Degree Disaster Behind The Great Wall
Based on my regular reading on education, but not China specifically, I know that the world’s most populous nation has had a lot of trouble finding jobs for its throngs of recent college graduates. I wrote a bit about that yesterday, pointing out that the important higher education lesson from China is that pumping out more college grads is meaningless if they don’t have skills that are in demand. Well, thanks to a very helpful Cato@Liberty reader who actually lives in China (and wishes to remain anonymous) I now have a much better idea just how important that lesson is. He directed me to this Asia Times article that includes, among many fascinating tidbits, this startling revelation:
An explosive report released by the Chinese Academy of Social Sciences (CASS) in September said earnings of graduates were now at par and even lower than those of migrant laborers [italics added].
Wow! If this report is accurate, until now I have had no idea how truly ridiculous Washington’s obsession with pumping out more degrees to keep up with the Chinese has been — and I’ve been pretty sure it’s ridiculous! Much more troubling, if I’ve had little clue about the true extent of the absurdity, imagine how far from grasping it our government-loving federal politicians have been! Of course, as I wrote yesterday, even if they did know it, they probably wouldn’t let on.
Filed under: Education and Child Policy; Tax and Budget Policy
Perpetuating Bad Housing Policy
Perhaps the worst feature of the bailouts and the stimulus has been that, whatever their merits as short terms fixes, they have done nothing to improve economic policy over the long haul; indeed, they compound past mistakes.
Here is a good example:
For months, troubled homeowners seeking to lower their mortgage payments under a federal plan have complained about bureaucratic bungling, ceaseless frustration and confusion. On Thursday, the Obama administration declared that the $75 billion program is finally providing broad relief after it pressured mortgage companies to move faster to modify more loans.
Five hundred thousand troubled homeowners have had their loan payments lowered on a trial basis under the Making Home Affordable Program.
The crucial words in the story are “$75 billion” and “pressured.”
No one should object if a lender, without subsidy and without pressure, renegotiates a mortgage loan. That can make sense for both lender and borrower because the foreclosure process is costly.
But Treasury’s attempt to subsidize and coerce loan modifications is fundamentally misguided. It means many homeowners will stay in homes, for now, that they cannot really afford, merely postponing the day of reckoning.
Treasury’s policy is also misguided because it presumes that everyone who owned a house before the meltdown should remain a homeowner. Likewise, Treasury’s view assumes that all the housing construction over the past decade made good economic sense.
Both presumptions are wrong. U.S. policy exerted enormous pressure for increased mortgage lending in the years leading up to the crisis, thereby generating too much housing construction, too much home ownership and inflated housing prices.
The right policy for the U.S. economy is to stop preventing foreclosures, to stop subsidizing mortgages, and to let the housing market adjust on its own. Otherwise, we will soon see a repeat of the fall of 2008.
Taking Over Everything
“My critics say that I’m taking over every sector of the economy,” President Obama sighed to George Stephanopoulos during his Sunday media blitz.
Not every sector. Just
- health care
- energy
- local schools
- banks
- insurance companies
- automobile companies
- compensation at financial firms
- newspapers
- the internet
This president and his Ivy League advisers believe that they know how an economy should develop better than hundreds of millions of market participants spending their own money every day. That is what F. A. Hayek called the “fatal conceit,” the idea that smart people can design a real economy on the basis of their abstract ideas.
This is not quite socialism. In most of these cases, President Obama doesn’t propose to actually nationalize the means of production. (In the case of the automobile companies, he clearly did.) He just wants to use government money and government regulations to extend political control over all these sectors of the economy. And the more political control achieves, the more we can expect political favoritism, corruption, uneconomic decisions, and slower economic growth.
Filed under: Finance, Banking & Monetary Policy; Tax and Budget Policy
Robbing Peter to Pay Paul
The FDIC’s insurance fund, which it uses to pay off despositors in failed banks, is getting low. One way it can bolster its reserves is to draw on a $100 billion line of credit from the Treasury. Instead, however,
Senior regulators say they are seriously considering a plan to have the nation’s healthy banks lend billions of dollars to rescue the insurance fund that protects bank depositors. That would enable the fund, which is rapidly running out of money because of a wave of bank failures, to continue to rescue the sickest banks.
A brilliant scheme to avoid another taxpayer bailout? Not really.
The banks are willing to lend because the FDIC will pay them a good interest rate. Repayment is virtually guaranteed because the FDIC can always draw on its line of credit. Thus the banks are getting a better deal than they would in the marketplace (that’s why they are doing this), so the scheme is a backdoor way of further bailing out the banks.
Why go through this charade? Apparently, using the Treasury credit line
is said to be unpalatable to Sheila C. Bair, the agency chairwoman whose relations with the Treasury secretary, Timothy F. Geithner, have been strained.
“Sheila Bair would take bamboo shoots under her nails before going to Tim Geithner and the Treasury for help,” said Camden R. Fine, president of the Independent Community Bankers. “She’d do just about anything before going there.”
Instead, the FDIC will con the taxpayers. The FDIC has no choice under existing policy, of course, but to pay off depositors of failing banks. They should just be honest about how who is paying for it.
C/P Libertarianism from A to Z
Filed under: Finance, Banking & Monetary Policy; General
Pakistan: More Aid, More Waste, More Fraud?
Pakistan long has tottered on the edge of being a failed state: created amidst a bloody partition from India, suffered under ineffective democratic rule and disastrous military rule, destabilized through military suppression of East Pakistan (now Bangladesh) by dominant West Pakistan, dismembered in a losing war with India, misgoverned by a corrupt and wastrel government, linked to the most extremist Afghan factions during the Soviet occupation, allied with the later Taliban regime, and now destabilized by the war in Afghanistan. Along the way the regime built nuclear weapons, turned a blind eye to A.Q. Khan’s proliferation market, suppressed democracy, tolerated religious persecution, elected Asif Ali “Mr. Ten Percent” Zardari as president, and wasted billions of dollars in foreign (and especially American) aid.
Still the aid continues to flow. But even the Obama administration has some concerns about ensuring that history does not repeat itself. Reports the New York Times:
As the United States prepares to triple its aid package to Pakistan — to a proposed $1.5 billion over the next year — Obama administration officials are debating how much of the assistance should go directly to a government that has been widely accused of corruption, American and Pakistani officials say. A procession of Obama administration economic experts have visited Islamabad, the capital, in recent weeks to try to ensure both that the money will not be wasted by the government and that it will be more effective in winning the good will of a public increasingly hostile to the United States, according to officials involved with the project.
…The overhaul of American assistance, led by the State Department, comes amid increased urgency about an economic crisis that is intensifying social unrest in Pakistan, and about the willingness of the government there to sustain its fight against a raging insurgency in the northwest. It follows an assessment within the Obama administration that the amount of nonmilitary aid to the country in the past few years was inadequate and favored American contractors rather than Pakistani recipients, according to several of the American officials involved.
Rather than pouring more good money after bad, the U.S. should lift tariff barriers on Pakistani goods. What the Pakistani people need is not more misnamed “foreign aid” funneled through corrupt and inefficient bureaucracies, but jobs. Trade, not aid, will help create real, productive work, rather than political patronage positions.
Bob McDonnell: The Modern Republican
This is from the Reagan administration’s deregulatory 1981 energy plan: “All Americans are involved in making energy policy. When individual choices are made with a maximum of personal understanding and a minimum of government restraints, the result is the most appropriate energy policy.”
Many modern Republicans claim devotion to Ronald Reagan’s ideas, but they often seem to forget about the “minimum of government” thing. The following points are from Republican Virginia gubernatorial candidate Bob McDonnell’s “More Energy, More Jobs” plan:
- “McDonnell was the chief sponsor of legislation creating the Virginia Hydrogen Energy Plan.”
- “McDonnell also supported grant programs for solar photovoltaic manufacturing, tax exemptions for solar energy and recycling property, and tax credits for solar energy equipment.”
- “In order to protect Virginia’s citizens from the skyrocketing wholesale prices of electricity seen in other states, McDonnell brought together all the necessary stake holders to re-regulate electricity in Virginia.”
- “Currently, Virginia is the second largest importer of electricity behind California. This is unacceptable.”
- “Bob McDonnell will establish Virginia as a Green Jobs Zone to incentivize companies to create quality green jobs. Qualified businesses would be eligible to receive an income tax credit equal to $500 per position created per year for the first five years.”
- “The Virginia Alternative Fuels Revolving Fund was established to assist local governments that convert to alternative fuel systems . . . Bob McDonnell will expand the purpose of this fund to include infrastructure such as refueling stations, provide seed money and aggressively pursue additional grants.”
- “Bob McDonnell will make Southwest and Southside Virginia the nation’s hub for traditional and alternative energy research and development…To assist with the attraction, building and operation of major energy facilities in Southside and Southwest Virginia, we will also support the establishment of the Center for Energy.”
- “To help Virginia universities gain access to federal stimulus money, as Governor, Bob McDonnell will establish the Virginia Universities Clean Energy Development and Economic Stimulus Foundation.”
- “As Governor, Bob McDonnell will leverage stimulus funding to incentivize individuals and businesses to conduct energy audits and encourage public private partnerships between small businesses and government.”
It’s true that McDonnell’s plan has some free market elements, and also that Ronald Reagan supported some wasteful energy boondoggles. However, the degree to which the modern Republican wants to micromanage and manipulate the energy industry is remarkable. McDonnell is almost setting out a Soviet five-year plan for a substantial part of the Virginia economy. For goodness sakes, he wants to treat Virginia like a separate country and try to fix the supposed problem that it is “importing” too much energy from other states!
It’s not just energy. Look at the top-down central planning ideas that McDonnell has for “creating jobs”:
Filed under: Energy and Environment; General; Government and Politics
President Obama Subsidizes President Obama with Tire Tariff
Who benefits from 35 percent duties on Chinese-produced tires?
U.S. producers? No, they are the ones who, pursuing profit-maximizing strategies, have consciously shifted production of low-end tires from their U.S. plants to their Chinese plants over the past few years. They will now have to incur the costs of shifting production from China to production facilities in Brazil, Mexico, Indonesia and other developing countries, where it makes economic sense to produce low-end tires.
U.S. workers, then? Nah. Low-end U.S. tire production workers won’t see an increase in U.S. capacity, capacity utilization, hours worked, or wages because, as implied above, production isn’t coming back to the United States. Meanwhile, U.S. workers in tire wholesaling, distribution, and other segment of the supply chain are likely to see a decline in business in the short-run, as higher prices reduce demand for tires. Things may improve once adjustments are made to the new production locations, but that will involve certain adjustment costs and lower profit margins because presumably China is the profit-maximizing production location. Right? Why else would producers have chosen China?
Does the tariff benefit consumers, then? Come on. Not only will it lead to higher prices for consumers, but it will hit cost-conscious consumers the hardest. And you thought President Obama opposed regressive taxation?
No, the only beneficiary of the tariff is President Obama, who presumably gets some political mileage for his Chicago-style payback of Big Labor. But make no mistake that any benefits to the president will be fleeting, as the direct costs of the tire tariff and the costs of copycat protectionism start to squeeze economic recovery. As the president is flooded with similar requests for protection from other unions and producers, he will have to choose between disappointing those favor-seekers or strangling economic prospects entirely. The tire decision was selfish and shortsighted.
Filed under: International Economics and Development; Trade and Immigration
The Legacy of TARP: Crony Capitalism
When Treasury Secretary Hank Paul proposed the bailout of Wall Street banks last September, I objected in part because the TARP meant that government connections, not economic merit, would come to determine how capital gets allocated in the economy. That prediction now looks dead on:
As financial firms navigate a life more closely connected to government aid and oversight than ever before, they increasingly turn to Washington, closing a chasm that was previously far greater than the 228 miles separating the nation’s political and financial capitals.
In the year since the investment bank Lehman Brothers collapsed, paralyzing global markets and triggering one of the biggest government forays into the economy in U.S. history, Wall Street has looked south to forge new business strategies, hew to new federal policies and find new talent.
“In the old days, Washington was refereeing from the sideline,” said Mohamed A. el-Erian, chief executive officer of Pimco. “In the new world we’re going toward, not only is Washington refereeing from the field, but it is also in some respects a player as well. . . . And that changes the dynamics significantly.”
Read the rest of the article; it is truly frightening. We have taken a huge leap toward crony capitalism, to our peril.
Filed under: Finance, Banking & Monetary Policy; Government and Politics
Monday Links
- Obama spoke on Wall Street today about increasing regulation of the American financial system. But did deregulation really cause the financial crisis?
- Burnt rubber: Obama’s decision to slap a 35 percent tariff on Chinese tires whiffs of senseless protectionism.
- According to the Economic Freedom in the World report, the U.S. was ranked the second-freest economy in 2000. It has fallen to 6th place this year.
- A bold exit strategy for Afghanistan.
- Why it’s time for the U.S. to start doing less abroad.
- Podcast: China’s economy is on track to be larger than the U.S. economy in a few years. Trade expert Dan Griswold says, “So what?”
A Harsh Climate for Trade
Although it has very much taken a back-seat to health care, and a press report [$] today say it could be bumped down yet another notch on the administration’s hierarchy of goals, climate change is shaping up to be a major battle if the others don’t prove to be prohibitively exhausting. So today I am weighing in on the debate by releasing my new paper on the dangers of using trade measures as a tool of climate policy.
The Democrats were keen to pass a climate change bill in advance of the December meeting in Copenhagen designed to agree on a successor regime to the Kyoto protocol, which expires in 2012. However, opposition from a number of quarters and the fear of health-care-town-halls-mark-II has cooled their heels. Senate leaders have pushed back the deadline for passing bills out of committees a number of times.
The reason why climate change legislation has become so controversial is that businesses and consumers are, quite understandably, fearful about any policies that threaten to increase their costs. I’ll leave it to others to blog about the effect of emissions-reductions policies on jobs and profits, but even the fear of losses has led to calls for special deals for “vulnerable industries”, in the form of free emission permits and/or protection from imports that are sourced from countries that purportedly take insufficient steps to limit emissions.
H.R. 2454, the so called Waxman-Markey bill passed by the House in June, contains both free permits and provisions for carbon tariffs. I’ve blogged before about the efforts of trade-skeptic senators to introduce the same kinds of protections in the senate bill. To that end, Sen. Sherrod Brown (D, OH) is reportedly meeting with Sen. Barbara Boxer, Chairwoman of the Senate Environment and Public Works Committee next week about trade protections for manufacturing industries. As my paper makes clear, I think these efforts are misguidedly ineffective at best, and harmful at worst.
I’m looking forward to discussing these issues in more detail tomorrow at a Hill briefing in Washington DC. Registration for the event was closed very early because of overwhelming demand, but you can watch the event when the video becomes available on the Cato website.
Filed under: Energy and Environment; Trade and Immigration
When Governments Are Forced to Compete, the Result Is Better Policy and More Liberty
A story in USA Today is a perfect illustration of the liberalizing power of tax competition. In an effort to attract more jobs and investment, states are competing with each – even taking the aggressive step of advertising in high-tax states. This does not guarantee that states will always use the best approach since states sometimes try to lure companies with special handouts, but tax competition generally encourages states to lower tax rates and control fiscal and regulatory burdens. The same process works internationally, which is precisely why international bureaucracies controlled by high-tax nations are seeking to thwart fiscal competition between nations:
Las Vegas is running ads in California warning businesses they can “kiss their assets goodbye” if they stay in the Golden State. In New Hampshire, economic development officials pick up Massachusetts business owners at the border in a limousine and give them VIP treatment and a pitch about why they should relocate there. Indiana officials, using billboards at the borders and direct appeals to businesses in neighboring states, are inviting them to ‘Come on IN for lower taxes, business and housing costs.’ As states struggle to keep jobs in a continuing recession, they are no longer hoping businesses in other states happen to notice their lower taxes, cheaper office space and less-stringent regulations. They are taking the message directly to them and taking shots at their neighbor’s shortcomings. …No one does it more unapologetically than the Nevada Development Authority. The agency has picked on California before, but its $1 million campaign, launched this month, ratchets up the mockery of California’s budget deficits and IOU paychecks. ‘It’s all done tongue-in-cheek. But the underlying deal is, we want this business,’ Nevada Development Authority President and CEO Somer Hollingsworth said. …’They do mask the nastiness of their message with humor, but this time, their ads are over the top,’ said [California Assemblyman] Solorio, a Democrat from Santa Ana.
Filed under: Finance, Banking & Monetary Policy; International Economics and Development; Tax and Budget Policy
Our Tax Dollars Are Being Used to Lobby for More Government Handouts
The First Amendment guarantees our freedom to petition the government, which is one of the reasons why the statists who wants to restrict or even ban lobbying hopefully will not succeed. But that does not mean all lobbying is created equal. If a bunch of small business owners get together to lobby against higher taxes, that is a noble endeavor. If the same group of people get together and lobby for special handouts, by contrast, they are being despicable. And if they get a bailout from the government and use that money to mooch for more handouts, they deserve a reserved seat in a very hot place.
This is not just a hypothetical exercise. The Hill reports on the combined $20 million lobbying budget of some of the companies that stuck their snouts in the public trough:
Auto companies and eight of the country’s biggest banks that received tens of billions of dollars in federal bailout money spent more than $20 million on lobbying Washington lawmakers in the first half of this year. General Motors, Chrysler and GMAC, the finance arm of GM, cut back significantly on lobbying expenses in the period, spending about one-third less in total than they had in the first half of 2008. But the eight banks, the earliest recipients of billions of dollars from the federal government, continued to rely heavily on their Washington lobbying arms, spending more than $12.4 million in the first half of 2009. That is slightly more than they spent during the same period a year ago, according to a review of congressional records.
…big banks traditionally are among the most active Washington lobbying interests in the financial industry, and the recession has done little to dent their spending. …Since last fall, companies receiving government funds have argued that none of the taxpayer money they were receiving was being spent on lobbying.
…American International Group, the insurance firm crippled by trades in financial derivatives that received roughly $180 billion in bailout commitments, closed its Washington lobbying shop earlier this year. AIG continues to spend money on counsel to answer requests for information from the federal government, but the firm said it does not lobby on federal legislation.
The most absurd part of the story was the companies claiming that they did not use tax dollar for lobbying. I guess the corporate bureaucrats skipped the classes where their teachers explained that money is fungible.
The best part of the story was learning that AIG closed its lobbying operation, though that does not mean much since AIG basically now exists as a subsidiary of the federal government. The most important message (which is absent from the story, of course) is that the real problem is that government is too big and that it intervenes in private markets. Companies would not need to lobby if government left them alone and/or did not offer them special favors. Indeed, that was the key point of my video entitled, “Want Less Corruption: Shrink the Size of Government.”
Banks, Bailouts, and Political Pressure
The Washington Post reports:
Sen. Daniel K. Inouye’s staff contacted federal regulators last fall to ask about the bailout application of an ailing Hawaii bank that he had helped to establish and where he has invested the bulk of his personal wealth.
The bank, Central Pacific Financial, was an unlikely candidate for a program designed by the Treasury Department to bolster healthy banks. The firm’s losses were depleting its capital reserves. Its primary regulator, the Federal Deposit Insurance Corp., already had decided that it didn’t meet the criteria for receiving a favorable recommendation and had forwarded the application to a council that reviewed marginal cases, according to agency documents.
Two weeks after the inquiry from Inouye’s office, Central Pacific announced that the Treasury would inject $135 million.
As we’ve said here many times, going back to 1983, when government is in the business of making economic decisions, you inevitably get more lobbying, more campaign spending, and more political influence on economic decision-makers.
Attention GM Shareholders (That Means You!)
As my colleague Doug Bandow pointed out this morning, today’s Washington Post has an analysis about the uncertain prospects of GM ever making taxpayers whole again. It is a very similar analysis to the one I gave in this L.A. Times Dust-Up installment four weeks ago, although I find prospects unlikely, rather than just uncertain.
If GM emerges from bankruptcy next month in accordance with the pre-packaged Obama plan (as expected), taxpayers will be on the hook for $50 billion. That $50 billion will buy taxpayers a 60 percent stake in the company, which according to the laws of mathematics means that GM has to be worth $83.33 billion for the taxpayers to get their equity back without making a dime in capital gains or interest. In the L.A. Times, I asked:
How and when will that ever happen? At its peak in 2000, GM’s value (based on its market capitalization) stood at $60 billion. Thus, the minimum benchmark for “success” will require a 38% increase in GM’s value from where it was in the heady days of 2000, when Americans were purchasing 16 million vehicles per year. U.S. demand projections for the next few years come in at around 10 million vehicles. Taxpayer ownership of GM is something we should all get used to, and the “investment” is only going to grow larger. Think Amtrak.
Don’t Count on Getting Your “Investment” Back from Government Motors
The president and his appointees have expressed their hope that Government Motors will eventually pay back taxpayers for their “forced investment” in the company. But there aren’t many cases of this sort of lemon socialism actually paying off.
Now most everyone connected with GM is admitting the same thing. Reports the Washington Post:
If a new General Motors emerges from bankruptcy as planned, U.S. financial aid for the company will expand to nearly $50 billion, but neither the government nor the company is forecasting how much of the public money will be repaid.
It’s sure to be a stretch. For the United States to fully recover its investment, the value of General Motors stock will have to reach levels it has never before attained.
“I’m not going to predict it — that’s not my job today,” GM chief executive Fritz Henderson said in a recent interview.
“I don’t know how much we’re going to recover,” a senior Obama administration official said as the company headed into bankruptcy last month.
This uncertainty stems from the difficulty in valuing the 60 percent GM stake that the United States will receive in exchange for the public investment. The government also gets preferred shares and other compensation.
The stake will be worth enough to fully cover the government’s direct investment only if GM’s stock rises above $68 billion. Even at its recent 2000 peak, GM’s stock was worth only $56 billion.
“I don’t see GM hitting those benchmarks in a very long time,” said Maryann Keller, a veteran automotive analyst and author of “Rude Awakening: The Rise, Fall, and Struggle for Recovery of General Motors,” which was published in 1989.
She noted that global competition will continue to squeeze American automakers. Though the world’s factories can produce about 100 million vehicles a year, demand for them only stands at about 55 million, and the gap will push prices and profits down, she said.
“It’s very unlikely” that the government will recover its money, said David Whiston, auto equities analyst at Morningstar. “GM will be a smaller company after the bankruptcy and there are going to be more foreign automakers entering the market that will make GM’s efforts more difficult.”
Oh, well. As they say, it’s only money!
Filed under: Finance, Banking & Monetary Policy; Tax and Budget Policy
Buy American Hurts Most Americans
Earlier today, Doug Bandow weighed in with some commentary on the problems that Buy American provisions are creating for both Canadian and American businesses. Let me reinforce his view that such rules are anachronistic and self-defeating with some thoughts from a forthcoming paper of mine about the incongruity between modern commercial reality and trade policies that have failed to keep pace.
Even though President Obama implored, “If you are considering buying a car, I hope it will be an American car,” it is nearly impossible to determine objectively what makes an American car. The auto industry provides a famous example, but is really just one of many that transcends national boundaries and renders obsolete the notion of international competition as a contest between “our” producers and “their” producers. The same holds true for industries throughout the manufacturing sector.
Dell is a well known American brand and Nokia a popular Finnish brand, but neither makes its products in the United States or Finland, respectively. Some components of products bearing the logos of these internationally recognized brands might be produced in the “home country.” But with much greater frequency nowadays, component production and assembly operations are performed in different locations across the global factory floor. As IBM’s chief executive officer put it: “State borders define less and less the boundaries of corporate thinking or practice.”
The distinction between what is and what isn’t American or Finnish or Chinese or Indian has been blurred by foreign direct investment, cross-ownership, equity tie-ins, and transnational supply chains. In the United States, foreign and domestic value-added is so entangled in so many different products that even the Buy American provisions in the recently-enacted American Recovery and Reinvestment Act of 2009, struggle to define an American product without conceding the inanity of the objective.
The Buy American Act restricts the purchase of supplies that are not domestic end products. For manufactured end products, the Buy American Act uses a two-part test to define a domestic end product: (1) The article must be manufactured in the United States; and (2) The cost of domestic components must exceed 50 percent of the cost of all the components. Thus, the operational definition of an American product includes the recognition that “purebred” American products are increasingly rare.
Shake your head and chuckle as you learn that even the “DNA” of the U.S. steel industry, which pushed for adoption of the most restrictive Buy American provisions and which has been the manufacturing sector’s most vocal proponent of trade barriers over the years, is difficult to decipher nowadays. The largest U.S. producer of steel is the majority Indian-owned company Arcelor-Mittal. The largest “German” producer, Thyssen-Krupp, is in the process of completing a $3.7 billion green field investment in a carbon and stainless steel production facility in Alabama, which will create an estimated 2,700 permanent jobs. And most of the carbon steel shipped from U.S. rolling mills—as finished hot-rolled or cold-rolled steel, or as pipe and tube—is produced in places like Canada, Brazil and Russia, and as such is disqualified from use in U.S. government procurement projects for failure to meet the statutory definition of American-made steel.
Whereas a generation ago the cost of a product bearing the logo of an American company may have comprised exclusively U.S. labor, materials, and overhead, today that is much less likely to be the case. Today, that product is more likely to reflect foreign value-added, regardless of whether the product was “completed” in the United States or abroad. Accordingly, Buy American rules and trade barriers of any kind (as appealing to politicians as they may be) hurt most American businesses, workers, and consumers.
It’s time to wake up and scrap these stupid rules.
Injustice of State Subsidies
My colleague Chris Edwards made a good point yesterday in his post on the injustice of federal subsidies. The wrangling between the states to haul in the federal largesse is wasteful, and getting worse. But the underlying issue in the article Chris cites — a state using taxpayer money to lure a company away from another state — is another wasteful activity that is all too common.
Instead of competing with other states to attract industry by lowering taxes and reducing regulations, it seems most state governors prefer a politically opportunistic method I call “press release economics.” Here’s how it works:
A state “economic development” agency offers an out-of-state company (or even an out-of-country company) tax breaks and/or direct subsidies to locate some or all of its business operations in that state. Most likely, the business would have located there anyhow due to myriad factors including demographics, transportation logistics, and workforce capabilities. Sometimes several states will engage in a “bidding war” to get a business to set up shop within their borders. The governor of the “winning” state will then issue a press release citing the new jobs and capital his administration has just brought to the state. The locating company usually tells the press that the winning state’s package helped seal the deal. The company and the governor’s press staff then typically arrange a photo-op at an orchestrated ground-breaking ceremony for the new facilities.
If a state is already bleeding jobs, as is often the case in the current economy, such press releases and photo-ops can be a political coup. Moreover, the governor will have given up, or foregone, relatively little in tax revenue in comparison to, say, cutting the state corporate income tax. This also leaves the governor with more money to spend on various vote-buying programs. I’m picking on governors, but the legislature generally prefers the press-release economics route for similar reasons. And if you’re a governor, why risk the headache of engaging the legislature in a fight over reducing corporate taxes, unemployment taxes, or any other tax — including personal income taxes and sales taxes — that effect industry when you can take the easy win?
Am I too cynical? Actually, I had first-hand experience with this issue when I worked in state government. My suggestion that the governor eliminate or reduce the state’s high corporate income tax rate, and “pay for it” — at least in part — by getting rid of the state’s corporate welfare apparatus, was routinely ignored for the reasons I cited above. That one would be hard-pressed to find support among the economics profession for the state corporate welfare give-away game means little to the majority of policymakers and their minions who naturally favor short-term political gain over long-term economic gain. That other companies already located within the state are stuck paying the regular tax rate, and are thus put at a competitive disadvantage, is a secondary or non-concern as well.
Another issue that I won’t delve into here is the fact that these giveaways often blow up in a state’s face when the locating company ends up not producing the jobs it promised and/or it relocates to another state or country after pocketing the free taxpayer money. Anyhow, journalists should be on the lookout for more press-release economics schemes coming from the states as revenues remain tight and politicians become desperate to demonstrate they’re “doing something.” Journalists should examine a state’s tax structure when a taxpayer giveaway is announced to see if perhaps the governor is masking economic-unfriendly fiscal policies.
Note: South Carolina Gov. Mark Sanford proposed late last year to do exactly what I recommended: eliminate the state’s corporate income tax, offset in part by the elimination of corporate tax incentives. There is hope.
Richard Epstein on Sotomayor
Cato adjunct scholar Richard Epstein of the University of Chicago and New York University, finds much to worry about in Judge Sonia Sotomayor’s nomination to the Supreme Court:
The treatment of the compensation packages of key AIG executives (which eventually led to the indecorous resignation of Edward Liddy), and the massive insinuation of the executive branch into the (current) Chrysler and (looming) General Motors bankruptcies are sure to generate many a spirited struggle over two issues that are likely to define our future Supreme Court’s jurisprudence. The level of property rights protection against government intervention on the one hand, and the permissible scope of unilateral action by the president in a system that is (or at least should be) characterized by a system of separation of powers and checks and balances on the other.
Here is one straw in the wind that does not bode well for a Sotomayor appointment. Justice Stevens of the current court came in for a fair share of criticism (all justified in my view) for his expansive reading in Kelo v. City of New London (2005) of the “public use language.” Of course, the takings clause of the Fifth Amendment is as complex as it is short: “Nor shall private property be taken for public use, without just compensation.” But he was surely done one better in the Summary Order in Didden v. Village of Port Chester issued by the Second Circuit in 2006. Judge Sotomayor was on the panel that issued the unsigned opinion–one that makes Justice Stevens look like a paradigmatic defender of strong property rights.
I have written about Didden in Forbes. The case involved about as naked an abuse of government power as could be imagined. Bart Didden came up with an idea to build a pharmacy on land he owned in a redevelopment district in Port Chester over which the town of Port Chester had given Greg Wasser control. Wasser told Didden that he would approve the project only if Didden paid him $800,000 or gave him a partnership interest. The “or else” was that the land would be promptly condemned by the village, and Wasser would put up a pharmacy himself. Just that came to pass. But the Second Circuit panel on which Sotomayor sat did not raise an eyebrow. Its entire analysis reads as follows: “We agree with the district court that [Wasser's] voluntary attempt to resolve appellants’ demands was neither an unconstitutional exaction in the form of extortion nor an equal protection violation.”
Maybe I am missing something, but American business should shudder in its boots if Judge Sotomayor takes this attitude to the Supreme Court.
Like FDR — In a Really Bad Way
President Barack Obama based his candidacy in part on the promise to set a new tone in Washington. But we saw a much older tone emerge with his demonization of hedge funds over the Chrysler bankruptcy. Reports the Washington Post:
President Obama’s harsh attack on hedge funds he blamed for forcing Chrysler into bankruptcy yesterday sparked cries of protest from the secretive financial firms that hold about $1 billion of the automaker’s debt.
Hedge funds and investment managers were irate at Obama’s description of them as “speculators” who were “refusing to sacrifice like everyone else” and who wanted “to hold out for the prospect of an unjustified taxpayer-funded bailout.”
“Some of the characterizations that were used today to refer to us as speculators or to say we’re looking for a bailout is really unfair,” said one executive who spoke on condition of anonymity because of the sensitivity of the matter. “What we’re looking for is a reasonable payout on the value of the debt . . . more in line with what unions and Fiat were getting.”
George Schultze, the managing member of the hedge fund Schultze Asset Management, a Chrysler bondholder, said, “We are simply seeking to enforce our bargained-for rights under well-settled law.”
“Hopefully, the bankruptcy process will help refocus on this issue rather than on pointing fingers at lenders,” he said.
I won’t claim any special expertise to parse who is responsible for what in the crash of the U.S. (meaning Big Three) auto industry. However, attacking people for exercising their legal rights and trashing those who make their business investing in companies hardly seems like the right way to get the U.S. economy moving again.
During the Depression, FDR’s relentless attacks on business and the rich almost certainly added to a climate of uncertainty that discouraged investment during tough times. Why put your money at real risk when the president and his cohorts seem determined to treat you like the enemy? While President Obama need not treat gently those who contributed to the current crisis by acting illegally or unscrupulously, he should not act as if those who simply aren’t willing to turn their economic futures over to the tender mercies of the White House are criminals.
We’ve just lived through eight years of bitter partisan warfare. The president shouldn’t replace that with a jihad against businesses that resist increased government direction of the economy.
Filed under: Finance, Banking & Monetary Policy; Government and Politics; Law and Civil Liberties
The Politics of Budget-Cutting
In Washington, the symbolic almost always trumps the substantive. Thus, legislators complain, for good reason, about pork and earmarks, which ran about $35 billion at their maximum, and ignore entitlements, which entail some $100 trillion in unfunded liabilities.
So it is with President Obama. He continues the endless bailouts, which cumulatively now run around $13 trillion. He proposed a $3.6 trillion budget and will leave us with a $1.4 trillion deficit next year–and nearly $5 trillion in additional debt on top of the massive deficits already projected over the coming decade. But he asked his Cabinet officers to chop $100 million in administrative expenses.
And he says he doesn’t need a new helicopter. Fiscal responsibility in action.
Alas, the helicopter, while costing billions, isn’t an easy budget target.
Reports the New York Times:
At a Washington conference on fiscal responsibility in February, President Obama tried to set the tone by saying he did not need the new costly presidential helicopters that had been ordered by the Bush administration.
“The helicopter I have now seems perfectly adequate to me,” he said to laughter. On a more serious note, he added, “I think it is an example of the procurement process gone amok. And we’re going to have to fix it.”
But the president is learning that in the world of defense contracting, frugality can be expensive. Some lawmakers and military experts warn that his effort to avoid wasting billions of dollars could end up doing just that.
The administration’s plan to halt the $13 billion helicopter program, announced this month, will leave the government with little to show for the $3.2 billion it has spent since the Bush administration set out to create a futuristic craft that could fend off terrorist attacks and resist the electromagnetic effects of a nuclear blast.
Critics say the Pentagon would also spend at least $200 million in termination fees and perhaps hundreds of millions to extend the life of today’s aging fleet. As a result, several influential lawmakers and defense analysts are now calling for a compromise that would salvage a simpler version of the helicopter that is already being tested.
They say it could be a more palatable alternative in tough economic times than seeking new bids for a more advanced craft, which has proved difficult to develop.
No wonder Washington is known as a place where everything about government is permanent. Once you start spending money on a program, it becomes extremely hard to stop. Part of that is the political dynamic of interest groups, the problem so well dissected by the Public Choice economists. And part of it is legal and procedural. Contracts are let, cancellation fees are due. It’s bad to waste money on a gold-plated helicopter. It seems even worse to waste money developing a gold-plated helicopter, and then getting nothing at all by canceling it.
There is, however, an amazingly simple solution, of which Congress and the president apparently are not aware.
Don’t spend the money in the first place. Eschew new programs. Say no to special interests. Let taxpayers keep more of their own money.
This approach would seem to make sense at any time. But especially today, with the federal government facing a deficit approaching $2 trillion in 2009.
Didn’t Nancy Reagan lecture us to “just say no”? We should invite her back for a return tour of Washington, only she should talk about federal spending this time.
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