Monetary Mercantilism

Chile’s Central Bank has finally decided to intervene in the local currency market in order to avoid a further appreciation of the peso against the U.S. dollar. In doing this, Chile joins a monetary policy trend that includes most Latin American countries, particularly Argentina, Bolivia, Peru, Colombia, Costa Rica and Guatemala.

Until recently, Chilean monetary policy was regarded as an example for all Latin America. Chile was mentioned frequently — especially by defenders of “monetary sovereignty” — as a model of how a Latin American country can have both a national currency and monetary stability.

However, alarm bells started ringing last year when inflation tripled to almost 8 percent, mainly because of an excessive increase in public spending by the government of Michelle Bachelet. Now, by deciding to abandon the historic policy of free floatation of the peso, Chile’s Central Bank further compromises this year inflation’s target.

Aiming for a cheaper peso will prove very expensive for Chileans.

Max Boot’s Moral Compass

Max Boot writes this today, discussing the competing currents of American foreign policy, militarized Wilsonianism and those who oppose it:

The opposing viewpoint—which denounces American “imperialism” and abjures the defense of liberty abroad—has an equally long history. It lists among its proponents not only modern-day neocon-bashers such as Michael Moore and Pat Buchanan, but also such illustrious predecessors as the “progressive” historians Charles Beard and William Appleman Williams and realpolitik thinkers like Hans Morgenthau and Walter Lippmann.

Does Boot want us to believe that–to take a particularly salient example–playing one Shi’a militia off the other amounts to “the defense of liberty abroad”? Maybe I don’t want to know the answer, since Boot has called the deranged Gen. Curtis LeMay “one of the ‘greatest peacemakers in modern history,’ a proper candidate for a Nobel Peace Prize” and gushed over how maybe the Philippines (200,000 civilians killed! torture!) could be a model for how to win in Iraq. So I for one will pass on taking my moral cues from Boot, thanks.

Dispatch from the ASIL Annual Conference II

This morning I attended two panels at the ongoing American Society of International Law Conference. The first was “The Politics of War Crimes Tribunals,” which refreshingly did not simply rehash the formation of the International Criminal Court but dealt with the meatier issues of how to decide whom to prosecute, what kind of justice to pursue, etc. The panelists, all academics who had played various roles associated with, for example, the Special Court for Sierra Leone, discussed precisely the issue that most interests me: how to draw the line between law and politics. If you overshoot and try to prosecute thousands of perpetrators of unspeakable crimes, spread across multiple countries, your political support will collapse. If you amnesty everyone, there is no justice. Tough decisions have to be made such that there is some justice, which is better than no justice.

One interesting anecdote from this first panel involved the quixotic attempt by Col. Luke Lea and a motley band of doughboys to capture Kaiser Wilhelm at the end of World War One. The panelist who told this story – which was relevant because the plan was to prosecute the Kaiser as a war criminal – misnamed Col. Lea as having been a Texan, when anyone worth his salt knows that it’s “Luke Lea of Tennessee.”

(Ok, ok, the only reason I knew this factoid was because when I interned for former Senator Bill Frist (R-TN) over a decade ago, I was charged with writing an essay on Lea as part of a project to document the lives of all Tennessee senators. Lea was a one-termer who, upon losing the Democratic nomination after the passage of the Seventeeth Amendment – direct election of senators – volunteered for the Great War.)

Who Wins the Tax Competition Debate?

The Wall Street Journal posted an online debate between yours truly and Raymond Baker of the Brookings Institution. We are supposed to decide which is worse: tax havens or high taxes. I began the debate by explaining:

Tax competition is a liberalizing force. When politicians worry that jobs and investment have the freedom to cross borders, their reflexive desire to overtax and overspend is at least somewhat curtailed. Tax havens play a valuable role in this process, and this helps explain why income tax rates have dropped by more than 25 percentage points since 1980 and corporate rates have fallen by more than 20 points. These reforms have greatly strengthened the global economy, improving living standards across the board and helping to lift hundreds of millions of people out of poverty. Efforts by bureaucracies such as the OECD to create a tax cartel – an “OPEC for politicians” – should be rejected.

In his contributions, Mr. Baker largely avoided any debate about tax competition and repeatedly asserted that tax havens were refuges for dirty money. I cited numerous sources that suggest otherwise. I then closed by arguing that: Because of tax havens and tax competition, the world today is much more prosperous and global poverty has been reduced. The OECD should not be allowed to disrupt the world economy by stifling competition and creating an “OPEC for politicians.” Every nation has the sovereign right to determine its own tax and privacy laws – and to control the taxation of economic activity inside its borders. Tax competition is good for America, good for the world, and good for freedom.

It will be interesting to see whether the comments in the reader forum will favor one side or the other.

Massachusetts: a Cautionary Tale

Before and after Gov. Mitt Romney (R) signed into law the Massachusetts health care reforms of 2006, Cato scholars predicted that this attempt at central planning would fail.  Both Michael Tanner and David Hyman predicted that the cost of the reforms would exceed projections.  The Boston Globe recently reported:

The subsidized insurance program at the heart of the state’s healthcare initiative is expected to roughly double in size and expense over the next three years - an unexpected level of growth that could cost state taxpayers hundreds of millions of dollars or force the state to scale back its ambitions. 

State projections obtained by the Globe show the program reaching 342,000 people and $1.35 billion in annual expenses by June 2011. Those figures would far outstrip the original plans for the Commonwealth Care program …

The state has asked the federal government to shoulder roughly half of the program’s cost from 2009 through 2011, but there is no guarantee of that funding. 

“The state alone cannot support that kind of spending increase,” said Michael Widmer, president of the Massachusetts Taxpayers Foundation, a business-funded budget watchdog group. 

I predicted that shifting uncompensated care subsidies to insurance subsidies wouldn’t much reduce uncompensated care.  The Globe reports:

[Romney] has repeatedly suggested that the state could insure low-income residents largely by reallocating money paid to hospitals and health centers that serve the uninsured … As more uninsured residents were covered, the state had expected to shift hundreds of millions of dollars from free care to insurance subsidies, but the drop has been slower than predicted.

David Hyman noted that “the Massachusetts plan does nothing to control the cost of health care—and health care in Massachusetts is already pricey because of the heavy reliance on teaching hospitals and academic medical centers.”  I wrote, “An individual mandate would not fix our broken health care system.  It would simply pump more money into that system. ”  The Globe reports:

Even with federal backing, the state may not be able to afford the insurance initiative as designed, because the law did not make any attempt to trim wasteful health spending, said Alan Sager, a Boston University professor who specializes in healthcare costs.

The Globe also notes, “There has been no discussion of a tax increase to pay for the healthcare plan.”  So far.

Other states (and the District of Columbia) should take note.

Sneaky Supplemental Spending

Many people are spilling a lot of ink debating whether America is taking the right approach in the war against terrorism, but very few are analyzing how that war is being financed. That is why an article by Veronique de Rugy of the Mercatus Center is a welcome contribution to the debate. She explains that politicians in Washington are deliberately abusing the supplemental spending process (which ostensibly is reserved for unforeseen emergencies):

… the total price tag for America’s present wars [is] at least $822 billion, approximately 80 percent of which will be spent on Iraq. That surpasses the cost of the Vietnam War ($670 billion in inflation-adjusted dollars). And the Iraq portion dwarfs the $50 billion to $60 billion cost predicted at the outset of the war by Mitch Daniels, then director of the Office of Management and Budget. …To distract people from the real price tag of a two-front war, the president and Congress have used an unprecedented and fiscally irresponsible budgetary trick: a series of “emergency” supplemental spending bills totaling hundreds of billions of dollars. This scheme has allowed them not only to hide the costs of the conflicts but also to avoid painful budget choices while funneling billions of dollars in unvetted goodies to favored interest groups. Once a small blip among federal outlays, emergency supplementals have exploded since 2002, when the Republican Congress let a key legislative restriction on their use expire. In May 2007, President Bush signed into law the biggest supplemental bill in history, $120 billion, to fund military operations in Iraq and Afghanistan ($100 billion) and pay for hurricane recovery and agricultural disaster relief at home. This came just five months after Congress approved another $70 billion emergency request for the wars. By contrast, the average annual amount of emergency supplemental spending in the 1990s—a decade that saw interventions in Iraq, Somalia, Haiti, Bosnia, and Kosovo—was just $13.8 billion. … The costs of the war may be necessary and temporary, but they are by no means sudden or unforeseen. The war in Afghanistan started in October 2001, and the war in Iraq commenced in March 2003. Furthermore, the easy-to-predict salaries and benefits of Army National Guard personnel and reservists called to active duty amount to some of the largest expenditures in the supplemental bills.

One final note: Democrats such as Franklin Roosevelt and Harry Truman reduced domestic spending to help finance, at least in part, war spending. Bush unfortunately has chosen to increase domestic spending at the same time that the defense budget has grown.