Topic: International Economics and Development

Crumbling Bridges

A Wall Street Journal story today begins “America’s road to recovery may face a costly detour due to a fraying transportation network. One in nine of the country’s 607,380 bridges are structurally deficient …”

Newspapers have been full of such infrastructure stories in recent years. Pro-spending lobby groups such as ASCE have certainly pumped-up public concerns. America’s highways are becoming more congested, and we should have a discussion about how to finance needed expansions in capacity.

But the popular “crumbling bridges” theme is a bit of a scam. Federal Highway Administration (FHWA) data does show that one in nine bridges are structurally deficient. However, the WSJ doesn’t tell its readers that the share of bridges that are deficient has been steadily declining for two decades, as the chart below reveals.

Bridge1

In 2012, 66,749 of the nation’s 607,380 bridges were structurally deficient, which is 11 percent, or one in nine, as the WSJ reports. But that’s down from 124,072 out of 572,629 bridges, or 22 percent in 1992, according to FHWA.

The general thrust of the WSJ story is correct that having an efficient transportation system aids economic growth. But falling down bridges isn’t the central problem, and hiking gas taxes and boosting federal spending isn’t the solution. Instead, we can spur growth and improve the efficiency of America’s infrastructure by moving as much of it as we can to the private sector.

Public TV to Air Documentary on Economic Freedom

It’s been more than a quarter century since the Fraser Institute set out to define and measure the concept of economic freedom, a project that culminated in the annual publication of the Economic Freedom of the World index (co-published in the United States by Cato). Since then, we’ve learned a tremendous amount about the contribution of economic freedom to human progress, there’s been an explosion of scholarly literature on the subject, and the term is now commonly used by politicians and international institutions alike.

A new documentary—Economic Freedom in Action: Changing Lives— will air this fall on public television stations and look at how the rise in economic freedom has transformed the lives of hundreds of millions of people around the world. See a trailer of the film below. Join us to see a screening of part of the documentary at a Cato forum on October 16 featuring the Fraser Institute’s founder and former executive director, Michael Walker, and Cato senior fellow Johan Norberg.

Syrian Pound Soars, Iran’s Single Digit Inflation, and Other Troubled Currencies Project Updates

Syria: On September 27th, the United Nations Security Council unanimously adopted a resolution outlining the details of the turn over and dismantlement of Syria’s chemical weapons. Syria’s president, Bashar al-Assad, has stated that his government will abide by last week’s UN resolution calling for the country’s chemical weapons to be destroyed. 

It appears that this news was well received by the people of Syria. The black-market exchange rate for the Syrian pound (SYP) has dropped from 206 per U.S. dollar on September 25th to 168 on September 30th. That’s a whopping 22.6% appreciation in the pound against the dollar. Currently, the implied annual inflation rate in Syria sits at 133 percent, down from a rate of 185 percent on September 25th.

Iran: Since President Rouhani took office, Iranian expectations about the nation’s economy have turned positive. Over the past month we have seen a significant decrease in the volatility of the Iranian rial on the black market. This trend of stability has continued into this week, as President Rouhani’s trip to the UN has raised hopes of constructive cooperation with the West. In consequence, the rial has remained virtually unchanged on the black market, moving from 30,500 per U.S. dollar on September 25th to 30,200 on September 30th. The implied inflation rate in Iran as of September 30th stands at 8%, down from 23% on September 25th.

Venezuela: While the crises in the Middle East are easing, the troubles in Venezuela are far from over. The black market exchange rate for the Venezuelan bolivar has fallen from 44.03 per U.S. dollar on September 24th to 40.92 on September 30th. This represents an appreciation of 7.6% over the last week.  The implied annual inflation rate as of September 30th sits at 255%, down from a local high of 292% on September 17th. The ConocoPhillips dispute, a massive blackout, and worsening shortages caused by price controls have ravaged the Venezuelans’ confidence in the bolivar over the month of September.

Although the bolivar has rebounded modestly in recent weeks, this simply indicates that the economic outlook in Venezuela is only slightly less miserable than it was in mid-September. The economy is still on a slippery slope and economic expectations continue to be weighed down by the fragile political atmosphere, worsening shortages, and the ever-present specter of political violence. An inflation rate of 255% is nothing to celebrate.

Argentina: The black market exchange rate for the Argentine peso has held steady at around 9.5 per U.S. dollar since September 25th, with a 9.55 exchange rate on September 30th. That represents a 2.9% decrease in the value of the currency from the September 22nd rate of 9.27. The implied annual inflation rate as of September 30th sits at 54%, a decrease from the rate of 49% on September 22nd.

Egypt: The black market rate for the Egyptian pound has held steady at around 7.1 per U.S. dollar since September 25th, roughly the same level as the official exchange rate. This indicates that, for the time being, the military has brought some semblance of stability to the Egyptian economy. As of September 30th, the black market exchange rate was 7.12. The implied annual inflation rate as of September 30th sits at 19%.

For up-to-date information on these countries and their troubled currencies, see the Troubled Currencies Project.

Rouhani Delivers Lower Inflation, and other Troubled Currencies Project Updates

Iran: Prior to Hassan Rouhani’s election as Iran’s new president in June, the black-market Iranian rial to U.S dollar (IRR/USD) exchange rate stood at 36150, implying an annual inflation rate of 109 percent (June 15th 2013). Since Rouhani took office, Iranian expectations about the economy have turned positive, or at least less negative, and the black-market IRR/USD exchange rate has strengthened to 29200. In consequence, the implied annual inflation rate has fallen like a stone, and currently sits at 20 percent. That’s even lower than the most recent official annual inflation rate of 35.1 percent. (August 2013).

Rouhani has stated that one of his top priorities is to set the Iranian economy right. So far, it appears the new president has delivered the goods.

Venezuela: September got off to a rocky start in Venezuela. On September 4th, the World Bank’s International Center for the Settlement of Investments Disputes announced that Venezuela had illegally expropriated ConocoPhillips’s multi-billion dollar crude oil projects. This coincided with a massive blackout that left half the country without power. To top it off, price controls have led to worsening shortages, with the government announcing on September 13th that the shortage index had hit a whopping 20 percent for the month of August. All of this bad news is reflected in Venezuelan’s economic expectations, as measured by the black-market exchange rate for the Venezuelan bolivar (VEF).

From beginning of the month through September 17th the VEF/USD exchange rate depreciated by 16.3 percent, from 37.32 to 44.59. In consequence, the implied annual inflation rate rose from 230 percent to a high of 292 percent.

Things took a turn for the positive on September 18th, when Venezuela and China agreed to a $14 billion investment package, which includes joint venture to develop the Junin 10 bloc of the Orinoco Oil Belt, as well as investments in mining, transportation and agricultural projects in Venezuela. In consequence, the black-market VEF/USD exchange rate has fallen to 44.03, yielding an annual implied inflation rate of 261 percent.

Argentina: Despite some recent good economic news, Argentineans still appear to be skeptical about their economy’s future. On Friday, September 20, Argentina announced a strong 8.3 percent year-over-year growth rate for Q2. One would think this strong performance would have improved Argentinean’s expectations for the economy, as measured by changes in the peso’s black-market U.S. dollar exchange rate. But, the black-market exchange rate has held steady in the days since the announcement. The current black-market ARS/USD exchange rate sits 9.43, yielding an implied annual inflation rate of 50 percent. It appears that concerns of ongoing inflation troubles are still weighing heavy on the minds of Argentineans.

Egypt: Since the Egyptian military ousted Mohammed Morsi on July 3rd, the Egyptian pound’s (EGP) official and black-market U.S. dollar exchange rates have converged. Currently, the black-market rate sits at 7.10 EGP/USD – very close to the official exchange rate of 6.89 EGP/USD. These rates have been stable for the past month.

Prior to the military takeover, the black-market exchange rate sat at 7.6 EGP/USD. Since Morsi’s ouster, the pound has appreciated by 7 percent, to 7.10 EGP/USD. This yields a current implied annual inflation rate of 18 percent, down from 28 percent in the final days of the Morsi government.

Yes, it appears the Egyptian generals have delivered some semblance of stability on the economic front. Indeed, the black market for foreign exchange has all but disappeared.

Syria: As President Obama heads to the United Nations General Assembly to iron out the terms of a tentative Syrian chemical weapons deal, the black-market exchange rate for the Syrian pound (SYP) continues to hold steady at 206. Currently, the implied annual inflation rate in Syria sits at 189 percent. This is down from a high of 291 percent on the 28th of August, when Secretary of State John Kerry kicked off the United States’ abortive march to war.


For up-to-date information on these countries and their troubled currencies, see the Troubled Currencies Project.

 

The Ban on Muslim Brotherhood Will Backfire

With today’s ruling by the ‘Cairo Court for Urgent Matters’, banning the activities of the Muslim Brotherhood and ordering a confiscation of its assets by the government, the Egyptian regime is taking the crackdown against its political opponents to the next level. While it is unclear what the decision means for the future of the Brotherhood’s political arm, the Freedom and Justice Party, the government has committed itself to disbanding an organization which counts between 300,000 and 1 million members and which has been in existence since 1928.

That is unlikely to work. The Brotherhood was banned during Nasser’s presidency. In Syria, Brotherhood membership was a capital offence between 1980 and 2011. If anything, these and similar bans strengthened the organization’s narrative of victimhood and enabled it to reemerge strengthened and relying on broader popular support. In a recent paper, I show that the electoral success of the Muslim Brotherhood in the aftermath of Arab Spring was foreseeable and resulted from the fact that the group had been actively involved in the provision of social services, particularly to poorer segments of the Egyptian population, and possessed a well-recognized brand name. Over time, this electoral advantage would have dissipated, particularly as the Brethren proved to be rather inept policymakers.

Alas, with the crackdown on the organization, the current leadership of the country seems to be determined to drive the organization underground and to radicalize it. At this moment, Alan Krueger’s characterization of terrorism sounds as an ominous warning of what is to come unless the Egyptian military relinquishes its grip to power:

[t]errorists and their organizations seek to make a political statement; terrorists arise when there are severe political grievances with no alternatives for pursing those grievances.

Focus on Employment, Not Citizenship, to Reform Immigration

Immigration reform, once the top priority in Washington coming out of the 2012 presidential election, has stalled. This is unfortunate because the current system is a shambles. Some 11 million people live in the U.S. illegally. But attempting to fence off the country is no answer. 

Immigration benefits the United States. Many immigrants are natural entrepreneurs. Well-educated foreign workers are inventive and productive. Expanded work forces increase economic specialization and business flexibility. 

Immigration may depress some wages in the short-term; however, the work force is not fixed. Immigration makes a more innovative and productive economy, with new and better jobs. 

Nevertheless, the public is skeptical of immigration. To move forward, Congress should separate employment from citizenship. Legislators should expand work visas for individuals. Immigration auctions or tariffs would be innovative alternatives. Congress also should regularize the status of those currently in America illegally by granting residence and employment permits. However, Congress should set aside debate over turning illegal aliens into citizens. In fact, Rep. Bob Goodlatte (R-Va.), chairman of the House Judiciary Committee, asked: “Are there options that we should consider between the extremes of mass deportation and a pathway to citizenship?”

Some immigration opponents complain that this approach would reward illegal behavior. However, the undocumented broke the law to improve their lives and the lives of their families, not to hurt others. Their presence also benefits the rest of us. Moreover, most Americans won’t support rounding up millions of people who have become part of U.S. society. Additional employment controls and sanctions would undermine domestic liberties. 

Immigration supporters are also critical of this approach. A blogger harkened back to the slave era, writing that the immigrants’ “status would be akin to the freedmen who were denied citizenship under the notorious Supreme Court decision in Dred Scott.”  Cristina Jimenez of the organization United We Dream called the idea “un-American.” 

However, in Dred Scott the court ruled that people who had been kidnapped and brought to America were not citizens. In contrast, today’s undocumented came voluntarily without any expectation of becoming citizens. Moreover, there is nothing “un-American” about not allowing those who entered the country illegally to jump the citizenship queue. 

A Rare Sign of Fiscal Sanity in France

We have an amazing man-bites-dog story today.

Let’s begin with some background information. A member of the European Commission recently warned that:

“Tax increases imposed by the Socialist-led government in France have reached a “fatal level”…[and] that a series of tax hikes since the Socialists took power 14 months ago – including €33bn in new taxes this year – threatens to “destroy growth and handicap the creation of jobs”.

Given the pervasive statism of the European Commission, that was a remarkable admission.

But the Commissioner who issued that warning, Olli Rehn, is Finnish, so French politicians presumably don’t listen to his advice any more than they listen to the thoughtful, well-meaning, and generous suggestions I make.

Indeed, based on the actions of the current President and the former President, we can say with great confidence that French politicians compete over who can pursue the most misguided policies.

But maybe, just maybe, there are some people inside France who realize the house of cards is in danger of collapse.

Here are some excerpts from a story I never thought I would read. At least one senior official in France has woken up to the dangers of ever-rising taxes and an always-growing burden of government spending.

France’s state auditor urged the government Tuesday to redouble efforts to limit spending rather than increases taxes… The head of the state auditor, Didier Migaud, said the interruption in deficit reduction stemmed primarily from lower-than-expected tax revenue, due to the weak economy. Yet, he said “the spiraling welfare debt was particularly abnormal and particularly dangerous.” During his first year in power, President François Hollande relied on large tax increases to plug holes in public finances, including social programs such as pensions, unemployment benefits and health care. But economic stagnation in 2012, coupled with a mild recession at the start of 2013, has waylaid the plan, while both companies and households are crying foul over what some have called “a tax overdose.” Mr. Migaud added his voice, saying: “The strategy of fixing the system by collecting new revenue is reaching its limits.”

Before any further analysis, I have to make one correction to the story. Hollande’s plan was not “waylaid” by a recession. Instead, his policies doubtlessly helped cause a recession. You don’t impose huge tax hikes on productive behavior without some sort of negative impact on economic performance.

So the “holes in public finances” are at least partially a result of the Laffer Curve. As I’ve repeatedly warned, higher tax rates rarely - if ever - collect as much money as politicians expect.

Returning to the specific case of France, the fiscal variable that should set off the most alarm bells is that the burden of government spending has soared to 57 percent of GDP. And based on projections from the BIS, OECD, and IMF, that number is going to get even worse in the future.

This is the data that presumably has convinced Monsieur Migaud that France is approaching the point of no return on taxes and spending.

Interestingly, the French people may be ahead of their politicians. Polling data from 2010 and 2013 show that ordinary people very much understand the need to limit the size and scope of government.

Heck, a majority of French people have said they would be interested in escaping to the United States if they had the opportunity. And successful people already have been leaving the country because of punitive tax rates.

But I’m not sure I believe the aforementioned polls. If the French people genuinely have sound views, why do they keep electing bad politicians? Of course, the same thing could be said about the United States, so perhaps I shouldn’t throw stones in my glass house.

P.S. My favorite example of government running amok in France is the law threatening three years in jail if you say your husband is a fat slob or if you accuse your wife of being a nag.

P.P.S. The most vile French official may be the current Prime Minister, who actually had the gall to complain that some of his intended victims weren’t quietly entering the slaughterhouse.

P.P.P.S. Just in case you think I’m exaggerating about France being a fiscal hellhole, more than 8,000 households last year were subjected to a tax burden of more than 100 percent . Obama must be very envious.