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Congress: Where 20 Jobs = $580m
When talking to groups about the political economy of trade protection, I always mention concentrated benefits versus diffuse costs. Public choice theory explains many bad policies, of course, but tariffs and subsidies are excellent examples of interventions that benefit the few at the expense of the many.
Congress, or specifically two members of that esteemed body, have recently provided me with a textbook example. The Generalized System of Preferences is a federal program that offers duty-free access to the U.S. market to certain goods from certain developing countries. Or, I should say, was a federal program, because it expired on December 31. My opinion of the program is ambivalent at best, but one cannot deny that the program brings real cost savings to American consumers and businesses — to the tune of $580 million a year — through lower import duties.
But those duty savings are, apparently, worthless in the face of special interest politics. From Inside U.S. Trade on January 6 [$]:
An Alabama sleeping bag manufacturer that benefited from the expiration late last year of the Generalized System of Preferences (GSP) program is now taking further steps in an attempt to ensure that Congress does not renew the program this year in the same form.
Exxel Outdoors CEO Harry Kazazian this week said his company is in the process of expanding its U.S. plant by adding workers and increasing production, and that this expansion is occurring as a direct result of the fact that Congress allowed the GSP program to expire on Dec. 31.
Under GSP, Bangladeshi sleeping bags that competed with the Exxel Outdoors product were able to enter the U.S. duty-free. On behalf of Exxel Outdoors, Sen. Jeff Sessions (R-AL) last year refused to let any renewal of GSP pass that would not remove at least some sleeping bags from the scope of the GSP program (Inside U.S. Trade, Dec. 23).
Surprise, Surprise
Last year I wrote about the intriguing proposal by the North Dakota Farm Bureau to do away with federal farm subsidies. I expressed at the time my doubt that the proposal would find much traction with the national American Farm Bureau Federation and, indeed, the group voted yesterday (at their annual conference in Atlanta) against the milder proposition to cut direct payments — the approximately $5.2 billion per year of your money that flows to farmers regardless of what, or even whether, they farm. Those payments are becoming increasingly politically contentious at a time of growing unease about record deficits, and some farm groups had said defending (let alone receiving) them was a threat to farmers’ broader interests.
Well, despite some discord among the group, the AFBF — you’ll be shocked, shocked to hear — voted largely for the status quo. From Brownfield (in an article that contains interesting analysis of how support for various programs breaks down on state/regional lines):
By a comfortable margin, the delegates passed a resolution calling for ‘a strong and effective safety net that consists of direct payments, crop insurance and a simplified Average Crop Revenue Election (ACRE) program.‘
Hopefully Congress can prove me wrong and cut farm subsidies when the farm bill comes up for renewal in 2012.
Senator Reid’s Gamble
My colleague Dan Mitchell has already written about the tax deal reached between President Obama and congressional Republicans. But there might be something in the package for people wishing to play poker freely online.
Sen. Harry Reid (D., Nev.) is apparently circulating draft legislation to overturn the Unlawful Internet Gambling Enforcement Act of 2006, which blocked financial institutions from processing transactions with online gambling companies. I would characterize that as a good move overall, apart from three quibbles. First, the draft legislation would — you guessed it –place a tax on the wagers (you didn’t think you’d get your freedom back without conditions, did you?). Second, the bill applies only to poker, and continues to prohibit “Internet gambling” more broadly. And third, the fine-print sounds problematic from a trade policy (and trade law) point of view:
…Mr. Reid’s office is considering language that would allow only existing casinos, horse tracks and slot-machine makers to operate online poker websites for the first two years after the bill passes, which could limit the ability of other companies to enter the market.
Carving out this fast-growing market for established gambling service providers sets off my protectionist alert. The cosy little cartel wouldn’t just exclude domestic potential competitors; I wrote a short paper a few years ago on how the UIGEA got the United States into hot water with the World Trade Organization, and the same arguments apply today. The United States still — despite vague, and so far empty, talk about changing its commitments with WTO members — has an obligation under the General Agreement on Trade in Services to open its market to online gaming operators abroad.
Politico has more about the groups supporting this move, suggesting (as are many Republicans opposed to internet gambling) that Reid has seen religion on online poker in direct response to the campaign contributions he received from gambling interests. I’m not so much interested in that angle –politicians responding to special interests is hardly news — as I am in the substance of what the legislation is proposing. And if the following reporting from Politico is accurate, the substance is troubling enough :
The National Indian Gaming Association is opposing Reid’s effort to insert the online poker language in any tax cut bill, said an official with the group, Jason Giles. He asserted it gives an advantage to Las Vegas-based gambling operators while discriminating against tribal operators.
“It is drafted to create an initial regulatory monopoly for Nevada and New Jersey for the first several years of the bill, which gives Las Vegas operators time to capture the market,” he said.
A gambling industry insider familiar with Reid’s efforts said Republican-leaning Vegas casino moguls Steve Wynn and Sheldon Adelson, while generally supportive of Reid’s legislation, take issue with provisions that could allow companies that previously operated in violation of online gambling laws to cash in.
The UIGEA is/was a nightmare for online operators to work around, partly because it never really defined “unlawful internet gambling.” Therefore, I am not sure how one would determine unambiguously whether a company “operated in violation of online gambling laws”. The UIGEA referred to transactions processors rather than gambling companies. And in any case, a few European operators (PartyGaming most famously) withdrew from the U.S. market at the time the UIGEA passed, just to be safe, and yet have continued to face prosecution. The European firms are at the cutting edge of online gaming services. Of course Messrs. Wynn and Adelson would want them out of the picture, but legislators should resist their attempts.
While Reid’s proposal may be an improvement on the status quo, it falls far short of restoring the full freedom of consenting adults to use their money, time, and online access in a manner of their choosing. It also is a long way from allowing a competitive, open market in gaming services to thrive. We should see this as a step in the right direction, but not the end game.
O’Grady on the US-Colombia FTA
Mary Anastasia O’Grady has an excellent article in today’s Wall Street Journal on the Obama administration’s failure to push the U.S.-Colombia preferential trade agreement. She rightly points out that the terms of the agreement should be especially favorable to mercantalists, since the agreement would see no reductions in the tariffs the United States places on Colombian goods — most of which already enter duty-free under the terms of the Andean Trade Preference Act — but will oblige Colombia to open its markets to those U.S. exports the administration is always banging on about.
Quick Link on the Tea Party and Ag Subsidies
I wrote last week about my concerns regarding the fiscal conservatism of tea party candidates when it comes to farm programs. Edward Lotterman, writing in the (Minnesota) Pioneer Press Online, asks the key question:
If you campaign on a platform of lower taxes, smaller government, no budget deficits and ending government redistribution of income to small interest groups, how on Earth can you vote for continued spending on federal commodity programs?
Read the whole thing here.
New Paper on the Generalized System of Preferences
I have a new paper out today on the Generalized System of Preferences, the program by which the U.S. government allows certain imports from most developing countries to enter the U.S. market duty-free. The program has benefits: some producers in some poor countries are able to sell more than they otherwise would in the U.S. market, and U.S. consumers benefit to the tune of hundreds of millions of dollars a year because of the tariff exemptions.
But the GSP still represents managed trade, and poorly managed at that. The program is designed so certain goods in which poorer countries tend to have a comparative advantage — textiles, for example — are excluded from the program, mainly because of the influence of the U.S. textile lobby. There are limits on how much of a particular product a beneficiary country can export duty-free, which means that truly efficient and competitve exporters are shut out. The very existence of the program has proved a stumbling block to (superior, if not first-best) multilateral trade liberalization, because GSP beneficiary countries don’t want reductions in general tariffs to erode their preferential access.
With the GSP expiring at the end of the year (more here on possible vehicles for its passage [$]), it is a good time for Congress to consider radically changing this program. The best way to secure an open, prosperous world economy is to allow trade to flow freely across borders. If that is a bridge too far for politicians, they should at least consider some of the other reforms I suggest to make the GSP more open to more products, and to reduce the interference these programs impose on voluntary, peaceful exchange. Opening the U.S. market on a permanent and non-discriminatory basis should be the ultimate goal.
Republican Hypocrisy Watch
Last week I urged readers to be on the lookout for Republicans seeking to exclude farm subsidies from any cuts they plan to make to federal spending. And it seems the first example of “smaller government for thee, but not for me” has been provided by incoming congresswoman Vicki Hartzler, who campaigned on a Tea Party-ish platform and defeated long-time congressman Ike Skelton (in Missouri’s 4th congressional district).
Ms. Hartzler calls Margaret Thatcher her role model because she “took principled stands.” (As, indeed, she often did.) Ms. Hartzler also says economic issues — cutting government spending, complete repeal of the health care bill — are her main concern. But read the fine-print in this article from the St. Louis Beacon:
Hartzler says cutting spending is a top personal priority; she wants to roll back non-discretionary funding levels to 2008 levels, before the economic stimulus and TARP programs. …
The congresswoman-elect would exempt some of the federal budget’s high-cost categories — including Social Security, Medicare and the Pentagon budget — from cutbacks. But she would not exempt agricultural subsidies,* another major area of federal spending popular in rural areas such as west-central Missouri’s Fourth District. Among the many farms to receive such subsidies is the 1,700-acre Hartzler farm, which — according to the Environmental Working Group’s “Farm Subsidy Database” — received about $774,000 in federal payments (mainly commodity subsidies for corn, soybeans and wheat) from 1995 through 2009.
“Everything should be on the table,” she says. While she says some agriculture programs represent a “national defense issue” because they help guarantee that “we have a safety net to make sure we have food security in our country,” Hartzler adds: “Should we continue the CRP [Conservation Reserve] program, where you pay farmers to not plant ground and set it aside for awhile? I’m not sure. The time for that may be over.” [emphasis added]
Let’s be clear about what Ms. Hartzler is talking about here. Those “some” agricultural programs she says should be guaranteed on “national defense” grounds (see below) are what we commonly think about as “farm subsidies” — payments to farmers to produce certain commodities, whether those payments are funded by taxpayers or consumers. They encourage overproduction and thus alienate our trade partners, complicate efforts to make global trade freer, harm poor farmers abroad and damage America’s reputation in the process. They cost us billions of dollars a year.
She is, on the other hand, open to cutting farm programs that at least pretend to have environmental benefits. I’m not commenting here on the validity of those sorts of ”public goods” claims, and of course I am not conceding that the federal government should be involved in them. But I think most reasonable people would agree that they are less economically damaging than traditional farm subsidies. In other words, in the hierarchy of damage, and therefore in the hierarchy of what should be cut first, I would put farm subsidies ahead of the CRP. And I fail, in any event, to see how anyone calling themselves a fiscal conservative can promote the idea of excluding a priori that which we commonly think of as “farm subsidies.”
[Also, can we please abandon once and for all this nonsense idea that we need farm subsidies to have food security? Appeals to "national defense" are disingenuous and cynical. They are also belied (rather obviously) by the fact that we see abundant supplies of fruit, vegetables and other horticultural goods even though those products attract no subsidies directly. The best way to ensure a food security is to ensure open markets, so food can flow from where it is abundant to where it is scarce. Self-sufficiency is a misguided policy, as the experience of North Korea can attest.]
So, in summary, when Ms. Hartzler says “everything should be on the table”, she basically means “not much, and certainly nothing that might harm powerful special interests that I care about.” I lost count of the number of Republican politicians being interviewed during the campaign and on election night talking about the need for “across-the-board cuts to discretionary spending” as their fiscal plan. Most if not all of them emphasized that so-called mandatory spending (which includes some farm subsidies) would be exempt from their cuts. I’m sorry, but I cannot take seriously the “fiscal conservative” credentials of any politician who adopts such a line.
*It appears, judging from the quote below, that she would indeed exempt farm subsidies from cuts, even if other farm programs would be on the chopping block. I’m going to assume here the reporter was using the term “farm subsidies” in an imprecise manner.
The Seen and the Unseen
Quote of the day from outgoing Chairman (and soon-to-be Ranking Member) of the House Agriculture Committee, Collin Peterson (D., MN):
“I’ll be able to take care of sugar, that’s not even a question,” Peterson said. “We’ll keep the same program; it doesn’t cost anything. That won’t be hard.”
(Source: the North Dakota InForum, which has many more gems from the Chairman about why the election is not a problem for Big Ag)
Au contraire, Mr Peterson. The U.S. sugar program costs sugar consumers, including food manufacturers, billions of dollars a year, by the government’s own figures.
I just love the way that so many politicians (and bureaucrats) assume that if something doesn’t show up as a line item in the budget, then it is essentially free. Tens of thousands of pages added to the Federal Register every year, placing staggering regulatory burdens on business? Costless! The immense inconvenience to travellers and business people from debilitating lines at airports because of security measures? No need to consider those costs against any supposed security benefits; they’re paid for by the fairies. And the sugar program, which shifts the burden of supporting sugar prices onto consumers rather than taxpayers? Well, it simply “doesn’t cost anything.”
For more of Cato’s work on sugar policy, see here, here, and here.
Post-Election Outlook: Agriculture Edition
My colleagues have done a thorough job of analyzing the policy implications of Tuesday’s federal election outcome as it affects trade policy, health care, immigration, education, and the scope and size of government generally (more here on federal spending). Most of them are cautiously optimistic that a Republican-controlled House is good news for liberty-minded folk. Let’s hope so.
Unfortunately, there are fewer obvious reasons for optimism that Tuesday’s result will mean big changes in agricultural policy, a depressingly bipartisan area of federal intervention. Even Rand Paul, the poster child for the Tea Party, expressed “moderate” views on farm subsidies during his campaign.
On the positive side of the ledger, our friends at the Environmental Working Group make the excellent point that being a friend of Big Farming was not enough to shield many Democrats from defeat. Earl Pomeroy (D, ND) represents the congressional district that ranks Number One in farm subsidy receipts (now there’s a source of pride!) and even he got the boot. As did Senator Blanche Lincoln, chairperson of the Senate Agriculture Committee and shameless architect of a bailout package for farmers that was funded we-don’t-exactly-know-how. At least 15 (possibly 16 if Rep. Jim Costa (D., CA) loses his too-close-to-call race) Dem members of the House Agriculture Committee — friends of the farmer all — are now looking for work. In other words, support for Big Ag is not a sufficient shield.
On the other hand, it’s not clear that their replacements are an improvement as far as agriculture policy is concerned. With a new farm bill due to be written in 2012 (although soon-to-be-former House Agriculture Committee chairman Collin Peterson (D., MN) was trying to get that ball rolling earlier), it is not certain that the fiscal conservatism exhibited during most Republicans’ campaigns extends to farm policy. Indeed, probable new House Agriculture Committee chairman Frank Lucas (R., OK) has said he disagrees with getting rid of the fiscally offensive (but less trade-distorting) direct payments that flow to farmers regardless of what, or even whether, they farm. That was an area of reform that Collin Peterson was at least willing to look at. (More on the implications for direct payments here).
Chuck Abbott, agriculture reporter for Reuters, has more analysis on the outlook for farm policy. His is a more optimistic take, and I hope he’s correct. For my part, my skepticism is based on statements such as those by the CEO of the Renewable Fuels Association, speaking on a conference call yesterday:
[F]or the most part those that may have been defeated were replaced with equally strong advocates for value added agriculture and ethanol. Does anyone believe that Kristy Noem (R-SD) will not be a strong voice for ethanol?
Exactly. The fight’s not over yet, folks.
Free Trade Consensus Remains Intact in Australia
As many of you may know, Australia had a federal election on August 21 that yielded an at-time-of-blogging inconclusive result. As a consequence, the Liberal-National coalition (currently in opposition) and the Australian Labor Party are both wooing the Green and Independent members in the hope of securing their support. A Canberra-based friend sent me a link to an article in today’s (or, strictly speaking given the time difference, yesterday’s) Australian about the trade-related aspects of the current negotiations to form a minority government.
I’ll admit, the story had me worried. I’ve bragged before about Australia’s bipartisan political consensus on free trade, and it looked as though that was under threat. According to the article, Labor — the party responsible for much of the unilateral trade liberalization undertaken in the 1980s – was considering “re-erecting tariff walls”:
Yes, modern Labor has degenerated to the point where the Treasurer allows the prospect of protectionist horse-trading to be part of the equation for forming Australia’s next government. And so Australia’s political deadlock threatens to encourage the rise of a new industry protectionism driven by the anti-capitalist Greens in cahoots with left-wing trade unions and rural populism…
A few hours later, a new, happier story was filed on the Australian‘s website:
…Ms Gillard used her press club speech to offer continuity and certainty, but made clear she would not seek [Independent] Mr Katter’s vote by pandering to his passionate rejection of free trade, which he believes has ravaged sectors such as the sugar industry in his north Queensland seat of Kennedy.
“You’re talking to the leader of the political party that literally went to hell and back to modernise the Australian economy, including reducing tariff barriers,” Ms Gillard said.
“That is our heritage, that is our belief, that is in us.
“We would not have the modern resilient Australian economy we have now if Labor had not built it.
I’ll ignore that last preposterous statement about a political party building an economy, and instead focus on the main thrust of Ms. Gillard’s comments, which should come as a relief to free-traders everywhere, especially in Australia.
Prominent Economists Debate Trade Deficits
Following Dan’s and David’s recent posts on the trade deficit and its (ir)relevance, allow me to draw readers’ attention to the Economist’s “By Invitation” blog, where invited prominent economists debate topical economic issues.
One of their current questions is: Should governments take any steps to boost exports? That’s an important topic, and an especially timely one given the Obama administration’s ‘National Export Initiative,’ a five-year plan to double U.S. exports. All of us here at Cato’s trade center have previously expressed skepticism about the feasiblity and/or wisdom of that plan, and Dan Ikenson blogged earlier today about the administration’s apparent incoherence in pursuit of that goal.
The Economist‘s debate talks about industrial policy and export promotion in the abstract, rather than the NEI per se, but I recommend checking it out. Scott Sumner and Laurence Kotlikoff make especially good sense.
The Letter Is Different, but the Spirit Still Lives
An update from my post yesterday about the bill to establish a Commission to End the Trade Deficit (now called the “Emergency Trade Deficit Commission”): apparently the bill that passed the House was different from the bill initially considered, and to which I linked (and commented). My apologies.
The bill that was passed had many of the most egregious provisions and provocative wording stripped out. There was no talk of eliminating the trade deficit, for example. And the provision that would have prohibited congressional consideration of any trade deal before the Commission reported is, thankfully, gone too. But I would suggest that the underlying message of the bill — that individuals cannot be trusted to make their own decisions about which products to buy, and from where — is intact. There are plenty of references to “improving trade balances,” “enhancing the competitiveness of U.S. manufacturers,” and environmental and labor standards. I stand by comments about those sentiments.
Maybe a commission is a useful way of distracting members of Congress from actually doing anything, and certainly this bill is less offensive than the original, but it still betrays an unwillingness of some members of Congress to let consumers and firms make decisions without a commission studying, reporting on, and possibly correcting them.
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