Topic: International Economics and Development

Our “Pig in a Poke” Farm Subsidies

Not content to lavish federal subsidies on farmers and landowners just because they grow certain agricultural crops, Congress is also in the business of subsidizing them even when they do NOT grow those crops. In a major expose, the Washington Post reports that the federal government pays out billions of dollars in subsidies to landowners based on past production of certain program crops, such as rice, even when the land is no longer used to grow the crops. As a result, federal farm subsidies are being paid to landowners who have no interest in farming. As the Post reported yesterday:

Nationwide, the federal government has paid at least $1.3 billion in subsidies for rice and other crops since 2000 to individuals who do no farming at all, according to an analysis of government records by The Washington Post.

Some of them collect hundreds of thousands of dollars without planting a seed. Mary Anna Hudson, 87, from the River Oaks neighborhood in Houston, has received $191,000 over the past decade. For Houston surgeon Jimmy Frank Howell, the total was $490,709.

Other federal farm programs offer “loan deficiency payments” to corn growers in Iowa and elsewhere when the price of corn falls below a certain minimum. Farmers collect the payments even if they eventually sell their corn at a higher, profitable price. According to a Post story today, the program has cost American taxpayers $4.8 billion in the current fiscal year, and $29 billion since 1998.

Federal farm subsidies are not only costly to the U.S. Treasury but they also distort global agricultural markets by encouraging overproduction. Those subsidies contributed to the demise of the current round of trade negotiations in the World Trade Organization. A Cato Institute study last year, titled “Ripe for Reform,” documented the many ways Americans are hurt by our own farm programs.

Of course, members of Congress from farm states refuse to give up these costly programs unless other countries agree to reform their own farm programs. As today’s Post story concludes: “Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) has warned U.S. trade negotiators not to bow to foreign pressure unless they win major concessions for U.S. agriculture. ‘We’re not going to buy a pig in a poke,’ he said.”

“Pig in a poke” sounds like a fitting description of our own farm programs.

This Sunday in Bolivia and Mexico

This Sunday, when Mexicans will vote for a new president, Bolivians will also be going to the polls — selecting a new constituent assembly that will rewrite their constitution.

Bolivian president Evo Morales is using Venezuelan leader Hugo Chavez’s example as a model to concentrate power. Chavez introduced a new constitution that centralized political control and he has used popular referendums to eliminate checks and balances on his power. Morales will have a somewhat harder time at gaining and maintaining similar control, since he doesn’t have the vast oil resources or military background to support him that Chavez has.

If Mexican populist Andres Manuel Lopez Obrador is elected this weekend, will he too follow the Chavez path? Many observers, including the market, don’t seem overly concerned. Mexico is not Bolivia; it is a much larger, more diverse, open economy with a free trade agreement with the United States. Democratization and economic reforms — especially openness to international capital markets — will temper Lopez Obrador’s populist sentiments. At least, so the argument goes.

Unfortunately, I don’t believe that Mexico’s reforms have been sufficiently institutionalized. Mercantilism, political opportunism, and the party machine are still quite alive in a Mexico that spent most of the 20th century looking inward and under state domination. Even President Vicente Fox’s great achievement of maintaining a macroeconomic stability not seen in more than 30 years depended heavily on the admirable qualities of the current finance minister and central bank president.

As Mexican economist Manuel Suarez Mier has been emphatically warning, a President Lopez Obrador would find it relatively easy to buy off congressmen from the opposition and discredited PRI party and to thus begin re-establishing the political hegemony that existed in Mexico before Fox came to power. Except this time, the ruling party would be Lopez Obrador’s PRD.

That scenario may seem extreme, especially since it would require plenty of resources to sustain. The path to populism in Mexico would be different than that of Venezuela. But given Lopez Obrador’s political record of behaving irresponsibly and openly disdaining the rule of law (e.g., he has disregarded court rulings with which he disagrees), there is every reason to believe that he will follow through with the vast New Deal-type spending projects that he has promised, the creation of state-owned businesses, and the protection of favored industries even in the face of adverse economic results.

Bolivia is guaranteed a rough ride almost regardless of its election results this weekend. Because the leading presidential contenders are essentially tied in the polls, Mexico can still opt against the candidate that promises to take the country backward.

Foolishness High as an Elephant’s Eye…

Kudos to the New York Times for Sunday’s article critically examining the United States’ dubious infatuation with ethanol. A sample:

For all its allure, though, there are hidden risks to the boom. Even as struggling local communities herald the expansion of this ethanol-industrial complex and politicians promote its use as a way to decrease America’s energy dependence on foreign oil, the ethanol phenomenon is creating some unexpected jitters in crucial corners of farm country.

A few agricultural economists and food industry executives are quietly worrying that ethanol, at its current pace of development, could strain food supplies, raise costs for the livestock industry and force the use of marginal farmland in the search for ever more acres to plant corn… .

But many energy experts are also questioning the benefits of ethanol to the nation’s fuel supply. While it is a renewable, domestically produced fuel that reduces gasoline pollution, large amounts of oil or natural gas go into making ethanol from corn, leaving its net contribution to reducing the use of fossil fuels much in doubt.

The article is not without its faults; for instance, it gives an uncritical airing of the opinion that American agriculture should be used for “food first, then feed” for livestock, “and last fuel.” (If the economics are such that demand for ethanol is more intense than the demand for corn chips, then why shouldn’t U.S. corn go to ethanol? Of course, that’s an enormous “if.”) Still, the NYT article is a very welcome departure from the claptrap on ethanol offered by other media.

It’s Not Just Wages

Why do U.S. companies set up shop in countries such as China? Aside from trying to penetrate foreign markets, most people assume it’s the relatively low-cost labor abroad.

But the head of Intel Corporation, Craig Barrett, testified to Congress yesterday that relative tax costs are crucial to their choices regarding global investment locations.

Barrett said that “a critical issue we must now consider when deciding where to locate a new wafer fabrication plant is that it costs $1 billion more to build, equip, and operate a factory in the U.S. than it does outside the U.S. The largest portion of this cost difference is attributable to taxes.”

Why are taxes the biggest cost for Intel? As Barrett pointed out, “Semiconductor manufacturing is extremely capital intensive,” thus taxes on profits are a more important issue than wage levels.

Barrett noted that when Intel builds a plant in China, the firm get “a five-year tax holiday, followed by 50% of the normal tax rate for five more years. These are in comparison to the U.S., with its 35% corporate tax rate, lack of investment incentives, and relatively uneconomic and uncompetitive depreciation treatment.”

A story in the Wall Street Journal yesterday (sorry, subscriber-only site) noted that even Germany is now planning to sharply cut its corporate tax rate because of competitive pressures. That would leave United States with easily the highest corporate rate in the industrial world.

Hillary and the Candlemakers: Not a Parody

One of the most famous documents in the history of free-trade literature is Bastiat’s famous “Candlemakers’ Petition.” In that parody, the French economist and parliamentarian imagined the makers of candles and street lamps petitioning the French Chamber of Deputies for protection from a most dastardly foreign competitor:

You are on the right track. You reject abstract theories and have little regard for abundance and low prices. You concern yourselves mainly with the fate of the producer. You wish to free him from foreign competition, that is, to reserve the domestic market for domestic industry.

We come to offer you a wonderful opportunity… . 

We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival …  is none other than the sun.

For after all, Bastiat’s petitioners noted, how can the makers of candles and lanterns compete with a light source that is totally free?

Thank goodness we wouldn’t fall for such nonsense today. Or would we?

Last month, Sen. Hillary Rodham Clinton and nine colleagues (ranging from Barbara Boxer to Tom Coburn) endorsed a petition from — you guessed it — the domestic candlemaking industry asking the secretary of commerce to impose a 108.3 percent tariff on Chinese candle producers.

After the Commerce Department approved the candlemakers’ petition, Clinton said in a statement:

This is a real victory for the Syracuse candle-making industry. Our manufacturers deserve a level playing field and we owe it to them to make sure that others do not unfairly circumvent our fair trade practices. Syracuse has a proud history of candle production but attempts by importers to undercut our producers have put that tradition at risk. I am pleased that the Department of Commerce heeded our call to take action against these unfair practices and recognized the importance of this decision to local producers, especially here in Syracuse. We will continue to make the case on behalf of Syracuse candle-makers as the Commerce Department considers its final determination.

But perhaps the comparison is unfair. After all, Clinton and the National Candle Association aren’t asking for protection from the sun, only from Chinese candle producers who are allegedly “dumping” candles in to the American market “at less than fair value.”

What’s the difference, though? Any source that supplies light to American consumers is a competitor of the American candle industry. And any source that can deliver the light cheaper than American candle companies is a tough competitor. Domestic producers will no doubt gain by imposing a 100 percent tariff on their Chinese competitors. But they could also sell more candles if the government required “the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds — in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses,” as Bastiat’s candlemakers requested.

In our modern world, the candlemakers might also propose that electric lights be banned. Think what that would do for the Syracuse candlemaking industry! Sales would soar, profits would soar, jobs would be created. And, no doubt, the owners and the employees would be immensely grateful to Senator Clinton. Of course, Senator Clinton is a centrist these days, so she would not support such sweeping legislation; perhaps she would propose only to ban electric lights from 10 p.m. to 6 a.m.

In either case, the benefits would not stop with the Syracuse candlemaking industry alone. As Bastiat’s candlemakers told the Chamber of Deputies:

If you shut off as much as possible all access to natural light, and thereby create a need for artificial light, what industry in France will not ultimately be encouraged?

If France consumes more tallow, there will have to be more cattle and sheep, and, consequently, we shall see an increase in cleared fields, meat, wool, leather, and especially manure, the basis of all agricultural wealth.

If France consumes more oil, we shall see an expansion in the cultivation of the poppy, the olive, and rapeseed. These rich yet soil-exhausting plants will come at just the right time to enable us to put to profitable use the increased fertility that the breeding of cattle will impart to the land… .

Thousands of vessels will engage in whaling, and in a short time we shall have a fleet capable of upholding the honour of France and of gratifying the patriotic aspirations of the undersigned petitioners, chandlers, etc.

No doubt, we can expect the same cascade of benefits to ensue from the government’s approval of the petition of the Syracuse candlemaking industry.

What’s Worse than Corruption?

Visiting Ireland, Washington Post columnist Steven Pearlstein writes about the death of former prime minister Charles Haughey:

In recent years, Haughey’s reputation has been badly tarnished by revelations that he diverted millions of dollars from party coffers to finance his lordly lifestyle, that he carried on an affair for years with a newspaper gossip columnist, that he tapped the phones of political journalists, and that he had to sell his large Georgian estate to pay more than $6 million in back taxes.

But Haughey was also “the father of the Celtic economic miracle … that transformed Ireland from one of the poorest countries in Europe to one of its most prosperous and dynamic.” So the column raises an interesting question: Would you rather have an honest, abstemious Puritan who taxes, regulates, and plans an economy into stagnation or worse – or a high-living, philandering cream-skimmer who transforms your economy from the world’s leading exporter of talent into a Celtic tiger?

In his book Prosperity versus Planning: How Government Stifles Economic Growth, David Osterfeld discussed two kinds of corruption. As John Mukum Mbaku explains, Osterfeld “argued that in a heavily regulated economy, one can find two distinct types of corruption: ‘expansive corruption,’ which involves activities that improve the competitiveness and flexibility of the market; and ‘restrictive corruption,’ which limits opportunities for productive and socially beneficial exchange.” In other words, when a trade official takes a bribe to allow imports in, or a regulator issues a business license for a piece of the action, they’re making economic activity happen. But when a regulator embezzles public funds or takes a bribe to prevent a business from opening, he is reducing competition and economic activity. So the problem isn’t corruption per se; it’s corruption that restricts productive activity.

Haughey’s case is slightly different: wiretapping journalists and evading his own taxes are not market-expanding activities. So maybe he offers the political choice in starker relief: was Ireland better off with a corrupt prime minister who kick-started economic growth than it would have been with an honest socialist who kept Ireland in poverty? I’d say so. They should have gotten Helmut Kohl to speak at his funeral. Kohl could have made his own case there: I served 16 years as German chancellor, I ended communism in East Germany and reunified the country, and along the way, to stay in power, I helped my party skim a few million off arms sales and privatization deals. Not as good a case as Haughey would have, since Haughey opened up his country’s economy and improved growth, while Kohl allowed the German economy to slow and stagnate–but I’ll bet a lot of Germans still think it was overall a good bargain.

Slovak Election Update

Much of the world’s media portrayed the victory of the populist socialist party in the Slovak elections as the voters’ rejection of the free market reforms pursued by the center-right government of Prime Minister Mikulas Dzurinda. Not exactly.

First, the election turnout was only 55 percent (down from 70 percent in 2002). It is true that the socialists increased their support from 13.46 percent in 2002 to 29.14 percent in 2006. But the low election turnout means that the socialists had their program endorsed by only about 14 percent of eligible voters – hardly a ringing endorsement of a return to socialism.

Second, Dzurinda’s party did better than last time. It received 15.09 percent in 2002 and 18.35 percent this year. So did its coalition partners. Christian Democrats were up from 8.25 percent to 8.31 percent and the Hungarian minority party was up from 11.16 percent to 11.68 percent.

The real shockers were the reduction in the support for the Movement for Democratic Slovakia of the former Prime Minister Vladimir Meciar, which was down from 19.5 percent to 8.79 percent, and the rise of the Slovak National Party, which was not represented in the last parliament, but managed to get 11.73 percent in this year’s election.

The communists, who got 6.32 percent in 2002, did not make it to parliament. Unfortunately, the liberals who got 8.01 percent in 2002, did not make it to parliament either.

So, what does all of this mean?

As has been predicted, the three parties of the center right can count on 65 seats in the Slovak parliament of 150. They will thus be 11 seats short of a majority. The socialists will have 50 seats, but need 76 to form a government. With their racist, homophobic and socialist policies to the left of the communist party, the Slovak National Party will have 20 seats. That leaves Meciar and his 15 seats in the role of the kingmaker.

Ironically, Meciar’s worst electoral performance coincides with a huge increase of his party’s relevance for the future of Slovakia. If he throws his weight behind the socialist leader Robert Fico, he will, once again, take the country down the wrong path. If he goes into coalition with the center-right, the continuity of the liberal reforms will be assured. (Note: The Christian Democrats stated that they will not be in government with Meciar, because of his past authoritarianism. But, they might agree to give him in a largely symbolic role of the chairman of the Slovak parliament.)

The upshot is that under the Slovak electoral system, elections don’t conclude the process of political horse-trading. They begin that process. True, Fico, the socialist leader, will get the first crack at forming a government, but that does not mean much. Both in 1998 and in 2002, it was the second largest party in parliament that formed the government. In both cases, that party was Dzurinda’s party.

One can only hope that history repeats itself.