Archives: May, 2012

Happy Birthday, F. A. Hayek

Today is the 113th anniversary of the birth of F. A. Hayek, perhaps the most subtle social thinker of the 20th century.

He was awarded the Nobel Prize in Economics in 1974. He met with President Reagan at the White House, and Margaret Thatcher banged The Constitution of Liberty on the table at Conservative headquarters and declared “This is what we believe.” Milton Friedman described him as “the most important social thinker of the 20th century,” and Lawrence H. Summers called him the author of “the single most important thing to learn from an economics course today.”

He is the hero of The Commanding Heights, the book and PBS series by Daniel Yergin and Joseph Stanislaw. His most popular book, The Road to Serfdom, has never gone out of print and sold 125,000 copies last year. John Cassidy wrote in the New Yorker that “on the biggest issue of all, the vitality of capitalism, he was vindicated to such an extent that it is hardly an exaggeration to refer to the 20th century as the Hayek century.”

Last year the Cato Institute invited Bruce Caldwell, Richard Epstein, and George Soros to discuss the new edition of The Constitution of Liberty, edited by Ronald Hamowy. In a report on that session, I concluded:

Hayek was not just an economist. He also published impressive works on political theory and psychology.

He’s like Marx, only right.

Cato published two original interviews with Hayek, in 1983 and 1984.

Find more on Hayek, including an original video lecture, at Libertarianism.org.

Paul Krugman and the European Austerity Myth

With both France and Greece deciding to jump out of the left-wing frying pan into the even-more-left-wing fire, European fiscal policy has become quite a controversial topic.

But I find this debate and discussion rather tedious and unrewarding, largely because it pits advocates of Keynesian spending (the so-called “growth” camp) against supporters of higher taxes (the “austerity” camp).

Since I’m a big fan of nations lowering taxes and reducing the burden of government spending, I would like to see the pro-tax hike and the pro-spending sides both lose (wasn’t that Kissinger’s attitude about the Iran-Iraq war?). Indeed, this is why I put together this matrix, to show that there is an alternative approach.

One of my many frustrations with this debate (Veronique de Rugy is similarly irritated) is that many observers make the absurd claim that Europe has implemented “spending cuts” and that this approach hasn’t worked.

Here is what Prof. Krugman just wrote about France.

The French are revolting. …Mr. Hollande’s victory means the end of “Merkozy,” the Franco-German axis that has enforced the austerity regime of the past two years. This would be a “dangerous” development if that strategy were working, or even had a reasonable chance of working. But it isn’t and doesn’t; it’s time to move on. …What’s wrong with the prescription of spending cuts as the remedy for Europe’s ills? One answer is that the confidence fairy doesn’t exist — that is, claims that slashing government spending would somehow encourage consumers and businesses to spend more have been overwhelmingly refuted by the experience of the past two years. So spending cuts in a depressed economy just make the depression deeper.

And he’s made similar assertions about the United Kingdom, complaining that, “the government of Prime Minister David Cameron chose instead to move to immediate, unforced austerity, in the belief that private spending would more than make up for the government’s pullback.”

So let’s take a look at the actual data and see how much “slashing” has been implemented in France and the United Kingdom. Here’s a chart with the latest data from the European Union.

I’m not sure how Krugman defines austerity, but it certainly doesn’t look like there’s been a lot of “slashing” in these two nations.

To be fair, government spending in the United Kingdom has grown a bit slower than inflation in the past couple of years, so one could say that there’s been a very modest bit of trimming.

There’s been no fiscal restraint in France, however, even if one uses that more relaxed definition of a cut. The only accurate claim that can be made about France is that the burden of government spending hasn’t been growing quite as fast since the crisis began as it was growing in the preceding years.

This doesn’t mean there haven’t been any spending cuts in Europe. The Greek and Spanish governments actually cut spending in 2010 and 2011, and Portugal reduced outlays in 2011.

But you can see from this chart, which looks at all the PIIGS (Portugal, Italy, Ireland, Greece, and Spain), that the spending cuts have been very modest, and only came after years of profligacy. Indeed, Greece is the only nation to actually cut spending over the 3-year period since the crisis began.

Krugman would argue, of course, that the PIIGS are suffering because of the spending cuts. And since there actually have been spending cuts in the last year or two in these nations, does that justify his claims?

Yes and no. I don’t agree with the Keynesian theory, but that doesn’t mean it is easy or painless to shrink the burden of government. As I wrote earlier this year, “…the economy does hit a short-run speed bump when the public sector is pruned. Simply stated, there will be transitional costs when the burden of public spending is reduced. Only in economics textbooks is it possible to seamlessly and immediately reallocate resources.”

What I would argue, though, is that these nations have no choice but to bite the bullet and reduce the burden of government. The only other alternative is to somehow convince taxpayers in other nations to make the debt bubble even bigger with more bailouts and transfers. But that just makes the eventual day of reckoning that much more painful.

Additionally, I think much of the economic pain in these nations is the result of the large tax increases that have been imposed, including higher income tax rates, higher value-added taxes, and various other levies that reduce the incentive to engage in productive behavior.

So what’s the best path going forward? The best approach is to implement deep and meaningful spending cuts, and I think the Baltic nations of Estonia, Lithuania, and Latvia are positive role models in this regard. Let’s look at what they’ve done in recent years.

As you can see from the chart, the burden of government spending was rising at a reckless rate before the crisis. But once the crisis hit, the Baltic nations hit the brakes and imposed genuine spending cuts.

The Baltic nations went through a rough patch when this happened, particularly since they also had their versions of a real estate bubble. But, as I’ve already argued, I think the “cold turkey” or “take the band-aid off quickly” approach has paid dividends.

The key question is whether nations can maintain spending restraint, particularly when (if?) the economy begins to grow again.

Even a basket case like Greece can put itself on a good path if it follows Mitchell’s Golden Rule and simply makes sure that government spending, in the long run, grows slower than the private economy.

The way to make that happen is to implement something similar to the Swiss Debt Brake, which effectively acts as an annual cap on the growth of government.

In the long run, of course, the goal should be to shrink the overall burden of government to its growth-maximizing level.

Ex-Im Reauthorization Vote Expected Tomorrow

House legislators have reached a “compromise” deal to reauthorize the Export-Import Bank of the United States until 2014 and at an increased funding level ($120 billion, with a possible increase to $140 billion). The compromise builds on a bill crafted by Rep. Eric Cantor (R-VA) I blogged about in March, but seems to largely be a win for the pro-bank folks judging by the increased funding levels, with the “compromise” part being not much more than pathetic sops to those concerned about the bank’s mission, if not its very existence.

Inside U.S. Trade [$] has more details:

House Republican and Democratic leaders late last week announced that they had a reached a compromise deal to reauthorize the Export-Import Bank through fiscal year 2014 and immediately raise its lending cap to $120 billion, with the possibility of further increases to $140 billion during that period if default rates are kept low and other conditions are met. The House expects to consider the bill on Wednesday (May 9) under suspension of rules, a House GOP aide said.

The bill contains a longer reauthorization, and a higher lending cap, than what was included in an initial draft bill floated by Rep. Eric Cantor (R-VA) in March. That draft bill would have renewed the bank’s charter only through June 2013, and would have raised the lending cap to $113 billion, up from the current level of $100 billion.

At the same time, the compromise bill reflects some of the demands of Cantor and other Republicans who are wary of reauthorizing the activities of a bank they say puts taxpayer money at risk and distorts the free market.

For instance, it conditions further increases in the lending cap, to $140 billion for fiscal year 2014, on the bank maintaining a default rate on outstanding loans that is below two percent and submitting other required reports. It also includes language from Cantor’s draft instructing the president to enter into negotiations with other countries to substantially reduce official export financing in general and for aircraft in particular, with the goal of ultimately eliminating such financing altogether.

Under suspension of rules, which is a procedure typically reserved for non-controversial legislation, debate is limited to 40 minutes and the bill must garner a two-thirds majority to pass.

The article goes on to describe all of the ostensible brakes that the Republican leadership have insisted placing on Ex-Im, but they really amount to the usual Washington ways of pretending they are implementing real reform: calls for the bank to issue business plans, address GAO concerns, be more transparent, etc. Nothing, unfortunately, about changing the accounting rules under which the bank operates let alone setting a path to winding down the bank altogether.

In short, the “compromise” is just fiddling while Washington is awash in red ink, and the federal government encroaches more and more into what should be private markets.

U.S. Taxpayers Subsidize Afghan Insurgents

Less than a week after President Barack Obama made a surprise visit to Afghanistan and proclaimed, “We broke the Taliban’s momentum,” the chairs of the Senate and House intelligence committees offered a candid assessment of the U.S. mission. Senator Dianne Feinstein (D-CA), alongside Representative Mike Rogers (R-MI), said on CNN’s “State of the Union,” “I think we’d both say that what we found is that the Taliban is stronger.” Their observations are the type of unvarnished truth that our military and civilian leaders typically avoid. U.S. and NATO officials meeting in Chicago later this month should take heed, especially since American taxpayer dollars are helping to fund the insurgents we’re fighting.

In a not-much publicized report last August from the Commission on Wartime Contracting in Iraq and Afghanistan, researchers found that after the illegal opium trade, the largest source of funding for the insurgency was U.S. contracting dollars. It found that Afghan companies under the Host Nation Trucking program use private security contractors who then turn around and pay insurgents and warlords who control the roads we must use. Although the Commission on Wartime Contracting report did not mention how much was funneled to the insurgency, a similar protection racket was also uncovered a couple of years ago.

Task Force 2010, assembled by General David Petraeus, examined the connections between insurgents and criminal networks on the one hand and Afghan companies and their subcontractors for transportation, construction, and other services on the other. The task force estimated that $360 million in U.S. tax dollars ended up in the hands of insurgents and other “malign actors,” including criminals, warlords, and power-brokers.

The $360 million “represents a fraction of the $31 billion in active U.S. contracts that the task force reviewed,” Associated Press reporters Deb Riechmann and Richard Lardner explained. As Brussels-based International Crisis Group observed in a depressingly frank June 2011 report:

Insecurity and the inflow of billions of dollars in international assistance has failed to significantly strengthen the state’s capacity to provide security or basic services and has instead, by progressively fusing the interests of political gatekeepers and insurgent commanders, provided new opportunities for criminals and insurgents to expand their influence inside the government. The economy as a result is increasingly dominated by a criminal oligarchy of politically connected businessmen.

Is it any wonder why pouring massive piles of cash into a broken and war-ravaged system resulted in failure? Those who follow the news from Afghanistan will see how rent-seeking inadvertently strengthens that country’s twin evils: corruption and insecurity. As journalist Douglas A. Wissing writes in his eye-opening new book, Funding the Enemy: How U.S. Taxpayers Bankroll the Taliban, in addition to foreign development advisers preoccupied with their own career advancement, development money itself was not countering the insurgency but rather paying for it. Combined with an enemy whose strategy was always about exhaustion, the result has been catastrophic.

Wissing writes, “I learned that the linkage between third-world development and US national security that foreign-aid lobbyists peddled to American policymakers was a faith-based doctrine with almost no foundation in research.” Year after year, the American public was spoon-fed government reports that lacked honesty about why our top-down security and development programs were constantly failing. Buildings were poorly constructed. Projects were bereft of proper oversight. Schools were built without teachers to staff them. Road construction contracts financed insurgent racketeering operations.

The undistorted evidence of a European-based think tank, a bipartisan congressional commission, and a report from military experts, assembled by the war’s former commander, leads to one conclusion: the war is inadvertently throwing American taxpayer dollars at insurgents killing American troops. What about this self-aggrandizing system is making Americans safer? Moreover, what about the safety of the Afghans whom planners in Washington swore to protect from the Taliban? In spite of the tripling of U.S. troops since 2008, a recent report by the U.N. mission concluded that 2011 was the fifth straight year in which civilian casualties rose.

As Feinstein said to CNN on Sunday, “The Taliban has a shadow system of governors in many provinces. They’ve gone up north. They’ve gone to the east. Attacks are up.” After over a decade of inadvertently funding the enemy and alienating the local people, Americans should not be surprised with such a dire outcome. If anything, they should be surprised that their elected leaders are finally telling the truth.

Cross-posted from the Skeptics at the National Interest.

New Underwear Bomb, New Threat Information

It’s a good bet that news of a new thwarted underwear bomber will underlie more than one argument for the strip-search machines American travelers encounter even at the domestic terminals of our airports. According to the AP:

The plot involved an upgrade of the underwear bomb that failed to detonate aboard a jetliner over Detroit on Christmas 2009. This new bomb was also designed to be used in a passenger’s underwear, but this time al-Qaida developed a more refined detonation system, U.S. officials said. … The would-be suicide bomber, based in Yemen, had not yet picked a target or bought his plane tickets when the CIA stepped in and seized the bomb, officials said.

Reading this, you’ve been reminded of the fact that, somewhere in a remote Middle Eastern backwater, someone would like to bomb an aircraft flying into the United States. For many, this will induce a bout of probability neglect, making it very hard to process the upshot of this news: This type of attack, which was already very unlikely to succeed, has been made even less likely to succeed.

How did it become less likely to succeed? Let’s use the Transportation Security Administration’s layered security concept to examine things.

In December 2009, the underwear bomber (well—he failed: the “underwear bomb plotter”), managed to get a deformed bomb onto a plane. It was so deformed that he could not cause it to explode. Instead, he burned himself while other passengers subdued him. In the TSA’s formulation, the plot was foiled by the last security layer (it’s hard to read in the graphic): passengers.

(This is not actually the last security layer. The design of planes to withstand shocks to the fuselage is a preventive against downings that small smuggled bombs will have a hard time overcoming.)

The latest news has it that an updated underwear bomb was seized in Yemen by the CIA. That’s the first layer of security in the TSA’s graphic. Intelligence—the first layer.

(This is not actually the first security layer. A benign, phlegmatic foreign policy would produce fewer people worldwide wishing to do the United States harm and more people intolerant of those who do.)

Now, it is not all 100%, unalloyed good security news. As the AP report says:

The FBI is examining the latest bomb to see whether it could have passed through airport security and brought down an airplane, officials said. They said the device did not contain metal, meaning it probably could have passed through an airport metal detector. But it was not clear whether new body scanners used in many airports would have detected it.

There may be an innovation in underwear bombs that make them easier to smuggle on to planes. At its best, this innovation may render the body scanners useless against them. (Again, watch for arguments that, despite their impotence, this news makes body scanners all the more essential. A news report yesterday said that new vulnerabilities in the machines have been unearthed by government investigators.)

On balance, I think this news shows just how much the threat is diminished. Innovations in bomb-making, happening on the far outskirts of modern society, are being thwarted at their source, long before they begin the journey through the many other security layers that protect aviation and air travelers. You may continue to move about the country even more confident of your safety than you did before. I’m hopping on a plane again Friday morning, and I will be just as polite and cheerful as ever in declining to go through the strip-search machines.

‘People’s Rights Amendment’ Would Knock Out People’s Rights

This blogpost was co-authored by Cato legal associate Kathleen Hunker.

Any prizefighter worth betting on knows that the worst thing you can do in a tough match is succumb to frustration.  House Democrats should heed that wisdom.  Frustrated by the Constitution’s interference in their efforts to muzzle certain kinds of political speech, Rep. Jim McGovern (D-MA), House Minority Leader Nancy Pelosi (D-CA), and 27 other congressmen have proposed a constitutional amendment that would overturn the Supreme Court’s holding in Citizens United.

Unfortunately, in their haste to deliver a blow against evil corporations, these lawmakers have exposed the Constitution’s flank in a way that would lead to debilitating blows against individual civil rights were this measure ever adopted.

The proposed change, absurdly titled the People’s Rights Amendment, asserts that the Constitution protects only the rights of “natural persons” and that Congress retains the ability to subject “all corporate entities” to any regulation or restriction Congress deems “reasonable.”  Its supporters contend that the Amendment is necessary to reduce the role of money in politics and ensure that elections represent the voice of the people.  As several commentators have already observed, however, the amendment does far more than subject corporations to new campaign finance regulations.

Although the People’s Rights Amendment says that it shall not be construed “to limit the people’s rights of freedom of speech, freedom of the press, free exercise of religion, freedom of association and all such other rights of the people,” it radically contracts those and other rights entrenched in America’s political tradition.

George Will’s latest column explains this very point. In addition to denying “natural persons” the right to associate and speak in concert,

McGovern stresses that his amendment decrees that “all corporate entities — for-profit and nonprofit alike” — have no constitutional rights.  So Congress — and state legislatures and local governments — could regulate to the point of proscription political speech, or any other speech, by the Sierra Club, the National Rifle Association, NARAL Pro-Choice America or any of the other tens of thousands of nonprofit corporate advocacy groups, including political parties and campaign committees.

Newspapers, magazines, broadcasting entities, online journalism operations — and most religious institutions — are corporate entities.  McGovern’s amendment would strip them of all constitutional rights.

Instead of removing corporate money – which goes much more to lobbyists (petitioning for redress of grievances) than electioneering anyway – the amendment grants Congress the power to strip think tanks, advocacy groups, charities, newspapers, political parties, and even a candidate’s campaign of the right to criticize and oppose the government.  Any political speech more complex than standing on a park bench at an Occupy rally becomes subject to the whims of federal bureaucrats.  Even books don’t escape the amendment’s long reach, as the government lawyer admitted would be the case under the pre-Citizens United law that the amendment hopes to reinstate.

McGovern and Pelosi haven’t answered how the People’s Rights Amendment ensures that elections represent the voice of the people when it takes away the very venues on which the people stand to have their voice heard.

George Will makes a second foreboding observation.  He notes that, by stripping corporations of all constitutional protections, the amendment would empower the government to do much more than proscribe speech:

[G]overnment, unleashed by McGovern’s amendment, could regulate religious practices at most houses of worship, conduct whatever searches it wants, reasonable or not, of corporate entities, and seize corporate-owned property for whatever it deems public uses — without paying compensation. Yes, McGovern’s scythe would mow down the Fourth and Fifth Amendments, as well as the First.

For more on these dangers, see here and here.  Of course corporations aren’t human beings, but that brilliant insight is legally irrelevant.  Corporations are formed by individuals as a means of exercising their constitutionally protected rights, and those individuals do not lose the protection of the Constitution by choosing to exercise their right to associate and pool their resources.

Thus, while a corporation does not enjoy the full breadth of constitutional rights (i.e., sexual privacy), it warrants whatever degree of protection is necessary for its members to exist as free and rational beings.  These rights certainly extend to the ability to publicize and support political initiatives.

Before the supporters of People’s Rights Amendment make that massive lunge against what they view as constitutional frustrations, they should take a step back and reassess whether the satisfaction they derive from sticking it to corporations is worth the potential collapse of our political system’s commitment to a free society.

Misguided Misgivings about the Miscellaneous Tariff Bill

Those of us who view import tariffs as distortive taxes on consumption and production tend to find merit in any effort to reduce them. That’s why Senator Jim DeMint’s opposition to the perennial import duty suspension process known as the Miscellaneous Tariff Bill (MTB) seems a bit misplaced. DeMint has – according to Cato’s Congressional Trade Votes database – a glowing record of unfettered support for free trade. So what’s DeMint’s problem with the MTB?

Well, the MTB is a vehicle through which duties on certain, “non-controversial” products – usually raw materials or intermediate goods, such as chemicals, electronic components, and mechanical parts, used by downstream U.S. firms to produce their own output – are temporarily suspended for two or three years. A product is considered non-controversial if its proposed duty suspension engenders no opposition from a domestic producer and if its suspension will not reduce tariff “revenues” by more than $500,000.

Given those conditions (temporary, no domestic producers, tariff savings of no more than $500,000 per product), the MTB is hardly the kind of bold reform to spark an economic renaissance. It’s far from the kind of across-the-board, even-if-we-have-domestic-producer-opposition, unilateral trade liberalization that would really help U.S.-based firms reduce their costs and compete more effectively at home and abroad, and help U.S. individuals and families reduce their costs of living. But that shortcoming – the MTB’s smallness – is, regrettably, not the basis for DeMint’s opposition.

Rather, DeMint’s opposition to these kinds of duty suspensions is borne of his party’s 2010 pledge to oppose earmarks. DeMint’s view is that these duty suspensions provide a “limited tariff benefit,” which is defined under House rules as benefiting 10 or fewer entities.  However, the fact is that the benefits are not limited.  Anyone or any entity that imports or intends to import as a result of the tariff suspension benefits, as do others down the supply chain all the way to the consumer.  There is a pretty clear distinction between funding expenditures from the national treasury for the benefit of a limited few in a particular congressional district and suspending the payment of taxes on imports, which is available to all and can benefit many.

Trade liberalization, in this case, is being held captive to the Republican Party’s battle over semantics.  In the meantime, there are likely to be real costs to real businesses and consumers if the MTB is jettisoned because several duty suspensions are set to expire at the end of the year. 

Moreover, even if these duty suspensions were earmarks, DeMint’s proposed alternative does nothing to change that.  He and Sen. Claire McCaskill (D-MO) proposed legislation last year that would require the U.S. International Trade Commission to decide which products qualified for duty suspension, and then to inform Congress of those products.  Presumably, this would reduce the lobbyist activity in Congress, which is something DeMint cites as unseemly and the source of America’s disgust with the process.  Well, his solutions seems a bit cosmetic.  It could be a better approach, and the USITC might recommend more duty suspensions than are currently pursued, but it’s entirely unclear why a duty suspension under that system would not be an earmark, where suspension under current procedures is considered as such by DeMint. 

To overcome his own concerns that narrowly-defined tariff suspensions recommended by the firms likely to benefit are indistinguishable from earmarks, DeMint should be thinking bigger and more substantively. His bill with Sen. McCaskill does nothing to overcome the smallness of the effort. We’re still dealing with temporary suspensions on products not made in the United States that don’t deprive the Customs Service of more than $500,000.  Where’s the creative destruction in that?  Where are the gains from trade? How does that liberate America’s downstream producers from the monopolistic tendencies of upstream producers who raise prices behind tariff walls?

The MTB is hardly a demonstration of congressional courage or wisdom. It nibbles around the edges of the problems caused by our distorted tariff system. However, it is a step in the right direction, if not for the huge savings and efficiencies, for the fact that it provides the rare occasion when policymakers of both parties and at both ends of Pennsylvania Avenue actually talk about the benefits of imports and how tariffs raise costs of production and living expenses for Americans.