12 November 2014

Will America follow Canada’s economic fight against impertinent obstructions?

Twenty-six years after the United States and Canada concluded their historic free trade agreement, it may startle some to see how their constituents size up the trading relationship.

In a report published last month, Nanos Research (in collaboration with the University of Buffalo) found that when Canadians were asked to ‘rank the top two countries that are closest with Canada in terms of business values’, the United States polled at 61 per cent, far beyond the next two challengers, with Britain at 20 per cent and Germany at 12 per cent.1

Meanwhile, when Americans were asked the same question in relation to their own business values, Canada came in at a mere 24 per cent, followed close at the heels by Britain and Japan, both at 21 per cent.2

Were citizens asked to describe the socio-economic fabric of their countries, no doubt a plurality of Americans would respond through a mantra coloured by the heroics of their Founding, noting their adherence to limited government, free market values, and individual freedom, principles which FEE founding father Leonard Read described as ‘the essence of Americanism’.3

Canadians, still hewing to the country’s tory origins (which skew social democratic), would list their traditions of robust government, interventionist economic policies, and communal politics. Indeed, many Canadians reflexively identify themselves as the ‘un-Americans’ — our own Confederation moment, aspects of which continue to show up in the Nanos/UB survey on border security. And yet in many respects, Canadians — or at least their federal government — have come to exemplify those American values which its southern neighbours have allowed progressive ideals to supplant.

During the Great Recession of 2007-09, for instance, Canadian banking rules regulating adequate reserves and conservative lending practices meant that Bay Street experienced few of the credit disturbances or the financial meltdowns that became regular occurrences on Wall Street. And, under the Liberal governments of Jean Chrétien and Paul Martin and the Conservative government of Stephen Harper, Ottawa has pursued measures of deficit reduction and lower government expenditures as a percentage of GDP, policies virtually orphans on Capitol Hill with its $500 billion deficits and $18 trillion debt. Canada’s commitment to global competitiveness is clearly visible it its reduction of corporate taxes to 15 per cent, where in America corporate taxes are amongst the highest in the West at 35 per cent.

According to the 2014 Index of Economic Freedom, published annually by the Heritage Foundation, Canada ranks sixth in the world, making it the ‘freest economy in the North American region.’ Its debt to GDP stands at 86 per cent — its path toward fiscal prudence slowed by the Great Recession. The United States, meanwhile, does not even place in the top ten, ranking twelfth among leading nations. Its debt to GDP now exceeds 100 per cent.

Canada’s economic successes are replicated within the Anglosphere, with Australia and New Zealand surpassing it on the Heritage Index (third and fifth, respectively), with Ireland at ninth and the United Kingdom placing fourteenth. (Britain’s former colony of Hong Kong, reunited politically to mainland China since 1997 under a ‘one country, two systems’ agreement, ranked first.)

All is not lost for the United States, though. Already the country has made strides in the right direction, largely through forced sequestrations and its indomitable entrepreneurial spirit to succeed. As Adam Smith observed in The Wealth of Nations:

The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security, is so powerful a principle, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often incumbers its operations; though the effect of these obstructions is always more or less either to encroach upon its freedom, or to diminish its security.4

America’s fundamentals remain strong; only its government agenda of Keynesian policies and interventionist programmes, including the Fed’s adherence to quantitative easing, need to be reformed. ‘Interventionist policies create uncertainty, raise the costs of financial intermediation and discourage investment. I might almost say that the problem is not that the government has done too little, but that it has done too much,’ writes Roger Koppl in From Crisis to Confidence: Macroeconomics after the Crash. ‘The problem is changing rules, uncertain regulations, shifting Fed policy. The problem is the variability and unpredictability of government economic policy.’5

These economic interventions are among the ‘impertinent obstructions’ with which the federal government burdens the states, business enterprises, and individual men and women. Canada’s own time of reckoning came in the mid-90s, when the choice was between reform or collapse. Forward-thinking leaders, putting national well-being before any ideological qualms, faced reality and restructured downward the Welfare State. Much the same scenario took place in Australia and New Zealand, with the United Kingdom making up for opportunities lost under its Labour governments.

To-day, with slight hiccups, the economic future of all these countries is promising. Now America is poised on a similar precipice. As Leonard Read observed, the key is leadership and a faith in ‘the spiritual antecedent of the American miracle’:

As this belief in the use of force as a means of creative accomplishment increases, the belief in free men—that is, men acting freely, competitively, cooperatively, voluntarily—correspondingly diminishes. Increase compulsion and freedom declines. Therefore, the solution to this problem, if there be one, must take a positive form, namely, the restoration of a faith in what free men can accomplish.6

Will the United States follow the Commonwealth example and, following the November mid-term repudiation of ‘Big Government’ and in preparation for the presidential contest in ’16, rally against coercive intervention and for economic prosperity?

ENDNOTES

1. CAN-AM Relationship Drift Continues, The Nanos-UB North American Monitor — Year 10, 11.

2.Nanos/UB Survey, 12.

3. See Leonard E. Read, ‘The Essence of Americanism’, The Freeman, 48:9 (September 1998), 527-32.

4. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Edwin Cannan, ed., Vol. 2 (London: Methuen & Co., 1904 [1776]), IV.v, 43.

5. Roger Koppl, From Crisis to Confidence: Macroeconomics after the Crash (London: Institute of Economic Affairs, 2014), 14.

6. Read, ‘The Essence of America’, 531.

31 July 2014

Why Progressive Taxation Abuses Tory Policies for the Common Good

Arguable it is that the traditional Tory is more amenable to the exercise of government and the financial burdens therein assumed than is the Whig; modern conservatism, arising from Burke’s pen and Peel’s practice (under the previous tutelage of Pitt the Younger and the 2nd Earl of Liverpool) were conscious steps away from the Toryism of paternalism and protection—Toryism which had its philosophical foundations in feudal society where the prince exercised charity through personal noblesse oblige but also through the State offices he assumed. Samuel Johnson, the idiosyncratic Tory par excellence, took the American colonists-in-rebellion to task for their Enlightenment views on taxation, arguing in ‘Taxation no Tyranny’ that

the supreme power of every community has the right of requiring from all its subjects, such contributions as are necessary to the publick safety or publick prosperity, which was considered by all mankind as comprising the primary and essential condition of all political society, till it became disputed by those zealots of anarchy, who have denied to the parliament of Britain the right of taxing the American Colonies.1

Progressive taxation builds on this notion, on the basis that those who earn more can afford to pay more.2 From Johnson a theoretical underpinning for graduated taxation can also be adduced, for he held that ‘A tax is a payment exacted by authority from part of the community for the benefit of the whole. From whom, and in what proportion such payment shall be required, and to what uses it shall be applied, those only are to judge to whom government is intrusted.’3 Johnson died in 1784, while the first income tax in the United Kingdom was introduced by Pitt thirteen years later, as a means of funding the nascent Napoleonic Wars.

Our understanding of political economy has evolved much since the time of Johnson; indeed, it was only in the year following Johnson’s essay that Adam Smith published his An Inquiry into the Nature and Causes of the Wealth of Nations,4 incidentally the same year that the Declaration of Independence was announced in Philadelphia. We now have a better understanding of capitalist enterprise, the importance of investment and entrepreneurship, and the limitations of the State in promoting, much less engaging in, productive activities. Far better for the marketplace to create wealth and employment opportunities than to have the State redistribute wealth ineffectually.

Yet beliefs that entrepreneurial activity behaves neutrally to disincentivising taxing policy still exist, nowhere more so than in the reborn idea of ‘progressive’ taxation, which takes the charitable precept that ‘from whom much is given, much is expected’ and enacts it into law. Taken to extreme lengths, it violates Laffer Curve analysis that shows that beyond a certain revenue maximising point—roughly 20-30 per cent—high marginal rates of taxation curb business incentives and, instead of raising more revenue for the State, actually raise less.5

To add insult to injury, though progressive taxation was introduced originally as a tax upon the rich, it now encompasses the middle class, both because ‘soak the rich’ policies can no longer fund the burgeoning Welfare State and due to pay rises (largely due to inflationary pressures) which float the earnings of the higher middle class into corresponding tax brackets.

As John Chamberlain wrote of the economic effects,

Psychologically speaking, there is obviously some point where the progressive tax must recoil upon itself, destroying the base from which it might hope to achieve a maximum of “take.” Just where the point is we cannot tell: there is no way of measuring businesses that are unborn, or energies and creative enthusiasm that simply fail to well up. But when a progressive tax dampens the impulse to generate income, then the tax base itself must narrow and diminishing returns set in.6

Whatever can be said in favour of progressive taxation as an historical artefact (rooted in feudal duties of noblesse oblige), in practice it has grown out of all proportion as a means of helping at the bottom by skimming more from the top. The appetite of the leviathan State knows no bounds.

Here endeth the first lesson; all which serves as preamble for my essay ‘Taxing the middle class to extinction’, published by courtesy of the Institute of Economic Affairs.

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#DMI_Reads Update — Here is a list of current reading for the month of July:

  • William Graham Sumner, The Challenge of Facts and Other Essays, Albert Galloway Keller, ed. (New Haven: Yale University Press, 1914) [insightful essays on politics and economics from the father of American sociology; I quote extensively from ‘What Makes the Rich Richer and the Poor Poorer?’ in the IEA essay above]; and
  • Albert Taylor Bledsoe, Was Davis a Traitor; or Was Secession a Constitutional Right Previous to the War of 1861? (Richmond, VA: Hermitage Press, 1907 [1866]) [an examination of the ‘compact’ theory of American Union (as opposed to the ‘nationalist’ theory) and the legitimacy of state secession, with a view to the Civil War actions of Confederate president, Jefferson Davis].

ENDNOTES

1. Samuel Johnson, ‘Taxation no Tyranny; an Answer to the Resolutions and Address of the American Congress [1775]’, in The Works of Samuel Johnson, LL.D., vol. 8 (London: Nichols and Son, 1816), 155-204; see 156.

2. For an excellent overview of progressive taxation, see John Chamberlain, ‘The Progressive Income Tax’, The Freeman: Ideas on Liberty, 11:11 (November 1961): 30-42.

3. ‘Taxation no Tyranny’, 162. Emphasis added.

4. Curiously, Smith too laid the theoretical groundwork for progressive taxation: ‘The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.’ See An Inquiry into the Nature and Causes of the Wealth of Nations, R.H. Campbell and A.S. Skinner, eds., Glasgow Edition of the Works and Correspondence of Adam Smith, vol. 2b (Indianapolis: LibertyClassics, 1981), V.ii.b.3.

5. Daniel J. Mitchell, ‘Taxation and government spending’, in A Beginner’s Guide to Liberty, Richard Wellings, ed. (London: Adam Smith Institute, 2009), 36-46; see esp. 42-43.

6. John Chamberlain, ‘The Progressive Income Tax’, 32.

30 June 2014

Speculation in light of Catholic Social Teaching

To-day the Institute of Economic Affairs posted my essay ‘Pope Francis should praise speculators, not spurn them’. Addressing a conference in Rome meeting to discuss the topic of impact investing, the Pope praised its work on behalf of the poor and marginalised, with a not-too-subtle condemnation of investment for self-interest.

Yet from the economic perspective, any legal investment is an investment toward the common good (barring criminal activities), as any successful enterprise will benefit not only the entrepreneur but also provide employment opportunities and make available a new good or service that serves a public need. At the same time, the increase in wealth makes additional charitable-giving possible. Asking the State to intervene in the investment process will only set up new bureaucratic obstacles, leading to economic decisions that are not motivated by the efficiency of free consumer-choice but by the wastefulness of political agendas.

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#DMI_Reads Update — Here is a list of current reading for the month of June:
  • Dwight R. Lee and Richard B. McKenzie, Failure and Progress: The Bright Side of the Dismal Science (Washington, DC: Cato Institute, 1993) [insightful analysis that economic growth also entails failure as innovation and competition jostle in the marketplace; fortunately, though, the failure of some usually means better opportunities for all]; and
  • S.C. Littlechild, The Fallacy of the Mixed Economy: An ‘Austrian’ Critique of Recent Economic Thinking and Policy, 2nd ed. (London: Institute of Economic Affairs, 2009 [1986]) [a lovely account of Austrian economic principles in relation to classical economic theory and planned economies, particularly in relation to the early years of the Thatcher ministry].
I have also been reading up on scholarly articles, listing them under the category of ‘Journal jottings’. Follow-up comments or suggestions for complementary reading are most welcome.

And to-morrow, enjoy a peaceful Dominion Day!

30 May 2014

The perpetual protest against economic error

Just a single posting for review, ‘The Infernal Resilience of Economic Fallacies’, examining the British government’s 2014 Budget and various commentaries on it, good and less good. Frédéric Bastiat, the French classical economist, once wrote that confronting bad economics was a ‘perpetual protest’ — a point illustrated in the necessity to correct the recurrent errors inherent in Keynesian policies of state intervention and protectionist trade programmes.

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#DMI_Reads Update — Here is a list of current reading, since the last message in February; perhaps it will lead to some interesting discussion:
  • Frédéric Bastiat, Economic Sophisms—Second Series, in The Bastiat Collection, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2011) [masterful short essays that demolish mercantilism and protectionism];
  • Christopher Hibbert, The Destruction of Lord Raglan: A Tragedy of the Crimean War, 1854-55 (Boston and Toronto: Little, Brown, 1961) [I cannot read Hibbert’s account of Lord Raglan’s misadventures in the Crimea without picturing Sir John Guilgud’s marvellous portrayal in The Charge of the Light Brigade];
  • Henry Hazlitt, The Inflation Crisis, and How to Resolve It (New York: Arlington House, 1978) [Hazlitt’s writings on the illusions of inflationary salvation are an education in themselves];
  • C. Brad Fraught, The Oxford Movement: A Thematic History of the Tractarians and Their Times (University Park, PA: Pennsylvania State University Press, 2003) [a lovely overview of Newman, Keble, Froude, and Pusey and their impact upon the Victorian Church of England];
  • Friedrich Gentz, The Origin and Principles of the American Revolution, Compared with the Origin and Principles of the French Revolution, John Quincy Adams, trans., Peter Koslowski, ed. (Indianapolis: Liberty Fund, 2010 [1800]) [Gentz’s summary of the causes of the American revolt is seminal in understanding the War of Independence]; and
  • Stephen Macedo, The New Right v. The Constitution, 2nd ed. (Washington, DC: Cato Institute, 1987) [a fascinating critique of conservative attempts to read the U.S. Constitution according to ‘democratic’ principles].
I have also been trying to catch up on scholarly articles, listing them under the category of ‘Journal jottings’. Follow-up comments or suggestions for complementary reading are most welcome.

06 May 2014

The Infernal Resilience of Economic Fallacies

If only economic fallacies were characteristic of economic goods — and scarce! Unfortunately, this is not so, and fallacies in favour of protection and stimulus flourish and spread their noxious untruths. For Frédéric Bastiat, it was the task of political economists to do battle against them in a ‘perpetual protest’1.

Sometimes, though, the source of the economic fallacy surprises, as it did when reading a brief John Redwood commentary on Britain’s latest Budget from its Chancellor of the Exchequer, George Osborne.

Redwood, once a protégé to Thatcher and a respected scholar and politician, understands the dynamism which underpins the Laffer curve2, writing that ‘tax revenues are rising ... by allowing more tax revenue to arise naturally through the growth of the economy’, underlining the fact that higher taxes do not necessarily result in higher revenues:

Where the government has tried higher tax rates on income and capital gains it has actually damaged the revenues, not increased them. If any government tried to reduce the deficit quickly through a series of tax rate rises, considerable damage would be done to the economy and tax revenues might fall.

Plus, he advocates a route to balanced budgets through such growth, which ‘...has always been the main requirement to help correct the large imbalances in the economy without pushing it into deep recession.’ Yet in the same paragraph, Redwood lauds government fiscal interventions that are just as likely — depending upon the steps taken — to be impediments to the economic growth he favours. ‘We need more exports, more homes, more domestically produced goods to replace imports, ‘he asserts. ‘The budget seeks to help bring that about.’

Export expansion, for instance, can benefit from reductions in regulations that artificially raise the price of British goods. As for housing, such regulatory reform would doubtless be of more benefit than the Chancellor’s ‘help-to-buy’ initiative: ‘The chancellor’s sub-prime subsidies risk further inflating the housing market,’ warns Richard Wellings. ‘More households will take on debts that could become unaffordable should interest rates return to normal levels. Thus significant default risk has been loaded onto taxpayers. There are also potentially very serious implications for the banking sector should government policies ignite another boom-bust cycle.’

All things being equal, Redwood goes off the beam, though, in his condemnation of foreign trade which he views as a threat to domestic industry or, nearer the mark, British employment. The organic ramifications of trade are by no means static, as Geoffrey Wood outlines in Fifty Economic Fallacies Exposed:

Producers are guided by the prices they see confronting them to produce what is most profitable for them and to do so as cheaply as they can. Prices thus direct resources to where they are most useful, as those producers to whom they are most valuable will pay most for them. If an economy is trading freely, without tariffs, its resources are making the most of the opportunities prescribed to them by the patterns of prices in the rest of the world.

The economy’s resources will thus be used where it is most productive, relative to the rest of the world, for them to be. The economy will be making the most of the opportunities available to it.3

In an harmonious trading environment, then, countries produce according to their strengths, and buy from countries with respective productive advantages. Far from a zero sum transaction as Redwood suggests, this is an economic policy with positive sum benefits — and a respectable pedigree: David Ricardo called it ‘the law of comparative advantage’, whereas for Ludwig von Mises it was ‘the law of association’.

But for sheer entertainment in slaying this protectionist bugbear, one must return to Bastiat, who doubtless would have relished a go at Redwood’s economic faux pas. From his essay ‘Domination through Industrial Superiority’, we can imagine how he would set upon Redwood’s admonition against imports:

We produce at home neither tea, coffee, gold, nor silver. Does this mean that our industry as a whole thereby suffers some diminution? No; it means only that, in order to create the equivalent value needed to acquire these commodities by way of exchange, we employ less labor than would be required to produce them ourselves. We thus have more labor left over to devote to satisfying other wants. We are that much richer and stronger. All that foreign competition has been able to do, even in cases in which it has absolutely eliminated us from a particular branch of industry, is to save labor and increase our productive capacity.4

Bastiat acknowledged that even the best are tripped up by economic fallacies, due to their sheer tenacity (and controversy over balance-of-trade issues is among the most intractable). Fortunately for Redwood (and us), there remain those political economists who can diagnose these errors and prescribe the needful antidotes. The Chancellor of the Exchequer himself would do well to schedule an appointment.

ENDNOTES

1. Frédéric Bastiat, ‘Property and Law’, in Selected Essays on Political Economy, George B. de Huszar, trans., Seymour Cain, ed. (Irvington-on-Hudson, NY: Foundation for Economic Education, 1995), 115.

2. See Arthur Laffer, The Laffer Curve and the Failure of Stimulus Spending, Lecture delivered to the Institute of Economic Affairs, London, 27 June 2012.

3. Geoffrey E. Wood, Fifty Economic Fallacies Exposed (London: Institute of Economic Affairs, 2002), 34.

4. Frédéric Bastiat, ‘Domination through Industrial Superiority’, in Economic Sophisms, Arthur Goddard, trans. & ed. (Irvington-on-Hudson, NY: Foundation for Economic Education, 1996), 268.