Archives: October, 2012

Candidate Romney Has a Plan for Agriculture

Republican presidential candidate Mitt Romney was campaigning in Iowa yesterday and, inevitably, went native. He—oh, hey, what a coincidence!—also released a 16-page white paper outlining his plan for rural America, which consists of four main ideas:

  • Implement effective tax policies to support family farms and strong agribusiness.
  • Pursue trade policies that expand upon the success of the agriculture sector, not limit it.
  • Create a regulatory environment that is commonsense and cost-effective.
  • Achieve energy independence on this continent by 2020.

These aren’t the typical subsidize-and-control policies that are usually associated with agricultural policy in the United States (which is not to say they are good ideas). But Mr. Romney betrayed his bias towards managing things—in a “commonsense” and “cost-effective” way, of course—in his remarks to the crowd. Politico reports:

“The big difference between the president and me, he has no plan for rural America, no plan for agriculture, no plan for getting America back to work,” Romney said. “I’m going to make sure I help the American people, and the American farmer, and get America working again.”

A quick fact-check: Obama does have a plan for agriculture. He endorsed the Senate-passed farm bill, and he (and his wife) have meddled plenty in agriculture and food policy in this country. But that’s not the point I am trying to make here.

Instead of launching and bragging about his “plan,” Mr. Romney would better serve the American people by giving them a clear alternative to current farm policy: an alternative that consists of no plan for agriculture, or rural America generally, at all. Let those folks get on with the business of farming, and give American taxpayers and consumers a break.

Mitt Romney Will ‘Champion Free Trade’

Putting all of his China-bashing aside for a moment, Mitt Romney announced the following in a speech on Monday:

I will champion free trade and restore it as a critical element of our strategy, both in the Middle East and across the world.  The President has not signed one new free trade agreement in the past four years.  I will reverse that failure.  I will work with nations around the world that are committed to the principles of free enterprise, expanding existing relationships and establishing new ones.

The point about President Obama not signing “new” free trade agreements is kind of a technicality.  He did sign some, but the negotiations originated with the Bush administration, so they weren’t “new,” according to Romney.

But I’m more interested in Romney’s “championing” of free trade.  Which nations will he be negotiating with?  He mentions countries that “are committed to the principles of free enterprise.”  That kind of sounds like the language used by California Rep. Devin Nunes, which I mentioned last week.  Nunes proposes starting free trade negotiations with the EU and Brazil.  Is this what Romney has in mind as well?  As noted in my earlier post, I’m pretty skeptical of the chances of success for both of these.  But Romney doesn’t get that specific in terms of trading partners, so I’m not sure exactly what he intends.  Even more reason to be skeptical.

Zycher, Fuller and Moore Discuss Military Spending and the Economy

Two months ago, Cato published a study by economist Benjamin Zycher, a senior fellow at the Pacific Research Institute, that showed that military spending contributes very little to GDP growth, and concludes that cuts would have very little long-term impact on GDP. On the contrary, Zycher estimates that cuts on the order of $100 billion a year would reduce costs in the wider economy by $135 billion per year. I wrote about that study when it was published here.

These findings conflict directly with two studies prepared for the Aerospace Industries Association (AIA) by George Mason University Professor Stephen Fuller. In October 2011, Fuller argued that a reduction of $45 billion in DoD procurement spending would result in a decline of about $86.5 billion in GDP in 2013, and the loss of 1,006,315 full-time, year-round equivalent jobs. Earlier this year, in July, Fuller expanded his research to include the effects of sequestration on both defense and non-defense spending. He concluded that such cuts will reduce the nation’s GDP by $215 billion, and cost 2.14 million jobs. Interestingly, Fuller’s second study concludes that cuts to non-defense spending will have a greater impact on economic activity than defense spending cuts.

As defense spending advocates continue to make the case against sequestration (or, to be more precise, that portion of sequestration that applies to the Pentagon) they have relied heavily on Fuller’s research to buttress their arguments. In his acceptance speech before the Republican National Convention Mitt Romney asserted that the president’s ”trillion dollar cuts to our military will eliminate hundreds of thousands of jobs.” The GOP platform claims ”Sequestration [would accelerate] the decline of our nation’s defense industrial base,…resulting in the layoff of more than 1 million skilled workers,” and later contends “If [Obama] allows an additional half trillion dollars to be cut from the defense budget,” that would harm “our national security and a struggling economy that can ill afford to lose 1.5 million defense-related jobs.”

There are two problems with these claims. First, they imply that the Pentagon’s budget has already been cut deeply and that the Obama administration’s current plans include even deeper cuts. It hasn’t, and they don’t. The Pentagon’s base budget in 2012 is roughly equal to that in 2011, and total military spending (including the cost of the wars) is near historic highs in inflation-adjusted terms. And current projections call for the Pentagon’s base budget to rise slightly above the rate of inflation; by 2022, it will be 17 percent higher than it was in 2002. Even under sequestration, which President Obama and the Democrats hope to avoid by convincing Republicans to cave on higher taxes, the Pentagon’s budget in 2013 would be roughly equal to what we spent on it in 2007. (I’ll be discussing sequestration with Dan Mitchell at a Cato Hill Briefing next week, Thursday, October 18th. Details here.)

But the more important flaw pertains to the perennial problem of the seen and the unseen. Spending on military hardware, bases, or the salaries of men and women in uniform, is visible, tangible–and, crucially, controlled by politicians. Spending by individuals in the private sector is the true driver of economic activity, but is less visible, largely because politicians have little incentive to call attention to it. No politician can credibly boast that he or she was responsible for my purchases this morning (gasoline and coffee, for the record). Nearly every politician claims credit when my tax dollars fund a new military facility located in his or her district or state, and nearly all of them will fight mightily to prevent bases and plants from closing, and boast about it if they succeed.

I wish that they were equally boisterous when they succeeded in releasing resources–including both tax dollars and talent–back to the private sector. That is what happens, or should, when the Pentagon’s budget declines, and the savings are not simply plowed into other government programs.

This Friday, October 12th, at Noon, Benjamin Zycher and Stephen Fuller will appear together at Cato to discuss their research. They will be joined by the Wall Street Journal’s Stephen Moore. More details available here. It is not too late to register, but you can watch online if you are unable to join us in person. I’m looking forward to a lively and substantive discussion.

Iran’s Lying Exchange Rates

On September 24th, the Iranian government announced that it would adopt a three-tiered, multiple-exchange-rate regime. This wrong-headed attempt to exert more control over the price of domestic goods and combat inflation has failed (and will continue to fail). Since the rial began its free-fall in early September, international observers and the Iranian people have struggled to understand the implications of this exchange-rate regime.

Iran has a history of implementing a variety of multiple-exchange-rate regimes – with mixed results, to say the least. Indeed, at its peak of currency confusion, the Iranian government set seven different official exchange rates. As the accompanying chart illustrates, the story of Iran’s hyperinflation has been one of divergence between the official and black-market (read: free-market) exchange rates.

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This divergence is a product of the declining value of the rial – freely traded on the black market. In consequence, prices are rising dramatically in Iran – by almost 70% per month, according to my estimates. That said, in order to make sense of this phenomenon, it is necessary to understand the system whose failure we are witnessing.

Currently, Iran has three exchange rates:

  • The Official Exchange Rate: 12,260 IRR/USD
  • The “Non-Reference” Rate: 25,480 IRR/USD
    • Purportedly 2% lower than the black-market rate
    • Available to importers of important, but non-essential goods, such as livestock, metals and minerals
  • The Black-Market Exchange Rate: Approximately 35,000  IRR/USD
    •  The last freely-reported black-market rate was 35,000 IRR/USD (2 October 2012). The most recent anecdotal reports confirm this number as the current exchange rate.
    • The Iranian government (read: police) has recently cracked down on currency traders and has also censored websites that report black-market IRR/USD exchange rates.

This complex currency system results in lying prices that distort economic activity. By offering different exchange rates for different types of imports, the Iranian government is, in effect, subsidizing certain goods – distorting their true price. In consequence, any fluctuations in the black-market exchange rate – and, accordingly, in the price level – will be amplified to different degrees for different goods. The end result for Iranian consumers is confusion and mistrust, which, as we have seen, are feeding the panic that has been driving the collapse of the rial and Iran’s hyperinflation.

For the latest news on Iran’s hyperinflation, follow my Twitter: @Steve_Hanke

Want Privacy Choice? Papa’s Gonna Give You One

I was interested by the title of a paper called “Behavioral Advertising: The Offer You Cannot Refuse” by a small coterie of privacy activist/researchers. I love the Godfather movies, in which the statement, “I’m going to make him an offer he can’t refuse,” is a coolly tuxedoed plan to threaten someone with violence or death. I don’t love the paper’s attempt to show that government “interventions” are superior to markets in terms of freedom.

Behavioral advertisers are no mafiosi. They are not in the business of illegal coercion. They’re not in any kind of illegal business, in fact. The choice of title suggests that the authors may be biased toward making targeted advertising illegal. (The lead author argued in 2004 that Gmail should be shut down as a violation of California law.)

What was most interesting, though, was the paper’s unspoken battle with lock-in, or path dependence. That’s the idea in technology development that a given state of affairs perpetuates itself due to the costs of changing course.

The QWERTY keyboard is a famous example of lock-in. The story with QWERTY is that keys on early mechanical typewriters were arranged so that commonly used letters wouldn’t strike one another and jam together. The result was an inefficient arrangement of keys for the fingers, but it’s an arrangement that has stuck.

The reason why it has stuck is because of switching costs. Everybody who knows how to type knows how to type on a QWERTY keyboard. If you wanted to change to a more efficient keyboard, you’d have to change every keyboard and everyone’s training. That’s a huge cost to pay in exchange for a modest increase in efficiency. So we’ve got QWERTY.

Since as close to the beginning as I know of, Web browsers have been designed to store information delivered by Web sites and to return it to those sites. Cookies are the best known form of this, tiny files that allow a Web site to recognize the browser (inferentially, the user) and deliver custom content. There are also “Flash cookies,” more accurately called “local shared objects,” which can store information about users’ preferences, such as volume settings for Internet videos. Flash cookies can also be used to store unique identifiers to use in tracking. These things provide value to Internet users, and most Web sites make use of them to deliver better content.

The authors of the paper don’t like that. The path of Web browsing technology is not privacy protective, and they would call on regulators to fix that with a pair of interventions: preventing Flash cookies from “respawning” cookies (that is, recreating them when they have been deleted) and regulation of consumer-data markets to prevent marketers from learning information about consumers. This would uphold consumer choice, they argue. And they argue dubiously that their work “inverts the assumption that privacy interventions are paternalistic while market approaches promote freedom.”

Now, ask yourself: If the government came in and required everyone to train for and use the more efficient Dvorak keyboard, would that be a paternalistic step? The end result would be more efficient typing.

Of course it would be paternalistic.

So let’s be frank. This is an argument for paternalistic intervention, attempting to allay the authors’ concern about what a favorite technology of Internet users is doing to privacy.

And it is the authors’ privacy concerns, not Internet users’ at large. Opinion surveys in the privacy area are notorious for revealing that consumers will state a preference for privacy no matter what their true interests are.

The good news is that there is far less lock-in in the Internet browser area than in keyboards. Technologists can and do build browser modifications that prevent tracking of the type this article is concerned with.

Their real problem is that few people actually care as much as the authors do about whether or not they receive tailored advertisements. Few people want to use a browser that is essentially crippled to gain a sliver of privacy protection to which they are indifferent.

Paternalist? It sure is. And unlike a paternally driven switch to a better keyboard, this policy wouldn’t obviously make consumers better off.

Thoughts on Little America and Afghanistan

I recently finished reading Rajiv Chandrasekaran’s Little America: The War within the War for Afghanistan. The entire book is terrific. I highly recommend it. But one chapter in particular—Chapter 7, “Deadwood”—spoke to some of the things that my colleagues and I have written over the years concerning America’s nation-building problems.

Most Americans have by now moved on from the war in Afghanistan (even though the U.S. military has not) and are focused on, in President Obama’s words, “nation building here at home.” But we still haven’t closed the book on the theories of nation building that arose after 9/11, including the belief that the United States needs to repair failed states, or rescue failing ones, lest terrorists from these states travel thousands of miles to attack Americans. Last month, for example, Mitt Romney’s senior foreign policy adviser Richard Williamson praised Bill Clinton’s nation-building adventures in Bosnia and Kosovo. Williamson told NPR’s Audie Cornish that the U.S. government must “help in reconciliation, reconstruction, helping institutions of law and order, security be built” after authoritarian regimes collapse. From the belief that we must repair failed states flows logically the belief that we can.

These beliefs are, in fact, myths. Cato has published many different papers, articles, and book chapters challenging the claim that fighting terrorism, or preserving U.S. security generally, requires us to engage in nation building abroad. We have been equally emphatic on the point that our efforts are likely to fail, no matter how well intentioned. Little America provides additional evidence to support that argument, although I doubt that was Chandrasekaran’s object.

Take, for example, the case of Summer Coish, the striking and extraordinarily motivated woman who wanted to go to Afghanistan so badly that she appealed directly to Richard Holbrooke. She got her wish—eventually. Despite the fact that the president’s designated point person on Afghanistan and Pakistan had marked her for the fast track, it took 14 months before she was cleared to travel to there.

Once she arrived, Coish’s dream of helping the Afghans emerge from decades of war and desperate poverty crashed against the reality of a soul-crushing bureaucracy. Security regulations made it nearly impossible for Coish and other civilians to regularly interact with Afghans, and few embassy staffers exhibited any desire to do so. “It’s rare that you ever hear someone say they’re here because they want to help the Afghans,” Coish told Chandrasekaran after she had been there a few months. Instead, Chandrasekaran observes, “everyone seemed bent on departure.”

The work itself was painfully dull. Coish concluded that most of it could have been accomplished in Washington, at far less cost to the taxpayers. The reason for the costly in-country presence? The need to count them as part of the vaunted “civilian surge.”

Coish and a handful of other dedicated civilians that Chandrasekaran writes about—including Kael Weston, an experienced political adviser to Marine General Larry Nicholson, and Carter Malkasian, the State Department’s representative in Helmand’s Garmser district—could not make up for the lack of ability (or desire) on the part of many other civilians (i.e. the deadwood). “It seems our best and brightest have burned out long ago and we’re getting the straphangers these days,” Marc Chretien, a senior State Department official in Helmand province, wrote to the embassy. “Or, as one wag put it, ‘they’re just along for the chow.’ No need to go into details here—let’s just say that there’s enough deadwood here that it’s becoming a fire hazard.”

At times, Chandrasekaran’s assessment of the civilian surge exhibits an oddly optimistic tone. I say “odd” because this is the same person who brilliantly documented the dysfunction of the Bush administration’s nation-building fiasco in Iraq (in Imperial Life in the Emerald City), but who can’t bring himself to say that Obama’s mission in Afghanistan couldn’t possibly succeed. Despite everything that he has seen, Chandrasekaran often reflects a belief that it all could have worked out (or that it still might) were it not for the “lack of initiative and creativity in Washington.”

Instead of scouring the United States for top talent to fill the crucial, well-paying jobs that were a key element of Obama’s national security agenda, those responsible for hiring first turned to State Department and USAID officers in other parts of the world. But the best of them had already served in Iraq or Afghanistan. Many of those who signed up were too new to have done a tour in a war zone or too lackluster to have better career options.

Pray-tell, where would the government have found such people? Or, more precisely, how would the government convince those already gainfully employed to set aside their careers, homes, and families to embark upon an Afghan adventure? What additional incentives—or threats—might have sufficed to mobilize the vast army of talented agronomists, lawyers, biologists, teachers, doctors, civil engineers, etc. who were not already motivated (as Coish, Weston and Malkasian were)?

Several years ago, I co-authored with Ben Friedman and Harvey Sapolsky a paper on the lessons of Iraq. Our research was informed by Chandrasekaran’s narrative from the Iraqi Green Zone, and a number of other books on the Bush administration’s signature foreign policy initiative. Here is what we said (the prose in this case is almost certainly Friedman’s; I’m not this clever) about the American people’s disinclination to embark on nation-building missions abroad.

A concerted effort to improve our collective nation-building skills would require “a foreign policy at odds with our national character.”

Reading through the proposals for rapidly deployable bureaucrats to help run failing states, one usually searches in vain for the pages where the author justifies the creation of an empire and a colonial service to run it. Whatever else changed after September 11, [Americans]…are ill-suited for stabilizing disorderly states and achieving success in protracted foreign wars.

The State Department’s budget, including the U.S. Agency for International Development (USAID), we explained, “is tiny because its aim is to relate to foreign nations, not to run them.”

National security organizations are formed by decades of budgets and decisions. Their organizational politics…reflect…lasting national interests, namely a disinclination to subjugate foreign peoples and lose unnecessary wars….Americans have historically looked askance at the small wars European powers fought to maintain their imperial holdings, viewing those actions as illiberal and unjust. Misadventures like Vietnam are the exceptions that make the rule. It is no accident that U.S. national security organizations are not designed for occupation duties. When it comes to nation building, brokering civil and ethnic conflict, and waging counterinsurgency, we are our own worst enemy, and that is a sign of our lingering common sense.

To repeat, Little America is a first-class read, and I hope that the book receives the attention it deserves. The anecdotes about Coish, Weston, and Malkasian, as well as countless stories about brave soldiers and Marines trying their best every day to make Afghanistan a better place, are heartwarming. We honor their service, and we should find other avenues for these people to perform their work, chiefly through NGOs, unencumbered by the massive federal bureaucracy.

But good intentions cannot distract us from the bleak reality: building a functioning nation-state in Afghanistan would require hundreds of thousands of equally dedicated civilians, to go along with a massive troop presence to protect them, tens of billions of dollars every year, and a commitment to remain in country for decades.

We aren’t going to do that. We should stop pretending that we will.