Tuesday, November 6, 2018

Economic Freedom, Part 3

The attempt to develop a rigorous, quantitative measure of economic freedom may strike some as a presumptuous undertaking.  The effort requires agreement on the conceptual dimensions of economic freedom, the indicators or data that fit or reflect each of the several dimensions of economic freedom, and the generation of a number (or numbers) that sums up all of the different dimensions, thereby permitting comparative ratings on the degree of economic freedom that exists both in the aggregate for each of the different dimensions of economic life in every country in the world at any point in time.  This post summarizes the initial effort.  I encourage you to read the full text of defining economic freedom and some possible measures, which appears in Chapter 4, Economic Freedom:  Toward a Theory of Economic Measurement (pages 87-108).  It lays a foundation for subsequent efforts to refine the conceptual elements of economic freedom, identify data requirements, and develop quantitative measures.  The ultimate objective is an annual report or yearbook, which has been produced annually by the Fraser Institute since 1996, rating economic freedom in every country around the globe, thereby upgrading the initial Freedom House Rating prepared by Zane Spindler and Laurie Still (Chapter 5, pages 135-171).

In Chapter 4 I tried to offer a preliminary definition, a check list, or a recipe of economic freedom ingredients.  I tried to identify the fewest number of dimensions that would be self-contained, consistent, and coherent.  Obviously, you could break them into many more.  This same set of seven dimensions could be subdivided into 10, 20, 25, or 30, as the case may be.  I compromised in the trade-off to produce something that is both meaningful and simple.

Some of the seven dimensions represent notions about individuals and others aggregate notions about the whole society.  For example, the schedule of marginal rates affects an individual’s decision to work, save, and invest, while an average tax burden may affect the society as a whole.

A second way to slice through these seven categories is in terms of institutions or rules and policies or incentives.  The first two, private property and the rule of law, I regard as institutional framework rules.  The others are public policies that governments undertake which have an effect on people’s capacity to do things economically and make them more or less free.

Two Institutions

My taxonomy is guided by philosophical considerations.  One cannot proceed without talking about private property.  A second area connected to private property is the rule of law.  In one community the rules are clear and one can expect fair and impartial treatment, and in the other the laws seem whimsical and decision making appears capricious.  The rule of law can enhance economic freedom through a written code, an independent judiciary, the structure of the legal codes, what kind of legal code it is, rights of appeal, and so on.

Five Categories of State Intervention

The first area of state intervention I examine is taxation.  Taxation can encompass high taxation, low taxation, the structure of taxes, composition of taxes, visible versus invisible taxes, rates of tax, whether taxes are used to redistribute income and wealth, taxes versus user fees to finance public services, and a broad-based proportional low tax scheme that promotes or enhances economic freedom as opposed to a loophole-ridden selective system with high rates on some kinds of economic activities and no rates on others.

A second area is public spending, the counterpart of taxation.  For centuries, the principle of balanced budgets regulated budget policy.  For the past 75 years, budget deficits have become a way of life in most advanced and developing countries. Until 1929, public spending in the U.S. consumed 10% of GDP.  Since then it has tripled.  The amount of spending, how it is spent, the amount of interest paid on a large and growing public debt, and the growing welfare state all have an impact on economic freedom, the ability of individuals to exercise responsibility for their own affairs.  What kind of spending enhances economic freedom and which doesn’t?

A third area is regulation of business and labor.  Regulatory agencies have dramatically increased in number and scope since 1960.  For business, important aspects of economic freedom include legal formalities required to set up a business should be few and inexpensive, free entry and exit into any line of production, absence or presence of monopoly practices that benefit specific firms or industries, and free movement of prices to equate supply and demand in the market place.  Other regulations are designed to control externalities such as air and water pollution, impose safety requirements on food, drugs, transportation carriers, the production of other goods and services that affect public health and safety, job safety inspections, equal employment opportunity enforcement, consumer product safety standards, and energy restrictions.  However, regulations can entail large expenditures to comply, or they can be imposed in a least-cost, minimally-interventionist manner.  How they are imposed affects both efficiency and economic freedom.

Labor regulations entail the rights of workers, choice of occupation, freedom to travel at home and abroad, unions (right to strike, compulsory payment of union dues, membership requirements), sick leave, vacation time, fringe benefits, hours of work, workmen’s compensation ordinances, pension fund requirements, and other measures.  All of these impact the economic freedom of workers and the overall labor market, raising the cost of production and reducing employment.

A fourth area is money.  The following policies, practices, and institutions, among others, should be examined to investigate a link between monetary policy and economic freedom:

The legal right of non-governmental entities to issue private currency;
The absence of legal tender laws;
The right to buy (free of sales and other taxes), own, and exchange gold (silver) coins;
An accurate description of the monetary system;
The successful conduct of monetary policy in terms of price stability and steady growth;
Convertibility of currency (into goods and services and other currencies);
Free inward and outward movement of capital;
Competition within banking and financial services sectors; and
Monetary policy rules.

The final area is foreign trade.  Free trade maximizes both efficiency and economic freedom.  It enables individuals to buy and sell freely on world markets, selling products at the highest possible price and purchasing goods and services at the lowest possible price and giving individuals the widest possible choice of consumer goods.  Free trade also permits specialization, division of labor, and the principle of comparative advantage to work to the benefit of individuals and firms in each country.

Those socialist and developing countries that pursued policies of self-reliance, self-sufficiency, import substitution, protectionism, and other inward-looking policies resulted in dismal records of economic performance and curtailed economic freedom.  Those that pursued policies in a milieu of free trade flourished.

Free trade means an absence of tariffs, non-tariff barriers, capital controls, restrictions on direct foreign investment, and government controlled marketing boards that fix the price of imports to consumers and exports to producers.

Summary

In the interests of parsimony here, I encourage you to read the full text of my paper and the subsequent discussion with the conference participants.

The measurement of economic freedom has been refined and improved since the Napa Valley Conference held in Vancouver in July 1988, both for the Fraser Institute Annual Report and the follow-on Heritage Foundation/Wall Street Journal Index.  I hope you will review the Fraser Institute Annual Report published in conjunction with the Cato Institute.

Thursday, October 25, 2018

Economic Freedom, Part 2

Most of us have an intuitive or common-sense notion of the meaning of economic freedom.  A smattering of features or attributes includes free markets, private enterprise, voluntary exchange, capitalism, limited government, laissez-faire, free trade, low taxes, free movement of capital, and other dimensions of economic life.

But we want to go beyond these descriptors to measures of economic freedom.  How much more economic freedom does South Korea have compared with North Korea?  Hong Kong with China?  China 35 years ago with China today?  Has economic freedom increased or decreased in Sweden during the last 10 years?  It would be ideal to develop a rating system that permits quantitative comparisons across nations and over time.

A first step is to develop a philosophy or definition of economic freedom in order to identify common (as well as divergent) elements that should be measured.

Political philosophers and thinkers have explored the notion of freedom from the beginning of recorded history.  The first use of the word “liberty” is traceable to ancient Sumer.  Cuneiform writing on clay cones excavated at Lagash, in Sumer, contained the freedom laws of the good King Urukagina that he promulgated to rid the land of tax collectors.

Ancient and medieval philosophers were largely concerned with the political dimensions of freedom:  a voice in collective decision making (Greek democracies).  Political freedom meant self-rule, or the absence of external control.  It did not emphasize the rights of the individual to non-interference from the state or protection under the rule of law.

The modern notion of freedom signifies non-interference in the private affairs of individuals in a society governed under the rule of law.  The freedom to own a certain amount of property was seen as a necessary condition for being able to maintain personal independence.  The development of property rights went hand-in-hand with longstanding provisions of human rights that were proclaimed in the Magna Carta in 1215, in thousands of medieval charters in England and continental Europe, and in the procedural safeguards of person and property that developed in the common law.

Against this backdrop, economic freedom seriously developed into a coherent and powerful intellectual tradition with the publication of John Locke’s Second Treatise of Civil Government (1689). which emphasized freedom of association, private property, and the sacrosanct nature of individual liberty secured under the rule of law.  David Hume reinforced Locke’s emphasis on the right to property as the foundation of society and government.

Locke was followed nearly a century later by Adam Smith with the publication of Inquiry into the Nature and Causes of the Wealth of Nations (1776), which emphasized a system of individual and commercial liberty based on private property.  Nineteenth-century England was governed by the principles of Locke and Smith.  Its hallmarks were free trade, laissez-faire, low taxes, low state expenditure, and a minimally interventionist government.

Milton Friedman was a modern-day Locke,  He asserted the primacy of the individual as the ultimate entity in society, focusing on the role that private property plays in fostering economic and political freedom, and economic prosperity.  Friedman, with the assistance of his wife Rose, set forth  a coherent statement of economic freedom in 1962 in a collection of essays entitled Capitalism and Freedom.  The book explains the role of competitive capitalism as a system of economic freedom.  It also discusses the legitimate role of government in a free society, identifying those areas where government intervention in the private affairs of individuals is warranted, but also where it goes beyond the limited legitimate tasks of government harming both economic freedom and efficiency.

The legitimate tasks of government include the maintenance of law and order to prevent physical coercion of one individual over another, to enforce contracts voluntarily entered into, and to regulate activities where one individual’s economic activity imposes harm or losses on another (externalities).

In a later volume Free to Choose (1980), the Friedmans set forth an Economic Bill of Rights, a counterpart to the political Bill of Rights in the Constitution.  These include a tax or spending limitation as a share of national income, freedom to import and export (free trade), a ban on wage and price controls, a ban on occupational licensure, a requirement for proportional taxation (flat-rate tax), and others.

A third approach to economic freedom is embodied in the libertarian work of Murray Rothbard, the purest expression of economic freedom.  Rothbard grounded his political philosophy of liberty on a natural law foundation, especially Locke’s treatment of property and ownership.  His theory of liberty rests on the establishment of the rights of property, which determines each individual’s sphere of free action.  His society of pure freedom is based on free and voluntary exchanges.  The free market economy thus depends on upon a free society with a certain pattern of property rights and ownership titles.  He departs from Friedman on the need for the state to enforce contracts.  It is not the function of law to enforce morality or promises made to each other.  Enforcement is only appropriate when one party steals the property of another.

Going further, Rothbard defines taxation as theft.  The use of coercive taxation to acquire revenue and the compulsory monopoly of force and ultimate decision-making power over a given territorial area on the part of the state constitute criminal aggression and depredation of the just rights of private property of its subjects.  Rothbard also contends that the services generally thought to require a state, from the coining of public money to police protection to the development of law in the defense of private property rights (all part of Friedman’s legitimate role for government) can be and have been supplied with greater efficiency and morality by private persons.

Rothbard’s libertarian vision is more utopian than practical.  Other philosophers, from John Locke to Adam Smith to Milton Friedman, grant specific, if limited, powers to government or the state, including the power to tax, enforce laws, maintain order, and defend the nation, which reflects the real world activities of government.

A fuller discussion of this synopsis of the philosophical aspects or definition of economic freedom is found in the Books section of my website, alvinrabushka.com, in Chapter 2, pp.23-55, of Economic Freedom:  Toward a Theory of Measurement.  See my article “Philosophical Aspects of Economic Freedom” and accompanying discussion, which can be downloaded here.  I encourage you to read the chapter.

The next post sets forth possible measures with which to rate economic freedom.

Tuesday, October 23, 2018

Economic Freedom, Part 1

In October 1986, with support from the Liberty Fund in Indianapolis, Indiana, the Fraser Institute convened the first of four conferences in Napa Valley, California.  The Fraser Institute published the proceedings in 1988, Economic Freedom, Democracy and Welfare.  Edited by Michael A. Walker, Director of The Fraser Institute, and co-chaired with Milton and Rose Friedman, the conference was organized as a counterpart to do for economic freedom what Freedom House did for political freedom:  to calculate the amount of economic freedom that exists in various nations of the world.

Its origins can be traced to a conversation in 1984 at the Mont Pelerin Meeting in Cambridge, England, between Michael Walker and Milton Friedman, whose book Capitalism and Freedom had been extant since 1962.  However, there had been no serious attempt to explore the relationship between economic and political freedom in a scholarly way.  That conversation led to the idea of broadening the analysis to also include civil freedoms, which can often be more important than political freedoms.

The conference consisted of several conceptual, historical, and statistical papers, most notably those Nobel Laureates in Economics Douglass C. North and Milton Friedman.  These were fleshed out with case studies on economic freedom in East Asia (Alvin Rabushka), Africa (Lord Peter Bauer), Latin America (Ramon Diaz), and Sweden (Ingemar Stahl).  Another paper dealt with property rights (Svetozar Pejovich).  Discussants included Armen Alchian, Walter Block, Herbert J. Grubel, Arnold Harberger, Brian Kantor, Assar Lindbeck, Michael Parkin, Gordon Tullock, and Sir Alan Walters.  It would be hard to find a more distinguished group of scholars concerned with economic freedom, or any other economic subject for that matter.

A second conference was convened in July 1988 in Vancouver, Canada.  Edited by Walter E. Block, the proceedings were published in 1991, Economic Freedom:  Toward a Theory of Measurement.  (The volume is available for free download on my website alvinrabushka.com.)  This conference was designed to set forth the philosophical foundations of economic freedom and its conceptual definition that would provide a basis for measurement.

Michael Walker set the background for the proceedings with a summary of the preceding conference held in Napa Valley.  Alvin Rabushka wrote the next three papers:  “Philosophical Aspects of Economic Freedom,” “Freedom House Survey of Economic Freedoms“ (for comparative purposes), and “Preliminary Definition of Economic Freedom.”  I will discuss the contents of these papers in subsequent posts.  The final paper was an initial attempt by Zane Spindler and Laurie Still to calculate “Economic Freedom Rankings” for 145 countries on a five-point scale based on Rabushka’s “Definition” paper.

Conference participants, in alphabetical order, also included James Ahiakpor, David Friedman, Milton Friedman, Rose Friedman, James Gwartney, William Hammett, Henri LePage, Henry Manne, Richard McKenzie, Antonio Martino, Charles Murray, Ellen Paul, Robert Poole, and Gerard Radnitsky.

The third and fourth conferences were held in Banff, Alberta, Canada in 1989, and Sea Ranch, California in 1990.  The two were melded into the third volume in The Fraser Institute Rating Economic Freedom Project.  Stephen T. Easton and Michael A. Walker edited the volume, Rating Global Economic Freedom, published in 1992.

Papers in this volume focused on more precise measures of economic freedom for countries around the world for which data were available.

Authors and participants included James C.W. Ahiakpor, Juan F. Bendfelt, Walter E. Block, Jack L. Carr, John F. Chant, Edward H. Crane, Arthur T. Denzau, Thomas J. DiLorenzo, Stephen T. Easton, Milton Friedman, John C. Goodman, James D. Gwartney, Edward Lee Hudgins, Ronald W. Jones, Robert A. Lawson, Richard McKenzie, Joanna F. Miyake, Charles Murray, Alvin Rabushka, Richard W. Rahn, Alan Reynolds, Laurie Rubner, Gerard W. Scully, Bernard H. Siegan, Zane A. Spindler, Alan C. Stockman, Richard L. Stroup, Melanie Tammen, and Michael A. Walker.

The first comprehensive report based on the four conferences and three conference volumes was Walter Block, James Gwartney, and Robert A. Lawson, Economic Freedom of the World, 1975-1995, published on January 1, 1996.  Thereafter subsequent annual reports were published for 1997, 1998-1999, and then annually through 2018 (published in conjunction with the Cato Institute since 2001).  Separate periodic reports for North America were published from 2002 and for the Arab World from 2005.  Altogether, about a dozen individuals have helped to edit the series of annual reports on Economic Freedom.

In 1995, The Heritage Foundation, in conjunction with the Wall Street Journal, created a rival Index of Economic Freedom.  The Heritage/WSJ index was conceptually and empirically simpler than the Fraser Index.

Subsequent posts in this series will discuss in greater detail the philosophy, concepts, and measures of Economic Freedom that make up the Fraser Institute Annual Report

Thursday, October 4, 2018

Academic Freedom Hangs By A Thread

In a previous post comparing Chinese and American universities, I noted that applicants for a faculty position at the University of California must submit a Diversity Statement.

This is no minor detail.  In the section on Academic Diversity Statements under Academic Personnel for UC Santa Cruz, the last sentence unequivocally states that “Applications that do not include a Diversity Statement will not be forwarded to the search committee for consideration.”

What should be included in a Diversity Statement?  “Describe any experience or background that has made you aware of challenges faced by historically underrepresented populations.”  These include mentoring activities, committee service, research activities, teaching activities, and other activities that show how you have advanced Diversity, Equity, and Inclusion among underrepresented groups.  In addition, applicants must describe the role they envision in contributing to Diversity in the next two to five years.  Applicants are also encouraged to discuss their philosophy of Diversity as a potential UC Santa Cruz faculty member.

Similar guidelines are posted on the web sites of UCBerkeley, UC San Francisco, UCLA (page 5), and other campuses in the UC system.

Applications will not be accepted for consideration without a loyalty oath to Diversity.  Diversity and Inclusion do not permit questioning or criticizing Diversity and Inclusion as official doctrine of the UC system set forth by the Office of the President overseeing all nine UC campuses and the Chancellor of each campus.  Of course, prospective professors can avoid taking an oath to Diversity.  Do not apply for a faculty appointment in the UC system. 

UC campuses are ranked numbers 1, 2, 5, 7, 10, 12, 26, and 35 among the top 50 public universities in the United States.  It’s only a matter of time until Diversity Statements are required for faculty positions for the 23 campuses of the California State University System, all California Junior Colleges, and most universities and colleges throughout the United States.  Can Academic Freedom survive if the oath is required in the colleges and universities in most or all of the 50 states and federal territories with colleges and universities?

In Defense of Academic Freedom


Closer to home, on November 7, 2017, and February 21, 2018, Stanford’s president and provost posted articles on the Stanford's concomitant commitment to the free exchange of ideas and an inclusive campus culture.  Provost Drell acknowledged that it is extremely difficult to balance the principles of free expression with ideals of an inclusive community.  It is even harder to implement in practice.  When does Diversity and Inclusion curtail or give way to Academic Freedom?

In a statement released on July 20, 2018, Thomas Gilligan, director of the Hoover Institution, announced the Institution’s support of professor Mike McFaul, who the Russian government was seeking to interview.  Gilligan said, “The free expression of ideas is absolutely central to the academic life of the Hoover Institution at Stanford University.  We stand behind professor Mike McFaul’s freedom of inquiry, thought, expression, speech, and publication—ideals that are fundamental to the mission of the university and to the Hoover Institution,  An assault on Mike McFaul’s academic freedom for the purpose of retribution and intimidation cannot and should not be tolerated.” 

A history conference held at Hoover during the 2017-18 academic year was criticized by the provost because it failed to include any female historian paper givers.  The provost stated that she did not want to see any more Hoover conferences with all male presenters.  The Academic Freedom of Hoover fellows to organize conferences as they deem intellectually appropriate was not defended as an exercise of Academic Freedom as it was for McFaul.

In practice, Inclusion trumps Academic Freedom.  It is likely to do so in the overwhelming majority of cases when the two principles conflict.

In marked contrast, conferences consisting of all Black, all Hispanic, or all female paper givers generally proceed without objection.  Over the past 8 years, I attended four events at Stanford’s Clayman Center for Gender Research.  None included a male of any racial or ethnic background.  No problem.

Time will tell if Academic Freedom can coexist with Diversity and Inclusion.  The spread of a required Diversity Statement has already eroded Academic Freedom in California.  Can Chicago hold firm or will it be “Apres Chicago, la deluge.”

It’s only a hop, skip, and a jump to extend the doctrine of Diversity and Inclusion to encompass Inequality Reduction.  Some campuses already use the broader phrase of Diversity, Equity, and Inclusion.  Applicants for a faculty appointment at the University of California and other schools could soon be required to complete an Inequality Statement, reporting what they have done to reduce Inequality, and how their research and teaching in the next two to five years will reduce it.

The best artistic representation of the Diversity and Inclusion requirement at the University of California is French painter Jacque Louis David's Oath of the Horatii.


Friday, September 21, 2018

A Theory of Racial Harmony

Racial bias--explicit, implicit, conscious, or unconscious--in U.S. universities and colleges is not a new subject.  Race relations have been a heated, controversial subject of research and discussion for decades.  Since the 1960s, recommendations for improving race relations have largely been unidirectional, favoring more and larger government programs to assist the advancement of non-Whites in the broader society and to compel non-Hispanic Whites to abide by stronger norms of diversity, equity, inclusion, and social justice.  These political and social policies have accompanied the changing demographic composition of the United States, from an 88.7% Non-Hispanic White Majority in 1970, to 72.4% in 2010, with projections to 55.5% in 2030, and Non-Hispanic Whites becoming a minority in the early 2040s

Universities have been the vanguard in defining and trying to document racial bias in America, and leading the efforts to expand government involvement in higher education and society in general to reduce and eradicate it.  Only a handful of scholars have argued that government programs often exacerbate race relations.  These scholars have been widely criticized or dismissed by the vast majority of those favoring more government laws, regulations and programs.  (Take a look at the notes and bibliographies of the recent spate of books on identity politics and try to find references to Thomas Sowell, Walter E. Williams, William Hutt, and other authors documenting state repression of Blacks and other minorities.)

I encountered this reality as early as 1972.  I was a visiting scholar at Stanford in 1971-72 as a fellow in the inaugural year of the National Fellows Program, now in its 37th year, at the Hoover Institution.  Fresh off completing Race and Politics in Urban Malaya (Hoover Press, 1974), a revision of my doctoral dissertation based on a year’s research in multi-racial Malaysia (Malays, Chinese and Indians), I next drafted a short book entitled A Theory of Racial Harmony, based on that experience and researching 20 other multi-ethnic/racial countries, resulting in publication of Politics in Plural Societies:  A Theory of Democratic Instability.  The first two books are available as free download on my website, alvinrabushka.com.

I submitted the manuscript to Stanford University Press for review and possible publication.  Ordinarily academic presses send manuscripts to experts in the field for review and comments.  In my case, the then Executive Editor took matters into his own hand and returned the manuscript with a letter dated May 18, 1972, without review.

After a paragraph of positive comments on style and clarity of exposition, he turned to the substance of the book.  Here he proffered a litany of charges against my racial harmony hypothesis that governments often exacerbate, rather than ameliorate, race relations and that racial harmony is better in conditions of free markets and limited government: “the carriage breaking down; the exposition begins to muddy up; the persuasiveness of the argument fades markedly; tough propositions are dealt with too quickly,” and several others.

But his foremost charge was that my “thesis begins to look like an argument for keeping them [he presumes we all know who “them” are] down on the farm,” and that my empirical examples were “anomalies and anachronisms.”  “You’re writing economics, but you’re also writing about highly visible problems we all worry about, and I’m afraid we remain confidently unconvinced.”

The manuscript, he stated, needed more real-world analysis, but that would, he guessed, result in my thesis coming unglued.  But this was his assertion, not that of experts in the field.

I subsequently found a publisher willing to proceed with my book, the University of South Carolina Press on behalf of the Institute of International Studies at the University of South Carolina.  Read it free online and judge for yourself.

Thursday, February 22, 2018

Sub-Saharan Africa Is Really Poor, Part Two

Transparency International has released its Corruption Perceptions Index 2017.  (Click on link)  The map reveals that Sub-Saharan Africa encompasses the most corrupt countries of any region or continent in the world.

Scroll down to the last country on the list, which is perceived as the most corrupt country in the world.  Twenty of the 37 most corrupt countries are located in Sub-Saharan Africa.  These are the same countries that are the poorest in the world.

Decades of post-independence financial aid, foreign experts, celebrity visits, and scores of university centers on African studies in North America and Western Europe have made little headway in reducing corruption.

Secretary of State Rex Tillerson is scheduled to travel to Africa in March 2018.  It will be interesting to observe his comments and press conferences with heads of states of those countries he visits.  And, what policy changes, if any, he recommends to President Trump.

Tuesday, January 30, 2018

Sub-Saharan Africa Is Really Really Poor

President Trump has instructed Secretary of State Rex Tillerson to take an extended trip to Africa in March 2018.   Perhaps the purpose of his trip is to sooth the hurt feelings and anger of  African leaders over the unsavory remarks President Trump allegedly made about African countries in discussing U.S. immigration policy.

What will Secretary Tillerson find?

The World Bank ranks all 187 countries in the world by GDP (in PPP dollars) per capita.  In 2017, of the bottom 34, 27 are in Sub-Saharan Africa.  They range from no. 153 (Cameroon, $3,359) to no. 187 (Central African Republic, $681).  GDP per capita is even lower in nominal (current exchange-rate) dollars.  To put this in perspective, in 2017 per capita GDP (in PPP dollars) was $39,388 in South Korea and $59,495 (2017) in the U.S.

The 27 countries, in alphabetical order, include Benin, Burkino Faso, Burundi, Cameroon, Central African Republic, Chad, Comoros, Democratic Republic of the Congo, Ethiopia, Gambia, Eritrea, Guinea-Bissau, Liberia, Madagascar, Malawi, Mali, Mozambique, Niger, Rwanda, South Sudan, Sao Tome and Principe, Senegal, Sierra Leone, Tanzania, Togo, Uganda, and Zimbabwe.

Between 1957 and 1965, 30 African countries secured their independence from the European colonial powers.  Another 10 achieved independence during 1966-70.  The vast majority of Sub-Saharan African countries have been self-governing for a half-century or more.

Most began as parliamentary democracies, but the new nations quickly gave way to authoritarian regimes of one form or another. Sub-Saharan democratic politics became known as “one man, one vote, one time.”  The most recent report of Freedom House, which classifies countries on the basis of political freedom and civil liberties as ”free,” “largely free,” “largely unfree,” and “unfree,” rates most Sub-Saharan countries “unfree.”

Since decolonization, Overseas Development Assistance (foreign aid) has poured into Africa.  Annual average aid amounted to $19.4 billion during 1970-79, $29.6 billion during 1980-89, $31.8 billion during 1990-99, $39.1 billion during 2000-09, and $56.6 billion during 2010-14 ($1.4 trillion dollars in all between 1970 and 2014) .

Loans to Sub-Saharan Africa amounted to $18.5 billion in 2010, more than doubling to $40.7 billion in 2013.  Excluding South Africa, the external debt of Sub-Saharan Africa increased from $228 billion in 2008 to $378 billion in 2013, despite cancellation of over $100 billion in debt. 

Individual countries and multinational organizations have also provided technical expertise, medical and educational assistance, and economic policy advice.  Western scholars and their graduate students have written hundreds of books and thousands of dissertations and articles about Sub-Saharan Africa.  Centers on African Studies are ubiquitous in American and European universities.  These organizations and individuals have a stake in the status quo.  Self-supporting and fast-growing African “tigers” are not in their financial or professional interest.

Celebrities from all walks of life have traveled to Sub-Saharan African countries to bring attention to the dismal plight of their people.

And yet, most of Sub-Saharan Africa remains mired in poverty.

Secretary Tillerson is likely to state that the U.S. wants to partner with Sub-Saharan countries to help improve governance and living standards.  He will likely offer additional financial and technical assistance.  He will tell Africa’s leaders that President Trump values their friendship and hopes they will join the U.S. in fighting terrorism.

And nothing will change.  Sub-Saharan Africa will remain mired in poverty until there is a change in governance, economic policies, cultural attitudes, and an end to tribal conflict.

I’m from Missouri, the “show me” state.

Tuesday, January 2, 2018

Evaluating Trump’s Tax Cut And Tax Reform

The commentariat has spilled millions of gallons of digital ink and spoken millions of syllables on the pros and cons of President Trump’s tax cut and the degree to which it represents real tax reform.

Supporters point to the lower 21% corporate tax rate and expensing (100% first-year write-off) of investment spending, the latter for only five years, but perhaps to be extended upon its expiration.  In combination, these should encourage investment in new business, expansion of existing business, new jobs, higher wages, and a higher return to capital.

Supporters also praise doubling the standard deduction, which is projected to reduce the share of individual tax returns with itemized deductions from about one-third to one-tenth.  This is an indirect way of simplifying the tax code by reducing the benefits of itemizing.  Ideally, it would be nice to eliminate all deductions, preferably by sheer brute political will in exchange for yet lower rates.

A 500-page law with 500 pages of explanation cover a lot of ground.  I will leave details to the tax lawyers and accountants.

Here I want to put the tax reform into a broader context, namely, how does it compare with an ideal income tax code:  a progressive, fully integrated, cash-flow expenditure tax.

You are correct if you recognize that ideal as the Hall-Rabushka Flat Tax, first proposed in 1981, which many commentators have called the “gold standard” of tax reform.  (The current edition of the book is free online at the Hoover Press.)  Its core features include (1) expensing of business investment, (2) a single flat rate on all labor and business income, (3) full integration, (4) progressive in the form of a personal allowance for all taxpayers based on the composition and size of households, in effect a zero rate up to a specified level of income, and (5) no taxation of interest, dividends, capital gains, gifts, and estates.

A variation of the flat tax has been adopted in more than 40 countries and political jurisdictions around the world.  Estonia, for example, has eliminated the corporate income tax.  I encourage you to have a look at specific legislation in these territories to see how a flat tax has been put into practice.

To summarize, pieces of the new tax code are a good start.  Much more remains to be done.  Perhaps in a second Trump term!