The core of the European crisis is a lack of economic freedom

As the Greek crisis rapidly turn into the European crisis there is a scramble by world leaders to “fix it.” Of course it isn’t that easy because the real crisis in Europe is a systemic one; the real downfall of Europe is a lack of economic freedom and it isn’t going to be easy for European leaders to change that overnight.

I backed up the claim that a lack of freedom is the primary issue in a recent op-Ed I wrote with Fred McMahon. We examine where the Euro-countries place on the Fraser Institute’s Economic Freedom of the World Index:

A glance at the Eurozone countries shows us that nine out of 16 of the member countries fall under the “mostly free” category, five of the 16 are “relatively free,” and two of the countries are “relatively unfree.” The freest country in the Eurozone is Finland, ranked 11th in the world in the economic freedom index. In contrast the least free country, Greece, ranks 88th in the world. The massive difference in economic freedom enjoyed in different countries in the Eurozone creates a dividing line and it is pretty easy to see conflict arising across that line.

The list of countries that fall into the less free side of the line reads like a list of the economic problem children of Europe. Spain, Italy, and Portugal all fall into the “relatively free” category. Greece, the main problem child, is ranked “relatively unfree” on the index. The only country that has required assistance that is “mostly free” is Ireland, and Ireland has shown the strongest signs of economic recovery.

The “mostly free” United States has also experienced economic turmoil but the downturn there pales in comparison to Greece or Spain. No one but the most exaggerating of alarmists would claim that the American economy is in danger of imminent collapse, while the complete unraveling of the Greek economy is quite real. More so than in America, it is the less economic free countries of Europe that are bearing the brunt of the ongoing global economic crisis.

Some European countries (as we write above) are pretty high on the economic freedom index.
Proponents of economic freedom would expect these countries to be more able to handle the shock of the crisis, and so they are. At the same time, however, the freer Euro-countries are being dragged down with the not so free.

It isn’t because investors don’t trust Germany that the German bond auction went so badly. It is because investors now know that Germany is tied to the hip to countries that they do not trust. The bad economic policies of Italy and Greece are damaging the German economy and finances in a big way. At the same time the only thing that is keeping Greece from completely sinking is that they are tied to the hip of Finland and Germany

Ultimately, for the long run, there can only be one solution to this problem:

Austerity measures are not enough. Greece and the other troubled countries need to take a fundamental look at the very structure of their economies and find a way to increase economic freedom if they want to ensure a prosperous future for their citizens.

Death to Pennies

This makes sense:



And most of the arguments can apply to Canada too.

Milton Friedman on taxing the rich and government failure

His ability to go straight to the heart of an issue is truly amazing. As good of an economist as he was, his true greatness was his ability to communicate.

In America the rich is not a closed caste

Pundits and Occupiers talk about the rich or the “super rich” as if they were a closed caste. They seem to think that the wealthy in America are the product of generation after generation of rich families. It is true that some of the wealthy members of American society can trace their wealthy ancestors to the 19th century, but this is actually really rare.

In a recent op-Ed Michael Tanner of the Cato Institute pointed out that 80% of America’s millionaires come from families that are not rich.

So the vast majority of the wealthiest came about their wealth by moving up the income scale. I would also point out that it is not uncommon for the children of millionaires to lose all their parent’s money after inheriting.

What we have here is a society where people are rising and falling to the top of the economic/social scale as fortune and skill dictates. This is incredibly rare in the history of humanity and it should be celebrated more.

People who love F.A. Hayek a lot

This makes more sense to me than Edward Cullen.

Federal government can't spend money on infastructure, it has no money

As pressure continues for the federal government to introduce another round of new spending, the Federation of Canadian Municipalities are adding its voice and suggesting that commuter infrastructure would be a good way to spend all that money that the federal government doesn’t have.

The first thing that comes to my mind is that even among Keynesians the usefulness of government infrastructure spending as a way to improve the short term economy is disputed. The effects on the job market are too narrow when you consider that it only employs people with specific skills, and usually it takes too long for these projects to be launched. So even if you do think that boosting aggregate demand is the thing to do (which I don’t) you have to wonder if infrastructure spending is the best way to do that.

The next thing that comes to my mind is that Toronto desperately needs a better system for commuters. I spent two weeks commuting from the Newmarket area to midtown Toronto and I vowed never to do it again. “Stimulating” the economy may just be a convenient excuse to tackle the problem. Although I would think that even if there is disagreement on what should be done and how it should be done, pretty much everyone agrees that something needs to be done.

The third thing that comes to my mind is something that I mentioned in the first paragraph: the federal government has no money. The Government of Canada has been in deficit since the 2009/2010 budget and the Minister of Finance was betting a return to surplus on a fast growing economy, which is a dubious prospect at best. So if the federal government has to borrow money without even having to take on new projects, you have to wonder where this new spending is going to come from. How much more money do we really want our government borrowing? Also, if you have to borrow just to pay your day to day bills, is that really the best financial moment to invest in a large capital project?

Back in 2007 the Government of Canada may have been able to afford the cost of improving commuter infrastructure, but over the last few years the gluttony of spending has made it impossible. It would be incredibly financially prohibitive to spend the billions it would require.

Fortunately there are things that governments can do to take pressure off the system, if they have the political will. But at some point governments will have to spend money to address the problem and that money has already been wasted away.

Niall Ferguson: 6 killer apps for prosperity

Niall Ferguson lectures on the importance of certain ideas and institutions for prosperity.



I don't share Mr. Ferguson's optimism regarding the progress of some of the emerging countries in Asia. I get the impression that they are trying to download half the app and it won't work like that.

Government Spending Doesn't Create Jobs

Well it does create jobs, but it doesn't create wealth. And as the video points out wealth is what needs to be created for a more prosperous society.

Economic Freedom of the World Index shows decline in Canada

The Fraser Institute has released its new Economic Freedom of the World Index, and for the first time the United States ranks below Canada in terms of economic freedom. Not just below but significantly below. The United States ranks tenth in the world and Canada ranks a comfortable 6th. But before you get too smug you should take a moment to compare the scores of Canada this year to last year.

In the 2010 EFW Index (which is based on 2008 data) Canada scored 7.95 and came in 7th place. In the 2011 EFW Index (based on 2009 data) Canada scored 7.81 and came in 6th place. So we improved relative to the rest of the world but we declined relative to our past results. In fact all this really shows is that economic freedom is declining in Canada at a slightly slower rate.

Canada can’t even claim the prize for being the slowest to decline in the top ten. That prize goes to Singapore, which declined by only .02 points.

Australia deserves special mention as the only country to gain any points in economic freedom. They went from 7.90 to 7.98. The bulk of that gain came from increases in sound money and the freedom to trade internationally.

The bottom line is that when you look at Canada in isolation we are declining and when you compare Canada to our cadre of top economically free countries we aren’t doing that well either.

How will the Conservatives say no to new spending?

Three weeks ago I wrote a post that argued that the Conservative Party will have trouble resisting the calls for more “stimulus” spending because they have lost the credibility to offer an alternative (i.e. conservative) perspective. It has become the accepted wisdom of Canada’s political class that deficit spending can improve the economy. This is despite the lack of credible evidence proving this wisdom to be right. In fact there is considerable evidence that deficits are harmful in the long run and that government debt can cripple an economy. The Conservative Party can’t make these points, however, because it has publicly declared its faith in Keynes’ folly.

Yesterday Stephen Harper made a speech saying that the federal government will be “flexible” about its financial plan. This, more than any other statement thus far made, has opened the door to the possibility of more spending. Once that door has cracked open the pressure will be enormous for the Conservative Party to commit themselves to more years of deficit.

Lacking any credible intellectual defenses against this inevitable pressure, the Conservative Party will certainly succumb. The Conservatives’ only hope would be if the economy improves before they have to put forth an economic update in the late fall. It is only by arguing that it is not needed, as oppose to arguing that it is not useful, will the Conservatives be able to resist and keep to their already flawed plan to return to surplus.

As I said three weeks ago:

We are screwed.

Increase in private health care spending not necessarily bad

The Centre for Living Standards has released a report warning that Canadians are at great financial risk because of the large increase in private health care spending. They argue that since health care spending is using up a greater share of an individual’s disposable income Canadians are at financial risk if they become sick or unemployed. Fortunately this conclusion is based on a fundamental misunderstanding of how individuals make spending choices.

It is important to note that the Centre for Living Standards has also found that “there has been a dramatic increase in per-capita consumption and wealth across the country.” Which means that we are all, for the most part, better off and we own more stuff. Since we already have all this stuff we can then use our left over disposable income to do something that use to be a luxury: take care of our health.

The concept is similar to Maslow’s hierarchy of need but it focuses more on economic choices. Once one desire has been satisfied we humans move on to the next desire and then the next and so on. Once I have bought a beer my desire for beer depreciates and is replaced by something else, perhaps a desire for a steak sandwich. Every individual has a different hierarchy of desires based on their own preferences and so it is difficult to generalize, but we can observe patterns in the choices that people are making.

It is likely that the Centre for Living Standards has simply observed one of these patterns. People may be more willing to spend a greater portion of their income on health care because they can afford it and because they have already taken care of their other desires. If this is the case then this is a sign not of Canadians being worse off but of being better off because they are able to satisfy more of their desires.

Of course I could be wrong and it could be that people are sacrificing more of their desires to afford the rising cost of health care. In some individual’s cases this could very well be what is happening, but considering the rarity of health related bankruptcies in Canada I am skeptical that there is an epidemic of financial risk due to health.

We shouldn’t overlook the fact that fundamentally the Centre for Living Standards has shown what should be obvious, we are all better off than we were 30 years ago. And that is good news

Why do men make more than women?

We are losing the war of ideas

Last Friday I wrote a post that argued that the Conservative Party has damaged the conservative movement when it comes to the debate between fiscal restraint and “stimulus” spending. By advocating for deficit spending in the 2009/2010 budget and then claiming that this budget was fundamental in saving the economy, the Conservatives have left themselves no room (or at the most a very little bit of room) to argue any other position when the next recession hits. Why not more stimulus spending if it worked so well last time (although it didn’t)? I concluded by saying that Keynesian economics now dominates the fiscal policy debate in Canada because of the actions of the Conservative Party.



Evidence has come out today that the damage has been done not just among policy wonks but the general population as well. A survey conducted by Abacus Data showed that most people would support further “stimulus” spending in the event of a recession.

The federal government has promised to balance the federal budget by 2015 without raising taxes or cutting transfers to persons, including those for seniors, children and the unemployed, or cutting transfers to other levels of government that support health care and other social programs.



Which of the following statements, if either, come closest to your view? [rotate statements]



The federal government should continue with its plan to reduce the federal deficit even if the economy enters another recession: 33%



The federal government should reconsider its deficit reduction plans and focus instead on job creation and stimulating the economy if the economy enters another recession. 58%



Neither: 11%

I had never heard of Abacus Data before but I lack the technical knowledge to judge the methodology and so I will give the benefit of the doubt and assume that this survey is reasonably accurate. You can see all the details here.



I’m not surprised that the majority of people would be supportive of something where there is no strong national voice arguing against it. Organizations such as the Fraser Institute and the Canadian Taxpayers Federation are the only ones speaking out against deficit spending in Canada. But the Conservative Party has a far greater reach and pull than either of these organizations. Without the Conservative Party to make the case the debate has become entirely one sided with most of the population.



Conservatives, libertarians, or whatever…we are losing the war of ideas on this issue.

The Conservative Party has screwed itself and the movement

The early days of 2009 were crucial in Canadian financial, economic, and political history. Most people will remember the attempt by the opposition parties to form a coalition government at the end of 2008, but really it was the decision to return to deficit spending that is and will have a longer lasting effect. We can see the ripples of that decision not just in the fact that we are still in deficit but in the way that government spending is currently being debated.



As you may recall, the Conservatives ran in the 2008 election promising to continue a balanced budget. Shortly after the election, even while the world was in a global economic meltdown, the Conservatives still rightly and bravely refused to return to deficit. The economic update that Jim Flaherty brought in a month or so after the election confirmed the government’s commitment to a balanced budget.



Included with that economic update was a change to the party subsidy system that opposition MPs perceived would disadvantage them. They rebelled not so much against the idea of balanced budgets but to save their party coffers.



What happened next was fantastic for the Conservatives.



The public by in large despised the new coalition. Partly it was because of the inclusion of the separatists in a supporting role and partly it was the erroneous idea that Mr. Dion wanted to steal the election. For whatever the reason, the public were not behind the coalition and the Conservatives were enjoying polling numbers that they have never seen since. Mr. Dion was shortly thrown out and the coalition collapsed.



Before the coalition collapsed though, they had scrambled for an excuse to take the reigns of government that didn’t look completely self serving. They came up with the idea that the “real issue” was the government’s lack of action on the economy. Not many people really bought this, but once the coalition crisis was over the opposition parties held on to their assertion that “stimulus” was required.



It was at this point that the Conservatives had a choice. Really they had three choices:



1. They could have refused to go back into deficit and possibly fight an election (although I personally think the disorganized Liberals would have backed down).

2. They could have made the case for a balanced budget but be willing to compromise and bring in a small deficit.

3. They could have taken ownership of the “stimulus” concept and outspend the opposition’s wildest dreams.



The key difference between the third option and the other two is that it concedes that deficit spending is beneficial to the economy. Stephan Harper would not have had to look far to find arguments against this; he could have referenced his own Master’s thesis. Yet he decided to ignore his own intellectual history and embrace ideas that he would have once spat at.



We can speculate on why he did this. My personal feeling is that the coalition crisis scared the hell out of him. He simply did not want to lose power. But such speculation is beside the point. The result was that there were no federal politicians in Canada arguing against the failed Keynesian theory of “stimulating” the economy.



Flash forward to this week.



Once again Canada’s economic outlook is not so good. It isn’t nearly as bad as 2008 or 2009 but it is bad enough that Jim Flaherty is under pressure to introduce more stimulus spending. Now that they are secure with a majority government it looks as if the Conservatives are preparing to resist that pressure, but they lack any real strong arguments against the opposition.



Mr. Flaherty has said that it is more important to balance the budget and really the economy isn’t all that bad anyway. So the natural response is, “well how bad does it have to get before you stimulate?” The Conservatives want to say never, but they can’t. They have already conceded that there are times that “stimulation” is needed.



So instead of being able to debate with conservative ideas, the Conservative Party is stuck pussy footing around the issue and vaguely assuring that maybe they would stimulate if things were very bad, but well maybe not, it depends, you see, on conditions and we don’t really know what is going on, so we have to wait and see, and really we don’t want to leave the deficit for our children to pay for so we need to be very careful about more spending and…so on.



This is how the Conservatives have screwed the conservative movement and themselves. They have made it impossible for them to put forth a genuinely conservative response to the likely coming recession. They may be able to resist the pressure to spend more but they have to do so while at least pretending that it is a viable option. Thus fiscal conservatism is completely thrown out the window.



This problem will persist for years if not for decades. Every time there is an economic downturn there will be pressure to spend money trying to “stimulate.” Every time, whether in opposition or government, it will be impossible for the Conservatives to convincingly argue against it without renouncing the actions of Stephan Harper and Jim Flaherty.



So thanks to the Conservative Party of Canada, Keynes and his big spending admirers now have a death grip on Canadian fiscal policy.



We are screwed.

Stop messing around Obama

Standard & Poor has lowered the USA federal government`s credit rating. This was more than predictable. It is exactly what they said would happen if the US government doesn`t come forth with a real plan to bring the country out of red. Despite the antics around the debt ceiling. The United States is in no better position today than it was on July 31st.

Barrick Obama must wake up to the steady decline of America`s finances and the inevitible consequances. Stop the smoke and mirrows and actually cut spending.