Archive for the ‘International Economics and Development’ Category
Will the Federal Reserve’s Easy-Money Policy Turn the United States into a Global Laughingstock?
Early in the Obama Administration, there was an amusing/embarrassing incident when Chinese students laughed at Treasury Secretary Geithner when he claimed the United States had a strong-dollar policy.
I suspect that even Geithner would be smart enough to avoid such a claim today, not after the Fed’s announcement (with the full support of the White House and Treasury) that it would flood the economy with $600 billion of hot money. Here’s what my colleague Alan Reynolds wrote in the Wall Street Journal about Bernanke’s policy.
Mr. Bernanke…believes (contrary to our past experience with stagflation) that inflation is no danger thanks to economic slack (high unemployment). He reasons that if people can nonetheless be persuaded to expect higher inflation, regardless of the slack, that means interest rates will appear even lower in real terms. If that worked as planned, lower real interest rates would supposedly fix our hangover from the last Fed-financed borrowing binge by encouraging more borrowing. This whole scheme raises nagging questions. Why would domestic investors accept a lower yield on bonds if they expect higher inflation? And why would foreign investors accept a lower yield on U.S. bonds if they expect exchange rate losses on dollar-denominated securities? Why wouldn’t intelligent people shift their investments toward commodities or related stocks (such as mining and related machinery) and either shun, or sell short, long-term Treasurys? And if they did that, how could it possibly help the economy?
The rest of the world seems to share these concerns. The Germans are not big fans of America’s binge of borrowing and easy money. Here’s what Finance Minister Wolfgang Schäuble had to say in a recent interview.
The American growth model, on the other hand, is in a deep crisis. The United States lived on borrowed money for too long, inflating its financial sector unnecessarily and neglecting its small and mid-sized industrial companies. …I seriously doubt that it makes sense to pump unlimited amounts of money into the markets. There is no lack of liquidity in the US economy, which is why I don’t recognize the economic argument behind this measure. …The Fed’s decisions bring more uncertainty to the global economy. …It’s inconsistent for the Americans to accuse the Chinese of manipulating exchange rates and then to artificially depress the dollar exchange rate by printing money.
The comment about borrowed money has a bit of hypocrisy since German government debt is not much lower than it is in the United States, but the Finance Minister surely is correct about monetary policy. And speaking of China, we now have the odd situation of a Chinese rating agency downgrading U.S. government debt.
The United States has lost its double-A credit rating with Dagong Global Credit Rating Co., Ltd., the first domestic rating agency in China, due to its new round of quantitative easing policy. Dagong Global on Tuesday downgraded the local and foreign currency long-term sovereign credit rating of the US by one level to A+ from previous AA with “negative” outlook.
This development shold be taken with a giant grain of salt, as explained by a Wall Street Journal blogger. Nonetheless, the fact that the China-based agency thought this was a smart tactic must say something about how the rest of the world is beginning to perceive America.
Simply stated, Obama is following Jimmy Carter-style economic policy, so nobody should be surprised if the result is 1970s-style stagflation.
Commercial Ties with India Are An Opportunity, Mr. President–Not A Problem
During his visit to India, President Obama should bury once and for all his divisive rhetoric about American companies shipping jobs overseas. Our growing commercial ties with India are a great opportunity, not a problem. U.S. exports to India have doubled in the past four years. American companies that have set up shop in India have helped to fuel demand in that country for U.S. products and services. The president should be celebrating rather than demonizing our deeper economic ties with India.
Why Don’t Koreans Buy More Ford F-150 Trucks?
Ford Motor Company ran a full-age ad this morning in The Washington Post urging Congress and President Obama to reject the pending free-trade agreement with South Korea unless its provisions on automobiles are changed to promote the sale of more U.S.-made vehicles in Korea.
To drive home the point, the ad shows 52 cars with Korean flags in the windshield dominating one car sporting an American flag. The ad claims that, “For every 52 cars Korea ships here, the U.S. can only export one there.”
As my colleague Dan Ikenson blogged earlier, Ford blames the disparity on Korean trade barriers that discourage auto imports. Ford demands that the Obama administration “fix” the agreement before it can be approved by Congress.
In a study we released last month analyzing the agreement, Cato senior fellow Doug Bandow offered a different explanation of why we import so many more cars from Korea than the Koreans import from the United States, and why the agreement would go a long way to addressing legitimate concerns about barriers to U.S. auto exports:
In terms of tariff reduction, the agreement would deliver the “level playing field” many members of Congress demand. Tariffs on imported passenger cars and parts and accessories are currently 8 percent in Korea and 2.5 percent in the United States. Most of those tariffs would be eliminated upon enactment of the agreement, and all by its full implementation.
Although the FTA reduces South Korean tariffs, American automakers complain that the accord does not address non-tariff restrictions. … In fact, social and cultural barriers may be more important than government policies. One problem is auto size, since American cars are larger than those typically preferred by apartment-dwelling South Koreans. Even if all tariff and non-tariff-barriers were removed, the average Korean would still be much less inclined to buy a Ford F-150 pickup truck, a Chevy Suburban, or a Jeep Grand Cherokee than the average American would be inclined to buy a smaller, more fuel-efficient Korean-made vehicle such as a Hyundai Sonata. No free trade agreement can change fundamental consumer preferences.
Instead of complaining about all those Korean cars Americans want to buy, we should be glad for an agreement that opens both markets to greater competition.
How President Obama Can Make His India Trip Meaningful
To make his coming visit to India meaningful, President Obama needs to combat the impression that India fares better with Republican presidents than Democratic ones, because the latter are instinctively more protectionist. In his quest for economic recovery, he has bashed US corporations that outsource jobs to places like India, forbidden companies getting government rescue funds from outsourcing work, and has now enacted higher visa fees for visiting IT professionals which seem designed to hit Indian companies quite specifically. This may be designed to win votes in the Congressional elections, but will not win hearts and minds in India. President Obama needs to state categorically that he will not follow the Great Depression formula of trying to combat unemployment with protectionism.
A better way to create US jobs will be to relax labyrinthine export licensing rules for exports of dual-technology equipment and technology (which can be used for both civilian and defense purposes). India also needs to do its bit by shedding its reputation as world champion in anti-dumping actions (206 in the five years to 2009).
What Happens When Politicians Get a New Source of Revenue?
We’ve been spending too much time on elections, so let’s get back to pointing out inane, foolish, and destructive government policies. Our latest example comes from the United Kingdom, where politicians are pushing airline ticket taxes to punitive levels and harming the tourism industry. But the real lesson from this story is that it is very dangerous to give politicians a new revenue source.
The airline ticket tax was first imposed by a (supposedly) Conservative Party government in 1994 at a maximum rate of 10 pounds. During the Blair/Brown Labor Party reign, the tax was boosted to a maximum rate of 50 pounds. Now, the new government, led by ostensible Conservative David Cameron, is pushing the maximum tax up to 75 pounds (more than $120) per ticket.
Here’s an excerpt from the story in the Telegraph.
Families are avoiding holidays in Egypt and the Caribbean because of the high cost of air taxes — even before the hike in passenger duty that comes into place on Monday.
…The duty, which is paid by all travellers on leaving Britain and added automatically to the price when a ticket is booked, is to increase by 50 per cent to some destinations. It is the second significant rise in two years, and figures show that previous hikes have already influenced people’s choice of holiday destinations.
…Bob Atkinson, travel expert at Travelsupermarket.com, said: “Families looking to book for this winter and summer next year will be faced with tax rises of up to 54 per cent on their family holidays. This tax rise is completely out of line with inflation and bears no relation to the original purpose of the tax.”
…The tax was introduced in 1994 at the rate of £10 on long-haul flights, but increased by the previous Government, which said it was a necessary “green measure”.
…The increases mean a family of four flying to the Caribbean will pay £300 in duty compared with the old rate of £200 or £160 last year. Willie Walsh, the chief executive of British Airways, has branded the higher taxes a “disaster”. Earlier this month, he called the duty a “disgrace”.
No wonder families are choosing not to travel. But, more important, imagine what American politicians will do if they ever succeed in imposing a value-added tax. The rate initially will be low (just as the original income tax had a top rate of just 7 percent), but nobody should delude themselves into thinking the rate won’t quickly climb as greedy politicians get hooked on a new form of revenue to feed their spending addictions.
Currency Wars Also Have Unintended Consequences and Collateral Damage
The Fed’s planned purchases of $600 billion of long-term Treasury bonds were targeted for domestic problems, but are having international consequences. The expansion of the Fed’s balance sheet drives down the foreign-exchange value of the U.S. dollar, and (same thing) forces other currencies to appreciate in value.
Emerging markets with high short-term interest rates will attract “hot money” flows. These flows are not stable sources of funding, and disrupt the small capital markets in these countries. Long-term, the appreciation of their currencies harms their competitiveness in global goods’ markets.
Brazil has already imposed capital controls and other emerging markets may follow. The Chinese in particular have reacted sharply. According to a Reuters dispatch, Xia Bin, adviser to China’s central bank, said another financial crisis is “inevitable.” He added that China will act in its own interests.
In short, the Fed’s actions have undone whatever good came out of the G20 meetings. Any hope for cooperation on currency values and financial stability is out the window. There are potential spillovers in other areas of global cooperation.
Currency wars, like other wars, have unintended consequences and collateral damage. Some countries will predictably react by imposing capital controls. Moves to curb imports can follow. Monetary protectionism leads to trade protectionism.
However it might like matters to be, the Fed cannot simply act domestically. It has reached the useful limits of further easing.
A Witch Hunt Is Underway in Ecuador
Many people feared that President Rafael Correa would unleash a witch hunt in Ecuador after the police uprising of September 30th that his government quickly dubbed a “coup attempt.” As my colleague Gabriela Calderón wrote a few days after those incidents, the government’s narrative that Correa was kidnapped in a hospital by rogue elements of the national police has been severely undermined by several witnesses who claim that Correa stayed voluntarily in the building and was in control of the situation the entire time. Mary O’Grady of the Wall Street Journal also mentioned this in her weekly column.
One of these critical witnesses is César Carrión, director of the hospital where Correa was supposedly being held against his will. Carrión had not been implicated by the authorities in the police riots—until last week. On October 21st Carrión declared in a special report aired on CNN en Español that Correa hadn’t been kidnapped or faced any threat. A couple of days later, Correa lambasted Carrión on national TV, calling him a “conspirator” and warning him that “he better know who he’s dealing with, I’m the president and you’re my subordinate… you can’t make your boss look like a liar.” Carrión was fired from his post soon afterward, and yesterday he was arrested for “attempting to murder Rafael Correa.”
Many other people, including journalists, who dared to question the government’s dubious claim that there was a coup attempt (for example, the military high command gave its full support to the president the day of the supposed coup) have also been harassed by the authorities. However, some government officials apparently didn’t get the memo of the official coup attempt allegation. On the day of the uprising, Doris Soliz, minister of Political Coordination told CNN en Español that there wasn’t a coup under way. Also that day, Vinicio Alvarado, secretary of Public Administration denied on public TV the possibility of a coup, saying that the protest was simply “a specific demand from a government institution.”
International observers have also raised many doubts about the seriousness of Correa’s coup allegation. But what seems clear now is that the Ecuadorian government is dead serious in its efforts to use the incident to persecute political opponents and independent media. Those who challenge the official narrative, face the consequences.
The Bogus Charge of ‘Shipping Jobs Overseas’
In the final push before Election Day, President Obama has been traveling the country criticizing Republicans for favoring tax breaks for U.S. companies that supposedly ship U.S. jobs overseas. It’s a bogus charge that I dismantle in an op-ed in this morning’s New York Post:
The charge sounds logical: Under the US corporate tax code, US-based companies aren’t taxed on profits that their affiliates abroad earn until those profits are returned here. Supposedly, this “tax break” gives firms an incentive to create jobs overseas rather than at home, so any candidate who doesn’t want to impose higher taxes on those foreign operations is guilty of “shipping jobs overseas.”
In fact, American companies have quite valid reasons beyond any tax advantage to establish overseas affiliates: That’s how they reach foreign customers with US-branded goods and services.
Those affiliates allow US companies to sell services that can only be delivered where the customer lives (such as fast food and retail) or to customize their products, such as automobiles, to better reflect the taste of customers in foreign markets.
I go on to point out that close to 90 percent of what U.S.-owned affiliates produce abroad is sold abroad; that those foreign affiliates are now the primary way U.S. companies reach global consumers with U.S.-branded goods and services; and that the more jobs they create in their affiliates abroad, the more they create in their parent operations in the United States. If Congress raises taxes on those foreign operations, it will only force U.S. companies to cede market share to their German and Japanese (and French and Korean) competitors.
I unpack the issue at greater length in a Free Trade Bulletin published last year, and on pages 99-104 of my recent Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization.
Heightening the Contradictions in Iran
This, it seems to me, is a sign of a brittle, weak government that is fighting time and surviving exclusively on its nationalist credential:
TEHRAN (Reuters) – Iran will not allow its universities to begin teaching certain disciplines it deems too “Western,” and existing courses will be revised, a senior Education Ministry was quoted as saying Sunday.
“Expansion of 12 disciplines in the social sciences like law, women’s studies, human rights, management, sociology, philosophy….psychology and political sciences will be reviewed,” Abolfazl Hassani was quoted as saying in the Arman newspaper.
“These sciences’ contents are based on Western culture. The review will be the intention of making them compatible with Islamic teachings.”
Hassani said Iranian universities will not be allowed to open new departments in these disciplines and the curricula for existing departments would be revised.
Link via John Sides.
Santos: ‘Proposition 19 Could Change Colombia’s Drug Policy’
Colombian president Juan Manuel Santos has stated that if Proposition 19 passes next week in California and marijuana is legalized in the state, it could force his country to rethink its drug policy.
“Tell me if there is a way to explain to a Colombian peasant that if he produces marijuana we are going to put him in jail… [while] the same product is legal [in California]. That’s going to produce a comprehensive discussion on the approach we have taken on the fight against drug trafficking,” said Santos, who, a couple of months earlier, endorsed the call for a debate on drug legalization made by Mexican president Felipe Calderón. However, Santos has also said that he believes that legalization will increase drug consumption, a presumption that has been rebutted by evidence in countries with liberal drug policies such as Portugal.
Today, in his opening remarks at a Latin American presidential summit held in the Colombian city of Cartagena, Santos brought up [in Spanish] the subject again : “If we don’t act in a consistent way on this issue, if all we are doing is to send our fellow citizens to jail while in other latitudes the market is being legalized, then we have to ask ourselves: isn’t it time to review the global strategy against drugs?”
Santos’ statements have been backed by his Minister of Foreign Relations, who even said in an interview with El Tiempo, Colombia’s leading newspaper, that the country’s new seat on the UN Security Council could be “a good place” to start a “worldwide discussion” on the way that the war on drugs is being conducted.
It’s ironic–and gratifying–that the president of Washington’s closest ally in Latin America is the leading voice in the region questioning the wisdom of the war on drugs. It shouldn’t be a surprise, though. Back in 1998 Juan Manuel Santos signed a public letter to then Secretary General of the UN Kofi Annan denouncing the war on drugs as a “failed and futile” experiment, and calling for drug policies to be based on “common sense, science, public health and human rights.”
Even though the impact of Proposition 19 in California and the United States could be limited, Juan Manuel Santos’ statements show that its reverberations in Latin America could be significant.
The IRS’s Tax Rate on Google’s Foreign-Source Income Is 2.4 Percentage Points Too High
There’s been considerable attention to the news that the IRS only managed to grab 2.4 percent of Google’s overseas income. As this Bloomberg article indicates, many statists act as if this is a scandal (including a morally bankrupt quote from a Baruch College professor who thinks a company’s lawful efforts to lower its tax liability is “evil” and akin to robbing citizens).
Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda. Google’s income shifting — involving strategies known to lawyers as the “Double Irish” and the “Dutch Sandwich” — helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries. …Google, the owner of the world’s most popular search engine, uses a strategy that…takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there, largely escaping the country’s 12.5 percent income tax. The earnings wind up in island havens that levy no corporate income taxes at all. Companies that use the Double Irish arrangement avoid taxes at home and abroad as the U.S. government struggles to close a projected $1.4 trillion budget gap and European Union countries face a collective projected deficit of 868 billion euros. …U.S. Representative Dave Camp of Michigan, the ranking Republican on the House Ways and Means Committee, and other politicians say the 35 percent U.S. statutory rate is too high relative to foreign countries. …Google is “flying a banner of doing no evil, and then they’re perpetrating evil under our noses,” said Abraham J. Briloff, a professor emeritus of accounting at Baruch College in New York who has examined Google’s tax disclosures. “Who is it that paid for the underlying concept on which they built these billions of dollars of revenues?” Briloff said. “It was paid for by the United States citizenry.”
Congressman Dave Camp, the ranking Republican (and presumably soon-to-be Chairman) of the House tax-writing committee sort of understands the problem. The article mentions that he wants to investigate whether America’s corportate tax rate is too high. The answer is yes, of course, as explained in this video, but the bigger issue is that the IRS should not be taxing economic activity that occurs outside U.S. borders. This is a matter of sovereignty and good tax policy. From a sovereignty persepective, if income is earned in Ireland, the Irish government should decide how and when that income is taxed. The same is true for income in Bermuda and the Netherlands.
From a tax policy perspective, the right approach is “territorial” taxation, which is the common-sense notion of only taxing activity inside national borders. It’s no coincidence that all pro-growth tax reform plans, such as the flat tax and national sales tax, use this approach. Unfortunately, America is one of the world’s few nations to utilize the opposite approach of “worldwide” taxation, which means that U.S. companies face the competitive disadvantage of having two nations tax the same income. Fortunately, the damaging impact of worldwide taxation is mitigated by a policy known as deferral, which allows multinationals to postpone the second layer of tax.
Perversely, the Obama Administration wants to undermine deferral, thus putting American multinationals at an even greater disadvantage when competing in global markets. As this video explains, that would be a major step in the wrong direction. Instead, policy makers should junk America’s misguided worldwide system and replace it with territorial taxation.
In Which the French Are Explained, but They Remain Mistaken
The French youth are rioting over retirement ages, and I’ve seen it claimed that they’re failing to act in their own interests. More generous retirements have to be paid for by someone, and that “someone” will have to be the young workers. Why on earth are they shooting themselves in the foot like this? Why aren’t they acting in their class (err, age cohort) interests?
One of my favorite authors, Theodore Dalrymple, writes:
The lycéens’ demonstrations against the increase in the retirement age seemed to me something of a failure of the Cartesian critical spirit on which the French pride themselves… Whose labor, after all, do these lycéens imagine will pay for all of the unfunded pension obligations of the French state, as pensioners live longer and longer? Where do they imagine the money will come from?
He has a point here, but his explanation falls a bit short:
What probably accounts for the strikes is a mixture of combativeness—the prejudice that being against something is inherently superior, morally speaking, to being for it—and a desire for a day off from school.
Combativeness, sure. Nothing ever happens in France without someone going on strike. And nothing really important happens without a general strike. Now, the leaders do tend to be students, so I can’t dismiss the day off school hypothesis out of hand. But let’s at least look at the students’ own professed motives. Here’s what one of them had to say:
“If the reform passes, we’ll have even fewer chances to find work, we young people, because the jobs will be freed up more slowly.”
The impulse is both subtler and more ridiculous than Dalrymple realizes. It’s our old friend, the lump of labor fallacy: Force the oldsters into retirement, and it’s like a jobs program for everyone else. There is only so much labor to go around — not like jobs are ever created, you know — so we’d better be sure we get our fair share of it. Or so the theory goes. The protest signs, insofar as they communicate anything worth repeating, have often read “Place aux jeunes!” — Make room for the young! — or similar.
Not that this approach to economics makes any sense, either theoretically or practically. Putting someone out of work faster means he’s not producing anymore, which makes the economy worse off on the whole. And “his” job won’t necessarily stick around, because retirement is often the least painful time at which to eliminate a position entirely. Today’s workers aren’t likely to be trained for the same types of work as their parents and grandparents, and they shouldn’t necessarily want to be. The lump of labor fallacy imagines a world frozen in time, not one of dynamism and growth.
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