The TPP Is, In Fact, About Trade

One of the criticisms of the Trans Pacific Partnership (TPP) is that it’s “not about trade.”  While it is true that the TPP goes beyond trade, and addresses issues such as labor, environment and intellectual property protection (in ways that I’m not always happy about), its impact on traditional protectionist measures such as tariffs should not be ignored.  Here is Politico on this issue:

Vietnam slaps tariffs of 70 percent on U.S. cars and machinery, 35 percent on U.S. chemicals, 30 percent on U.S. biscuits and baked goods, and 25 percent on U.S. recording equipment. Japan marks up our oranges 16 percent from June through November and 32 percent from December through May; it marks up our beef exports 38.5 percent all year long. Cars made in America face a 30 percent tariff in Malaysia, which might not seem stiff compared to 50 percent on motorcycles or 35 percent on plywood, except that cars made in Japan and other Asian nations don’t face any tariff in Malaysia.

These burdensome overseas tariffs, provided to POLITICO by US Trade Representative Michael Froman, are the kind of problems President Obama hopes to address with the free trade deal known as the Trans-Pacific Partnership, which has not yet been finalized but has recently erupted into one of the most contentious topics on Washington’s agenda. 

Overall, the U.S. imposes an average tariff of 1.4 percent on foreign goods, less than half the average for the rest of the nations Froman is negotiating with, barely a fourth the average in Vietnam and Malaysia. And it can get much worse for specific industries and products. TPP nations have tariffs ranging up to 100 percent on textiles, 87 percent on corn, and 75 percent on consumer goods, not to mention selected Japanese tariffs that amount to 189 percent on U.S. shoes and a don’t-even-think-about-it 778 percent on U.S. rice above a certain annual quota.

Even our friendly trading partner to the north has some brutal anti-American protectionism on its books. The North American Free Trade Agreement of 1994 broke down a slew of barriers between the U.S. and Canada, but it exempted the poultry and dairy industries, which is why U.S. eggs face tariffs of up to 163.5 percent—and not less than 79.9 cents per dozen—in the land of ice hockey and eh. U.S. yogurt, milk, cheese, and frozen chicken all face tariffs between 237.5 percent and 249 percent in Canada.

Of course, when you talk to a U.S. government official, the focus will be on the protectionism of others, and U.S. protectionism will be ignored.  In reality, the U.S. is not all that great either.  Among other things, we have some “tariff peaks” of our own, we abuse anti-dumping duties, and there is lots of protectionism in government procurement (e.g., Buy America laws).  But the overall point is still valid: There is plenty of protectionism for trade agreements to take on.  The key, from my perspective, is how much of it the TPP actually gets rid of.  For that, we need to wait for the TPP to be completed, and see what the negotiators have accomplished.  Then, whatever has been achieved in this regard needs to be balanced against the other parts of the TPP.

Talk to Kim Jong-un Even as He Kills His Way to Power in North Korea

Secretary of State John Kerry recently visited Seoul and South Korean President Park Geun-hye will head to Washington later this month. The main agenda item: what to do about North Korea.

As usual, no one knows what is going on in Pyongyang. Its internal politics appears to be bloodier than usual. Ironically, this might provide an opportunity for Washington to initiate talks over a more open bilateral relationship.

The latest rumor is that young dictator Kim Jong-un had his defense minister executed with anti-aircraft fire for disrespectful conduct. Hyon Yong-chol probably has been purged, though South Korea’s intelligence agency acknowledged that it could not confirm his gruesome death. If Hyon was executed, it probably was because the military man was plotting, or at least feared to be plotting, against the North’s leadership.

There has been striking turnover among party and military officials since Kim Jong-un took over after his father’s death in December 2011. Most dramatic was the arrest and execution of Kim’s uncle, Jang Song-taek, seen as the regime’s number two, in December 2013. Overall some 70 top apparatchiks and more than 400 lower level officials apparently have been killed this year.

This brutality towards the power elite sets Kim apart from his father and grandfather. While Kim Jong-un’s apparent penchant for executions may reflect a peculiarly sadistic nature, it more likely grows out of insecurity. Only 28 or maybe 27 when his father died, Kim’s succession was pushed extremely quickly after his father suffered a stroke in August 2008.

Although there is no sign of organized resistance to the latest Kim, continuing turnover suggests that Kim is not, or at least does not see himself, as yet secure. Instead of cowing resistance, promiscuous executions, even for acts short of actual rebellion, might make subordinates believe it is worth going for broke.

Repression is rising in other ways. For instance, the regime apparently has been employing “Patrol Teams” as press gangs to fill out its construction work force for projects to be finished by October, the 70th anniversary of the founding of the Korean Workers’ Party. The regime also has strengthened border controls with China.

If Kim retains control, none of this might matter. However, everyone is wary of something other than the usual predictable unpredictability in Pyongyang. South Korean President Park Geun-hye noted “growing concern” over “an extreme reign of terror within North Korea.”

Governance matters since the North continues to expand its nuclear capabilities. While nothing suggests that Kim is suicidal—members of the dynasty appear to prefer their virgins in this world rather than the next—Pyongyang’s decision-making process could become more unilateral, unpredictable, or both.

Unfortunately, there is little that the U.S. can do to directly influence events within the DPRK. War would be foolhardy, tougher sanctions aren’t likely to work, and the Kim regime is well beyond the reach of moral suasion.

Nor is negotiation likely to have much effect. While the North recently launched an international charm offensive, it continues to highlight weapons development and spout rehashed threats against America and the South. The Kim regime is not likely trade away the one factor causing the world to follow events in the DPRK.

Nevertheless, as I point out in Forbes, “the possibility of division and dissension in Pyongyang gives Washington a new reason to suggest direct discussions without preconditions, but with the prospect of benefits for a change in direction. If the regime is unsettled, those disaffected might benefit if Washington stood ready to reward a new approach.”

A peace treaty, diplomatic relations, and end of economic sanctions all should be on the table. It’s still a long-shot, but so is almost any other proposal to address the North.

Someday Pyongyang will change. Engagement is the best way to prepare for that day.

Venezuela’s Inflation: Up, Up, and Away

Like the 2009 Oscar award-winning Pixar film Up, Venezuela’s annual inflation rate has soared sky high (see the chart below). On December 31, 2014, Venezuela’s bolivar traded at a VEF/USD rate of 171 and the implied annual inflation rate stood at 169%. In May of 2015, Venezuela’s bolivar collapsed and the implied annual inflation rate broke the 500% barrier. On May 28, 2015, the VEF/USD rate was 413, a 59% depreciation in the bolivar since January 1st. Not surprisingly, the implied annual inflation rate stood at a staggering 495%.

Venezuela's Annual Inflation Rates

From the Rights of Englishmen to the Inalienable Rights of All Men

Daniel Hannan writes in the Wall Street Journal today about Magna Carta, whose 800th anniversary will also be celebrated at a Cato conference next week. Alas, he persists in an error that I regret to say he’s made before.

Hannan is a great advocate of liberty and particularly of English liberty. His patriotism is admirable in an English representative to the European Parliament. But he fails to grasp the shift in the idea of liberty that took place in America in the 1770s. Hannan, I think correctly, celebrates Magna Carta as the great foundation of ordered liberty, of what I have called the greatest libertarian achievement in history, bringing power under the rule of law:

As Lord Denning, the most celebrated modern British jurist put it, Magna Carta was “the greatest constitutional document of all time, the foundation of the freedom of the individual against the arbitrary authority of the despot.”

It was at Runnymede, on June 15, 1215, that the idea of the law standing above the government first took contractual form. King John accepted that he would no longer get to make the rules up as he went along. From that acceptance flowed, ultimately, all the rights and freedoms that we now take for granted: uncensored newspapers, security of property, equality before the law, habeas corpus, regular elections, sanctity of contract, jury trials.

But he goes wrong when he glosses over the change in thinking that occurred around 1776 in the American colonies:

The American Revolutionaries weren’t rejecting their identity as Englishmen; they were asserting it. As they saw it, George III was violating the “ancient constitution” just as King John and the Stuarts had done. It was therefore not just their right but their duty to resist, in the words of the delegates to the first Continental Congress in 1774, “as Englishmen our ancestors in like cases have usually done.”

Nowhere, at this stage, do we find the slightest hint that the patriots were fighting for universal rights. On the contrary, they were very clear that they were fighting for the privileges bestowed on them by Magna Carta. The concept of “no taxation without representation” was not an abstract principle. It could be found, rather, in Article 12 of the Great Charter: “No scutage or aid is to be levied in our realm except by the common counsel of our realm.” In 1775, Massachusetts duly adopted as its state seal a patriot with a sword in one hand and a copy of Magna Carta in the other.

I recount these facts to make an important, if unfashionable, point. The rights we now take for granted—freedom of speech, religion, assembly and so on—are not the natural condition of an advanced society. They were developed overwhelmingly in the language in which you are reading these words.

When we call them universal rights, we are being polite.

It’s true that the colonists came here with the spirit of English liberty running in their veins. They brought with them the books of Locke and Sydney, the examples of Lilburne and Hampden, the writings of Edward Coke. In the 18th century they read Cato’s Letters and William Blackstone. They petitioned Parliament and the king for their rights as Englishmen. 

But the Declaration of Independence marks a break in that thinking. When Thomas Jefferson sat down to write “an expression of the American mind,” he did not appeal to the rights of Englishmen. Instead, the Americans declared:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. (emphases added)

They appealed not to the British Parliament nor to King George III, but rather to “the opinions of mankind…a candid world…the Supreme Judge of the world.” Hannan glosses over this when he makes reference to 1774 and writes, “Nowhere, at this stage, do we find the slightest hint that the patriots were fighting for universal rights.” True, not in 1774. But by 1776, when Thomas Paine published Common Sense, in which he defended “the natural rights of all mankind” and denounced kings as “ruffians” and “a French bastard landing with an armed banditti,” and the Continental Congress made its case on the basis of the unalienable rights of all men, American thinking had changed. Americans declared their belief in universal rights and their independence from a nation that denied those rights.

As I was researching this post, I found a similar argument from Tim Sandefur a year ago. Alas, Hannan persists in making this error year after year. Besides citing the argument of the Declaration, Sandefur presents in evidence the thoughts of John Quincy Adams on the 50th anniversary of the Constitution:

English liberties had failed [the Patriots]. From the omnipotence of Parliament the colonists appealed to the rights of man and the omnipotence of the God of battles. Union! Union! was the instinctive and simultaneous cry throughout the land. Their Congress, assembled at Philadelphia, once—twice had petitioned the king; had remonstrated to Parliament; had addressed the people of Britain, for the rights of Englishmen—in vain. Fleets and armies, the blood of Lexington, and the fires of Charlestown and Falmouth, had been the answer to petition, remonstrance and address.

Independence was declared. The colonies were transformed into States. Their inhabitants were proclaimed to be one people, renouncing all allegiance to the British crown; all co-patriotism with the British nation; all claims to chartered rights as Englishmen. Thenceforth their charter was the Declaration of Independence. Their rights, the natural rights of mankind. Their government, such as should be instituted by themselves, under the solemn mutual pledges of perpetual union, founded on the self-evident truths proclaimed in the Declaration…. The omnipotence of the British Parliament was vanquished. The independence of the United States of America, was not granted, but recognized. The nation had “assumed among the powers of the earth, the separate and equal station, to which the laws of nature, and of nature’s God, entitled it.”

Daniel Hannan is a thoughtful, forceful, and eloquent advocate of liberty under law. But he needs to read the Declaration of Independence and respect what it says, that the United States of America, though inspired by the tradition of English liberty, was founded on the self-evident truth that all men are endowed by their Creator with certain unalienable Rights, and that those rights reside in all men and women in every country of the earth.

 

Evaluating Quantitative Easing

In my prior post, “The Futility of Stimulus,” I examined whether Federal Reserve Policy has provided economic stimulus. I employed standard measures of money-supply growth to evaluate the question. I concluded that Federal Reserve policy has resulted in less expansion of the money supply than would normally be expected. The weakness of the current economic expansion testifies to that.

In this post, I employ an alternative measure of monetary stimulus. I rely on a recent lecture at the University of Nevada Reno by Professor John Taylor of Stanford University. With a series of charts, he made a convincing case that successive rounds of Quantitative Easing provided no monetary stimulus. Taylor looked at the interest-rate channel, particularly longer-term interest rates. If monetary policy stimulates the economy through real capital investment, then we must look to longer-term interest rates.

Taylor specifically examined the effects on 10-year Treasury yields of each round of Quantitative Easing by the Fed. In each case, there was an announcement effect. When the Fed announced a new round of bond purchases, interest rates on 10-year Treasuries did drop. As QE was executed, however, the 10-year rate recovered to its previous level or even moved higher. On the assumption that rates on corporate bonds price off Treasuries, there was no measurable effect on investment and economic growth. Again, the weakness of the economic expansion is consistent with Taylor’s argument.

There is policy background here. Taylor is the author of a monetary rule, which others have dubbed the Taylor Rule. It is a rule for adjusting short-term interest rates (the Fed Funds rate) to changes in inflation and real economic activity. The Taylor Rule calculates that the Fed Funds should by 1.5 percent versus the current reality of near-zero. Taylor did not advocate an immediate increase to that level, but the beginning of gradual increases.

What of the economic recovery? If Taylor is correct, then low short-term interest rates have not contributed to the economic expansion and raising them will not slow economic growth.

Have very low short-term interest rates had any effect? Janet Yellen recently hinted they might have contributed to unsustainably high equity prices. I will not argue with the Fed Chair on that point, but only suggest that other financial bubbles may also have been financed by Fed policy. To repeat a hackneyed phrase (nonetheless accurate), Wall Street has benefited but not Main Street.

To sum up, following Taylor’s analysis of the interest-rate channel, I conclude that Fed policy has not stimulated economic growth. It has had consequences, which some would consider undesirable. Taylor has provided a reasonable case for beginning to raise interest rates. I doubt that will happen soon. But the debate should continue.

ISIS and Saudi Sectarianism

This morning, a car bomb exploded outside a mosque in Saudi Arabia, the second such attack in a week. The attacks, which have killed at least 25 people, were aimed at the minority Saudi Shi’a community. In doing so, ISIS is expertly capitalizing on Saudi Arabia’s internal sectarian divide, which is worsened not only by domestic repression, but by the propaganda supporting Saudi Arabia’s activist foreign policy in Syria, Yemen and elsewhere. Saudi rulers should remember that sectarianism, though convenient for political purposes, also carries substantial risk.

In an interview shortly before the recent Camp David summit, President Obama committed the faux-pas of pointing out the internal problems faced by many of the GCC states. He noted that these states contain “populations that, in some cases, are alienated, youth that are underemployed, an ideology that is destructive and nihilistic, and in some cases, just a belief that there are no legitimate political outlets for grievances… The biggest threats that they face may not be coming from Iran invading. It’s going to be from dissatisfaction inside their own countries.”

He’s not wrong. Saudi Arabia is well-known as one of the world’s most repressive states, with little political representation and no rights for women or minorities. Further, oil prices remain low, and while the Saudi state has massive cash reserves, the rise of shale oil has diminished its role as the world’s main oil producer. Saudi Arabia also has a growing youth population, with 51% of the population under the age of twenty five.

This is itself less concerning than the inability of the oil-dependent Saudi state to provide stable employment opportunities; the unemployment rate for those between fifteen and twenty-five years of age is at least 30%. It is no wonder that many of the unemployed youth of Saudi Arabia are attracted by movements like ISIS. Indeed, by some estimates, more than 2,500 of the foreign fighters in Syria come from Saudi Arabia. The newest iteration of this threat is seen in attacks like those of the last week, as young men susceptible to ISIS avoid travel to Syria, and instead carry out attacks inside Saudi borders.

Yet the ISIS attacks also highlight the pernicious influence of state-supported sectarianism. The bombers astutely aimed the bombings not at Sunnis, but at the state’s minority Shi’a population. While targeting Sunnis would likely have increased resolve among Saudi citizens, targeting Shi’a mosques instead served to cast worshippers as heretics, highlighting domestic sectarian tensions.

The attacks remind Saudi Shi’ites that their own government uses sectarian messaging on state TV, and has close ties to clerics which rail against Shi’a heretics. Shi’ites in Saudi Arabia don’t even enjoy the same minimal political rights that their Sunni compatriots do, and the state has repeatedly cracked down on calls for increased representation.

These tensions are being further inflamed by the war in Yemen, which is being presented by Saudi state TV as a crusade against Houthi Shi’ites. The same applies to the state’s newly activist foreign policy, which is portrayed broadly as a challenge to Iranian and Shi’a interests across the region. The high civilian death toll in Yemen – as many as 2,000 people – and the reticence of the Saudi government to seek a political settlement with the Houthis also contributes.

In short, the ISIS attacks targeted a potential cause of instability within the Saudi state, requiring Saudi rulers to strike a delicate balancing act. They must show support for the attacked communities, while avoiding upsetting the hardline Sunni clerics which support the royal family. Balancing these factors while continuing to use sectarian language to justify the state’s wars in Yemen and elsewhere may prove impossible.

As the Arab Spring illustrated, even states which appear relatively stable can suffer from instability and chaos. It also showed that once the Pandora’s Box of sectarianism has been opened, it is extremely difficult to shut. As ISIS attacks within Saudi Arabia seek to increase tensions between Sunni and Shi’a populations, this is a lesson Saudi Arabia’s rulers would be wise to bear in mind.  

The Folly of Centralized Spending

I’ve argued that the centralization of government spending in Washington over the past century has severely undermined good governance. Citizens get worse outcomes when funding and decisionmaking for education, infrastructure, and other things are made by the central government rather than state and local governments and the private sector. The problem is the same in the European Union, as a new article in Bloomberg on the funding of Polish airports illustrates:

Local authorities are spending some 205 million zloty ($58 million), including more than $44 million in EU subsidies, to build runways and a new terminal that could accommodate more than 1 million passengers a year. The Olsztyn Mazury Airport is scheduled to open next January, but traffic and revenue forecasts developed by the project’s backers are “very far from reality,” says Jacek Krawczyk, a former chairman of LOT Polish airlines who advises the EU on aviation policy through its European Economic and Social Committee.

Szymany adds to a burgeoning supply of costly new airports across Poland. Since 2007, the EU has spent more than €600 million ($666 million) to build or renovate a dozen Polish airports.

… Mostly, though, Poland’s new airports have been a financial bust. A report in December by the European Court of Auditors found that EU-subsidized airport projects in Poland, as well as others in Estonia, Greece, Italy, and Spain, had “produced poor value for money.” Traffic at most airports fell far short of projections, and there was little evidence of broader economic benefits, such as job creation, the report found.  

With respect to U.S. infrastructure, there is ongoing pressure to increase federal investment, despite decades of experience on the inefficiency of it. Politicians and lobby groups constantly complain that America does not spend enough on infrastructure. But they rarely discuss how to ensure efficiency in spending, or cite any advantages of federal spending over state, local, and private spending.

I’ve discussed the many downsides to federal aid for infrastructure and other local activities here and here. But I was alerted to an additional argument against aid from this Regulation article by William Fischel and this book by James Bennett. Federal aid encourages local governments to expropriate private property, often for dubious purposes.

The article and book discuss the expropriation of Detroit homes for the benefit of General Motors in the 1980s. The “Poletown” project would not have happened without $200 million in federal and state loans and grants to the city. So Fischel makes the point that (abusive) government uses of eminent domain—such as the Kelo case in New London, Connecticut—are encouraged by the flow of federal and state funds to cities. That is, money for “economic development” and the like.

State and local governments would make better decisions if they were responsible for their own funding of programs and projects. The annual flow of more than $600 billion in federal aid to state and local governments should be phased out over time and eliminated.