Big Government Causes Crime, the Norwegian Version
I’ve written several times about the foolish War on Drugs, which has been about as misguided and ineffective as the government’s War on Poverty.
So when I saw a news report about a couple of Swedes getting busted for smuggling 200-plus kilos of contraband into Norway, and then another story about a Russian getting caught trying to sneak 90 kilos of an illicit substance into the country, I wondered whether these were reports about cocaine or marijuana. Or perhaps heroin or crystal meth.
Hardly. Norway’s law enforcement community was protecting people from the horrible scourge of illegal butter.
Sounds absurd, but there’s been an increase in the demand for butter and high import taxes have created a huge incentive for black market butter sales. Here’s a video on this latest example of government stupidity.
I guess the moral of the story is that if you outlaw butter, only outlaws will have butter. Or perhaps butter is the gateway drug leading to whole milk consumption, red meat, salt, and other dietary sins. Surely Mayor Bloomberg will want to investigate.
By the way, the United States is not immune from foolish policies that line the pockets of criminals. Here’s a video from the Mackinac Center revealing how punitive tobacco taxes facilitate organized crime.
From Russia with Butter
Just in time for the Christmas baking season, Norwegians are facing an acute butter shortage. Last Friday, customs officials detained a Russian trying to smuggle 90 kilos of the creamy goodness into the country by car.
Wait. What?!? Isn’t Norway that rich Scandinavian country with all the oil ?
Yup, that’s the one.
Wow… This European debt crisis is already causing shortages of staples?
No, that’s not it.
Huh. I feel silly asking this, but are they at war with someone?
Not as far as we know.
Well what gives then?
The story linked above claims bad weather hurt crops and milk production while demand has risen due to a high fat fad diet.
Well why don’t they just, you know, import more?
That’s what Sweden’s doing—they’ve had similar weather and they’ve got the same diet fad, but their stores (and soon their arteries) are chocked full of butter. But the Norwegians couldn’t do that.
Why on earth not?
Norway has a butter monopolist called “Tine” that is deliberately protected from foreign competitors by government-imposed import tariffs.
Well, with all due respect: duh! We’ve only known the damaging effects of monopolies and protectionism for, like a couple of hundred years. You’d think the Norwegian people would have wised up and ditched them by now. Americans would never stand for that sort of thing.
Norwegians seem pretty angry right now, and it sounds as though they may do just that. But I wouldn’t be too smug about the United States. Turns out, it’s got its own $600 billion per year government protected monopoly that makes Tine look like small potatoes indeed. Here’s a hint:
Eight Questions for Protectionists
When asked to pick my most frustrating issue, I could list things from my policy field such as class warfare or income redistribution.
But based on all the speeches and media interviews I do, which periodically venture into other areas, I suspect protectionism vs. free trade is the biggest challenge.
So I want to ask the protectionists (though anybody is free to provide feedback) how they would answer these simple questions.
1. Do you think politicians and bureaucrats should be able to tell you what you’re allowed to buy?
As Walter Williams has explained, this is a simple matter of freedom and liberty. If you want to give the political elite the authority to tell you whether you can buy foreign-produced goods, you have opened the door to endless mischief.
2. If trade barriers between nations are good, then shouldn’t we have trade barriers between states? Or cities?
This is a very straightforward challenge. If protectionism is good, then it shouldn’t be limited to national borders.
3. Why is it bad that foreigners use the dollars they obtain to invest in the American economy instead of buying products?
Little green pieces of paper have little value to foreign companies. They only accept those dollars in exchange for products because they intend to use them, either to buy American products or to invest in the U.S. economy. Indeed, a “capital surplus” is the flip side of a “trade deficit.” This generally is a positive sign for the American economy (though I freely admit this argument is weakened if foreigners use dollars to “invest” in federal government debt).
4. Do you think protectionism would be necessary if America did pro-growth reforms such as a lower corporate tax rate, less wasteful spending, and reduced red tape?
There are thousands of hard-working Americans that have lost jobs because of foreign competition. At some level, this is natural in a dynamic economy, much as candle makers lost jobs when the light bulb was invented. But oftentimes American producers can’t meet the challenge of foreign competition because of bad policy from Washington. When I think of ordinary Americans that have lost jobs, I direct my anger at the politicians in DC, not a foreign company or foreign workers.
5. Do you think protectionism would help, in the long run, if we don’t implement pro-growth reforms?
If we travel down the path of protectionism, politicians will use that as an excuse not to implement pro-growth reforms. This condemns America to a toxic combination of two bad policies – big government and trade distortions. This will destroy far more jobs and opportunity that foreign competition.
6. Do you recognize that, by creating the ability to offer special favors to selected industries, protectionism creates enormous opportunities for corruption?
Most protectionism in America is the result of organized interest groups and powerful unions trying to prop up inefficient practices. And they only achieve their goals by getting in bed with the Washington crowd in a process that is good for the corrupt nexus of interest groups-lobbyists-politicians-bureaucrats.
7. If you don’t like taxes, why would you like taxes on imports?
A tariff is nothing but a tax that politicians impose on selected products. This presumably makes protectionism inconsistent with the principles of low taxes and limited government.
8. Can you point to nations that have prospered with protectionism, particularly when compared to similar nations with free trade?
Some people will be tempted to say that the United States was a successful economy in the 1800s when tariffs financed a significant share of the federal government. That’s largely true, but the nation’s rising prosperity surely was due to the fact that we had no income tax, a tiny federal government, and very little regulation. And I can’t resist pointing out that the 1930 Smoot-Hawley tariff didn’t exactly lead to good results.
We also had internal free trade, as explained in this excellent short video on the benefits of free trade, narrated by Don Boudreaux of George Mason University and produced by the Institute for Humane Studies.
My closing argument is that people who generally favor economic freedom should ask themselves whether it’s legitimate or logical to make an exception in the case of foreign trade.
Easter Bunny’s Burden
From Pennsylvania, bad news for chocolate lovers:
The Hershey Company says it is raising wholesale prices by 9.7% on most of its candy products. The maker of Reese’s, Kit Kat, Hershey’s Kisses and Twizzlers cited increased costs for raw materials, fuel, utilities and transportation.
The costs of two key raw materials—sugar and dairy products—are artificially inflated by federal government policies, the effect of which is to harm U.S. consumers and U.S. food producers, such as Hershey.
Senator Richard Lugar has introduced legislation to reform U.S. sugar policies. His timing is good, as world food prices are rising and some experts predict that sugar prices will soar in coming years.
The best ways to combat rising food prices—which particular harm people with moderate incomes—are free markets, open international trade, and vigorous competition. Unfortunately, those pro-growth and progressive policies are absent in the U.S. dairy and sugar industries, which are subject to Soviet-style central planning. (See here and here).
A consultant study last year (not commissioned by Hershey) indicated that high corporate taxes are also a negative with respect to Hershey’s U.S. production:
On the Interstate Shipment of Green Beer
Today being St. Patrick’s Day, it seems appropriate to revisit the unlikely juxtaposition of two of my favorite legal policy topics: alcohol and the Commerce Clause. (Listen to my podcast on the subject or read its transcript.) The point of all this is that alcohol is no different from any other commodity in that states cannot erect arbitrary regulations that privilege in-state interests (be they retailers, wholesalers, or producers) ahead of their out-of-state counterparts.
But St. Paddy’s Day is not the only reason the issue is topical. Last week, the Supreme Court declined to review the Fifth Circuit’s indefensible decision in Wine Country Gift Baskets.com v. Steen. It did so despite the Fifth Circuit’s upholding of a Texas law designed to protect Texas’s in-state liquor retailers from out-of-state competition, a holding that disregarded recent high-court precedent.
In Granholm v. Heald (2005), decided together with the Institute for Justice’s Swedenberg v. Kelly, the Supreme Court struck down a similar protectionist law. Both cases challenged laws that permitted in-state wine producers to sell directly to consumers while prohibiting similar sales from out-of-state producers. The Court held that, notwithstanding a provision in the 21st Amendment (which repealed prohibition) that allows states to regulate their own liquor industries, the Commerce Clause prohibits states from disrupting free trade by discriminating against out-of-state businesses in favor of in-state businesses. This interpretation of the Commerce Clause grew out of the common-sense understanding that, if left unchecked, state governments have strong incentives to protect in-state businesses (who are voters) at the expense of their (non-voting) out-of-state competitors. Without constitutional checks, such laws could eviscerate Congress’s constitutionally enumerated power to “regulate [make regular] commerce … among the several States.”
Nevertheless, the Fifth Circuit decided to limit Granholm to wine producers. As is evident by the name, however, the Wine Country Gift Baskets.com case concerns a wine retailer. Yet Granholm explicitly said that states “may not enact laws that burden out-of-state producers or shippers simply to give a competitive advantage to in-state businesses.” It is dismaying that the Supreme Court didn’t care about the Fifth Circuit’s neglect of this language.
Granholm was an important blow against the heavily protectionist and cartelized liquor industry. As was documented in a pre-Granholm article in Cato’s Regulation magazine, the prohibition on direct shipment has been used to strangle small wineries as they struggle to access larger markets without having to go through the state-controlled distribution networks. Despite an explosion of wine-drinking and -making in this country in the last 30 years — with consumption increasing by nearly 50% between 1991-2001 and wineries quadrupling between 1974-2002 — the small winery still fights against an old-boy network of producers and distributors. In 2003, the top 30 wine companies still provided 90% of U.S. wine although they were less than 1% of the producers.
This is, of course, exactly how the top 30 wine companies want it.
Granholm dismantled some of this network. Unfortunately, Wine Country Gift Baskets.com will allow this unconstitutional infringement of the right to earn an honest living (see Timothy Sandefur’s excellent book of the same name) to persist in some states.
But Americans, like most of the world, appreciate their booze. During prohibition, Americans endured Tommy-guns, corruption, gangsters, and speakeasies just for a drink. If the government made it illegal to drink responsibly, many Americans were willing to thwart the law and drink irresponsibly.
The negative effects of prohibition were too visible to deny and, after 13 years of waging war on a non-compliant population, prohibition ended. In its wake, however, prohibition left another war, an 80-year “on-going, low-level trade war” (in the words of Granholm) between states and their three-tiered monopolies over the production, distribution, and sale of alcohol. And so, 21st Amendment or not, prohibition lives on — though the colorful characters in spats carrying Tommy-guns have been replaced by iPad-wielding lobbyists and politicians who do their bidding.
Thanks to Trevor Burrus for his help with this blog post.
Getting Serious about Antidumping Reform in 2011
The U.S. antidumping law still enjoys broad bipartisan support in Congress and within pockets of the executive branch. Although some of that support can be chalked up to politicians representing the narrow interests of influential constituencies that have mastered the use of antidumping as a bludgeon to cripple the competition, much more support stems from a fundamental misunderstanding of the purpose, history, mechanics, and consequences of the law.
Too many policymakers passively accept the anachronistic rationalizations proffered by the steel industry, labor unions, other big antidumping users, and their hired guns in Washington. Too many buy into the idealized imagery of a patriotic, upstanding American producer working tirelessly to ensure the preservation of well-paying jobs for hard-working Americans, but is suffering the ravages of unscrupulous, predatory foreign traders intent on destroying U.S. firms and monopolizing the U.S. market. What politician could oppose a law presumed to protect that kind of a company against that kind of a scourge?
But when the curtain is peeled back, exposing the reality of the operation of the U.S. antidumping law, one discerns a very different reality. Antidumping measures always raise the costs of firms in downstream industries that rely on the affected imports. The law routinely claims domestic firms as victims. The law is often used as a tool by domestic firms waging battle for supremacy over other domestic firms. Sometimes foreign-owned firms are the petitioners and U.S-owned firms are the respondents. Rarely does the law lead to job creation or job restoration in the domestic industry. And never is the allegation of “unfair trade” substantiated, or even investigated. Myth and misinformation explains the persistence of the U.S. antidumping regime.
Over the next few months, the Cato Institute’s Center for Trade Policy Studies will shine the spotlight on U.S. antidumping policy and update its large body of research on the subject by publishing some new papers and hosting discussions about the prospects for meaningful antidumping reform. The new Congress should pay attention. After all, if renewed talk about completing the Doha Round in 2011 is to become action, so must antidumping reform.
The first of those studies is now available on the Cato home page. That paper describes the evolution of U.S. antidumping policy from an obscure offshoot of competition law into the predominant instrument of contingent protection that it is today and provides an account of some of the crucial statutory and administrative changes that have occurred over the decades. Its purpose is to demonstrate that the increase in antidumping activity reflects several developments that have nothing to do with foreign behavior whatsoever, including a progressive expansion of the definition of dumping, relaxation of evidentiary standards, and a pro-domestic-industry bias in the law’s administration at the U.S. Department of Commerce. The arcane mix of statutory rules and discretionary whims that emerged as contemporary antidumping policy is a far cry from the first antidumping law—in practice and intent. Today, antidumping is little more than an elaborate excuse for run-of-the-mill protectionism. And overwhelmingly, U.S. businesses and consumers are its victims.
President Obama Represents UAW Rather Than U.S. in Korea Trade Talks
This has been a tough month so far for President Obama and his policies.
After the “shellacking” that he, his party, and his domestic policies suffered at the hands of American voters last week, his international economic policies were no more popular among his counterparts at the G20 summit this week in Seoul, South Korea.
Even the sympathetic editors at the New York Times declared in a front-page (print edition) headline this morning: “Obama’s Economic View Is Rejected on World Stage: China, Britain and Germany Challenge U.S.—Trade Talks with Seoul Fail, Too.”
The other leaders at the summit were right to reject the president’s demands that China be singled out for its currency policies, as I’ve written before, and the South Korean government was right to reject his demands for changes in the U.S.-Korea trade agreement that has been waiting for more than three years for congressional approval.
Although not perfect, the U.S.-Korea agreement is a solid step forward. As my Cato colleague Doug Bandow wrote in a recent study, the agreement would sharply reduce trade barriers between our two nations while deepening our commercial and security ties with a key democratic ally in the Asian Pacific.
The Koreans rightly refused to substantially alter the sections of the agreement relating to automobiles. The agreement would eliminate tariffs on all automobile trade between the two countries. Ford, Chrysler, and the United Auto Workers union oppose the deal, claiming that it does not address non-tariff barriers that allegedly hinder U.S. exports to the Korean market.
As I posted in this space a few days ago, there are perfectly normal market reasons why Americans buy a lot more Korean cars than vice versa. The real agenda of Ford, Chrysler, and the UAW is not to gain greater access to the Korean market, but to prevent any greater access of their Korean competitors to the U.S. market.
The talks in Seoul this week reportedly foundered on the specific U.S. demand that Korea relax its emission and mileage standards so that U.S. automakers can more easily modify their cars for the Korean market. How ironic. It has become part of the Democratic mantra on trade that agreements must strengthen the environmental and labor standards of our trading partners. Yet here U.S. negotiators were strong-arming the Korean government to weaken its own standards while the Obama administration seeks to impose higher mileage and emission standards on cars sold in the United States.
There is still time to save the U.S.-Korea agreement and to present it to the potentially more trade-friendly Congress that will convene in January. But for now, President Obama has chosen to serve the narrow interests of two domestic automakers and their union rather than the overall economic and strategic interests of the American people.
President Obama Fails to Understand Trade
At the beginning of the Obama administration, I had the audacity to hope that the new president would defy conventional wisdom and become a proponent of trade and a good spokesman for its benefits. Scott Lincicome and I even wrote a 20,000-plus word Cato analysis explaining why the economic, geopolitical, and domestic political environment offered the president a unique opportunity to steer his party back to its pro-trade roots.
The thrust of our analysis was that, despite the campaign rhetoric, the president understood the economic benefits of trade and that he would see it as an escape route from recession and a path to political success; that the president’s visibility and new cache with his trade-skeptical political party—and the fact that he wasn’t George W. Bush—made him well-suited to the task of challenging and extinguishing lingering myths about the alleged ravages of trade, while explaining its many benefits; and, that the president would recognize that pro-trade policies should be part of the current Democratic Party platform, if for no other reason than the fact that restrictions governments place on trade harm lower-income Americans and the world’s poor more than they hurt anyone else. (Protectionism is regressive taxation, which is presumably anathema to Democratic Party creed.)
Alas, our study, “Audaciously Hopeful: How President Obama Can Restore the Pro-Trade Consensus,” was just a little too. It fell on deaf ears. It was ignored. In fact, it’s almost as if the past two years of trade policy were conducted to spite the recommendations in that paper.
From this administration, we’ve seen completed bilateral trade agreements sent to an off-site storage warehouse; the imposition of taxes on imported tires; “Buy American” provisions; prohibitions on Mexican trucks; demonization by the president of companies that outsource; defiance of multilateral rules governing use of the antidumping law; and, a “Boardwalk Empire”-style deal to prospectively compensate Brazilian farmers for the lower revenues they should expect on account of the lavish subsidies bestowed by U.S. taxpayers on U.S. cotton producers in lieu of reducing—or better still, halting—cotton subsidies altogether. Yes, the hallmark accomplishment of this administration’s trade policy so far is a deal that requires American taxpayers to subsidize Brazilian cotton producers for the right to continue subsidizing U.S. cotton producers.
Despite all that, I remained audacious (or gullible) enough to hold a glimmer of hope that the president would finally see the wisdom in our advice—given the new political landscape. That glimmer was snuffed out with publication of an oped in the New York Times this past Saturday, in which President Obama betrays profound misunderstanding of trade and its purpose. The president portrays trade as an enterprise that is won or lost at the negotiating table, where only the most savvy or most committed negotiators can succeed in bringing home the spoils. The president promises to fight hard to get Americans their fair shake from this dog-eat-dog process, while actual producers, consumers, workers, and investors are relegated to tertiary roles.
The central dysfunction between Americans and trade is the assumption—reinforced in the president’s op-ed—that exports are good, imports are bad, the trade account is the scoreboard, and our trade deficit means that we are losing at trade. That dysfunction resides comfortably within a zero-sum worldview, which the president touts in a purposeful cadence throughout the oped. In the penultimate sentence, the president writes:
Finally, at the Asia-Pacific Economic Cooperation meeting in Japan, I will continue seeking new markets in Asia for American exports. We want to expand our trade relationships in the region, including through the Trans-Pacific Partnership, to make sure that we’re not ceding markets, exports and the jobs they support to other nations.
By opining about trade without understanding that its real benefits are manifest in imports (here’s Don Boudreax’s elaboration of that process), the president is simply reinforcing myths that will continue to confuse and divide American. As long as politicians insist that our trade account is a scoreboard and that a surplus is a trade policy success metric, Americans will continue to be skeptical about trade.
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).
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 Rumors of Manufacturing’s Death Have Been Greatly Exaggerated
“US manufacturing grows for 13th straight month” is the headline of an AP newswire story posted around noon today. This statistic doesn’t surprise me, since I’ve been following developments in U.S. manufacturing for many years now, and have published analyses of public data that refute the myth of deindustrialization and manufacturing decline.
With the exception of the recession of 08-09, when all U.S. economic sectors took a hit, U.S. manufacturing has been breaking its own record, year after year, with respect to output, value-added, profits, returns on investment, exports, and imports. U.S. factories are the world’s most prolific, accounting for 21.4% of global manufacturing value added in 2008 (China accounted for 13.4%).
But I bring the AP headline to your attention for one reason: so that you can judge for yourself who has any credibility on Capitol Hill, within the executive branch, in the media, among organized labor, in industry, in the think tank world, and within the international trade bar, as Nancy Pelosi tries to stuff a ruinous anti-China trade bill down our throats in the name of supporting our floundering manufacturing base. Look for the columns, the op-eds, the press releases, and the floor statements between next week and November.
Who among them will continue to cite our suffering manufacturing sector as the justification for protectionism? They should never again have any credibility.
Free Trade Consensus Remains Intact in Australia
As many of you may know, Australia had a federal election on August 21 that yielded an at-time-of-blogging inconclusive result. As a consequence, the Liberal-National coalition (currently in opposition) and the Australian Labor Party are both wooing the Green and Independent members in the hope of securing their support. A Canberra-based friend sent me a link to an article in today’s (or, strictly speaking given the time difference, yesterday’s) Australian about the trade-related aspects of the current negotiations to form a minority government.
I’ll admit, the story had me worried. I’ve bragged before about Australia’s bipartisan political consensus on free trade, and it looked as though that was under threat. According to the article, Labor — the party responsible for much of the unilateral trade liberalization undertaken in the 1980s – was considering “re-erecting tariff walls”:
Yes, modern Labor has degenerated to the point where the Treasurer allows the prospect of protectionist horse-trading to be part of the equation for forming Australia’s next government. And so Australia’s political deadlock threatens to encourage the rise of a new industry protectionism driven by the anti-capitalist Greens in cahoots with left-wing trade unions and rural populism…
A few hours later, a new, happier story was filed on the Australian‘s website:
…Ms Gillard used her press club speech to offer continuity and certainty, but made clear she would not seek [Independent] Mr Katter’s vote by pandering to his passionate rejection of free trade, which he believes has ravaged sectors such as the sugar industry in his north Queensland seat of Kennedy.
“You’re talking to the leader of the political party that literally went to hell and back to modernise the Australian economy, including reducing tariff barriers,” Ms Gillard said.
“That is our heritage, that is our belief, that is in us.
“We would not have the modern resilient Australian economy we have now if Labor had not built it.
I’ll ignore that last preposterous statement about a political party building an economy, and instead focus on the main thrust of Ms. Gillard’s comments, which should come as a relief to free-traders everywhere, especially in Australia.
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