Tea Partiers are right and the left wrong about the growth of goverment

USA-Today and the cited Center for American Progress is not being serious in its latest analysis about taxes. They are claiming that taxes are only 9.2% of income, and that this is some sort of historical low.

They claim:

"Federal, state and local taxes — including income, property, sales and other taxes — consumed 9.2% of all personal income in 2009, the lowest rate since 1950"

This is nonsense.

According to the Bureau of Economic Analysis total government revenue in last quarter of 2009 was 30.2% of National Income, hardly 9.2%. In the first quarter of 1950 revenue was 23.8% of national income, less than they are now.

How do they cheat the figure down to 9.2%? By excluding most taxes from government revenue. For example, the payroll tax is not defined as a tax, even tough for most individuals it is a bigger burden than the federal income tax. This is not serious analysis. Over time, more of government revenue is coming from indirect taxation. Should this be combined with accounting tricks to give the false impression to the voters that taxes are going down?

Trained journalists and economists should work to inform the public, not use their superior knowledge to obfuscate. For example, the BEA defines the trillion dollars in revenue from payroll taxes as "Contributions for government social insurance". Fine. For all intents and purposes, this is a tax, and anyone who knowingly removes it from taxes without explaining it and tells the public they are paying little in taxes is a simply dishonest.

It becomes extra disgusting when these tricks are used to portray their political enemies as stupid and uninformed. For example, USA-Today portrays Tea Party follower as ignorant, because they are protesting taxes which are only 9.2%, the lowest in 60 years, and declining. The only problem with the story is that taxes are not only 9.2% on average, they are not the lowest in 60 years, and tax rates are not going to decline.

Remember also that during a recession tax revenue goes down even while tax rates stay the same, simply because firms and people are poorer. According to economic theory burden of taxation for society depends on the effective tax rates, not the tax revenue.

Lastly, the burden of government includes deficits, which are only delayed taxes (with interest). Are the Tea Partiers supposed to be mucked because they are prudent and take the future into account?

Within the discipline of economics, introducing forward looking individuals into public finance was considered an improvement. It seems however that the modern left bizarrely enough is accusing you of being cray if you think ahead a couple of years. According to the left smart citizens are supposed to simply ignore the impacts of President Obama's shortsighted and unsustainable policies on Americas future.

I have plotted the government as a share of national income from 1950 until today. First, the graph with revenue. As you can see there is a slow upward trend, combined with some cuts in the Bush years and a collapse of revenue after the crisis.


Second, the graph with the total size of government. Leviathan is growing over time, with acceleration during the last year and a half.


But why let our lying eyes deceive us when the mainstream media and leftist think thanks are assuring us that government is smaller than ever, and that taxes are not going up, despite Obama's own proposals and despite massive deficits?

Hispanic voters are few compared to anti-illegal immigration voters

Most analysts support amnesty for illegal immigrants, so they analysis and commentary is biased towards the arguments that Republicans should not pursue tougher enforcement policies, least they anger the growing "Hispanic vote". This includes supposedly conservative Fox News.

The truth is that while the Hispanic vote is certainly growing, for the foreseeable future the Hispanic vote is a negligible when compared to the anti-illegal immigration vote.

Voters in 2008 were given a choice: Either their view came closer to fining illegal's and giving them a pathway to citizenship (a moderate choice), or deporting them outright (pretty dramatic given the political climate). About 85% of the voters in 2008 expressed an opinion. Of all voters, an astonishing 59% preferred that illegal immigrants be deported.

I combine these figures with US Census measure of voting in 2008.

Let us compare the anti-illegal immigration block with the Hispanic vote.

Generally, people overestimate how large of the population minorities are. According to the General Social Survey, people think 25% of the population was Hispanic when the true figure is closer to 15%.

Second, disproportionally Hispanics are children and thus not allowed to vote.

Third, many Hispanics are not citizen, and thus not allowed to vote. In the 2008 election only 9.5% of the citizen population was Hispanic.

Fourth, Hispanics are less likely to vote than other groups, even if citizen. In the 2008 election, only 7.4% of voters were Hispanic.

Fifth, not all Hispanic voters support amnesty. Of Hispanic voters, 37% of Hispanics supported deporting illegal immigrants rather than fining them and than giving them a pathway to citizenship. So the pro-immigration Hispanics vote in 2008 was only 5.4% of the total vote.

Sixths, the national popular vote is not what counts. The Hispanic vote is concentrated in a few large, non-competitive states such as California, Texas, New York and Illinois.

I have calculated the vote share in the 18 battleground states. These are Florida, Ohio, Pennsylvania, Michigan, Colorado, New Hampshire, Iowa, Missouri, Georgia, Indiana, Minnesota, Wisconsin, Montana, Nevada, New Mexico, North Carolina, Oregon and Virginia. Most likely the battleground states in 2008 are the same as 2012 and onward.

According to the best source, the U.S Census, in 2008 only 4.7% of voters in 18 battleground states were Hispanic. In comparison 81% where non-Hispanic white. 12% were African American, and 1% Asian.

Let me repeat one of those figures again. Even in 2008, when minority turnout was high due to Obama being on the ticket, and white turnout was low due to McCain being on the ticket, white voters in battleground states outnumbered Hispanic voters 17 to 1!

Political correctness has been allowed to determine how much attention is given to voting groups. Despite the impression the media has given us, each white vote is still worth as much as each hispanic vote.

The share of the Hispanic voters in battleground states who supported deporting illegal's was 34%.

This makes the size of the Hispanic pro-amnesty vote a negligible 3.1% of the battleground state vote.

In contrast, 60% of battleground voters supported deportation of illegal immigrants. This included 64% of white voters, 37% of Asian voters and 40% of Black voters.

The white anti-illegal immigration block alone constituted 52% of battleground state voters in 2008.. This is not taking into account another 8 percentage points of minority (hispanic, black, asian) anti-illegal immigration voters. Even this little group is much larger than the Hispanic vote...

Again, the white anti-illegal immigration vote is 17 times larger than the Hispanic pro-amnesty vote. Which voting group would a rational politician aim for to win, the 3% block or the 52% block?

Of course, Hispanic pro-immigration voters care more about Amnesty than white voters. Still, no amount of voter enthusiasm is going to dominate a 17-1 difference in size.

Yes, the Hispanic vote is growing, but at a slow speed. The Hispanic share is growing by about 1 percentage points per election (every 4 years), so it will take decades for them to be an significant part of the vote. Currently they are too few to determine American immigration policy. Even the supporters are amnesty are mostly not Hispanic, but liberal whites (and African Americans) in the blue, non-competitive states.

If someone wants to convince us that suburban white women feel skirmish about illegal immigration and that this is a reason not to be too tough, I am willing to listen. But pro-amnesty analysts telling us we should not fix the border of fear of Hispanic voters is either unaware of the facts on the ground or trying to trick us.

Math triumphs political correctness, and the math is telling us that enforcing the laws is a winning political issue for conservatives.
PS.

An interesting fact about Arizona is that unlike most other states, in Arizona 60% of Hispanics as well as 65% of whites support deportation of illegal immigrants.

Update on employment protection

A few days ago I showed that Sweden did well during the last few years in employment terms, taking the fall in GDP into account.

A couple of readers were concerned that the employment residual reflected employment protection laws.

So I did a regression of employment protection laws from the OECD and the employment residual. No statistically significant relationship can be established.

Employment protection index, from the OECD (2003).

Tur 3.72
Prt 3.67
Mex 3.13
Fra 3.05
Grc 2.83
Nor 2.56
Deu 2.35
Esp 2.34
Swe 2.24
Bel 2.18
EU15 2.14
Nld 2.12
Kor 2.03
Fin 2.02
Ita 1.95
Aut 1.93
Cze 1.9
Jpn 1.84
Pol 1.74
Hun 1.52
Nzl 1.47
Dnk 1.42
Svk 1.42
Aus 1.19
Che 1.14
Irl 1.11
Can 0.78
Gbr 0.75
USA 0.21

Britain enjoyed higher GDP growth post Thatcher

In 1979, when Margaret Thatcher became prime minister, out of the 4 major European countries, the United Kingdom was the poorest. It had a lower gdp per capita than Germany, France and Italy.

But the U.K subsequently grew faster than the other European countries. By 2008, the latest available year, the U.K was the richest out of the 4.

White the U.K in per capita terms was 7% poorer than France in 1979, it was 10% richer than France in 2008.

This graph shows real per capita GDP (from OECD) for the U.K, and a population weighted average of the other 3 major west European nations: Germany, France and Italy. As you see they start of richer than the U.K in 1979, but by the end of the period the U.K is richer than the average (and richer than any individual country).

It will be interesting to see if this advantage is maintained after the crisis.


There is a strong case to be made that Thatcher's pro-market reforms had a lot to do with this remarkable recovery.

Michael Medved gets the math wrong about white vote

Michael Medved claims that Republicans will be unable to win based on the white vote alone.

I don't have any problems with his arguing this point, but I do have problems with his use of the data.

He writes:

" First, there is no chance that white voters will ever again comprise 74 percent of the electorate. Most projections for 2012 suggest that self-identified whites will comprise 70 percent or, at most, 72 percent of those who cast presidential ballots."

I will bet with Michael Medved or anyone that when the most detailed survey is completed by the Census after 2012, whites will be 74% or more than of the voters.

Medved relies on the exit polls, rather than the more comprehensive data by the U.S Census. According to the later even in 2008 non-Hispanic whites were 76.3% of the vote.

The slow, demographically drive decline of the white vote share is not the reason Obama won in 2008. That process exists, but far too slow to effect matters much. In 2004, non-Hispanic whites were 75.2% of the adult citizen population. In 2008, they were 73.4%. The decline is only 1.8 percentage points, or 0.44 percentage point per year. If the demographic decline was responsible, McCain, who won whites by 12% and lost Hispanics by 36%, would have lost only 0.8% of vote compared to what Bush got in 2004. In fact, McCain did 5.1% worse than Bush.

Only about 0.8% out of the 5.1% McCain lost compared to Bush are due to demographic change, the force Michael Medved focuses on!

So why did McCain lose? Here are several factors, some of which Medved ignores:

1. McCain did worse than Bush among white voters. He won by 12 point, Bush won by 17 points. That is a 5 point decline right there for you.

2. White turnout was lower in 2008 than 2004 , because McCain could not motivate white voters (and because the election was close). There is no reason white voters cannot be motivated to vote more in 2012 or beyond. One factor to keep in mind is that whites are aging (and old people vote more).

3. Non-white turnout was inflated in 2008, because Obama was on the ticket. This effect will not last beyond 2012, and perhaps not even that long. White turnout decreased 1.1 percentage points between 2004 and 2008. Non-white turnout increased by 3.7%.

4. Non-white voters went to Obama by a much larger margin than 2004. There is virtually nothing the GOP could do about minority voters wanting to vote for a minority. If the 2008 election was to be won, with a African American on the ticket, it has to be done through getting more white votes. The same is true for 2012.

The claim "there is no chance that white voters will ever again comprise 74 percent of the electorate." is based on the mistaken belief that slow-working, long term demographic factors determined the decrease in white share between 2004-2008, whereas in fact it was mostly turnout.

Unless something dramatically happens (like amnesty for Hispanics) The white voting share will decline by on average about 1.5-2 percentage points per election cycle, no more. The effect on the Republican vote margin will be marginal for the next 20 years or so to come.

In 2012, non-Hispanic white voters will be about 75% of the voters, and Hispanics about 8%. Because of political correctness, Medved is advising Republicans to target the second group, and ignore the first one, which is 10 times bigger!

Furthermore, it is silly by Medved to claim that Bush's 58% in 2004 was some sort of magical ceiling for the white vote. First, Bush was a mediocre candidate. Second, as the demographics of the country change, white voters will block together, just as blacks and Hispanics engage in block voting. Lastly, the republicans can alter their agenda in order to target white voters better.

There is absolutely nothing that says that Republicans cannot win election by taking 60-65% of the white vote, just as Democrats routinely win 90% of the Black vote, and 70% of the Latino and Asian vote.

Black and Latino voters are concentrated in non-battleground states. One last figure. I have compiled data using a national survey of voters. Only 4.7% share of the battleground state voters were Hispanic in 2008, and 12% black, compared to 81% who were non-Hispanic white.

David Brooks uses some of my figures

He writes:

"Roughly a century ago, many Swedes immigrated to America. They’ve done very well here. Only about 6.7 percent of Swedish-Americans live in poverty. Also a century ago, many Swedes decided to remain in Sweden. They’ve done well there, too. When two economists calculated Swedish poverty rates according to the American standard, they found that 6.7 percent of the Swedes in Sweden were living in poverty.

In other words, you had two groups with similar historical backgrounds living in entirely different political systems, and the poverty outcomes were the same.

A similar pattern applies to health care. In 1950, Swedes lived an average of 2.6 years longer than Americans. Over the next half-century, Sweden and the U.S. diverged politically. Sweden built a large welfare state with a national health service, while the U.S. did not. The result? There was basically no change in the life expectancy gap. Swedes now live 2.7 years longer.

Again, huge policy differences. Not huge outcome differences."

My brother, using figures I prepared for him, wrote in a smaller journal:

"A Scandinavian economist once stated to Milton Friedman: "In Scandinavia we have no poverty." Milton Friedman replied, "That's interesting, because in America among Scandinavians, we have no poverty either." Indeed, the poverty rate for Americans with Swedish ancestry is only 6.7%, half the U.S average. Economists Geranda Notten and Chris de Neubourg have calculated the poverty rate in Sweden using the American poverty threshold, finding it to be an identical 6.7%.

In 1950, before the high-tax welfare state, Swedes lived 2.6 years longer than Americans. Today the difference is 2.7 years."

While I agree with the thrust of Brook's article, he neglects one figure.

"These cultural phenomena do not disappear when Swedes cross the Atlantic to the supposedly inferior “cowboy” country. On the contrary, they appear to bloom fully. The 4.4 million Americans with Swedish origins are considerably richer than the average American. If Americans with Swedish ancestry would form their own country their per capita GDP would be $56,900, more than $10,000 above the earnings of the average American.

The old Sweden, in contrast, has not done as well in economic terms. In 1960 taxation stood at 30 percent of GDP, roughly where the US is today. As taxes rose, economic growth decreased, with Sweden dropping from being the 4th richest country in 1970 to being the 12th richest in 2008. Swedish GDP per capita is now $36,600, far below the $45,500 of the US, and even further behind the $56,900 of Swedes in America."

Swedes are a very competent people. Under the American free-market system, they earn about 50% more than they do in Swede. Despite the fact that the Swedish system is geared towards reducing poverty and income inequality, they manage only the same poverty rate, and much lower average income.


So far I have been linked or cited (directly or indirectly, I frankly don't care) by Greg Mankiw, Tylwer Cowen, The Economist blog, Casey Mulligan, National Review and the New York Times.

The Swedish labor market performed remarkably well during the crisis

In 2006 there was a change in government in Sweden. The new center-right government of Fredrik Reinfeldt carried out dramatic reforms of the labor market, including cuts in unemployment benefits, tightening the rules for sick-leave and cutting taxes for work.

Because Sweden is an export driven country, and because Sweden's industrial mix is historically sensitive to business cycles, Sweden was hit by the crisis much harder than most other countries. It is therefore interesting to compare how Swedish employment fared in the crisis. Did the reforms have any effect of dampening the crisis?

The result are a resounding yes.

My method is quite primitive, and not useful for long term analysis. I compare how much GDP changed compared to how much employment changed. Since my focus is Sweden, I initially look at the absolute employment change and change in real GDP between the 4th quarter of 2006 (when labor market reforms in Sweden started) and the 4th quarter of 2009 (the latest available year). All figures are from the OECD.

Since Sweden and most other advanced OECD countries have low rate population growth, that is not a major bias (although it means the true figures for the U.S are even worse than indicated). The big problem is that employment is a component of GDP growth. What is crucial for this analysis is however that this underestimates how well Sweden performed. We use GDP growth to get at the value of the "crisis shock". If one country had supply side labor market reforms during this period, and if this worked, this dampens the decline in growth. The true shock was likely even higher for Sweden than the decline in GDP suggests.

In terms of GDP decline, only 3 countries were hit more by the crisis. Yet, in employment terms, Sweden did better than 15 OECD countries. The decline in GDP in Sweden was twice the average of the Euro-countries. Despite this, employment increased 4% for Sweden during this period, with virtually zero growth of the EU-countries!


There is a strong link between the performance of GDP and employment. Different countries were hit by the crisis with different severity. If we compare how employment was to be predicted to perform based on GDP growth with how employment actually performed, we get an index of how well the labor market did in the crisis. This measures the distance between the countries and the regression line for all countries (look at the red line for Sweden and the U.S).


By this index, Sweden did second best out of 23 OECD countries, after Germany.

Considering how hard Sweden was hit by the crisis, if Sweden had the same employment performance of the average of 23 OECD countries, employment should have fallen by 2.0%. Instead, employment increased by 2.2%.



The decline in GDP for Sweden, Denmark and Finland (who did not undertake similar reforms) are very similar. Yet, while Denmark and Finland witnessed a decline of employment by 4.3% and 1.3% respectively, Sweden had a growth in employment of 2.2%.

Since the core period of the crisis was the second half of 2008 until now, I do the same analysis with starting period the second quarter of 2008 and the last quarter of 2009 (all my data are seasonally adjusted).


Again Sweden does far better than average, being the 4th best country in handling the crisis in employment terms. Since many of the labor market reforms precede the second half of 2008, this underestimates how well Sweden performed.


Note in both cases how poor the United States, the epicenter of the crisis, performed in labor market terms. One possibility is that the employment wedge for the U.S increased in this period, through for example higher minimum wage, expectations of higher future taxes and extending unemployment insurance.

Something that this method does not capture is the depths of the crisis. Notice that the U.S, Spain, Iceland and Ireland perform the worst between the crash and 4th quarter of 2009 (the latest available period). These countries were hit by a banking and housing market shock, whereas most of the effect on Sweden and other countries was decline in export.

Perhaps firms let workers go in countries where the effect was deep and expected to be prolonged, whereas they kept on to them in countries where the crisis was equally severe but expected to last shorter.