Topic: International Economics and Development

Based on a Review of Studies Looking at the Impact of Taxes on Growth, Academic Research Gives Obama a Record of 0-23-3

How do you define a terrible team? No, this isn’t going to be a joke about Notre Dame foolishly thinking it could match up against a team from the Southeastern Conference in college football’s national title game (though the Irish win the contest for prettiest make-believe girlfriends). I’m asking the question because a winless record is usually a good indication of a team that doesn’t know what it’s doing and is in over its head. With that in mind, and given the White House’s position that class warfare taxation is good fiscal policy, how should we interpret a recent publication from the Tax Foundation, which reviews the academic research on taxes and growth and doesn’t find a single study supporting the notion that higher tax rates are good for prosperity. None. Zero. Nada. Zilch. Twenty-three studies found a negative relationship between taxes and growth, by contrast, while three studies didn’t find any relationship. For those keeping score at home, that’s a score of 0-23-3 for the view espoused by the Obama Administration. This new Tax Foundation report is also useful if you want more information to debunk the absurd study from the Congressional Research Service that claimed no relationship between tax policy and growth. Indeed, the TF report even explains that serious methodological flaws made “the CRS study unpublishable in any peer-reviewed academic journal.”

Hagel’s Common Sense on Cuba

Foes of Chuck Hagel have found another reason to oppose his nomination for secretary of defense: he supported ending the 50-year old embargo on Cuba. Hagel also called the idea that the government in Havana constitutes a terrorist threat to the United States “goofy”, referring to Fidel Castro as a “toothless old dinosaur.” Supposedly, this proves he’s weak and won’t stand up to world dictators when vital U.S. interests are at stake. 

In reality, Hagel belongs to a growing group of conservatives who have come to realize the failure of U.S. policy towards Cuba. This group includes former senator Richard Lugar, who until recently was the highest ranking Republican on the Senate Foreign Relations Committee, and Senator Jeff Flake, a freshman Republican from Arizona. Even Paul Ryan (R-WI), the GOP’s former VP candidate, voted against the embargo the last time it came to a vote in the House in 2005. 

You don’t need to think hard to understand why the embargo and travel ban on Cuba have failed: the Castro brothers are still in power in Havana. Five decades of economic sanctions—the most stringent Washington has imposed on any country—have failed to bring about a democratic transformation of Cuba. Moreover, the embargo has served as a scapegoat to the regime.

Elizardo Sánchez Santa Cruz, a leading dissident in Cuba, has aptly summed up that strategy: “[Castro] wants to continue exaggerating the image of the external enemy which has been vital for the Cuban Government during decades, an external enemy which can be blamed for the failure of the totalitarian model implanted here.” Cuban dissident blogger Yoani Sánchez has called the embargo “the regime’s excuse for all its failures” and pointed out that its existence has undermined the work of dissidents on the island. 

Proponents of the embargo (who are now opposing Hagel’s nomination) inadvertently accept this reality. Our friend Frank Calzón, at the Center for a Free Cuba, mentions in the Washington Post several instances when Havana rebutted Washington’s outreach efforts: “Each solicitation has been met with aggressive action.” Why? Perhaps because the Castro regime fears that an end to the embargo and travel ban could weaken its grip on power? 

Ironically, those who argue that national security concerns are reasons to oppose changing U.S. policy towards Cuba ignore that the embargo has also become somewhat of a U.S. security liability itself. A 2007 report by the Government Accountability Office points out that enforcing the embargo and travel ban diverts limited resources from homeland security that could be used to keep terrorists and criminals out of the United States. The GAO report warned that arrival inspections from Cuba intended to enforce the embargo are “straining Customs and Border Patrol’s capacity to inspect other travelers according to its mission of keeping terrorists, criminals, and inadmissible aliens out of the country.”     

It would be naïve to think that ending the embargo will somehow transform Cuba into a democratic society. As long as the Castros are in change, that won’t happen. But it’s equally naïve to believe that there are great benefits and no significant downsides to the current policy. Chuck Hagel doesn’t have a Cuba problem. Just the opposite. He has shown common sense in ending one of Washington’s most anachronistic foreign policies.

New Trade Negotiations on Services

Of all the international trade negotiations being talked about these days, the one I’m most enthusiastic about is on trade in services.  Today, the U.S. Trade Representative’s Office notified Congress of the Obama Administration’s intent to enter into negotiations for a new trade agreement on international trade in services, with a group of 20 trading partners.  Brazil, China and India are not participating, which is disappointing, but most other major trading nations are in.  (This is in contrast to many of the narrower bilateral or regional trade agreements under discussion, which create a mess of overlapping agreements.)

It can be frustrating to hear how the U.S. government talks about these initiatives, for example, when they refer to “a new international services agreement to support additional U.S. exports and jobs.”  Producer interests are always put front and center, while consumer interests are ignored.  And they say:  ”The agreement we envision will place a high priority on enabling our service suppliers to compete on the basis of quality and competence rather than nationality.”  Here, I like the general sentiment, but I would simply apply it to service suppliers from foreign countries as well – we should be able to compete there, and they should be able to compete here.  It’s great that U.S. producers will benefit from this agreement, but it’s just as good that U.S. consumers will have additional choices.

In terms of the scope of the agreement, services holds great potential for opening up a variety of new sectors to competition.  Liberalization started much later with services than with goods, so there is more that can be accomplished.  As USTR puts it:  “The agreement must also permit comprehensive coverage of all services, including services that have yet to be conceived.”  In the Internet age, trade in services is now possible in many new sectors.  It would be nice to get as many service sectors covered as possible.

It’s not clear yet which sectors will be the focus.  Let me give two suggestions.  First, there has been a lot of talk recently about online higher education.  In a policy analysis to be published soon, I argue that we should encourage free trade in online higher education, and this new trade in services agreement would be a good place to do it.  And second, I have written about the idea of free trade in health insurance.  I’d love to see that included in these talks.  But those are just two small possibilities, and I look forward to seeing the United States and other governments push to liberalize as many service sectors as possible.

Prosperity and World Population Growth

Readers of Matt Ridley’s The Rational Optimist and Ronald Bailey’s columns in the Reason magazine will not be surprised to hear that the rate of population growth is slowing—dramatically—throughout the world. Jeff Wise’s article in the Slate magazine, “About that Overpopulation Problem,” revisits that familiar territory and makes some interesting points. Ultimately, however, Wise fails to appreciate the real reasons for the fall in population growth rate.

First, the good news. As Wise notes, “[The] rate of global population growth has slowed. And it’s expected to keep slowing. Indeed, according to experts’ best estimates, the total population of Earth will stop growing within the lifespan of people alive today. And then it will fall… the long-dreaded resource shortage may turn out not to be a problem at all.”

“For hundreds of thousands of years,” Wise’s article continues, “in order for humanity to survive things like epidemics and wars and famine, birthrates had to be very high. Eventually, thanks to technology, death rates started to fall in Europe and in North America, and the population size soared. In time, though, birthrates fell as well, and the population leveled out.”

Why might that be? “The reason,” Wise avers, “for the implacability of demographic transition can be expressed in one word: education. One of the first things that countries do when they start to develop is educate their young people, including girls. That dramatically improves the size and quality of the workforce. But it also introduces an opportunity cost for having babies.”

True enough, better education is a by-product of development, but where does development come from?

For that we have to look to Ronald Bailey. As he writes, “In 2002, Seth Norton, a business economics professor at Wheaton College in Illinois, published a remarkably interesting study on the inverse relationship between prosperity and fertility. Norton compared fertility rates of over 100 countries with their index rankings for economic freedom and another index for the rule of law. ‘Fertility rate is highest for those countries that have little economic freedom and little respect for the rule of law,’ wrote Norton. ‘The relationship is a powerful one. Fertility rates are more than twice as high in countries with low levels of economic freedom and the rule of law compared to countries with high levels of those measures.’”

And, “Economic freedom and the rule of law produce prosperity which dramatically lowers child mortality which, in turn, reduces the incentive to bear more children. In addition, along with increased prosperity comes more education for women, opening up more productive opportunities for them in the cash economy. This increases the opportunity costs for staying at home to rear children. Educating children to meet the productive challenges of growing economies also becomes more expensive and time consuming.”

So, education is a proximate cause of population growth slowdown. The ultimate cause, however, rests with economic freedom and resulting prosperity.

America’s European Diplomacy: A Bull in a China Shop

The U.S. government appears to be pathologically unable not to interfere in matters foreign as well as domestic. According to the Sun, the Obama Administration has warned the British government not to hold a referendum on remaining a part of the European Union. The U.S. assistant secretary for Europe Philip Gordon said that, “We have a growing relationship with the EU, which has an increasing voice in the world, and we want to see a strong British voice in it. That is in America’s interests.” He added that, “Referendums have often turned countries inward.”

Predictably, the British are annoyed. Bernard Jenkin, a Conservative Party member of Parliament said:

“The Americans don’t understand Europe. They have a default position that sometimes the United States of Europe is going to be the same as the United States of America. They haven’t got a clue.”

Another parliamentarian, Peter Bone, said that Gordon should “butt out” and that the British membership of the EU had “nothing to do with the Americans.” “It’s quite ridiculous,” he added, “and it’s not what you’d expect from a member of the senior executive in the USA.”

Quite so! After all, how would Americans feel if the British government opined about U.S. membership in NAFTA? Would they not be a bit “miffed?” Not too long ago, the then-secretary of state Condoleezza Rice urged the Europeans to accept Turkey as an EU member state. Again, how would Americans feel if the Europeans urged the U.S. government to make Mexico America’s 51st state?

Moreover, is it really a good idea for the U.S. government to be dissuading foreign governments from consulting their people on matters of national interest? Not quite democratic, is it?

Finally, consider the astonishing brazenness of America’s government officials. Note that Gordon did not say that British membership of the EU was in the British interest. Instead, he simply stated that the British membership of the EU was in America’s interest. That, presumably, settles the matter for everyone. Gordon’s behavior is worthy of a Roman proconsul throwing his weight around some impoverished province on the edge of the world. It is not what people expect from a White House administration that supposedly wishes to correct the foreign policy mistakes of the previous one.

It’s Showtime for the Iron Lady

That is, Friday night at 8:00 the Showtime cable channel will broadcast the movie “The Iron Lady,” starring Meryl Streep as Margaret Thatcher. When it came out a year ago, I published the tart analysis below. On cable, my recommendation is that you DVR it and then fast-forward through all the imaginative scenes of Thatcher as a doddering old lady. What you want to watch is the rise and triumph of a “conviction politician.” And again I appeal to the Weinsteins to release a version that omits all the nonsense and shows us the Margaret Thatcher of history.


The reviewers warned me – don’t see The Iron Lady, the new movie starring Meryl Streep as Margaret Thatcher. Kelly Jane Torrance of the Washington Examiner mourns, “The climax of this movie about one of the most important people – not just women, but people – of the 20th century comes when Margaret Thatcher decides to throw out her dead husband’s clothes.” James Verniere of the Boston Herald asks, “Mamma mia! Why would you turn the story of Margaret Thatcher into a tale of a sweet, dotty old lady having a love affair with her beloved late husband?” Virginia Postrel excoriates the filmmakers: “These supposedly feminist filmmakers could have portrayed Thatcher as an ambitious woman who had nothing to feel guilty about. Instead they chose to inject guilt where it did not belong. They obscured Thatcher’s public accomplishments in a fog of private angst. The portrait of dementia isn’t the problem. The way the film uses old age to punish a lifetime of accomplishment is.”

Even the Washington Post, the New York Times (“You are left with the impression of an old woman who can’t quite remember who she used to be and of a movie that is not so sure either.”), and the New Yorker wonder why you would make a movie about one of the most influential and controversial political figures, the first woman to lead a Western country, the woman who arguably saved Great Britain and helped Ronald Reagan win the Cold War, and then spend half the film depicting her as a confused old lady with hallucinations.

Nevertheless, Thatcher is indeed a compelling figure, and the commercials and trailers showed Streep portraying her as a leader of conviction and strength. So I ignored the critics and bought a ticket. And the film was slightly better than I expected. It absolutely wastes about 40 percent of its time on the imagined scenes of a confused old lady. How much more rewarding it would have been to see a great actress play a pioneering political figure rising to power, leading her country, and facing opposition from both friends and enemies. Instead, we get a few vignettes of that, about half the film’s running time. So it wasn’t terrible, just a lost opportunity.

Interestingly, the marketing team at Weinstein Company seems to understand the appeal of a film on Margaret Thatcher far better than the writer and director. They know what the audience wants. Take a look at the trailer:

You’ll notice that there’s not a single shot of the old-lady part of the movie. Instead, it’s two fast minutes of Margaret Thatcher in action. Including a final scene (“Gentlemen, shall we join the ladies”) that harks back to an earlier scene of Thatcher on her way up, dramatizes her uniqueness – and is actually not in the film.

So I have a suggestion: Often the DVD of a film will include the film as released to theaters and also a “Director’s Cut” that reflects the director’s own artistic choices that the studio may have blocked. I recommend that the DVD of The Iron Lady include a “Marketer’s Cut” that omits all the old-lady scenes and just shows us Margaret Thatcher the political figure. And if there’s good material like the “join the ladies” scene left on the cutting-room floor, then the marketers could add that back in. In that case, I’d buy the DVD. In fact, someone should start a Facebook campaign: “Put a Marketer’s Cut of The Iron Lady on the DVD.”

By the way, Mitt Romney should not want Republicans to watch this movie: It will remind them of what it means to be inspired by a political leader.

Iran’s Lying Inflation Statistics

Today, the Central Bank of Iran released its inflation statistics for 2012.  Remarkably, despite all of the international notoriety surrounding Iran’s outbreak of hyperinflation in October, the Central Bank claims that Iran experienced an annual inflation rate of only 27.4%.

The Central Bank has a habit of failing to release useful economic data, and what it does release often has what I would describe as an “Alice-in-Wonderland” quality. Indeed, the Central Bank’s official annual inflation rate is grossly off from the true rate. Using a well-established methodology, I estimate that Iran experienced an annual inflation rate of 110% during 2012.

Ever since hyperinflation briefly reared its head, back in October, the Iranian government has tried to prop up its faltering currency and stop its economy’s death spiral through force and deception.  In a sense, these oppressive tactics seem to have “worked,” as Iran’s inflation rate has fallen somewhat since it peaked in October 2012.  That said, Iran’s true annual inflation rate (110%) – which I calculated using objective, market-based data – is a whopping four times higher than the official reported rate.

The use of lying statistics is not a first for a country with hyperinflation. Indeed, when inflation begins to spiral out of controlsuch as the most recent cases in Zimbabwe and North Korea – it’s all too common for governments to wrap their statistics in a shroud of secrecy.

Now, this shroud of secrecy has cast its shadow over Tehran. Once again, lying statistics remain the order of the day.