And These Folks Are Our Friends…

Here’s what Anatole Kaletsky, columnist at the London Times, has to say about the task facing Gordon Brown:

The question Mr Brown must now ask himself is whether he can still allow himself to remain publicly allied to a US Administration that is so recklessly belligerent in its diplomatic conduct, so demonstrably incompetent in warfare and so irresponsibly dangerous to the peace of the world.

As the anarchy in Iraq goes from bad to worse and Washington’s only answer is to expand the circle of its aggression, clichés about the special relationship are no longer sufficient. Mr Brown must decide whether to remain a silent but active partner in this madness, whether to retreat quietly like the Italians, Poles and Spaniards or to develop a third and genuinely courageous option. This is to positively forestall further disasters by breaking publicly with the Bush Administration and trying to develop a genuine European alternative to the suicidal American-led policies, not only in Iraq, but also in Israel, Palestine and Iran.

It’s one thing to hear Dominique de Villepin or “Pootie-Poot” talking like this, but when your friends in England have thrown up their hands, it’s doubly bad news. Interestingly, both Brown and the Tory leader David Cameron have moved away from the stance of Tony Blair, with Cameron going so far as to announce that “We should be solid but not slavish in our friendship with America.”

Sometimes the best friends provide not reflexive support but constructive criticism and prudent advice. Hopefully the U.S.-England relationship will move away from the former and toward the latter.

Maine House Approves Flat Tax — Over GOP Objections

Maine has one of the country’s highest income tax rates, which stifles growth and undermines competitiveness. But this may soon be a relic of the past, as the state House has approved a flat tax. The supposed revenue loss from lower income tax collections will be offset by broadening the base of the sales tax, which currently applies to only a narrow range of products.

Interestingly, Republicans in the statehouse are opposing the proposal, though it is not clear whether they are being partisans and reflexively opposing a Democratic plan or whether there are some genuinely objectionable features of what otherwise seems to be a pro-growth reform. This story in the (Brunswick, ME) Times Record, for instance, does not reveal whether the tax plan is designed to raise more money for government:

The House voted largely along party lines Wednesday to support a tax restructuring plan that expands the sales tax base to lower the income tax rate — a plan Republicans warned would cause a revolt back home when people realize how it affects their day-to-day purchases.

…[I]t gives tax relief to Mainers of all income-levels and stabilizes the tax system that currently relies on sales in just 24 categories. That limited base makes sales tax revenue very volatile and leaves the state short on cash when the economy slows. On the other hand, the state has the seventh highest income tax rate in the country and that discourages businesses from moving here and retirees from making the state their full-time home. The plan would rebalance that system. “This plan will provide a tremendous economic boost to the state of Maine,” [state Rep. John] Piotti said. “It will be a huge stimulus for people in state who want to expand and for people out of state looking to do business….”

The proposal would raise more than $230 million in sales-related revenue by expanding the 5 percent sales tax base to a long list of currently exempt services; raising the meals and lodging tax from 7 to 8 percent; increasing the real estate transfer tax on a sliding scale based on the property’s selling price; and doubling the excise tax on beer and wine. That money, in turn, would be used to lower the state’s graduated income tax to a flat tax of 6 percent.

Ron Paul and the NBA

Ron Paul is the San Antonio Spurs of Congress.

Washington Post sports columnist Mike Wise praises the resilience of the Spurs, who keep coming back to win the NBA championship without ever being quite a Bulls-style dynasty. He says the Spurs “had their crown taken away twice since 2003 and got it back both times.”

Similarly, Ron Paul is the only current member of Congress to have been elected three times as a non-incumbent. Given the 98 percent reelection rates for House members, it’s no great shakes to win three terms — or 10 terms — in a row. It’s winning that first one that’s the challenge. And Ron Paul has done that three times.

He first won in a special election for an open seat. He then lost his seat and won it back two years later, defeating the incumbent. After two more terms he left his seat to run unsuccessfully for the U.S. Senate (and thereby did his greatest disservice to the American Republic, as his seat was won by Tom DeLay). Twelve years later, in 1996, after some redistricting, he ran again for Congress, again defeating an incumbent, this time in the Republican primary. Some political scientist should study the political skills it takes to win election to Congress without the benefit of incumbency — three times.

Tax Revenues Hit All-Time Highs

While Democrats plot to raise taxes (and Republicans indirectly help them by failing to push for smaller government), Investor’s Business Daily provides a useful service by pointing out that inflation-adjusted tax revenues have reached record levels. And even when measured as a share of economic output, tax collections have risen above their long-term average (though the assumption that politicians automatically deserve a slice of additional economic output is a pernicious notion):

Tax revenues will be about 18.5% of GDP this year — above the average of 18.2% since 1960. As for inflation-adjusted tax revenues — a little-used but equally telling statistic — they’ll reach an all-time high of $2.013 trillion. That’s higher even than in the last year of the dot-com boom. And by the way, it’s an astounding 26% gain since 2003 — after inflation. What about the claim that tax cuts “lose” revenues for the government? Also not true. What is true is that by creating a dynamic of powerful economic growth, lower taxes expand the economy and, therefore, overall tax revenues. They do this by giving people more incentives to work, save, invest and innovate — all drivers of long-term economic growth.

Good News for School Choice in AZ

The Arizona Superior Court handed the anti-school-choice crowd yet another in a long string of legal defeats by upholding the recently passed voucher program for foster children.  They still have cases pending, but if they couldn’t get the courts to overturn a voucher, they have no chance with the tax credit. 

I can’t say it any better than the Institute for Justice, the public-interest law firm that’s defending this and many other school choice programs:

Relying on U.S. Supreme Court and Arizona Supreme Court precedent, including 1999’s Kotterman v. Killian case upholding Arizona’s first tax credit scholarships program, Judge Hicks rejected opponents’ claims that the new scholarship programs violate the state Constitution’s Blaine Amendments and its education guarantee.

“This is the fifth lawsuit that school choice opponents have filed against educational aid programs designed to help Arizona schoolchildren most in need, and it is the fifth time that courts have sided with kids,” said Tim Keller, executive director of the Institute for Justice Arizona Chapter.  “It is time for opponents of genuine education reform to get the message and stop these frivolous legal battles.  All our clients want is a good education that meets their children’s unique needs.”

I suppose we all should be happy that they’re continuing to waste so many resources fighting a lost cause in AZ.  Hopefully Big Ed remains clueless and doesn’t move on.

Teachers Win (a little) at the Supreme Court

The U.S. Supreme Court has just ruled, in Davenport v. Washington Education Association (WEA), that states can require public school employee unions to obtain non-member teachers’ explicit consent before using their compulsory dues for political activities.

Hurray! Sort of.

This ruling is great as far as it goes, and Washington State’s Evergreen Freedom Foundation should be commended for all the hard (and smart) work it put in fighting this case on behalf of the state’s teachers.

This, however, is just a baby step in the right direction. It is still legal for unions to forcibly collect dues from non-members in states all across the country. This is a patent violation of the 13th Amendment’s injunction against involuntary servitude. To work in a public school, teachers MUST pay union dues in “agency shop” states, whether they want to or not. They must work for the financial benefit of others against their will. That is involuntary servitude.

The rationale for this practice is that anyone who benefits from the union’s actions should be compelled to pay for them. By the same argument, anyone who invests money and time landscaping their front yard, and thus raising their own and their neighbors’ property values, would be entitled to accost those neighbors, reach into their wallets, and pull out their “fair” share. Such a practice would be unthinkable, and yet the analogous practice of levying compulsory union dues is the law of the land in many states.

Which presidential candidates, I wonder, will be most likely to appoint justices who can see that simple fact?

Bark Dwarfs Bite in China Currency Legislation

Yesterday, THE much-anticipated, passable-with-a-veto-proof-majority, WTO-consistent, legislative response to Chinese intransigence over its undervalued currency was introduced in the Senate.  As it turns out, “much-anticipated” and “legislative” appear to be the only apt adjectives.  It is unlikely to pass with a veto-proof majority, and my initial analysis leads me to conclude that its provisions would likely contravene U.S. WTO commitments. 

That being said, I am heartened by the bill because, despite all the hostile rhetoric and hand wringing on Capitol Hill, it seems to reflect a surprising degree of realism and rationality that I assumed was missing in Congress.  It quietly acknowledges that precipitous currency adjustment could be destabilizing and that U.S. WTO obligations are, in fact, worthy and worthwhile commitments to honor. 

On the continuum of prospective proposals under consideration ranging from innocuous to the nuclear 27.5% across-the-board-tariff, the “Currency Exchange Rate Oversight Reform Act of 2007” is relatively tame.  It has its problems and it is unnecessarily intrusive, but if this represents the final word of Congress on the matter, I’ll take it. 

Here is the gist of the bill. 

First, it makes “currency misalignment” instead of “currency manipulation” the trigger for action, which effectively lowers the threshold, and is thus not good.  Changing the designation effectively strips the Treasury Secretary of the discretion to determine whether currencies are manipulated intentionally for purposes of gaining a trade advantage.  Under the new rule, a formula will be used to determine automatically whether a conclusion of misalignment is rendered.  The precise formula is still a bit unclear to me, though. 

Depending on the degree of misalignment, countries will either be put on notice and consultations requested or priority action will be considered right away.  As far as I can tell, it would be a minimum of six months after the designation of misalignment before any punitive action can be taken against a priority country.   

Punitive action includes a cessation of U.S. government purchases of goods and services from the offending country; U.S. denial of support for multilateral institution or OPIC financing of projects in the offending country; U.S. denial of support for proposals and other items of interest to the “offending” country within multilateral institutions; adverse consideration of proposals to graduate the offending country from non-market economy status to market economy status for purposes of the antidumping law, and perhaps most significantly; adverse treatment of exchange rate conversions for purposes of calculating antidumping deposits and owings.  That would lead, inevitably, to higher dumping duties.  

Ultimately, if insufficient action is taken by the offending country to bring its currency into alignment, the
United States can lodge a formal complaint in the WTO (although it is unclear to me exactly what WTO provision the offending country would be violating). WTO-consistency was one of the driving considerations of this bill.  But I rather doubt that the antidumping provision would pass muster with a dispute panel, since Article 2.3 of the Antidumping Agreement seems to require that currency conversions be made using the exchange rate on the date of the U.S. sale.  The new legislation would allow the
U.S. authorities to substitute its estimate of the market-based exchange rate for the official exchange rate. Finally, and very importantly, as is the case with respect to Section 421 trade cases (the China-specific safeguard, agreed as part of China’s accession protocol), the president has the authority under this bill to reject any remedial/punitive measures on national economic security grounds.  That’s a very important safety net because the executive branch is typically much less willing to engage in the sort of punitive actions that Congress tends to demand reflexively. 

Thus, at the end of the day, even though the legislation is banal and unnecessary, something was going to materialize legislatively.  Congress talked itself into a corner with its continuous complaining about the administration’s failure to address “unfair” Chinese practices.  Congress promised to get tough if the administration continued to fiddle.  So it had to walk the walk.   

Despite some harsh provisions, it could have been worse.  Practically speaking, at the end of the day, there might not be much difference between this legislation and the gradual, negotiations approach to the Chinese currency issue that is favored by the administration, and to which this legislation is supposed to be an alternative.  Here’s why. 

By the time the bill introduced yesterday makes it through conference, passes both chambers of Congress, gets vetoed by the President, and then secures two-thirds majorities in both chambers to override the veto to become law, and then the new regulations are promulgated, it will likely be too late for the statutory September 15 Treasury report to be issued.  The earliest report that could identify Chinese currency misalignment would be the March 2008 report, and the earliest that countervailing action could take effect would be September 2008.  The Yuan has appreciated against the dollar by nearly 8.5 percent since July 2005.  Since the Chinese government allowed for a wider band of daily fluctuation and appreciation two months ago, the Yuan is now on a steeper trajectory of appreciation.  By then—15 months from now—the Yuan is likely to have appreciated considerably more.  It could very well have appreciated “between 15 and 40 percent,” which has been the estimate of undervaluation for the past few years.  If that is the case, there should be no need for action.  

But, finally, given the feature of executive override and precisely because sanctions are a long way off under this bill, I can’t see it passing Congress with a veto-proof majority.  But a more hostile, impose-sanctions-first-ask-questions-later bill is also unlikely to pass with a veto proof majority.   

Thus, the preferable and much wiser gradual approach it is, by default.