Tag: europe

Let Europe Be—and Defend—Europe

In the midst of difficult domestic political battles, Barack Obama begins a lengthy European trip today.  He should encourage the continent to increase its defense capabilities and take on greater regional security responsibilities.

Presidential visits typically result in little of substance.  President Obama’s latest trip will be no different if he reinforces the status quo.  His policy mantra once was “change.”  No where is “change” more necessary than in America’s foreign policy, especially towards Europe.

Despite obvious differences spanning the Atlantic, the U.S. and European relationship remains extraordinarily important.  The administration should press for increased economic integration, with lower trade barriers and streamlined regulations to encourage growth.

At the same time, however, Washington should encourage development of a European-run NATO with which the U.S. can cooperate to promote shared interests to replace today’s America-dominated NATO which sacrifices American interests to defend Europe.  Americans no longer can afford to defend the rest of the world.  The Europeans no longer need to be defended.

Although World War II ended 66 years ago, the Europeans remain strangely dependent on America.  Political integration through the European Union has halted; economic integration through the Euro is under sharp challenge; and military integration through any means is reversing.

Indeed, the purposeless war in Libya, instigated by Great Britain and France, has dramatically demonstrated Europe’s military weakness.  Despite possessing a collective GDP and population greater than that of America, the continent’s largest powers are unable to dispatch a failed North African dictator.

President Barack Obama starts with visits to Ireland,  the UK, and France.  In the latter he will consult with the heads of the G8 nations, which include Germany and Italy.

His message should be clear:  while America will remain politically and economically engaged in Europe, it will no longer take on responsibility for setting boundaries in the Balkans, policing North Africa, and otherwise defending prosperous industrial states from diminishing threats.  Washington should expect the continent to become a full partner, which means promoting the security of its members and stability of its region.

The president should deliver a similar message when he continues on to Poland.  Part of “New Europe,” which worries more about the possibility of revived Russian aggression, Warsaw has cause to spend more on its own defense and cooperate more closely with its similarly-minded neighbors on security issues.

In fact, Poland, Slovakia, Hungary, and the Czech Republic, members of the “Visegrad Group,” recently announced creation of a “battle group” separate from NATO command to emphasize regional defense.  The president should welcome this willingness to take on added defense responsibilities.

Bailout Coming for the Postal Service?

The U.S. Postal Service is in financial trouble. Undermined by advances in electronic communication, weighed down by excessive labor costs and operationally straitjacketed by Congress, the government’s mail monopoly is running on fumes and faces large unfunded liabilities. Socialism apparently has its limits.

While the Europeans continue to shift away from government-run postal monopolies toward market liberalization, policymakers in the United States still have their heads stuck in the twentieth century. That means looking for an easy way out, which in Washington usually means a bailout.

Self-interested parties – including the postal unions, mailers, and postal management – have coalesced around the notion that the U.S. Treasury owes the USPS somewhere around $50-$75 billion. (Of course, “U.S. Treasury” is just another word for “taxpayers.”)  Policymakers with responsibility for overseeing the USPS have introduced legislation that would require the Treasury to credit it with the money.

Explaining the background and validity of this claim is very complicated. Fortunately, Michael Schuyler, a seasoned expert on the USPS for the Institute for Research on the Economics of Taxation, has produced such a paper.

At issue is whether the USPS “unfairly” overpaid on pension obligations for particular employees under the long defunct Civil Service Retirement System. The USPS’s inspector-general has concluded that the USPS is owed the money. The Office of Personnel Management, which administers the pensions of federal government employees, and its inspector-general have concluded otherwise. Again, it’s complicated and Schuyler’s paper should be read to understand the ins and outs.

Therefore, I’ll simply conclude with Schuyler’s take on what the transfer would mean for taxpayers:

Given the frighteningly large federal deficit and the mushrooming federal debt, a $50-$75 billion credit to the Postal Service and debit to the U.S. Treasury will be a difficult sell, politically and economically. Although some advocates of a $50-$70 billion transfer assert it would be “an internal transfer of surplus pension funds” that would allow the Postal Service to fund promised retiree health benefits “at no cost to taxpayers,” the reality is that the transfer would shift more obligations to Treasury, which would increase the already heavy burden on taxpayers, who ultimately pay Treasury’s bills. (The Congressional Budget Office (CBO) prepares the official cost estimates for bills before Congress. Judging by how it has scored some earlier postal bills, CBO would undoubtedly report that the transfer would increase the federal budget deficit.) For those attempting to reduce the federal deficit, the transfer would be a $50-$70 billion setback.

Sounds like a bailout to me.

See this Cato essay for more on the U.S. Postal Service and why policymakers should be moving toward privatization.

The Value-Added Tax Must Be Stopped - Unless We Want America to Become Greece

Sooner or later, there will be a giant battle in Washington over the value-added tax. The people who want bigger government (and the people who are willing to surrender to big government) understand that a new source of tax revenue is needed to turn the United States into a European-style social welfare state. But that’s exactly why the VAT is a terrible idea.

I explain why in a column for Reuters. The entire thing is worth reading, but here’s an excerpt of some key points.

Many Washington insiders are claiming that America needs a value-added tax (VAT) to get rid of red ink. …And President Obama says that a VAT is “something that has worked for other countries.” Every single one of these assertions is demonstrably false. …One of the many problems with a VAT is that it is a hidden levy. …VATs are imposed at each stage of the production process and thus get embedded in the price of goods. And because the VAT is hidden from consumers, politicians find they are an easy source of new revenue – which is one reason why the average VAT rate in Europe is now more than 20 percent! …Western European nations first began imposing VATs about 40 years ago, and the result has been bigger government, permanent deficits and more debt. According to the Economist Intelligence Unit, public debt is equal to 74 percent of GDP in Western Europe, compared to 64 percent of GDP in the United States (and the gap was much bigger before the Bush-Obama spending spree doubled America’s debt burden). The most important comparison is not debt, but rather the burden of government spending. …you don’t cure an alcoholic by giving him keys to a liquor store, you don’t promote fiscal responsibility by giving government a new source of revenue. …To be sure, we would have a better tax system if proponents got rid of the income tax and replaced it with a VAT. But that’s not what’s being discussed. At best, some proponents claim we could reduce other taxes in exchange for a VAT. Once again, though, the evidence from Europe shows this is a naive hope. The tax burden on personal and corporate income is much higher today than it was in the pre-VAT era. …When President Obama said the VAT is “something that has worked for other countries,” he should have specified that the tax is good for the politicians of those nations, but not for the people. The political elite got more money that they use to buy votes, and they got a new tax code, enabling them to auction off loopholes to special interest groups.

You can see some amusing – but also painfully accurate – cartoons about the VAT by clicking here, here, and here.

For further information on why the VAT is a horrible proposal, including lots of specific numbers and comparisons between the United States and Western Europe, here’s a video from the Center for Freedom and Prosperity.

Great Moments in Human Rights: Creating an Entitlement for Free Soccer Broadcasts in Europe

Forget the Magna Carta and the Constitution. Don’t pay attention to the end of slavery. Ignore the defeat of the Nazis or the collapse of the Soviet Empire.

If you want a real victory for humanity, European courts have ruled that people have the right to free soccer games on TV. Apparently, people are now “entitled” to anything that is “of major importance” to society.

Isn’t that just peachy? Europe is slowly collapsing under the weight of the welfare state. Nations such as Greece and Portugal already have reached the point of fiscal collapse. But rather than address these problems, the political elites at the European institutions have decided on a modern-day version of bread and circuses for the masses.

Here’s a blurb from the Financial Times.

European countries are entitled to ban the exclusive airing of World Cup and European football championship games on pay-TV in order to allow wider public viewing on free channels, one of Europe’s top courts has ruled. The ruling is a blow for Fifa, which organises the World Cup finals, and Uefa, which handles the European Football Championship finals. Both organisations depend heavily on the sale of broadcasting rights for much of their income and had challenged the extent to which games had to be shown more widely. But on Thursday the General Court in Luxembourg slapped down their arguments and ruled in favour of Belgium and the UK, which had included games organised by Fifa or Uefa on their lists of events they considered to be “of major importance” to society and so entitled to wider audiences.

New Rasmussen Poll Finds Modest Support for Restraint

A just-released Rasmussen survey finds that nearly half of all American voters would withdraw troops from Europe and Japan, but fewer than one in three favor leaving U.S. forces on the Korean peninsula. This portion of the survey is attracting most of the attention, but the survey as a whole reveals some modest public support for a strategy of restraint, one in which the U.S. military focuses primarily on defending U.S. security and core interests, and calls on other countries to play a larger role in their own defense.

For example, when asked “Should the U.S. military strategy be to focus narrowly on defending the United States and U.S. interests, or should the U.S. military strategy seek to maintain worldwide stability and peace?” a solid majority of likely voters (55 percent) agreed with the former, with just 34 percent wishing to be the world’s policeman. Other polls have shown even less support for the globo-cop role (e.g. here).

On this point, and the related one of allowing wealthy allies to defend themselves, I was able to drill down in the cross tabs a bit, and I found a few suprising areas of divergence between likely voters, former military, and self-identified members of the Tea Party movement.

There is some obvious overlap in the survey among these three groups (e.g. 30 percent of former military people self-identify as Tea Partiers, compared with just 18 percent of likely voters). Tea Partiers are more likely than LVs to agree with the statement U.S. military strategy should  “Focus narrowly on defending the United States and U.S. interests” (66 pct vs. 55 pct), but they are less likely to support removing U.S. troops from Europe (40 pct. vs. 49 pct). Also interesting, this is one of the few areas where the former military members agree more with LVs than Tea Partiers. Those who have served in the military align with TPers (within the margin of error, +/- 3 pct, 95 pct confidence interval) on the question of focusing on defending U.S. interests, but agree with LVs that we should withdraw troops from Europe.

One last point: these and other surveys (including an earlier Rasmussen poll) reveal a considerable gap between what the public believes, and what is actually true. For example, when presented with the true/false question “Most federal spending is spent on only three programs—Social Security, Medicare and national defense,” only 40 percent of respondents correctly answered “True” (38 percent said no, and 22 percent were unsure). A solid majority (65 percent) agreed that “the United States military [is] more powerful than any other nation’s military force,” but that still left a troubling 21 percent who disagreed, and another 14 percent whe were unsure.

That means, as I argued here last year, that those of us responsible for explaining public policy still have a lot of work to do.

America’s Number One! America’s Number One!…Oops, Never Mind

Sometimes it’s not a good idea to be at the top of a list. And now that Japan has announced a five-percentage point reduction in its corporate tax rate, the United States will have the dubious honor of imposing the developed world’s highest corporate tax rate. Here’s an excerpt from the report in the New York Times.

Japan will cut its corporate income tax rate by 5 percentage points in a bid to shore up its sluggish economy, Prime Minister Naoto Kan said here Monday evening. Companies have urged the government to lower the country’s effective corporate tax rate — which now stands at 40 percent, around the same rate as that in the United States — to stimulate investment in Japan and to encourage businesses to create more jobs. Lowering the corporate tax burden by 5 percentage points could increase Japan’s gross domestic product by 2.6 percentage points, or 14.4 trillion yen ($172 billion), over the next three years, according to estimates by Japan’s Trade Ministry. … In a survey of nearly 23,000 companies published this month by the credit research firm Teikoku Data Bank, more than 44 percent of respondents cited lower corporate taxes as a prerequisite to stronger economic growth in Japan. … A 5 percentage-point tax rate cut is unlikely to do much to solve Japan’s woes, however. An effective corporate tax rate of 35 percent would still be higher than South Korea’s 24 percent or Germany’s 29 percent, for example. … Meanwhile, the government is trying to offset lost tax revenue with tax increases elsewhere, which could blunt the effect of reduced corporate tax burdens.

I suspect the Japanese government’s estimate of $172 billion of additional output is overly generous. After all, the corporate tax rate in Japan will still be very high (the government originally was considering a bigger cut). And foolish Japanese politicians will probably raise taxes elsewhere. But there will be some additional growth since the corporate tax rate is an especially damaging way to collect revenue.

But I’m not losing sleep about Japan’s economic future. I hope they do well, of course, but my bigger concern is the American economy. The U.S. corporate tax rate of nearly 40 percent (including state corporate burdens) already is far too high, particularly since America adds to the competitive disadvantage of U.S.-domiciled firms by being one of the few nations to impose an extra layer of tax on foreign-source income. Japan’s proposed rate reduction, however,  means the high tax rate in America will be an even bigger hindrance to job creation.

It’s also worth noting that the average corporate tax rate in Europe has now dropped to less than 24 percent, so even welfare states have figured out that a high tax burden on business doesn’t make sense in a competitive global economy.

Sometimes you can fall farther behind if you stand still and everyone else moves forward. That’s a good description of what’s happening in the battle for a pro-growth corporate tax system. By doing nothing, America’s self-destructive corporate tax system is becoming, well, even more destructive.

American Taxpayers Should Not Bail Out the European Union

The fiscal disintegration of Europe is bad news, though I confess to a bit of malicious glee every time I read about welfare states such as Greece and Portugal getting to the point where they no longer have the ability to borrow enough money to finance their bloated public sectors (I have mixed feelings about Ireland since that nation at least has been a good example of low tax corporate tax rates, but I still think they should get punished for over-spending and bailouts). This I-told-you-so attitude is not very mature on my part, but one hopes that American politicians will learn the right lessons and something good will come from this mess.

I have not written much about the topic in recent months, in part because I don’t have much to add to my original post about this issue back in February. All the arguments I made then are still true, particularly about the moral hazard of bailouts and the economic damage of rewarding excessive government. So why bother repeating myself, particularly since this is an issue for Europeans to solve (or, as is their habit, to make worse)?

Unfortunately, it appears that all of us need to pay closer attention to this issue. The Obama Administration apparently thinks American taxpayers should subsidize European profligacy. Here’s a passage from a Reuters report about a potential bailout for Europe via the IMF.

The United States would be ready to support the extension of the European Financial Stability Facility via an extra commitment of money from the International Monetary Fund, a U.S. official told Reuters on Wednesday. “There are a lot of people talking about that. I think the European Commission has talked about that,” said the U.S. official, commenting on enlarging the 750 billion euro ($980 billion) EU/IMF European stability fund. “It is up to the Europeans. We will certainly support using the IMF in these circumstances.” “There are obviously some severe market problems,” said the official, speaking on condition of anonymity. “In May, it was Greece. This is Ireland and Portugal. If there is contagion that’s a huge problem for the global economy.”

This issue will be an interesting test for the GOP. I think it’s safe to say that the Tea Party movement didn’t elect Republicans so they could expand the culture of bailouts - especially if that means handouts for profligate European governments. Some people will argue that American taxpayers aren’t at risk because this would be a bailout from the IMF instead of the Treasury. But that’s an absurd and dishonest assertion. The United States is the largest “shareholder” in that international bureaucracy, and there’s no way the IMF can get more involved without American support.

In some sense, this is a corporatism vs. free markets battle for Republicans. Big banks and Wall Street often support bailouts since they like the idea of somebody else saving them from their bad investment decisions (though American financial institutions fortunately are not as exposed as their European counterparts). Economists despise bailouts, by contrast, since they subsidize risky choices and lead to the misallocation of capital.

Which side is John Boehner on? Or Mitch McConnell? And what about Mitt Romney, or Mike Huckabee?