Topic: International Economics and Development

Jeff Flake, Take (Another) Bow!

Further to Tom’s post on Monday, our friend Jeff Flake (R–AZ) has written an excellent op-ed in today’s Wall Street Journal (subscription required) on the need for Republicans to apologize for betraying their small-government principles. Mr. Flake points to the farm bill, up for renewal next year, as the best opportunity to ” hew back to our [i.e., Republicans’] first principles.”

Yes, please. And may I propose the dairy policy, one of the most egregious examples of Soviet-style intervention, as one of the first to be reformed? Here’s a study I released yesterday on that very topic.

Bravo, Mr. Flake. I wish you the best of luck.

America’s Record Capital Surplus

The Commerce Department announced the latest U.S. trade deficit figures on Thursday. Although the monthly deficit for September was down from previous months, Americans are still on track to run a record merchandise trade deficit for all of 2006 that will reach nearly $900 billion by the end of the year.

The trade deficit numbers are sure to provide fodder for the incoming 110th Congress, which because of Tuesday’s election will probably take a more belligerent tone toward global trade than the previous, Republican-controlled Congress.

How worried should we be about the large and growing trade deficit? I’ve written extensively about what the trade deficit means, and what it doesn’t mean. (See here and here for details.) One unappreciated aspect of the trade deficit is the offsetting capital surplus that flows into the U.S. economy year after year.

Think about it for a moment: What on earth are the Chinese, Japanese, Canadians, and Mexicans doing with those hundreds of billions of dollars they earn each year exporting into the American market? They are not stuffing them in cookie jars and under mattresses. Almost all those dollars come back to the United States to buy U.S. assets — real estate, stocks, corporate and Treasury bonds, and bank deposits. In other words, they invest those dollars in America.

According to the basic rules of supply and demand, the surplus of global savings flowing into the United States each year to finance the trade deficit puts downward pressure on U.S. interest rates. A new study from the National Bureau of Economic Research, “International Capital Flows and U.S. Interest Rates,” by Francis Warnock and Veronica Warnock, confirms the positive effect of international capital flows on long-term U.S. interest rates. “Large foreign purchases of U.S. government bonds have contributed importantly to the low levels of U.S. interest rates observed over the past few years,” the authors concluded. Specifically, they found that current inflows of foreign capital reduce long-term U.S. interest rates by about 100 basis points, or one percentage point.

If you are among the tens of millions of American families that are paying off a home mortgage, you can thank the trade deficit and the offsetting foreign capital surplus for saving you thousands of dollars a year in interest payments.

Schumer-Bloomberg on Sarbanes-Oxley

Apparently I am not alone in the skepticism I expressed last week concerning an oped by Sen. Chuck Schumer (D-NY) and New York City mayor Michael Bloomberg, in which the duo decries the ill effects of regulation and frivolous lawsuits on New York’s financial services sector.  Four of the five letters to the editor in today’s Wall Street Journal expressed incredulity that these two pols could possibly expect to be taken seriously on the subject, given their otherwise steadfast support for government intrusion into our lives. 

I don’t know the newspaper business, but I have an inkling the WSJ ran their piece not so much for the good ideas it contained, but because it knew that the juxtaposition of those ideas with that by-line would elicit a spankfest from its readership that would lend itself to today’s title of the Letters to the Editor section: ”Schumer and Bloomberg Are For Less Regulation? Is This a Joke? (sorry, subscription required).

There was one letter, however, that actually defends Sarbanes-Oxley and the huge regulatory burdens imposed upon financial services firms operating in New York because it “gives our New York financial market a distinct competitive advantage [relative to London].”  Come again?  Yes, this letter argues that, ”while it is quite true that there are more regulatory bodies and higher fines in New York than overseas, that is only a temporary situation.”  The author argues not that those U.S. regulations will be relaxed, but that the regulatory burden on firms operating in the London market will be just as heavy in the future, and that New York firms are lucky to have a head start on the learning curve.

To put this all in context, the author of the pro-regulation letter is a vice president at Orchestria Corporation (a New York company), which is an entity that “helps companies achieve compliance and good governance through electronic communication control.”  Orchestria is in the business of helping it’s customers “to efficiently manage the burden of regulation and ensure compliance.”  In other words, Orchestria (and probably hundreds of companies like it) is the Frankenstein of Sarbanes-Oxley.  Although people like Schumer and Bloomberg are recognizing rhetorically the damage caused by regulatory overkill, righting the ship will be more difficult than just publishing an oped.

Sarbanes-Oxley has created a whole new industry that benefits from the status quo.  I wonder if they know any politicians who would enjoy their financial support.

Classical Liberal International Hootenanny

Several hundred friends of liberty have gathered in Guatemala City for the 2006 international meeting of the Mont Pelerin Society.  The Cato Institute is well represented, with numerous Cato authors, adjunct fellows and scholars, officers, board members, and sponsors in attendance.  Right now we’re being treated to a great talk on “Latin American Populism” by the brilliant and insightful Alvaro Vargas Llosa.  The papers are really of a high order and represent a serious intellectual effort by advocates of freedom and limited government to address new and emerging challenges to classical liberalism.  It won’t do just to repeat the same old themes; advocates of individual rights, toleration, free markets, free trade, and limited government have to address new issues and to engage our critics fairly and squarely.  I’m really pleased to see that happening here in Guatemala, among participants who have come from throughout the world, from Mexico and Mongolia, Germany and Ghana, India and Ireland, Jordan and Japan.  (I’ll post a few times on some of the papers and presentations, at least those that strike me as the most interesting.)

Schumer’s Epiphany?

I had to do a double take of the by-line of an unabashedly pro-capitalism op-ed (subscription required) in today’s Wall Street Journal. Yes, indeed, that was Sen. Chuck Schumer (D-NY) who co-authored a piece with New York City mayor Michael Bloomberg on the need to rethink stifling regulation of America’s financial services industries, and to consider tort reform.

Lamenting the relative decline of NYC as the world’s financial capital, Schumer and Bloomberg identify stifling regulation and frivolous law suits in the United States as major factors contributing to London’s and Hong Kong’s relative ascent as premiere locations for initial public offerings in recent years. Among the facts they cite is that in 2005, only one out of the top 24 IPO’s was registered in the United States, while four were registered in London. Moreover, “next year more money will be raised through IPOs in Hong Kong than in either London or New York.”

Schumer and Bloomberg cite regulatory costs that are 15 times higher in the United States than in Britain, an adversarial relationship between “tough cop” regulators and business in the United States, and the surging costs of securities-related class action suits as key factors driving business away from New York’s financial houses. The auditing expenses associated with the requirements of Sarbanes-Oxley are deemed to have grown “beyond anything Congress had anticipated.”

These are indeed serious problems, but it’s hard not to laugh about the irony. Schumer’s never met a regulation he didn’t like. He’s never been a friend of business. Of course he voted for Sarbanes-Oxley, along with all of his colleagues in the Senate, but he also led the charge against Kelloggs, General Mills, and the other cereal companies in the 1990s, when the price of Lucky Charms became unacceptably high to him. Just last summer, Schumer urged federal regulators to examine the behavior of oil companies to make sure they weren’t holding back production. And Schumer has been quick to ascend the podium to decry America’s growing trade deficit, urging, at times, government intervention to “correct” that growing problem.

That Schumer is suddenly opposed to stifling regulation and is saying things that are sure to upset the trial lawyers is welcome news. But it is likely just a fleeting flirtation with enlightenment. Let’s see what happens when someone points out to the Senator that New York’s capacity to attract IPOs, and the foreign investment that follows, is more a cause of the U.S. trade deficit than any “unfair trade” practices he assails. Which cause will he champion then?

The Upside of Nature’s Wrath

Fourteen months after Katrina devastated large swaths of the Gulf Coast, the Commerce Department has finally gotten around to promulgating new regulations that could relax antidumping and countervailing duty restrictions for a temporary period after the next national emergency.

In the weeks following Katrina, some observers (including this one) pointed to the absurdity of maintaining restrictions on foreign cement, lumber, and steel when the costs of those crucial building materials comprised a substantial chunk of the projected reconstruction bill.  Of course, trade restrictions raise the cost of production to U.S. businesses and the cost of living for U.S. citizens everyday.  But the effects of the hurricane provided an extreme example of the lunacy of trade restrictions, which is what was necessary to get the Commerce Department to acknowledge that its protectionist trade policies carry real costs.

The scope of circumstances that will trigger temporary lifting of trade remedy restraints prospectively is a bit unclear, but it requires the president to authorize Commerce “to permit the importation of supplies for use in ‘emergency relief work’ free of antidumping and countervailing duties.”  Considering that emergencies are typically met with a costly (and often mismanaged) federal response, a regulation that actually mandates loosening the federal noose is welcome news indeed.

Now, all we need is a president who will consider it “emergency relief work” to educate policymakers about the predictable impact of constrained supply on price. 

America’s National Truck?

As another election approaches, Americans have probably grown jaded toward politicians who use naked appeals to patriotism to win votes. Now patriotic appeals are being enlisted to sell pickup trucks.

Baseball fans watching the World Series game Friday night witnessed an ad by General Motors that had nothing to do with the finer qualities of its Silverado pick up truck. Set to the driving beat of a John Mellencamp song, “Our Country,” the ad flashed images designed to tug at the heart of every red-blooded American. (It certainly tugged at mine.) Here’s how a New York Times story today described the ad:

As the commercial begins, an industrial history rolls out, touching the usual icons of the Statue of Liberty, busy factory workers and Americans at their leisure. But then a more conflicted narrative emerges, quickly flashing on bus boycotts, Vietnam, Nixon resigning, Hurricane Katrina, fires, floods, then the attacks of Sept. 11, replete with firefighters.

All that’s missing is a plague of locusts, until the commercial intones ‘This is our country, this is our truck’ as a large Silverado emerges from amber waves of grain.

The not-so-subtle message is that if you are a real American, you buy a real American vehicle. Of course, this is not the first time patriotism has been exploited to sell a product, but the ad obscures an important fact about the American automobile industry: it is far more diverse today than the Big Three of Ford GM, and Chrysler.

In a Cato Free Trade Bulletin published over the summer, my colleague Dan Ikenson and I showed that, while Ford and GM in particular have struggled with declining sales and huge losses, the U.S. automobile market remains healthy. Last year, American workers produced about 12 million cars and light trucks domestically, including those made in factories owned by Honda, Toyota, Nissan, and BMW. American families can chose from a wider range of affordable, quality vehicles than perhaps ever before.

The Big Three have been losing market share, not because Americans are any less patriotic than in the past, but because Americans are increasingly exercising their freedom to decide for themselves what  is “our truck.”