Time for a Reality Check on the Trade Deficit
The U.S. trade deficit rose in January, according to this morning’s monthly trade report from the U.S. Commerce Department, and on cue the news is being greeted as a bad omen for the U.S. economy.
Reflecting the conventional wisdom, this morning’s Associated Press story states as a matter of fact, with no attribution:
A widening trade deficit hurts the U.S. economy. When imports outpace exports, more jobs go to foreign workers than to U.S. workers.
Oh really? As I’ve documented elsewhere, the U.S. economy actually grows faster during periods when the trade deficit is widening compared to when it is shrinking. That’s because an expanding economy increases demand for imports as well as domestically made goods. Stronger growth also attracts more foreign investment, which is the flip side of the trade deficit.
The same story is true for jobs. In Chapter 5 of my 2009 Cato book, Mad about Trade, I show how the unemployment rate invariably rises during periods when the trade deficit is “improving,” and declines during periods when the deficit is “worsening.” (Check out Table 2.2 on p. 81, courtesy of Google Books.)
Just think back to the 1990s. From 1992 to 2000, the trade deficit widened from 0.5 percent of GDP to 3.9 percent. During that same period, the unemployment rate fell from 7.3 percent to 3.9 percent and the economy added more than 18 million jobs.
More recently, the trade deficit narrowed sharply between 2007 and 2009 as a share of GDP, while the economy lost more than 8 million jobs and unemployment soared.
The conventional wisdom on trade deficits and the economy is due for a reality check. If politicians believe that “a widening trade deficit hurts the economy,” contrary to all the evidence, they will be more tempted to reach for the snake oil of protectionism.
Yes, We Do Bribe Kids!
While politicians probably support many policies for college students in part because they think the policies will be educationally or otherwise beneficial, vote buying is no doubt also important. Of course, it’s hard to find a politician who will actually cop to the latter. On this morning’s Today show, however, Democratic National Committee Chairman Tim Kaine came about as close to doing that as you could possibly hope for.
Responding to interviewer Ann Curry’s observation that President Obama has aimed a lot of campaigning at college students lately, Kaine noted that young people voted for Obama in record numbers in 2008, and “the message to young voters is pretty simple… we’ve done the largest expansion of the student loan program in American history… we’ve done a health care reform that allows youngsters to stay on their family insurance policy until age 26, and we’ve done important credit card reform that has helped young voters. So we have their attention….”
Translation: Kids, vote the right way, and keep that free stuff coming!
Trade Can Help the Poor Escape Poverty
Professor William Easterly, the economic development expert from New York University, has written an excellent comment for the Financial Times online. He writes, “The Millennium Development Goals [summit that wraps up in NY today] tragically misused the world’s goodwill to support failed official aid approaches to global poverty and gave virtually no support to proven approaches. … But current experience and history both speak loudly that the only real engine of growth out of poverty is private business, and there is no evidence that aid fuels such growth.”
At the Center for Global Liberty and Prosperity, we have continuously emphasized the power of trade to help the poor escape poverty. Unfortunately, politicians in rich countries find it easier to waste billions of taxpayers’ dollars in the form of foreign aid than to take on special interests that thrive on trade protectionism; hence European and American agricultural tariffs and subsidies.
However, the impact of rich countries’ protectionism should not be exaggerated. African countries are typically more protectionist than rich countries. In fact, they are more protectionist against one another than against rich countries. The sad truth is that poor countries are perfectly able to shoot themselves in the foot by following growth-killing economic policies – irrespective of what the rich countries do.
Foreign aid, incidentally, has been ineffective at promoting liberalization.
The Fraud From Basel
Despite every major US bank being declared by regulators as “well capitalized” prior to the financial crisis, we still found ourselves watching the government plow hundreds of billions of capital into said banks. How can this be? The answer is quite simple: we were lied to. Maybe that’s a little harsh, after all these banks did meet the regulatory definition of “well capitalized”. But when push came to shove, market participants rightly ignored regulatory capital. After all you cannot use things like “deferred tax losses” to pay your bills with.
It is hard to improve upon Martin Wolf’s observation in today’s Financial Times: “This amount of equity is far below levels markets would impose if investors did not continue to expect governments to bail out creditors in a crisis.” This point is best illustrated by the trend in bank capital over the last 100 years. Back when banks were actually subject to market forces and were not explicitly subjected to government capital standards, they held significantly more capital. In 1900 the average US bank capital ratio was close to 25%, now it’s closer to 5%. The trend is unmistakable: the more government has regulated bank capital, the less capital banks have ended up holding.
Despite the claims of the banking industry, what the bank regulators have just delivered with “Basel III” is simply another fraud upon the public and investors. Any framework that continues to treat say Greek or Fannie Mae debt as largely risk-free is a sham.
The real solution is to first end the various government bailouts, guarantees and subsidies behind the banking system, subjecting bank creditors to actual losses, while also abandoning the charade that is capital regulation. Sadly politicians (see the Dodd-Frank Act) and regulators continue to simply tweak a flawed and morally bankrupt system.
“Either the Most Honest Politician in the World or the Most Opportunistic”
Paul Waldie at Toronto’s Globe and Mail reports on the case of Mike Reilly, who (unsuccessfully so far) has sought to write off as tax expenses the costs of campaigning for local office in a suburb of Vancouver. Reilly told a tax court that there was nothing idealistic about his quest for government office: he wanted “to earn a good salary and promote his business,” raising the visibility of his development company. Lawyers for the Canada Revenue Agency insisted that Reilly wouldn’t have gone to the trouble of running unless he had cared about at least some public issues, but he disputed that:
“You know, I don’t recall being passionate about any issues other than seizing an opportunity to step in and develop a better profile for myself,” Mr. Reilly replied. “No. It was strictly business for me.”
The tax judge ruled against Reilly based on accounting issues but accepted his general contention that he “was not passionate about any issue except increasing his own profile and earning the salary of mayor,” noting that the candidate “did not listen to the citizens of Delta and did not appear to have much interest in their concerns.” If all politicians had to tell the truth, how many similar confessions might we hear?
Your Health Insurance, Designed by Lobbyists
Christopher Weaver of Kaiser Health News has an excellent article in today’s Washington Post on the various government agencies that will now be deciding what health insurance coverage you must purchase, and how many of those decisions will ultimately fall to lobbyists and politicians:
For years, an obscure federal task force sifted through medical literature on colonoscopies, prostate-cancer screening and fluoride treatments, ferreting out the best evidence for doctors to use in caring for their patients. But now its recommendations have financial implications, raising the stakes for patients, doctors and others in the health-care industry.
Under the new health-care overhaul law, health insurers will be required to pay fully for services that get an A or B recommendation from the U.S. Preventive Services Task Force…[which] puts the group in the cross hairs of lobbyists and disease advocates eager to see their top priorities — routine screening for Alzheimer’s disease, diabetes or HIV, for example — become covered services.
And it’s not just the USPSTF that will be deciding what coverage you must purchase:
[P]lans must also cover a set of standard vaccines recommended by the Advisory Committee on Immunization Practices, as well as screening practices for children that have been developed by the Health Resources and Services Administration in conjunction the American Academy of Pediatrics. Health plans will also be required to cover additional preventative care for women recommended under new guidelines that the Department of Health and Human Services is expected to issue by August 2011.
The chairman of the USPSTF says the task force will try “to stay true to the methods and the evidence… the science needs to come first.” A noble sentiment, but as my colleague Peter Van Doren likes to say, “When politics and science conflict, politics wins.” Witness how industry lobbyists have killed or neutered every single government agency that has ever dared to produce useful comparative-effectiveness research. (You’re next, Patient-Centered Outcomes Research Institute!)
When government agencies are making non-scientific value judgments–e.g., are these studies reliable enough to merit an A or B recommendation? what should be the thresholds for an A or B recommendation? will the benefits of mandating this coverage outweigh the costs?–politics does even better. Witness Sen. Barbara Mikulski (D-Md) overruling a USPSTF recommendation when she “inserted an amendment in the [new] health-care law to explicitly cover regular mammograms for women between 40 and 50. ”
Speaking of value judgments, the one flaw in Weaver’s article is that it inadvertently conveys a value judgment as if it were fact. He writes that the mandate to purchase coverage for preventive services is “good news for patients” and that 88 million Americans “will benefit.” Whether the mandate is good news for patients depends on whether patients value the added coverage more than the additional premiums they must pay. (The administration estimates that premiums for affected consumers will rise an average of 1.5 percent. One insurer puts the average cost at 3-4 percent of premiums. Naturally, some consumers will face above-average costs.) Whether the benefits outweigh the costs is ultimately a subjective determination. (The best way to find out, as it happens, is to let consumers make the decision themselves.)
Libertarianism Hits the Big Time
Michael Crowley, late of the New Republic and now with Time magazine, writes thoughtfully about Ron Paul, Rand Paul, and libertarianism. Crowley notes that Rand Paul, “more politically flexible than his father,” has plenty of unlibertarian positions. But both of them are tapping into a real strain in contemporary politics:
But he, like his father, also knows well that a genuine libertarian impulse is astir in America…. polls show an uptick in both social permissiveness and skepticism of government intervention….[Ron Paul] has already waited a long time — and it appears the country is moving his way.
This is a current trend, but it’s also deeply rooted in the American political culture. As David Kirby and I wrote in “The Libertarian Vote“:
It’s no surprise that many Americans hold libertarian attitudes since America is, after all, a country fundamentally shaped by libertarian values and attitudes. In their book It Didn’t Happen Here: Why Socialism Failed in the United States, Seymour Martin Lipset and Gary Marx write, “The American ideology, stemming from the [American] Revolution, can be subsumed in five words: antistatism, laissez-faire, individualism, populism, and egalitarianism.”… Richard Hofstadter wrote: “The fierceness of the political struggles in American history has often been misleading; for the range of vision embraced by the primary contestants in the major parties has always been bounded by the horizons of property and enterprise. However much at odds on specific issues, the major political traditions have shared a belief in the rights of property, the philosophy of economic individualism, the values of competition; they have accepted the economic virtues of capitalist culture.”… McClosky and Zaller sum up a key theme of the American ethos in classic libertarian language: “The principle here is that every person is free to act as he pleases, so long as his exercise of freedom does not violate the equal rights of others.”…
The Mote in Paul Krugman’s Eye
Paul Krugman says libertarianism is not a serious political philosophy because politicians are corruptible, do stupid things, et cetera. My colleagues Aaron Powell and David Boaz demonstrate why that’s a bigger problem for Krugman than for libertarians: Krugman’s statism wouldn’t make politicians any less ignorant or corruptible, it would just give those ignorant and corruptible politicians more power.
I made the same point to Krugman during a health care debate. He complained that Republicans complain that government doesn’t work, and then they get elected and prove themselves correct. (It’s a good line, but I think he stole it from P.J. O’Rourke.) I responded, “Unless you have a plan to abolish Republicans, they’re part of your plan. Maybe we can put them in camps?” Krugman seems impervious to the point.
Slippery Standards Slope
The draft national curricular standards released yesterday, as I wrote earlier, will in all likelihood do little or no educational good if adopted. They’ll either be ignored or, if hard to meet, dumbed-down.
That said, the really troubling question is not whether the standards will do any good, but whether they will do much harm.
The answer: Oh, they’ll do harm. They’ll move us one step closer to complete centralization of education, which portends many potentially bad things, from total special-interest domination to even more wasteful spending.
Perhaps the most concerning possibility is that complete centralization — meaning, federalization — will lead to nationwide conflict over what the schools should teach, much as we are seeing in Texas right now and witnessed in the 1990s, the last time Washington tried to push “voluntary” national standards. Back then national standards in several subjects were proposed, and a national firestorm was set off over what they did, and did not, contain.
Open All of Obama’s Health Care Meetings to C-SPAN
From my op-ed in The Daily Caller:
ObamaCare would dramatically expand government control over health care.
Each new power ObamaCare creates would be targeted by special interests looking for special favors, and held for ransom by politicians seeking a slice of the pie.
ObamaCare would guarantee that crucial decisions affecting your medical care would be made by the same people, through the same process that created the Cornhusker Kickback, for as far as the eye can see.
When ObamaCare supporters, like Kaiser Family Foundation president Drew Altman, claim that “voters are rejecting the process more than the substance” of the legislation, they’re missing the point.
When government grows, corruption grows. When voters reject these corrupt side deals, they are rejecting the substance of ObamaCare.
If Obama is serious about fighting corruption, he should invite C-SPAN to into every meeting he holds with members of Congress.
Then we’ll see whether he’s lobbying House members based on the Senate bill’s merits, or promising House members judgeships or ambassadorships in exchange for their votes.
What’s going on behind those closed doors, anyway? Aren’t you just a little bit curious?
Or does corruption only happen when Billy Tauzin is in the room?
Six Reasons to Downsize the Federal Government
1. Additional federal spending transfers resources from the more productive private sector to the less productive public sector of the economy. The bulk of federal spending goes toward subsidies and benefit payments, which generally do not enhance economic productivity. With lower productivity, average American incomes will fall.
2. As federal spending rises, it creates pressure to raise taxes now and in the future. Higher taxes reduce incentives for productive activities such as working, saving, investing, and starting businesses. Higher taxes also increase incentives to engage in unproductive activities such as tax avoidance.
3. Much federal spending is wasteful and many federal programs are mismanaged. Cost overruns, fraud and abuse, and other bureaucratic failures are endemic in many agencies. It’s true that failures also occur in the private sector, but they are weeded out by competition, bankruptcy, and other market forces. We need to similarly weed out government failures.
4. Federal programs often benefit special interest groups while harming the broader interests of the general public. How is that possible in a democracy? The answer is that logrolling or horse-trading in Congress allows programs to be enacted even though they are only favored by minorities of legislators and voters. One solution is to impose a legal or constitutional cap on the overall federal budget to force politicians to make spending trade-offs.
5. Many federal programs cause active damage to society, in addition to the damage caused by the higher taxes needed to fund them. Programs usually distort markets and they sometimes cause social and environmental damage. Some examples are housing subsidies that helped to cause the financial crises, welfare programs that have created dependency, and farm subsidies that have harmed the environment.
6. The expansion of the federal government in recent decades runs counter to the American tradition of federalism. Federal functions should be “few and defined” in James Madison’s words, with most government activities left to the states. The explosion in federal aid to the states since the 1960s has strangled diversity and innovation in state governments because aid has been accompanied by a mass of one-size-fits-all regulations.
For more, see DownsizingGovernment.org.
Criminalizing Politics
Steve Poizner, the California insurance commissioner who is seeking the Republican nomination for governor, created a stir this week by charging opponent Meg Whitman’s campaign with attempting to coerce him out of the race. He said he had reported her campaign to state and federal law enforcement authorities.
What did Whitman actually do? Well, Poizner said that Whitman consultant Mike Murphy had contacted a Poizner staffer by phone and email to urge him to withdraw from the race. The email, released by Poizner, said: “I hate the idea of each of us spending $20 million beating on the other in the primary, only to have a badly damaged nominee. And we can spend $40 million tearing up Steve if we must; bad for him, bad for us, and a crazy waste to tear up a guy with great future statewide potential.” In the email, Murphy went on to suggest that if Poizner dropped out of the race before the June 8 vote, Whitman and her team would immediately get behind him for a 2012 challenge to Sen. Dianne Feinstein.
Poizner says that’s not only “strong-arm tactics” but possibly an illegal inducement to get him to withdraw. But isn’t this really just politics as usual? Don’t candidates as a matter of course say “support me this time, and I’ll support you next time” or “run for a different office and I’ll endorse you”? Presidential candidates, or their campaign managers, are often said to have promised the vice presidency to more than one rival to clear the field.
The point about spending $40 million of Republican money tearing up fellow Republicans is a pretty common complaint about party primaries. In fact, National Review correspondent John J. Miller raised just that concern about the Rick Perry-Kay Bailey Hutchison showdown in Texas.
Even during the Rod Blagojevich flap over “selling” a Senate seat, the always-provocative Jack Shafer and Jim Harper both asked, Isn’t this what politicians do? They make deals — including deals like “I’ll support your campaign if you’ll make my buddy (or me) a Cabinet secretary.” No doubt the promises are often worthless, but they still get made. Blagojevich and Murphy have reminded pols all over the country that such deals are better made in person, not via email or telephone.
Politics ain’t beanbag, Mr. Poizner. Accept the deal or reject it. But “let’s clear the field and spend our money fighting the other party” is pretty standard politics. And a darn sight better than another standard political practice, using the taxpayers’ money to bribe the voters to support you.
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