Expand Trade by Repealing Monopoly Unionism

Republicans say they favor cutting regulations to spur growth and create jobs. And they generally favor expanding international trade. They can attain those goals by reforming labor union laws.

America’s West Coast seaports are getting hammered by aggressive unionism. The damage spreads out across the economy during these labor disputes, affecting billions of dollars worth of trade. It’s an economically absurd situation, and it’s hugely unfair to the millions of workers whose jobs depend on trade. It should not be happening in America in the 21th century.

In her official response to President Obama’s SOTU, new GOP senator Joni Ernst (Iowa) said, “Let’s tear down trade barriers in places like Europe and the Pacific. Let’s sell more of what we make and grow in America over there so we can boost manufacturing, wages, and jobs right here, at home.”

She’s right, and she should use her prestige and tough-gal credentials to push for change. In the 1980s, Margaret Thatcher challenged the militant unions in Britain and she privatized most of that nation’s seaports. Senator Ernst has an opportunity to push for the same reforms here.  

The key to union reform is repealing the 1935 National Labor Relations Act, also called the Wagner Act. That act imposed “collective bargaining,” which is a euphemism for monopoly unionism. Monopoly unionism is incompatible with individual rights and it encourages unions to disrupt workplaces. The private-sector unionization rate is down to just 7 percent in the United States, but where it persists it causes major damage.

That brings us to the West Coast seaports. The Wall Street Journal reports:

The labor dispute that has magnified snarls at U.S. West Coast ports may be on the brink of a settlement, but it will take months to end the widespread pain, freight disruptions, and losses caused by the massive cargo traffic jam.

The near-paralysis at the ports is rippling through the economy. Railroads are reducing service to the West Coast. Cargo ships have slowed down—and even turned around—as containers have stacked up at the ports. And an official of a meat-industry trade group said last week that port gridlock was costing meat and poultry companies more than $30 million a week.

… Neely Mallory III, president of Mallory Alexander International Logistics in Memphis … is having trouble getting railroads to take loads west from Memphis, Dallas or Chicago, because they are reducing service to the ports until the congestion clears. He can’t arrange to export more than 10,500 containers of cotton. Last Friday, a ship due in with imports for his customers gave up, he said. It will avoid the U.S. for 30 days. “It’s devastating,” he added.

Manufacturers also are feeling the pain. The National Association of Manufacturers has heard from members that container shipments through the West Coast ports in recent months have become “incredibly erratic,” said Robyn Boerstling, director of transportation and infrastructure policy for the trade group. “Everyone is feeling extremely uneasy and frustrated,” she said. Companies fear that if they can’t deliver on orders it will be very hard to win business back, she said.

NAM said a small U.S. maker of pulp and paper told it that the company had lost about $1 million of pulp exports to China in the past few months because it couldn’t meet shipment deadlines or customers feared it might not deliver on time. FastenalCo., a distributor of industrial and construction supplies based in Winona, Minn., said some deliveries of screws, nails and other fasteners from Asia are delayed by a week or two, forcing it and some customers to hold larger inventories.

For more on the West Coast seaports, see here.

Cutting Spending Is the Best Approach

On Monday, the White House will release President Obama’s budget proposal for Fiscal Year 2016. The president is expected to reemphasize his previous fiscal approach of higher spending coupled with higher taxes, while completely ignoring the country’s long-term fiscal problems.

A new study published by the National Bureau of Economic Research (NBER) provides evidence of the best way to solve those problems, should the president decide to tackle the nation’s fiscal mess. The study, by Alberto Alesina, Omar Barbiero, and others, tries to answer one central question: What is the best way for a country to rebalance policy to solve a fiscal crisis?  

The study looked at Organization of Economic Cooperation and Development member countries and their response to the financial crisis from 2009 to 2013. Following the crisis, many of those countries became burdened by large amounts of debt and deficit as a result of rising spending and falling revenues. Government spending grew to an average of 43 percent of gross domestic product (GDP) within the European Union.

With a fiscal crisis on the horizon, many of the countries turned to so-called “austerity” measures in order to promote economic growth. Some countries adopted policies that focused on increasing revenue to close budget gaps, while others focused spending cuts. Researchers distinguished between fiscal plans based on spending cuts and those based upon tax increases.

The researchers found that spending cuts, not tax increases, are the best way to resolve a fiscal crisis. According to the researchers, “Fiscal adjustments based upon cuts in spending appear to have been much less costly, in terms of output losses, than those based upon tax increases.” Tax-based fiscal plans are an inefficient solution to fiscal problems in the long-term. An average tax-based plan with a size of 1 percent of total GDP was shown to shrink the economy by almost twice that amount over the next three years.

The NBER study provides valuable insight regarding the effectiveness of different types of fiscal adjustment plans. Fiscal plans emphasizing cuts in spending are more successful in promoting economic growth in the long term.

Thanks to Kristina Pepe for her excellent research assistance on this piece.

Ignorance of Economics Is No Excuse

The new Spanish leftist party Podemos takes great inspiration from the victory of Syriza in Greece. As NPR reports:

Much of Europe is watching Greece closely after an anti-austerity party won elections there last weekend. And Spaniards are paying particular attention because Greece may be influential. A similar new political party–left-wing, anti-establishment–has formed in Spain over the past year. And polls show that it could win power in elections this fall.

If Podemos is elected, Spaniards may be disappointed in the results. Consider the cognitive dissonance here:

Many Spaniards are … frustrated that while the economy here is growing, unemployment still tops 23 percent and double that for youth. Polls show voters are switching to Podemos. It promises to raise the minimum wage, hike taxes on the rich and re-evaluate whether Spain should pay its debts.

Making it more expensive to hire workers and reducing the return on investment don’t seem like policies designed to deal with Spain’s appalling unemployment problem. Europe has had higher unemployment than the United States for most of the past two decades. In 2004, economist William B. Conerly suggested some reasons for that: longer and more generous unemployment benefits, reducing the incentive to find a job; inflexible wages; and job protections that make businesses reluctant to hire workers whom they won’t be able to let go. The economist Mark Perry reports that the unemployment rate in European countries with a minimum wage is twice as high as in countries with no minimum wage. And minimum wage laws certainly seem to reduce youth employment.

Senate Passes Bill to Approve Keystone XL Pipeline

Today, in a 62-36 vote, the U.S. Senate passed a bill to approve the Keystone XL pipeline. The House passed a similar measure a few weeks ago. These actions come more than 6 years after TransCanada Corp originally submitted its application to the State Department to build a pipeline linking the Alberta oil sands to refineries along the U.S. Gulf Coast.

Did I say State Department?

Yep, in matters involving the crossing of an international border (in this case the one with Canada) the State Department must make a determination as to whether or not the project is in the “national interest.” Two-thousand, three hundred and twenty-three days later, the ultimate head of the State Department still hasn’t made up his mind.

So Congress has attempted to make the decision for him.

But it probably won’t work.

President Obama has already advertised that he plans on vetoing the measure, because, well, because the State Department already has a procedure in place to handle cross border pipeline projects like this one.

In fact, this procedure has worked flawlessly up until the Keystone XL pipeline.  The previous cross-border pipeline that was proposed—the Alberta Clipper in 2007—was approved in just over two years. At the time, the State Department wrote in glowing terms about the project praising it for advancing “strategic interests,” being a “positive economic signal” and adding that “reduction of greenhouse gas emissions are best addressed through each country’s robust domestic policies.”

The Oil Price Plunge Won’t Cause Russia or Iran to Capitulate

The recent dramatic drop in global oil prices has significant geopolitical as well as economic implications.  Consumers in the United States and other countries enjoy substantial savings, while marginal producers, both here and abroad, find their profit margins severely squeezed.  As I discuss in an article at Aspenia Online, some of the oil-producing states that have been especially hard hit include Russia, Venezuela, and Iran.  All of those countries are governed by regimes that are on bad terms with the United States, so there is a temptation among American political leaders and pundits to relish the current discomfort of those governments.

Greater restraint is warranted.  The geopolitical benefits to the United States from the current depressed pricing environment are not trivial.  Increased economic constraints appear to be one factor making Iran’s clerical regime more willing to negotiate seriously about that country’s nuclear program.  Venezuela’s already substantial financial woes, caused by the leftist government’s chronic economic mismanagement since the late 1990s, has made that country a less appealing political model for the rest of Latin America.  Washington’s worries about a leftist “Bolivarian” revolution sweeping the region, which were prominent just a few years ago, have faded considerably.

The Obama administration is especially pleased about how lower oil prices are putting pressure on Vladimir Putin’s government.  Although Western economic sanctions, imposed after Russia’s annexation of Crimea, account for some of the country’s distress, the precipitous drop in oil prices (with Brent crude now selling for well under $50 per barrel) is a more important factor.  Not only has the value of the Ruble shrunk by more than 50 percent, the Russian government faces a budgetary squeeze verging on a crisis.  U.S. officials hope that the growing financial and economic discomfort will compel Putin to make major foreign policy concessions.

Capitalism Defused the Population Bomb

Journalists know that alarmism attracts readers. Just yesterday, an article in the British newspaper The Independent titled, “Have we reached ‘peak food’? Shortages loom as global production rates slow” claimed humanity will soon face mass starvation. Just as Paul Ehrlich’s 1968 bestseller The Population Bomb  predicted that millions would die due to food shortages in the 1970s and 1980s, the article from yesterday tried to capture readers’ interest through unfounded fear. Let’s take a look at the actual state of global food production.

The alarmists cite statistics showing that while we continue to produce more and more food every year, the rate of acceleration is slowing down slightly. The article then presumes that if the rate of food production growth slows, then widespread starvation is inevitable. This is misleading. Let us take a look at the global trend in net food production, per person, measured in 2004-2006 international dollars. Here you can see that even taking population growth into account, food production per person is actually increasing:

Pentagon Spending and Bureaucratic Bloat

There are major spending battles on the Washington agenda this year, including over the defense budget. Congress needs to decide whether to stick with capped spending levels agreed to in 2011, or allow its past restraint efforts to unravel.

Republican defense hawks want to bust the spending caps, while the small-government wing of the party wants to hold the line. Rep. Justin Amash (R-Mich.) told the Wall Street Journal, “We’ve been spending too much on defense for years because we have a lot of waste within the Department of Defense … There’s room to cut, and I think we are perfectly capable of staying within the sequester caps.” Sen. Rand Paul (R-Ky.) noted, “To defend ourselves, we need a lean, mean fighting machine that doesn’t waste money on a bloated civilian bureaucracy.”

Amash and Paul’s position is buttressed by a new GAO study on the management bloat in Department of Defense (DoD) headquarters.

It is also buttressed by looking at DoD civilian and uniformed employment levels. The chart below shows that civilian DoD employment has grown 105,000 since 2001, while uniformed employment has grown just 22,000. Based on numbers in the chart, the ratio of bureaucrats-to-soldiers has increased from 47 percent in 2001 to 54 percent in 2014. But with the advance of computer power and other technologies, one would think that the bureaucratic overhead costs of our fighting force would be falling over time, not increasing.

How much could we save by improving bureaucratic efficiencies, and cutting the number of Pentagon civilians by at least the apparent excess of about 100,000? Annual pay and benefits for federal civilians is about $120,000 a year, so we could save roughly $12 billion a year by trimming this aspect of Pentagon bloat.

All data from the “Analytical Perspectives” sections of the FY2003 and FY2015 federal budgets. Data for 2014 are OMB estimates.

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