Topic: International Economics and Development

At Least He’s Good on Trade

My colleagues Gene Healy and Justin Logan catalogue some of Sen. John McCain’s less admirable policies below, but at the risk of being the skunk at the dinner party, today I have released a paper arguing that John McCain’s trade policy position is much preferable to that of either of the Democratic candidates.

Over his career in the Senate, McCain has been a consistent free trader, voting against increases in trade barriers 88 percent of the time, and against subsidy increases 80 percent. Senators Clinton and Obama, on the other hand, have only managed 31 (Clinton) and 36 (Obama) on tariffs and 14 (Clinton) and zero (Obama) on subsidies. (For all congresscritters’ trade votes, see here).

To his credit, Senator McCain has also avoided the easy and politically tempting practice of railing against trade deals on the campaign trail, including in Michigan where the political prize probably required it. Both the Democratic candidates, however, turned to an unseemly debate on who hated NAFTA the most in Ohio, and may be tempted to do so again while campaigning in Pennsylvania.

Expect the Democratic candidates’ rhetoric on trade policy to degenerate, by the way, as economic conditions worsen.

The World at 350 ppm Carbon Dioxide

According to James Hansen, the Paul Revere of global warming, the safe level for CO2 may be 350 ppm. Hansen is concerned that “ice sheet disintegration, vegetation migration, and GHG release from soils, tundra or ocean sediments, may begin to come into play on time scales as short as centuries or less.”  But currently the atmospheric concentration is 385 ppm. The 350 ppm level was reached twenty years ago in 1988, the same year that James Hansen sounded the alarm over global warming at a Congressional hearing.

Is the world better off today compared to 1988?

Let’s check:

  • Life expectancy in developing countries was 4-5 years lower in 1988 than it is today (62 years rather than the current 67 years). Even in the US, it increased from 74.9 years in 1988 to 77.8 years in 2004!
  • Compared to today, at least 15 more infants out of every 1,000 in developing countries died in 1988 before reaching their first birthdays. In industrialized countries, the infant mortality rate dropped from 9 to 5.
  • India’s per capita income (in constant dollars adjusted for purchasing power) has more than doubled since 1988. China’s has more than quadrupled. As a result, hundreds of millions are no longer living in absolute poverty today. Even the US’s per capita income has increased by 40 percent.
  • Food production per capita in developing countries has increased 36 percent since 1988, despite a population increase of 40% (that is, 1.5 billion more people). [What fraction of this was due to the increase in carbon dioxide in the atmosphere, and petroleum-based and greenhouse gas-emitting fertilizers, all of which stimulates crop growth?].

Much of these improvements are due to economic growth and agricultural activity that fueled the rise of CO2 concentrations beyond 350 ppm. Because of technological change, it is likely that a portion of these improvements would have occurred absent any economic growth (as pointed out in the book, The Improving State of the World ). But had CO2 concentrations been capped at 350 ppm, we would have to forgo many of the above improvements in the quality of life, and not only in the developing world.

But would we want to go back to the world of 1988 — or even 1998 for that matter?

If we can go back to 350 ppm without giving up the real and tangible advances in human well-being that have accrued since that “benchmark” was passed, I’d have nothing against that, but based on the precautionary principle, one needs a stronger reason than the speculative catastrophes that Hansen is concerned “may begin to come into play on time scales as short as centuries or less,” whatever that means.

Flat Tax Progress in Hungary and Poland

While most other East European nations have adopted pro-growth flat tax systems, Hungary and Poland are still burdened by class-warfare systems that penalize people for contributing more to economic performance. The Budapest Times, however, reports that Hungary’s small parties may combine to push through an 18 percent flat tax:

MDF leader Ibolya Dávid called for opposition parties to attend talks on 15 April to work out details of a bill to submit to parliament by May. The party wants to emulate regional peers such as Slovakia and Romania by introducing a flat 18% personal income tax to reduce a tax burden it called “unfairly high”. The Free Democrats (SZDSZ) and main opposition party Fidesz - along with its ally the Christian Democrats (KDNP) - have said in the past that they would favour a flat tax. …The MSZP has only 190 seats in the 386-seat parliament, meaning that the opposition parties could force through a flat tax bill by banding together. Hungary is ranked as having the second-highest tax burden for single people, behind Belgium, amongst the members of the Organisation for Economic Cooperation and Development (OECD). Many feel the high burden - made worse in 2006 when the government hiked taxes as part of its economic reforms - damages Hungary’s regional competitiveness.

Meanwhile, the Polish government already has promised to implement a flat tax, but a key official has suggested that the new system may be implemented in 2009 rather than in 2010 or 2011 as originally planned. Because of its size and geography, Poland’s shift to a flat tax would be a momentous development and could sharply increase the pressure for pro-growth reforms in Old Europe:

According to Zbigniew Chlebowski, head of ruling Civic Platform’s (PO) parliamentary club, there is a possibility of introducing a flat tax rate as early as 2009. Chelbowski said that Prime Minister Tusk supports this option and is ready to fight President Kaczynski should he veto it. Chelbowski, however, did not give a concrete rate of the possible flat tax, but stressed that it shall surely be lower than 18 percent, because such a rate would be higher than the present tax rates. The final decision is to be made in July or August. The ruling Civic Platform had originally planned to introduce the new tax in 2010 or 2011.

Monetary Mercantilism

Chile’s Central Bank has finally decided to intervene in the local currency market in order to avoid a further appreciation of the peso against the U.S. dollar. In doing this, Chile joins a monetary policy trend that includes most Latin American countries, particularly Argentina, Bolivia, Peru, Colombia, Costa Rica and Guatemala.

Until recently, Chilean monetary policy was regarded as an example for all Latin America. Chile was mentioned frequently — especially by defenders of “monetary sovereignty” — as a model of how a Latin American country can have both a national currency and monetary stability.

However, alarm bells started ringing last year when inflation tripled to almost 8 percent, mainly because of an excessive increase in public spending by the government of Michelle Bachelet. Now, by deciding to abandon the historic policy of free floatation of the peso, Chile’s Central Bank further compromises this year inflation’s target.

Aiming for a cheaper peso will prove very expensive for Chileans.

OECD Tax Bureaucrat Admits Tax Competition Leads to Better Tax Policy

The Organization for Economic Cooperation and Development is infamous for its anti-tax competition campaign. Acting on behalf of uncompetitive nations such as France and Germany, the Paris-based bureaucracy even has a blacklist of low-tax jurisdictions and wants those “tax havens” to be subjected to financial protectionism. Yet a top OECD tax official just confessed that tax competition is driving tax policy in the right direction by pressuring governments to lower tax rates, as noted in this Thomson Financial News report on the Forbes website:

Chistopher Heady, head of the OECD’s centre for tax policy and administration said…whilst corporate tax rates have fallen in Europe, revenues have not. ‘It is likely that corporate tax revenue will eventually start falling,’ he said at the Brussels Tax Forum. He said that combined with decreasing tax income from high earners…this could lead to a combination of taxes which would be more beneficial for GDP growth. ‘The pressures of tax competition may lead to a tax mix that is better for growth,’ he said.

The OECD logic is remarkable. The bureaucrats admit that tax competition is producing positive results. Heck, an earlier OECD report admitted that “the ability to choose the location of economic activity offsets shortcomings in government budgeting processes, limiting a tendency to spend and tax excessively.” Yet rather than celebrate tax competition as a liberalizing force, the bureaucracy wants to sanction and penalize jurisdictions with pro-growth tax systems.

Shameless, Feckless Cowards

Further to yesterday’s post, rather than have a vote on the U.S.-Colombia Free Trade Agreement within 90 legislative days (as set out by law), House Speaker Nancy Pelosi announced that she will change House rules to avoid having a vote on the agreement before the November elections. It’s not yet clear to me how that can be done, but such action will speak volumes about the rudderless Democratic Party.

Apparently, the leadership hasn’t decided whether supporting the agreement—supporting export opportunities, encouraging and deepening business ties, promoting investment in Colombia, supporting an ally in a hostile region, and preserving the value of U.S. credibility—is worth more votes than union money can buy.

If members of Congress don’t want to be held accountable to the electorate, they shouldn’t seek office in the first place. But as we’ve seen time and again, it’s never about good policy. It’s only about holding onto power. No wonder Americans have such contempt for Congress.