Archives: 03/2015

Even the IMF Agrees that Spending Caps Are Effective

It’s not very often that I applaud research from the International Monetary Fund.

That international bureaucracy has a bad track record of pushing for tax hikes and other policies to augment the size and power of government (which shouldn’t surprise us since the IMF’s lavishly compensated bureaucrats owe their sinecures to government and it wouldn’t make sense for them to bite the hands that feed them).

But every so often a blind squirrel finds an acorn. And that’s a good analogy to keep in mind as we review a new IMF report on the efficacy of “expenditure rules.”

The study is very neutral in its language. It describes expenditure rules and then looks at their impact. But the conclusions, at least for those of us who want to constrain government, show that these policies are very valuable.

In effect, this study confirms the desirability of my Golden Rule! Which is not why I expect from IMF research, to put it mildly.

Why We Filed a Brief Defending Offensive Speech

Here’s Boston College law professor Kent Greenfield, writing at The Atlantic about the racist-chant scandal at the University of Oklahoma:

We are told the First Amendment protects the odious because we cannot trust the government to make choices about content on our behalf. That protections of speech will inevitably be overinclusive. But that this is a cost we must bear. If we start punishing speech, advocates argue, then we will slide down the slippery slope to tyranny.

If that is what the First Amendment means, then we have a problem greater than bigoted frat boys. The problem would be the First Amendment.

Cato’s brief in Walker v. Texas Division (the Confederate flag license-plate case) pokes plenty of fun at government censors who would protect us from “offensive” speech, but this is no laughing matter. 

H/t Trevor Burrus

Regulatory Capture of Trade Agreements

This is from Ezra Klein:

I’m skeptical of the sheer size of modern trade deals and the opaque process that creates them. The negotiation process isn’t quite as secretive as some think — the congressional briefings are constant, and the advisory committees are sprawling — but it is insanely complex.

The result is that even where there is transparency, it’s a form of transparency that can only really be navigated by politically sophisticated, highly motivated actors — which is to say it’s a form of transparency that quickly becomes a venue for lobbying. That’s one reason these deals end up including so much … stuff. The process is constructed in such a way that the negotiators get a lot of special pleading from individual industries and interests. Responding to those requests feels like responding to the public, but it isn’t, and it leads to deals jam-packed with individual provisions that look a lot like giveaways.

This is a great insight about modern trade agreements.  It’s important to think of a trade agreement as just another piece of legislation.  In the past, trade agreements focused mainly on tariffs.  Now they govern a wide range of policies (“stuff”), and as a result they are susceptible to regulatory capture.  Special interest groups see them as just another way to achieve their political goals.  What this means is, as with any piece of legislation, don’t be fooled by the marketing.  Look closely at all the details.

The Dollar, Oil Prices and Exports: Lessons of Recent History

Business news pages are suddenly full of hand-wringing about how the rising dollar threatens to slash U.S. exports and economic growth.  “The strong dollar is the biggest threat to economic recovery,” warns one reporter.  Others quote White House chief economist Jason Furman saying “the strong dollar is undoubtedly a headwind” for the U.S. economy.

It’s not that simple.

dollar and exports

The graph above compares real U.S. exports with the trade-weighted exchange rate.  The dollar was rising much faster in 1995-2000, when both exports and the economy were growing at an impressive pace.  Exports eventually fell with recession, as always.  But it is much harder to blame the recession on exchange rates than on interest rates – the Fed pushed the fed funds rate 4.7 percentage points above core inflation.   

From 2001 to 2007, the dollar fell and exports rose.  That pattern might appear to justify recent lobbying for a lower dollar were it not for the familiar connection between oil prices and the dollar.  As the dollar fell, the price of West Texas crude soared from $19 a barrel in December 2001 to over $133 in June-July 2008.  Every postwar recession except 1960 was preceded by a spike in oil prices, and the Great Recession turned out to be no exception.

The dollar weakened at the start of this recovery, but related inflation cut average real wages by 1.5% in 2011 and 0.6% in 2012.   As the dollar firmed up, by contrast, real wages rose by 0.7 % in 2013 and 0.8% in 2014.

The recent rise in the dollar has merely brought it back to about where it was in 1998 or 2006, which were not bad years.  The latest exchange rate gyrations are dominated by self-inflicted wounds to the euro and yen, but U.S. exports to the EU are only 1.3% of GDP, and exports to Japan are 0.4% of GDP.

U.S. multinationals have complained about “translation losses” – the fact that profits of subsidiaries in Europe or Japan will be less valuable when translated into dollars.  But that is equally true for earnings of European and Japanese firms too (and for their stock prices when translated into dollars). And multinationals often leave foreign earnings abroad, due to the uniquely foolish U.S. tax if offshore earnings are brought home.  

The weakened euro and yen will raise the cost of living and cost of production for citizens of the afflicted countries (including the price of oil and other commodities).  It is true that such expertly planned impoverishment of such large economies can scarcely benefit the global economy. If other countries want to make their money less trustworthy and less desirable, however, there is not much we can do about that.  

Upcoming Fiscal Deadlines

The federal government’s debt ceiling will return on Monday following a 14 month suspension. This is the first of many important fiscal deadlines that Congress must consider before the end of the calendar year. These deadlines represent opportunities for Congress to control spending growth and reform entitlement programs.

Below is a list of the major fiscal deadlines:

  • Debt Ceiling: The federal debt ceiling limits the amount of outstanding federal debt. When the debt ceiling returns on March 16, it will be approximately $18.1 trillion. Congress is not expected to raise the limit this weekend, so the Treasury Department will have to use its flexibility to fit the debt within that limit. With these Treasury procedures, the Congressional Budget Office expects that congressional action can be put off until October or November.
  • Sustainable Growth Rate: The Sustainable Growth Rate (SGR or “doc fix”) was passed in 1997 and attempts to control Medicare spending growth. If Medicare grows faster than the legislated formula, reimbursements to doctors are cut. However, Congress has never let the cuts go into effect. The current relief from cuts expires on April 1. If Congress doesn’t act, reimbursements would be cut by 20 percent. Congress is expected to pass a short-term patch, the 18th time it will have done so in 13 years.
  • Budget Resolution: The House of Representatives and the Senate are supposed to pass the annual budget resolution by April 15. The budget resolution sets the broad trajectory of spending for the upcoming fiscal year. Both chambers are expected to release their budget drafts during the week of March 16 to give themselves several weeks to work through this process and provide an opportunity to reconcile the two proposals.
  • Highway Trust Fund: The Highway Trust Fund will become insolvent on May 31. For a number of years, the Highway Trust Fund has spent more than it collects in revenue from the federal gas tax. Its current annual imbalance is $14 billion. Congress will need to figure out a way to balance the trust fund’s spending and revenue.

A Message from Cato’s Center for the Study of Science

As we’ve mentioned before on the Cato blog, over the past few weeks some members of Congress have been sending letters of intimidation to researchers whose scientific findings were politically inconvenient to the members’ policy proposals. First, seven scientists working at public universities were harassed by Rep. Raul Grijalva (D-AZ). This was followed by letters to 100 organizations, ranging from private companies to think tanks, attempting to create a whisper campaign of allegations of impropriety. My boss, Cato CEO John Allison, received one of these letters.

Mr. Allison’s response to the letter he received from Sens. Ed Markey (D-MA), Barbara Boxer (D-CA), and Sheldon Whitehouse (D-RI) is reproduced below the jump.

We at the Center for the Study of Science, as with the rest of the Cato Institute, are very proud not only of the quality of the work we produce but also of our values—and those morals compel us to not bow to those using their authority as a weapon to silence legitimate scientific inquiry.

The actions of these members of Congress are exactly why Cato’s Center for the Study of Science was founded: the government wishes to use science as a weapon to increase its political power, then use that political power to create a more convenient political climate. We wish to change this climate of fear into one of truth—and we would like to extend an invitation to Sens. Markey, Boxer, and Whitehouse to join us.

Global Warming: Good for Bad and Bad for Good?

Another day, another negative impact from pernicious global warming caused by humanity’s relentless quest for self-betterment.

Today, it is our coffee supply that is in jeopardy. Earlier this week, global warming was melting mummies in Chile. Last week, it was blamed for war in Syria. Turns out that global warming is a highly selective beast—it only harms the things we love, while enhancing the things we don’t.

Penguins? Polar bears? Songbirds? Coffee?

Harms. Harms. Harms. Harms.

Jellyfish? Poison ivy? Ragweed? War?

Helps. Helps. Helps. Helps.

Mummies are sort of a special case.  If they were roaming around attacking people, we’d imagine that global warming would empower them. But in this case, the mummies are harmlessly laying around in the (apparently poorly climate-controlled) vaults in a museum in Chile.  There, they are a natural treasure. So, predictably, global warming is causing harm.