Tag: competition

The Irony of the President’s STEM Initiatives

The media tide of the past two days has carried in a great flood of stories on science, technology, engineering and math (STEM) education. ABC, NBC, AP, Reuters, the Christian Science Monitor, Politico, the Detroit News, and others joined in. This torrent of attention is due to a White House science fair at which the president announced several initiatives to boost student achievement in those fields. Details are scant, but based on the administration’s press release it seems that $100 million or so would go to encourage particular kinds of teacher’s college programs. Various extracurricular STEM programs funded by non-profit foundations were also touted in the release.

The obvious irony in the president’s plan to tweak teachers’ college programs is that those programs are themselves a key part of the problem. The nation’s state school monopolies typically require most or all of their teachers to either have a degree from a government-approved college of education or to be pursuing such a degree during evenings and weekends. Few of those studying or working in STEM fields are willing to sit through a teachers’ college program—with good reason. Not only are these programs often pointless according to their own graduates, they are not associated with improved student performance. They are a requirement without a function–at least without a function that benefits students. The one thing they do accomplish is to erect a barrier to entry that protects incumbent teachers from competition, allows the specter of “teacher shortages” to be floated at regular intervals, and thus to justify above market wages [state school teachers receive compensation that is roughly $17,000 per year higher than their private sector counterparts].

As a result, many of the most promising teaching candidates in these fields are weeded out from the start. President Obama’s plans to “improve” this barrier to entry into the profession amounts to reupholstering the deck chairs on the sunken Titanic.

But how to ensure that only effective teachers lead the nation’s classrooms given that the government certification process is not just useless but counterproductive? Here, again, there is irony. Somehow, in the thousands of different fields in which scientists and engineers work every day, the competent are distinguished from the incompetent. And somehow, those who underperform are either helped to improve or cut loose to seek work in a field (or with an employer) to which their talents are better suited. It is ludicrous to suggest that managers can effectively evaluate the work of the scientists and engineers they employ in every field _except_ education.

The media would do us all a favor if they would look past the Obama administration’s marshmallow launcher for a moment and contemplate the effect that our massive barrier to entry into the teaching profession has on recruiting scientists and engineers.

People Think of Something as Their Business When It Is Their Business

A WSJ interview with Bill Gates includes this pivotal observation:

“I believe in innovation and that the way you get innovation is you fund research and you learn the basic facts.” Compared with R&D spending in the pharmaceutical or information-technology sectors, he says, next to nothing is spent on education research. “That’s partly because of the problem of who would do it. Who thinks of it as their business? The 50 states don’t think of it that way, and schools of education are not about research. So we come into this thinking that we should fund the research.”

While it’s true that public school districts don’t spend a lot on R&D, a vast army of academics has been cranking out research in this field for generations. The Education Resources Information Center, a database of education studies dating back to 1966, boasts 1.3 million entries. So the problem is not a lack of research, but rather that most of the research is useless and that the rare exceptions have been ignored by the public schools.

Why? Because, as Bill Gates correctly observes, hardly anyone thinks of education as their business. And how do you get masses of brilliant entrepreneurs to think of education as their business? You make it easy for them to make it their business. When and where education is allowed to participate in the free enterprise system, entrepreneurs enter that field just as they do any other–and excellence is identified and scales up. It is a process that happens automatically due to the freedoms and incentives inherent in that system. More than that, it is the only system in the history of humanity that has ever led to the routine identification and mass replication of excellent products and services.

So what happens if you want market outcomes but reject the market system that creates them? You are left to re-invent the wheel… without the only value of pi that makes a circle.

Yet More U.S. Trade Policy Incoherence

In hailing this week’s ruling by a World Trade Organization dispute settlement panel that certain Chinese government restrictions on raw material exports violate China’s WTO commitments, U.S. Trade Representative Ron Kirk made the point that such restrictions hurt U.S. manufacturers who rely on those imported raw materials.

Today’s panel report represents a significant victory for manufacturers and workers in the United States and the rest of the world. The panel’s findings are also an important confirmation of fundamental principles underlying the global trading system. All WTO Members – whether developed or developing – need non-discriminatory access to raw material supplies in order to grow and thrive.

And, simultaneously, by artificially increasing domestic supply, the same export restrictions advantage Chinese manufacturing consumers of those materials.

China’s extensive use of export restraints for protectionist economic gain is deeply troubling. China’s policies provide substantial competitive advantages for downstream Chinese industries at the expense of non-Chinese users of these materials.

And here’s how the USTR website described the central issues of the case:

China maintains a number of measures that restrain exports of raw material inputs for which it is the top, or near top, world producer. These measures skew the playing field against the United States and other countries by creating substantial competitive benefits for downstream Chinese producers that use the inputs in the production and export of numerous processed steel, aluminum and chemical products and a wide range of further processed products…These raw material inputs are used to make many processed products in a number of primary manufacturing industries, including steel, aluminum and various chemical industries. These products, in turn become essential components in even more numerous downstream products.

I agree.

But what you won’t find in the USTR’s statements is any acknowledgement that the U.S. government, in defiance of Ambassador Kirk’s logic, maintains import restrictions on three of the nine raw materials at issue in the China WTO case. That’s right! While arguing correctly that Chinese restrictions on exports of magnesium, silicon metal, and coke raise production costs and subsequently reduce U.S. manufacturing competitiveness, the U.S. government maintains antidumping restrictions on the same inputs, which raises U.S. production costs and reduces U.S. manufacturing competitiveness. (See pages 14-17 of this new Cato paper to learn what happened to certain U.S. industrial consumers of these raw materials)

How can such dissonance persist, you ask? Under the U.S. antidumping law, manufacturing consumers of subject imports have no legal standing to participate in the proceedings. In fact, the U.S. administering agencies are forbidden by statute from even considering the impact of antidumping duties on the downstream, consuming industries. Nor is an assessment of the costs of prospective antidumping restrictions on the broader economy permitted to carry any weight under the statute.

Instead, in the present case, those producers hurt by our own import restrictions had to take the circuitous route of enlisting the support of the USTR to pursue a WTO case to secure – what will eventually be – only a half-a-loaf solution. Even if and when China relents with respect to its export restrictions, the U.S. antidumping restrictions on imported raw materials will persist because the law effectively insulates the patrons of antidumping measures from competition.

It should be embarrassing to the administration that it rigorously pursues a WTO case to end an economic injustice committed by another country that we gleefully inflict upon ourselves. We are committing economic self-flagellation by ignoring antidumping reform in this country, where 80 percent of all antidumping measures in place restrict crucial manufacturing inputs. And it’s not like President Obama doesn’t understand the relationship between manufacturing competitiveness and access to manufacturing inputs. Here’s what the president said less than one year ago, when he signed into law a tariff liberalization bill:

The Manufacturing Enhancement Act of 2010 will create jobs, help American companies compete, and strengthen manufacturing as a key driver of our economic recovery. And here’s how it works. To make their products, manufacturers—some of whom are represented here today—often have to import certain materials from other countries and pay tariffs on those materials. This legislation will reduce or eliminate some of those tariffs, which will significantly lower costs for American companies across the manufacturing landscape—from cars to chemicals; medical devices to sporting goods. And that will boost output, support good jobs here at home, and lower prices for American consumers.

But, then, at some point, that logic no longer resonates with this administration.

Antidumping reform is an essential ingredient of U.S. manufacturing competitiveness. Anyone inclined to celebrate the U.S. WTO “victory” in the Chinese export restrictions case should understand the rest of that story.

Are U.S. Corporate Taxes Low?

In a new column, Bruce Bartlett argues that U.S. corporate taxes are the lowest in the OECD, and therefore there is no need to reduce them. As usual, Bruce frames the debate as between sensible center-left economists like himself vs. crackpot Republicans. Yet on this issue, the great majority of serious tax scholars agree that a corporate tax rate cut is long overdue. Indeed, there is such broad agreement among experts that even the Obama White House is considering a corporate rate cut.

Bruce offers only weak and deceptive data in support of his views:

One would not know from the Republican document that corporate taxes are expected to raise just 1.3 percent of GDP in revenue this year, about a third of what it was in the 1950s.

This statistic does not show what Bruce pretends it shows. Corporate income taxes are paid by a subset of businesses called “C” corporations. But the share of total U.S. business income reported by C corporations has plunged in recent decades with the rise in other business structures, particularly LLCs and S corporations.

In a 2007 article in Tax Notes, PwC economist Peter Merrill showed that the share of total U.S. business income reported by C corporations fell from 71 percent in 1987 to just 49 percent by 2004. C corporations are less important business structures than they used to be, so it is to be expected that corporate taxes as a share of GDP has fallen.

Another way to see the relative decline in C corporations is to look at the ratio of C corporation revenues to GDP. In 1980, for example, C corporation revenues were more than two times larger than GDP ($6.1 trillion to $2.8 billion), but by 2008 C corporation revenues were only about 1.5 times larger than GDP ($22 trillion to $14 trillion). (Revenues from the IRS corporate report for those two years).

Bruce’s centerpiece is a table showing that U.S. corporate taxes as a share of GDP were 1.8 percent in 2008, a lower share than in other OECD countries. But the rise in LLCs and S corporations in the United States makes this table almost useless in furthering Bruce’s argument. C corporations may simply represent a smaller share of the overall economy in the United States than in other countries. To make his point, Bruce would need to show that taxes as a share of corporate profits are lower in the United States than elsewhere.

If taxes are low historically and in comparison with our global competitors, how are Republicans able to maintain that taxes are excessively high? They do so by ignoring the effective tax rate and concentrating solely on the statutory tax rate.

The effective tax rate Bruce refers to is the average effective rate, which is the rate he calculates in the faulty manner of taxes as a share of GDP. However, marginal effective rates are generally considered to be more important for international competitiveness. When Toyota is considering expanding its North American production at one of its U.S. or Canadian locations, it will look at the marginal effective tax rate in the two countries. And when it comes to marginal effective corporate tax rates, the United States has one of the highest rates in the world, according to a Cato study by tax scholars Jack Mintz and Duanjie Chen.

The economic importance of statutory tax rates is blown far out of proportion by Republicans looking for ways to make taxes look high when they are quite low.

Actually, statutory corporate tax rates are extremely important in the modern global economy because of the high mobility of corporate profits. In general, marginal effective tax rates drive real investment flows, but statutory corporate rates drive cross-border movements of reported income. Politicians frequently express their outrage at corporations pushing their profits offshore through transfer pricing and other techniques, but they could fix the problem anytime they wanted by slashing the uniquely high U.S. statutory corporate rate.   

This brings us back again to Bruce’s statistic that U.S. corporate taxes as a share of GDP are low at just 1.8 percent. Another reason that figure is low is that the high U.S. statutory rate is pushing reported income offshore through avoidance and evasion. If we cut the statutory corporate rate, the apparent low burden that Bruce points to would increase. This chart shows the inverse relationship between statutory corporate taxes and corporate taxes as a share of GDP.

By the way, if the importance of statutory corporate rates were “blown far out of proportion” as Bruce says, then why has every other advanced economy put so much effort into reducing its statutory rate over the last two decades? The answer is that liberal, centrist, and conservative governments around the world have understood that a country imposing a high statutory corporate rate shoots itself in the foot in today’s competitive world economy.

To sum up:

  • The U.S. has a low average effective corporate rate when measured incorrectly as a share of GDP, as Bruce does. The low rate results from the relative decline in C corporation business activity, the high U.S. statutory rate driving profits offshore, and the high U.S. marginal effective rate suppressing real investment.
  • The U.S. has one of the highest statutory corporate tax rates in the world. The high statutory rate drives reported income offshore, and it is also an important component of the marginal effective tax rate faced by companies.
  • The U.S. has one of the highest marginal effective corporate tax rates in the world according to some calculations, which likely reduces U.S. capital investment substantially. After all, “corporate taxes are the most harmful type of tax for economic growth,” according to the OECD.

 For more, see Global Tax Revolution.

Gingrich & Woolsey on Energy

The other day, The Wall Street Journal provided a public service by lambasting Newt Gingrich for his absurd speech to the ethanol lobby in Des Moines last month (money line:  ”Obviously big urban newspapers want to kill it because it’s working, and you wonder, ‘What are their values?’”).  Today, Gingrich and fellow ethanol-maven James Woolsey struck back in those very same pages.  In doing so, Gingrich provided yet more evidence that he’s intellectually unfit for office.

“It is in this country’s long-term best interest,” he said, ”to stop the flow of $1 billion a day overseas.”  Really?  So money sent overseas is gone forever.  News to me.  The only thing you can buy with dollars earned from oil sales to the U.S. is to buy things denominated in dollars or to exchange them so that someone else can.  And we sell a lot of stuff to foreigners that are denominated in dollars (treasury bills for one) and that money comes right back to the good old U.S. of A.

But put that aside.  If Gingrich really believes this, then why not just ban all imports all together?  Is that what the GOP is about these days - rank gooberism on trade?

And one other thing; the U.S. does not spend $1 billion a day on foreign oil.  It spends about half that; $530 million a day (in 2009 anyway).

“[I] co-produced a movie with my wife, Callista, ‘We Have the Power,’ that argued for an ‘all of the above’ energy strategy which would maximize all forms of domestic energy production.”  Apparently, being a pol means that one doesn’t have to pick and choose between investments a, b, or c.  We’ll just mandate everyone invest in everything that can attract a lobbyist. 
When you hear this stuff about an ”all of the above” energy strategy, what you’re hearing is a complaint that the Democrats aren’t subsidizing enough of the energy industry.  They are too tight-fisted with the public purse.  They are not ambitious enough in their planning.  And while Republicans bang the table for more, more, and more handouts to private corporations, liberals like Amory Lovins (prominent left-of-center energy guru) and Carl Pope (former head of the Sierra Club) call for zeroing out everyone’s subsidies and leaving the energy market the heck alone (at least when it comes to this matter).  It’s a mad, mad world.
“Nevertheless,” says Gingrich, ”the Journal attempts to equate my career-long commitment to increased American energy production with the anti-energy agenda of President Obama. This is a laughable charge, especially considering I have been one of the most vocal opponents of the president’s energy policies since he took office.”  Perhaps, but on this matter, Gingrich is attacking the administration from the Left.  
Even more amusing was James Woolsey’s lecture to the editorial board over what it means to be a conservative.   “We could not help wondering,” he asked along with his co-author, Gal Luft, ”why the Journal, despite its commitment to free enterprise, chose to attack Newt Gingrich for his call to open vehicles to fuel competition, which would cost auto makers under $100 per new car.”  Well Jim, a commitment to free enterprise is a commitment to allow enterprises to be free to produce whatever they want.  Of course, if Woolsey had read Gingrich’s speech to the ethanol lobby, he would not need to wonder - it’s about their sick, twisted values.
Nonetheless, Woolsey claims that such a mandate ”is perfectly in line with conservative economic principles.”  That may be true given what conservatives believe about economics.  But it’s not consistent with a principled support for a free market.
Finally, “Challenging Mr. Gingrich’s conservative bona fides based on his support for breaking oil’s virtual monopoly over transportation fuel is not only myopic but also the best gift the Journal can give OPEC.”  But … oil dominates the transportation market because it is a heck of a lot cheaper than any other fuel.  If it weren’t so much cheaper than ethanol, then we would have no need for such massive subsidies for the same.  The same goes for electric cars.  If and when that changes, oil’s “monopoly” will crumble.  Until then, taking oil out of transportation markets simply takes cheap fuel out of transportation markets.  It would be fun to watch a Gingrich/Woolsey ticket run on that.

Krugman (Both of Them) on Competitiveness

When it became clear that President Obama would make “competitiveness” a theme of his SOTU address, I looked forward to seeing Paul Krugman’s statement pointing out how much nonsense that is. Here he is, after all, in his excellent 1997 book, Pop Internationalism (MIT Press):

…International trade, unlike competition among businesses for a limited market, is not a zero-sum game in which one nation’s gain is another’s loss. It is [a] positive-sum game, which is why the word “competitiveness” can be dangerously misleading when applied to international trade.

Sure enough, President Obama’s speech last night was peppered with references to “the competition for jobs,” “new jobs and industries take root in this country, or somewhere else, “the competion for jobs is real,” etc. And of course there was a healthy dose of the usual mercantalist obsession with exports.

Although written before the President’s address was delivered, what would Paul Krugman 2.0 think of this sort of talk? The title of his column Sunday was certainly encouraging: “The Competition Myth.” But the substance of the column went in a … er… different direction from that which I had anticipated/hoped:

…talking about “competitiveness” as a goal is fundamentally misleading. At best, it’s a misdiagnosis of our problems. At worst, it could lead to policies based on the false idea that what’s good for corporations is good for America

So what does the administration’s embrace of the rhetoric of competitiveness mean for economic policy?

The favorable interpretation, as I said, is that it’s just packaging for an economic strategy centered on public investment, investment that’s actually about creating jobs now while promoting longer-term growth. The unfavorable interpretation is that Mr. Obama and his advisers really believe that the economy is ailing because they’ve been too tough on business, and that what America needs now is corporate tax cuts and across-the-board deregulation. [emphasis mine]

In other words, Krugman’s objections to the “competitiveness” rhetoric are based on his fear that it will lead to policies favorable to corporations, not that the whole concept is flawed.

[Disclaimer: the above is by no means an exhaustive analysis of the problematic parts of the column]

I yield to no-one in my admiration for Paul Krugman, trade economist. He made a real contribution to the discipline I’ve loved since I was a teenager. But Paul Krugman, columnist…not so much.