Topic: Trade and Immigration

A Microeconomic Look at Regulatory Overkill

In this new paper, I argue that an overly burdensome U.S. regulatory state is partly responsible for the downward trend in domestic and foreign investment in U.S. factories, professional services operations, distribution centers, and research and development facilities. EPA mandates, Obamacare’s costly, complicated new health care directives, and the slowly emerging financial services restrictions stemming from Dodd Frank, are just some of the new regulations that have thickened the Federal Register to more than 80,000 pages per year and added 16,500 new pages to the Code of Federal Regulations during the Obama presidency, undoubtedly deflecting and chasing investment and business creation to foreign shores.

Oddly, this massive expansion of federal rules has evolved as President Obama has simultaneously expressed concerns about the impacts of both declining investment and regulatory overkill on economic growth. In 2011, the president issued Executive Order 13563 under the heading “Improving Regulation and Regulatory Review.” Section 1 states:

Our regulatory system must protect public health, welfare, safety, and our environment while promoting economic growth, innovation, competitiveness and job creation. It must be based on the best available science. It must allow for public participation and an open exchange of ideas. It must promote predictability and reduce uncertainty. It must identify and use the best, most innovative, and least burdensome tools for achieving regulatory ends. It must take into account benefits and costs, both quantitative and qualitative. It must ensure that regulations are accessible, consistent, written in plain language, and easy to understand. It must measure, and seek to improve, the actual results of regulatory requirements.

The president issued this EO in the wake of his party’s mid-term election rebuke, perhaps to indicate that he understood the concerns of business. He even required that his agencies formulate plans for undertaking systematic, retrospective reviews of their rules and regulations with an eye toward making them less imposing on society:

Sec. 6. Retrospective Analyses of Existing Rules. (a) To facilitate the periodic review of existing significant regulations, agencies shall consider how best to promote retrospective analysis for rules that may be outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned…

In the words of a former chief economist at the Council of Economic Advisers:

The single greatest problem with the current system is that most regulations are subject to a cost-benefit analysis only in advance of their implementation. That is the point when the least is known and any analysis must rest on many unverifiable and potentially controversial assumptions.

U.S. Policies Deter Inward and Encourage Outward Business Investment

This morning, Cato published a new study of mine titled, “Reversing Worrisome Trends: How to Attract and Retain Investment in a Competitive Global Economy.” The thrust of the paper is that, despite still being the world’s premiere destination for foreign direct investment, the U.S. share of the global stock of direct investment fell from 39% in 1999 to 17% today.

This downward trend is attributable to two broad factors. First, developing economies – many of which have achieved greater political stability, sustained economic growth, improved infrastructure and higher-quality worker skill sets – are now viable options for pulling in the kinds of FDI that was once untenable in those locales. Second, a deteriorating business and investment climate in the United States – owing to burgeoning, burdensome, and uncertain regulations; an antiquated, punitive corporate tax system; incoherent immigration, energy, and trade policies; a wayward tort system; cronyism and perceptions thereof; and other perverse incentives and disincentives of policy have pushed investment away.

The first trend should be welcomed and embraced; the second must be reversed. From the study:

Unlike ever before, the world’s producers have a wealth of options when it comes to where and how they organize product development, production, assembly, distribution, and other functions on the continuum from product conception to consumption. As businesses look to the most productive combinations of labor and capital, to the most efficient production processes, and to the best ways of getting products and services to market, perceptions about the business environment can be determinative. In a global economy, “offshoring” is an inevitable consequence of competition. And policy improvement should be the broad, beneficial result.

The capacity of the United States to continue to be a magnet for both foreign and domestic investment is largely a function of its advantages, many of which are shaped by public policy. Considerations of taxes, regulations, trade openness, access to skilled workers, infrastructure, energy policy, and dozens of other policy matters factor into decisions about whether, where, and how much to invest. It should be of major concern that inward FDI has been erratic and relatively downward trending in recent years, but why that is the case should not be a mystery. U.S. scores on a variety of renowned business surveys and investment indices measuring policy and perceptions of policy suggest that the U.S. business environment is becoming increasingly less hospitable.

Although some policymakers recognize the need for reform, others seem to be impervious to the investment-repelling effects of some of the laws and regulations they create. Some see the shale gas and oil booms as more than sufficient for overcoming policy shortcomings and attracting the necessary investment. The most naive consider “American” companies to be tethered to the U.S. economy and obligated to invest and hire in the United States, regardless of the quality of the business and policy environments. They fail to appreciate that increasingly transnational U.S.-based businesses are not obligated to invest, produce, or hire in the United States.

It is the responsibility of policymakers, however, to create an environment that is more attractive to prospective investors. Current laws, regulations, and other conditions affecting the U.S. business environment are conspiring to deter inward investment and to encourage companies to offshore operations that could otherwise be performed competitively in the United States.

A proper accounting of these policies, followed by implementation of reforms to remedy shortcomings, will be necessary if the United States is going to compete effectively for the investment required to fuel economic growth and higher living standards.

Details, charts, and analysis, and citations are all included here.

Good News! U.S. Can Keep Sending $147m (per annum) to Brazilian Cotton Farmers after All

Phew. That was close.

Earlier this month, Secretary of Agriculture Tom Vilsack said that without a new farm bill to replace the 2008 farm bill, the USDA would not have the authority or the funds to continue paying the $147m per year bribe we had settled with Brazil in 2010 as part of a trade deal. (The fulsome details are available in this blog post, written at the time of the deal, and more about the underlying trade dispute is available in this 2005 policy analysis by Cato Adjunct Scholar Dan Sumner). And without those bribes, Brazil would likely suspend the ceasefire deal and retaliate against U.S. export interests by raising import taxes and suspending its obligations to protect Americans’ intellectual property. So, Mr. Vilsack implied, Congress needs to pass a farm bill now, and include changes to the cotton program that would satisfy the Brazilians and prevent a trade war. 

Well stand down, America, because according to some unnamed trade experts quoted by Inside U.S. Trade today [$], Mr. Vilsack’s analysis is not exactly correct. He may even be lying:

Agriculture Secretary Tom Vilsack misconstrued the facts, or was at least misleading, when he claimed last week that the U.S. government will lose the authority on Oct. 1 to continue paying Brazil $147 million annually under a temporary settlement to a World Trade Organization dispute, according to four non-government experts.

The statement, these experts agreed, was clearly aimed at pressuring Congress to pass a new farm bill and thereby resolve the longstanding fight with Brazil over agricultural subsidies…

But a decision on whether to end that authority is clearly within the purview of the administration – not Congress, these experts said. In other words, if the authority is expiring this fall, it is only because the administration has determined internally that it wants it to expire and does not want to continue making the payments, they said…

Foreign-Owned Airlines Should Fly U.S. Routes

Blogger Matt Yglesias proposes that in order to promote competition in the airline industry, foreign-owned airlines should be allowed to fly domestic routes here in the United States:

Let foreign airlines fly domestic routes in the United States.

This is one of those ideas that’s so commonsensical, people tend not to realize it isn’t permitted. But if you’re wondering why it is that, say, Emirates will fly you from Los Angeles to Dubai or from Dubai to New York but not from California to the East Coast, that’s the reason. It’s illegal.

To bolster competition, you need to let foreign airlines actually operate domestic routes.

In theory this might be accomplished through the ongoing negotiations for a Transatlantic Trade and Investment Partnership. The main promise of TTIP is to open up new frontiers in cross-border trade beyond the traditional transportation of manufactured goods. And while letting EasyJet or Aer Lingus fly from Seattle to San Antonio isn’t “trade” per se, the case for it is essentially the same general case for trade—American consumers will benefit if we are allowed to purchase from a wider range of options.

Let any company—regardless of where its headquarters are or who owns it—that’s capable of flying planes safely connect any two American cities, if the company thinks it can make it work.

This is a great idea, and I hope this gets done as part of the TTIP and other trade talks.  I just wanted to comment on his statement that this “isn’t ‘trade’ per se.”  In fact, it is trade per se.  For two decades now, trade rules have covered trade in services, which can be carried out through a number of different “modes.”  I don’t want to get all technical (and believe me, this gets really technical), but when a foreign entity operates a service in the market of another country, that constitutes trade and can be part of trade liberalization commitments in trade agreements.

So, including airline trade liberalization in the TTIP would not be anything novel–it would just be good policy.

Some Trade Links, and Today’s “Shamelessly Pandering Congressman” Exhibit

A few items that crossed my desk today. All the emphases in the blockquotes are my own.

Imported Food Regulations

Following up from Doug’s post yesterday advocating for a “deregulatory stimulus,” here’s a story from Inside U.S. Trade [$] that shows how even obscure areas of federal law can serve as examples of, as the article puts it, a “paradigm shift” in the way regulations are written and applied:

The [Food and Drug Administration] proposal represents something of a paradigm shift in the way that imported food is currently regulated. FDA generally allows food to come into the country unless it has information that an exporter has lax safety practices or that a specific shipment is tainted – although it tests only a tiny percentage of imported food.

In essence, the [Foreign Supplier Verification Program, or FSVP] rule is shifting some of the burden to show that food is safe to the private sector. It also creates a basis for FDA to reject food imports besides finding a shipment to be adulterated. Under the proposed rule, food can be turned away if FDA finds that an importer does not have an adequate FSVP in place.

This is all part of a broader change in the way FDA operates that is being brought about under the Food Safety Modernization Act. That law, which was signed by President Obama in January 2011, also requires a frequency of overseas facility inspections by FDA that some observers say are unrealistic given its current funding levels….

In other words, the new Food Safety Modernization Act no longer just requires that imported food be safe. Now imported food can be rejected simply because of the absence of certain documentation. Proving food to be safe is a lot more burdensome than preventing unsafe food from entering the country. It does indeed represent a paradigm shift, and an unwelcome one.

How is the private sector coping with all of this?

Reaction from the private sector to the proposed rule has been fairly positive, according to industry sources. Many were pleased by the fact that FDA narrowed the scope of who is subject to the requirements to the party that actually caused the food to be imported, rather than including the agents who often act as middlemen in trade transactions.

England [a consultant to food importers] also generally praised FDA for limiting the importers’ responsibilities to interacting with the last party involved in exporting the food, and not imposing requirements for importers to go through their suppliers’ entire supply chain, which he said would have been unworkable.

I think that’s code for “not as bad as it could have been.” Kind of sad, don’t you think?

Copyright Terms in the TPP: Too Long, or Way Too Long?

Last December, there was an excellent policy forum here on whether copyright, an issue which I previously knew little about, has become “unbalanced.” It seems that copyright terms in the United States have increased significantly over the years: simplifying the issues a bit, these terms went from 14 years (with the possibility of a 14 year renewal) as set by the first Congress, to 28 years (with a 28 year renewal) in 1909, to life of the author plus 50 years in 1976, to life of the author plus 70 years today.

I don’t know how you are supposed to come up with a “correct” figure for the term of copyright. It all feels like instinct more than science. The earliest time periods – 28 years total or 56 years total, taking into account renewal – seem reasonable. Even life of the author seems reasonable. But life of the author plus 50 years? Or life of the author plus 70 years? That seems excessive.

I bring this up because as part of various trade negotiations, the U.S. government is now pushing others to adopt ever longer terms. One of the big trade talks these days is the Trans Pacific Partnership (TPP). The Electronic Frontier Foundation explains how the TPP would affect copyright terms:

New Zealand, a party to the TPP negotiations, currently has a copyright term of the author’s life and an additional 50 years for literary works. Another TPP member, Malaysia, has a copyright term of life plus 50 years for “literarymusical or artisticwork.” Canada, which is just entering negotiations, has an even shorter term of just 50 years for fixed sound recordingsPursuant to the current TPP terms [pdf], all of these countries would be required to extend their terms and grant companies lengthy exclusive rights to works for no empirical reason.

There are lots of good things in trade agreements, and I’m reluctant to oppose them. But it gets very frustrating to see them used for purposes other than free trade, especially when those purposes are so problematic. It seems to me that the appropriate focus of copyright policy right now would be a domestic debate that focuses on how long copyright terms should be, rather than an attempt to push our own excessive terms on our trading partners.

Anemic Business Investment Indicts U.S. Policies

Since the beginning of the Great Uncertainty – the period that began with the “stimulus,” the auto bailout, the push for another major entitlement program, Dodd-Frank, the regulatory dam burst, the subsidies for favored industries, and the proliferation of distinctly anti-business rhetoric from the White House – President Obama has appeared puzzled by the dearth of business investment and hiring. Go figure.

Nonresidential fixed investment fell off a cliff in 2009, and has yet to recover even in nominal terms. As a share of GDP and relative to the trend in investment growth prior to the 2008 recession, the picture is more troubling still. If tomorrow’s wealth and living standards are functions of today’s investment – and they are – reversing the decline in investment should be the economic priority of U.S. policymakers. 

Instead, the administration has been cavalier about the problem and aloof to real solutions, choosing to view investment as a casualty of partisan politics, as though business is intentionally holding back to sully the economy on this president’s watch. Such narcissism has obscured the White House’s capacity to grasp the power of incentives.

It’s not just domestic investment that is lagging. Foreign direct investment in real U.S. assets is also on the decline. The United States is part of a global economy, which means that U.S. and foreign based businesses can invest, hire, develop, produce, assemble and service almost anywhere they choose. And that means the United States is competing with the rest of the world to attract and retain investment. Of course, the implication of this – whether policymakers know it or not and whether they like it or not – is that globalization is serving to discipline bad public policy. Policies that are hostile to wealth creators chase them away, while smart policies attract them and harvest their fruits.

Business investment is ultimately a judgment about a jurisdiction’s institutions, policies, human capital, and prospects. As the world’s largest economy featuring a highly productive work force, world-class research universities, a relatively stable political climate, strong legal institutions, accessible capital markets, and countless other advantages, the United States has been able to attract the investment needed to produce the innovative ideas, revolutionary technologies, and new products and industries that have continued to undergird its position atop the global economic value chain. 

The good news is that the $3.5 trillion of foreign direct investment parked in the United States accounted for 17 percent of the world’s direct investment stock in 2011 – more than triple the share of the next largest single-country destination. The troubling news is that in 1999 the United States accounted for 39 percent of the world’s investment stock.