Tag: economics

Trade Agreements Promote U.S. Manufacturing Exports

Do trade agreements promote trade? The answer appears to be yes. In a new Cato Free Trade Bulletin released today, I examine the record of trade agreements the United States has signed with 14 other nations during the past decade.

The impact of those agreements on U.S. trade is a timely subject because Congress may soon consider pending free-trade agreements (FTAs) with South Korea, Colombia, and Panama. Opponents of such deals often argue that they open the U.S. economy to unfair competition from low-wage countries, displacing U.S. manufacturing. Advocates argue the agreements do open the U.S. market further to imports, but they open markets abroad even wider for U.S. exports.

Based on actual post-agreement trade flows, I found that both total imports and exports with the 14 countries grew faster than overall U.S. trade since each agreement went into effect. For politicians obsessed with manufacturing exports, the study should be especially encouraging. Here is a key finding:

Politically sensitive manufacturing trade with the 14 FTA partners has expanded more rapidly than overall U.S. manufacturing trade, especially on the export side. U.S. manufacturing exports to the recent FTA partners were 10.5 percent higher in 2010 compared to our overall export growth since each agreement was signed. That represents an additional $8 billion in manufacturing exports.

I’ll be discussing the three pending trade agreements alongside William Lane of Caterpillar Inc. at a Cato Hill Briefing on Wednesday of this week. Along with the new study on the past FTAs, I’ll be talking about our recent studies on the Columbia and Korea agreements.

New Paper Explains Why Low-Tax Jurisdictions Should Resist OECD Attacks against Tax Competition and Fiscal Sovereignty

One of the biggest threats against global prosperity is the anti-tax competition project of a Paris-based international bureaucracy known as the Organization for Economic Cooperation and Development. The OECD, acting at the behest of the European welfare states that dominate its membership, wants the power to tell nations (including the United States!) what is acceptable tax policy.

I’ve previously explained why the OECD is a problematic institution - especially since American taxpayers are forced to squander about $100 million per year to support the parasitic bureaucracy.

For all intents and purposes, high-tax nations want to create a global tax cartel, sort of an “OPEC for politicians.” This issue is increasingly important since politicians from those countries realize that all their overspending has created a fiscal crisis and they are desperate to figure out new ways of imposing higher tax rates. I don’t exaggerate when I say that stopping this sinister scheme is absolutely necessary for the future of liberty.

Along with Brian Garst of the Center for Freedom and Prosperity, I just wrote a paper about these issues. The timing is especially important because of an upcoming “Global Forum” where the OECD will try to advance its mission to prop up uncompetitive welfare states. Here’s the executive summary, but I encourage you to peruse the entire paper for lots of additional important info.

The Paris-based Organization for Economic Cooperation and Development has an ongoing anti-tax competition project. This effort is designed to prop up inefficient welfare states in the industrialized world, thus enabling those governments to impose heavier tax burdens without having to fear that labor and capital will migrate to jurisdictions with better tax law. This project received a boost a few years ago when the Obama Administration joined forces with countries such as France and Germany, which resulted in all low-tax jurisdictions agreeing to erode their human rights policies regarding financial privacy. The tide is now turning against high-tax nations – particularly as more people understand that ever-increasing fiscal burdens inevitably lead to Greek-style fiscal collapse. Political changes in the United States further complicate the OECD’s ability to impose bad policy. Because of these developments, low-tax jurisdictions should be especially resistant to new anti-tax competition initiatives at the Bermuda Global Forum.

To understand why this issue is so important, here’s a video I narrated for the Center for Freedom and Prosperity.

 

And here’s a shorter video on the same subject, narrated by Natasha Montague from Americans for Tax Reform.

Last but not least, here’s a video where I explain why the OECD is a big waste of money for American taxpayers.

Who’s Right on Medicare Reform, Ryan and Rivlin or Obama and Gingrich?

This new video, narrated by yours truly, discusses a proposal to solve Medicare’s bankrupt finances by replacing an unsustainable entitlement with a “premium-support” system for private insurance, also known as vouchers.

This topic is very hot right now, in part because Medicare reform is included in the budget approved by House Republicans, but also because Newt Gingrich inexplicably has decided to echo White House talking points by attacking Congressman Ryan’s voucher plan.

Drawing considerably from the work of Michael Cannon, the video has two sections. The first part reviews Congressman Ryan’s proposal and notes that it is based on a plan put together with Alice Rivlin, who served as Director of the Office of Management and Budget under Bill Clinton. Among serious budget people (as opposed to the hacks on Capitol Hill), this is an important sign of bipartisan support.

The video also notes that the “voucher” proposal is actually very similar to the plan that is used by Members of Congress and their staff. This is a selling point that proponents should emphasize since most Americans realize that lawmakers would never subject themselves to something that didn’t work.

The second part discusses the economics of the health care sector, and explains the critical need to address the third-party payer crisis. More specifically, 88 percent of every health care dollar in America is paid for by someone other than the consumer. People do pay huge amounts for health care, to be sure, but not at the point of delivery. Instead, they pay high tax burdens and have huge shares of their compensation diverted to pay for insurance policies.

I’ve explained before that this inefficient system causes spiraling costs and bureaucratic inefficiency because it erodes any incentive to be a smart shopper when buying health care services (much as it’s difficult to maintain a good diet by pre-paying for a year of dining at all-you-can-eat restaurants).  In other words, government intervention has largely eroded market forces in health care. And this was true even before Obamacare was enacted.

Medicare reform, by itself, won’t solve the third-party payer problem, but it could be part of the solution - especially if seniors used their vouchers to purchase real insurance (i.e., for large, unexpected expenses) rather than the inefficient pre-paid health plans that are so prevalent today.

Could Technical Default Today Save America from Greek-Style Fiscal Disaster in the Future?

There’s a lot of buzz about a Wall Street Journal interview with Stanley Druckenmiller, in which he argues that a temporary delay in making payments on U.S. government debt (which technically would be a default) would be a small price to pay if it resulted in the long-term spending reforms that are needed to save America from becoming another Greece.

One of the world’s most successful money managers, the lanky, sandy-haired Mr. Druckenmiller is so concerned about the government’s ability to pay for its future obligations that he’s willing to accept a temporary delay in the interest payments he’s owed on his U.S. Treasury bonds—if the result is a Washington deal to restrain runaway entitlement costs. “I think technical default would be horrible,” he says from the 24th floor of his midtown Manhattan office, “but I don’t think it’s going to be the end of the world. It’s not going to be catastrophic. What’s going to be catastrophic is if we don’t solve the real problem,” meaning Washington’s spending addiction. …Mr. Druckenmiller’s view on the debt limit bumps up against virtually the entire Wall Street-Washington financial establishment. A recent note on behalf of giant banks on the Treasury Borrowing Advisory Committee warned of a “severe and long-lasting impact” if the debt limit is not raised immediately. …This week more than 60 trade associations, representing virtually all of American big business, forecast “a massive spike in borrowing costs.” On Thursday Federal Reserve Chairman Ben Bernanke raised the specter of a market crisis similar to the one that followed the 2008 bankruptcy of Lehman Brothers. As usual, the most aggressive predictor of doom in the absence of increased government spending has been Treasury Secretary Timothy Geithner. In a May 2 letter to House Speaker John Boehner, Mr. Geithner warned of “a catastrophic economic impact” and said, “Default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover.”

Mr. Druckenmiller is not overly impressed by this hyperbole. The article continues with this key passage.

“Here are your two options: piece of paper number one—let’s just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years … and one of my interest payments is going to be delayed, I don’t know, six days, eight days, 15 days, but I know I’m going to get it. There’s not a doubt in my mind that it’s not going to pay, but it’s going to be delayed. But in exchange for that, let’s suppose I know I’m going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured,” he says. Then there’s “piece of paper number two,” he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. “I don’t have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we’re going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it’s a no-brainer. It’s piece of paper number one.” …”Russia had a real default and two or three years later they had all-time low interest rates,” says Mr. Druckenmiller. In the future, he says, “People aren’t going to wonder whether 20 years ago we delayed an interest payment for six days. They’re going to wonder whether we got our house in order.”

This is a very compelling argument, but it overlooks one major problem – the complete inability of Republicans to succeed in forcing fiscal reform using this approach.

Here’s a sure-fire prediction, assuming GOPers in the House actually are willing to engage in an eyeball-to-eyeball confrontation with Obama on the debt limit.

  • There will be lots of political drama.
  • We will get to a point where the federal government exhausts its borrowing authority.
  • At that point, either Geithner or Bernanke (or probably both) will make some completely dishonest statements designed to rattle financial markets.
  • The establishment media will echo those statements.
  • The stock market and/or bond market will have a negative reaction.
  • Republican resolve will evaporate like a drop of water in the Mojave Desert.
  • The debt limit will be increased without any meaningful fiscal reform.

For all intents and purposes, this is what happened with the TARP vote in 2008. There were basically two choices of how to deal with the financial crisis. The establishment wanted a blank-check bailout, while sensible people wanted the “FDIC-resolution” approach (similar to what was used during the savings & loan bailouts about 20 years ago, which bails out retail customers but wipes out shareholders, bondholders and senior management). Republicans initially held firm and defeated the first TARP vote, but then they folded when the Washington-Wall Street establishment scared markets.

I hope I’m wrong in my analysis, but I don’t see how Republicans could win a debt limit fight. At least not if they demand something like the Ryan budget. The best possible outcome would be budget process reform such as Senator Corker’s CAP Act, which would impose caps on future spending, enforced by automatic spending cuts known as sequestration. Because it postpones the fiscal discipline until after the vote, that legislation has a chance of attracting enough bipartisan support to overcome opposition from Obama and other statists.

Clinton, Obama, and Hayek

President Obama has been saying that if the United States government can find and eliminate Osama bin Laden after ten years of searching, it can do anything:

Already, in several appearances since the raid, Obama has described it as a reminder that “as a nation there is nothing that we can’t do,” as he put it during an unrelated White House ceremony Monday. On Sunday night, during his first comments about the operation, he linked it to American values, saying the country is “once again reminded that America can do whatever we set our mind to.”

This is, of course, nonsense. Finding bin Laden, difficult as it proved to be, was an incomparably simple task compared to using coercion and central planning to bring about desired results in defiance of economic reality. You can’t deliver better health care to more people for less money by reducing the role of incentives and markets, even if you set your mind to it. As Russell Roberts said about a similar concept, “If we can put a man on the moon, then…”:

Putting a man on the moon is an engineering problem. It yields to a sufficient application of reason and resources. Eliminating poverty is an economic problem (and by the word “economic” I do not mean financial or related to money), a challenge that involves emergent results. In such a setting, money alone—in the amounts that a non-economic approach might suggest, one that ignores the impact of incentives and markets—is unlikely to be successful.

Obama should listen to Bill Clinton, who last fall seemed to be channeling Hayek:

Friedrich Hayek, The Fatal Conceit: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

Bill Clinton, 9/21: “Do you know how many political and economic decisions are made in this world by people who don’t know what in the living daylights they are talking about?”

Back-Door Tax Increases Are a Recipe for Bigger Government

Martin Feldstein’s on a roll, but not in a good way. Earlier this week in the Wall Street Journal, he advocated throwing in the towel on reforming Social Security into a system of personal retirement accounts. Today, in the New York Times, he endorses big tax increases.

Rather odd positions for someone who served as Chairman of President Reagan’s Council of Economic Advisers. The Gipper must be rolling in his grave.

To be fair, when compared to Obama’s tax-hike plan, Feldstein wants to raise taxes in ways that impose much less damage on the economy. Obama wants to raise tax rate on productive behavior, thus discouraging work, saving, investment, and entrepreneurship. Feldstein, by contrast, wants to cap various tax preferences.

Reducing the budget deficit and stopping the explosion of our national debt will require more tax revenue… But the need for more revenue needn’t mean higher tax rates. …tax revenues can be increased substantially by limiting the deductions, credits and exclusions that are essentially government spending by another name. …such tax expenditures create incentives for wasteful borrowing and spending; they have been factors in the mortgage crisis and the rising cost of health care. …here is a way to curb this loss of revenue without eliminating any individual deduction: limit the total tax saving for any individual to a maximum percentage of his total income. …What’s the result? Taxpayers with incomes of $25,000 to $50,000 would pay about $1,000 more in taxes; those with incomes of more than $500,000 might pay $40,000 more. The cap would affect more than 80 percent of taxpayers. Although they would continue to benefit from the mortgage deduction, the health insurance exclusion and other tax expenditures, their tax savings would not increase if they took out a larger mortgage or a more expensive insurance policy. … a 2 percent cap on tax expenditures in 2011 would raise tax revenue by $278 billion — nearly 30 percent of total projected income tax revenue for this year. The extra revenue would increase over time, reaching nearly half of the projected future fiscal deficits.

I’m not a fan of tax preferences. I agree with much of Professor Feldstein’s argument about the inefficiency and distortions that are created when government plays industrial policy with the tax code.

But there are good ways and bad ways of addressing the problem. If Professor Feldstein was proposing to cap or eliminate tax preferences as part of a plan that also lowered tax rates, that would be great news.

Unfortunately, Feldstein is proposing to cap tax preferences in order to funnel more money to Washington. But giving more tax revenue to politicians and bureaucrats, in the words of P.J. O’Rourke, would be like giving whiskey and car keys to teenage boys.

The big problem with Feldstein’s approach is that any source of additional revenue will ease up the pressure to restrain government spending. There are several budget plans, such as Congressman Ryan’s proposal and the House Study Committee plan, that would significantly improve America’s fiscal position by restraining the growth of federal spending. But these pro-growth initiatives will have zero chance of getting enacted if politicians think more revenue is forthcoming.

America’s fiscal problem is too much spending, not insufficient revenue.

Yes, the tax code is riddled with terrible provisions that are both corrupt and economically inefficient. But those provisions should be eliminated as part of tax reform - not as part of a plan to give politicians an excuse to prop up big government.

Look Who’s Back. Keynes and Hayek.

Keynes and Hayek are at it again in this new video from EconStories.tv.

According to the National Bureau of Economic Research, the Great Recession ended almost two years ago, in the summer of 2009. Yet we’re all uneasy. Job growth has been disappointing. The recovery seems fragile. Where should we head from here? Is that question even meaningful? Can the government steer the economy or have past attempts helped create the mess we’re still in?

The video was produced by Russ Roberts, advisor to the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies, and John Papola for EconStories.tv. I could be mistaken, but I believe that’s Duke professor Michael Munger as the bumbling security guard.