Libertarian Claims Are False (Part I)
08 August 2017 | Pago Pago, American Samoa
Libertarian core positions are the dogmatic three: 1) lower taxes increase growth, 2) smaller government is better 3) no interference in markets and the economy is better. To be testable hypothesis, these claims need to be sharpened. I would propose the following as fairly intended restatments:
1) Lower income taxes increase GDP growth;
2) Smaller government increases personal and economic freedom; and
3) Bigger government Interferes more in markets and the economy and that impairs economic prosperity.
Fortunately, we have time series data on the US for 65 years on hypothesis #1 and cross sectional data across over 160 countries on hypothesis #2 and cross sectional data across 149 countries on hypothesis #3 . We can test these three hypotheses which republicans, conservatives and libertarians accept as true on faith.
The Human Freedom Index kept by the Cato Institute for over 160 countries consists of two parts. One is the Economic Freedom Index (EFI) from the Fraser Institute, which includes measures of the size of government, protection of property rights, sound money, freedom of international trade, and regulation. The other is Cato’s own Personal Freedom Index (PFI), which includes measures of rule of law, freedom of movement and assembly, personal safety and security, freedom of information, and freedom of personal relationships. The Cato and Fraser links provide detailed descriptions of the two indexes.
Fraser’s Size of Government indicator is not a statistically sound measure of the size of government. We can check that by comparing SoG with a simpler measure based on the ratio of total government expenditures to GDP, which we will abbreviate as SGOV. The required data are available for all countries in our sample from the IMF World Economic Outlook database. That will be used for SOG.
A third data set covering almost 150 countries is the Legatum Prosperity Index (LPI) from the Legatum Institute. The LPI includes data on nine “pillars” of prosperity, including the economy, business environment, governance, personal freedom, health, safety and security, education, social capital, and environmental quality.
The time series data for 65 years clearly show 1) Lower income taxes do NOT increase GDP growth. There is no discernible relationship at all. Why is because the old neoclassical economic model no longer applies. Today, the neo Keynesian model does and it explains that with huge income inequality and much hoarding of cash and cash equivalents by the rich that are not consumed or used for real investment (counted in national income accounting), tax cuts simply add to the cash hoards of the rich and are not consumed or used for real investment at all. This is a liquidity trap. The more cash the rich get (who pay most of the taxes), the more they hoard it.
This lack of any relationship between lower taxes and growth is spelled out and statistically studied in a new study from the Congressional Research Service, "Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945." Other shorter term studies reach the same conclusion. This pillar of libertarianism is explained, studied and destroyed: 1) lower income taxes do not increase GDP growth. This is key. Much republican policy in Washington, D.C., depends and relies on this destroyed proposition.
(to be continued)