What the West Can Learn from Eastern Europe About Reform

by Johnny Munkhammar

A REASON WHY DONALD RUMSFELD’S QUIP about certain parts of Western Europe being “old”—indirectly implying that other parts represented the new—created such a stir was probably that he just put words on the thoughts of many. During the turbulent years when the Berlin Wall came down and the Iron Curtain was lifted, there were many worries and fears for the future. A general belief was that the countries in the East would never be able to compete with the West and would most likely be dependent on foreign aid for decades. There was also a debate about whether they should choose stepwise reforms or “shock therapy” to get away from the disaster of the centrally planned economy. Today, we can see the astonishing results. Most countries in Eastern and Central Europe have developed better than anyone dared to hope, due to free-market reforms, and the countries that have done so best were the ones that launched the most radical reforms. This has, in turn, enhanced competition and reform throughout Europe. In 2003, the year before the eastward enlargement, 36 reforms to facilitate doing business were carried out in European countries out of 89 globally, and eight of the top ten reformers were European.

Foreign direct investment in Eastern and Central Europe has boomed, with European Union companies investing about €150 billion in these countries since the early 1990s. Exports increased strongly following liberalization of foreign trade. Hungary’s exports rose, for example, by 380 percent, and Czech exports rose by 280 percent in the 10 years before EU entry. Incomes have risen, and poverty rates have fallen. The high growth rates of Eastern and Central Europe have also contributed to higher growth rates in Western Europe. The 10 new EU countries from Eastern and Central Europe, with some 100 million inhabitants, still account for only about 7 percent of EU GDP—the EU had 492 million inhabitants in January 2007—but the share is growing.

It is sometimes claimed that most of this growth is just about catching up with the wealthiest countries and that when these countries do so, their growth will fade. It is probably partly true that they are catching up, helped to a great extent by the availability of imported technology and skills. But the evidence suggests that catching up is just a small part of the explanation. If catching up by poor countries was an automatic mechanism, why did it happen now in Eastern and Central Europe and not in the 1970s or 1980s? A country like Ireland was said to be just catching up, only for it to then surpass most other nations in the prosperity stakes. It is more a matter of growth-friendly institutions and policies, such as openness to trade, low and flat taxes, deregulated markets, improved macroeconomic frameworks, low inflation, and limited public expenditure.

The starting point for these countries in the early 1990s was very different from the situation in most other OECD countries today. They were poor, and the old system was obviously totally incapable of delivering anything but problems. Still, there are reasons to take a look at these countries in a reform perspective today. First, it is important to see which policies actually work and what direction reforms should take. Second, there are strategic lessons: There were great problems 15 years ago, but there were also obstacles to reform and uncertainty about its direction and speed, and it was hard to know where to begin. Third, a main cause of economic problems, especially in Western Europe, has been excessive state intervention in the economy, and the problems in Eastern and Central Europe had a similar root, though different in extent. Ivan Miklos, former finance minister of Slovakia, thinks there is much for the West to learn. “The areas that need reform, such as social security systems, labour markets, welfare services, are largely the same and the reasons for the problems are similar.”

Every country in Eastern and Central Europe has an intriguing story to tell, and it has been told eloquently and extensively elsewhere. Two—Estonia and Slovakia—can illustrate the success and may be of particular use when analyzing reform strategies.

Estonia’s Radical Reforms

Estonia today has a population of 1.3 million. I visited the Estonian capital of Tallinn in 2007, 14 years since my last visit, and found the difference dramatic. In 1993, two years after the liberation from the Soviet Union and Communism, the Hanseatic city of Tallinn was deeply depressing. Houses were falling apart, the streets were dirty, there were hardly any restaurants, and people seemed genuinely miserable. Army hats from the Soviet Union and vodka were two of only a few products sold on the street corners. Tallinn today is simply shining. There are many new office buildings, the old town has been renovated, restaurants abound, people communicate a sense of well being, technology seems to be present everywhere, and there is activity wherever you look. Of course, some parts of the city still retain traces of the old, but what has happened is nothing short of remarkable.

Tallinn shows what happens if a country launches radical free-market reforms. In 2006, growth in Estonia exceeded 11 percent. Average income has risen by 120 percent in the last 10 years. Incomes for the 10 percent with the lowest incomes have risen by 160 percent. The Estonian Environment Information Centre shows that the environment has improved in many ways in Estonia, again stressing the need to grow economically to get greener. According to the World Database of Happiness, Estonians are also much happier today, which is also apparent in most other reformist countries for which there are sufficient time-series data. Estonia is now a member of the EU and NATO.

Under the leadership of Mart Laar, Estonia swiftly abandoned the collapsing centrally planned economy. Instead, the recipe was privatization, deregulation, tax cuts, and e-government. In 1994, Estonia introduced a flat tax of 26 percent for everyone regardless of income. Laar was warned that a flat tax would be impossible. It was not. Tax revenues have increased every year since 1994, despite reductions in the tax rate to 22 percent (soon to be 18 percent). The current government’s state aim is a 12 percent flat tax. Estonia actually initiated the flat tax trend.

Many of Estonia’s reformers were not politicians initially. Laar, for instance, was a history professor. But since the established politicians were part of the old system, there had to be new people coming in. A main question at the time was, of course, whether they should emulate the economic and social policies and systems of Western Europe, but they chose not to, because they wanted to achieve different results. However, they did get many of their ideas from Western think tanks and institutes. The political leaders were not experts in economic theory or policy, but they knew the broad picture.

The reformers faced resistance from special interests, and in countries that had experienced a large amount of propaganda about the dangers of the market and the decadence of the West, there were fears and counter-reactions at first. But there was decisive political action, and the opponents were confronted. The abolition of all tariffs on foreign trade by Estonia—the first country to do so unilaterally after World War II—is also an interesting case of reform strategy. The Estonians believed they had to abolish all tariffs, without exception. Allowing some tariffs would have provided other industries with an argument to have tariffs for their protection, creating a slippery slope toward more trade restrictions.

Slovakia’s “Gold Rush”

Going a bit further to the south, then, what are the reform lessons from Slovakia? In 1993, Czechoslovakia was peacefully dissolved (it had existed since World War I after the dissolution of the Austro-Hungarian Empire) and the Slovak Republic was founded, with a population of 5.5 million. For most of the 1990s, Slovakia did not reform like other countries in the region, and its political leadership under Vladimir Meciar was authoritarian and populist. Slovakia’s prospects looked bleak, and it seemed unlikely that the country would be able to join the EU in the foreseeable future.

In 1998, a new government was elected. It proceeded to launch a series of reforms, including a flat income tax rate of 19 percent, privatization, deregulation, macroeconomic stabilization, and increased openness. The economic growth rate became one of the highest in Europe at 5 percent to 8 percent annually, and unemployment dropped from 19 percent in 2000 to 13.6 percent in 2006 (still quite high). In 2004, Slovakia was among the 10 new European Union entrants, having enacted substantial reforms to meet the entry criteria. Following the economic reforms, Slovakia managed to attract considerable volumes of foreign direct investment. Indeed, the country has become the world’s largest producer relative to its size. A visitor to the capital, Bratislava, these days will still find that the Communist regime’s highway cuts brutally through the Old Town, but they will also see many signs of progress.

The reformist government was re-elected once, but in the election of 2006, the opposition formed a new coalition government. The government is led by Robert Fico of Smer, the party of Vladimir Meciar has returned, and there are a few xenophobic forces involved. In the election campaign, Fico promised to roll back reforms, especially the flat tax, in order to end the Slovakian “gold rush,” which was odd, given how much Slovakians had benefited from the investments. This was widely reported as evidence that reform was unpopular and that reformers tend to lose elections. However, the main party of the previous government—and indeed the most reformist one—gained votes in the 2006 election. It was the lack of support for some smaller parties and their tactical moves that in the end paved the way for a new government. Contrary to some reports, therefore, democratic support for the Slovak reformers actually rose in 2006.

Since the 2006 elections, none of the main reforms, including the flat tax, has been rolled back as promised. True, the new government is not pressing ahead with further reform, but neither is it undoing what has been done. This is an important lesson, also confirmed by similar developments in many other reformist countries. Reforms are usually not repealed, simply because although they may be unpopular at first, nobody wants to go back afterwards. The next election outcome remains to be seen, but it is a fact that it is the previous government’s efforts that pulled Slovakia out of misery to success, and that is already part of the history books.

Lessons

One lesson from Eastern and Central Europe has been that radical reforms do not always produce immediate positive results. There will be a period of transformation that also poses difficulties. The results will come—and will be more positive if the reforms are more radical—but it takes political persistence. Voters do not necessarily prefer far-reaching changes in these countries either, and the political situation in Eastern and Central Europe has been somewhat problematic in the last few years. Important further reforms have stalled. Still, the success of many countries in Eastern and Central Europe is enormous when their situation today is compared with the reality 15 years ago.

An international comparison with other wealthy countries is favorable for these countries in many respects, but it is also apparent that they need to do more. There have been a number of reforms of macroeconomic frameworks, product markets, state-owned companies, taxes, and trade. But as in Western Europe, a great deal remains to be done with regard to welfare services, social security, and (for countries like Poland) labor markets. Long-term trends such as globalization will, of course, have an impact, and demographics pose a bigger challenge for many countries in Eastern and Central Europe than for others.


Mr. Munkhammar is Associate Scholar at the Centre for European Policy Studies. This article is excerpted from his recent book, The Guide to Reform, published by Timbro and the Institute of Economic Affairs, © 2007 by Johnny Munkhammar and Timbro.

Why Capitalism Is Good for the Soul

by Peter Saunders

THERE IS PROBABLY NOBODY in Australia more committed to the proposition that capitalism is bad for the soul than Clive Hamilton. The executive director of the Australia Institute, a green socialist think tank, he is the author of books such as Growth Fetish and Affluenza, which have achieved some influence in Australia and notched up quite respectable sales. His message, aimed mainly at a disaffected intellectual middle class, is that we have become preoccupied with the pursuit of wealth and are increasingly unhappy and unfulfilled as a result of our materialistic lifestyles. Clive believes we have broken our “magical relationship with the natural environment,” and that the pursuit of money is getting in the way of our ability to reconnect with our “true selves.”

Last fall, at Macquarie University, I debated Clive Hamilton on the proposition that “capitalism is bad for the soul.” Our debate attracted around 500 people. When the Vice-Chancellor put the motion to a show of hands, the tellers judged that the ayes had it, though not by much. This suggests that substantial numbers of people don’t just buy Clive’s books; they also buy his arguments.

Soulless Capitalism

The problem for those of us who believe that capitalism offers the best chance we have for leading meaningful and worthwhile lives is that in this debate, the devil has always had the best tunes to play. Capitalism lacks romantic appeal. It does not set the pulse racing in the way that opposing ideologies like socialism, fascism, or environmentalism can. It does not stir the blood, for it identifies no dragons to slay. It offers no grand vision for the future, for in an open market system the future is shaped not by the imposition of utopian blueprints, but by billions of individuals pursuing their own preferences. Capitalism can justifiably boast that it is excellent at delivering the goods, but this fails to impress in countries like Australia that have come to take affluence for granted.

It is quite the opposite with socialism. Where capitalism delivers but cannot inspire, socialism inspires despite never having delivered. Socialism’s history is littered with repeated failures and with human misery on a massive scale, yet it still attracts smiles rather than curses from people who never had to live under it. Affluent young Australians who would never dream of patronizing an Adolf Hitler bierkeller decked out in swastikas are nevertheless happy to hang out in the Lenin Bar at Sydney’s Circular Quay, sipping chilled vodka cocktails under hammer-and-sickle flags, indifferent to the 20 million victims of the Soviet regime. Chic westerners are still sporting Che Guevara t-shirts 40 years after the man’s death, and flocking to the cinema to see him on a motor bike, apparently oblivious to their handsome hero’s legacy of firing squads and labor camps.

Environmentalism, too, has the happy knack of inspiring the young and firing the imagination of idealists. This is because the radical green movement shares many features with old-style revolutionary socialism. Both are oppositional, defining themselves as alternatives to the existing capitalist system. Both are moralistic, seeking to purify humanity of its tawdry materialism and selfishness, and appealing to our “higher instincts.” Both are apocalyptic, claiming to be able to read the future and warning, like Old Testament prophets, of looming catastrophe if we do not change our ways. And both are utopian, holding out the promise of redemption through a new social order based on a more enlightened humanity. All of this is irresistibly appealing to romantics.

Both socialism and environmentalism also share an unshakeable belief in their own infallibility, which further ramps up their attractiveness. Both dismiss their opponents as either ignorant (“falsely conscious”), or in bad faith, and they are both reluctant to allow counter-arguments, evidence, or logic to deflect them from the urgent pursuit of their proffered solutions. Although they both ground their claims in “science,” their appeal is as much emotional as rational, and both take themselves so seriously that they lose any sense of irony. Rock stars fly around the world in private jets to perform at sellout stadium concerts demanding action on global warming, and indignant youths coordinate anti-globalization protests using global communication networks.

Boring capitalism cannot hope to compete with all this moral certainty, self-righteous anger, and sheer bloody excitement. Where is the adrenalin in getting up every day, earning a living, raising a family, creating a home, and saving for the future? Where is the moral crusade in buying and selling, borrowing and lending, producing and consuming? The Encyclopedia Britannica describes “soul music” as “characterized by intensity of feeling and earthiness.” It is in this sense that capitalism is soulless, for although it fills people’s bellies, it struggles to engage their emotions.

Capitalism Nurtures the Human Spirit

If we want to know if capitalism is bad (or good) for the “soul,” it probably makes more sense to approach the question metaphorically rather than theologically. Approached in this way, saying something is “good for the soul” implies simply that it enhances our capacity to live a good life. On this less literal and more secular interpretation of the “soul,” capitalism fares rather well.

We have known since the time of Adam Smith that capitalism harnesses self-interest to generate outcomes that benefit others. This is obvious in the relationship between producers and consumers, for profits generally flow to those who anticipate what other people want and then deliver it at the least cost. But it also holds in the relationship between employers and employees. One of Karl Marx’s most mischievous legacies was to suggest that this relationship is inherently antagonistic: that for employers to make profit, they must drive wages down. In reality, workers in the advanced capitalist countries thrive when their companies increase profits. The pursuit of profit thus results in higher living standards for workers, as well as cheaper and more plentiful goods and services for consumers.

The way this has enhanced people’s capacity to lead a good life can be seen in the spectacular reduction in levels of global poverty, brought about by the spread of capitalism on a world scale. In 1820, 85 percent of the world’s population lived on today’s equivalent of less than a dollar per day. By 1950, this proportion had fallen to 50 percent. Today it is down to 20 percent. World poverty has fallen more in the last 50 years than it did in the previous 500. This dramatic reduction in human misery and despair owes nothing to aging rock stars demanding that we “make poverty history.” It is due to the spread of global capitalism.

Capitalism has also made it possible for many more people to live on Earth and to survive for longer than ever before. In 1900, the average life expectancy in the “less developed countries” was just 30 years. By 1960, this had risen to 46 years. By 1998, it was 65 years. To put this extraordinary achievement into perspective, the average life expectancy in the poorest countries at the end of the 20th century was 15 years longer than the average life expectancy in the richest country in the world—Britain—at the start of that century.

By perpetually raising productivity, capitalism has not only driven down poverty rates and raised life expectancy, it has also released much of humanity from the crushing burden of physical labor, freeing us to pursue “higher” objectives instead. What Clive Hamilton airily dismisses as a “growth fetish” has resulted in one hour of work today delivering 25 times more value than it did in 1850. This has freed huge chunks of our time for leisure, art, sport, learning, and other “soul-enriching” pursuits. Despite all the exaggerated talk of an “imbalance” between work and family life, the average Australian today spends a much greater proportion of his or her lifetime free of work than he would had he belonged to any previous generation in history.

There is another sense, too, in which capitalism has freed individuals so they can pursue worthwhile lives, and that lies in its record of undermining tyrannies and dictatorships. As examples like Pinochet’s Chile and Putin’s Russia vividly demonstrate, a free economy does not guarantee a democratic polity or a society governed by the rule of law. But as Milton Friedman once pointed out, these latter conditions are never found in the absence of a free economy. Historically, it was capitalism that delivered humanity from the “soul-destroying” weight of feudalism. Later, it freed millions from the dead hand of totalitarian socialism. While capitalism may not be a sufficient condition of human freedom, it is almost certainly a necessary one.

Has Capitalism Outlived Its Usefulness?

Interestingly, Hamilton does not deny any of this. In a recent article he admits: “It was not socialism that broke down the barriers of poverty and class, it was capitalism.” He even accepts that “the arrival of widespread material abundance in the West for the first time provided the opportunity for the mass of ordinary people to pursue self-realization.” Like Marx before him, Hamilton is happy to acknowledge capitalism’s historical accomplishments. But, again like Marx, his argument is that capitalism has now outlived its usefulness: What once promoted human progress now restrains it.

Hamilton’s complaint is that the opportunity for a full and meaningful life that capitalism opened up has not been grasped. This is because a growing preoccupation with consumption, economic growth, and the pursuit of wealth has subverted our search for authenticity and self-realization. The charge against capitalism is that it has gone too far; it has made us too materialistic, and our preoccupation with money has invaded every corner of our lives, driving out much more important concerns. As a result, we are increasingly unhappy and dissatisfied, and only by turning against capitalism will we be able to move on.

When Should Capitalism Have Been Halted?

When I was a university teacher, I frequently encountered students who argued just as Clive does. We are too materialistic, they told me; we don’t need all these possessions; we should stop the capitalist machine and devote our energies to better and higher pursuits. But whenever I asked them at what point in history they thought the machine should have been turned off, they would invariably reply: “now!”

These students wanted everything that industrial capitalism had delivered to their generation up to that point—the comfortable housing, the audio systems, the cheap flights to foreign countries, the medical advances, and the increased education and leisure time—but they thought future generations should go without the additional benefits that would be generated in the years of capitalism to come. I used to wonder what they would think if their parents and grandparents had reasoned along similar lines, and switched off economic growth 20, or 50, or 100 years ago.

Clive says the problem of excess materialism has come about “over the last two or three decades.” So what would we have lost if he had been able to impose his anti-growth ideology in, say, 1980?

The Web is not the only innovation we would have gone without if Clive had been given his head. There would be no personal computers. No satellite navigation (an extraordinary feat of human ingenuity destined to make street maps redundant for pedestrians and drivers alike). No mobile phones or cheap intercontinental telephone calls. No digital music on CDs or iTunes, and no digital images on cameras, televisions, and DVDs. No hybrid cars and very little solar or wind powered electricity generation. No International Space Station or space shuttle missions to continue exploring the heavens. No genetically modified crops so farmers can guard against insect attack without using insecticides. No human genome map with its potential cures for Alzheimer’s and heart disease. No AIDS treatments or MRI scans. And (although Clive detests them) no plasma televisions!

True, most of us could live without all these things. But on what possible grounds could it be argued this would benefit our souls?

Heads, I Win; Tails, You Lose

No socioeconomic system can guarantee people a good life. All we can reasonably ask of any society is the conditions that will enable us to construct happy and worthwhile lives for ourselves. On this test, capitalism passes with flying colors.

A modern capitalist country like Australia guarantees necessities like food and shelter. By enforcing a clear system of private property rights, it offers individuals security. It allows people to interact freely, forming family ties, friendship groups, and communities of common interest; and it maximizes opportunities for people to realize their potential through hard work and innovation. These are the conditions that Abraham Maslow identified as essential for humans to satisfy their core needs. If these conditions are in place, as they are in modern, capitalist countries, no individual can reasonably claim that external conditions have prevented them from pursuing happiness.

Traditional critics of capitalism, like Marx, argued that these preconditions of human happiness could not be satisfied in a capitalist society. Marx’s theory of the “immiseration of the proletariat” held that capitalism couldn’t even guarantee provision of food and shelter, for mass poverty, misery, ignorance, and squalor were the inevitable consequence of the accumulation of wealth by a tiny capitalist class.

We now know that Marx was spectacularly wrong. Working people today do not just earn a good wage; they own comfortable homes, have shares in the companies that employ them, go to university, win entry to the professions, set up businesses, and run for high office. The western “working class” (to the extent that such a thing still exists) has been so busy expanding its horizons that it has quite forgotten about its historic mission of overthrowing capitalism.

For a while, this triumph of mass capitalism left western Marxists badly wrong-footed, but in the 1960s, they regrouped around a different kind of critique advanced by that darling of the Parisian soixante-huitards, Herbert Marcuse. Marcuse accepted that modern capitalism provides the masses with all the material things they desire, but he said this starves them of any meaning and purpose in their lives. Returning to Marx’s youthful writings, and splicing these together with some fashionable Freud, Marcuse suggested that the advertising industry engineers “false needs” for consumer goods that capitalism then provides, while deeper, more authentic desires remain “sublimated” and unfulfilled. The working class is “alienated” because all relationships and experiences are mediated through this empty consumption of commodities.

Marcuse turned Marx’s critique of capitalism on its head. Where Marx complained that capitalism cannot supply the masses with the goods they need, Marcuse complained that it supplies them with too many. Clive Hamilton is arguing much the same thing today. It is no more convincing now than it was then.

Are We All Suffering from Collective Brain Damage?

Wherever populations have a chance to move, the flow is always toward capitalism, not away from it. The authorities never had a problem keeping West Germans out of East Germany, South Koreans out of North Korea, or Taiwanese out of Communist China.

The attraction of living in a capitalist society is not just that the economy works. It is also that if your version of the good life leads you to turn your back on capitalism, you don’t have to pick up sticks and move away. If you don’t like capitalism, there is no need to bribe people-smugglers to get you out of the country. You simply buy a plot of land, build your mud-brick house, and drop out (or, like Clive, you set up your own think tank and sell books urging others to drop out).

And people do drop out, or at least scale down. A survey conducted by Hamilton’s Australia Institute claims that 23 percent of Australians between the ages of 30 and 60 have taken a cut in their income to get more control over their lives, spend more time with friends and families, or achieve greater personal fulfillment. Clive calls them “downshifters.”

However, 23 percent isn’t good enough for Clive, for it means more than 75 percent of us are still accumulating and consuming. Too many of us are still making the “wrong” choice. Like Marcuse, Hamilton thinks this is because we are beguiled by advertisers who promote false needs. We are all suffering from what Engels famously called “false consciousness” (or what Frank Parkin mischievously described as “collective brain damage”). We need to have our consciousness raised by those who know better.

In a passage reminiscent of Engels and Lenin, Hamilton writes: “The downshifters are the standard bearers in the revolt against consumerism, but the social revolution required to make the transition to a post-growth society will not come about solely through the personal decisions of determined individuals … Making [this] transition demands a politics of downshifting.” The phrase is ominous. Just as Lenin couldn’t trust the proletariat to make the transition to socialism, so too Hamilton cannot trust us to make the transition to the “post-growth” society he thinks we should have. Left to ourselves, we’ll never get there. We need a leader to give us a shove. As to who this leader will be, Clive is far too modest to say.

The Intellectuals and Capitalism

Andrew Norton notes that disaffected intellectuals since Rousseau have been attacking capitalism for its failure to meet “true human needs.” The claim is unfounded, so what is it about capitalism that so upsets them?

Joseph Schumpeter offered part of the answer. He observed that capitalism has brought into being an educated class that has no responsibility for practical affairs, and that this class can only make a mark by criticizing the system that feeds them. Intellectuals attack capitalism because that is how they sell books and build careers.

More recently, Robert Nozick has noted that intellectuals spend their childhoods excelling at school, where they occupy the top positions in the hierarchy, only to find later in life that their market value is much lower than they believe they are worth. Seeing “mere traders” enjoying higher pay than them is unbearable, and it generates irreconcilable disaffection with the market system.

But the best explanation for the intellectuals’ distaste for capitalism was offered by Friedrich Hayek in The Fatal Conceit. Hayek understood that capitalism offends intellectual pride, while socialism flatters it. Humans like to believe they can design better systems than those that tradition or evolution have bequeathed. We distrust evolved systems, like markets, which seem to work without intelligent direction according to laws and dynamics that no one fully understands.

Nobody planned the global capitalist system, nobody runs it, and nobody really comprehends it. This particularly offends intellectuals, for capitalism renders them redundant. It gets on perfectly well without them. It does not need them to make it run, to coordinate it, or to redesign it. The intellectual critics of capitalism believe they know what is good for us, but millions of people interacting in the marketplace keep rebuffing them. This, ultimately, is why they believe capitalism is “bad for the soul”: it fulfills human needs without first seeking their moral approval.


Mr. Saunders is Social Research Director at the Centre for Independent Studies, Australasia’s leading free-market think tank. This article is excerpted from a longer article published in Policy magazine, Summer 2007.

Why Tax Cuts Still Matter

by William Beach

ONCE AGAIN, PRESIDENTIAL POLITICS has turned to tax policy.

The candidates are debating not only whether the sluggish economy justifies another round of tax cuts, but whether the tax cuts enacted by President Bush in 2001 and 2003 should be allowed to expire or be made permanent.

Our country’s economic future may well turn on how voters resolve these questions. Right now, voters may be somewhat confused. After all, much of what is being said about the state of tax policy in the United States seems to make a lot of sense. Take the issue of extending the Bush tax cuts.

Most Democrats argue that these cuts have primarily benefited upper-income taxpayers, who now enjoy a smaller tax burden than before the reductions were put into place. They also argue that the Bush tax cuts have starved the federal government of needed revenue. Letting the cuts expire, they claim, would help fund other national priorities, such as building new schools and repairing roads and bridges.

These are all compelling claims. But as with everything else in politics, the question must be asked: Are they true? 

The Truth About Tax Cuts

Let’s look at the first claim. Central to the argument for letting the Bush tax cuts expire is the claim that high-income taxpayers do not pay as great a share of all income taxes today as they did prior to 2001. This claim is plainly false.

The Internal Revenue Service provides data on its Web site (www.irs.gov) on the percentage of income taxes paid by high-income taxpayers out of all income taxes. Anyone can obtain this information. Many who do will be surprised to learn that the top 1 percent of income earners paid 39.4 percent of all income taxes in 2005, the latest year for which such data are available. That is the highest percentage of all income taxes that this group has paid since 1986, when their share stood at 25.7 percent.

The top 5 percent of income earners paid 59.7 percent of all income taxes in 2005, which was the highest percentage in the past 20 years. Tax share records were also set by the top 10, top 25, and top 50 percent of income earners. In other words, every category of high-income taxpayer as defined by the IRS paid a higher share of taxes in 2005 than they have since 1986, the earliest date for which the IRS provides data.

Of course, a taxpayer’s share of all income taxes could go up while the percentage of his or her own income paid in taxes goes down. Has that happened? If the Bush tax cuts did for all taxpayers what they were intended to do, then the answer would be yes, and it is. The Congressional Budget Office (CBO) analyzed the effects of the Bush tax cuts by estimating the percentage of household income that typical households all across the income distribution paid in all federal taxes, including income taxes. By this measure, the percentage paid in income taxes (the so-called effective tax rate) was lower in 2005 for every group than it was in 2000. For example, the middle fifth of households had an effective tax rate of 5 percent in 2000 and a rate of 3 percent in 2005. The top 20 percent had an effective rate of 17.5 percent in 2000 and 14.1 percent in 2005.

That’s a lot of numbers. Suffice it to say that most taxpayers paid lower taxes in 2005 than in 2000. So, high-income taxpayers are shouldering a greater share of income taxes paid, but they—like all other taxpayers—are paying at a lower rate on their own income.

If that’s the case, then don’t the advocates of letting the Bush tax cuts expire prevail on their second claim—mainly, that the tax cuts starve the government of revenue and more tax cuts would just make the revenue picture worse?
Actually, that claim also is false.

The CBO provides data on revenues as a percentage of GDP from 1962 through 2007 and forecasts of the revenue percentage for 2008 (see www.cbo.gov). Since 1962, the long-term percentage has been at or near 18 percent of GDP. In 2000, this percentage stood at a whopping 21.4 percent, its record since 1962.

Then the recession set in and revenues dropped steadily through 2002. By 2003, the slow economy and the tax cuts of 2001 had reduced the percentage to 16.1 percent. Congress cut taxes again that year. Interestingly, revenues began to respond to the stronger economy that the 2003 tax changes encouraged.

By 2005, the percentage had climbed to 17.4 percent. By 2007, it had risen again—to 18.6 percent. For 2008, the CBO expects the revenues as a percent of GDP to stand at 19 percent, significantly above the long-term trend of about 18 percent of GDP.

If the Bush tax cuts starved Washington of revenues, why did revenues start growing again after the second large tax cut in 2003? The reason is clear: The tax cuts had their intended effect of lowering the burden of Washington on working families and entrepreneurs. These folks responded by working harder and making more investments, all of which lifted the economy out of its doldrums following the collapse of the dot-com bubble. If there was anything that starved Washington of revenues, it was a sluggish economy, not the tax cuts.

What of the claim that more tax cuts are not needed now to boost the economy out of its doldrums?

What strikes economists who study U.S. economic growth is the trend of this economy, not the occasional slowdown. This is an economy that appears always able to absorb increases in labor and capital by growing steadily and more strongly. Indeed, tax policymakers should always set their sites on encouraging more work, entrepreneurship, and investment, since the U.S. economy seems to have an insatiable appetite for all three. What this means is that tax cuts on labor, capital, and enterprise still matter, and probably will always matter. That is a particularly telling truth when Washington’s overall revenue take rises significantly above its long-term trend of 18 percent.

Given that the claims against the Bush tax cuts are false, that revenue growth is strong at the lower levels of tax rates instituted in 2001 and 2003, and that federal revenues have risen significantly above their long-term trend, now is the time to consider more tax reductions, not tax increases.


Mr. Beach is the Director of the Center for Data Analysis at The Heritage Foundation. This article is reprinted from Ripon Forum, February/March 2008.

To Petition or Not to Petition

by Isabel Santa

PAUL JACOB IS A FATHER OF THREE who has worked tirelessly to advance liberty over the past several decades. His radio program, “Common Sense,” runs on 150 radio stations in 48 states. He has been called a “rising star in politics” by Campaigns & Elections magazine and dubbed one of “The Best and The Rightest” by the National Journal.

To Drew Edmondson, however, Jacob is a conspirator against the state of Oklahoma. Edmondson is the attorney general of Oklahoma, and he thinks Jacob should go to jail for 10 years. Jacob’s alleged offense: violating laws against using non-residents to collect signatures in a petition drive for a Taxpayers Bill of Rights.

Jacob is an activist, organizer, and advocate for legislative term limits, initiative and referendum rights, and limited government in the United States. One thing he is not is a conspirator.

The Story

In 2005, Paul Jacob and Susan Johnson, who is president of the Michigan-based petition management firm National Voter Outreach, helped Rick Carpenter, the leader of Oklahomans in Action—better known as the Oklahoma 3—organized a petition drive that gathered 300,000 signatures to place a Taxpayer Bill of Rights (TABOR) measure on the state ballot. The constitutional amendment would have capped Oklahoma government spending growth by annual population growth and rate of inflation, and allowed the cap to be overridden only with voter approval.

During the petition drive, National Voter Outreach confirmed with state officials that people could move to the state, immediately declare residency, and thus qualify to begin circulating a petition.

To confirm the state officials’ response, organizers referred to a 2001 Oklahoma Supreme Court decision in which the court stated that circulators had to be over 18, bona fide residents of the state, and qualified electors. The only requirement the court defined was qualified electors: Circulators don’t have to be registered voters to petition.

Thus, Jacob, Johnson, and Carpenter hired and re-located professional petition circulators who became residents and began circulating.

However, a coalition of Oklahoma’s most powerful political players sued to block the measure from appearing on the ballot.

The Oklahoma Supreme Court sided with the challenge and created a much stricter definition of what constitutes a resident. Under the new definition, one must intend to “permanently” reside in the state to be considered a resident.

On October 2, 2007, the attorney general convinced a multi-county grand jury to indict Jacob and two of his colleagues for violating state law in the petition process, but the grand jury dismissed the charges.

Everyone thought it was over.

However, on December 6, 2007, the attorney general re-indicted Paul and his colleagues. Edmondson contends that Paul and his team broke the state’s residency requirement to petition, claiming they didn’t use state residents.

On January 28, 2008, before the Oklahoma 3 pled not guilty, their supporters rallied outside the courthouse denouncing the political attacks on the defendants.

Prosecution’s Problem

The main problem with the attorney general’s criminal suit is that he is retroactively charging the Oklahoma 3 for a crime they never committed, because the law at the time was ambiguous and didn’t mention a resident’s intent to permanently live in the state.

Imagine you’re a motorist who travels at the posted speed limit of 70 miles per hour. Then the state lowers that limit to 60 mph, and retroactively cites you a ticket for speeding. In effect, that is what the attorney general is seeking to do.

While Jacob and the Oklahoma 3 operated within the limitations of the law when the campaign was run, the attorney general is applying the Oklahoma Supreme Court ruling and law change that came after the fact in his prosecution.

Constitutionality of the Residency Requirement

Currently, Yes on Term Limits, an Oklahoma-based group seeking to place a constitutional amendment on the ballot, filed suit in federal court to overturn the state’s residency requirement. The group argues that the requirement violates a petitioners First Amendment right to freely engage in political speech and petition the government. Federal Judge Timothy Leonard upheld the state’s ban on out-of-state petition circulators. The case, Yes on Term Limits v. Secretary of State Savage, is now on appeal before the U.S. Court of Appeals for the 10th Circuit.

Hypocrisy of the Establishment

Attorney General Edmondson believes that only Oklahomans should circulate petitions to change state laws, because they are the only ones vested in state matters. But those in the Oklahoma political establishment often use out-of-state resources to advance political goals. For example, campaign contributions and volunteers from out-of-state are routinely used in Oklahoma. Out-of-state private law firms are even solicited to pursue lawsuits on behalf of the Oklahoma government. Those who criticize petition drives for using out-of-state signature gatherers should look at their own political use of out-of-state resources.

There are eight states that have similar residency requirements in relation to their petition process. The result of this decision could have an impact on the abilities of citizens to petition their government, not just in Oklahoma but around the country.

Jacob, Johnson, and Smith fought to give Oklahomans more freedom and control over how the government taxes them. Although they abided by the rules of the state at the time, the Oklahoma 3 face a potential jail sentence of 10 years. What hangs in the balance is more than just their freedom. It is the ability of the people to have a voice in their government.

If you’re interested in learning more about Paul Jacob and this case, please visit www.freepauljacob.com.


Ms. Santa is press secretary for the Sam Adams Alliance, an educational network supporting citizens seeking political reform.

Make Your Point with Better Graphics

by John W. Fleming

IT’S NO STRETCH TO SUGGEST that practically every public policy analyst working today has, at one time or another, taken figures from a spreadsheet and tried to generate a chart. And why not? Computer programs are replete with charting or graphing capabilities, and think tanks have access to enormous amounts of data. The analyst inputs some numbers, adjusts a few settings, and voilà—instant visuals! But while the tools are accessible, the results can be mixed. Many analysts find themselves underwhelmed with the results. Others try to increase the visual impact by changing colors, using patterns, or adding other elements, only to see their work spiral into a mass of clashing colors and illegibility.

If the results are sometimes disappointing, the efforts are noble. Information graphics are the great companions to research articles. Some are modest, yet others lead the charge and can actually become the article. Whether they are born out of little or great ambition, information graphics, when used with care and understanding, can make points in ways that words alone cannot.

My primary role as graphics editor is to oversee the production of information graphics, but experience has taught me the importance of demystifying my work. Much of my time is spent with dozens of incredibly intelligent colleagues; I couldn’t hope to know what they know. One of the keys to improving our graphics, I’ve found, is to allow them to see through my eyes a little and give them a glimpse of what is possible. Here are a few insights that can help form the foundation of a successful graphics operation.

Don’t Reinvent the Wheel with Each Graphic

To determine how your graphics will look, you need to develop a style. Style refers to visual elements such as colors, fonts, and so forth. The goal is to promote a consistent appearance. Once you develop a style that works, stick to it. Consistency in style will direct the reader’s attention to the content of the graphic; inconsistency, on the other hand, can be a distraction.

Consistency in style will direct the reader’s attention to the content of the graphic; inconsistency can distract.

To establish a house style and ensure it is followed consistently, you should create style sheets. Style sheets document the visual elements of the graphic—mainly fonts, sizes, line thicknesses, colors, and distances between elements—thus becoming a reference for those who produce them. The primary benefits are maintaining a consistent appearance and saving time. Style sheets reduce guesswork. An artist can spend more time developing the content in a graphic and less time trying to figure out what the best typeface is.

Style sheets can vary from basic to detailed, depending on the organization, the product, and the art director; but regardless, they are documents that should change, grow, and evolve. They are communication devices and are meant to be shared. Style sheets and their subsequent templates should be perceived as living documents. Business practices, procedures, and products constantly change, so style sheets need regular reviewing, updating, and discussion. And while their main goal is to aid communication between artists and designers, they’re worth sharing with other members of your team. Coworkers might be surprised with the level of detail in your documentation.

Focus on the Data and Avoid Decoration

Credible public policy articles are the result of intensive researching, fact-checking, crafting, and editing, and they touch on important issues in our lives. Their audiences range from the concerned man on the street to the most powerful leaders of the world. Simply put, public policy articles are for intelligent adults, so graphics that accompany them should be designed that way—sophisticated, informative, and insightful.

The perception persists that the purpose of graphics is to provide visual zing. The temptation, upon seeing a small, simple, yet clear information graphic, is often to jazz it up with additional elements and garish colors. It looks too simple, an editor might argue, so we need to make it pop out more. We need to make it grab the eye, draw the readers in, sock them in the nose! Enhance those visuals, liven up those colors, scream from the hilltops!

This attitude approaches graphics in terms of how they look, but not how they work. A good information graphic is about the information, and graphical elements are tools to enhance, clarify, and reveal that information. A graphic should give the reader a greater understanding of the data. That’s how graphics should work.

Graphics have inherent visual appeal. Merely placing a small, simple graphic onto a page filled with nothing but text can break up the grayness and make it more presentable, but the same can be said of other style choices such as using a different font or color for a heading, or leaving some space on the page empty. An information graphic’s greatest potential lies in its ability to illuminate.

Thinking of graphics as decorations not only marginalizes the craft and ignores the possibilities for presenting information; it actually does a disservice to the product. Imagine an article analyzing the trade deficit. The analyst explains the situation early in the article and states how the deficit is affecting the economy, then carefully and precisely begins to reveal the connection between the deficit and the points made in the analysis. The reader follows along, absorbing the facts, then upon turning the page is jarred by an eye-popping graphic with images of stacked U.S. dollars whose heights represent imports and exports for this quarter compared to the previous quarter. Chances are the graphic did as it was intended: It grabbed the eye. Unfortunately, it may have had unintended secondary effects, such as causing the reader to laugh, sneer, or—worst of all—stop reading.

better-graphics-1&2This example displays two common mistakes in the approach of information graphics. First, the information was decorated. Second, the artist accepted only two quarters’ worth of data (four data points). Both choices put the visuals first and the information second. The editor may have been correct that the first draft (Figure 1) was too simple, but at least its size was appropriate to the data it contained; the decorated version (Figure 2) takes up nearly three times the space as the first, but contains no additional information. A more sophisticated solution could have been simply to expand the data set (Figure 3). Instead of leaning on special effects, this version appeals to the reader’s intellect and curiosity. How big is the deficit? What is the historical context of the deficit? Are there any interesting anomalies? A cursory glance reveals a lag in both imports and exports in 2001, but a closer look shows a dip in imports between the third and fourth quarters of 2006. Does it mean anything? Is it significant? Raising those questions is part of the analysis.

better-graphics-3

Engaged readers think while reading. They don’t just download the article into their brain—they connect points, relate what they’re reading to other ideas, and ask questions. And those questions can lead to more questions. Readers don’t need a graphic to prod them awake; they need it to make information clearer and to answer questions they may not even know they have. That’s stimulation.

Understanding the Role of the Graphic

In the context of a research article, information graphics constitute specialized content to provide evidence for individual points made in the narrative. Their goal is to support and extend the reach of the article by clearly presenting data. A common adage among information artists is “show, don’t tell.” It’s a rule of thumb that also serves as a reminder that graphics work best when they focus on visuals and can operate with a minimum of words. Analysts express themselves with characters generated by typing on a keyboard; modern graphic artists use lines, polygons, and color to do their heavy lifting.

The goal of graphics is to support and extend the reach of an article by clearly presenting data.

The ultimate goal of a graphic, however, should not be wordlessness. To exist only as a vision without a voice is an unnecessary limitation. Text is just another tool in the artist’s toolbox. Adept use of headlines, introductory text, and descriptions can increase a graphic’s impact and encourage reader interaction.

In particular, a common oversight demonstrated by research article graphics is to underestimate the utility of a good headline. Consider, for example, these two title options:

Figure 1. Poverty rates of families with children under the age of 18, by family structure and race/ethnicity, 1974–2006.

Figure 1. Children in single-parent households are far more likely to be in poverty.

Both are accurate, but the first is a description, and the second is an assertion. I suspect most readers will find the second more compelling.

A headline is a functional element. Simply put, it is the most prominent text within a given layout and is typically read first. That hierarchy can be applied to individual graphics as well. Arguably, it is better for a reader’s first encounter with a graphic to be a simple but confident proclamation with data to back it up rather than merely a flat description of the contents. In as much as the article exists to make a point, the graphic can adopt a similar voice.

Making effective use of text advances a graphic toward a more worthy goal: to stand alone. A graphic that can serve both as supplementary content referenced from the narrative and as an independent, self-contained visual article is more engaging to readers. Diligent readers who start at the beginning of the article and review the graphic when it is first referenced benefit from the reiteration. Other readers who sample headlines and introductions before committing may discover a graphic through casual page flipping. If the headline and introduction are succinct, the graphic may serve as a small window to the overall theme of the article and actually encourage closer attention.

As specialized content, though, graphics should be used judiciously. A dozen pie charts might sound like a good idea, but, if handled poorly, they can become an eye-rubbing distraction that derails a reader’s efforts. So, how many is too many? How big is too big? When does a graphic cross the threshold between highly sophisticated and downright overwhelming?

There are both hard rules and best practices for the proper implementation of information graphics. By definition, simple graphics are simple endeavors; plotting univariate data as either a bar chart or a line graph doesn’t require much skill, but it’s clear the payoff is minimal. To fully explore the realm of possibilities and seek out maximum impact, you’ll need real expertise.

Information artists are specialists—even within the graphics community—and they frequently demonstrate a wide-ranging and diverse set of skills, including (but hardly limited to) a traditional artist’s ability to render visuals; a designer’s eye for color, composition, and layout; a statistician’s appreciation for data analysis; and a student’s curiosity and desire to understand subjects that are entirely new. Additionally, information artists require specialized tools and technical skills. They typically work in Adobe Illustrator, the industry standard for desktop graphics, and in today’s information age, experience with Web-based applications such as Flash is becoming more of a requirement. If your product is in print, the artist needs to design for print, and likewise for the Web.

That may sound like a tall order, but it’s not a checklist. An artist should use their skills to extend the paper—to make the article easier to understand, more accessible, more engaging, more fascinating, and more convincing. That’s how they should be used, and readers—even if they don’t know why—will appreciate it.


Mr. Fleming is Senior Data Graphics Editor at The Heritage Foundation.

 
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