Archives: 07/2006

Porkers Get Prime Seats

This morning I attended President Bush’s speech on the release of the midsession budget review at the White House.  Bush first tied his tax cuts to the strong economic growth the nation is experiencing, and he was on solid ground. He then delivered some fine rhetoric about restraining spending and cutting special interest pork.  Perhaps his new budget and Treasury chiefs–Rob Portman and Henry Paulson–can actually get him to follow through on those frequently made promises.  But I would be more convinced if the White House hadn’t invited two of the Senate’s biggest pork barrelers–Ted Stevens and Conrad Burns–to sit right in the front row for the speech!  

Policy Dreams vs. Government Realities

When I came to Washington in 1990, central planning (“industrial policy”) was all the rage. As the 1990s progressed, the clamor for industrial policy faded, partly because the Japanese and German economies stagnated while the US economy soared.

But in my inbox this morning came news of a new study from the Progressive Policy Institute claiming that “America needs a national comprehensive strategy in order to maintain its preeminence within the world economy.”

Which government would implement this “national comprehensive stategy” I wonder? Surely not the same one that delivers non-stop pork barrel spending, management failure, and corruption year after year, decade after decade.

A Surplus of Benefits from Trade with China

The Chinese government reported on Monday that China’s trade surplus with the rest of the world hit a new monthly record in June [see story] and is on pace to reach $130 billion to $150 billion for all of 2006. The news will fuel demands that China allow the value of its currency to rise in international foreign exchange markets, making exports from China more expensive and imports to China more attractive. China’s currency, the yuan, has only appreciated about 3 percent since July 21, 2005, when its central bank announced that the currency would no longer be tightly pegged to the U.S. dollar.

Unfortunately, the news may also stoke support in Congress for imposing tariffs on imports from China if its government does not move soon to revalue its currency upward by 15 to 40 percent. As I explain in a Cato Trade Briefing Paper [“Who’s Manipulating Whom? China’s Currency and the U.S. Economy”] released today, imposing trade sanctions on China would be a colossal policy blunder.

Imposing tariffs on Chinese imports would be a direct consumer tax on tens of millions of American families. Of the $243 billion in goods we bought from China in 2005, about 80 percent were the type of products we use everyday in our homes and office—shoes, clothing, toys, sporting goods, bicycles, TVs, consumer electronics, and personal and laptop computers. In fact, shipments from China tend to bump up every fall as retailers stock up for the Christmas shopping season. The Grinch who stole Christmas would be delighted if Congress were to impose punitive tariffs on all those Chinese goods entering our country! 

The study found no support for arguments that China’s currency regime and trade with China in general are somehow hurting the U.S. economy or U.S. manufacturing. Rising imports from China have not primarily replaced domestic U.S. production, but rather they have replaced imports from other low-wage countries or from other East Asian countries that have relocated production to China. With the exception of apparel, few U.S. manufacturers compete head to head with products made in China. Overall U.S. manufacturing output is 50 percent higher today than in 1994 when China first pegged its currency to the dollar.

Focusing on the bilateral trade balance with China obscures the very tangible benefits Americans enjoy from our growing commercial ties with the people of China. 

To explore the issue further on the one-year anniversary of China’s currency reforms, Cato will be hosting a Policy Forum on July 19 titled, “U.S.-China Trade, Exchange Rates, and the U.S. Economy.” You can register for the event here.

Bhagwati vs. Bhagwati on Trade Liberalization

Jagdish Bhagwati, one of the world’s finest and most renowned trade economists, gave some of his thoughts on the Doha Round and prospects for trade liberalization in yesterday’s Cato podcast. Professor Bhagwati, who is also on the Board of Advisers of Cato’s Center for Trade Policy Studies, spoke more in depth on the subject at a Cato policy forum last month titled, “U.S. Trade Policy in the Wake of Doha: Why Unilateral Trade Liberalization Makes Sense.”

Unlike most trade policy observers, Bhagwati believes the Doha Round can still succeed. The key to success, he suggests, is for U.S. negotiators to embrace a concept he calls “relaxed reciprocity.”  Rather than seek a highly ambitious outcome by demanding all participants accept maximum “concessions,” U.S. negotiators should improve their own offer while accepting whatever level of reform other countries are willing to undertake.  The logic of this approach rests in the fact that most of the gains from trade liberalization come from opening one’s own market (access to cheaper inputs for business, greater competition and choice, productivity gains, lower prices for consumers), and thus, such reforms are not concessions at all.  Greater export market access for U.S. companies is just the icing on the cake, and the prospect of a lightly frosted cake is no reason to forego the entire dessert. His conclusion, then, is that U.S. negotiators should offer to open the U.S. market as wide as possible and accept minimal openings from abroad for the sake of achieving an agreement.

I concur with Professor Bhagwati that the United States should open its market without the condition that similar measures be undertaken abroad. Admittedly, my opinion is shaped in no small part by the arguments put forth by Bhagwati over the years.  But I think the United States probably has more to gain by doing so unilaterally and not partaking of an agreement that memorializes bold U.S. reform alongside marginal reform abroad. 

Any agreement, regardless of how minimalist foreign reform is, will be an invitation for the United States to bear the brunt of the blame for any adjustment costs or continued economic problems that persist in developing countries (even if those problems have nothing to do with the agreement).  Any agreement, no matter how bold or meager, will subject the United States to claims of arm twisting and bullying, regardless of the merits of those claims.  Such developments are precisely what the United States, with its tattered international reputation and credibility, does not need right now.  The costs of such fallout, although measured differently, could easily surpass any benefits associated with an agreement that requires nothing more than window dressing abroad.

Unless our trade partners are willing to agree to ambitious reform (which will undoubtedly cause adjustment costs but will also undoubtedly help spur economic growth and provide U.S. exporters with better terms) there is little point in the U.S. agreeing to a new deal.  On the contrary, by liberalizing independent of other countries, we reap the benefits of our openness, give the developing world better access, correct the reality and perception that U.S. trade barriers are a cause of developing world poverty, and remove the capacity for the United States to serve as a scapegoat for developing country stagnation.

The determinative calculation is whether the prospective net benefits of the marginal offerings of our trade partners exceed the net benefits of unilaterally liberalizing without any demands on our partners.  Of course that depends on how much reform is ultimately offered up abroad. 

In my view, the benefits from unilateral liberalization in terms of reversing growing hostility toward the United States and softening the ground for international receptivity to U.S. foreign and security policy objectives could be quite significant and could easily exceed the net benefits (marginal export benefits minus the costs of being perceived as an agreement’s strongman) of an agreement based on relaxed reciprocity.

Implicit in Bhagwati’s call for relaxed reciprocity is the idea that an agreement, regardless of the feebleness of the commitments it extracts, is valuable beyond the trade flows it may spur.  Agreements do produce greater certainty and without an agreement, the WTO and the verdicts of its dispute settlement system could lose crediblity among its member states.  After all, a multilateral trade negotiating round has never failed to produce an agreement.

Those are legitimate concerns.  However, I don’t believe U.S. unilateral liberalization would be an end in itself.  I believe such a policy, if commenced by the U.S., would inspire what Professor Bhagwati himself calls “sequential reciprocity.” If U.S. policymakers were to unconditionally open the U.S. market, others would likely follow suit.  Quite frankly, most countries have no choice but to open up well beyond what they are offering in the Doha Round.  In this highly integrated world of just-in-time supply chains, where countries are competing with each other for investment and markets, only the most transparent and efficient ones will succeed.  And it’s not like developing countries don’t know this conclusively.  Many are quite familiar with unilateral liberalization themselves.  In fact, the World Bank reports that between 1983 and 2003, developing countries reduced their weighted-average tariffs by 21 percentage points.  Nearly two-thirds of that reduction was achieved through unilateral reform.

Alas, unilateral liberalization or even relaxed reciprocity is unlikely to be embraced by this or the next Congress.  The concept remains foreign, even preposterous, to U.S. policymakers.  Last week, U.S. Trade Representative Susan Schwab acknowledged that even though imports are good for the economy, the winning formula does not entail convincing decision makers of that truth, but requires that the voices of those who will benefit from enhanced export access drown out the voices of those who will suffer from import competition, and that’s why an all-encompassing, ambitious agreement is the only one that will work politically in the United States.

We have a long way to go to change minds, but here’s the argument in a 24-page nutshell.

Rick Santorum: Left, Right, and Wrong

The New York Times reports that Sen. Rick Santorum…

…distributed a brochure this week as he worked a sweltering round of town hall meetings and Fourth of July parades: “Fifty Things You May Not Know About Rick Santorum.” It is filled with what he called meat and potatoes, like his work to expand colon cancer screenings for Medicare beneficiaries (No. 3), or to secure money for “America’s first ever coal to ultra-clean fuel plant” (No. 2)….

He said he wanted Pennsylvanians to think of him as a political heir to Alfonse M. D’Amato of New York, who was known as Senator Pothole for being acutely attuned to constituent needs.

So … the third-ranking Republican leader in the Senate wants to be known as a porker, an earmarker, and Senator Pothole.

Santorum had already dismissed limited government in theory. He told NPR last year:

One of the criticisms I make is to what I refer to as more of a libertarianish right. You know, the left has gone so far left and the right in some respects has gone so far right that they touch each other. They come around in the circle. This whole idea of personal autonomy, well I don’t think most conservatives hold that point of view. Some do. They have this idea that people should be left alone, be able to do whatever they want to do, government should keep our taxes down and keep our regulations low, that we shouldn’t get involved in the bedroom, we shouldn’t get involved in cultural issues. You know, people should do whatever they want. Well, that is not how traditional conservatives view the world and I think most conservatives understand that individuals can’t go it alone. That there is no such society that I am aware of, where we’ve had radical individualism and that it succeeds as a culture.

He declared himself against individualism, against libertarianism, against “this whole idea of personal autonomy, … this idea that people should be left alone.” Now he’s also against the conservative idea that taxpayers matter, that the federal government has a limited role.

No wonder Jonathan Rauch wrote last year that, “America’s Anti-Reagan Isn’t Hillary Clinton. It’s Rick Santorum.” Rauch noted:

In his book he comments, seemingly with a shrug, “Some will reject what I have to say as a kind of ‘Big Government’ conservatism.”

They sure will. A list of the government interventions that Santorum endorses includes national service, promotion of prison ministries, “individual development accounts,” publicly financed trust funds for children, community-investment incentives, strengthened obscenity enforcement, covenant marriage, assorted tax breaks, economic literacy programs in “every school in America” (his italics), and more. Lots more.

Rauch concluded,

With It Takes a Family, Rick Santorum has served notice. The bold new challenge to the Goldwater-Reagan tradition in American politics comes not from the Left, but from the Right.

At least Santorum is right about one thing: sometimes the left and the right meet in the center. In this case the big-spending, intrusive, mommy-AND-daddy-state center. But he’s wrong that we’ve never had a firmly individualist society where people are “left alone, able to do whatever they want to do.”

It’s called America.

HSA Gumbo

A Lousiana blogger named Dr. Hébert offers a skeptical but open-minded critique of health savings accounts. Hébert is board certified in internal medicine and pediatrics. I addressed many of his criticisms in a recent study on HSAs, but I’ll see if I can tackle his concerns head-on – and perhaps more succinctly.

Here are Hébert’s main concerns, saving the biggest for last.

1. HSAs favor the wealthy. Yeah, that’s pretty much true. But the fault here lies more with the problem that HSAs attempt to correct. The federal tax code has exempted employer-sponsored insurance premiums from payroll and income taxes for over 60 years. The wealthy get the biggest tax breaks from that exemption. (See neat graphics to that effect on pp. 14-15 of my paper.) But money saved or used to purchase health care directly is subject to both types of taxation. That causes people to rely on health “insurance” more than they should. HSAs are an attempt to level the playing field between health savings and out-of-pocket expenditures on the one hand and third-party payment on the other. So extending to HSAs a tax break that already benefits the wealthy naturally will benefit the wealthy more than the poor. Since eliminating those tax breaks entirely doesn’t seem politically feasible, HSAs are the best shot we’ve got for fixing what the tax code has done to the health care sector.

2. Employers won’t pass the savings on to workers. HSAs make it easier for employers to provide less health coverage, because they and/or their workers can contribute money to the worker’s HSA tax-free. But if employers cut back on coverage, how can we be sure that employers will “pass on this savings to their employees by paying higher wages”? In the short term, we can’t be sure; employers could just pocket the savings. (If there are any savings – the rising cost of health insurance could eat up any potential wage increase even if employers cut back on coverage.) It’s in the long run that economists agree that non-cash compensation reduces cash wages. And it’s in the long-run that premium savings will be passed on to workers.

3. HSA rules discriminate against those who want traditional insurance. Okay, I have to agree with Hébert again. And with Jason Furman of NYU. It is inconsistent for HSA supporters to say that people are smart enough to shop around for medical care, but not smart enough to choose their own health insurance. That’s one reason I’ve proposed turning HSAs into “large” HSAs, where you would get a tax break on up to $8,000 in HSA deposits ($16,000 for families) and you could use that money to buy whatever kind of health insurance you prefer.

4. HSAs are not a good deal for those with high expected medical expenses. As I discuss in my paper, HSAs may be unpopular with people whose health insurance currently pays for what are essentially uninsurable expenses. In order for insurance to work, coverage has to be confined to expenses that are unknown. If you try to force insurance to cover known expenses, you drive people out of the market – because they know you’re just trying to extract wealth from them. This is not an argument against subsidies, only an argument against trying to cram subsidies into “insurance.” As I wrote in an exchange with Matthew Holt from TheHealthCareBlog.com:

My preference is to let insurance markets do all they can do to improve efficiency, particularly by encouraging patients to pay directly more often. Some people will still require assistance, though with a more efficient health care sector their numbers should be smaller. We should subsidize those who remain directly, with cash.

But that hardly means that chronically ill patients won’t like HSA coverage. As the Congressional Research Service notes, HSAs could be popular with many such patients because they offer much more control over one’s medical decisions.

5. HSAs won’t result in higher quality care. Hébert gives two reasons. First, patients not always in a position to shop around, because you can’t comparison shop when you’re on a gurney. Yet as I wrote in my paper:

Most health care spending occurs in circumstances under which the patients can comparison shop. For example, emergency room care accounts for only 3.3 percent of health expenditures. Hospital and nursing home care combined account for 45 percent of personal health care expenditures, yet many hospital expenditures are discretionary. Spending on physicians, prescription drugs, home health care, and other services accounts for 55 percent of personal health care expenditures. Those data suggest that a large share of health care spending does allow time for considering one’s options.

Hébert’s second reason is that medical billing is too complicated for patients to comparison shop. Yet the scenarios he offers are no more complicated than comparing prices for cars or houses or mobile phones with calling plans – and consumers comparison shop for all of those things, sometimes all at once. When they need help finding value, they find an agent (e.g., realtors) to guide them. Which brings me to Hébert’s main critique.

6. HSAs equal less health care, and that’s bad. Hébert’s biggest concern seems to be that HSAs will cause people to cut back on their medical consumption, particularly visits to primary care physicians. The way HSAs are set up right now, many primary care visits are not be covered by insurance, although preventive care may be covered below the deductible. That means that patients may face actual tradeoffs if they want to go to the doctor, and will therefore demand more value. If primary care physicians provide as much value as Hébert believes, he should have nothing to fear from cost-conscious patients. But if it turns out we are wasting money even on primary care – and there’s evidence to suggest that is the case – then maybe primary care physicians will have to focus more on providing value.

Hébert predicts that HSAs will meet the same end as HMOs. I disagree, because HSAs give people more control over their health care decisions, and people are not going to want to give that up. HMOs did exactly the opposite. But Hébert offers a testable hypothesis to which I hope we both shall return in the coming years.

(Hat tip to Trapier Michael, the hardest working man in health policy.)

RIAA to Congress: Jump! Congress: How High? On One Foot or Two?

The entrenched powers in Washington are continuing their efforts to stamp out the consumer-friendly technology spawned by satellite radio.

From Congressional Quarterly:

Majority Leader Bill Frist (R-Tenn.) quietly has gone to bat for the Recording Industry Association of America and other groups to make sure that a key industry priority was included in the massive overhaul of telecommunications laws that the panel approved just before the July Fourth recess, several Senate Commerce, Science and Transportation Committee aides confirmed.

The provision Frist helped place prevents satellite radio listeners from being able to record, store and rearrange music they receive from popular subscription services such as XM and Sirius. Music industry officials say that such copying would cheat labels and artists out of fees that consumers otherwise would pay when buying music on CDs or from online music services.

But the push by the record labels is rankling radio, electronics and consumer groups, who argue that listeners should be able to store songs for personal use as long as they are not selling or passing them along.

Several Commerce Committee aides confirmed that Frist had made it clear that he would allow the telecom bill to come to the floor only if it included the measure, which is commonly called the “audio flag” provision.

[…]

Beyond what appears to be a home-state interest in the issue, aides and lobbyists close to the debate noted that former Frist Chief of Staff Mitch Bainwol now heads the record labels’ lobby, the RIAA.

The provision is ridculous, of course. XM and Sirius already pay royalties for use of the copyrighted songs, and users are already permitted to record from the radio for personal use by other means. RIAA’s position is that there’s something about digital recordings that deserves extra protection. In truth, this bill will effectively kill XM and Sirius attempts to innovate and offer a more interactive, useful, and interesting form of radio.

Of course, this isn’t the first time a Washington dinosaur has attempted to use the regulatory process to stamp out innovation from satellite radio at the expense of consumers. The National Association of Broadcasters has been waging a protectionist campaign against satellite radio’s efforts to localize for years.

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