Archives: 03/2012

How Washington Sees the World

A headline in Tuesday’s Washington Post – actually, it was a teaser on page B1 for a story inside – read:

Another hand on wallets

I figured it would be a story about the Maryland income tax increase, or the proposed Arlington County tax increase, or the coming federal tax tsunami.  But then I read the subhead:

If it’s Tuesday – or any day that ends with “Y” – it must be time for another move on the wallets of federal workers.

Ah, yes. In the world as seen by the Washington Post, the “hand in your wallet” is the taxpayers, trying to keep some of their hard-earned money. And then, when you read the story, titled “Another hand in federal workers’ pockets,” it says, “The latest attempt in a seemingly unending series of proposals to cut their pay or benefits is scheduled for a Senate vote Tuesday.” But it’s not a cut! It’s just a proposal to extend the alleged federal pay freeze. So not a cut in pay, just no increase.

And then, as so often happens in Washington, it turns out that even if this did save any money, the money wouldn’t go back to the taxpayers anyway:

In an amendment to the highway bill now being considered by the Senate, Sen. Pat Roberts (R-Kan.) wants money saved by extending the federal pay freeze to fund energy projects, an adoption tax credit, and tax deductions for college expenses and for state and local property taxes.

Oh, there go those mean ol’ Tea Party, tight-fisted Republicans again, trying to restrain federal workers’ already high pay in order to … um, fund their own favorite projects. Seems like the taxpayer has no dog in this fight.

The Massacre in Panjwai

In yesterday’s Politico, my coauthor Robert Naiman and I examine the U.S. mission in Afghanistan in the wake of the sad and inexplicable massacre of 16 Afghan civilians—nine of them children, most of them allegedly toddlers—by a U.S. soldier in Panjwai, Kandahar. While we address some of the possible policy implications, it is equally instructive to read what is happening on the ground. On Monday, the New Yorker’s Amy Davidson aggregated reports from local witnesses. I would encourage everyone to read Davidson’s piece in full; below are some of the more interesting excerpts:

First, in the early hours of Sunday, there was noise. “I told my son not to speak because the Americans are here,” an Afghan woman told the BBC. “They went next door and the first thing they did was shoot the dog. And then there was a muffled bang inside the room—but who could go and see?”

A mother using the word “Americans” to scare her child into silence is alone cause for reflection. And “who could go and see”? Despite the dark and noise and confusion—was there more than one soldier? A helicopter?—some Afghans in the village saw something. Here is what another woman told the BBC:

There was one man, and he dragged a woman by her hair and banged her head repeatedly against the wall. She didn’t say a word.

And Mohammad Zahir, age twenty-six, to the AP:

He was walking around taking up positions in the house—in two or three places like he was searching… . He was on his knees when he shot my father… . [My father] was not holding anything—not even a cup of tea.

Abdul Hadi, age forty, to the Times.

My father went out to find out what was happening, and he was killed… . I was covered by the women in my family in my room, so that is why I survived.

Gul Bashra, identified as a “mother,” on Al Jazeera (and the woman who told the BBC about the noises):

They killed a child who was two years old. Was that child Taliban?

Anar Gula, an elderly neighbor, to the Times:

All the family members were killed, the dead put in a room, and blankets were put over the corpses and they were burned… . We put out the fire.

War is heart wrenching, as Afghans surely know. Their country has been in near ceaseless conflict for the last thirty years, and according to the latest U.N. report on armed conflict in Afghanistan, 2011 was the fifth straight year in which civilian casualties rose. Although insurgents were mainly responsible for those deaths, in 2009 the Obama administration adopted a new mission: protecting ordinary Afghans and winning over their allegiance, a case put forward most vigorously by General David Petraeus (ret.), General Stanley McChrystal (ret.), and other military and civilian experts in what now seems like eons ago.

Today, the metric for success is to help Afghans establish some semblance of internal security, a shifting goalpost that was always an uphill battle. During and after the surge, it was clear that the administration’s new strategy did not have enough troops, enough time or enough competent local partners—as called for by the U.S. Army and Marine Corps in its counterinsurgency (COIN) field manual—to compete credibly with the Taliban. As a result, officials in Washington and Kabul fed foreign observers stage-managed showpieces like the offensive in Marjah.

Applied according to doctrine, COIN in Afghanistan would have required several hundreds of thousands of troops, ten to twelve years of implementation and local government leaders who were not motivated primarily by personal advancement. It’s difficult to imagine a successful application of COIN in that landlocked country even if the coalition had these essential building blocks. After all, in addition to the oft-mentioned issue of cross-border militant sanctuaries, the cultural chasm between foreigners and rural locals has always persisted—and the Taliban have readily exploited this rift.

As Army Special Forces Maj. Fernando M. Lujan noted in a March 4 article, “One of the first things we learned was the power of a simple narrative, repeated endlessly by the Taliban: The coalition is here to occupy Afghanistan and destroy Islam.” Indeed, right after last Sunday’s massacre and the allegation that the soldier’s multiple deployments may have created mental-health issues, the Taliban issued this statement:

If the perpetrators of this massacre were in fact mentally ill, then this testifies to yet another moral transgression by the American military because they are arming lunatics in Afghanistan who turn their weapons against the defenseless Afghans without giving a second thought.

Although a new Washington Post-ABC News poll shows that 54 percent of Americans believe we should withdraw before the Afghan army is “self-sufficient,” the administration remains committed to withdrawing in 2014. Between now and then, it hopes to set up a minimally functioning government in the middle of central Asia that is resistant to internal insurrection and to foreign invasion. It’s going to be a long two years.

Cross-posted from the Skeptics at the National Interest.

Gingrich Adviser Urges States to Implement ObamaCare

State after state is refusing to implement ObamaCare’s health insurance Exchanges. Republican David Merritt hopes they will “grudgingly decide” to change their minds.

Merritt is a health care adviser to Newt Gingrich. He is also a senior adviser at Leavitt Partners. Leavitt Partners is a consulting firm that makes money by helping states implement ObamaCare. In the Daily Caller, Merritt tries to persuade state officials to help implement a law they oppose.

Merritt begins his pro-Exchange argument like so: “Imagine that you’re being required to buy a car.” Would you rather choose that car yourself, he then asks, or would you rather the dealer choose the car? Hmm, good question. I choose Option C: wring the neck of whoever is requiring me to buy a car. Not Merritt, though. He counsels states to choose their own “car.”

There are so many problems with this analogy that it’s hard to list them all. First, as Merritt essentially admits, states would be able to choose from such a narrow range of “cars” that it scarcely makes a difference whether they pick their own or let the feds do it. Second, states would only have to pay for their “car” if they pick it out themselves; otherwise, the feds pay for it. So Merritt is literally urging states to volunteer to pay for a “car” when the feds would otherwise hand them one for free. Finally, he says states should select their own “car” even though “no one knows what a federal [car] would look like.” How can Merritt counsel states to choose Option A if he admits he doesn’t even know what Option B is? Wouldn’t the prudent course be to wait and see? Especially since the Obama administration admits it doesn’t have the money to create Exchanges itself?

Merritt’s hypotheticals don’t make his point, either:

Take, for example, the treatment of high-deductible health plans with health savings accounts. A state exchange could and should include them as an option…But considering that many on the left oppose consumer-directed plans, a federal exchange may very well exclude them.

Perhaps a federal exchange will lard mandate upon mandate on participating plans, driving costs through the roof. Perhaps it will be so restrictive in its plan eligibility that only a few options will be available. Perhaps HHS will offer a public option.

This is nonsense. If the federal government wants to exclude HSAs, etc., it will do so in both federal and state-run Exchanges. States that establish their own Exchanges won’t be able to do a darned thing about it.

But here’s where Merritt’s argument really fails:

Unless and until the law is repealed by Congress or overturned by the Supreme Court, all health care stakeholders — including state policymakers — need to prepare for it as though it will be the law of the land forever. Wishing the law away is not a strategy. Hoping that it is overturned is not a plan.

Wishing? Hoping? Perhaps Merritt hasn’t noticed, but countless Americans are pursuing multiple well-considered strategies (and working their fingers to the bone) to ensure that ObamaCare is not “the law of the land forever.”

State-run Exchanges undermine all of those repeal strategies. In fact, they completely derail one of the most promising ones. Worse, Exchanges create new constituencies that would be dependent on ObamaCare, and would therefore fight repeal – constituencies not unlike Leavitt Partners. One of the most important reasons for states not to establish Exchanges is that the federal government does not have the money to establish Exchanges itself. Translation: fewer constituencies for ObamaCare.

For all these reasons, scholars from the Heritage Foundation, the Cato Institute, and countless other groups are advising states to refuse to create ObamaCare Exchanges and to send all related grants back to Washington. Perhaps Newt Gingrich’s health care advisers could lend a hand, instead of trying to cement ObamaCare in place.

Update: While it is important to understand the financial interests involved in such issues, I do not believe that financial interest is what’s motivating Merritt. He sincerely believes that creating their own Exchanges will allow states to make the best of a bad situation.

Update #2: Gingrich campaign spokesman Joe DeSantis writes, “Mr. Merritt is still an advisor to Speaker Gingrich, but he was not writing this article as a representative of the campaign. Newt receives advice from a large number of people. That does not mean he always agrees with the advice he is given. In this case of states implementing ObamaCare as a precaution, he explicitly disagrees with Mr. Merritt. He believes states need to resist the implementation of the law because it is a threat to our freedom.”

 

 

Ed DeMarco Deserves a Medal

The same people who helped create the $180 billion bailout of Fannie Mae and Freddie Mac are now demanding the head of Ed DeMarco, the acting director of the Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac. Some commentators have gone as far to say that the “single largest obstacle to meaningful economic recovery is a man who most Americans have probably never heard of, Edward J. DeMarco.” Of course, such a statement shows a stunning lack of understanding of both the mortgage market and the economy in general.

Why are so many upset with Mr.DeMarco? One simple reason: he is following the law. Some believe that broadly writing down the mortgages of underwater borrowers would turn the economy around, regardless of the cost to the taxpayer. While that assumption itself is highly questionable, it doesn’t matter. As I’ve detailed elsewhere, the current statutory language governing FHFA limits Mr. Demarco from doing so. Yes, some proponents have found language elsewhere in the statute they believe allows sticking it to the taxpayer for another $100 billion. But their argument relies on general introductory sections of the statute, not the powers and duties of FHFA as a conservator. Statutory interpretation 101 is that more specific sections trump general introductory sections. General sections have “no power to give what the text of the statute takes away” (Demore v. Kim, 538 U.S. 510, 535). One would expect senior members of Congress to understand that.

Of course, if some members of Congress believe we should spend $100 billion bailing out deadbeats, then why don’t they simply offer a bill on the floors of the House and Senate doing so? I’m sure House leadership would be happy to have a vote on the issue. The notion, instead, that an unelected, un-appointed, acting agency head should, in the absence of clear authority to do so, spend $100 billion is simply offensive to our system of government. Not to mention it probably violates the Anti-Deficiency Act, and would be hence subject to criminal prosecution.

Unfortunately, one of the common themes of the financial crisis was outright unlawful behavior by the financial regulators, such as the FDIC broad guarantee of bank debt, which lacked any statutory basis. Mr. DeMarco is to be commended for staying within the letter of the law. If Congress had wanted Fannie and Freddie to bailout underwater borrowers, they could have simply written that into the statute. Congress didn’t, regardless of whatever spin any current members of Congress might want to place on the issue.

Trade Policy Lessons in WTO Challenge of China’s Rare Earth Restrictions

This morning the Obama administration lodged an official complaint with the World Trade Organization’s (WTO) Dispute Settlement Body over China’s ongoing restrictions of exports of “Rare Earth” minerals. Rare Earths are crucial ingredients used in the production of flat-screen televisions, smart phones, hybrid automobile batteries, and other high technology products.

The formal complaint was not entirely unexpected since the dispute has been on a low boil for nearly 18 months; the U.S. government recently prevailed in a WTO dispute over a similar issue concerning Chinese export restrictions on nine raw materials used in manufacturing; and, this is an election year in which President Obama has carte blanche to outbid the Republican presidential aspirants’ China-bashing rhetoric with administrative action. So, no surprises really.

Despite the added political incentive to look tough on China this year, the administration should be applauded for its efforts to compel China to oblige its WTO commitments. This is a legitimate complaint following proper channels. In fact, this is exactly the course of action I have long argued for. Negotiations, consultations, and formal WTO dispute resolution (which begin with a long consultation period in which the parties are encouraged to find solutions without formal adjudication) are precisely the methods of dispute settlement conducted by governments that respect the process, their counterparts, and the rule of law in international trade.

In a Cato paper published last week, I wrote:

There is little doubt that certain other Chinese policies would not pass muster at the WTO. China’s so-called indigenous innovation policies, forced technology transfer requirements, porous intellectual property enforcement regime, and rare earth mineral export restrictions are some of many legitimate concerns that might justify formal WTO challenges. (Emphasis added.)

Now, my perspective is not motivated by a fetish for WTO litigation, but a certainty that the alternatives would be bad. Unilateral, discretionary actions taken by governments to redress perceived violations or shortcomings of another government undermine the rule of law in trade and encourage retaliation. Both China and the United States are guilty of taking such unilateral, discretionary actions, and bilateral tensions have increased as a result (see here).

U.S. policymakers should appreciate that today’s formal complaint on rare earths is an example of the right way to address perceived trade barriers. They should also recognize in the arguments advanced by the Office of the U.S. Trade Representative the flawed economics in their support of last week’s countervailing duty legislation (the so-called GPX or NME/CVD bill).

Here’s the USTR’s rationale for the Rare Earths complaint:

China imposes several different types of unfair export restraints on the materials at issue in today’s consultations request, including export duties, export quotas, export pricing requirements as well as related export procedures and requirements. Because China is a top global producer for these key inputs, its harmful policies artificially increase prices for the inputs outside of China while lowering prices in China. This price dynamic creates significant advantages for China’s producers when competing against U.S. producers – both in China’s market and in other markets around the world. The improper export restraints also contribute to creating substantial pressure on U.S. and other non-Chinese downstream producers to move their operations, jobs, and technologies to China.

And here’s a quote from USTR Ron Kirk:

America’s workers and manufacturers are being hurt in both established and budding industrial sectors by these policies. China continues to make its export restraints more restrictive, resulting in massive distortions and harmful disruptions in supply chains for these materials throughout the global marketplace.

And here’s Ambassador Kirk in a statement responding (a few months ago) to the WTO Appellate Body ruling that China’s export restrictions on nine raw materials were not in conformity with that country’s WTO commitments:

Today’s decision ensures that core manufacturing industries in this country can get the materials they need to produce and compete on a level playing field.

And, finally, a statement from the USTR’s website on the raw material export restrictions cases:

These raw material inputs are used to make many processed products in a number of primary manufacturing industries, including steel, aluminum and various chemical industries. These products, in turn become essential components in even more numerous downstream products.

USTR’s argument against Chinese export restrictions in the raw materials and Rare Earths cases are just as applicable to U.S. import restrictions. Removing restrictions—whether the export variety imposed by foreign governments or the import variety imposed by our own—reduces input prices, lowers domestic production costs, enables more competitive final-goods pricing and, thus, greater profits for U.S.-based producers.

Yet the U.S. government imposes its own restrictions on imports of some of the very same raw materials. It maintains antidumping duties on magnesium, silicon metal, and coke (all raw materials subject to Chinese export restrictions).  In fact, over 80 percent of the nearly 350 U.S. antidumping and countervailing duty measures in place restrict imports of raw materials and industrial inputs—ingredients required by U.S. producers in their own production processes. But those companies—those producers and workers for whom Ambassador Kirk professes to be going to bat in the WTO case on rare earths (and the previous raw materials case)—don’t have a seat at the table when it comes to deciding whether to impose AD or CVD duties. (Full story here.)

Ambassador Kirk’s logic and the facts about who exactly is victimized by U.S. trade policies provide a compelling case for trade law reform, such as requiring the administering authorities to consider the economic impact of AD/CVD measures on producers in downstream industries—companies like magnesium-cast automobile parts producers, manufacturers of silicones used in solar panels, and even steel producers, who require coke for their blast furnaces.

Last week, when the CVD legislation passed both chambers overwhelmingly, Congress was implicitly thumbing their noses at these same producers and workers who the USTR rightly identifies as victims of Chinese trade restrictions. They are clearly victims of our own policies, derived in dark shadows by interests with asymmetric influence on the process. Maybe we should dwell on that hypocrisy for a while, and work to fix it by reconsidering the self-flagellation that is the U.S. trade remedies regime.

Our Imperfect Constitution

The distinguished legal scholar from the University of Texas, Sanford Levinson, has written a new book, Framed. Here’s a brief description from the Oxford University Press:

In Framed, Levinson challenges our belief that the most important features of our constitutions concern what rights they protect. Instead, he focuses on the fundamental procedures of governance such as congressional bicameralism; the selection of the President by the electoral college, or the dimensions of the President’s veto power–not to mention the near impossibility of amending the United States Constitution. These seemingly “settled” and “hardwired” structures contribute to the now almost universally recognized “dysfunctionality” of American politics.  Levinson argues that we should stop treating the United States Constitution as uniquely exemplifying the American constitutional tradition.

Levinson makes a basic point that I agree with: there is too much reverence for our fundamental charter (though certainly not enough in certain places!) and that we should seriously consider changes that would improve our polity.

In that connection, let me draw some attention to  a symposium that I participated in a few months ago. The Tennessee Law Review asked various academics and lawyers to come up with ideas for improving the American Constitution. My proposal was and is to amend the amendment process itself. My thesis is that the Framers made the amendment process very difficult with the idea that they were safeguarding their charter for limited government. Let’s face it—it did not work. What we have seen is a reinterpretation of the charter that has rationalized the expansion of federal powers. By making the amendment process easier, I argue that we can bridge the gulf that exists between our legal charter and the government that we actually have. I also think we could expect to see more candor in our constitutional discourse. Prof. Levinson was asked to comment on all the symposium proposals and we found ourselves in agreement on this idea. Here’s Levinson:  “I am glad to specify my agreement with [Tim Lynch’s] argument that perhaps the most most valuable single amendment would be to make the process of amendment significantly easier than it is now.” I will have to consider Prof. Levinson’s other concrete proposals in Framed to see if the case has been made for other changes as well.

For related Cato scholarship, go here and here.

CBO Perpetuates Small Business Administration Myth

A new brief from the Congressional Budget Office discusses the role of small businesses in the economy and how they’re affected by federal policy. The CBO cites the Small Business Administration as one example of how federal policy favors small businesses over larger businesses:

Assistance from the Small Business Administration (SBA), through loan guarantees that enable small firms to borrow at more attractive terms (for example, lower interest rates and fees) than they might otherwise obtain.

That’s the popular perception of the SBA’s loan guarantee programs, but I would argue that it’s inaccurate for two reasons:

  1. The Government Accountability Office has calculated that SBA 7(a) loans only account for a little more than one percent of total small business loans outstanding. Veronique de Rugy and I looked at the top 15 industries that received SBA-backed loans from 2001-2010 and found that only 0.5 percent of the small businesses that comprise these industries received loans backed by the SBA. Thus, rather than helping small businesses compete against big businesses, SBA loan guarantees mainly help a tiny share of small businesses compete against other small businesses.
  2. The real winner from the SBA’s loan guarantees is the banking industry—particularly large banks. In 2009, the top 10 lenders (out of 2,600 total lenders) accounted for close to one-quarter of the SBA’s flagship 7(a) loan guarantee program’s volume. Wells Fargo & Co. alone accounted for 7.3 percent of the total 7(a) loan volume. Other large banks in the top ten include J.P. Morgan Chase, U.S. Bancorp, and PNC Financial Services Group. Although lawmakers portray the SBA’s loan programs as a boost for small businesses, the programs are actually a form of corporate welfare for some of America’s largest banks.

See this Cato essay for more on why the Small Business Administration should be abolished.