Archives: October, 2012

A Divide and Conquer Trade Policy

California Rep. Devin Nunes has proposed what seems like a neo-con approach to trade policy:  Trade with our allies, not with our perceived enemies.  His goal is to make trade policy part of our general foreign policy, which, in his view, should focus on making alliances with our friends and isolating our enemies.

This is a bad idea, for many reasons.  I’ll explain the details of his plan a bit more, then I’ll go over all of the problems I see with it.

As he explains over at NRO, Rep. Nunes would like to create “an alliance of free-trading nations.” He supports the Trans Pacific Partnerhship (TPP) negotiations, and would also like to see U.S.-EU and U.S.-Brazil free trade agreements. He then talks about “distinguishing friend from foe,” and singles out Venezuela, the Gaza Strip, Russia and Egypt as countries who are “hostile” to the United States.

In support of his approach to trade/foreign policy, he has introduced in Congress the Economic Freedom Alliance Act, which is made up of several specific pieces of legislation to accomplish the various elements of his plan.

It would be easy to ignore this proposal.  It’s just some legislation introduced by one Congressman.  However, note the similarities with part of Mitt Romney’s economic plan:

… there is an opportunity to pursue a game-changing multilateral agreement among like-minded nations genuinely committed to the principles of open markets. As president, Mitt Romney will pursue the formation of a “Reagan Economic Zone.” …

Such a partnership would be extraordinarily attractive to most developed nations, and to those developing nations that have embraced free enterprise and open markets. With membership open to any nation willing to abide by the rules, two primary U.S. objectives would be fulfilled. First, as the most open and innovative economies came together, the dynamism of the resulting economic zone would serve as a powerful magnet, drawing in an expanding circle of countries willing to abide by the rules in exchange for greater access to one another’s markets. At the same time, it would also serve as a mechanism for confronting nations that violated trade rules while free-riding on the international system. Creating a large open market, and excluding countries that failed to respect the rule of law, would prevent cheaters from prospering and provide a major incentive for them to reform.

I think the trade part of this approach can be summed as follows:  “We” are more open and free than “they” are, and so we should set up a system that is just for “us,” and if “they” change to be more like “us,” “they” can be part of “our” system.  Romney focuses on trade more than Nunes does; Nunes goes further in tying this plan to foreign policy.

As I said, I think this is a bad approach.  Here are all the things that are wrong with it.

At the outset, if we’re being honest, an “alliance of free-trading nations” would not have many members.  Certainly the U.S. wouldn’t be part of it.  With our tariffs in traditionally protected industries, excessive use of trade remedies, massive subsidies, and discriminatory government procurement, we are hardly a model of free trade virtue.

But just for the sake of argument, I’ll stipulate to the assumption Rep. Nunes makes, that we are relatively more free trade oriented than many countries.  Even under this assumption, this proposal is still a bad idea.

First, it builds discrimination into the world trading system.  The idea is to strengthen “alliances.”  But the converse of making an ally is making an enemy out of those not in the alliance.  Singling countries out as not part of your alliance is likely to generate a good deal of antipathy.  Nunes mentions Russia, and presumably he has China in mind to some extent.  But will putting them formally outside of our “free trade alliance” cause them to want to be more like us?  That seems unlikely.  As Exhibit A on this issue, look at Cuba.  I’m not sure we even need an Exhibit B, but let me also mention China.  There is a lot of hand-wringing about China these days.  But compare China today with China in 1990.  Isn’t it pretty clear that the world economy is better off with China having opened itself to international trade and investment to a great degree, and bound itself to WTO rules?  Despite what you often hear in the media, we sell a lot of stuff to China.  Also despite what you may hear, all that stuff we buy from China is actually a benefit to us.

Second, the specific proposed free trade agreements he mentions have fairly dim prospects. The TPP has progressed a bit already, but with more countries being added, and lots of contentious issues, it would come as no surprise if the negotiations dragged on and on, and never concluded.  As for a U.S.-EU free trade agreement, if the two of them can work out a way to cut their massive farm subsidies, I will be greatly pleased.  But I’m not holding my breath.  And the U.S. and Brazil are currently arguing about Brazil’s proposed tariff increases and U.S. monetary policy.

So what should we do instead?  Let me offer the following suggestions.

The first thing we should do is commit ourselves to pushing for free trade in our domestic policy.  Many Americans are under the impression that we are the free traders, and Rep. Nunes seems to have assumed this.  But the rest of the word doesn’t see things that way, for good reason.  Let’s take Brazil, one of Rep. Nunes’ potential free trade partners, as an example.  A few years ago, Brazil brought a WTO complaint challenging U.S. subsidies to cotton producers.  The WTO found the U.S. to be in violation of free trade rules.  Did the U.S. respond by removing the subsidies, which would have been the obvious free trade position to take?  No.  Instead, the U.S. bought off Brazil by offering additional subsidies to Brazilian cotton producers, so that it could maintain the subsidies to U.S. producers.   Does anyone think Brazil sees U.S. policy as one based on free trade?

The second thing we should do is keep trade policy about economics.  Underlying the Nunes plan is that it is not really about trade policy.  It is about foreign policy.  He says:  “America’s foreign policy is incoherent and adrift, lacking clear criteria even for distinguishing friend from foe.”  Maybe, maybe not.  But even if true, this is not a trade policy issue.  He is using trade policy to pursue foreign policy goals.  This is not likely to lead to an economically sensible trade policy.

And finally, one of the biggest problems I see with current U.S. trade policy is that it often gets distracted from core trade issues.  Intellectual property, labor, and environmental rules in trade agreements are some good examples.  But Rep. Nunes provides another.  In a blog post related to his proposal, he refers to the Agriculture Trade Facilitation Act as one part of his proposal.  An older version of this bill set out one of its negotiating objectives for food safety and health measures as follows:  “To strengthen the requirement that the application of measures is based on scientific evidence by requiring parties to the agreement to make available their risk assessments and provide a science-based justification for regulations, in particular in cases in which measures are more restrictive than international standards.”  Now, I’m all for science-based regulation.  If we are going to regulate on health issues, science should guide the process.  But making science-based regulation a binding international law rule is another matter.  (To be clear, it already is part of WTO rules; Rep. Nunes wants to make the international rules tougher.)  To me, this is one of the issues that is distracting us from core free-trade principles.

So, to sum up:  Free trade only with our allies is bad foreign policy and it distracts from good trade policy.  U.S. foreign policy already has enough problems with creating new enemies.  Let’s not bring trade into the mix, making both foreign policy and trade policy worse as a result.

Privatization at Cato Unbound

Longtime Freeman editor Sheldon Richman leads this month’s Cato Unbound with a look at privatization – the transfer of assets and responsibilities from the government to private holders.

In the first part of his essay, Richman explains why we should want such a thing. As he points out, there are solid economic reasons to expect that governments will be worse than private actors at providing many different types of goods and services.

But how do you actually let go? Richman argues for a fairly absolutist position; for him, vouchers, charters, and contracting with private firms are no proper solution. “[W]hen a company becomes a monopoly government contractor,” he writes, “to that extent it is an arm of the state rather than a private firm.” When privatization ends here, things have not improved at all, and even the word “privatization” is misleading. Worse, whole swathes of the government’s work shouldn’t be done by anyone. We don’t make the war on drugs any better by putting it in the hands of a private contractor.

Is he right? Over the next week, we’ll have a series of response essays from Leonard Gilroy, Director of Government Reform at the Reason Foundation; Dru Stevenson, Professor of Law and the Helen and Harry Hutchins Research Professor at the Southern Texas College of Law; and Cato Senior Fellow Randal O’Toole.

Readers are encouraged to take up our themes and enter into the conversation on their own websites and blogs, or on other venues. We also welcome letters. Send them to jkuznicki at cato dot org. Selections may be published at the editors’ option.

Renters Have Privacy and Property Rights Too

Cato legal associate Sophie Cole co-authored this blog post.

A person’s home is his castle and thus affords certain protections and immunities — including the right to exclude unwanted visitors — that apply whether you own or rent.

Unfortunately, ordinances authorizing general administrative searches of rental properties have been increasingly adopted by local authorities with little protection for privacy interests. These inspections reach the whole of the buildings and all of the activity that occurs within, opening up every aspect of people’s lives to the government: political and religious affiliations, intimate relationships, and even all those Justin Bieber posters and Fifty Shades of Gray books you hide when people come over.

For the past five years, the city of Red Wing, Minnesota, has been enforcing such a rental property inspection program whereby landlords and tenants must routinely open their doors to government agents. These searches take place even if both the landlord and tenant believe it not to be necessary. The owner of the property even has to pay a fee for the unwanted search to receive a rental license!

The city sometimes makes initial requests for consent, but these are mere courtesy because the city proceeds with an administrative warrant in the event of a refusal — without a showing of probable cause to believe there’s a housing code violation or other problem. The inspection ordinance doesn’t even attempt to prevent the disclosure of information revealed during the search; the whole neighborhood may find out that you have five different facial cleansers and an unusual amount of apple sauce.

A group of landlords and tenants have thus challenged the inspection program, arguing that several alternatives are available to meet what legitimate interests local governments have. They successfully opposed three applications made for administrative warrants and now seek a court order that the rental inspection ordinance is unconstitutional.

Unfortunately, the U.S. Supreme Court has read the Fourth and Fourteenth Amendments as not prohibiting such legislation, but of course states are free to offer more protection for individual rights. The Red Wing plaintiffs have thus invoked Article I, Section 10 of the Minnesota Constitution, which contains language similar to the federal Fourth Amendment.

Cato has joined the Reason Foundation, Libertarian Law Council, Minnesota Free Market Institute at the Center of the American Experiment, and Electronic Frontier Foundation in filing an amicus brief urging the Minnesota Supreme Court to take the Red Wing case and confirm that no Minnesotan should be subjected to an intrusive invasion of privacy when there has been no showing of some cognizable public health or safety issue within the home subject to inspection.

The Minnesota Supreme Court should be the first to decide that its state’s constitution provides greater protections against warrantless home inspections than even the Fourth Amendment (as construed by the U.S. Supreme Court). No other state judiciary has substantively ruled on constitutional protections against administrative searches in residential contexts, so this case presents an opportunity to set a benchmark for liberty.

The Minnesota Supreme Court will decide whether to take the case of McCaughtrey v. City of Red Winglater this fall.

Calderón Meets Friedman on Drugs

The Wall Street Journal published on Saturday an interview by Bret Stephens with Felipe Calderón. This is what the outgoing Mexican president had to say about the economic dynamics of fighting the supply of drugs to the United States:

“If the price goes up [thanks largely to interdiction efforts] and the demand is the same, you will increase profits so you are creating more incentives for participants in the market. And it’s clearly a textbook case of an unstable economic system in which the more successful you are, the more criminals you are creating.”

Stephens added, “The war on drugs, in other words, ineluctably breeds its own enemies. Milton Friedman would have agreed.”

It seems pretty clear by now that Calderón acknowledges drug legalization is the only sensible alternative to the mayhem in his country, which has cost the lives of almost 60,000 people in the last 6 years. In his final speech to the UN General Assembly, Calderón once again encouraged the United States to explore all the alternatives, “including the market alternatives,” to deal with drug consumption.

Unfortunately, unlike Guatemalan president Otto Pérez Molina, Calderón could never muster the courage to openly favor drug legalization. It’s up to his successor, Enrique Peña Nieto, to defend the interests of the Mexican people by pressing Washington to have a meaningful debate on ending the war on drugs.

Segmenting the Libertarian Vote: Tea Partiers, Civil Libertarians, and Libertarian Independents

Last week, I posted data from the latest Reason-Rupe poll showing 77 percent of libertarians supporting Romney—the highest percentage share of the libertarian vote of any Republican presidential candidate since 1980.

Many commenters on Twitter and Facebook were horrified! Surely, many reasoned, this large vote share is a measure of antipathy for Obama rather than affinity for Romney. Others commented that any libertarian supporting Romney doesn’t deserve to be considered a “true” libertarian.

I wanted to reflect on this last comment. Who should count as a libertarian?

In our Cato research, David Boaz, Emily Ekins and I have taken to using a relatively broad definition of a libertarian. Why? Compared to other political words like “capitalism” or “socialism,” fewer know the word “libertarian.” Many who hold libertarian views call themselves “moderate” or “independent” or even “conservative.” Few polls even offer respondents an option to identify themselves as “libertarian.” Those that do reveal confusion about what the word means.

Given all this, we have preferred to probe respondents’ basic background beliefs about the role of government, using questions commonly asked on national polls. Libertarians give different answers than liberals or conservatives. For instance, in the Reason-Rupe poll, we chose three questions to screen libertarians. This gives us a 20 percent group of libertarian likely voters. Other methods and questions produce slightly higher or lower estimates.

But what if you define libertarians more strictly, say, only libertarians who self-identify as such? Or libertarians who also prioritize civil liberties, like support for the legalization of marijuana? Or libertarian independents? Or tea party libertarians? The chart below breaks out these different segments of the broader libertarian vote.* (Thanks again to Emily Ekins for sharing the crosstabs.)

  • Civil liberties libertarians – among libertarians (by our broader definition) who also favor “legalizing small amounts of marijuana for personal use,” Romney support drops to 63 percent. If you add Gary Johnson to the list of candidates, Johnson wins 17 percent, pulling mostly from Obama voters. While many civil libertarians held out hope for Obama, he has continued many of the Bush era policies. For instance, Obama’s Justice Department continues to raid medical marijuana dispensaries in California and support Bush era surveillance policies.
  • Tea party libertarians – the data show that half of tea party is libertarian. Among libertarians who also support the tea party, Romney would win his largest percentage vote share at 93 percent. Though interestingly, tea party libertarians seem as willing as other libertarians to consider voting for a third party candidate Gary Johnson. Johnson wins 13 percent of tea party libertarians, if you add him to the candidate list.
  • Libertarian independents – among libertarians who also consider themselves “independent” (like the voters Matt Welch and Nick Gillespie profile in their book Declaration of Independents), 71 percent would vote for Romney, 23 percent Obama. Interestingly, among libertarian independents, Gary Johnson pulls a larger share away from Obama voters than Romney voters.
  • Self-identified libertarians – respondents who self-identify as “libertarian” are the smallest of these groups at only 4 percent of likely voters. Among self-identified libertarians, Romney would win 66 percent of the vote and Obama 32 percent. Perhaps not surprisingly, self-identified libertarians are most willing to consider voting for a Libertarian Party candidate, with 51 percent saying they’d vote for Johnson, if he is offered him as an option.

So who are the true libertarians? Take your pick!

My own perspective is that the libertarian brand seems broader and more self-aware today than ever before—and that’s a good thing. Ron Paul has certainly played a big role in this. It also may be that in confusing economic times, people are more open to the libertarian ideas long espoused by Cato, Reason, FreedomWorks, and other free-market organizations. In interviews at the grassroots level, Emily and I found more and more voters who act like libertarians, talk like libertarians, and reason like libertarians.

And who knows—as pollsters, strategists, and pundits pick up on the importance of the libertarian vote, more politicians may start to behave like libertarians.

————

*Note: One should be cautious when comparing such small subsets of voters, as the statistical margin of error increases, making comparisons problematic. For instance, Reason polled only 787 likely voters with a margin of error +/- 4%. Among the broadest 20 percent of libertarians, the margin of rate increases to +/- 7%. Among self-identified “libertarians,” who represent only 4 percent of likely voters, the margin of error increases to +/- 15%. For instance, given this large margin of error, we cannot say that Romney’s vote share among self-identified libertarians is statistically different than Romney’s vote share among libertarians more broadly. But among self-identified libertarians, the jump in support for Johnson is large enough to be statistically significant.

A Tip for Gov. Romney: Florida Seniors Hate the Fed’s Low Interest Rates

A new poll by Money magazine (October) asked its readers, “What’s the single biggest way Washington could improve your finances?”  The most popular answer among Democrats and second among Republicans was to “Preserve Social Security and Medicare in current form.”  That pipe dream suggests many Money readers are close to 65 or older, since the young surely know it is impossible to keep paying current benefits for much longer without imposing brutal tax hikes on the rapidly dwindling portion of younger Americans still willing to work.

What was far more intriguing about the Money poll, however, is that the second or third most popular policy was to, “Raise interest rates so savers can earn more.”  In fact, higher interest rates for savers was the single most important issue for 15% of both Democrats and Republicans, compared with only 10-11% who found “more jobs” most important.  If the poll had been confined to seniors, that 15% figure might well have doubled.

The Wall Street Journal’s “Viewer’s Guide” to the first presidential debate (September 29-30) included the Federal Reserve as one of eight topics, noting that Romney has criticized the latest experiment with quantitative easing (monetizing debt) and suggested replacing Bernanke.  But the article went on to imply that everyone, including “a top Romney adviser,” thinks of Ben Bernanke as an untouchable or even heroic figure.  As a senior with a condo in Florida I can assure you that other Florida seniors (17.3% of the state’s population in 2010 and much larger share of voters) have a quite different opinion. They feel robbed, not helped, by the Fed.

Seniors in Florida absolutely hate the Fed for forcing them to settle for a negative real return on safe, liquid savings. In this and other states with many seniors, questioning ridiculously low interest rates is a potential winning issue for any presidential candidate willing to challenge the Fed for buying too many federal IOUs with funny money.  That includes several other battleground states where seniors make up an above-average share of the population – a list that includes Maine (15.9% seniors), Pennsylvania (15.4%), Iowa (14.9%), Ohio (14.1%), Missouri (14%) and Michigan (13.8%).

Absurdly low interest rates may be good news for borrowers, but they are simply a loss of income for savers.  Personal interest income in August was 28.6 percent lower than it was in 2008.   Lower income seems an unlikely way to stimulate spending.  After all, decades of miniscule interest rates haven’t helped Japan.

Aside from mortgage payments (which are tied to housing investments), personal interest payments were running at an annual rate of just $171.7 billion in August, which is far less important than personal interest receipts ($986.6 billion).

The Bernanke Fed has been showing blatant favoritism toward large borrowers – mainly governments and banks − at the expense of small savers, particularly those dependent on lifetime savings in their senior years.  Recent Fed policy rewards profligate speculation and punishes prudent thrift.  That is why 15 percent of both Democrats and Republicans in the Money poll say that ending the Fed’s bond-buying spree is the single most important thing the next President could do to help their personal finances.

Senior savers will be closely watching the campaign and debates to see if either candidate has their very legitimate interest in mind.

Another Newspaper Attempts Suicide

Last Friday, the often-respectable newspaper Education Week published a blog post that seems designed to destroy its credibility. The piece makes a claim so egregiously false that it could have been caught by a motivated 10-year-old using a second-rate search engine:

A growing number of countries are surpassing the United States in student performance and are spending less per student than the United States.  Not one has used choice and market incentives to do it.

In fact, according to the latest PISA international test results, the Netherlands, Belgium, Australia, and Canada all significantly outperform the United States in every subject tested. They also all spend less than the United States per pupil, and make use of choice and market incentives such as competition between schools, to varying degrees. The Netherlands, for example, has had a universal public and private school choice program for the last 95 years, which, according to the National Center on Education and the Economy is “one of the [Dutch] education system’s primary strengths.”

Could the author of the Education Week commentary possibly be ignorant of the Dutch and other examples that flatly contradict his claim? That seems unlikely since he is the president of the National Center for Education and the Economy.

In addition to its central falsehood, the piece also relies on an oversimplified and flawed understanding of how to draw lessons from foreign educational experiences. It fails to consider the very different cultural, demographic, and economic conditions prevailing in different countries and therefore offers no basis for apportioning responsibility for a nation’s educational outcomes between environmental factors and the design of its school system.

That is an unforced error, because there is a reliable way of learning from the educational experiences of other nations: within-country comparisons of different education systems. Many nations have two or more education systems operating side-by-side, sometimes in similar communities and sometimes in the same communities. By comparing the relative performance of these systems within countries (taking into account any differences in student/family background across sectors) it is possible to avoid the confounding variables that plague between-country comparisons.

When I surveyed this within-country scientific literature for the Journal of School Choice I found 150 separate statistical findings reported by 65 papers. The results not only favored private over government provision of schooling, they revealed that the most market-like, least regulated school systems have the biggest advantage over state school monopolies such as are the norm in the United States.

It is disappointing to see Education Week publish such obviously false and confused twaddle. If it wishes to remain a serious publication it should establish some minimal standards for the veracity and coherence of its commentary and enforce them with at least a cursory editorial review.