The Consequences Of Bad Economic Policy: Gradual Relative Decline

California's recent rounds of tax increases, particularly on incomes of high earners, have many predicting some kind of exodus or other rapid economic calamity.  See for example this article from the Orange County Register.  For better or worse, these economic forces work much more slowly than that.  We can get an idea how bad economic policies will play out from looking at the histories of places that have tried them.

Consider Venezuela.​   Short of North Korea, this is about as bad as economic policy can get.  A Heritage Foundation report out yesterday contains a litany of the bad ideas of the just-ended Chavez era:  doubling in size of the state sector over 13 years; government deficits increasing to 15% of GDP in the most recent period; rampant inflation accompanied by exchange controls, black markets for currency, and allocation of currency at official rates to government cronies; bureaucratic interference in the judicial system; subsidies to favored products (gasoline in this case); etc., etc.

​What have been the results?  in the real economy, bad.  "There are scarcities of nearly all staple food and fuel products. . . .   Venezuela faces the most severe food shortages in four years. . . .  [O]ver the past 10 years inflation in food and nonalcoholic beverages is 1,284%."  In official economic statistics, not nearly that bad, but still bad:  "Between 1999 and 2012, average annual per capita growth was just 1.1 percent. . . ."  That's from the IMF, which of course counts all government spending at 100 cents on the dollar in measuring GDP.  When wasteful government spending has just exploded, that methodology gives a wildly misleading picture of the real economy.  If you gave government spending an appropriate discount of 50% or more in calculating GDP, then almost certainly the correct number for Venezuela's GDP  "growth" over the last 13 years is negative, although Venezuelans are not told that.  And meanwhile, the Chavista candidate just won a new six year term, although very narrowly. 

Still, terms like "economic collapse" are very strong.  Even with the hugely counterproductive policies of the Chavez regime, what Venezuela has experienced is really a gradual decline, a slow slide into economic irrelevance.  By comparison to Venezuela, California's new high tax rates are only a pale imitation of the medley of disastrous policies pursued by the Chavistas.​

Similarly, consider the UK in the pre-Thatcher era.  As discussed by me a few days ago here and in the linked Wikipedia article, the policies of the preceding Labor governments included ​nationalization of most major industry, high government spending, special political status for labor unions, repeated Keynesian "stimulus" programs, and price controls (then known as "incomes policy").  According to a 2011 article in the Economist, the top marginal income tax rate in the UK pre-Thatcher was 83% (an additional tax on investment income could lead to a top rate of 98%!); Thatcher reduced the 83% to 40% between 1979 and 1988.  But even with those incredible rates for long periods in the 60s and 70s, it's not like everyone picked and left, or like the economy experienced sudden collapse.  Instead, they had what the Economist calls "the dawn of stagnation."  England became the "sick man of Europe," with a prolonged era of little-to-no economic growth (again, likely negative if government spending were accounted for reasonably in GDP instead of at 100 cents on the dollar). 

Or closer to home, consider New York.  It's hard to say that New York City is not doing rather well today, after 20 years of at least nominally Republican mayors.  Public safety is hugely improved over that time, and taxes have at least been kept somewhat under control.  But still, with a top income tax rate of near 13% (combining New York State and City rates), New York is being far outpaced in growth by lower tax jurisdictions.  People want to live in big, happening cities, and in other countries throughout the world, the main business capitals are booming relative to the rest of the country they are in (think any place from London to Shanghai to Bangalore to Moscow).   New York is holding its own, but it could be doing far better, if only it had just reasonably competitive economic and tax policy.  And upstate New York, saddled with the high taxes but lacking the allure of the big city, is in a slow death spiral.

​But here's the hardest thing to understand:  In places with bad economic policies, and suffering ongoing relative economic decline, somehow the grip of the political class gets tighter and tighter, and the possibilities of effecting change through the voting booth become less and less.  Those receiving state handouts come to perceive their well-being as coming from the handouts, even as nations or regions surrounding them achieve superior economic performance for all without the handouts.​  So New York and Chicago, and Detroit, and Philadelphia, and very likely now California go into gradual relative economic decline, and continue to decline for decades, but even as their decline becomes more and more obvious to anyone following the data the voters in these jurisdictions vote in higher and higher percentages for the continuation of the policies of high taxes and handouts that brought about the decline.   It's the political genius of Progressivism.