Archives: December, 2010

Earmarks, Spending, and the Scope of the Federal Government

The Washington Post reported yesterday that Republican senators were turning their back on a massive spending bill stuffed full of their own earmarks. Those earmarks, the Post noted, included quite a few to benefit Mississippi, the home state of Senators Roger Wicker and Thad Cochran:

Wicker, along with Cochran, had by then already sponsored earmarks in the spending bill that would fund an airport expansion in Tunica ($1.75 million), new riverwalk lights in Columbus ($300,000), improvements to a hiking and biking trail in Hattiesburg ($700,000) and improvements to an assortment of bridges, highways, trails, railways and streets across Mississippi.

A burgeoning Tea Party revolt against earmarks caused the bill to be withdrawn. Senate Majority Leader Harry Reid held a press conference to defend earmarks as the constitutional duty of the people’s elected representatives. (And, as many of our friends have emailed to tell us, held up a copy of the Cato pocket Constitution — 10 for $10 this Christmas season! — to make his point. Ah, well.)

But the real problem here is not earmarks. The underlying issue is not whether members of Congress or unelected bureaucrats spend the money that Congress appropriates for highways and the like. The real question is, why are local roads and bridges and hiking trails and riverwalk lights being paid for by taxpayers across the country?

If the people of Columbus, Mississippi, want new lights on their riverwalk, why are they asking the families of New Hampshire and Indiana and Oregon to pay for them? Shouldn’t they pay for their own lights, and let the people of Hattiesburg pay for their own hiking trails, and let the people of Oregon pay for any roads, bridges, or hiking trails that they value?

The fundamental problem is not earmarks. It is that the federal government is paying for clearly local and state responsibilities. Opponents of excessive spending should not stop at an earmark ban. They should insist that the federal government pay for national needs and leave state and local projects to the states and towns that want them.

Taxpayers Got a Big Christmas Present Yesterday, but It Wasn’t the Tax Bill

There’s a lot of attention being paid to yesterday’s landslide vote in the House to prevent a big tax increase next year. If you’re a glass-half-full optimist, you will be celebrating the good news for taxpayers. If you’re a glass-half-empty pessimist, you will be angry because the bill also contains provisions to increase the burden of government spending as well as some utterly corrupt tax loopholes added to the legislation so politicians could get campaign cash from special interest groups.

If you want some unambiguously good news, however, ignore the tax deal and celebrate the fact that Senator Harry Reid had to give up his attempt to enact a pork-filled, $1 trillion-plus spending bill. This “omnibus appropriation” not only had an enormous price tag, it also contained about 6,500 earmarks. As I explained in the New York Post yesterday, earmarks are “special provisions inserted on behalf of lobbyists to benefit special interests. The lobbyists get big fees, the interest groups get handouts and the politicians get rewarded with contributions from both. It’s a win-win-win for everyone — except the taxpayers who finance this carousel of corruption.”

This sleazy process traditionally has enjoyed bipartisan support, and many Republican senators initially were planning to support the legislation notwithstanding the voter revolt last month. But the insiders in Washington underestimated voter anger at bloated and wasteful government. Thanks to talk radio, the Internet (including sites like this one), and a handful of honest lawmakers, Reid’s corrupt legislation suddenly became toxic.

The resulting protests convinced GOPers — even the big spenders from the Appropriations Committee — that they could no longer play the old game of swapping earmarks for campaign cash. This is a remarkable development and a huge victory for the Tea Party movement.

Here’s part of the Washington Post report on this cheerful development:

Senate Democrats on Thursday abandoned their efforts to approve a comprehensive funding bill for the federal government after Republicans rebelled against its $1.2 trillion cost and the inclusion of nearly 7,000 line-item projects for individual lawmakers.

…Instead, a slimmed-down resolution that would fund the government mostly at current levels will come before the Senate, and Reid and Minority Leader Mitch McConnell (R-Ky.) said it will pass by Saturday.

…The majority leader’s surrender on the spending bill marked a final rebuke for this Congress to the old-school system of funding the government, in which the barons of the Appropriations Committee decided which states would receive tens of millions of dollars each year.

…Almost every Senate Republican had some favor in the bill, but as voter angst about runaway deficits grew before the midterm elections, Republicans turned against the earmark practice.

This is a very positive development heading into next year, but it is not a permanent victory. Some Republicans are true believers in the cause of limited government, but there are still plenty of corrupt big spenders as well as some Bush-style “compassionate conservatives” who think buying votes with other people’s money somehow makes one a caring person.

In other words, fiscal conservatives, libertarians, and Tea Partiers have won an important battle, but this is just one skirmish in a long war. If we want to save America from becoming another Greece, we better make sure that we redouble our efforts next year. Eternal vigilance is the price of liberty.

Investigate All Air Travelers, Say Experts in Dog Food Rebranding

Washington Post staff writers Anne Kornblut and Ashley Halsey cite “experts” six times in a story today about the nascent pendulum swing in airport security policy back toward government investigation of travelers.

“[M]ore than a dozen U.S. officials, lawmakers and experts interviewed said they would like to move to a system that relies more on passenger data than on airport checkpoint screening,” they write. “[I]f the security system were allowed to access even more — such as personal information collected by companies that do credit ratings — suspicious passengers would be more readily identified, experts say.”

Without irony, they cite these methods as a way of closing gaps in current airport security. But no system would be quite so gapped as a system of mass investigations. As I wrote recently with regard to the “Trusted Traveler” notion, which has the same provenance:

[P]recisely what biographical information assures that a person is “good”? (The proposal is for government action: it would be a violation of due process to keep the criteria secret and an equal protection violation to unfairly divide good and bad.) How do we know a person hasn’t gone bad from the time that their goodness was established?

Kornblut and Halsey have turned up what appears to be a new idea by citing only experts who have not thought through the weaknesses, due process issues, and privacy costs in identity-based security. Mass investigation of air travelers is rebranded dog food. We don’t need to run to the bowl and drive our snouts into it.

Continuing the canine analogy, note how much tail-chasing there is in airport security policy. Kornblut and Halsey write:

[P]assengers must surrender sharp objects (a response to the Sept. 11 attacks) and slip off their shoes (a response to the 2001 would-be shoe bomber). They must remove liquids from their bags (a result of a 2006 plot to blow up planes), and, as of a few weeks ago, they must submit to body scans or pat-downs (a process accelerated by the attempted airline bombing last Christmas Day).

Terrorists can throw new tactics at us endlessly, causing us each time to add billions more in spending and undercut our liberty and prosperity.

The reason for the tail-chasing is the formulation reported in a companion piece to the main story:

“The terrorists just have to get it right once. The people who are trying to stop them can get it right 99.9 percent of the time and then when something happens, people get upset and want to vote out of office the people they hold responsible.”

It’s nice to see this formulation racheted back to where terrorism threatens politicians. In other versions, the success of any attack has been treated as a threat to the whole nation—an “existential” threat, no less. But even as to politicians, it’s not a given of terrorism that “they only have to get it right once.” It’s only true if politicians (lie to us and) promise that terrorists will have zero successes, treating our nation as so fragile and weak that the fragile-America prophecy self-fulfills.

The alternative is to adopt a national mind-set of indomitability rather than fragility. It is risk acceptance when the costs of risk avoidance are too high.

Cato has hosted true experts on terrorism and counterterrorism at two significant conferences, one in January 2009 and another in January 2010. A good framework for re-thinking counterterrorism policy can be found in the Cato book, Terrorizing Ourselves: Why U.S. Counterterrorism Policy is Failing and How to Fix It.

House Bill Repeals DADT the Right Way

The House passed a repeal of Don’t Ask, Don’t Tell (DADT) yesterday, and it appears that the Senate will take up the measure sometime next week. Good.

DADT should end. I’ve said so, and debated the issue with repeal opponent Stuart Koehl (posts 1, 2, 3, and 4). Most servicemembers I know (appropriate disclaimer here) already have a mindset of Don’t Ask, Don’t Care, and its time for official policy to catch up.

We should note that a legislative effort is the right way to change the current policy. DADT is based on a law – 10 U.S.C. § 654 – enacted with the FY1994 National Defense Authorization Act.

Some have argued (and here, and here) that President Obama could stop enforcing DADT by executive order. The President does have control over enlisted separations under 10 U.S.C. § 12305 and officer separations under 10 U.S.C. § 123. But, as Gene Healy noted in a recent column, “it would be kinda cool if our representatives got to vote on [policies] before they became the law of the land.” More than kinda cool, it would comply with the Constitution, which gives Congress the authority “To make Rules for the Government and Regulation of the land and naval Forces.”

The repeal legislation also deals with the legal and policy questions that are implicated with DADT repeal. This is important in a couple of ways. First, the policy change is phased in over time, giving the services time to adjust policies.

Second, as I said at this event, the sexual offenses in the Uniform Code of Military Justice (UCMJ) are a mess that Congress needs to untangle along with repeal. Article 125 of the UCMJ criminalizes all sodomy – heterosexual, homosexual, consensual, or otherwise. As this article points out, the Court of Appeals for the Armed Forces’ decision in United States v. Marcum wounded Article 125 in the wake of Lawrence v. Texas, but did not kill it. The definition of “sexual intercourse” in the UCMJ only includes sex between a man and a woman, so the offenses of adultery, prostitution, and patronizing a prostitute under Article 134 of the UCMJ don’t apply when committed in a homosexual manner. The UCMJ should adopt a uniform standard - criminalize sexual behavior that is prejudicial to the good order and discipline of the armed forces, period. The DOD Report takes this into account (see pp. 138-39) and Congress and the military will have a chance to sort things out as repeal is under way.

In short, repeal is the right thing to do, and passing this law is the right way to do it.

Lies, Damned Lies, and Trade Statistics

If you want to understand how global integration and cross-border investment have left U.S. trade policy in need of a new purpose, check out today’s Wall Street Journal article about the Apple iPhone’s complex production-supply chain.  (And then see this analysis for more depth and detail.) The story is both testament to the benefits of globalization and the latest indictment of a decrepit international trade flow accounting system that nourishes misleading trade skeptics and misinforms policy.

Following in the footsteps of a groundbreaking and widely-cited 2007 UC-Irvine study, which disaggregated the components of a Chinese-assembled Apple iPod and assigned its constituent value to the companies and countries responsible for their production, two researchers at the Asian Development Bank Institute applied a similar analysis to the Apple iPhone. Like the UC-Irvine iPod study before it, the ADBI analysis found that just a tiny fraction of the cost of producing the iPhone is Chinese value-added. The only Chinese input is labor, which is used to assemble the components manufactured in other countries. The value of that labor accounts for $6.50 or 3.6 percent of the total cost of $178.96 to produce an iPhone (about the same percentage as the iPod). The other 96.4 percent of that total is the cost of components produced (and the labor and overhead employed to produce those components) in Japan, Germany, South Korea, the United States, and several other countries. This breakdown is very similar to that found for the iPod in 2007, and the punch lines are identical.

While firms in Japan and Germany account for the most expensive parts (and quite obviously benefit from the advent of the iPhone), most of the value of the iPhone (like the iPod) accrues to Apple, which reaps the lion’s share of the approximately 100 percent markup. When iPhones sell for $399 in the United States, the difference between that retail price and the $178.96 cost of production goes to retailers, distributors, marketers, other firms in the supply chain, and to Apple, which distributes some earnings to its shareholders and retains some for research and development, supporting engineering and design jobs higher up the value chain so that the virtuous circle can continue.

Rather than appreciate how this complementary process harnesses the benefits of our globalized division of labor, some begrudge iPod and iPhone sales in the United States for adding to the bilateral trade deficit. Technically, for every $399 iPhone sold in the United States, the U.S. bilateral trade deficit with China increases by $178.96. Even though only $6.50 of that iPhone is Chinese value, under our antiquated, pre-globalization, method of tallying a nation’s imports and exports, the entire $178.96 is chalked up as an import from China because that was the product’s final point of assembly. According to the authors of the ADBI study, iPhones added $1.9 billion to the politically volatile U.S. trade deficit with China in 2009. Alas, this is the basis of the claim—popular among the most shameless trade critics—that America has a “high-tech” trade deficit with China.

Should we lament a trade deficit in iPhones or any other products assembled abroad, particularly when those products comprise U.S. value-added and support high-paying U.S. jobs? I think not.  As I wrote last year:

U.S. factories and workers are more likely to be collaborating with Chinese factories and workers in production of the same goods than they are to be competing directly. The proliferation of vertical integration (whereby the production process is carved up and each function performed where it is most efficient to perform that function) and transnational supply chains has joined higher value-added U.S. manufacturing, design, and R&D activities with lower-value manufacturing and assembly operations in China. The old factory floor has broken through its walls and now spans oceans and borders. Though the focus is typically on American workers who are displaced by competition from China, legions of American workers and their factories, offices, and laboratories would be idled without access to complementary Chinese workers in Chinese factories. Without access to lower-cost labor in places like Shenzhen, countless ideas hatched in U.S. laboratories—which became viable commercial products that support hundreds of thousands of jobs in engineering, design, marketing, logistics, retailing, finance, accounting, and manufacturing—might never have made it beyond conception because the costs of production would have been deemed prohibitive for mass consumption. Just imagine if all of the components in the Apple iPod had to be manufactured and assembled in the United States. Instead of $150 per unit, the cost of production might be multiple times that amount.

Consider how many fewer iPods Apple would have sold; how many fewer jobs iPod production, distribution, and sales would have supported supported; how much lower Apple’s profits (and those of the entities in its supply chains) would have been; how much lower Apple’s research and development expenditures would have been; how much smaller the markets for music and video downloads, car accessories, jogging accessories, and docking stations would be; how many fewer jobs those industries would support; and the lower profits those industries would generate. Now multiply that process by the hundreds of other similarly ubiquitous devices and gadgets: computers, Blu-Ray devices, and every other product that is designed in the United States and assembled in China from components made in the United States and elsewhere.

The Atlantic’s James Fallows characterizes the complementarity of U.S. and Chinese production sharing as following the shape of a “Smiley Curve” plotted on a chart where the production process from start to finish is measured along the horizontal axis and the value of each stage of production is measured on the vertical axis. U.S. value-added comes at the early stages—in branding, product conception, engineering, and design. Chinese value-added operations occupy the middle stages—some engineering, some manufacturing and assembly, primarily. And more U.S. value-added occurs at the end stages in logistics, retailing, and after-market servicing. Under this typical production arrangement, collaboration, not competition, is what links U.S. and Chinese workers.

The proliferation of cross border investment and global production-supply chains is a major reason the world averted a global trade war of 1930s proportions during and in the wake of the recession, as described in this paper; it explains why Chinese currency appreciation between 2005 and 2008 did not reduce the U.S. trade deficit with China during that period, and why Yuan appreciation, alone, going forward will have no discernible impact on the deficit in this paper; and, it explains why the world should rejoice in China’s becoming the world’s largest exporter in 2009, in this oped.

Global integration requires new thinking about trade statistics, which should be reported on a constituent value-added basis, if at all.  It also requires that trade policy get with the times and consist of goals that are not mired in the old  “Us” versus “Them” way of thinking.  Relying on old-fashioned trade statistics for 21st century policy decisions is a recipe for disaster.

Consumer Group Sues McDonald’s Over Happy Meals

The Center for Science in the Public Interest (CSPI), which has long agitated for wider government intervention in food and nutritional matters, has filed a lawsuit charging that McDonald’s is violating California consumer laws by marketing Happy Meals with toys. It wants to force the burger chain either to drop the toy, or to replace the meals’ food components with something more whole-grain-and-vegetable-y. The New York Daily News invited me to have my say on the controversy, and I did. I pointed out that the lawsuit seemed to be aimed at an end run around the reality of individual choice:

No one forced [named plaintiff Monet] Parham to take her daughters to McDonald’s, buy them that particular menu item, and sit by as they ate every last French fry in the bag (if they did).

No, she’s suing because when she said no, her kids became disagreeable and “pouted” – for which she wants class action status. If she gets it, McDonald’s isn’t the only company that should worry. Other kids pout because parents won’t get them 800-piece Lego sets, Madame Alexander dolls and Disney World vacations. Are those companies going to be liable too?

The center’s [CSPI’s] longtime shtick is to complain that businesses like McDonald’s, rather than our own choices, are to blame for rising obesity. So let’s take Happy Meals as an example. When you buy one, you get a string of choices. Milk or soda? (Is that really a hard choice for a parent worried about nutrition?) You can swap out the fattening French fries for “apple dippers” with caramel sauce and plenty of kid appeal. But your choices do not end there. If you think the scoop of fries is too big for a kid serving, you can tell the kid to share it with the grownup on hand, namely you. (You’re the grownup. You make the rules.) You can even, shocking as this sounds, toss the surplus French fries into the disposal bin.

…[I]t’s unlikely that even California courts will approve this suit. But in the mean time, the Center for Science in the Public Interest will fatten off the publicity, unattractively.

You can read the whole thing here. As I’ve noted at my website Overlawyered, the case is one element in a wider campaign that includes newly enacted bans on Happy Meals in San Francisco and nearby Marin County. In June, California blogger Bruce Nye predicted that CSPI would try to build on a 1983 California Supreme Court precedent, Committee on Children’s Television, Inc. v. General Foods Corp., that invites suits over advertising to kids that is purportedly “predatory,” but that they’d run into trouble proving (as the law has required since California voters passed Prop 64 in 2004) that its client, Ms. Parham, is “a person who has suffered injury in fact and has lost money or property” owing to the advertising. Even under California law, having to say “no” to one’s kids is not a legal injury.

Banks Are Lending, but to Whom?

A recurring concern we have heard since the financial crisis erupted is that banks are simply not lending, and that this is holding back economic activity.  If only banks would lend, the economy would grow.  As usual, the truth is a little more complex. 

Unlike in the Great Depression, and despite about 300 bank failures, the balance sheets and deposits of insured commercial banks and thrifts has been steady, if slowly, expanding throughout the financial crisis and recess.  Banks have continued lending during this time; however, they have changed who they are lending to.  Over the last two years we have witnessed a massive shift from lending to the private sector to lending to the public.

The chart below shows banking business lending and bank holdings of U.S. government securities.   The chart suggests that the approximately $500 billion increase in bank lending to Uncle Sam came at the expense of a $400 billion decline in lending to private business.  If one assumes that bank balance sheets have either been stable or increased slightly, then a loan to the government must off-set a loan otherwise made somewhere else.

While its hard to exactly measure the job impact of this reduced business lending, some estimates have been made on the impact of SBA lending.  According to one study, every $41,600 in new small business loans is associated with 1 new job created.   While this number should be taken with a grain of salt, it implies that the $400 billion reduction in business lending has cost over 9 million jobs.  Of course, one might argue that the half-trillion in lending to the govt has created or “saved” some jobs.  Accepting the difficulty of coming up with a reliable estimate, I think its fair to say that on net a few million jobs have been lost due to this shift of lending from the private to the public sector.

Also of interest is that since the financial crisis, and despite the failures of Fannie and Freddie, commercial banks and thrifts have increased their holdings of Fannie/Freddie/Ginnie securities by over $300 billion.

Textbook economics usually teaches that government crowding out of private investment only really occurs when we are near full-employment.  Yet looking at the balance sheets of our commercial banks and thrifts, would suggest that U.S. Treasuries and Agency securities have crowded out significant lending that would otherwise go to the private sector.   But this should come as no surprise, since banks can borrow for close to zero and invest risk-free in government debt, earning a nice spread of 3 to 4 percentage points.