Tag: subsidies

Trade Problems May Not Always Call for Trade Answers

The federal system of government in the United States has the invaluable consequence of enabling policy experimentation.  If a state legislature is considering adopting a particular policy, it can often look at the experiences of other states that have tried that policy before.  A recent study from the Milken Institute in California tries to take advantage of such potential comparisons to offer ways that California could increase its dwindling share of U.S. exports.  It is a valiant effort, but California’s decline is not the consequence of inadequate trade policy and no amount of export promotion is going to fix it.

The study begins by comparing California’s decline in export share to the dramatic rise in cross-border trade originating from Texas, the nation’s leader in goods exports. After using Texas’s success as an example of how California is lagging behind, the study decides not to use Texas as a model for reform and instead focuses on other states that have used export promotion (subsidy) agencies as case studies for how California can improve its bureaucracy to reverse the current trend.

If the success of Texas is what California should seek, then why not look at Texas as a model for reform? The study says that Texas is “unique” because it 1) has no export promotion agency, 2) has a low cost of doing business, and 3) has benefited from increased trade with the growing economy of Mexico by virtue of NAFTA-enabled integration. These differences seem to point to clear policy choices: don’t worry about export promotion (easy), improve your state’s business environment, and be close to Mexico (done!).

If it becomes more business-friendly, your state will have more business, export-oriented business included.  Since we’re looking at Texas as a model, may I suggest improving the business environment by lowering taxes and reducing regulation.

Now, I realize that the Overton Window for politically feasible reform proposals in California may not include lowering the cost of doing business. It makes a lot of sense for the authors of the study to point out the root causes of different outcomes in Texas and California but still seek a different solution more palatable to Californian sensibilities. I think their specific proposals for enhancing the capacity and quality of the export promotion process are insightful and well-supported.

There is a larger lesson in all of this for national economic policy. Increasing exports through the National Export Initiative has been a major goal of the Obama Administration’s economic recovery plan, and subsidizing loans through the Export-Import Bank has been a primary tool in that endeavor. But the people of the United States don’t need more bureaucracy to engage in more trade. They need policies that remove artificial barriers and decrease the cost of doing business—international and otherwise.

Mitt Romney’s Contrived Trade War

The Obama administration filed a formal complaint with the World Trade Organization on Monday alleging that the Chinese government is bestowing various prohibited subsidies upon Chinese automobile and auto parts producers to the tune of $1 billion and that Beijing is, accordingly, in violation of its commitments under the WTO Agreement on Subsidies and Countervailing Measures.

There are reasons to shake one’s head at this move, including the apparent hypocrisy it reveals of an administration that spins the $85 billion of subsidies it heaped upon two U.S. car companies and the United Autoworkers union as its chief economic accomplishment. Of course that figure doesn’t even include the $12-$14 billion in unorthodox tax breaks granted to GM under the bankruptcy terms; $17 billion in funds committed from the TARP to GM’s former financial arm GMAC (which received taxpayer support to facilitate GM auto sales); GM’s portion of the $25 billion Energy Department slush fund to underwrite research and development in green auto technology; and the $7,500 tax credit granted for every new purchase of a Chevy Volt, and more. (Full story here.)

To complain about $1 billion of Chinese subsidies is – shall we say – a bit rich.

Moreover, the filing of the WTO case reveals some of the unseemly perquisites of incumbency. A large concentration of the beneficiaries of the GM bailout resides in Ohio, a state that has had the administration’s strategic attention since its reelection campaign began in November 2008. But in case that largesse wasn’t enough to secure their support in November 2012, a large concentration of the beneficiaries of a successful U.S. WTO complaint also resides in Ohio, which is where – by Jove – the president was speaking when word of the WTO complaint became public.

It is all exasperating, no doubt.

But the bigger and more disconcerting story in all of this is the apparent ascendancy of economic nationalism within the GOP. Romney’s persistence in trying to brand himself the “most protectionist” or “biggest China basher” in the presidential race sort of forced Obama to bring the WTO case – or at least expedited the timetable. Have you seen the Romney ads? Have you read the shrill RNC taunts that cite the widely-discredited, union-funded Economic Policy Institute’s figures on job losses caused by trade with China? Strange bedfellows, indeed!

It was once the case – not too long ago – that Republican candidates argued in support of trade and the freedom of Americans to partake of the opportunities afforded by the global economy. But things, apparently, have changed. The nationalistic strains within the Republican Party have strengthened since 2009. I explained why this was happening in this 2010 Cato paper, which is excerpted below:

Frictions in the U.S.-China relationship are nothing new, but they have intensified in recent months. Tensions that were managed adeptly in the past are multiplying, and the tenor of official dialogue and public discourse has become more strident. Lately, the media have spilled lots of ink over the proposition that China has thrived at U.S. expense for too long, and that China’s growing assertiveness signals an urgent need for aggressive U.S. policy changes. Once-respected demarcations between geopolitical and economic aspects of the relationship have been blurred. In fact, economic frictions are now more likely to be cast in the context of our geopolitical differences, which often serves to overstate the challenges and obscure the solutions.

A sign of the times is a recent commentary by Washington Post columnist Robert J. Samuelson, in which he declares: “China’s worldview threatens America’s geopolitical and economic interests.” That statement would seem to support a course of action very different from the course implied by the same columnist 18 months earlier, when he wrote, “Globalization means interdependence; major nations ignore that at their peril.” That change of heart appears to be contagious.

Understandably, there is angst among the U.S. public, who hear frequently that China will soon surpass the United States in one economic superlative after another. Some worry that China’s rise will impair America’s capacity to fulfill or pursue its traditional geopolitical objectives. And those concerns are magnified by a media that cannot resist tempting the impulses of U.S. nationalism. Woven into stories about China’s frantic pace of development are reminders that the Chinese have not forgotten their two-century slumber—a period of humiliation and exploitation by foreign powers.

A recent National Journal cover story describing areas of bilateral policy contention—which the article laments as “frustrating” the fact that U.S. experts see “few alternatives to continued engagement” —features three menacing photographs of Chinese military formations, one picture of North Korean leader Kim Jong Il flanked by members of the Chinese military, and one photo of the Chinese foreign minister shaking hands with Iranian President Mahmoud Ahmadinejad.

Subtly, and sometimes not, the media and politicians are brandishing the image of an adversarial China. In Chinese reluctance to oblige U.S. policy wishes, we are told that China selfishly follows a “China-First” policy. In the increasing willingness of Chinese officials to criticize U.S. policies, we are told of a new “triumphalism” in China. In the reportedly shabby treatment of President Obama by his Chinese hosts on his recent trip to Beijing, we are told that the “Chinese have an innate sense of superiority.” But indignation among media and politicians over China’s aversion to saying “How high?” when the U.S. government says “Jump!” is not a persuasive argument for a more provocative posture.

China is a sovereign nation. Its government, like the U.S. government, pursues policies that it believes to be in its own interests (although those policies—with respect to both governments—are not always in the best interests of their people). Realists understand that objectives of the U.S. and Chinese governments will not always be the same, thus U.S. and Chinese policies will not always be congruous. Accentuating and cultivating the areas of agreement, while resolving or minimizing the differences, is the essence of diplomacy and statecraft. These tactics must continue to underpin a U.S. policy of engagement with China.

In this campaign, the RNC seems to be fighting to position itself to the protectionist side of Obama, daring the president to take action – a dare the president has accepted, inflating his political credit in places like Ohio. In response to Governor Romney’s assertion that the president had been soft on China and that he, Romney, would label China a currency manipulator on his first day in office, Obama created the Interagency Trade Enforcement Center, which resonated politically with the target audience. While the challenger blathers about the president’s alleged fecklessness in dealing with China, the president responds by bringing new WTO cases against Beijing. The most recent complaint, relative to the strident tack Mitt Romney is advocating, is the more responsible, more pro-market course of action. If Romney is to be believed, his trade actions would have far worse consequences for the economy.

Instead of focusing on the real sources of economic stagnation in the United States – including the uncertain business climate inspired by the bailouts, the proliferation of costly and superfluous new environmental, health, and financial regulations, a tax code that is in constant flux, frivolous torts, an education monopoly that fails to produce enough talent backstopped by an immigration system that chases it away – Mitt Romney has chosen to blame America’s woes on China. THAT is the message the Republican presidential candidate, with the full backing of the RNC, brings to the voters in Ohio, whose fortunes are increasingly tied to America’s engagement in the global economy. As of July, Ohio’s unemployment rate was 7.2 percent, more than one full percentage point lower than the U.S. rate of 8.3%. Ohio’s economy is growing on account of trade – particularly with China, the state’s third largest market and destination of $2.7 billion worth of Ohio’s output in 2011. Just look at this bar chart that depicts the importance of China to Ohio, and conversely, the costs of a real bilateral trade war.

Governor Romney should ditch his trade warrior schtick pronto, and start explaining to the electorate how pro-trade policies – including the freedom of corporations to invest abroad (to offshore a la Bain Capital)– help enlarge the economic pie. Puffing out the chest to appear the biggest protectionist in the race is bad economics and bad politics.

Enron: Dependent on Government

A new piece at the Library of Economics and Liberty written by Robert J. Bradley is a timely reminder that it’s often government policies that fosters bad corporate behavior—not the “free market” as the left likes to claim.

Bradley, a sixteen year employee of the now defunct Enron Corporation, demonstrates that the company was actually “a political colossus with a unique range of rent-seeking and subsidy-receiving operations.” Manipulating the tax code, pushing for self-serving government regulations, and grabbing taxpayer handouts were all key components of Enron’s energy empire. It’s not a stretch to suggest that in the absence of government, the Enron story never happens.

In my recent Cato paper on corporate welfare in the federal budget, I discuss the government subsidies that Enron received:

Enron Corporation is a poster child for the harm of business subsidies, particularly with regard to its disastrous foreign investments. Enron lobbied government officials to expand export subsidy programs, and it received billions of dollars in aid for its projects from the Export-Import Bank, the Overseas Private Investment Corporation, the U.S. Trade and Development Agency, the U.S. Maritime Administration, and other agencies. Enron received about $3.7 billion in financing through federal government agencies.

Business subsidies create damaging economic distortions. All those subsidies to Enron induced the firm to make exceptionally risky foreign investments. And the resulting losses were an important factor in the company’s implosion.

A 2010 Bloomberg investigation, which looked at the Ex-Im Bank, found that companies seeking financing aid from this agency had been paying the travel expenses of government employees on visits to projects under consideration. For instance, Exxon Mobil spent almost $100,000 on Ex-Im Bank employees responsible for helping the agency decide whether it should aid Exxon on a major gas project in Papua New Guinea. Eleven months later, the Ex-Im Bank approved $3 billion in financing for the venture.

Early in the Bush administration, high-level officials went to considerable lengths to help Enron on an investment in India that had gone bad. When the Washington Post reported this in 2002, the administration argued that it was simply trying to guard taxpayer interests in the more than $600 million in federal loans that had been given to Enron by Ex-Im and the Overseas Private Investment Corporation. However, the government should not be putting taxpayer money into such risky private schemes in the first place.

Obama and Daniels Team Up to ‘Shovel’ Subsidies

(Credit: Westgate @ Crane)

The Indianapolis Star recently profiled local boy makes good (handing out other people’s money) John Fernandez, the ex-Bloomington mayor and Obama fundraiser who now heads up the Economic Development Administration. A reference to an EDA taxpayer handout to a technology park in southern Indiana caught my eye:

Southwestern Indiana got a $6.7 million boost from the EDA last year to create a multi-county technology park to tap into the research related to the Crane Division, Naval Surface Warfare Center in Martin County. At the July groundbreaking for the park, Gov. Mitch Daniels called it a ‘long-awaited development that will serve as an economic catalyst for the region.’

Why would Republican governor Mitch “Red Menace” Daniels want to help the Obama administration score public relations points with Hoosiers? One reason is Daniels’s favorite corporate welfare apparatus, the Indiana Economic Development Corporation, also handed out money from state taxpayers for the technology park.

From a WestGate @ Crane Technology Park press release:

The Indiana Economic Development Corporation offered WestGate @ Crane Authority, Inc. up to $1 million from the Technology Development Grand Fund as a local match to a U.S. Economic Development Administration grant commitment of $6.6 million.

So what is this technology park that U.S. and Indiana taxpayers are being forced to subsidize?

Qualified as a state Certified Technology Park (CTP) by the Indiana Economic Development Corporation (IEDC), the WestGate @ Crane Technology Park represents a natural marketplace for defense contractors currently providing technical support, and research and development services to the Naval Surface Warfare Center, Crane Division in southern Indiana. Operations of the $2 billion URS corporation, and SAIC, the nation’s 7th largest defense contractor, in addition to ITT, CACI, CSC, CLEC, MLE, Raydar & Associates, Novonics, NAVMAR, Stimulus Engineering and Technical Services Corporation (TSC), already maintain operations in the park.

Great. A high-tech playground for defense contractors—an industry that has enjoyed a taxpayer windfall thanks to Uncle Sam’s ten years of warring on terror.

In a blistering op-ed, Indiana Policy Review editor Craig Ladwig calls Daniels “more of an accountant than an economist, more Beltway than Hoosier” and says that “although he claims to admire the classical liberal philosophy, you strain to see any sign of it in his governing.” As evidence, Ladwig cites Daniels’s record of supporting “crony capitalist ventures.”

Craig is correct, but it’s not just Mitch Daniels. Support in the nation’s statehouses for crony capitalism is ubiquitous. And key enablers of state business subsidies are the numerous federal “economic development” programs—like the Economic Development Administration—that policymakers in Washington use to coddle special interests in the name of “job creation.”

As the Obama-Daniels tag-team demonstrates, corporate welfare is a bipartisan affliction. Indeed, back in February, Rep. Michael Michaud (D-ME) offered an amendment to restore $80 million in funding for the EDA. The amendment passed with 145 votes from Republicans and 160 from Democrats.

New Video Shows the War on Poverty Is a Failure

The Center for Freedom and Prosperity has released another “Economics 101” video, and this one has a very powerful message about the federal government’s so-called War on Poverty.

As explained by Hadley Heath of the Independent Women’s Forum, the various income redistribution schemes being imposed by Washington are bad for taxpayers – and bad for poor people.

The video has a plethora of useful information, but the data on the poverty rate is particularly compelling. Prior to the War on Poverty, the United States was getting more prosperous with each passing year and there were dramatic reductions in the level of destitution.

But once the federal government got involved in the mid-1960s, the good news evaporated. Indeed, the poverty rate has basically stagnated for the past 40-plus years, usually hovering around 13 percent depending on economic conditions.

Another remarkable finding in the video is that poor people in America rarely suffer from material deprivation. Indeed, they have wide access to consumer goods that used to be considered luxuries - and they also have more housing space than the average European (and with Europe falling apart, the comparisons presumably will become even more noteworthy).

The most important message of the video, however, is that small government and economic freedom are the best answers for poverty. As Hadley explains, poor people can be liberated to live meaningful, self-reliant lives if we can reduce the heavy burden of the federal government.

Last but not least, the video doesn’t address every issue in great detail, and there are three additional points that should be added to any discussion of poverty.

  1. The biggest beneficiaries of the current system are the army of bureaucrats that receive very comfortable salaries administering various programs.
  2. The Obama Administration is looking to re-define poverty in a way that would expand the welfare state and increase the burden of redistribution programs.
  3. The welfare reform legislation of the 1990s was a small step in the right direction because it eliminated a federal entitlement and shifted responsibility back to the state level. This success story should be replicated for programs such as Medicaid.

This last point is worth emphasizing because it is also one of the core messages of the video. The federal government has done a terrible job dealing with poverty. The time has come to get Washington out of the racket of income redistribution.

The (Beginning of the) End of the Shameful U.S. Cotton Deal?

Heartening news from the Appropriations Committee yesterday: they voted to cut aid to farmers generally, and to make significant changes to an egregious cotton program. But first, some background.  You’ll recall the embarrassing deal made by the Obama administration last year to head off Brazil’s right to impede American exports in retaliation for WTO-illegal cotton support. The United States is, in other words, now sending almost $150m worth of “technical assistance” and “capacity building” funds to Brazil, just so we can continue to subsidize American cotton growers without penalty (so much for U.S. promotion of the rule of law in international commercial relations). Rep. Ron Kind (D-WI) tried to end that deal earlier this year, but to no avail. Big Ag’s friends in Congress argued, unfortunately successfully, that any changes to the cotton bribes should be dealt with in the context of the 2012 Farm Bill, and by the agriculture committees (good luck with that).

But yesterday, the Appropriations Committee approved by voice vote an amendment from Rep. Jeff Flake (R-AZ) to take the fiscal 2013 payment to Brazil from funds that would normally go to supporting U.S. cotton growers. According to an article [$] in the Congressional Quarterly, Rep. Flake argued that “American cotton growers should pay the bill since the United States was making the payment on their behalf.” Well played, sir.  Rep. Rosa DeLauro (D-CT) filed an amendment that would send the FY2012 cotton payment to the Women’s, Infants and Children nutrition program instead.

The Committee also voted to lower the income eligibility cap to $250,000 AGI.

The CQ article did contain this worrying footnote, however:

Support for the amendments may be tenuous — especially if lawmakers cannot hide behind the anonymity of a voice vote. After winning the voice vote in committee, Flake sought a roll call, prompting appropriators of both parties to suggest that he did not need the recorded vote. Flake took their advice and demurred.

 Leglislators are usually shy about publicizing their positions only when they think it could get them in political hot water, so let’s not uncork the champagne yet.

High-Speed Rail and Federalism

Florida Governor Rick Scott deserves a big round of applause for dealing a major setback to the Obama administration’s costly plan for a national system of high-speed rail. As Randal O’Toole explains, the administration needed Florida to keep the $2.4 billion it was awarded to build a high-speed Orlando-to-Tampa line in order to build “momentum” for its plan. Instead, Scott put the interests of his taxpayers first and told the administration “no thanks.”

That’s the good news.

The bad news is that the administration is going to dole the money back out to 22 passenger-rail projects in other states. Florida taxpayers were spared their state’s share of maintaining the line, but they’re still going to be forced to help foot the bill for passenger-rail projects in other states.

Here’s Randal’s summary:

Instead, the Department of Transportation gave nearly $1 billion of the $2.4 billion to Amtrak and states in the Northeast Corridor to replace worn out infrastructure and slightly speed up trains in that corridor, as well as connecting routes such as New Haven to Hartford and New York to Albany. Most of the rest of the money went to Midwestern states—Illinois, Iowa, Minnesota, Michigan, and Missouri—to buy new trains, improve stations, and do engineering studies of a few corridors such as the vital Minneapolis-to-Duluth corridor. Trains going an average of 57 mph instead of 52 mph are not going to inspire the public to spend $53 billion more on high-speed rail.

The administration did give California $300 million for its high-speed rail program. But, with that grant, the state still has only about 10 percent of the $65 billion estimated cost of a San Francisco-to-Los Angeles line, and there is no more money in the till. If the $300 million is ever spent, it will be for a 220-mph train to nowhere in California’s Central Valley.

Why should Floridians be taxed by the federal government to pay for passenger-rail in the northeast? If the states in the Northeast Corridor want to pick up the subsidy tab from the federal government, go for it. (I argue in a Cato essay on Amtrak that if the Northeast Corridor possesses the population density to support passenger-rail then it should just be privatized.)

I don’t know if taxpayers in Northeast Corridor would want to pick up the federal government’s share of the subsidies, but I’m pretty sure California taxpayers wouldn’t be interested in footing the entire $65 billion for their state’s high-speed boondoggle-in-the-works. As I’ve discussed before, the agitators for a national system of high-speed rail know this:

If California’s beleaguered taxpayers were asked to bear the full cost of financing HSR in their state, they would likely reject it. High-speed rail proponents know this, which is why they agitate to foist a big chunk of the burden onto federal taxpayers. The proponents pretend that HSR rail is in “the national interest,” but as a Cato essay on high-speed rail explains, “high-speed rail would not likely capture more than about 1 percent of the nation’s market for passenger travel.”

According to the Wall Street Journal, congressional Republicans aren’t happy that the administration is taking Florida’s money and spreading it around the country:

Monday’s announcement drew criticism from House Republican leaders, who questioned both the decision to divide the money into nearly two-dozen grants around the country—instead of concentrating it into fewer major projects—and the fact that many of the projects will benefit Amtrak, the federally subsidized passenger-rail operator.

I heartily agree with the Amtrak complaint, but I’m not sure why as a federal taxpayer I should feel better about instead “concentrating [the money] into fewer major projects.” Subsidizing passenger-rail is no more a proper role of the federal government than education or housing. Unfortunately, for all the criticisms of the Obama administrations and the constant talk about spending cuts, Republicans don’t appear to possess much more desire to limit the scope of the federal government’s activities than the Democrats.

See this Cato essay for more on fiscal federalism.