A Poison Pill for China?

Last week top Chinese and American economic officials met in Washington for the second “Strategic Economic Dialogue.” While trade and exchange rates grabbed all the headlines, one less publicized subject was advice from the American side on how the Chinese can promote consumption in their domestic economy.

More consumption would presumably mean the Chinese would buy more American products and send less of their excess savings to the United States, leading eventually to a smaller Chinese trade surplus with the United States and the world.

How did U.S. government officials propose to promote more consumption in China? The Chinese were advised by their American friends to “create a social safety net for its population, similar to the Social Security and Medicare programs in the United States, so Chinese residents do not need to continue to save as much as 50 percent of their income for their retirement and future medical needs,” according to one trade newsletter.

Whoa. Would China’s economic managers really want to saddle its population with the same unsustainable government promises that characterize our two biggest entitlement programs? As my Cato colleagues have long noted, and as USA Today reported on its front page this week, the unfunded liabilities wracked up by those two programs has now reached more than $45 trillion (yes, that’s trillion).

I suppose saddling the Chinese economy with a huge, unfunded government obligation would be one way to “level the playing field.”

National Service Is Garbage

In Albania, anyway. NPR reports that garbage is piling up in the streets of Tirana, and “It’s something you could blame on the fall of communism.” As reporter Vicky O’Hara explained,

When communism collapsed here in the early 1900s so did the city’s system of garbage removal. Shpresa Rira, a teacher at the foreign language institute in Tirana, remembers that under communism families were ordered to spend part of their weekend picking up trash.

Ms. SHPRESA RIRA: It was called the communist Saturday because people were meant to come to come together and give their services to the community.

O’HARA: Rira says that people were not paid but they turned out anyway, because if they didn’t, the consequences could be dire.

So it was universal compulsory service, like Melvin Laird and John Edwards want for the United States. But it turns out it didn’t work so well in Albania.

The communist tactic, she says, destroyed community spirit in Albania.

Ms. RIRA: We thought that we were closely connected, but as soon as communism was over, you know, we understood that that community spirit didn’t exist at all. It was just a fake.

And like most collectivist systems, it did not  “foster a culture of responsibility for our democracy.” Instead, it left people expecting that government would handle everything. So now, the government no longer threatens people with dire consequences for not picking up trash, and no one does. The city has been slow to create a normal garbage collection system. Maybe this forced community spirit stuff isn’t such a good idea after all.

Canadian Tax Exiles

Thanks to high tax rates, two successful Canadian artists have escaped to Switzerland. Both Shania Twain and Luc Plamondon have decided that the Canadian residence is not worth the price if government seizes too much of their income. One politician calls tax migration a form of “economic treason,” but the real problem is greedy politicians who think that successful people should be milk cows for wasteful government. The Montreal Gazette reports:

He’s one of Quebec’s highest-profile tax avoiders - moving to Ireland, and then to Switzerland to avoid paying Canadian and Quebec income taxes. For the last few weeks, successful songwriter Luc Plamondon is also the owner of an Order of Canada pin, presented to those who, through their achievements, set an example for other Canadians. Ironically, the presentation of Plamondon’s Order of Canada pin by Governor-General Michaelle Jean in a private ceremony last month comes as the Conservative government is moving to crack down on tax avoidance by Canadian companies. …some MPs, such as Liberal finance critic John McCallum, say they see nothing wrong with electing a residence outside Canada to avoid Canadian taxes, others, like New Democrat MP Pat Martin, strongly condemn the practice. “I call it economic treason to be a tax fugitive,” said Martin, suggesting that Plamondon return his Order of Canada pin. …In 1999, three years before he was named to the Order of Canada, Plamondon moved to Ireland, saying he was doing it to avoid high federal and provincial taxes in Canada and to take advantage of its special tax breaks for artists. “There is an enormous number of writers and musicians from around the world who have moved to Ireland because of the tax savings,” Plamondon said when he sold his Montreal home. …Among the other residents of the Montreux area is Canadian singer Shania Twain, also an Order of Canada recipient. …David Perry, senior research associate with the Canadian Tax Foundation, said countries like Canada, which has higher tax rates than some other countries, risk having some of their most successful citizens elect to live outside the country of their birth. “Any country that has had a very high level of taxation on the rich … soon finds itself exporting that type of talent.” A minority of wealthy Canadians elect to reside outside the country to escape its taxes, and the practice is less common than it once was, he said. However, it nevertheless increases the frustration for other Canadians left to bear the tax burden, he said.

Tony Soprano Earmarks

A commentary from Jeff Birnbaum of the Washington Post aired on American Public Media’s Marketplace yesterday.  The topic was the evolving alternative to earmarks, what Birnbaum calls “phonemarks.” 

Here’s the basic idea (from the transcript available at the Marketplace website):

Eager to avoid the bad publicity of legislative earmarking, lawmakers are secretly calling or writing bureaucrats and demanding that they fund their pet projects by fiat. These projects-via-telephone, or “phonemarks,” are the hottest new gimmick on the Washington scene.

Executive branch officials can dole out millions of dollars with impunity. And they avoid the scrutiny of the public, since they are done quietly and without any disclosure.

Earmarks actually have to be written down in a public law. Phonemarks, on the other hand, are accomplished through bureaucratic sleight-of-hand and nobody but the lawmaker and the bureaucrat need to know for sure.

My preferred descriptor is “Tony Soprano earmarks.”  As I wrote in a January 22 column for Business Week:

Even if transparency leads to fewer earmarks, there are no promises these projects won’t reappear in other ways and other places. The congressional budget process is nothing if not a game of reinvention. You could call spending items Happy Funtime Projects instead and sock them away in another part of the budget, but they will remain the coin of the realm on K Street.

Of course, Congress could simply give a bucket of money to an agency with no strings attached. But then a member of the Appropriations Committee would write a letter to the department head suggesting something like: “Gee, wouldn’t it be nice if Project X got some of this pot of money?”

Can you really blame a government department head who reads a letter like that—from a member of Congress who controls his budget and oversees his agency—and obliges? It would strike anyone in that position as similar to Tony Soprano saying to the corner grocery store owner: “Nice little place you got here. Damn shame if anything were to happen to it.”

Now for a secret.  The big problem in Washington isn’t earmarks.  They’re just a symptom of the real problem: policymakers who believe the federal government should be all things to all people.  Pork projects – disclosed or not – are inevitable in such an environment no matter what you call ‘em.      

Gov. Kaine Warns against Protectionism

Virginia’s Gov. Tim Kaine has a message for his fellow Democrats on the subject of trade: protectionism is for losers.

In an interview with Bloomberg News that was published this morning, Kaine said he disagreed with members of his party who criticize globalization and trade agreements such as NAFTA. Their attitude displays a “loser’s mentality,” Kaine countered, adding that, “The only way you’ll succeed [in the global economy] is by being an aggressive competitor rather than trying to hoard your dwindling assets.”

As I’ve argued elsewhere, the Democratic Party’s embrace of Lou Dobbs-style populism against trade betrays the party’s historical commitment to competition and internationalism. For its own and the nation’s good, party leaders would be wise to listen to Gov. Kaine’s advice on trade.

A Travesty in Tehran

I’ve been out of the office for a bit, but coming back I see that the Government of Iran has now charged Woodrow Wilson Center scholar Haleh Esfandiari with trying to foment a “velvet revolution” in Iran. It is awful news for several reasons.

First, the charges that Esfandiari was plotting to overthrow the Tehran government seem ridiculous. The notion is entirely at odds with the body of Esfandiari’s scholarly work at the Wilson Center, not exactly a hotbed of ideological bomb-throwing. (The Wilson Center chief, Lee Hamilton, tried quietly approaching President Ahmadinejad starting in February, keeping the matter out of the headlines. He has as yet received no response.) It is also worth mentioning that Esfandiari had come under some criticism from neocons and right-wingers in Washington for being too sympathetic to Tehran’s position in the bilateral relationship. The notion that she is a U.S. or Israeli spy strains credulity.

Second, her arrest gives hardliners in Washington grounds to wag their fingers in the faces of those of us (including people like Esfandiari) who favor dialogue and reduced tensions. Reuel Marc Gerecht immediately charged to the pages of the New York Times to argue that the event made clear that his view of the Islamic Republic, “suspicious, cynical, hawkish and religiously oriented,” offered the most plausible explanation. In part as a result of the Esfandiari case, it is an argument with more momentum than this analyst would like.

Third, it greatly jeopardizes U.S.-Iran relations at a time when the Bush administration is seen (grading on a curve, admittedly) as taking small steps away from confrontation with Iran and toward conciliation. Whether Esfandiari’s detention and arrest were an attempt by hardliners in Iran to scuttle rapprochement or not, the events have an effect of putting a damper on pushes from Washington to get to the negotiating table and avert a catastrophe.

But all of the political implications pale by comparison to the fact that a human being–and one who has worked tirelessly to produce outcomes that would benefit the citizens of both Iran and the United States–has been imprisoned unjustly and without even the pretense of due process. One can only hope that the leadership in Iran will come to its senses, whether out of recognition of its error or out of the realization that this sort of confrontation serves no one’s interests: the regime’s, the Iranian people’s, or the world’s.

The American Islamic Congress has set up a “Free Haleh” website here, and for further back story, read the op-ed from Esfandiari’s husband, GMU professor Shaul Bakhash.

Tax Competition Catches the Attention of the International Herald Tribune

An article in the IHT reports on the rush to cut corporate tax rates in Europe. The story appropriately credits tax competition, though the story is incomplete in that it should mention the reductions in death taxes, wealth taxes, capital taxes, as well as the flat tax revolution in Eastern and Central Europe:

A tax-cut war is spreading across Europe as leaders of the Continent’s biggest economies give up criticizing smaller neighbors for cutting business-tax rates and decide to join them instead. … It comes after Ireland and new European Union members from Eastern Europe succeeded in attracting investment, and irking their larger rivals, with tax rates of less than 20 percent, among the world’s lowest. … The EU’s average corporate tax rate at the end of 2006 was a record low of 26 percent, and more cuts are in the works this year. … The rush to lower business taxes is a turnaround for the biggest European countries, whose governments once complained that their neighbors were engaging in “tax dumping” and threatened to cut aid to them. Just three years ago, Sarkozy, then the French finance minister, sought EU support to implement a minimum corporate tax rate throughout the bloc. Feeding the complaints were business-tax reductions by Poland, Slovakia and Hungary before their EU entry in 2004. Poland cut its levy to 19 percent from 27 percent. Slovakia adopted a flat-tax rate of 19 percent, down from 25 percent, and Hungary went to 16 percent from 18 percent. The lower rates helped lure operations from companies in higher-tax countries. PSA Peugeot Citroën, an automaker based in Paris, and Siemens, an engineering company based in Munich, for example, moved some production to Slovakia. … Supporters of lower corporate taxes point to the success of Ireland, whose 12.5 percent rate, the lowest in the developed world, is down from 47 percent in 1988. That proved a magnet for such U.S.-based technology companies as Microsoft, Intel and Dell and helped Ireland’s economy grow more than three times the rate of the euro area in the past decade, while still running a budget surplus in nine of the 10 years. … a study of 86 countries last year by KPMG International … showed corporate tax cuts allowed countries to attract and retain business investment with little loss of revenue.