Kingdom, France, and Greece — countries widely cited for adopting austerity measures — haven’t significantly reduced spending since 2008. These countries still spend more than pre-recession levels France and the U.K. did not cut spending.

There are lots of problems here. To begin with, de Rugy reports her data in a simple chart where government spending is going up in actual euros. But this is like studying global warming based on the temperature in Miami in July. Her data reporting opens more questions than it answers: How high was inflation? What about GDP growth? And the most important question of all: Was there any change in the composition of government spending?

But there is also a more important analytical problem with this piece, a problem that has to do with a deep misunderstanding of austerity in itself. I cannot stress this often enough: austerity does not mean “spending cuts” as de Rugy and many others on the East Coast libertarian consensus circuit seem to believe. Austerity is not a number – it is a policy strategy. This means that it has a purpose, a method and a set of effects and consequences:

  • The purpose of austerity is to reduce a budget deficit;
  • The method of austerity is a combination of tax increases and spending cuts;
  • The effects of austerity are reduced growth, higher unemployment and more people eligible for welfare;
  • The consequences of austerity are an eroded tax base and higher spending on welfare.

One of de Rugy’s problems, which she shares with others in the American austerity debate is that she seems to believe that austerity is a new invention in Europe. But the fact of the matter is that European countries such as (but not limited to) Denmark, Sweden, Ireland and Germany have used austerity policies on numerous occasions over the past three decades. The effects of those policies are visible all over national accounts data and socio-economic data, especially in the statistics over the heavy dependency on welfare and other entitlements in Europe. It is also visible in the disastrously high waiting lists in government-run health care, and in the combination of a low standard of living with high taxes.

Some would rightly point out that high taxes and low standard of living is a correlation that is general and not specific to austerity. But this only brings up another, all too common misunderstanding of austerity. People seem to believe that austerity policies somehow are aimed at reducing the size of government. They are not. Austerity aims to preserve government. It aims to preserve government by closing a budget deficit, without recognizing that the deficit is caused by the welfare state and aggravated by the taxes levied to pay for that same welfare state. The policies used to close the budget deficit are tax increases and spending cuts, which, obviously means a net expansion of government.

In other words, when de Rugy says that there is no austerity in Europe, she misstates the very meaning of the concept, as well as fails to analyze correctly the policies taking place there. What makes me concerned is that her fire-aim-ready approach comes with significant risks. Too many talking heads on the debate circuit stay alive not by virtue of their original contributions, but by regurgitating opinions and observations put forward by someone who got to the keyboard before they did.  When someone like de Rugy comes out and blasts off a salvo of “analysis”, others join in her debate shooting spree; drive-by debaters, to borrow a metaphor from Rush Limbaugh. In doing so, they unwittingly contribute to the establishment of truth by quantity, not quality. The more people repeat the same opinions and more  or less erroneous observations, the easier it is to create a prevailing paradigm. That paradigm, in turn, is based not on good analysis but on who fired first.

Let’s not forget the old memento that the establishment of the truth is a grueling, painstakingly methodoligcal process: If ten people people say that the sun revolves around Earth, and one person says Earth revolves around the sun, then who’s right?

This is a critical point, because with her latest salvo de Rugy made quite a splash in the economic policy debate. The latest example is a reference to her by Michael Barone in the Washington Examiner. That Barone fails to recognize her shoot-from-the-hip strategy is excusable; that de Rugy herself does not see it, is less so.

Austerity is not something that can be handled as casually as is currently the case here in America. For someone who has lived through the Swedish austerity of the 1990s, when government cut away nine percent of GDP in three years, and who has studied the dire consequences of the Danish austerity program of the late ’80s, it is ridiculous to suggest that austerity is palatable, perhaps even desirable.

By leaping over three decades of historic evidence of what austerity does to a country, de Rugy is also contributing to an emerging, and rather dangerous consensus among fiscal conservatives in America. This consensus favors a kind of spending cuts that have no other purpose than to balance the government budget. They do nothing to initiate structural reforms to the welfare state, which leaves the structural driving forces of government spending intact. As a result, their policies will backfire no later than in the next recession.

A major problem that de Rugy and others on the East Coast libertarian consensus circuit overlook is that Europe’s austerity policies have increased the demand for government spending. When taxes go up, government takes more from the private sector; when spending is cut, government gives even less back for the taxes they take. The result is less growth, fewer jobs, more people asking for a handout from government – and more government spending.

These obvious facts are right there for Veronique de Rugy to see, but instead she assumes that just because government spending has not fallen in nominal terms, there is no austerity:

In Greece, and Spain, when spending was actually reduced — between 2009–2011 — the cuts have been relatively small compared to what is needed. Also, meaningful structural reforms were seldom implemented. As for Italy, the country reduced spending between 2009 and 2010 but the data shows and uptick in spending 2011. The increase in spending represents more than the previous reduction.

Exactly. The reason for this is theoretically well explained here, and empirically observable in Eurostat data over government spending on what Europeans call “social protection programs”. We call them entitlement programs. Detailed numbers are only available up to 2009, but we nevertheless see the trend that my theoretical paper explains:

  • For the EU as a whole (27 countries) entitlement spending grew from 25.7 percent of GDP in 2006 to 28.4 percent in 2009;
  • In Greece the increase was from 24.2 percent to 27.3 percent;
  • The Spanish increase is even more startling:  from 20 to 24.5 percent of GDP;
  • Italy: from 25.6 percent to 28.4.

These numbers indicate a correlation between austerity policies and entitlement spending: wherever austerity goes, entitlement spending increases as a result. The reason is not intention, but consequence: austerity drives people off self sufficiency and partly or entirely into dependency on government. This explains why de Rugy’s observation of no spending cuts and her wish…

…that we would stop assuming that gigantic “savage” cuts are the source of the EU’s problems…

…is entirely misguided. Austerity preserves government by purpose and expands government by method, effect and consequence. This perspective entirely escaped de Rugy. Her failure to recognize the nature of austerity is, sadly, symptomatic of a lot of the twitterized public policy debate we have to deal with these days.

By the way, it is worth noting that even the Baltic countries, which are often held up on the libertarian consensus circuit as examples of good governance, have significant problems with entitlement spending:

  • Estonia: entitlement spending grew from 12 percent of GDP in 2006 to 19 percent of GDP in 2009;
  • Latvia: from 12.4 percent to 16.6 percent;
  • Lithuania: from 12.9 percent fo 20.6 percent.

The shallowness of this debate also tends to blindfold friends of limited government in other areas of their research. A bizarre example is the growing consensus among East Coast libertarians that Sweden – with the world’s harhest, most austere welfare state – is somehow an example  of good, fiscally conservative governance. Ms. de Rugy joins in the appreciation choir lauding Sweden’s statist finance minister, Mr. Anders Borg. Here is what de Rugy says:

Sweden is another good example. The data show that after the recession, Sweden’s finance minister, Anders Borg, not only successfully implemented reduction in welfare spending but also pursued economic stimulus through a permanent reduction in the country’s taxes, including a 20-point reduction to the top marginal income tax rate. As a result, the country’s economy is now the fastest-growing in Europe, with real GDP growth of 5.6 percent. Unsurprisingly, the Financial Times recently declared Borg the most effective finance minister in Europe.

Returning to the Eurostat entitlement spending data reported above, we find that since Mr. Borg took office in 2006, the share of Sweden’s GDP that is spent on tax-paid entitlements has gone up from 29.8 to 31.5 percent. Other Eurostat data on total government spending shows that government gobbles up 52-53 percent of GDP on average, and does so even with Mr. Borg being in office since 2006.

Will someone please explain to me how spending one third of the economy on entitlements, and running more than half of GDP through government, is good libertarian policy?

Even more surprising is de Rugy’s suggestion that Mr. Borg has cut some kind of top income tax. If Ms. de Rugy won’t take my word for it, she can check for herself: there has been NO cut in the top marginal tax rate in Sweden. Contrary to what de Rugy is trying to tell us, Mr. Borg is adamantly defending Sweden’s high marginal income taxes, which for 2012 force the highest earning Swedes to surrender more than 60 percent of their last earned krona to the government. They have been there for the past two decades.

De Rugy completes her backward homerun with a suggestion that Sweden’s “fastest-growing” GDP is somehow related to some sort of policies for limited government. Nothing could be further from the truth, as national accounts data from Statistics Sweden reaveals. The latest growth spurt in the country’s GDP is entirely due to a rapid increase in exports:

  • Exports is the largest share of GDP in Sweden, bigger even than private consumption;
  • Sweden has a foreign trade surplus equal in size to government consumption!
  • The growth spurt in the Swedish economy over the past couple of years is driven entirely by a surge in exports. There is no domestically sourced growth, and no discernible spillover effects from exports to private consumption.

In short: Sweden is an industrialized banana republic, divided into two sectors: a thriving foreign-trade sector and a depressed domestic sector with a government-run health care monopoly with enormous waiting lists, the highest taxes in the world and, with the new earned income tax credit that Mr. Borg pushed through, marginal tax rates for low-income families are among the highest in the world.

I don’t like bashing fellow libertarians, but when someone puts forward bad analysis and incorrect facts, and when others run with those talking points as if they were tried, true and solid, there is suddenly a lot more at stake than friendship and collegial cordiality. Policies are made based on what is said in the public arena. The more people repeat purported facts and claimed conclusions, the more likely it is going to influence policy makers. Bad analysis leads to bad policy, and bad policy that is marketed as derived from alleged libertarian principles will come back to hurt those who actually try to advance libertarianism.

For this reason – and for the sake of the integrity of free-market think tank research – I have to put a foot down and point a finger at fellow travelers when they are wrong. I know that by doing this I infuriate some tenderfoot libertarians on the East Coast. But the goal for me is not to belong to the consensus circuit – it is to advance economic freedom in America.