Archives: July, 2010

President Obama’s Incomplete Speech on Immigration

President Obama spoke this morning at American University on the need for comprehensive immigration reform. The president deserves credit for turning his attention to a thorny problem that desperately needs action from Congress, but the speech failed to hit at least one important note.

While the president called for comprehensive reform, he neglected to advocate the expansion of legal immigration in the future through a temporary or guest worker program for low-skilled immigrants. Even his own Secretary of Homeland Security, Janet Napolitano, has said such a program is the necessary “third leg” of immigration reform, the other two being legalization of undocumented workers already here and vigorous enforcement against those still operating outside the system.

As I’ve pointed out plenty of times, without accommodation for the ongoing labor needs of our country, any reform would repeat the failures of the past. In 1986, Congress passed the Immigration Reform and Control Act, which legalized 2.7 million workers already here illegally, while beefing up enforcement. But without a new visa program to allow more low-skilled workers to enter legally in future years, illegal immigration just began to climb again to where, two decades later, we are trying once again to solve the same problem.

On the plus side, President Obama reminded his audience of the important role immigrants play in our open and dynamic country. And he rightly linked immigration reform to securing our borders:

“[T]here are those who argue that we should not move forward with any other elements of reform until we have fully sealed our borders. But our borders are just too vast for us to be able to solve the problem only with fences and border patrols. It won’t work. Our borders will not be secure as long as our limited resources are devoted to not only stopping gangs and potential terrorists, but also the hundreds of thousands who attempt to cross each year simply to find work.

Unfortunately, given the political climate in Washington, an election looming only four months away, and the president’s unwillingness to press for an essential element of successful reform, the illegal immigration problem will still be on the agenda when a new Congress comes to town in 2011.

Getting Right Why the Teacher Bailout Is Wrong

Here’s the good news: The once $23 billion teacher bailout proposal has been shrunk to $10 billion.

Here’s the bad news: There are still people in Congress trying to enact a bailout, and no Democrat seems to know why the new bailout is wrong.

In case you haven’t been following the drama, for months now primarily Democrats in Congress have been pushing various “emergency” funding proposals to deal with everything from the War in Afghanistan to infusing funds into Pell Grants. A big part of the emergency funding has been money to save public education employees – teachers and other staffers – from cuts Secretary of Education Arne Duncan said could range from 100,000 to 300,000 jobs.  The intial teacher bailout was championed by Sen. Tom Harkin (D-Iowa), who put it at $23 billion.

Well, it turns out that screaming that the sky is falling because some people in public schooling might lose their jobs just doesn’t scare people much anymore. Despite union-courting Chicken Littles like Duncan and Harkin wailing about a “catastrophe” should the $23 billion not be doled out, Harkin’s effort never caught fire and he dropped it. House Appropriations Committee Chair David Obey (D-Wis.) tried to pick it up, but had to cut his companion proposal back to $10 billion. He has also felt compelled to – heaven forefend! – find some way to pay for the bailout, which wouldn’t have been required had he been able to get away with calling it “emergency” spending.

Obey’s new proposal has taken heat from some fellow Democrats, who have attacked it for all the wrong reasons.

Part of Obey’s plan to pay for the bailout is to take a total of $500 million from President Obama’s vaunted Race to the Top program, and $300 million from other supposedly “reform-y” efforts. It’s left some congressional Democrats apoplectic, including Rep. Jared Polis (D-Colo.), who wrote a letter ot Obey stating that:

Race to the Top has already led to major progress that will improve student achievement. The discussions and changes that have taken place across the nation in the past year have accelerated long overdue and necessary reforms.

But now, this progress is now threatened by the proposed $800 million cuts to three critical education reform programs: $500 million from Race to the Top, $200 million from the Teacher Incentive Fund and $100 million from the Charter Schools Program. While Chairman Obey’s efforts to provide critical funding for cash-strapped public schools across the nation through a $10 billion Education Jobs Fund are commendable, it is very troubling that these three innovative programs were chosen to bear the brunt as offsets. This proposal undermines the President’s effort to reshape and reinvent our nation’s schools, by incentivizing educational innovation, building on what works, and rewarding results…

Here’s where Polis is first wrong: Asserting that Obey’s $10 billion proposal is “commendable.” As I and Andrew Coulson have demonstrated repeatedly, there is zero need for a bailout. For one thing, 300,000 employees – the absolute worst-case unemployment scenario – isn’t all that big a chunk of a public schooling  system that employs over 6 million people. Moreover, we’ve had huge increases in spending and staffing over the last several decades but no real improvements in academic outcomes. If anything, then, we have way too much fat in public schooling and should be looking to make even bigger cuts, giving taxpayers sizable breaks they could use to get the economy really humming again.

Polis is also mistaken to claim that Race to the Top has “led to major progress.” As I have written on several occasions, it has led to lots of reform promises and some ultimately hollow legislative changes, but it definitely has not translated into major progress. And as anyone who has followed public schooling knows full well, there is almost always a huge gulf between what is promised, and what is accomplished. So the best one can say for Race to the Top is that the jury is still out, and even that, frankly, would be being optimistic.

Unfortunately, the other basic objection to Obey’s plan is even worse, and it comes most notably from Rep. George Miller (D-Calif.), chair of the House Education and Labor Committee. With what seems to be his customary disregard for fiscal discipline, taxpayers, etc., Miller’s complaint is that “We have an emergency on our hands—teachers’ jobs and our children’s future are at stake. This initiative should have been funded through emergency spending.”

Right. When some relatively small number of public school staffers – not just teachers, mind you – might lose jobs that haven’t produced any measurable good, that is an emergency that justifies yet more deficit spending. The $13 trillion national debt, on the other hand? Well, that’s just one of those things you can attend to next time you’ve got nothing else to do, like painting the mailbox, or whittling.

Enough is enough: The teacher bailout needs to go completely away, people have to be realistic about Race to the Top, and sooner or later Washington has got to be crushed down to size.

Pearlstein Wants Tough Trade Measures Against China…and the U.S.

Steven Pearlstein’s ready for the nuclear option.  With the conviction of a man who knows he won’t be held accountable for the consequences of his prescriptions, Pearlstein says the time has come for action against China.  Hopefully, those whose fingers are actually near the button will recognize Pearlstein’s suggestion for what it is: an outburst of frustration over what he considers China’s insubordination.

In his Washington Post business column yesterday, Pearlstein criticizes U.S. policymakers for blindly adhering to the view that China will inevitably transition to democratic capitalism, while they’ve excused market-distorting protectionism, mercantilism, and state dominance over the economy in China.  Pearlstein writes:

Up to now, a succession of administrations has argued against directly challenging China over its mercantilist policies, figuring it would be more effective in the long run to let the economic relationship grow deeper and give the Chinese the time and respect their culture demands to make the inevitable transition to democratic capitalism.

What we have discovered, however, is that the Chinese don’t view the transition as inevitable and that, in any case, they really aren’t much interested in relationships. If anything, they’ve proven to be relentlessly transactional. And their view of business and economics remains so thoroughly mercantilist that they not only can’t imagine any other way, but assume that everyone else thinks the way they do. To try to convince them otherwise is folly.

Pearlstein’s suggestion that the Chinese “aren’t much interested in relationships” strikes me as frustration over the fact that China is no longer a U.S. supplicant.  Perhaps the truth is that China isn’t much interested in a one-way relationship, where it is expected to meet all U.S. demands, while seeing its own wishes ignored.  Calling them “relentlessly transactional” is accusing them of naivety for missing the bigger picture, which, for Pearlstein, is that the U.S. is still top dog and China ignores that at its peril. 

Pearlstein is not the first columnist to criticize the Chinese government for putting its interests ahead of America’s (or, more accurately, putting what it believes to be its best interests ahead of what U.S. policymakers believe to be in their own interests).  In a recent Cato policy paper titled Manufacturing Discord: Growing Tensions Threaten the U.S.-China Economic Relationship, I was addressing opinion leaders who have staked out positions similar to Pearlstein’s when I wrote:

Lately, the media have spilled lots of ink over the proposition that China has thrived at U.S. expense for too long, and that China’s growing assertiveness signals an urgent need for aggressive U.S. policy changes….

One explanation for the change in tenor is that media pundits, policymakers, and other analysts are viewing the relationship through a prism that has been altered by the fact of a rapidly rising China.  That China emerged from the financial meltdown and subsequent global recession wealthier and on a virtually unchanged high-growth trajectory, while the United States faces slow growth, high unemployment, and a large debt (much of it owned by the Chinese), is breeding anxiety and changing perceptions of the relationship in both countries….

Of course, the U. S. is the larger economy and the chief designer of the still-prevailing global economic architecture.  But the implication that that distinction immunizes the U. S. from costly repercussions if U.S. sanctions were imposed against China is foolish.  But that’s exactly where Pearlstein’s going when he writes:

Getting this economic relationship back into balance is the single biggest challenge to the global economy, not just because of its direct effects on China and the United States, but the indirect effects it has on the rest of the world. The alternative is a return to living beyond our means, a further erosion of our industrial and technological base and a continued loss of ownership of business and financial assets.

By balancing the economic relationship, presumably Pearlstein is speaking about the need to reduce the bilateral trade deficit, which spurs a net outflow of dollars to China, some of which the Chinese lend back to Americans, who in turn can then buy more imports from China, and the cycle continues.  But to tip the scales in favor of the blunt force action he recommends later, Pearlstein characterizes Chinese investment in the United States as living beyond our means, losing ownership of “our” assets, and eroding our industrial and technological base.  That is a paternalistic and inaccurate characterization of the dynamics of capital inflows from China.

First, let’s remember that the Chinese aren’t holding a gun to the heads of the chairs of our congressional appropriations committees demanding that politicians borrow and spend more on senseless programs.  It’s absolutely priceless when spendthrift members of Congress, oblivious to the irony, blame the Chinese for having caused the U.S. financial crisis for providing cheap credit to fuel asset bubbles when it was their own profligacy that brought the Chinese to U.S. debt markets in the first place.  Stop deficit spending and the need to borrow from China (or anywhere else) goes away. 

Likewise, it is a sad commentary on the state of individual responsibility in the U.S. when a prominent business writer thinks the only way to keep consumers from living beyond their means is to deprive their would-be-creditors of capital.  It sounds a bit like the same tactics deployed in the U.S. War on Drugs.  Blame the suppliers.  The fact that U.S. savings rates have been rising for two years suggests that responsible Americans are interested in rebuilding their assets without need of such measures.

There are other destinations for capital inflows from China, which (despite Pearlstein’s disparaging allusions) should be entirely unobjectionable.  Chinese investment in U.S. corporate debt, equities markets, real estate markets, and direct investment in U.S. manufacturing and services industries does not erode our industrial and technological base.  It enhances it.  It does not constitute a loss of ownership of business and financial assets, but rather a mutual exchange of assets at an agreed price.  When Chinese investors compete as buyers in U.S. markets, the value of the assets in those markets rises, which benefits the owners of those assets when there is an exchange.  Chinese purchases of anything American, with the exception of debt, do not constitute claims on the future.  Accordingly, the economic relationship can achieve the much vaunted need for rebalancing without need of attempting to forcefully reduce the trade deficit by restraining imports.

Pearlstein continues:

So if the urgent need is to rebalance the global economy by rebalancing the U.S.-China economic relationship, we are probably going to have to begin this process on our own. And that means establishing some sort of tariff regime that will increase the cost of imports not just from China, but other countries that keep their currencies artificially low, restrict the flow of capital or maintain significant barriers to imports of goods and services. The proceeds of those tariffs should be used to encourage exports in some fashion…

This relationship, however, is one that must be actively managed by the two governments. It should be obvious by now that their government is rather effective at managing their end of things. It should be equally obvious that we cannot continue to rely on free markets to manage our end.

So Pearlstein comes full circle.  He wants the U. S. to impose tariffs on Chinese imports, subsidize U.S. exports, and institute top-down industrial policy.  In other words, he wants the U.S. to be more like China. 

Of course, I would argue, we already have something that encourages exports.  They’re called imports.  Over half of the value of U.S. imports are intermediate goods—capital equipment, components, raw materials—that are used by American-based producers to make goods for their customers in the U. S. and abroad.  Furthermore, foreigners need to be able to sell to Americans if they are going to have the dollars to buy products from Americans.  And finally, if the U.S. implements trade restrictions on China to compel currency revaluation or anything else, retaliation against U.S. exports is a given.

In short, imports are a determinant of exports.  If you impede imports, you impede exports.  So Pearlstein’s idea that we can somehow subsidize exports by taxing and reducing imports is not particularly well-considered.  And though it may be tempting to look at China’s economic success as an endorsement or vindication of industrial policy, it is difficult to discern how much of China’s growth can be attributed to central planning, and how much has happened despite it.  But in the U.S., where one of our unique and core strengths has been the relative dynamism that has produced more inventions, more patents, more actionable industrial ideas, more freeedom, and more wealth than at any other time in any other nation-state in the world, it would be imprudent bordering on reckless to suppress those synergies in the name of industrial policy.

In the end, I rather doubt that Pearlstein is truly on board with the course of action he suggests.  In response to a question presented to him on the Washington Post live web chat yesterday about how the Chinese would react if his proposal were implemented, Pearlstein wrote:

They’d make a huge stink. They’d cancel some contracts. They’d slap on some tariffs of their own. They’d launch an appeal with the World Trade Organization. It would not be costless to us – getting into fights never is. But after a year, once they saw we were serious, they would find a way to begin accomodating [sic] us in significant ways, and if we respond with a positive tit for tat, things could finally improve. They’ve been testing us for years and what they discovered was that we were easy to push around. So guess what – they pushed us around.

I’m willing to chalk up Pearlstein’s diatribe to pent-up frustration.  But let me end with this admonition from that May Cato paper:

 [I]ndignation among media and politicians over China’s aversion to saying “How high?” when the U.S. government says “Jump!” is not a persuasive argument for a more provocative posture.  China is a sovereign nation.  Its government, like the U.S. government, pursues policies that it believes to be in its own interests (although those policies—with respect to both governments—are not always in the best interests of their people).  Realists understand that objectives of the U.S. and Chinese governments will not always be the same, thus U.S. and Chinese policies will not always be congruous.  Accentuating and cultivating the areas of agreement, while resolving or minimizing the differences, is the essence of diplomacy and statecraft.  These tactics must continue to underpin a U.S. policy of engagement with China.

Rand Paul Not So Hardcore On Farm Subsidies

Rand Paul, after setting the newswires alight with his controversial stance on the Civil Rights Act, is busy touting his “moderate” credentials.

Moderate, in this case, being a euphemism for “laughably timid.”

In a recent interview with a Kentucky radio station, Paul rejected the charge of his political opponent that he was opposed to farm subsidies. Not true, sayeth Paul. He is “much more moderate than that.”

According to an article in yesterday’s  Lexington Herald-Leader, Paul’s less-than-radical view on farm subsidies is that, well, maybe dead people should not receive them:

Let’s just agree that we will get rid of subsidies for dead farmers first,” he said.

After that, Paul said, the government should restrict subsidies to farmers who make more than $2 million a year.

Paul said 2,007 farmers last year whose income was greater than $2 million received subsidies.

“Let’s agree that maybe we can cut them out,” he said.

Despite his “ideologically pure” stance on the CRA, Rand Paul can compromise on issues of freedom when he wants to, for example on drug laws and gay marriage, as Tim Lee points out.  And now, apparently, he is to the left of Barack Obama (who favored a $500,000 adjusted gross income limit) when it comes to farm subsidies. Paul’s choice of when to be ideologically pure is curious indeed.

HT: Don Carr at the Environmental Working Group

Thanks to Tax Competition, Corporate Tax Rates Continue to Fall in Europe

Many people assume that Europe is the land of high-tax welfare states and America is an outpost of laissez-faire capitalism. We should be so lucky. The burden of government in America is still lower than it is in the average European nation, but the United States is a lot closer to France than it is to Hong Kong – and the trend is not comforting.

We recently endured the embarrassing spectacle of President Obama arguing with Europeans that they should increase the burden of government spending. Now we have a new report from the European Commission indicating that the average corporate tax rate in member nations of the European Union has plummeted to just 23.5 percent while the corporate tax rate in the U.S. has stagnated at 35 percent. In the past dozen years alone, as the chart illustrates, the average corporate tax rate in the European Union has dropped by nearly 12 percentage points. To make matters worse, the corporate tax rate in America actually is closer to 40 percent if state tax burdens are added to the mix.

This is not to say that European politicians are reading Hayek and Friedman (or watching Dan Mitchell videos on corporate taxation). Almost all of the positive reforms are because of tax competition. Thanks to globalization, it is increasingly easy for labor and (especially) capital to cross national borders to escape bad policy. As such, nations now have to compete for jobs and investment, and this liberalizing process is particularly powerful among nations that are neighbors.

Not surprisingly, European politicians despise tax competition and instead would prefer to impose a one-size-fits-all policy of tax harmonization. These efforts to create a tax cartel have a long history, beginning even before Reagan and Thatcher lowered tax rates and triggered the modern era of tax competition. The European Commission originally wanted to require a minimum corporate tax rate of 45 percent. And as recently as 1992, there were an effort to require a minimum corporate tax rate of 30 percent.

Fortunately, the politicians did not succeed in any of these efforts. As such, tax competition remains alive and corporate tax rates continue to fall. What remains to be seen, however, is whether America will join the race to lower corporate tax rates – and more jobs and investment.

How Much Is Enough?

In yesterday’s Daily Caller, I responded to an article questioning cuts in military spending. Although the author focuses on a few of the specifics proposals put forward by the Sustainable Defense Task Force (SDTF), he seems to imply that any cuts in a budget that has grown 86 percent since 1998 (in real terms) would undermine our security.

I was able to respond to his more outrageous claims, including his assertion that Barack Obama plans to cut $1 trillion from the Pentagon budget over the next ten years. In fact, Obama has now submitted two DoD budgets, each larger than the year before. We are spending more money (in real, inflation-adjusted dollars) on the military today than at any time since World War II.

One of the other assertions in an article riddled with errors deserves a response. The author claims that cuts in military spending would leave as vulnerable as we were in the early 19th century, when:

Strapped for money, Jefferson cut the navy by two-thirds and built small gunboats instead, saying they “are the only water defense which can be useful to us, and protect us from the ruinous folly of a navy.” What were the results of Jefferson’s version of a low cost ‘policy of restraint?’ Britain’s navy brushed the gunboats aside and burned the White House in 1814.

Fortunately, the British superpower of 1814 did not have an air force, a strategic missile force, or a large amphibious Marine Corps. If they had, they would have burned the Declaration of Independence, too.

Historical analogies are always tenuous, but this one might work…if you imagine that we were the British in the 19th century, and any other country in the world was the adolescent United States. The American superpower of the 21st century doeshave “an air force, a strategic missile force, [and] a large amphibious Marine Corps” and we will continue to have all of those things in the extremely unlikely event that Congress adopts all of the SDTF’s recommendations for cuts.

Here is how the SDTF report addresses the question of relative military spending:

In 1986, US military spending was only 60% as high as that of its adversaries (taken as a group). Today, America spends more than two and one-half times as much as does the group of potential adversary states, including Russia and China. This means that if the United States were to cut its spending in half today, it would still be spending more than its current and potential adversaries – and the balance would still be twice as favorable as during the Cold War.

The notion that we can’t cut anything from the military budget without diminishing American security, that we need to spend more money on the military today than at the height of the Cold War, is absurd. Even some prominent conservatives are beginning to question the wisdom of spending hundreds of billions of dollars every years on the military. Let’s hope this sensible thinking starts to catch on.