Tag: the economy

Cato and the Bailouts: A Correction for the NY Times ‘Economix’ Blog

At the New York Times Economix blog, economist Nancy Folbre of the University of Massachusetts writes:

The libertarian Cato Institute often emphasizes the issue of corporate welfare, but it’s remained remarkably quiet so far on the topic of bailouts.

Excuse me?

Since she linked to one of our papers on corporate welfare, we assume she’s visited our site. How, then, could she get such an impression? Cato scholars have been deploring bailouts since last September. (Actually, since the Chrysler bailout of 1979, but we’ll skip forward to the recent avalanche of Bush-Obama bailouts.) Just recently, for instance, in – ahem – the New York Times, senior fellow William Poole implored, “Stop the Bailouts.” I wonder if our commentaries started with my blog post “Bailout Nation?” last September 8? Or maybe with Thomas Humphrey and Richard Timberlake’s “The Imperial Fed,” deploring the Federal Reserve’s help for Bear Stearns, on April 14 of last year?

Cato scholars appeared on more than 90 radio and television programs to criticize the bailouts during the last quarter of 2008. Here’s a video compilation of some of those appearances.

Folbre complains that some people seem more concerned about welfare – TANF, in the latest federal acronym – than about welfare for bankers – TARP. Google says that there are 138 references to TANF over the past 13 years or so on the Cato website, and 231 references to TARP in the past few months.

Now she has a legitimate point. Welfare for the rich is at least as bad as welfare for the poor. And as much as welfare for the poor has cost taxpayers, the new welfare for banks, insurance companies, mortgage companies, and automobile industries is costing us more. Samuel Brittan of the Financial Times has written that “reassignment,” an economic policy that changes individuals’ ranking in the hierarchy of incomes, is far more offensive than a policy of redistribution, which in his idealized vision would merely raise the incomes of the poorest members of society. By that standard, taxing some businesses and individuals to subsidize the high incomes of others is certainly offensive. Of course, Brittan underemphasized the harm done by welfare to people who become trapped in dependency. But there’s good reason to oppose both TANF and TARP, and Cato scholars have done both.

Lest the good work of Cato’s New Media Manager Chris Moody go under-utilized, here’s a probably incomplete guide to Cato scholars’ comments on the bailouts of the past few months. (Note that it doesn’t include blog posts, of which there have been many.) Quiet? I don’t think so:

Articles:

September 9, 2008, “Fannie/Freddie Bailout Baloney,” Gerald P. O’Driscoll Jr., New York Post.

September 18, 2008, “Why Bailouts Scare Stocks,” Alan Reynolds, New York Post.

September 17, 2008, “Bailout-Mania,” Jagadeesh Gokhale and Kent Smetters, Forbes.com.

October 1, 2008, “The Bailout’s Essential Brazenness,” Jay Cochran, Cato.org.

October 3, 2008, “The Big Bailout – What’s Next?” Warren Coats, Cato.org

October 13, 2008, “Should Taxpayers Fund the American Dream?,” Daniel J. Mitchell, Los Angeles Times.

October 20, 2008, “Is the Bailout Constitutional?,” Robert A. Levy, Legal Times.

November 11, 2008, “There’s Nothing Wrong with a “Big Two”,” Daniel J. Ikenson, New York Daily News.

November 21, 2008, “Don’t Bail Out the Big Three,” Daniel J. Ikenson, The American.

November 5, 2008, “Is it Constitutional?,” Richard W. Rahn, Washington Times.

December 14, 2008, “Consequences of the Bailout,” Richard W. Rahn, Washington Times.

December 5, 2008, “Bail Out Car Buyers?,” Daniel J. Ikenson, Los Angeles Times.

December 3, 2008, “Big Three Ask for Money — Again,” Daniel J. Ikenson, Los Angeles Times.

December 10, 2008, “Dissecting the Bailout Plan,” Alan Reynolds, Wall Street Journal.

January 14, 2009, “Bailing out the States,” Michael New, Washington Times.

February 28, 2009, “Stop the Bailouts,” William Poole, The New York Times.

Papers:

Bailout or Bankruptcy?,” by Jeffrey A. Miron (Cato Journal, Winter 2009)

Freddie Mac and Fannie Mae: An Exit Strategy for the Taxpayer,” by Arnold Kling (September 8, 2008)

Financial Crisis and Public Policy,” by Jagadeesh Gokhale (March 23, 2009)

Bright Lines and Bailouts: To Bail or Not To Bail, That Is the Question,” by Vern McKinley and Gary Gegenheimer (April 20, 2009)

On Television and Radio:

Dan Ikenson discusses auto bailout

September 30, 2008 Daniel J. Mitchell discusses the failed bailout on NPR Affiliate KPCC’s “The Patt Morrison Show”

September 29, 2008 Peter Van Doren discusses government bailouts on WTTG FOX 5.

September 29, 2008 Daniel J. Mitchell discusses the failed bailout on NPR Affiliate KPCC’s “The Patt Morrison Show”

September 26, 2008 Jagadeesh Gokhale discusses the bailout on BNN (CANADA)

September 26, 2008 Steve H. Hanke discusses the bailout on BBC Radio’s “Have Your Say”

September 25, 2008 Patrick Basham discusses the bailout on Radio America’s “The Michael Reagan Show”

September 24, 2008 William A. Niskanen discusses government bailouts on WUSA 9

September 24, 2008 William Poole discusses government bailouts on NPR DC Affiliate WAMU’s “The Diane Rehm Show”

September 23, 2008 William A. Niskanen discusses government bailouts on CNBC’s “Closing Bell”

September 23, 2008Bert Ely discusses government bailouts on WOR’s “The John Gambling Show”

September 22, 2008 Daniel J. Mitchell discusses government bailouts on the CBS “Early Show”

September 22, 2008 William Poole discusses government bailouts on Bloomberg Live.

September 22, 2008 William A. Niskanen discusses government bailouts of financial institutions on Bloomberg TV

September 22, 2008 Steve H. Hanke discusses government bailouts of financial institutions on Bloomberg Radio’s “On the Money”

September 19, 2008 Daniel J. Mitchell discusses government bailouts on Federal News Radio

September 18, 2008 Daniel J. Mitchell discusses the AIG bailout on KTAR’s “Ankarlo Mornings”

September 17, 2008 Daniel J. Mitchell discusses the AIG bailout on WTTG FOX 5

September 17, 2008 Daniel J. Mitchell discusses the AIG bailout on FOX’s “America’s Election HQ”

September 10, 2008 Daniel J. Mitchell discusses a proposed bailout for the auto industry on Marketplace Radio.

October 24, 2008 Gerald P. O’Driscoll Jr. discusses the fallout of the bailout on FOX Business Network’s “Cavuto”

October 15, 2008 Daniel J. Mitchell discusses the bailout on Federal News Radio

October 14, 2008 Daniel J. Mitchell discusses the financial crisis on CNN’s “American Morning”

October 14, 2008 Daniel J. Mitchell discusses the banking crisis on BBC World

October 14, 2008 Gerald P. O’Driscoll Jr. discusses the banking crisis on WBAL Radio. (Baltimore, MD)

October 13, 2008 Daniel J. Mitchell discusses the financial crisis on the FOX Business Network

October 9, 2008 Jim Powell discusses the economy on FOX Business

October 9, 2008 Daniel J. Mitchell discusses the current treasury plan on Reuters TV.

October 9, 2008 Daniel J. Mitchell discusses the bailout on the WIBA’s “Upfront w/Vicki McKenna” (Madison, WI)

October 2, 2008 Daniel J. Mitchell discusses the bailout bill on WRVA’s “Morning Show” (West Virginia)

October 1, 2008 Daniel J. Mitchell discusses the bailout plan on CNBC’s “On the Money.”

October 1, 2008 Daniel J. Mitchell discusses the bailout plan on CNBC’s “Power Lunch”

October 1, 2008 William Poole discusses the bailout on KMOX’s “The Charlie Brennan Show” (St. Louis, MO)

October 1, 2008 Daniel J. Mitchell discusses the failed bailout on WTOP Radio (Washington, D.C.)

Federal Tax Rates

Conveniently timed as Tax Day approaches, the Congressional Budget Office has released new data on the taxes paid by each income group. The CBO data includes federal income taxes, payroll taxes, and excise taxes, which amounts to almost the entire federal tax grab.

The CBO calculates tax rates by quintile from the lowest-earning to the highest earning households. These tax rates are simply total federal taxes paid by the group divided by total income earned by the group.

The chart makes clear that we have a very graduated or redistributive tax system, which some people call “progressive.” President Obama doesn’t think that the 25.8% rate paid by the top quintile is progressive enough, so he plans to penalize that group with an income tax rate hike.

Obama’s Tax Commission

The Obama administration has announced the formation of a task force to recommend major changes to the federal tax code. According to Congressional Quarterly today:

[Obama budget director Peter] Orszag said the task force will focus on three areas: tax simplification, reducing “corporate welfare” and shrinking the estimated $290 billion a year “tax gap” between taxes owed and taxes paid.

Isn’t Orzag missing something here? For goodness sakes, what about about economic growth? The economy is in the crapper, America has huge competitive challenges ahead with the rise of China, and the ratio of unproductive retirees to productive workers is soaring – it’s obvious that we need to reduce government hurdles to economic growth every way we can, and the high-rate federal tax code is one giant hurdle that policymakers need to start cutting. U.S. companies are not investing in China and elsewhere because our business tax code is too complex, but because our business tax rates are far higher than just about anywhere else.

America’s Problem: Too Little Government Lending!

Suffering through a massive housing bust spurred by the activities of utterly irresponsible government-sponsored entities such as Fannie Mae and Freddie Mac, may have led you to believe that the government should stop subsidizing the irresponsible and improvident.   Indeed, with government spending and lending off the charts, you might even have come to believe that Washington should cut back on its spending and lending. 

Silly you.

According to the Obama administration, more spending and lending is in order.  And by Fannie Mae and Freddie Mac.  Indeed, preparing the government for even more spending and lending apparently is the goal of current policy, which already includes a lot of spending and lending.

Christina Romer, Chairwoman of the Council of Economic Advisers, was interviewed by CNN’s John King on Sunday.  She helpfully sought to clear up the confusion exhibited by  those of us who thought the current economic crisis resulted from irresponsible spending and lending.  According to CNN:

KING: Mr. Liddy said he is going to break up AIG. Do we need to break up Fannie and Freddie?

ROMER: I think that is certainly going to be an issue going forward. I think it should be part of the overall financial regulatory reform, to figure out what is the best way.

Again, you know, anytime we have now got taxpayer money on the line, what we have an obligation to do is do it in a way that protects the American taxpayer. What is going to be the way that gets these institutions safe, gets them doing what we need them to do, which is lend like crazy, and just basically functioning again for the economy.

Of course. 

“Lend like crazy” really is the “just basically functioning” of Fannie and Freddie.  But it is beyond question that this behavior helped spark the current crisis.  Unfortunately, Dr. Romer does not explain exactly how we can make these fiscally irresponsible, money-losing organizations “safe.”  Nor does she enlighten us on how having Fannie and Freddie ”lend like crazy” will have better results than before. 

If this is the advice President Barack Obama is getting from what traditionally is one of the most economically responsible agencies in the executive branch, imagine what he is hearing elsewhere.  Buckle up, for the economic ride is likely to get much worse.

Events This Week

kennedy-bookMonday, March 23, 2009

BOOK FORUM- The Tie Goes to Freedom: Justice Anthony M. Kennedy on Liberty
12:00 PM (Luncheon to Follow)
The Cato Institute

Author Helen Knowles examines how Kennedy’s background as a law student and classroom teacher has influenced his judicial philosophy. The book begins by examining Kennedy’s judicial thought in the context of libertarian thought. Knowles does not call the justice a libertarian. Instead, in a sympathetic but not uncritical analysis, she uses libertarian philosophy, focusing on privacy, race, and speech cases, to draw out Kennedy’s views about limited government and individual liberty. Please join us for a discussion of Justice Kennedy’s “modest libertarianism,” with comments by one of the nation’s foremost constitutional scholars, Professor Randy Barnett.

Watch live online here.

CAPITOL HILL BRIEFING- Tax Havens Should Be Celebrated, Not Persecuted
12:00 PM (Lunch Included)
B-340 Rayburn House Office Building

Join Cato scholar Dan Mitchell and former member of the Cayman Islands Monetary Authority Richard Rahn to review the myths and realities about the role of tax havens in the global economy.


Tuesday, March 24, 2009

POLICY FORUM- Georgia’s Liberal Institutions In the Wake of War and the Global Economic Crisis
12:00 PM (Luncheon to Follow)
The Cato Institute

Featuring David Bakradze, Speaker of the Georgian Parliament; Kakha Bendukidze, Former Minister of the Economy and Reform Coordination, Georgia; and Andrei Illarionov, Senior Fellow, Center for Global Liberty and Prosperity, Cato Institute.

Register to attend or watch live online here.

Week in Review: Bailout Bonuses, Marijuana and Eminent Domain Abuse

House Approves 90 Percent ‘Bonus Tax’

Sparked by outrage over the bonus checks paid out to AIG executives, the House approved a measure Thursday that would impose a 90 percent tax on employee bonuses for companies that receive more than $5 billion in federal bailout funds.

Chris Edwards, Cato’s director of tax policy studies, says the outrage over AIG is misplaced:

While Congress has been busy with this particular inquisition, the Federal Reserve is moving ahead with a new plan to shower the economy with a massive $1.2 trillion cash infusion — an amount 7,200 times greater than the $165 million of AIG retention bonuses.

So members of Congress should be grabbing their pitchforks and heading down to the Fed building, not lynching AIG financial managers, most of whom were not the ones behind the company’s failures.

Cato executive vice president David Boaz says this type of selective taxation is a form of tyranny:

The rule of law requires that like people be treated alike and that people know what the law is so that they can plan their lives in accord with the law. In this case, a law is being passed to impose taxes on a particular, politically unpopular group. That is a tyrannical abuse of Congress’s powers.

On a related note,  Cato senior fellow Richard W. Rahn defended the use of tax havens in a recent Wall Street Journal op-ed, saying the practice will only become more prevalent as taxes increase in the United States:

U.S. companies are being forced to move elsewhere to remain internationally competitive because we have one of the world’s highest corporate tax rates. And many economists, including Nobel Laureate Robert Lucas, have argued that the single best thing we can do to improve economic performance and job creation is to eliminate multiple taxes on capital gains, interest and dividends. Income is already taxed once, before it is invested, whether here or abroad; taxing it a second time as a capital gain only discourages investment and growth.

Obama to Stop Raids on State Marijuana Distributors

Attorney General Eric Holder announced this week that the president would end federal raids on medical marijuana dispensaries that were common under the Bush administration.

It’s about time, says Tim Lynch, director of Cato’s Project on Criminal Justice:

The Bush administration’s scorched-earth approach to the enforcement of federal marijuana laws was a grotesque misallocation of law enforcement resources. The U.S. government has a limited number of law enforcement personnel, and when a unit is assigned to conduct surveillance on a California hospice, that unit is necessarily neglecting leads in other cases that possibly involve more violent criminal elements.

The Cato Institute hosted a forum Tuesday in which panelists debated the politics and science of medical marijuana. In a Cato daily podcast, Dr. Donald Abrams explains the promise of marijuana as medicine.

Cato Links

• A new video tells the troubling story of Susette Kelo, whose legal battle with the city of New London, Conn., brought about one of the most controversial Supreme Court rulings in many years. The court ruled that Kelo’s home and the homes of her neighbors could be taken by the government and given over to a private developer based on the mere prospect that the new use for her property could generate more tax revenue or jobs. As it happens, the space where Kelo’s house and others once stood is still an empty dustbowl generating zero economic impact for the town.

• Daniel J. Ikenson, associate director of Cato’s Center for Trade Policy Studies, explains why the recent news about increasing protectionism will be short-lived.

• Writing in the Huffington Post, Cato foreign plicy analyst Malou Innocent says Americans should ignore Dick Cheney’s recent attempt to burnish the Bush administration’s tarnished legacy.

• Reserve your spot at Cato University 2009: “Economic Crisis, War, and the Rise of the State.”

Too Much Hysteria about Trade

The World Bank issued a press release on Tuesday announcing the results of a study published March 2, which concludes that 17 of the 20 so-called G-20 countries have invoked at least some protectionist measures since pledging last November to avoid protectionism for at least one year.

Of course the Washington Post—which now specializes in printing run-of-the-mill stories about trade that rarely come close to justifying the sensational headlines, provocative subheads, or gripping leads — jumped all over the report as evidence that: “Trade Barriers Could Threaten Global Economy: World Bank Finds Protectionist Trend.”

Well, we all know that trade barriers do threaten the global economy — in times of economic expansion and contraction. But most of the measures cited in the report are not particularly spectacular or unusual from a trade perspective. For better or worse, most WTO member countries do have some latitude to raise trade barriers — sometimes unconditionally. But also, in any given year, governments institute policies that happen to have adverse affects on trade (even if the measure wasn’t intended to be protectionist).

Sometimes aggrieved interests in affected countries prevail upon their governments to protest or otherwise seek resolution. And more often than not, under those circumstances, resolution is achieved. But sometimes, a protectionist measure doesn’t even provoke any kind of protest. So, quantifying protectionist measures is one thing, but qualifying them is quite another, more important exercise, if one is interested in making judgments about protectionist trends.

The by-line of the WP story belongs to Anthony Faiola, who last week wrote story titled: “U.S. to Toughen Its Stance on Trade: New Policy Reflects Growing Dissatisfaction With Global Markets.” The lead paragraph of the story read:

The Obama administration is aggressively reworking U.S. trade policy to more strongly emphasize domestic and social issues, from the displacement of American workers to climate change.

But nothing in the story supports the assertion that anyone is “aggressively reworking U.S. trade policy.” Nothing supports the subhead that there is a growing dissatisfaction with global markets. Trade policy may be in for some changes simply because there’s a new sheriff in town, who is beholden (to what extent we shall see) to interests that oppose competition, but not because of dissatisfaction with global markets.

Certainly there is no evidence of dissatisfaction with global markets in the story, which was occasioned by Ron Kirk’s confirmation hearing as U.S. Trade Representative. Kirk testified—before a Senate that already has before it legislation to make enforcement, rather than negotiation, the priority of trade policy for the next couple years—that he intends to focus on enforcement, rather than negotiation. Well, duh! What else is a nominee whose fate depends on the blessing of the people who want more enforcement going to say? For the record, it’s been known for quite some time that the administration would focus on systematizing enforcement efforts, so that’s not really news.

What is newsworthy, however, are the parts of Ron Kirk’s testimony that went unrevealed in Faiola’s reporting. For example, Kirk said that “at an appropriate time and with proper congressional input and concerns addressed,” the administration would ask Congress to grant the president fast-track trade negotiating authority, which is a tool required only by presidents interested in negotiating and expanding trade.

Kirk also said that “We are mindful that the benefits of trade are diffuse, while its pain is often concentrated. It is within that context that we seek to restore and build new bipartisan support for a progressive trade agenda for America.”  Where, then, is the reporting that the Obama administration does not reject trade? Where is the headline that Obama seeks support for a progressive trade agenda? (Cato is publishing a paper next month by Scott Lincicome and me that explains how President Obama can help restore the pro-trade consensus, which includes a large section on the role the media has played in perpetuating destructive myths about trade and globalization).

Where is the reporting that Democrats in Congress are not all opposed to trade liberalization? Senate Finance Committee chairman Max Baucus told Kirk during the hearing: “I also want to find a way to begin consideration of the three pending trade agreements. We should start with Panama. That’s the agreement that’s most ready for action. And it’s the agreement that will win the greatest level of support.” Reporting on these matters would be newsworthy and constructive since so few in the media seem to be willing to publish stories that contravene conventional wisdom about trade.

The fact of the matter is that there isn’t any discernible trend toward protectionism in the United States or in the world right now. World leaders issue warnings about the consequences of protectionism, but there are not trends. There are incidences, but no trends. The ballyhooed World Bank paper cites 78 trade measures “proposed and/or implemented,” 66 of which involved trade restrictions, 47 of which eventually took effect. The long footnote associated with the presentation of these numbers (footnote 1) includes the following sentence: “It is important to note that it is difficult to distinguish the trade policy measures that are taken in response to the current crisis from measures that might have been taken anyway.”

Most of the 47 measures cited in the report happened in November and December of 2008, and Faiola already ranted about them in the WP on December 22, 2008:

Moving to shield battered domestic manufacturers from foreign imports, Indonesia is slapping restrictions on at least 500 products this month, demanding special licenses and new fees on imports. Russia is hiking tariffs on imported cars, poultry and pork. France is launching a state fund to protect French companies from foreign takeovers. Officials in Argentina and Brazil are seeking to raise tariffs on products from imported wine and textiles to leather goods and peaches, according to the World Trade Organization.

There may be nothing necessarily incorrect about the facts reported. But the tone and implications are possibly misleading. It is hard to accept the otherwise marginally significant facts without also accepting the provocative metaphors and sense of impending doom. Those actions have less antagonistic explanations and more benign interpretations.

For example, the actions of Indonesia, Argentina, and Brazil are consistent with their rights under the WTO agreements and will have a negligible collective impact on world trade. Russia is not even a member of the WTO and frequently behaves outside of international norms, so its actions have very limited representative value. And France has intervened to block foreign takeovers of French companies on other occasions this decade, so its actions are not particularly noteworthy.

At least the World Bank study is careful enough to report some of the positive trade developments and reasons for optimism that I discuss in more detail in this paper that Cato published last week. The World Bank notes 10 instances of trade liberalization around the world, which presumably includes Mexico’s admirable decision to reduce tariff rates on 70 percent of the products listed in its tariff schedule; Brazil’s decision to scrap tariffs on certain raw materials, components, capital goods; China’s decision to forego inclusion of Buy China provisions in its own massive spending bill; and the signing of new free trade agreements between Australia, New Zealand, and the ASEAN countries.

The WB study, like my paper, points out that the sturdy legal and institutional infrastructure of the GATT/WTO system combined with the fact of growing interdependence between countries that are now linked by transnational supply chains will likely diminish prospects for more consequential protectionist indulgences.

Of course Anthony Faiola is not the only person at The Washington Post guilty of hyping protectionist rhetoric and war metaphors in trade stories (and the WP is not the only media outlet engaging in hype). But one of the more egregious disconnects between headline/subhead/lead and the body of the story is found in an article on U.S.-China trade relations by Faiola’s colleague, Ariana Eunjung Cha (which is dissected and analyzed here).

World policymakers and policy watchers do need to be vigilant about ensuring that the world doesn’t descend into a protectionist abyss. They will have plenty of help from their domestic constituencies who rely on open trade in both directions. But some vigilance must be reserved for a media that, if left unchallenged, could provoke a trade war on its own. The more reporting there is about protectionist measures—even if it is just more reporting about the same protectionist measures (as today’s WP article is)—the more justified or compelled policymakers will eventually feel in turning to that poison. If a Congressman’s aide can point to articles that cite rising protectionism, even if the measures cited don’t justify the label of protectionism, it becomes less taboo to propose or support protectionist policies. That kind of fear mongering needs to be identified as such.

Yes, some countries are likely to dabble in some degree of protectionism—either with border measures or the more camouflaged regulatory variety. But the costs of that protectionism will quickly become apparent in a world where capital and talent flow to the jurisdictions with the fewest physical and administrative frictions.

Maybe that story will be written as the economy is on its way back up.