Archives: September, 2010

China Currency Hearings a Distraction

This week’s congressional hearings on China’s currency generated a lot of heat but almost no light. Winning the prize among tough competition for the most irresponsible sound bite was Sen. Charles Schumer, D-N.Y. At a Senate hearing Thursday that featured Treasury Secretary Tim Geithner, Schumer tossed out this grenade:

At a time when the U.S. economy is trying to pick itself up off the ground, China’s currency manipulation is like a boot to the throat of our recovery. This administration refuses to try and take that boot off our neck.

The implication of the senator’s remark is that Americans would be enjoying a robust economic recovery right now if only China were to allow its currency to appreciate by 20 to 40 percent. But is that a reasonable charge?

Granted, China’s currency, the yuan, probably is priced in dollars below what it would be were its value freely determined in global currency markets. And an undervalued currency will make Chinese imports to the United States more affordable, and U.S. exports to China somewhat more expensive. But “a boot to the throat of our recovery”? Let’s get real.

The Chinese market has been one of the bright spots for American exporters. China’s economic growth has been so robust that its growing demand for U.S. goods has swamped any negative effect of its currency. In the first seven months of 2010, according to the most recent monthly report from the U.S. Commerce Department, exports of U.S. goods to China are up 36 percent compared to the same period last year. That is a 50 percent faster growth rate than U.S. exports to the rest of the world.

Meanwhile, U.S. imports from China so far this year have been growing more slowly than exports to China, and more slowly than imports from the rest of the world. As a result, while our trade deficit with China in 2010 has grown by $22 billion, our trade deficit with the rest of the world has grown by $64 billion. But it is much easier these days to demonize China than other trading partners with whom Americans run a trade deficit, such as Canada, Japan, and the European Union.

One of the bright spots of the U.S. economy has been the manufacturing sector, which is supposedly taking the brunt of China’s “currency manipulation.” According to the latest report from the Federal Reserve, U.S. manufacturing output is up about 8 percent from a year ago.

The chief obstacle to America’s recovery is not China’s currency regime, but a housing market that remains depressed, soaring government spending and debt, looming tax increases, and grandstanding politicians who refuse to remove those very large boots from the neck of the American economy.

And the Last Shall Be First

Ten years ago, the American Indian Charter School scored last among Oakland’s public middle schools. Today it’s the top-scoring public middle school in all of California, according to the state’s own Academic Performance Index ranking.

What changed? It wasn’t the school’s demographics. American Indian’s enrollment is still almost all low income and minority, and contrary to almost everyone’s expectations, these inner-city kids now outperform their age-mates in even the wealthiest districts in California. And the school accepts all applicants, so, no, they don’t cherry-pick. The only cherry-picking that happens at American Indian is when elite East-Coast boarding schools recruit their middle-school graduates, offering them full board and tuition–perhaps a way of diversifying their socio-economic makeup while also raising their academic performance.

The success of American Indian is due to the no-holds-barred management and academic culture created by its former principal, Ben Chavis, and now perpetuated by the principals to whom he passed the baton following his retirement in 2007. Ben brought this school from last in Oakland to 4th in the state, and his successors have raised it to #1.

There are no cell-phones, no jewelry, no pants-saggin’. Show up late and you have to come to school on Saturday… and you’ll be expected to WORK. Assiduous effort is expected always and from every student, and the teachers and principals will do everything conceivable to encourage that effort.

The students come to feel–rightly–that they belong to something exceptional and important. They develop ties to one another and to the school, and work not only for their own success but to ensure they don’t let down their comrades. It’s impossible to really describe this in a blog post, but the story is powerfully-captured in the book Crazy Like a Fox.

It is a model that is replicable, but one that will only be replicated on a massive scale if we allow the free enterprise system to take hold in American education. When entrepreneurs have the freedoms and incentives to scale-up great schools, just as they now have the freedoms and incentives to scale up great coffee shops and cell-phones, we will see educational greatness proliferate. Until then, most of the children who would thrive in schools like Ben’s won’t have access to them. And that’s a tragedy.

Constitution Day

On September 17, 1787, the Framers of the Constitution of the United States of America, having completed their work over that long hot summer, sent the document out to the states with the hope that conventions in the states, pursuant to Article VII, would see fit to ratify it. Nine months later, on June 21, 1788, New Hampshire became the ninth state to do so, making the Constitution effective between those states. Shortly thereafter, three more states ratified the document; and Rhode Island, the last, did so on May 29, 1790.

The Constitution was not perfect – what human creation is? – not least in its oblique recognition of slavery, believed necessary to ensure union. But it provided for amendment, as with the addition of the Bill of Rights in 1791 and the Civil War Amendments several decades later, which ended slavery and brought the Bill of Rights to bear upon the states. All things considered, especially when we look at the rest of the world, the Constitution has served us well, enabling us to prosper in greater freedom than most have ever enjoyed.

Over the past century, however, we’ve allowed governments at all levels to grow far more than the Framers ever would have imagined the Constitution allowed, until today the modern redistributive and regulatory state is everywhere upon us. James Madison, the principal author of the Constitution, wrote in Federalist 45 that the powers of the new government would be “few and defined,” leaving us largely free to plan and live our own lives. If we’re to restore that Constitution of limited government, it will take more than courts and “politics as usual” to do so. We’ve got to take the Constitution seriously not just on Constitution Day but on every day. Fortunately, there are stirrings in the nation today that suggest that ever more Americans are doing so. Thomas Jefferson said it best: “Eternal vigilance is the price of liberty.”

My Overdue Response to Jesse Larner

Back in August of 2007, I issued a challenge to Jesse Larner, who blogs at HuffingtonPost.  One week later, Larner took up my challenge in a post that I’ve just finished reading.

Larner very graciously admitted to a couple of misstatements, and I must reciprocate.  I wrote, “I challenge Larner to show where a Cato scholar … describes America’s as a ‘free-enterprise system of health care.’”  Sure enough, Larner found an oped where one of my colleagues wrote, “I live in a country with a free-market health-care system.”  Obviously, I disagree with that claim.  But Larner was right, and I will have to look into this.

A few remaining areas of disagreement:

  • I wrote that Larner “claims that people don’t die on waiting lists in Canada’s health care system.”  Larner responds: “Actually, that’s not what I claimed. I claimed that people don’t often die on waiting lists.”  Canada’s Supreme Court writes that “in some serious cases, patients die as a result of waiting lists for public health care.”  Is some as many as often?  I hope not.
  • Larner: “the Canadian system has problems … [but] it worked better before a series of conservative provincial governments began to de-fund it.”  This isn’t the first time that advocates of socialized medicine have blamed its shortcomings on politicians who (supposedly) oppose socialized medicine.  But it is an inherent feature of such systems that they will inevitably fall into the hands of whatever viable political parties exist in that nation.  As I explained to Paul Krugman, “Unless you have a plan to abolish Republicans, they’re part of your plan.”
  • Larner writes: “a public health care plan is a public good.”  Public good is an economic term with a specific meaning.  A public health care plan is not a public good.
  • Larner: “is Cannon saying that we do not have rationing in the US?”  Hardly.
  • Larner: “In a free-market system, what mechanisms would prevent insurers from cherry-picking their customers, and denying coverage to those who are likely to require expensive treatment?”  The question presumes that insurance should do something that insurance cannot do: insure the uninsurable.  In this chapter of the Cato Handbook on Policy, I explain the (amazing) things that health insurance can accomplish, and why “health insurance markets are completely justified in not covering preexisting conditions.”
  • “So here’s my challenge to Cannon: show me a way that a true free-market system can provide decent coverage to everyone, regardless of ability to pay, without rationing.”  Elsewhere in his post, Larner acknowledges this is an impossible task.  In this magazine article, I explain that there is no way to reform health care that can guarantee that no patients will fall through the cracks.  In this Cato paper, I explain how a free market would minimize the number of people who do.
  • “Cannon is not in favor of universal coverage as a social right.” True, that.  “As a libertarian, he doesn’t even recognize the concept of social rights.”  I believe it was Friedrich Hayek who said there’s no better way to strip a word of its meaning than to place the word “social” in front of it.  Try it yourself .  I suggest using words like security, contract, justice, responsibility…

Clean Elections Act Dirties the First Amendment

In 1998, after years of scandals ranging from governors being indicted to legislators taking bribes, Arizona passed the Citizens Clean Elections Act. This law was intended to “clean up” state politics by creating a system for publicly funding campaigns.

Participation in the public funding is not mandatory, however, and those who do not participate are subject to rules that match their “excess” private funds with disbursals to their opponent from the public fund. In short, if a privately funded candidate spends more than his publicly funded opponent, then the publicly funded candidate receives public “matching funds.”

Whatever the motivations behind the law, the effects have been to significantly chill political speech. Indeed, ample evidence introduced at trial in a lawsuit challenging the law showed that privately funded candidates changed their spending — and thus their speaking — as a result of the matching funds provisions. In elections, where there is no effective speech without spending money, the matching funds provision of the Clean Elections Act diminishes the quality and quantity of political speech.

In 2008, the U.S. Supreme Court in Davis v. FEC struck down a similar provision in the federal McCain-Feingold law in which individually wealthy candidates were penalized for spending their own money by triggering increased contribution limits for their opponents. Even this modest opportunity for opponents to raise more money was found to be an unconstitutional burden on political speech.

Cato has thus filed a brief supporting a request that the Supreme Court review the lower court’s decision upholding Arizona’s Clean Elections Act.  We highlight Davis (in which Cato also filed a brief) and numerous other cases that point to a clear conclusion: if the mere possibility of your opponent getting more money is unconstitutional, then the guarantee that your opponent will get more money (Arizona’s act automatically disburses matching funds) is even more so. Allowing the government to abridge political speech in this fashion not only diminishes the quality of our political debate, but it ignores the fundamental principle upon which the First Amendment is premised: that the government cannot be trusted to regulate political speech for the public benefit. 

The Supreme Court will decide later this fall whether to review this case, McComish v. Bennett.

Cato’s Eternal Vigilance

Today is Constitution Day, when all educational institutions are supposed to teach something about our founding document and when all citizens should think about the liberty that is so precious, but that requires, as Jefferson said, eternal vigilance.  We at Cato celebrate Constitution Day with our annual symposium – this year held yesterday so as to accommodate Yom Kippur, which begins tonight – and by releasing the Cato Supreme Court Review, the nation’s first in-depth review of the Supreme Court term just ended.

We’ve now had nine such conferences – which take place about two and a half months after the previous term concludes and two weeks before the next one begins – and published nine such volumes.  We are proud of the speed with which we publish the Review – authors of articles about the last-decided cases have little more than a month to provide us full drafts – and of the tome’s accessibility, at least insofar as the Court’s opinions allow for that.  Both the book and the conference are intended for everyone from lawyers to educated laymen and interested citizens.

I hope that our Constitution Day event and the Review’s collection of essays will deepen and promote the Madisonian first principles of our Constitution, giving renewed voice to the Framers’ fervent wish that we have a government of laws and not of men.  In so doing, we hope also to do justice to a rich legal tradition in which judges, politicians, and ordinary citizens alike understood that the Constitution reflects and protects the natural rights to life, liberty, and property – including The Right to Earn a Living, to quote the title of a new book by my friend and Cato adjunct scholar Timothy Sandefur (for which we’re having a Hill briefing today and book forum Monday) – and serves as a bulwark against the abuse of government power.

In this uncertain time of individual mandates, endless “stimulus,” financial “reform,” and general overreach, it is more important than ever to remember our Constitution’s roots in the Enlightenment tradition.

More Evidence of the Failed Stimulus

Not that we need more evidence, but here is a story from Los Angeles revealing that the city only created 55 jobs with $111 million of stimulus funds. This translates to a per-job cost of $2 million, which is a grossly inefficient rate of return. But this calculation is incomplete because it doesn’t measure how many jobs would have been created if the money had been left in the productive sector of the economy. Moreover, it’s also important to consider long-term costs such as the fact that Los Angeles now has more overhead, which will exacerbate the city’s fiscal problems.

A snippet:

The Los Angeles City Controller said on Thursday the city’s use of its share of the $800 billion federal stimulus fund has been disappointing. The city received $111 million in stimulus under the American Recovery and Reinvestment Act (ARRA) approved by the Congress more than a year ago.

“I’m disappointed that we’ve only created or retained 55 jobs after receiving $111 million,” says Wendy Greuel, the city’s controller, while releasing an audit report.

…The audit says the numbers were disappointing due to bureaucratic red tape, absence of competitive bidding for projects in private sectors, inappropriate tracking of stimulus money and a laxity in bringing out timely job reports.