Topic: Trade and Immigration

The Washington Times and Debunked Statistics

Yesterday, the Washington Times editorialized in favor of E-Verify, the inchoate government background check system for all American workers, saying, “[T]he system is 99.5 percent accurate, according to DHS, and it permits employers to verify work eligibility in minimal time (10 minutes or less) and at minimal cost ($419 per year for a federal contractor of 10 employees).”

Don’t be so sure. The DHS mantra of 99.5 percent accuracy was debunked long ago. The government doesn’t actually know the status of the 5.3% of workers that the system bounces out, an issue the Christian Science Monitor explored last summer.

I examined the numbers in detail here, also last summer. The 0.5% error rate that DHS acknowledges is the known error rate. Others bounced out of the system DHS assumes to be illegal aliens. This is almost certainly wrong, and the program is denying legal workers the ability to earn a living, as the Christian Science Monitor reported.

But in an op-ed published in the Washington Times last fall, lobbyist Janice Kephart argued the DHS line, as carelessly as one can be with statistics: “[T]he numbers rejected by E-Verify as not authorized to work closely parallels the estimated percentage of illegal aliens in the work force, about 5 percent.” Right, the numbers are close so the program is working. Nevermind that the livelihoods of American citizens and legal workers are in the balance.

Earlier this month, the Times printed Rep. Lamar Smith’s plea for E-Verify, which touted these (well, similar) discredited statistics.

It’s time for the Washington Times to stop shilling for the Department of Homeland Security and the anti-immigrant lobby by printing and reprinting discredited statistics about E-Verify.

The Outsourcing Canard

“We will restore a sense of fairness and balance to our tax code by finally ending the tax breaks for corporations that ship our jobs overseas.”

    -President Barack Obama, Speech before Joint Session of Congress, February 24, 2009

To further Chris Edwards’ post earlier today, demonizing multinational corporations has long been a Democratic Party mainstay on the campaign trail. But the campaign is over. And given our colossal budget and debt disasters, it is almost criminal that our political leaders continue to tilt at windmills.

Chris notes that “U.S. corporations are moving investment and profits abroad, but it is because we have the world’s second highest corporate tax rate, not because of special loopholes as the president keeps implying.”

Punitive U.S. tax policy is beyond question a strong incentive for U.S. companies to invest capital and reinvest profits abroad. But there is also the fact that 95 percent of the world’s population lives outside the U.S. border. And those people have a hankering for U.S. products and services.

The main reason U.S. companies make direct investments abroad is to serve foreign demand, plain and simple — although politicians characterize competitive efforts to win foreign market share as “shipping our jobs overseas.” In many industries, it makes more sense to serve foreign demand through production operations in those countries (or in that region) than it does to produce in the United States and then export. Likewise, foreign-owned companies like Honda, Toyota, BASF, Thyssen-Krupp, Michelin, and Anheuser-Busch InBev find that it makes more sense to serve U.S. demand by producing in the United States. (The Organization for International Investment has a lot of useful information about “Insourcing” at its website.)

But there’s no need to reinvent the wheel here. My colleague Dan Griswold recently wrote a concise, fact-filled paper, attempting to interpret President Obama’s campaign pledge (and now presidential pledge) to “stop giving tax breaks to corporations that ship jobs overseas.” Dan’s analysis addresses three distinct questions raised by Obama’s pledge:

  1. Why do U.S. multinational companies establish affiliates abroad and hire foreign workers?
  2. What kind of tax breaks are they receiving?
  3. Should the new Congress and new president change U.S. law to make it more difficult for U.S. multinational corporations to produce goods and services in foreign countries?

You should read Dan’s paper and consider sending a copy of it to the White House. But here are some statistical highlights:

  1. More than 2,500 U.S. corporations own and operate a total of 23,853 affiliates in other countries.
  2. In 2006, U.S. corporations sold $3.3 trillion in goods (and $677 billion in services) through their majority-owned affiliates abroad, which was more than 6-times the value of U.S. exports. About 60 percent more services were sold through foreign affiliates than were exported from the U.S.
  3. U.S. corporations don’t use foreign operations as an “export platform” back to the U.S. (which is the primary gripe of those who oppose U.S. corporate investment abroad):
    • Almost 90 percent of the goods and services produced by U.S.-owned affiliates abroad are sold to customers either in the host country or re-exported to consumers in third countries outside the U.S.
    • More than half of the production of U.S. affiliates in China and Mexico is consumed in those markets, while only 17 percent of that production is sold to customers in the U.S.
    • There is no evidence that expanding employment at U.S.-owned affiliates comes at the expense of overall employment by parent companies back in the U.S.; in fact, there is a positive relationship between employment in the U.S. operations and employment in the foreign affiliates
    • In fact, foreign and domestic operations tend to move in tandem
  4. U.S. corporations don’t get any tax breaks from operating overseas; income on foreign operations that is repatriated is taxed at the much-higher-than-OECD-average U.S. corporate rate.
  5. Thus, “finally ending tax breaks for corporations that ship jobs overseas” can only mean extending the long arm of the U.S. tax code to apply to earnings on foreign operations that are not repatriated.
  6. And that would mean: “less investment in foreign markets, lost sales, lower profits, and fewer employment and export opportunities for parent companies back on American soil.”

Senator Lugar: ‘Lift the Embargo and Engage Cuba’

Sen. Richard Lugar (R-IN), the highest ranking Republican in the Foreign Relations Committee, has released a minority staff draft report on U.S. policy towards Cuba. It states that Washington’s sanctions against Havana have failed to bring democracy to the island and it recommends lifting the embargo and engaging Cuba.

The report’s recommendations are very similar to those that Ian Vásquez and I wrote for Cato’s recently published Handbook for Policymakers.

The U.S. Didn’t Cause the World Recession

In the Washington Post, Ricardo Caballero of MIT has a novel and promising idea about “How to Lift a Falling Economy.”  Unfortunately, he echoes the mantra that all the world’s economic problems can be traced to the U.S. in general, and to big U.S. banks in particular.  “Already,” he says, “this illness has spread to the global economy.”

Already?  Industrial production in Japan began collapsing in November 2007, two months ahead of the U.S., and the Japanese industrial decline has been twice as fast.

Unlike the U.S., real GDP began falling in the second quarter of 2008 in Germany, France, Italy, Japan, Singapore and Hong Kong.  By no coincidence, that was when the price of oil rose as high as $145 a barrel.  Soaring oil prices raise the cost of production and distribution for many industries, and reduce real household incomes and therefore consumption.   Nine of the ten postwar U.S. recessions were preceded by a major spike in the price of oil.

In a piece for the Claremont Review of Books (written last November), I conclude , “This recession is not just a U.S. problem, not just about housing, and not just financial.”

Compare the decline in real GDP over the past 4 quarters (from The Economist):

U.S.

-0.2%

France

-1.0

Germany

-1.6

Britain

-1.8

Italy

-2.6

Japan

-4.6

Does it make sense to blame the largest declines in GDP on one country with the smallest decline?  If so, then we need some explanation of how some uniquely American “illness has spread” to so many innocent victims.

If the explanation is supposed to be falling U.S. imports, then the worst decline by far would have been in Canada and Mexico (where real GDP was rising even in the third quarter).  If the alleged causality is supposed to be because of some undefined links between financial centers, then Italy would not be among the hardest hit.

When it comes to trade, in fact, the shoe is mainly on the other foot: Collapsing foreign economies crushed U.S. exports.

In the second quarter of 2008, U.S. exports accounted for 1.54 percentage points of the 2.83% annualized rise in real GDP.  But falling exports subtracted 2.84 percentage points from fourth quarter GDP.  Falling exports, not falling consumption, were the biggest single contributor to the overall drop of 3.8%.

After looking at which economies fell first and fastest, it might be more accurate to say that some foreign  illness has spread to the U.S. economy than to assert or assume the causality ran only in the opposite direction.

Talking up a Trade War

It seems the media are so obsessed with romanticizing the 1930s that a good trade war is all we need to complete the effect. Today’s Washington Post contains yet another trade scare story, the contents of which don’t even come close to supporting the bold headline or the lead.

“U.S.-China Trade Ties Erode Amid Accusations” is the attention grabbing headline, presumably chosen by someone other than the story’s writer, Ariana Eunjung Cha. But Ms. Cha is also guilty of promising her readers more than she delivers. “The global financial crisis is bringing out the worst in the trade relationship between the United States and China” is the story’s lead.

Here’s her supporting point number 1:

U.S. Treasury Secretary Timothy F. Geithner accused China of “manipulating” its currency, vowing in written testimony submitted for his confirmation hearing that the United States would act “aggressively” to remedy the situation.

Excuse me for not gasping, but I find that example rather bland. Legislation to compel China to allow the yuan to rise has been considered in every Congress since 2003. It’s nothing particularly new. Geithner was testifying before Senators who has sponsored some of those currency bills, and his uncertain confirmation prospects probably meant that he new what the committee wanted to hear.

Besides, later in her article, Cha concedes about Geithner’s testimony that:

The comments were later tempered by the Obama administration saying it hadn’t made any formal decision on the issue and Obama discussed the remarks with Chinese President Hu Jintao in a telephone call shortly after taking office.

Supporting point number 2:

The U.S. Trade Representative’s office, in a harshly worded and wide-ranging complaint to the World Trade Organization in December, alleged that China uses cash grants, cheap loans and other subsidies to illegally aid its exporters.

So a Bush Administration action from December is her second most compelling piece of evidence that the ‘financial crisis is bringing out the worst in the trade relationship”? Bringing cases to the WTO, instead of passing into law provocative unilateral trade sanctions (which scaremongering like Cha’s article is likely to encourage), is the ultimate sign of respect for the system. It is the proper way to resolve trade disputes, and I am positive that the Chinese are not affronted by that approach.

Supporting point number 3:

China, for its part, has bashed the “Buy America” program embedded in the just-passed stimulus package, calling it “poison to the solution” of the global economic crisis.

Well who hasn’t? The Canadians said the same thing and President Obama was in Ottawa yesterday assuring Prime Minister Harper that our countries remain best buds.

Supporting point number 4:

At the World Economic Forum meeting in Davos three weeks ago, Chinese Premier Wen Jiabao, without naming the United States explicitly, blamed the financial crisis on “unsupervised capitalism.”

Now them’s fightin’ words. Time to shut the borders to Chinese imports and close down all those American-owned factories in Shenzhen.

But the most compelling piece of analysis supporting the assertion that “U.S.-China Trade Ties Erode Amid Allegations” is supporting point number 5:

The crisis has pushed the China-U.S. relationship to a flash point. From now on, it will either become more stable or more confrontational,” said Mei Xinyu, a trade expert with the Chinese Commerce Ministry’s research arm.

Yes, and in 25 years I’ll be either alive or dead.

The remainder of the article goes on to cite old parochial grievances, clichés really, like U.S. textile industry complaints about a surge in Chinese imports or steel industry complaints about dumping and subsidization. Whining for protection by the textile and steel industries is nothing new. It has nothing to do with the financial crisis or global demand contraction per se.

But what is more troubling than these perennially parasitic industries demanding wealth transfers from unsuspecting Americans is the willingness of mainstream media to accept their adversarial narrative as an objective worldview.

Napolitano: Scrap REAL ID

She didn’t put it so bluntly, but DHS secretary Janet Napolitano appears ready to scrap the failed national ID program in the REAL ID Act. This is good news.

Is it great news? Not really. Nothing I’m aware of in her public comments reflects awareness of the thoroughgoing weakness of identity-based security or its prohibitive privacy and dollar costs. And she’s looking for an alternative national ID.

“ ‘Enhanced driver’s licenses give confidence that the person holding the card is the person who is supposed to be holding the card, and it’s less elaborate than Real ID,” the Washington Times quotes her saying. Less elaborate? Yes. Reliably secure? Not really. A full-fledged national ID? Eventually.

The point is to get away from national ID systems entirely. It’s not an achievement to produce a national ID that’s less bad than the one that went before. But it is progress.

When Will Ford Defend its Interests?

Earlier this week, the Congress and President Obama authorized a $787 billion borrow-and-spend plan to create “or preserve” 3.5 million American jobs. So, could there be a better time than now for GM and Chrysler to announce they will need billions more taxpayer dollars to avoid having to let go hundreds of thousand of workers? How likely is Washington to cut off the auto producers at this particular juncture?

It shouldn’t come as a surprise that GM and Chrysler are asking for a lot more money because, well, the warnings were issued. In fact, Bush’s decision to defy Congress and provide “loans” to GM ($9.4 billion) and Chrysler ($4 billion) back in December wasn’t even intended as a cure all. It was designed to buy time for the producers to come up with detailed viability plans for their next bite at the apple. And as expected, central to both viability plans, which were unveiled yesterday, is more taxpayer money.  At the moment, a combined $22 billion is being requested, which would bring the total doled out to just under $40 billion.

Just as stunning as the implied blackmail (give us money or we’ll give you idled workers) being perpetrated by GM and Chrysler is the continued silence of Ford. There is probably no company in America that stands to lose more from taxpayer subsidization of GM and Chrysler. (The foreign nameplate producers in the United States are also penalized by subsidies to GM and Chrysler, but in the current environment it is probably wiser for them to bite their tongues. And Ford is more of a direct competitor with the other Detroit producers than are the foreign nameplates, anyway.)

If GM and Chrysler were no longer producing, Ford would be able to pick up market share and productive assets from the others, and ultimately improve its own long term prospects. By keeping GM and Chrysler afloat with subsidies, the government is implicitly taxing Ford. Ford is facing unfair, government-subsidized competition, of the sort alleged against foreign producers all the time. But in this case, the subsidies are real, direct, quantifiable, and large. Ford is relatively healthy now, but continued subsidization of the others could well drive Ford to the trough, too.

When companies are losing billions per month with sales revenues continuing to shrink, it doesn’t require a finance degree to discern an imminent cash flow crisis. Even if the demand environment were picking up, these companies would still be losing money because their cost structures are impossibly inefficient. GM and Chrysler have nibbled around the edges to cut costs. Brands are being sold off or scrapped. Factories are being closed. Dealership arrangements are being terminated. But none of those changes addresses the big issues, particularly for GM: an unmanageable capital structure (its debt burden is too heavy), unmanageable legacy costs (paying for lavish promises made in the past), and uncompetitive operating costs (including still much higher than industry-average compensation).

Reorganization or liquidation under one of the bankruptcy chapters will condense the timetable for resolving this problem, will save taxpayer money, and very importantly, will speed the return to stability in the automobile market worldwide. It’s time for Ford to speak out on behalf of this solution too.