Monday Links
- “One of the first rules of negotiating is never to threaten to do something unless you are prepared to do it.”
- Policymakers and pundits assume the U.S. is so dominant that we’re prepared to fight multiple fronts at once, and that it won’t affect our security.
- Candidates for office should prepare to raise money, not rely on taxpayer subsidies.
- More market liberalization could help prepare Japan for any other natural disaster.
- Are Tea Party-backed Republicans prepared to go the distance on spending cuts?
Bastiat on the Japanese Tsunami
Nathan Gardels at the Huffington Post writes (emphasis added):
No one — least of all someone like myself who has experienced the existential terror of California’s regular tremors and knows the big one is coming here next — would minimize the grief, suffering and disruption caused by Japan’s massive earthquake and tsunami.
But if one can look past the devastation, there is a silver lining. The need to rebuild a large swath of Japan will create huge opportunities for domestic economic growth, particularly in energy-efficient technologies, while also stimulating global demand and hastening the integration of East Asia.
But as French political economist Frédéric Bastiat noted, destruction isn’t stimulative because it cannot create wealth:
New Rasmussen Poll Finds Modest Support for Restraint
A just-released Rasmussen survey finds that nearly half of all American voters would withdraw troops from Europe and Japan, but fewer than one in three favor leaving U.S. forces on the Korean peninsula. This portion of the survey is attracting most of the attention, but the survey as a whole reveals some modest public support for a strategy of restraint, one in which the U.S. military focuses primarily on defending U.S. security and core interests, and calls on other countries to play a larger role in their own defense.
For example, when asked “Should the U.S. military strategy be to focus narrowly on defending the United States and U.S. interests, or should the U.S. military strategy seek to maintain worldwide stability and peace?” a solid majority of likely voters (55 percent) agreed with the former, with just 34 percent wishing to be the world’s policeman. Other polls have shown even less support for the globo-cop role (e.g. here).
On this point, and the related one of allowing wealthy allies to defend themselves, I was able to drill down in the cross tabs a bit, and I found a few suprising areas of divergence between likely voters, former military, and self-identified members of the Tea Party movement.
There is some obvious overlap in the survey among these three groups (e.g. 30 percent of former military people self-identify as Tea Partiers, compared with just 18 percent of likely voters). Tea Partiers are more likely than LVs to agree with the statement U.S. military strategy should “Focus narrowly on defending the United States and U.S. interests” (66 pct vs. 55 pct), but they are less likely to support removing U.S. troops from Europe (40 pct. vs. 49 pct). Also interesting, this is one of the few areas where the former military members agree more with LVs than Tea Partiers. Those who have served in the military align with TPers (within the margin of error, +/- 3 pct, 95 pct confidence interval) on the question of focusing on defending U.S. interests, but agree with LVs that we should withdraw troops from Europe.
One last point: these and other surveys (including an earlier Rasmussen poll) reveal a considerable gap between what the public believes, and what is actually true. For example, when presented with the true/false question “Most federal spending is spent on only three programs—Social Security, Medicare and national defense,” only 40 percent of respondents correctly answered “True” (38 percent said no, and 22 percent were unsure). A solid majority (65 percent) agreed that “the United States military [is] more powerful than any other nation’s military force,” but that still left a troubling 21 percent who disagreed, and another 14 percent whe were unsure.
That means, as I argued here last year, that those of us responsible for explaining public policy still have a lot of work to do.
Which Nation Will Be the Next European Debt Domino…or Will It Be the United States?
Thanks to decades of reckless spending by European welfare states, the newspapers are filled with headlines about debt, default, contagion, and bankruptcy.
We know that Greece and Ireland already have received direct bailouts, and other European welfare states are getting indirect bailouts from the European Central Bank, which is vying with the Federal Reserve in a contest to see which central bank can win the “Most Likely to Appease the Political Class” Award.
But which nation will be the next domino to fall? Who will get the next direct bailout?
Some people think total government debt is the key variable, and there’s been a lot of talk that debt levels of 90 percent of GDP represent some sort of fiscal Maginot Line. Once nations get above that level, there’s a risk of some sort of crisis.
But that’s not necessarily a good rule of thumb. This chart, based on 2010 data from the Economist Intelligence Unit (which can be viewed with a very user-friendly map), shows that Japan’s debt is nearly 200 percent of GDP, yet Japanese debt is considered very safe, based on the market for credit default swaps, which measures the cost of insuring debt. Indeed, only U.S. debt is seen as a better bet.
America’s Number One! America’s Number One!…Oops, Never Mind
Sometimes it’s not a good idea to be at the top of a list. And now that Japan has announced a five-percentage point reduction in its corporate tax rate, the United States will have the dubious honor of imposing the developed world’s highest corporate tax rate. Here’s an excerpt from the report in the New York Times.
Japan will cut its corporate income tax rate by 5 percentage points in a bid to shore up its sluggish economy, Prime Minister Naoto Kan said here Monday evening. Companies have urged the government to lower the country’s effective corporate tax rate — which now stands at 40 percent, around the same rate as that in the United States — to stimulate investment in Japan and to encourage businesses to create more jobs. Lowering the corporate tax burden by 5 percentage points could increase Japan’s gross domestic product by 2.6 percentage points, or 14.4 trillion yen ($172 billion), over the next three years, according to estimates by Japan’s Trade Ministry. … In a survey of nearly 23,000 companies published this month by the credit research firm Teikoku Data Bank, more than 44 percent of respondents cited lower corporate taxes as a prerequisite to stronger economic growth in Japan. … A 5 percentage-point tax rate cut is unlikely to do much to solve Japan’s woes, however. An effective corporate tax rate of 35 percent would still be higher than South Korea’s 24 percent or Germany’s 29 percent, for example. … Meanwhile, the government is trying to offset lost tax revenue with tax increases elsewhere, which could blunt the effect of reduced corporate tax burdens.
I suspect the Japanese government’s estimate of $172 billion of additional output is overly generous. After all, the corporate tax rate in Japan will still be very high (the government originally was considering a bigger cut). And foolish Japanese politicians will probably raise taxes elsewhere. But there will be some additional growth since the corporate tax rate is an especially damaging way to collect revenue.
But I’m not losing sleep about Japan’s economic future. I hope they do well, of course, but my bigger concern is the American economy. The U.S. corporate tax rate of nearly 40 percent (including state corporate burdens) already is far too high, particularly since America adds to the competitive disadvantage of U.S.-domiciled firms by being one of the few nations to impose an extra layer of tax on foreign-source income. Japan’s proposed rate reduction, however, means the high tax rate in America will be an even bigger hindrance to job creation.
It’s also worth noting that the average corporate tax rate in Europe has now dropped to less than 24 percent, so even welfare states have figured out that a high tax burden on business doesn’t make sense in a competitive global economy.
Sometimes you can fall farther behind if you stand still and everyone else moves forward. That’s a good description of what’s happening in the battle for a pro-growth corporate tax system. By doing nothing, America’s self-destructive corporate tax system is becoming, well, even more destructive.
Don’t Be Afraid of the Chinese Economic Tiger
The news that China has surpassed Japan as the world’s second-largest economy has generated a lot of attention. It shouldn’t. There are roughly 10 times as many people in China as there are in Japan, so the fact that total gross domestic product in China is now bigger than total gross domestic product in Japan is hardly a sign of Chinese economic supremacy.
Yes, China has been growing in recent decades, but it’s almost impossible not to grow when you start at the bottom — which is where China was in the late 1970s thanks to decades of communist oppression and mismanagement. And the growth they have experienced certainly has not been enough to overtake other nations based on measures that compare living standards. According to the World Bank, per-capita GDP (adjusted for purchasing power parity) was $6,710 for China in 2009, compared to $33,280 for Japan (and $46,730 for the U.S.). If I got to choose where to be a middle-class person, China certainly wouldn’t be my first pick.
This is not to sneer at the positive changes in China. Hundreds of millions of people have experienced big increases in living standards. Better to have $6,710 of per-capita GDP than $3,710. But China still has a long way to go if the goal is a vibrant and rich free-market economy. The country’s nominal communist leadership has allowed economic liberalization, but China is still an economically repressed nation. Scores have improved, but the Economic Freedom of the World report ranks China 82 out of 141 nations, just one spot above Russia, and the Index of Economic Freedom has an even lower score, 140 out of 179 nations.
Hopefully, China will continue to move in the right direction. That would be good for the Chinese people. And since rich neighbors are better than poor neighbors, it also would be good for America.
China Now World’s 2nd Largest Economy: Ho Hum
China is now officially the world’s second largest economy, overtaking Japan in the quarter that ended in June and likely for all of 2010. While the story has been widely reported (more than 1,500 articles on Google News this morning), it is less significant than it first appears.
The news will probably ruffle the feathers of the China hawks, who will see in it a threat to America’s influence in the world, but China’s rise to no. 2 is really another sign of the world returning to normal.
China is home, after all, to one-fifth of mankind. Its population of 1,330 million is more than 10 times that of Japan (127 million) and more than four times that of the United States (310 million), according to the CIA Factbook. So even though China’s gross domestic product is now larger than Japan’s, its GDP per capita is still only one tenth that of its east Asian neighbor.
If China sticks to its path of market liberalization, it’s close to inevitable that its GDP economy will eventually surpass that of the United States in overall size. That news event is likely to grab headlines in 15 to 20 years based on current rates of growth. Even then, China’s per capita GDP will only be a quarter of what we enjoy in the United States.
China’s rank as no. 1 will be nothing new in history. According to the late British economic historian Angus Maddison, China’s economy had been the largest in the world for most of the past two millennia. In his magisterial 2001 book The World Economy: A Millennial Perspective, Maddison estimated that as recently as 1820 China’s GDP was 30 percent larger than the economies of Western Europe and the United States combined (p. 117).
After centuries of war, civil strife, and self-imposed isolation, China is only now rightfully reclaiming its rank as one of the world’s largest economies. That development is nothing to be feared.
What’s Going on in Japan?
Two weeks ago in Defense News, I argued that America’s alliances are growing increasingly detached from American security interests. With reference to Defense Secretary Bob Gates’ visit to the newly-minted government in Japan, I wrote that
after imploring [new Japanese PM Yukio] Hatoyama to continue Japan’s minuscule contribution to the war in Afghanistan and not to reconsider the deal to realign U.S. forces in Japan, Gates was asked whether the U.S. military role in Japan might be scaled back. Offering the obligatory reference to the countries’ “shared interest” in regional security, Gates admitted that “the primary purpose of our alliance from a military standpoint is to provide for the security of Japan … It allows Japan to have a defense budget … of roughly 1 percent of GDP.”
This is an excellent reason why the Japanese should support the alliance, but it raises the question of why U.S. taxpayers should want to pick up the tab for Japan’s security.
MCAS Futenma
But the Hatoyama government seems intent on reopening old wounds. Aside from its insistence on renegotiating the Futenma agreement on shifting US forces around in Japan, now comes the news that the just-elected Democratic Party (DPJ) is going to (*ahem*) open the kimono and reveal “evidence of a decades-old secret pact between Tokyo and Washington that allowed U.S. ships and aircraft to carry nuclear weapons on stopovers in Japan.”
The idea of a Japanese government breaking Japanese law in order to allow American military vessels to carry nuclear weapons in Japan is wildly unpopular among Japanese. In large part, this is a pretty transparent move by the DPJ to stick it to the now out of power Liberal Democratic Party (LDP) by tying them to illegal and secretive practices that huge majorities of the Japanese public oppose.
But the broader point is that for those of us who have been advocating a larger role in Asia for Japan and a smaller one for the United States, the increasingly independent nature of the new DPJ government ought to be seen as a feature, not a bug. If the Japanese are really feeling their oats and aren’t too excited at continuing the LDP’s lockstep alliance with the United States, more power to them. If they want fewer US troops in Japan, terrific. We’re militarily overextended as it is and have serious economic problems to deal with. The Bush administration took some baby steps in this direction. The Obama administration should keep the ball rolling.
American officials ought to be quietly thinking about how to use the developments in Japan to start handing off responsibility for defending Japan to the Japanese government.
Weekend Links
- Cato v. Heritage on the Patriot Act, Round II. Today’s topic: “Where are the demonstrated examples of abuses of liberties because of the Patriot Act? Are there any provisions of the law that civil libertarians would find acceptable?”
- Comparing the Great Depression to the current recession: Did we not learn anything?
- Re-examining the U.S. alliance with Japan: “The current relationship remains trapped in a world that no longer exists.”
- The human cost of delayed economic reform in India: “With earlier reform, 14.5 million more children would have survived, 261 million more Indians would have become literate, and 109 million more people would have risen above the poverty line.”
- Podcast: What we should have learned from our experience in Somalia. Background reading: Somalia, Redux: A More Hands-Off Approach
Is Buying an iPod Un-American?
We own three iPods at my house, including a recently purchased iPod Touch. Since many of the iPod parts are made abroad, is my family guilty of allowing our consumer spending to “leak” abroad, depriving the American economy of the consumer stimulus we are told it so desperately needs? If you believe the “Buy American” lectures and legislation coming out of Washington, the answer must be yes.
Our friends at ReasonTV have just posted a brilliant video short, “Is Your iPod Unpatriotic?” With government requiring its contractors to buy American-made steel, iron, and manufactured products, is it only a matter of time before the iPod—“Assembled in China,” of all places—comes under scrutiny? You can view the video here:
In my upcoming Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization, I talk about how American companies are moving to the upper regions of the “smiley curve.” The smiley curve is a way of thinking about global supply chains where Americans reap the most value at the beginning and the end of the production process while China and other low-wage countries perform the low-value assembly in the middle. In the book, I hold up our family’s iPods as an example of the unappreciated benefits of a more globalized American economy:
The lesson of the smiley curve was brought home to me after a recent Christmas when I was admiring my two teen-age sons’ new iPod Nanos. Inscribed on the back was the telling label, “Designed by Apple in California. Assembled in China.” To the skeptics of trade, an imported Nano only adds to our disturbingly large bilateral trade deficit with China in “advanced technology products,” but here in the palm of a teenager’s hand was a perfect symbol of the win-win nature of our trade with China.
Assembling iPods obviously creates jobs for Chinese workers, jobs that probably pay higher-than-average wages in that country even though they labor in the lowest regions of the smiley curve. But Americans benefit even more from the deal. A team of economists from the Paul Merage School of Business at the University of California-Irvine applied the smiley curve to a typical $299 iPod and found just what you might suspect: Americans reap most of the value from its production. Although assembled in China, an American company supplies the processing chips, a Korean company the memory chip, and Japanese companies the hard drive and display screen. According to the authors, “The value added to the product through assembly in China is probably a few dollars at most.”
The biggest winner? Apple and its distributors. Standing atop the value chain, Apple reaps $80 in profit for each unit sold—an amount higher than the cost of any single component. Its distributors, on the opposite high end of the smiley curve, make another $75. And of course, American owners of the more than 100 million iPods sold since 2001—my teen-age sons included—pocket far more enjoyment from the devices than the Chinese workers who assembled them.
To learn a whole lot more about how American middle-class families benefit from trade and globalization, you can now pre-order the book at Amazon.com.
Week in Review: Stimulus, Sarah Palin and a Political Conflict in Honduras
Obama Considering Another Round of Stimulus
With unemployment continuing to climb and the economy struggling along, some lawmakers and pundits are raising the possibility of a second stimulus package at some point in the future. The Cato Institute was strongly opposed to the $787 billion package passed earlier this year, and would oppose additional stimulus packages on the same grounds.
“Once government expands beyond the level of providing core public goods such as the rule of law, there tends to be an inverse relationship between the size of government and economic growth,” argues Cato scholar Daniel J. Mitchell. “Doing more of a bad thing is not a recipe for growth.”
Mitchell narrated a video in January that punctures the myth that bigger government “stimulates” the economy. In short, the stimulus, and all big-spending programs are good for government, but will have negative effects on the economy.
Writing in Forbes, Cato scholar Alan Reynolds weighs in on the failures of stimulus packages at home and abroad:
In reality, the so-called stimulus package was actually just a deferred tax increase of $787 billion plus interest.
Whether we are talking about India, Japan or the U.S., all such unaffordable spending packages have repeatedly been shown to be effective only in severely depressing the value of stocks and bonds (private wealth). To call that result a “stimulus” is semantic double talk, and would be merely silly were it not so dangerous.
In case you’re keeping score, Cato scholars have opposed government spending to boost the economy without regard to the party in power.
For more of Cato’s research on government spending, visit Cato.org/FiscalReality.
Finally, an Ally That Doesn’t Wait for America
Washington’s willingness to toss security guarantees about the globe like party favors has encouraged other nations to do little for their own defense. From the European, Japanese, and South Korean standpoint, why spend more when the Americans will take care of you?
But it looks like Australia takes a different view, and is willing to do more to defend itself and its region. Reports the Daily Telegraph:
The latest defence White Paper recommends buying 100 advanced F-35 jet fighters and 12 powerful submarines equipped with cruise missiles, a capability which no other country in the region is believed to possess.
The “potential instability” caused by the emergence of China and India as major world powers was cited as the most pressing reason for this military build-up. In particular, Australian defence planners are believed to be concerned about China’s growing naval strength and America’s possible retreat as a global power in the decades ahead.
Chinese officials say their country’s growing power threatens no-one. Behind the scenes, Beijing is thought to be unhappy about Australia’s White Paper, with one Chinese academic saying it was “typical of a Western Cold War mentality”.
But the Chinese navy has almost doubled the number of secret, long-distance patrols conducted by its submarines in the past year. The reach of its navy is extending into Australian waters. China is also acquiring new amphibious assault ships that can transport a battalion of troops.
So instead of calling Washington to deal with Beijing, the Australians are building up their own navy. Novel approach! Now, how can we implant a bit of the Aussie character in America’s other friends around the globe?
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