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Policy

President Donald Trump speaks about tax reform, Wednesday, Aug. 30, 2017, at the Loren Cook Company in Springfield, Mo. (Photo: AP)

President Donald Trump speaks about tax reform, Wednesday, Aug. 30, 2017, at the Loren Cook Company in Springfield, Mo. (Photo: AP)

Earlier this month, I talked about the economy’s positive job numbers. I said the data is unambiguously good, but warned that protectionism and wasteful spending will offset some of the good news from last year’s tax reform.

This is what’s frustrating about the Trump presidency.

Good policies in some areas are being offset by bad policies in other areas, so it’s not easy assigning an overall grade.

And it’s also difficult to predict the effect on economic performance. If you look at the formula for a prosperous economy, there’s no way of predicting whether Trump is a net positive or a net negative. At least in my humble opinion.

As such, I’ll be very curious to see what happens to America’s score in subsequent issues of Economic Freedom of the World.

It would be nice if the United States got back into the Top 10. For what it’s worth, I’m guessing America’s score won’t measurably improve.

That being said, if there was a pro-con debate on Trump’s performance, some people would be quite confident about declaring victory.

Mike Solon, a former budget staffer on Capitol Hill, offers the “pro” assessment in the Wall Street Journal.

Are low taxes key to a booming economy? Their success is harder than ever to deny after Friday’s report that the U.S. economy grew 4.1% in the second quarter, bringing the average quarterly growth rate during the Trump presidency to 2.9%. …In the first five quarters of the Trump presidency, growth has been almost 40% higher than the average rate during the Obama years, and per capita growth in gross domestic product has been 63% faster. …The CBO now projects that additional revenue from this economic surge will offset 88.2% of the estimated 10-year cost of the tax cut. …The CBO’s April revision projected an extra $6.1 trillion in GDP over the next decade—more than $18,000 of growth for every man, woman and child in America. …the Labor Department reports that worker bonuses have hit the highest level ever recorded. The Commerce Department reports that wages and salaries are growing almost 25% faster under President Trump than under Mr. Obama.

Since I have great confidence that lower tax rates are good for growth and that Laffer Curve-type feedback effects are real, I want to applaud what Mike wrote.

And since I’ve also dissed the idea of “secular stagnation,” I also like this part of his column.

Perhaps the most important narrative discredited by the economic revival is the “secular stagnation” excuse. Throughout the Obama years, progressive economists said Americans had become too old, lazy and complacent to achieve the growth that was regular before 2009. But somehow American workers overcame all of these supposed weaknesses when Mr. Trump changed federal policy. The problem was not our people but our government. Stagnation is not fate but a political choice.

Amen to that final sentence. Stagnation is the result of bad policy.

But my problem is that Trump has some bad policies that are offsetting his good tax reform. So I can’t help but think Mike is being too optimistic.

Let’s look at another perspective. It would be an exaggeration to state that Jimmy Pethokoukis of the American Enterprise Institute is in the “con” camp, but he definitely is skeptical.

GOP hot takes will come as fast and furious as the economic growth. “The tax cuts worked!” “Trumponomics rocks!” …Celebrating a stronger economy is not a bad thing, of course. Over the long run, sustainable economic growth is what generates higher living standards and greater social mobility. But drawing sweeping conclusions from a single three-month period is problematic…it doesn’t necessarily tell you a whole lot about where the economy is heading. There were eight quarters of 3 percent growth or faster scattered across the Obama presidency, including four of 4 percent or faster and one of 5.2 percent. But there was never much follow-through, and overall the expansion muddled through at roughly a 2 percent annual pace. …even a very strong report won’t tell us whether the Trump tax cuts, passed in December, are “working.” It’s just too soon. …that process will play out over a numbers of years.

This is a very sensible perspective. I’ve repeatedly warned not to overstate the importance of short-run data. And I also fully agree that there’s often a time lag between the adoption of good policy and the evidence of good results.

But I have the same complaint about the Pethokoukis column as I did about the Solon column. There’s a sin of omission because both focused on the tax reform.

As I noted above, we also need to consider the other policies that have changed in the last 18 months.

I don’t know the answer, but maybe this image will illustrate why we should hesitate before making sweeping assessments.

 

And also keep in mind that we have no way of knowing whether there’s a Fed-created bubble in the economy. As I said in the interview, what if 2018 is akin to 2006? Back then, most people underestimated the possibility that easy money and Fannie-Freddie subsidies had created an unsustainable housing boom.

But even if we ignore that wild card, I can’t help but wonder whether Trump’s pro-growth polices and Trump’s anti-growth policies are resulting in a wash.

Good economic policies in some areas --

Opinion

Alexandria Ocasio-Cortez, right, during a widely criticized interview with PBS, and a protestor resting next to a sign that reads, Big Government Big Mistake. (Photos: Screenshot/Fair Use)

Alexandria Ocasio-Cortez, right, during a widely criticized interview with PBS, and a protestor resting next to a sign that reads, Big Government Big Mistake. (Photos: Screenshot/Fair Use)

Move over, Crazy Bernie, you’re no longer the left’s heartthrob. You’ve been replaced by Alexandria Ocasio-Cortez, an out-of-the-closet socialist from New York City who will enter Congress next January after beating a member of the Democratic leadership.

Referring to the boomlet she’s created, I’ve already written about why young people are deluded if they think bigger government is the answer, and I also pointed out that Norway is hardly a role model for “Democratic socialism.”

And in this brief snippet, I also pointed out she’s wrong to think that you can reduce corporate cronyism by giving government even more power over the economy.

But there’s a much bigger, more important, point to make.

Ms. Ocasio-Cortez wants a radical expansion in the size of the federal government. But, as noted in the Washington Examiner, she has no idea how to pay for it.

Consider…how she responded this week when she was asked on “The Daily Show” to explain how she intends to pay for her Democratic Socialism-friendly policies, including her Medicare for All agenda. “If people pay their fair share,” Ocasio-Cortez responded, “if corporations paid — if we reverse the tax bill, raised our corporate tax rate to 28 percent … if we do those two things and also close some of those loopholes, that’s $2 trillion right there. That’s $2 trillion in ten years.” She should probably confer with Democratic Socialist-in-arms Sen. Bernie Sanders, I-Vt., whose most optimistic projections ($1.38 trillion per year) place the cost of Medicare for All at roughly $14 trillion over a ten-year period. Two trillion in ten years obviously puts Ocasio-Cortez a long way away from realistically financing a Medicare for All program, which is why she also proposes carbon taxes. How much she expects to raise from this tax she didn’t say.

To be fair, Bernie Sanders also didn’t have a good answer when asked how he would pay for all the handouts he advocated.

To help her out, some folks on the left have suggested alternative ways of answering the question about financing.

I used to play basketball with Chris Hayes of MSNBC. He’s a very good player (far better than me, though that’s a low bar to clear), but I don’t think he scores many points with this answer.

Indeed, Professor Glenn Reynolds of the University of Tennessee Law School required only seven words to point out the essential flaw in Hayes’ approach.

Simply stated, there’s no guarantee that a rich country will always stay rich.

I wrote earlier this month about the importance of long-run economic growth and pointed out that the United States would be almost as poor as Mexico today if growth was just one-percentage point less every year starting in 1895.

That was just a hypothetical exercise.

There are some very sobering real-world examples. For instance, Nima Sanandaji pointed out that his country of Sweden used to be the world’s 4th-richest nation. But it has slipped in the rankings ever since the welfare state was imposed.

Venezuela is another case study, as Glenn Reynolds noted.

Indeed, according to NationMaster, it was the world’s 4th-richest country, based on per-capita GDP, in 1950.

For what it’s worth, I’m not familiar with this source, so I’m not sure I trust the numbers. Or maybe Venezuela ranked artificially high because of oil production.

But even if one uses the Maddison database, Venezuela was ranked about #30 in 1950, which is still impressive.

Today, of course, Venezuela is ranked much lower. Decades of bad policy have led to decades of sub-par economic performance. And as Venezuela stagnated, other nations become richer.

So Glenn’s point hits the nail on the head. A relatively rich nation became a relatively poor nation. Why? Because it adopted the statist policies favored by Bernie Sanders and Alexandria Ocasio-Cortez.

I want to conclude, though, with an even better example.

More than seven years ago, I pointed out that Argentina used to be one of the world’s richest nations, ranking as high as #10 in the 1930s and 1940s (see chart to right).

Sadly, decades of Peronist policies exacted a heavy toll, which dropped Argentina to about #45 in 2008.

Well, I just checked the latest Maddison numbers and Argentina is now down to #62. I was too lazy to re-crunch all the numbers, so you’ll have to be satisfied with modifications to my 2011 chart.

The reverse is true as well. There are many nations that used to be poor, but now are rich thanks to the right kind of policies.

The bottom line is that no country is destined to be rich and no country is doomed to poverty. It’s simply a question of whether they follow the right recipe for growth and prosperity.

A once-rich Venezuela adopted the statist policies

Economy

An SUV moves through the assembly line at the General Motors Assembly Plant in Arlington, Texas June 9, 2015. (Photo: Reuters)

An SUV moves through the assembly line at the General Motors Assembly Plant in Arlington, Texas June 9, 2015. (Photo: Reuters)

The Dallas Federal Reserve’s Texas Manufacturing Outlook Survey continued to show “robust expansion” in July, beating an elevated consensus forecast. The production index, a key measure of state manufacturing conditions, increased 6 points to 29.4.

That’s a clear indication of an acceleration in output growth.

The new orders and growth rate of orders indexes — which are demand gauges in the Texas Manufacturing Outlook Survey — declined but remained well above average at 23.3 and 17.0, respectively. The shipments index increased by 5 points to 30.8, and the capacity utilization index ticked up to 25.0.

While business conditions were modestly less positive juxtaposed to June and uncertainty undoubtedly increased, the declines to current levels are still either above or far above their averages.

For instance, the company outlook index declined 13 points to 20.4, which is the second-lowest reading this year. However, it is still elevated when compared to the average. The same is true of the general business activity index, which declined by 4 points to 32.3.

The median forecast called for an even 32.0.

In July, a quarter of firms reported an increase in uncertainty, while just 8% said it decreased—bringing the outlook uncertainty index to 17.0. That’s well above its June reading and the highest level to date.

Nevertheless, optimism over future business conditions remained solidly optimistic in July.

The indexes of future general business activity and future company outlook were essentially unchanged at 36.2 and 37.2, respectively. Other indexes for future activity were mixed, but remained solidly in positive territory.

There was also positive news about labor market conditions. These gauges indicate a pickup in net hiring and longer work hours in July. The employment index increased by 5 points to 28.9, a 13-year high.

Thirty-six percent (36%) of firms noted net hiring, compared with 7% noting net layoffs. The hours worked index ticked up to 22.2.

The Dallas Federal Reserve's Texas Manufacturing Outlook

Economy

A single family home is shown with a sale pending in Encinitas, California May 22, 2013. (Photo: Reuters)

A single family home is shown with a sale pending in Encinitas, California May 22, 2013. (Photo: Reuters)

The National Association of Realtors (NAR) said pending home sales rose 0.9% in June, nearly doubling the median forecast. The Pending Home Sales Index, which rose 1 point from 105.9 to 106.9, has been an accurate forecast of the flat to declining trend in the existing home sales report.

But the month of June offered better — albeit modest — news for the housing market overall.

“After two straight months of pending sales declines, home shoppers in a majority of markets had a little more success finding a home to buy last month,” Lawrence Yun, NAR chief economist said. “The positive forces of faster economic growth and steady hiring are being met by the negative forces of higher home prices and mortgage rates.”

The consensus forecast was 0.5%, with individual forecasts ranging from 0.3% to 1.0%.

“Even with slightly more homeowners putting their home on the market, inventory is still subpar and not meeting demand, Mr. Yun added. “As a result, affordability constraints are pricing out some would-be buyers and keeping overall sales activity below last year’s pace.”

Pending home sales decreased modestly in May, by 0.5% in June and had fallen on an annualized basis for five straight months. Total pending sales are still in the red for the sixth straight month at -2.5%. A single month gain of nearly 1 percentage point will not yet offset what was a very soft Spring selling season.

However, Mr. Yun said that it is possible the worst of the supply shortage across most of the country has passed. Last month, existing inventory rose on an annual basis for the first time in 3 years, albeit very modestly.

“Home price growth remains swift and listings are still going under contract at a robust pace in most of the country, which indicates that even with rising inventory in many markets, demand still significantly outpaces what’s available for sale,” he said. “However, if this trend of increasing supply continues in the months ahead, prospective buyers will hopefully begin to see more choices and softer price growth.”

Total housing inventory at the end of June jumped 4.3% to 1.95 million, which is 0.5% higher than from year ago (1.94 million) and the first year-over-year increase since June 2015.

Mr. Yun now forecasts existing home sales in 2018 to decline 1.0% to 5.46 million, a decline from 5.51 million in 2017. The national median existing home price is expected to increase around 5.0%. In 2017, existing sales increased 1.1% and prices rose 5.7%.

The PHSI in the Northeast rose 1.4% to 93.7 in June, but is still 4.1% below a year ago. In the Midwest, the index inched higher by 0.5% to 101.9 in June, but is still 2.1% lower than June 2017.

Pending home sales in the South rose 1.1% to an index of 124.2 in June, but are 0.3% below a year ago. The index in the West also slightly increased by 0.7% in June to 95.4, but is 5.6% below a year ago.

The National Association of Realtors (NAR) said

Politics

U.S. President Donald Trump speaks while participating in a tour of U.S.-Mexico border wall prototypes near the Otay Mesa Port of Entry in San Diego, California. U.S., March 13, 2018. (Photo: Reuters)

U.S. President Donald Trump speaks while participating in a tour of U.S.-Mexico border wall prototypes near the Otay Mesa Port of Entry in San Diego, California. U.S., March 13, 2018. (Photo: Reuters)

President Donald Trump said Sunday he “would be willing to ‘shut down’ the government” if Democrats block funding for border security. The president made it clear that he considers funding for The Wall part of the deal.

I would be willing to “shut down” government if the Democrats do not give us the votes for Border Security, which includes the Wall! Must get rid of Lottery, Catch & Release etc. and finally go to system of Immigration based on MERIT! We need great people coming into our Country!”

But the president has reason to worry about the establishment members of his own party, too.

The presidential veto threat comes as the House Committee on Appropriations voted to triple the resident population of wage-cutting H-2B workers to almost 200,000. The House GOPe made moves to forward the deeply unpopular proposal even as the base of their party continues to indicate their disapproval with low enthusiasm levels.

The establishment wing of the Republican Party — beholden to the Chamber of Commerce — are more concerned about labor for lobbyists than they are about working Americans.

“The cheap-labor lobby never sleeps,” said Mark Krikorian, director of the Center for Immigration Studies told Breitbart. “The only solution is the elimination of the [H-2B] category.”

President Donald Trump said Sunday he "would

Opinion

Political cartoon depicting wasteful government spending of taxpayer money. (Photo: AdobeStock/CartoonResources)

Political cartoon depicting wasteful government spending of taxpayer money. (Photo: AdobeStock/CartoonResources)

Government needs to consider price versus cost. I wonder when the state is going to start worrying about the cost of things, and not the price.

The last few days there have been a number of articles about stimulus money or other monies being put to work in various civic projects around Phoenix.

Most the articles were concise, spelling out what was spent and on what. In most cases you got a familiar dose of, “Well the money was allocated in 2004 (or some other year) and we just now got around to spending it.”

People — both voters and government officials — have to understand that when the state spends money on civic projects and improvements, its not just the actual cost of the capital outlay that have to be considered, its the maintenance and upkeep costs down the road.

It’s not just a $35,000 dog park — its the costs involved to maintain that park at a standard that’s decent. Then there’s the repairs down the road when things need replacing. Or, the potential costs of liability, insurance, etc.

People think its great to have these civic improvements because we’ve been told its making things better by spending “stimulus” money and putting people to work.

The worst part is that they issue bonds to pay for things. Letting government issue bonds is like giving a drunken sailor a credit card.

Government building things it can’t afford is making things worse. Down the road we are going to need to pay back interest on bonds that may have been issued.  More debt and more taxes. We can’t even pay for the things we have, and yet we are building more stuff!

Bond and stimulus money doesn’t create jobs, private industry does, and you can’t pump billions of money into the government and expect to get the same results that you would have had you pumped it into private industry.

But let’s say you ARE going to do that, and let government handle that kind of spending. Better to use the money to repair and renovate EXISTING parks and other infrastructure projects. Don’t expand- maintain. Water pipes and sewer lines in this city deteriorating as we speak.

We are facing cutbacks in services in a variety of areas. Roads get potholes. All of these things would have put people to work, and LOWERED our costs down the road, and thus allow us to lower the tax drain on the economy and leave some wiggle room to expand in the near future. This is how private industry thinks when times get tough.

Lay off people and plan ahead.

Government doesn’t think that way though, it never has. Politicians want to say to their community, “Look at all the stuff I did for you.” It easier to proclaim the wonders of government standing over that new brass plaque at the park, rather than tell your constituents about how you got the sewer lines working right for the next 50 years.

This is why its critical not to get into the government mindset of “it’s ok to spend.” It’s not.  Stop cutting needed government services like roads, police, fire and teachers and stop building new projects we don’t need, and putting us into more debt.

This is why when you go to the ballot box, don’t just vote Republican or Democrat. Vote for people that vow to lower spending, make government smaller and lower taxes. Less power and money to government means better services down the road. It means a stronger economy and less need for social services that are crutches for a healthy and vibrant society.

Spending loads of money doesn’t mean new jobs and new services, it means LESS jobs and LESS services for all of us down the road.

Assuming that we have enough money to keep the roads from falling apart, that is.

Letting government issue bonds is like giving

Sponsored

What if a single video outlined everything you ever needed to know about illegal immigration? It’s called America’s Great Wall, produced by Burt Keefer.

Mr. Keefer says the purpose of the video is to make the American people aware of the real numbers associated with illegal immigration, as well as the hypocrisy and dishonesty surrounding the current national debate.

The nearly 40-minute video begins by telling the tale of the tape, reminding viewers just how similar to him critics of President Donald Trump sounded. That is, before cheap labor and voting coalitions became the predominant factors behind media coverage of and debate surrounding the issue of illegal immigration, itself.

During a press conference in 2005, then-Illinois Senator Barack Obama told reporters — without meeting “resistance” — exactly what the President Trump told the American people during his first State of the Union address.

We all agree on the need to better secure the border and to punish employers who choose to hire illegal immigrants. You know, we are a generous and welcoming people here in the United States.

But those who enter the country illegally and those who employ them disrespect the rule of law.

Barack Obama (2005)

In a 2017 op-ed in Fortune, Senator Dianne Feinstein,  D-Calif., referred to President Trump’s very popular immigration compromise “nativist.” Yet, in 1994, just two years after winning a special election to the U.S. Senate, she was singing a very different tune.

We can enforce our borders. I think we should enforce our borders. To have a situation where 40% of the babies born on Medicaid in California today are born of illegal immigrants, creates a very real problem for the state, which is in deficit.

To have 17% of our prison population at a cost of $300 million a year, the illegal immigrants who come here and commit felonies, that’s not what this nation is all about.

Dianne Feinstein (1994)

Senator Feinstein’s remarks came just a few years after her loss in a gubernatorial election to Republican Senator Pete Wilson, who vacated his seat to run for the governorship. Hellbent on avoiding another defeat, she ran ads in 1994 depicting illegal immigrants pouring over an open U.S. southern border, promising more “agents” and “fencing.”

Now, due in most part to decades of illegal immigration, the chances of Republicans winning a statewide race, are nil.

In 2006, Hillary Clinton argued passionately in favor of policies now labeled by her own party and the media as racist.

Mexico is such an important problem. Mexican government policies are pushing migration North. There isn’t any sensible approach except doing what we need to do simultaneously. You know: secure our borders and technology and personnel, physical barriers if needed.

Hillary Clinton (2006)

Sounds just like a certain campaign announcement made by a certain businessman after he came down a certain escalator, doesn’t it?

Yet, a few years later, Mrs. Clinton would tell financial magnates at Banco Itaú that her “dream is a hemispheric common market, with open trade and open borders.”

Nevertheless, the video also dives into the question of why politicians may want illegal immigration, as well as open borders. It targets the North American Free Trade Agreement (NAFTA).

“Proponents of the agreements argued that free trade was going to provide an economic benefit to all,” the video narrator states. “But unfortunately, it was never about free trade, but rather the creation of a North American union.”

From the time NAFTA was enacted in 1994 to 2010, the Economic Policy Institute found that 24,400 jobs had been lost or displaced in Indiana–not to mention about 700,000 in the U.S.–due only to the rise in the U.S.-Mexican trade deficit alone.

Since 1986, there have been 7 legislative and executive actions on illegal immigration, or amnesties. Each of them, beginning with the Immigration and Reform Control Act of 1986, promised to be a solution.

“We’ve already granted 7 amnesties,” the video states before beginning to introduce what is a 12-point plan to finally address illegal immigration. That includes (9) “abolishing all sanctuary cities and prosecuting anyone who disobeys.”

The U.S. Justice Department (DOJ) is currently considering legal action against Oakland Mayor Libby Schaaf for warning illegal immigrants about a pending raid by Immigration and Customs Enforcement (ICE).

Most Americans want the DOJ to punish sanctuary cities and another recent survey found voters want Mayor Schaaf charged with obstruction of justice.

What if a single video outlined everything

Policy

Conceptual business illustration with the words corporate tax. (Photo: AdobeStock)

Conceptual business illustration with the words corporate tax. (Photo: AdobeStock)

I generally don’t chortle with joy when I read the Washington Post. This is the newspaper, after all, that often slants the news in ways that irk me.

Though maybe, in one or two instances, I should accuse the paper of sloppiness rather than dishonesty. Regardless, I still shake my head with disdain.

But not today. A recent story about corporate taxation brought a big smile to my face. Here are some passages that warmed my heart.

Taxes on corporations are plummeting across the globe… The average corporate tax rate globally has fallen by more than half over the past three decades, from 49 percent in 1985 to 24 percent in 2018, the study found. …The international decline in corporate taxes threatens to drain governments of a source of funding for health care and other social welfare programs.

And here are some examples.

Republicans in Congress slashed the U.S. federal corporate tax rate from 35 percent to 21 percent. …the United States was joining a crowded party. In Japan and China, corporate tax rates have fallen by about a quarter since 2003. Rates are down about 30 percent over the same period across all of Europe, by 36 percent in Israel and by 27 percent in Canada. …Hungary…has lowered its corporate tax rate from 18 percent to 9 percent.

But I’m not happy simply because corporate tax rates are being reduced.

And I’m not smiling just because tax competition is pressuring politicians to do the right thing (though that does send a tingle up my leg).

I’m also overcome with schadenfreude because advocates of bad policy are chagrined by these developments.

“Corporate taxes are going to die in 10 to 20 years at this rate,” Ludvig Wier, an economist at the University of Copenhagen and a co-author of the study, said in an interview. “Without drastic collective action, you can see we’re nearing the end of it.” …academics say the falling tax rates…reflect a race to the bottom… The falling corporate tax rate represents a “collective action problem,” Wier argued, as each country has a strong incentive to lower its own tax rate, although when that is done the globe suffers.

I guess we know Mr. Wier’s perspective. There’s a “collective action problem” and “the globe suffers” because corporate tax rates are falling.

Perhaps he hasn’t read the substantial academic literature showing that lower rates are good for growth?

Fortunately, some academics are focused on measuring the real-world impact of policy changes. Professor Juan Carlos Suárez Serrato of Duke University crunched some numbers for the National Bureau of Economic Research and found that jobs and investment both decline when companies can’t protect their income from government.

…eliminating firms’ access to tax havens has unintended consequences for economic growth. We analyze a policy change that limited profit shifting for US multinationals, and show that the reform raised the effective cost of investing in the US. Exposed firms respond by reducing global investment and shifting investment abroad – which lowered their domestic investment by 38% – and by reducing domestic employment by 1.0 million jobs. We then show that the costs of eliminating tax havens are persistent and geographically concentrated, as more exposed local labor markets experience declines in employment and income growth for over 15 years.

The moral of the story is that workers and investors benefit when money stays in the private sector.

This means pushing corporate tax rates as low as possible, while also allowing companies to utilize low-tax jurisdictions for their cross-border transactions.

That’s a win-win for the economy, and the angst on the left is a fringe benefit.

I’ll close with this chart I put together showing how the average corporate rate has decline in developed nations.

Corporate tax rates are being slashed globally,

Policy

China's President Xi Jinping and Finland's President Sauli Niinisto shake hands during the signing ceremony at the Presidential Palace in Helsinki, Finland April 5, 2017. (Photo: Reuters)

China’s President Xi Jinping and Finland’s President Sauli Niinisto shake hands during the signing ceremony at the Presidential Palace in Helsinki, Finland April 5, 2017. (Photo: Reuters)

I’ve been in China this week, giving lectures about economic policy at Northeastern University in Shenyang.

I’ve explained that China has enjoyed reasonably impressive growth in recent decades thanks to pro-market reforms. But I’ve also pointed out that further economic liberalization is needed if China wants to avoid the middle-income trap.

That won’t be easy. Simply stated, I don’t think it’s possible to become a rich nation without free markets and small government.

The good news is that China’s economic freedom score has increased dramatically since reforms began, rising from 3.64 in 1980 to 6.40 in the latest edition of Economic Freedom of the World. And there’s been a dramatic increase in prosperity and a dramatic reduction in poverty.

The bad news is that a score of 6.40 means that China is only ranked #112 in the world. That’s way too low. The country needs a new burst of pro-market reform(especially since it also faces serious demographic challenges in the not-too-distant future).

In other words, China should strive to be more like #1 Hong Kong, which has a score of 8.97, or #4 Switzerland, with a score of 8.44.

Or even the #11 United States, which has a score of 7.94, or also #19 Netherlands, with a score of 7.74.

The bottom line is that China won’t become a rich nation so long as it has a score of 6.40 and a ranking of #112.

Fortunately, there is a pre-existing recipe for growth and prosperity. China needs to change the various policies that undermine competitiveness.

Since I’m a public finance economist, I told the students how China’s fiscal score (“size of government”) could be improved.

I recommended a spending cap, of course, but I also said the tax system needed reform to enable more prosperity.

Part of tax reform is low marginal tax rates on productive behavior.

Chinese academic experts agree. As reported by the South China Morning Post, they’re urging the government to significantly reduce the top rate of the personal income tax.

China needs to slash its highest tax levy on the nation’s top income earners in its upcoming individual tax code review, or risk seeing an unprecedented talent exodus, argued eight academics… They called for authorities to scrap the top two tax brackets of 35 per cent and 45 per cent in the current seven brackets progressive tax system on individuals, granting high income earners more leeway with a five tax brackets system that will be capped at 30 per cent.

The scholars pointed out that high tax rates are especially harmful in a world where high-skilled people have considerable labor mobility.

The academics from esteemed mainland universities called for further revision of the code, as the current draft failed…high income earners, a group that is often highly skilled professionals China wants to attract and retain in the global fight for talent. …For the “highly intelligent groups”, remunerations and royalties were likely to surpass the monthly salary, meaning that the combination can add up to a higher taxable income base and “seriously restrain them from” pursuing innovation, the academics argued. “In a global environment [when tax cuts become mainstream], if China maintains its high individual income tax rates … it will push the high-income, high-intelligent group overseas,” they said.

Needless to say, I’ll be very curious to see what happens. I’ve now been to China several times and I think the country has huge potential.

But achieving that potential requires reforms that will reduce the size and scope of government.

Here’s a chart I shared with the students, which shows that Taiwan has much more economic freedom and is much richer (basically an updated version of some numbers I put together in 2014).

The bottom line is that the country can become a genuine “Chinese Tiger” rather than a “paper tiger” with the right policies.

In order to become a Chinese tiger

Opinion

U.S.-China trade concept graphic. (Photo: Scott Maxwell via AdobeStock/PPD License)

U.S.-China trade concept graphic. (Photo: Scott Maxwell via AdobeStock/PPD License)

President Trump is a protectionist. He doesn’t understand the principle of “comparative advantage.” And he’s wrong about the implications of a “trade deficit.”

But that doesn’t mean everything he says about trade is wrong.

He frequently accuses other nations of “unfair” treatment of American products and China is one of his favorite targets.

Well, there’s some truth behind Trump’s bluster.

Here’s the World Trade Organization’s data on tariff rates imposed by the United States and China. As you can see, the United States has lower taxes on trade, which should be viewed as a net plus for the American economy (though we should be at 0.0, like Hong Kong).

Now let’s look at the trade data from the Fraser Institute’s Economic Freedom of the World.

As you can see, China moved substantially in the right direction in order to qualify for WTO membership in the early 2000s. And the American score has declined slightly since the 1980s.

Nonetheless, the United States still ranks higher.

So Trump is right, at least on the narrow issue of China being more protectionist.

But bad policy by China doesn’t justify bad policy by the United States. Especially when the main victims of Trump’s tariffs will include American consumers, workers, manufacturers, taxpayers, and exporters.

Instead, I explained in March that the United States should use the World Trade Organization to push China in the right direction.

The Tax Foundation has a similar perspective.

There is wide agreement that these concerns should be addressed, but the administration’s broad application of tariffs is not likely to change Chinese government policy, and will cause significant harm to the U.S. economy. The World Trade Organization’s Dispute Settlement Process is an alternative way to address trade disputes, rather than imposing unilateral actions, like tariffs, that damage economic growth and invite retaliation. …If an offending nation does not conform with the decision, the nation being harmed can request authorization for suspension of concession, meaning approval to increase its own tariffs, but only enough to make up for the damages caused. This avoids unilateral punishments and retaliations… The World Trade Organization’s Dispute Settlement Process should not be overlooked as an effective tool against harmful foreign trade practices. …The U.S. has allies in the IP dispute against China, and even some anti-dumping duties can be defended under WTO rules. But instead, the administration is pursuing a path of broad tariffs that invite retaliation, cause economic uncertainty, and damage economic growth.

Christine McDaniel of the Mercatus Center has a column in the Hill also explaining that the WTO option is far superior to unilateral tariffs.

…tariffs do self-inflicted harm. Imagine being in a gunfight in an old wooden ship, with every shot fired at your enemy putting a hole in your own hull. Eventually, you start to sink. …as for taking our complaints to the WTO, this is a decent bet. We have won most of the cases we have brought, including those against China, which does eventually oblige.

But Ms. McDaniel wants to be even bolder. She’s urging market-oriented nations to create a broad free-trade agreement that goes above and beyond the WTO. China would then feel significant pressure to fix its bad policies to be part of this new club.

…best option is to…Team up with our allies, who are just as frustrated with China as we are. Form a pact in which signatories commit to open trade and investment regimes, sufficiently strong intellectual property rights and enforcement, and legal recourse mechanisms. Most importantly, signatories commit to not engage in trade or investment with state-owned enterprises or those with close ties to state-owned enterprises. This would effectively leave China the odd man out. …China should implement reforms…: a more open trade and investment regime, phasing out state-owned enterprises, stronger patent rights, and legal recourse mechanisms. These policy shifts — a shift in thinking, really — would help put China on a more sustainable path to economic growth.

She’s right that China would benefit. But such a free-trade agreement also would put other participating nations on a better growth trajectory.

The United States is far from perfect on trade, after all, and the same is true of most of our allies.

So if we all formed a free-trade pact to encourage better policy in China, an indirect benefit would be better policy in America and other nations.

That kind of win-win scenario would be great news for the global economy. And it would be much better than a potentially dangerous tit-for-tat trade war, which seems to be where we’re heading now.

President Donald Trump is right and wrong

People's Pundit Daily
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