[A Conservative Teacher] BRIC and MIST economies vs the PIIGGS and the US

[A Conservative Teacher]

Rhetoric, good intentions, philosophies, ideologies, speeches- they don't mean as much to me as good policies. Purity of candidates, good communication skills, and hard work only mean anything if they are in pursuit of public policies which work to better protect human life, liberty, and property. Recently on RealClearPolitics Alan Reynolds wrote an excellent article The Truth About Taxes and Spending in Europe comparing the results of the public policies of two different sets of nations:

...Several European countries, including Cyprus, have been mired in economic stagnation or decline for five years or more. Yet other countries in Asia and Latin America have flourished. What are the weakest economies doing wrong? What are the strongest doing right?

Economist Jim O’Neill coined the acronym BRIC in 2001 to refer to four economies which showed great potential then and now — Brazil, Russia, India and China. More recently, he added four more promising MIST economies — Mexico, Indonesia, South Korea and Turkey.

In mid-2008, The Economist magazine drew a sharp contrast between the booming BRIC economies and four feeble PIGS — Portugal, Italy, Greece and Spain. By 2010, after Ireland and Great Britain bailed out their banks, that unkind acronym was stretched to PIIGGS.

All PIIGGS have two things in common. First of all, government spending grew dramatically — from an average of 43.2% of GDP in 2007 to 52.6% by 2010. Spending was modestly trimmed by 2012 in a few cases, yet the ratio of spending to GDP still remained 3 to 6 percentage points higher than it had been in 2007.

Government spending on bailouts, subsidies, grants, salaries and entitlements commands a much larger share of these economies than it did just a few years ago. European austerity has been focused on the private sector — namely, taxpayers with high incomes.

That is the second thing the PIIGGS have in common. The highest income tax rate was recently increased in every one of the troubled PIIGGS except Italy (where it was already too high at 43%). The top tax rate was hiked from 40 to 46.5% in Portugal, from 41 to 48% in Ireland, from 40 to 45% in Greece, from 40 to 50% in Great Britain, and from 48 to 52% in Spain....

...It is enlightening to compare the depressing performance of these tax-and-spend countries to the rapidly-expanding BRIC (Brazil, Russia, India and China) and MIST economies (Mexico, Indonesia, South Korea and Turkey).

Government spending is frugal in these countries, averaging 32.1% of GDP in the BRICs and 27.4% for the MIST group.

Rather than raising top tax rates, all but one of the BRIC and MIST countries slashed their highest individual income tax rates in half; sometimes lower. Brazil cut the top tax rate from 55 to 27.5%. Russia replaced income tax rates up to 60% with a 13% flat tax. India cut the top tax rate to 30% from 60%. Similarly, the top tax rate was cut from 55 to 30% in Mexico, from 50 to 30% in Indonesia, from 89 to 38% in South Korea, and from 75 to 35% in Turkey.

In China, statutory income tax rates can still reach 45% on paper, but that is only for high salaries and is widely evaded. Investment income is subject to a flat tax of 20%, the corporate tax is 15-25%, and China’s extremely low payroll tax adds almost nothing to labor costs.

Lower tax rates and faster economic growth in these countries didn’t mean bigger budget deficits. On the contrary, only one of of the eight MIST and BRIC countries (India) has a significant budget deficit.

In short, the world economy has become divided into two groups: (1) sickly PIIGGS with chronic fiscal crises and (2) booming BRIC and MIST economies with modest government spending, lower tax rates and vigorous growth of both the economy and tax receipts....

So there are two different groups of nations, one group successful and creating wealth and expanding opportunities for their citizens and leaving their people better off than they were previously (BRIC and MIST), and another group unsuccessful and destroying wealth through amassing debt and taking out loans and robbing from pensions and future entitlement programs and debasing their currency and leaving their people worse off than they were previously (PIIGGS).

Which of these two groups is the United States moving towards? Clearly the answer is the PIIGGS group. And that's bad public policy.

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Posted By A Conservative Teacher to A Conservative Teacher at 4/10/2013 01:00:00 AM