Government Financing: Heads I win, tails you lose

In Ayn Rand’s Capitalism: The Unknown Ideal, she writes,

Every government interference in the economy consists of giving an unearned benefit, extorted by force, to some men at the expense of others. By what criterion of justice is a consensus-government to be guided? By the size of the victim’s gang.

The logic behind this statement is simple and largely self-evident, though often ignored in policy discussions. It should be noted that the article I write about below has nothing to do with the above quote – which is precisely the problem.

A November 19th article from The Economist ponders the question of how governments can best raise revenue through taxes. To the author’s credit, he states in the first paragraph:

Although spending cuts could, and should, be the preferred route to prudence, taxes are all too likely to be part of the mix—at least judging from the experience of those countries that have already acted.

Unfortunately, the article concludes that developed countries would do best to focus on “efficiency” rather than “fairness.” If a government’s goal is to pursue the utilitarian goal of the “greatest good for the greatest number,” this preference for efficiency over fairness would be correct. However, any government with such utilitarian goals is an abomination.

The author does make some important points about alternate tax systems. Taxes on consumption, including a value-added tax (VAT), are regressive; meaning the lower an individual’s income, the higher he is taxed. Consumption taxes do, as the author points out, encourage saving – but they simultaneously discourage spending. Corporate taxes, it is noted, are particularly market-distorting. The critical numbers of the article can be found in the graph below (click to enlarge).

The author also illustrates an interesting phenomenon that often goes overlooked. Very collectivist (communist, socialist, fascist, etc.) have government revenues that make up a relatively large percentage of GDP, when compared with economically liberal countries such as the U.S. Russia, for example, has government revenues equal to 47.7 percent GDP, while the U.S. has government revenues equal to 33.7 percent GDP. But these percentages do not tell the whole story. It is also important to look at the components that make up these percentages. In Russia, non-tax revenues (largely related to state-owned oil companies) make up 14.5 percent of GDP, while in the U.S. non-tax revenues comprise only 5.7 percent of GDP.

At first, this may seem to be a much more efficient way for governments to raise revenue (though, to be sure, the article never makes this claim). It is easy to understand why a person unfamiliar with the record of history may see no difference between a government-run entity earning revenues and a private firm collecting profits. Is there any real difference between the Russian government selling oil and ExxonMobil selling oil?

The answer is a definite “yes”.

History and economics  both teach us that no central body can determine the amount of goods and services needed by individuals. Only the invisible hand of market forces can provide society any degree of efficiency. So even if government raises its revenue through so-called production instead of taxation, there will still be massive transaction costs and inefficiencies on both the supply and demand side. And of course, the government has incentives that conflict with offering the best product at the best prices. Governments typically have two goals: 1) gain power, 2) create social value. Yes, these are often at odds;  and yes, the second is often a means to the first. Regardless, governments are not motivated by profits. And the profit motive is the driving force behind real economic efficiency.

But all of this talk of efficiency misses the point. I’ll return now to the point of the quote I began with.

When reading such articles, it’s easy  to get wrapped up in the author’s arguments and lose the ability to distinguish the forest from the trees. Though the free market is far more efficient than a centrally-planned market, is that really a concern when so many tax systems and government sources of revenue violate individual rights? ExxonMobil has vast resources at its disposable to best its competition. But the one thing it does not have is the ability to coerce by force. Only by offering its customers the greatest value at the lowest price can it win in a free market. While the Russian government (or any other government) only has to pass laws – backed, of course, by men with guns – to maintain its supremacy. Take the U.S. Post Office, for example. If FedEx and UPS were allowed to carry mail, would the USPS have any chance at remaining viable? Of course not. Only by regulation and force can the USPS continue to provide income for the U.S. government.

So whether you are concerned with efficiency or freedom, the property confiscated by government should be reserved only for the protection of our individual rights.

One final thought from Ayn Rand on the subject:

There can be no compromise between freedom and government controls; to accept “just a few controls” is to surrender the principle of inalienable individual rights and to substitute for it the principle of the government’s unlimited, arbitrary power, thus delivering oneself into gradual enslavement. As an example of this process, observe the present domestic policy of the United States.

Der Spiegel on Obama’s Asia Trip

Gabor Steingart writes:

Upon taking office, Obama said that he wanted to listen to the world, promising respect instead of arrogance. But Obama’s currency isn’t as strong as he had believed. Everyone wants respect, but hardly anyone is willing to pay for it. Interests, not emotions, dominate the world of realpolitik. The Asia trip revealed the limits of Washington’s new foreign policy: Although Obama did not lose face in China and Japan, he did appear to have lost some of his initial stature.

In Tokyo, the new center-left government even pulled out of its participation in a mission which saw the Japanese navy refueling US warships in the Indian Ocean as part of the Afghanistan campaign. In Beijing, Obama failed to achieve any important concessions whatsoever. There will be no binding commitments from China to reduce greenhouse gas emissions. A revaluation of the Chinese currency, which is kept artificially weak, has been postponed. Sanctions against Iran? Not a chance. Nuclear disarmament? Not an issue for the Chinese.

The White House did not even stand up for itself when it came to the question of human rights in China. The president, who had said only a few days earlier that freedom of expression is a universal right, was coerced into attending a joint press conference with Chinese President Hu Jintao, at which questions were forbidden. Former US President George W. Bush had always managed to avoid such press conferences.

A short guide to protectionism

From the Telegraph:

1.  Smoot-Hawley

The most famous act of protectionism took place in the 1930s when the US government, facing the early forces of depression, legislated to impose tariffs on over 20,000 imported goods – some significantly. The act triggered a spiral of retaliatory protectionism across the world, and in the view of some economists, fuelled both the Great Depression and the geopolitical tension that led to the Second World War.

2. Common Agricultural Policy

Under the CAP – a European scheme, although similar programmes are in place in the US and throughout the developed world – domestic farmers are given subsidies for producing (or in some cases not producing) food. Without such subsidies many domestic agricultural businesses would collapse, since they cannot compete with the cheap prices charged by overseas exporters for everything from vegetables to livestock to cotton.

3. Shoe wars, bra wars

Recently, in his former role as European Trade Commissioner, Peter Mandelson accused China of illegally dumping vast numbers of shoes – and later bras – on the European markets. “Dumping” is the name given when a country exports a product at a price even lower than that paid in its domestic market. Under the WTO code, it can act against such moves under so-called “anti-dumping” rules.

4. Chinese tyres

China and the US are currently locked in a trade battle over the trade in car tyres. In September, the US Congress accused China of illegally swamping the US market with cheap tyres and imposed tariffs on those imported from the Asian giant. China in turn accused the US of protectionism, arguing that exports to America had actually dropped last year. But with thousands of American jobs on the line, the case is still the focus of heated debate.

5. India vs China

The WTO is not merely a mechanism for the West to fight its own corner against cheaper emerging market exporters. Emerging and developing nations also use it as a forum to tackle their own independent trade battles. Recently, China and India have been locked in debate over trade, with India accusing China of expanding overly aggressively into its silk and satin markets. India argues that Chinese prices are so cheap that its key domestic industry is simply unable to compete.

Foreign Policy Views and U.S. Standing in the World

Matthew A. Baum (Harvard University) and Henry R. Nau (George Washington University), who taught my first university course, have a new paper titled ‘Foreign Policy Views and U.S. Standing in the World.’

What do Americans think about the US role in world affairs and why do they think the way they do? Americans typically do not think about foreign policy most of the time, and, as a consequence, know relatively little about it (Almond 1950, Lippmann 1955, Converse 1964, Erskine 1963, Edwards 1983, Sobel 1993, Holsti 2004, Canes-Wrone 2006, Page and Bouton 2006, Berinsky 2007). While foreign policy issues can become salient when major international events (like 9/11 and the Iraq War) arise or when political candidates focus on foreign policy (Aldrich, Sullivan and Borgida 1989), ceteris paribus, Americans know and care more about domestic politics (Delli-Carpini and Keeter 1996, Holsti 1994, Canes-Wrone 2006, Converse 1964). Consequently, typical Americans are broadly aware of foreign policy, and have some available attitudes about it (Page and Bouton 2006, Aldrich et al. 1989). However, except in the face of political priming by elites or exogenous shocks, such attitudes may not be broadly accessible when making political decisions, like voting.

And if you know my style by now, you know I can’t resist throwing in a nice chart. The first illustrates the percent of Americans who believe the U.S. position in the world has grown weaker, broken down by party affiliation:

The second two charts show the favorability ratings of the United States and China based on the variations of the share of U.S.  global GDP:

China turns to Adam Smith

From the Telegraph:

What is more unexpected is that it is China that has an appetite for the father of modern capitalism, while the West is rediscovering Marx.

Smith’s first masterpiece, the Theory of Moral Sentiments, has been translated into Chinese for the first time, and Chris Berry, professor at Glasgow University, where Smith wrote the book, will next week deliver lectures on it at Fudan University in Shanghai.

China’s Premier, Wen Jiabao, has said he often carries the work – which preceded his more famous work The Wealth of Nations – in his suitcase when he goes abroad. Prof Berry said the earlier book emphasised the importance “not only [of] their material prosperity but also their moral welfare”.

China’s Economic Growth Causes Ten Times More Syphilis

According to the Associated Press:

A senior Chinese public health official says the tenfold growth in the number of syphilis cases over the past decade in China has been driven by the country’s rapid economic growth.

Xiang-Sheng Chen says the sexually transmitted disease re-emerged in the 1980s after being virtually eradicated for two decades.

Chen says prostitution, worker migration from the countryside to cities and poor health care systems means cases are now increasing 30 percent a year.

Chen, the deputy director of China’s National Center for Sexually Transmitted Diseases Control, says syphilis is particularly prevalent in the southeast, where the economy is booming but inequality is also the greatest.

The other side of Israel

Dan Senor (Council on Foreign Relations) and Saul Singer (Jerusalem Post) write:

For all the press coverage of the Middle East, there is one side of Israel that gets scant attention: the country’s economy has the highest concentration of innovation and entrepreneurialism in the world today. For years, multinational technology companies and global investors have been beating a path to Israel. Even in 2008—a year of global economic turmoil—per capita venture investments in Israel were 2.5 times greater than in the United States, more than 30 times greater than in Europe, 80 times greater than in China, and 350 times greater than in India. And Israel still boasts the highest density of start-ups in the world (a total of 3,850 start-ups, one for every 1,844 Israelis). More Israeli companies are on NASDAQ than companies from all of Europe, China, India, Korea, and Japan combined.

…In fact, according to the Organisation for Economic Co-operation and Development (OECD), 45 percent of Israelis are university-educated, which is among the highest percentages in the world. And according to a recent IMD World Competitiveness Yearbook, Israel was ranked second among sixty developed nations on the criterion of whether “university education meets the needs of a competitive economy.”

Click here to read the full article.

World Poverty Rates Decline

Maxim Pinkovskiy (MIT) and Xavier Sala-i-Martin (Columbia University) have a new paper on the world distribution of income:

We use a parametric method to estimate the income distribution for 191 countries between 1970 and 2006. We estimate the World Distribution of Income and estimate poverty rates, poverty counts and various measures of income inequality and welfare. Using the official $1/day line, we estimate that world poverty rates have fallen by 80% from 0.268 in 1970 to 0.054 in 2006. The corresponding total number of poor has fallen from 403 million in 1970 to 152 million in 2006. Our estimates of the global poverty count in 2006 are much smaller than found by other researchers. We also find similar reductions in poverty if we use other poverty lines. We find that various measures of global inequality have declined substantially and measures of global welfare increased by somewhere between 128% and 145%. We analyze poverty in various regions. Finally, we show that our results are robust to a battery of sensitivity tests involving functional forms, data sources for the largest countries, methods of interpolating and extrapolating missing data, and dealing with survey misreporting.

They also provide some lovely graphs. Here is one:

Academic income (in)equality

From Philip Altbach, Director of the Center for International Higher Education:

“Salary progression”—the difference in salary between junior and senior professors—in general appears modest compared to the situation in the professions outside academe. According to our research, for most of the 15 countries in the study, salaries seldom doubled between entry level and senior ranks. The major industrialized countries (including Germany, France, Canada, the United States, and the United Kingdom) stood at the bottom, in terms of variations between junior and senior ranks, and the developing countries (such as China, South Africa, Argentina, and others) at the top. India ranks poorly on both progression and on basic salary. The lack of possibilities for improved salaries is a problem for the profession in general, but it is particularly damaging for the most productive academics. The latter are the most likely to leave academe or to go to countries with higher salaries.

China-America trade war continues

China Set to Impose New Tariffs on Nylon (via Greg Mankiw):

China’s Ministry of Commerce has made a preliminary ruling to impose tariffs of as much as 36% on certain nylon imports from the U.S., saying the imports have damaged the domestic industry….The move is the latest in a series of Sino-U.S. trade disputes after the Obama administration said in September that it would impose duties of between 25% and 35% on imports of tires from China for the next three years. China followed that decision with probes of potential antidumping measures on U.S. auto parts and chicken.