Archives: 02/2014

Obama Administration Turns Antique Collectors And Dealers Into Criminals

The Obama administration is preparing to treat virtually every antique collector, dealer, and auctioneer in America as a criminal.  In the name of saving elephants, the administration is effectively banning the sale of all ivory objects, even if acquired legally decades ago.  Doing so will weaken conservation efforts and enrich those engaged in the illegal ivory trade.

Under the Convention on the International Trade in Endangered Species of Wild Fauna and Flora (CITES) only ivory from before 1989 can be sold.  Unfortunately, ivory prohibition has not stopped the slaughter of elephants. 

The greatest demand for new ivory comes from Asia.  Most ivory in America arrived legally, many years ago. 

Until now the rules were simple and sensible.  Ivory imported legally can be sold.  Moreover, the burden of proof fell on the government to convict you of violating the law.  That’s the way America normally handles both criminal and civil offenses.

However, in mid-February the administration issued what amounted to a ban on ivory sales.  As I point out in my new Forbes online column:

In practice, virtually every collector, dealer, auctioneer, and other person in America is banned from selling ivory items, even if acquired legally, owned for decades, and worth hundreds or thousands of dollars.  Every flea market, junk shop, estate sale, antique store, auction showroom, and antique show is at risk of raids, confiscations, and prosecutions.

First, no imports are allowed, not even of antiques, which before could be brought to America with a CITES certificate. 

Second, all exports are banned, except antiques (defined as over a century old) in what the Fish and Wildlife Service says are “exceptional circumstances.”  At best the administration is raising the administrative and cost burdens of exporting to countries which already limit ivory imports to items with appropriate CITES documentation.  Or the new rule may restrict the sale of items previously allowed, thereby hindering Americans in disposing of their legal collections. 

ABBA and the Story of the Most-Inane-Ever Tax Controversy

The tax code is a complicated nightmare, particularly for businesses.

Some people may think this is because of multiple tax rates, which definitely is an issue for all the non-corporate businesses that file “Schedule C” forms using the personal income tax.

A discriminatory rate structure adds to complexity, to be sure, but the main reason for a convoluted business tax system (for large and small companies) is that politicians don’t allow firms to use the simple and logical (and theoretically sound) approach of cash-flow taxation.

Here’s how a sensible business tax would work.

Total Revenue - Total Cost = Profit

And it would be wonderful if our tax system was this simple, and that’s basically how the business portion of the flat tax operates, but that’s not how the current tax code works.

We have about 76,000 pages of tax rules in large part because politicians and bureaucrats have decided that the “cash flow” approach doesn’t give them enough money.

So they’ve created all sorts of rules that in many cases prevent businesses from properly subtracting (or deducting) their costs when calculating their profits.

One of the worst examples is depreciation, which deals with the tax treatment of business investment expenses. You might think lawmakers would like investment since that boosts productivity, wage, and competitiveness, but you would be wrong. The tax code rarely allows companies to fully deduct investment expenses (factories, machines, etc) in the year they occur. Instead, they have to deduct (or depreciate) those costs over many years. In some cases, even decades.

But rather than write about the boring topic of depreciation to make my point about legitimate tax deductions, I’m going to venture into the world of popular culture.

Though since I’m a middle-aged curmudgeon, my example of popular culture is a band that was big about 30 years ago.

Are We Nearing a Breaking Point in Venezuela?

Today could be a very tragic day in Venezuelan history. Two large marches, one from the opposition and the other organized by the government, are already taking the streets of the capital and might converge in the same district. The regime of Nicolas Maduro outlawed the opposition march and threatened violence if they try to enter the municipality of Libertador, in downtown Caracas. Things could get very ugly.

Tensions have built up since last week when tens of thousands of people, mostly students, took to the streets to protest against the government. The heavy-handedness with which the regime has dealt with the protests is almost unprecedented. At least 3 people died, scores have been detained and many are still missing. The students that were released have denounced that they were tortured and raped while in custody. Moreover, the government issued an arrest warrant against Leopoldo López, former mayor of the district of Chacao and one of the most emblematic leaders of the opposition. As leader of the march today, he turned himself in to the National Guard.

We need to keep a few things in mind as events unfold:

A large segment of the population is fed up: This is not the first time that tens of thousands of Venezuelans take the streets to protest against the government. However, as the acute economic crisis worsens, the level of desperation among the population, especially the middle class, is reaching a boiling point. The scarcity index shows that more than one out of four basic products is out of stock. Hour-long lines are an every-day occurrence in super markets. And when you can actually find a product, your income is rapidly dwindling to purchase it. The official inflation rate reached 56 percent last year, but according to my colleague Steve Hanke’s Troubled Currency Project, the implied annual inflation rate is actually 305 percent. Crime has significantly worsened living conditions: Venezuela is now one of the most dangerous places in the world with almost 25,000 homicides in 2013 –a murder rate of 79 killings for 100,000 inhabitants. The country is quickly becoming unlivable and many Venezuelans think that they have nothing to lose.

Freedom to Panties!

The Associated Press reports that “30 women protesters in Kazakhstan were arrested and thrown into police vans while wearing lace underwear on their heads and shouting ‘Freedom to panties!’”

Is this the beginning of a sexual revolution in authoritarian central Asia?  Alas, no.  The protest is a response to new rules from the Russia-led Eurasian Customs Union banning the sale or importation of underwear containing less than 6% cotton.  The ban will outlaw 90% of the underwear currently being sold in those countries, stoking concerns of a return to Soviet-era underwear.

Although it is unclear to me at this point exactly why, lacy silk lingerie apparently threatens the economic vitality of Russia, Kazakhstan, and Belarus.

Banning clothes for economic reasons is unfortunately nothing new.  In her thorough and informative book, The Travels of a T-Shirt in the Global Economy, Georgetown professor Pietra Rivoli details the efforts of the English Parliament in the 17th Century to keep people from abandoning English woolens in favor of cotton garments from India.  In 1700, Parliament went so far as to mandate that all corpses be buried wearing nothing but wool.

Will trade historians one day write about the great Russian panty raid of 2014?  Will they tell of the uprisings in the streets, the dangerous and exotic world of black market lingerie smugglers, Vladimir Putin’s regime-shattering silk drawers scandal?  Only time will tell.

The purpose of trade barriers is always to control consumers, because free consumers are a danger to the goals of the state.  And so, I call on free traders all around the world to stand in solidarity with these protestors.  Freedom to panties!  Freedom for all!

Saving Rustbelt Cities

What should be done about the nation’s rustbelt cities–or, as they are being repackaged by marketers, “Legacy Cities”? The populations of at least a dozen major cities declined by more than 10 percent between 2000 and 2010, including Buffalo, Cincinnati, Cleveland, and of course Detroit and New Orleans (whose population decline has little to do with the rest of them). In many cases, such as Pittsburgh and St. Louis (which declined between 8 and 9 percent in the 2000s), recent declines are merely a continuation of trends since 1950.

Click image to download the report (7.6 MB)

A new report from the Lincoln Land Institute offers a set of prescriptions for these cities. While they may sound good at first glance, close scrutiny reveals that they are the same tired policies that have been trotted out by urban planners for decades.

These policies include:

  1. Urban renewal, funded with tax-increment financing and other subsidies, to “leverage assets” in the city;
  2. Regional government “to better distribute the burdens of urban infrastructure and other costs,” i.e., make the suburbs pay for the central cities’ mismanagement;
  3. “New urban forms,” meaning high-density, mixed-use developments;
  4. “Re-establishing the central role of the city,” meaning demands that employers move to cities rather than suburbs; and
  5. “New governance structures,” meaning “economic development corporations” that can “leverage assets” (use tax dollars) to benefit selected developers in selected neighborhoods with little public scrutiny.

The report gives examples of cities that are doing some of these things, but fails to show that any of them have actually succeeded at attracting new people and jobs. In fact, the higher taxes and increased regulation called for by this report is more likely a recipe for accelerated disaster.

Here’s a completely different set of recommendations that I suggest is more likely to succeed:

  1. Improve schools, probably by using a voucher system to create a competitive environment for both public and private schools;
  2. If the city has a large African-American underclass, make absolutely sure that all elementary students have caught up to their middle-class peers by the time they reach high school, and gather private funding to insure that all high-school students who graduate with decent grades know they will get scholarships to a major university, thus giving them an economic path out of poverty;
  3. Eliminate cronyism and corruption in city government, problems never mentioned in the Lincoln Land Institute report but which could actually be exacerbated by the report’s recommendations. Cities are the creation of state legislatures, and if cities can’t reform themselves, the legislatures should take action by rechartering the city governments;
  4. Reduce crime by doing things like changing the gridded city streets that planners love into cul de sacs so that criminals have fewer escape routes;
  5. Reduce taxes by eliminating all but the most essential urban services–this means no government-funded convention centers, sports stadiums, hotels, streetcar lines, or other things that ought to be privately funded, if they are needed at all;
  6. Reduce regulation, including zoning rules, so property owners can engage in urban renewal without government subsidies or top-down planning. Historic preservation ordinances may sound cool, but they are one of the biggest obstructions to private redevelopment;
  7. Fix city pension and health care funds, even if it means going bankrupt to allow cities to renegotiate unsustainable contracts with public employee unions;
  8. If it hasn’t been done already, legalize the sale of beer from the same premises in which it is made. As I’ve argued elsewhere (see page 6), the micro brewpub revolution has done more to revitalize cities than rail transit, urban renewal, and the other expensive programs planners and city officials love.

In short, rather than adding to the layers of taxes and regulation that already hinder city growth, government should get out of the way.

Spying on Trade Lawyers

The latest NSA spying revelations involve international trade issues, in particular an Indonesian complaint brought at the WTO in response to a U.S. ban on clove cigarette.  (The trade problem was that the U.S. banned clove cigarettes, which are mostly made in Indonesia, but did not ban menthol cigarettes, a competing U.S.-made product). According to the New York Times, the Australian government monitored communications between the Indonesian government and its DC-based trade lawyers, possibly in relation to this case, and passed the information along to the NSA.  (Note that law prof Orin Kerr is skeptical about the way the story is presented in the Times.)

Let me offer the following thoughts:

1. It’s hard to imagine that any information gathered by the Australians had much impact on the WTO case. I suppose it could be a slight advantage to get an early look at your opponents’ arguments, and see how they are thinking about the issues. But I can also imagine that all this additional information would be a distraction, with too much time being spent on marginal points.  It’s worth noting that, in spite of any information U.S. government trade lawyers may or may not have received, the U.S. lost the case. Thus, like most NSA spying, any spying here was probably of limited value.

2. Regardless of its value, this kind of spying is likely to be pretty offensive to our trading partners. The WTO has detailed rules of procedure for its disputes, one of which says the parties must act in good faith (“all Members will engage in these procedures in good faith in an effort to resolve the dispute”). It’s hard to see how receiving confidential information about your opponents’ arguments, if that happened, satisfies this requirement. It will be interesting to see if this gets discussed in upcoming WTO meetings.

3. I wonder whether all of these revelations about spying will accelerate proposals being made by foreign governments to develop non-U.S.-based communications networks: “German Chancellor Angela Merkel said on Saturday she would talk to French President Francois Hollande about building up a European communication network to avoid emails and other data passing through the United States.”

Venezuela Verifies Hayek on Exchange Controls

Foreign airlines have begun to restrict ticket sales in Venezuela. As the bolivars’ value evaporates, and with exchange controls in force, the airlines fear that the funds they have in Caracas will evaporate, too. By restricting ticket sales, the airlines will limit the amount of new money that is trapped behind the government’s wall of exchange controls.

Of course, President Nicolas Maduro isn’t the first autocrat to impose exchange controls, and he won’t be the last to impose these confiscatory policies. Indeed, the pedigree of exchange controls can be traced back to Plato, the father of statism. Inspired by Lycurgus of Sparta, Plato embraced the idea of an inconvertible currency as a means to preserve the autonomy of the state from outside interference.

So, the temptation to turn to exchange controls in the face of disruptions caused by hot money flows is hardly new.  Tsar Nicholas II first pioneered limitations on convertibility in modern times, ordering the State Bank of Russia to introduce, in 1905–06, a limited form of exchange control to discourage speculative purchases of foreign exchange.  The bank did so by refusing to sell foreign exchange, except where it could be shown that it was required to buy imported goods.  Otherwise, foreign exchange was limited to 50,000 German marks per person.  The Tsar’s rationale for exchange controls was that of limiting hot money flows, so that foreign reserves and the exchange rate could be maintained.  The more things change, the more they remain the same.

This brings me to Nobel laureate Friedrich Hayek’s 1944 classic, The Road to Serfdom. Many thought Prof. Hayek hurt his case because he was extreme. What nonsense. Just consider the Wall Street Journal’s reportage from Caracas about the real concerns of foreign airlines that have funds locked up in Venezuela. And then reflect on the following insightful analysis from the Road to Serfdom:

The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges. Nothing would at first seem to affect private life less than a state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference.  Yet the experience of most Continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty.  It is, in fact, the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape—not merely for the rich but for everybody.

Hayek’s message about convertibility has regrettably either been overlooked, or thought to be too extreme. Exchange controls are nothing more than a ring fence within which governments can expropriate their subjects’ property. Open exchange and capital markets, in fact, protect the individual from exactions, because governments must reckon with the possibility of capital flight.