Archives: 05/2011

This Week in Government Failure

Tad DeHaven has gone fishing with his dad, so I’ve got weekly wrap-up duties.

We focused on the following issues at Downsizing the Federal Government this week:

To close out, Tad would usually say something tech-savvy such as ”follow Downsizing the Federal Government on Twitter (@DownsizeTheFeds) and connect with us on Facebook.”

The Boundless Executive State: From Global Warming to Sexual Harassment

Two days ago Cato held a book forum to mark the publication of an excellent new book, Climate Coup: Global Warming’s Invasion of Our Government and Our Lives, edited by Pat Michaels. I coauthored chapter one, which shows how the modern executive state arose over the 20th century such that today the Environmental Protection Agency is able to regulate vast areas of life without ever having to go to Congress for authority to do so. It’s a remarkable inversion of the Founders’ vision. With emphasis added, the very first sentence of the Constitution, after the Preamble, reads as follows: “All legislative Powers herein granted shall be vested in a Congress …” — not in the executive branch, not in the courts, but in Congress. Yet today we are governed mainly by over 300 executive branch agencies that themselves exercise legislative, executive, and judicial powers, leaving the separation-of-powers principle in tatters.

And the executive’s reach extends, of course, far beyond environmental regulations. Thus we now learn from the Foundation for Individual Rights in Education (FIRE) — a fine organization dedicated to defending students and faculty caught in the jaws of higher education’s obsession with political correctness — that just last month the United States Department of Education’s Office for Civil Rights (OCR), all on its own, issued regulations requiring that colleges and universities receiving federal funding must employ not the beyond-a-reasonable-doubt standard, nor even the clear-and-convincing-evidence standard, but the low preponderance-of-the-evidence standard (a 50.01 percent, “more likely than not,” evidentiary burden) when adjudicating student complaints concerning sexual harassment or sexual violence. Institutions that fail to comply face federal investigation and the loss of federal funding.

It’s well understood, of course, that allegations of sexual crime involve difficult proof issues. Given that, FIRE’s open letter to OCR’s assistant secretary points out that Supreme Court precedent argues strongly against using the preponderance-of-the-evidence standard in campus hearings concerning allegations of sexual harassment and sexual violence. Lowering the burden of proof, FIRE notes in its press release,

will reduce confidence in campus judiciary systems and inevitably result in more incorrect guilty verdicts. Rather than provide for the “prompt and equitable” resolution of student allegations, FIRE contends that OCR’s new requirement “serves to undermine the integrity, accuracy, reliability, and basic fairness of the judicial process.” Further, relying on the preponderance of the evidence standard in sexual violence claims “turns the fundamental tenet of due process on its head, requiring that those accused of society’s vilest crimes be afforded the scant protection of our judiciary’s least certain standard.”

Yet already, FIRE adds, OCR’s new regulations have prompted colleges and universities across the country

to abandon their commitment to due process protections for students accused of sexual harassment and sexual violence. Brandeis University, Stanford University, Yale University, and the University of Massachusetts Amherst all have announced revisions, either already instituted or forthcoming. Given the threat of federal investigation and the loss of federal funding for failing to comply with OCR’s directives, hundreds of institutions will follow.

Thus, the modern executive state is at work, in this and a thousand and one other ways, writing and enforcing rules that Congress alone has the authority to write. But Congress long ago abdicated that responsibility, delegating it to politically non-responsible bureaucracies and bureaucrats. And that is where power rests today.

A Fiscal Royal Wedding

The British royal wedding was splendid, and the bride and groom were a great match. As a fiscal wonk, my idea of a royal match-up would be marrying corporate tax cuts and business subsidy cuts. The Obama administration is talking about corporate tax cuts and Republicans are talking about cuts to farm subsidies. Might they get together over a cup of tea and work out nuptials?

The global average corporate tax rate has fallen over the last decade from 32 to 25 percent (KPMG, page 79). We have been stuck with a highly damaging 40% federal-state rate. Canada is chopping its combined federal-provincial rate to 25 percent. The Conservative government just won a parliamentary majority, which promises even more pro-investment changes for our largest trading partner.

Consider a Japanese car company deciding where to build its next North American plant. Should it choose a place with a 25 percent tax and stable government finances, or a place with a 40 percent tax and soaring government debt threatening major tax hikes?

The American economy is sputtering, and today we learned that the unemployment rate is back up to 9 percent. If the Obama administration wants to get the economy booming before next year’s election, it should push for a cut in the federal corporate tax rate from 35 percent to 20 percent or lower. And it should put aside all this stuff about “closing corporate loopholes.” A lot of supposed corporate loopholes aren’t loopholes to begin with, and as soon as you start trying to cut the real loopholes, half the business community lines up against reform and nothing gets done. Furthermore, if we chopped the corporate rate, the economic distortions caused by loopholes would decline.

Anyway, the largest corporate “loopholes” are probably “homemade loopholes,” which start disappearing automatically if we cut the tax rate. With a high tax rate, corporations have fashioned all kinds of financial structures to avoid taxes. Corporate tax experts agree that the mobility of the corporate tax base is high and rising. If we sharply cut our corporate rate, reported income would increase substantially as multinationals shift their profits into the United States. (For more on this, see my book).

A corporate tax cut would spur capital investment and economic growth. In 2005, the Joint Committee on Taxation used two macro models to look at the effects of various fiscal reform packages. By far, the largest positive impacts on GDP came from matching a corporate tax rate cut with federal spending cuts. (See charts 1c and 1d). The JCT found that:

A decrease in the corporate income tax rate primarily affects the economy through increasing the after-tax rate of return on corporate capital, which provides incentives for increased investment in corporate capital. Over time, this increased investment results in more goods and services and higher total output. It also results in higher labor productivity, leading to increased wages and employment.

So, let’s get cracking on a corporate tax rate cut. Forget about the corporate loopholes, and instead match a rate cut with cuts to business subsidies, such as farm handouts.

Let’s also put aside the idea of tying corporate tax reform to individual tax reform, as Ways and Means chairman David Camp has suggested. That’s just a recipe for gridlock. Obama is offering up corporate tax reform — for the sake of jobs and the economy, Republicans should jump on that opportunity right away.

Friday Links

  • With both parties gearing up to battle over the debt ceiling, Republicans need to stop apologizing for spending cuts and argue for a smaller government.
  • Pat Michaels sat down with Caleb Brown to talk about the influence of politics on science.
  • There are many answers that Osama bin Laden’s death does not provide.
  • A scalpel is more effective than a sledgehammer against terrorists.
  • Please join us on Monday at 4 p.m. as Prof. Amitai Etzioni of George Washington University Law School debates Cato vice president for legal affairs Roger Pilon on the moral implication of deficits, debt and the budget battles ahead. Cato executive vice president David Boaz will be moderating. Complimentary registration is required by noon, eastern, May 6, 2011. If you can’t join us in person, we hope you can join us online.

Want to Repeal ObamaCare? Stay On Message

Yesterday, I reluctantly dinged House Majority Leader Eric Cantor (R-VA) and House Budget Committee chairman Paul Ryan (R-WI) for veering off-message after bravely introducing and winning House passage of badly needed Medicare reforms.  Each said ill-advised things to the media that undermined the long-term goal of Medicare reform.  I even emailed some colleagues, “Why can’t they stay on-message, as they have with ObamaCare?”

As if on cue, it appears that House Ways & Means Committee chairman David Camp (R-MI) may have outdone both Cantor and Ryan.  Huffington Post reports that Camp used the word “dead” to describe the effort to repeal ObamaCare.

I know, I know, he probably only meant that repeal is dead in this Congress.  Yes, yes, he was backed into it by a reporter.  Yeah, he will probably push for repeal in the next Congress, just as he did in this Congress.  Is Huffington Post seizing on the word dead and painting an inaccurate picture of just how much Camp really, really wants to get rid of this intolerable law?  No doubt all of this is true.  None of it matters one bit.

Camp is the chairman of a powerful congressional committee.  He should know that’s exactly what reporters are trying to do.  And he should know how to stick to the script.  Rather than use his comments to signal once again how committed he is to ensuring that ObamaCare never takes full effect in 2014, he gave us a news cycle — hopefully no more than one — where the words ObamaCare, repeal, and dead appear in the same sentence.

More Trade, More Jobs

Our friends at the Economic Policy Institute are at it again, issuing another study this week that shows some particular trade agreement has cost X thousands of jobs over a certain number of years.

The latest target of EPI’s flawed model is the North American Free Trade Agreement. Enacted in 1994, NAFTA has created a free trade zone comprising the United States, Canada, and Mexico. According to the EPI report,

U.S. trade deficits with Mexico as of 2010 displaced production that could have supported 682,900 U.S. jobs; given the pre-NAFTA trade surplus, all of those jobs have been lost or displaced since NAFTA. This estimate of 682,900 net jobs displaced takes into account the additional jobs created by exports to Mexico.

The report’s author, Robert Scott, claims it foreshadows job losses if Congress passes pending trade agreements with South Korea, Colombia, and Panama.

The EPI model has little relevance to the real American job market. As I’ve pointed out before (here and here), its model is based on an overly narrow view of trade’s impact on the job market. Yes, some people do lose their jobs because of import competition, no news there, but trade also creates jobs through increased exports. And even if we run a trade deficit with a country such as China or Mexico, jobs are also being created by the net inflow of foreign capital, which spurs domestic job creation through lower interest rates and direct investment. The money we save from lower-priced imports also liberates consumer dollars to fuel growth elsewhere in our economy, and cuts costs for import-consuming businesses, boosting their sales and employment.

Next, consider the EPI numbers on their face. Those alleged 682,900 net jobs lost came over a 16-year period. That’s a bit more than 40,000 jobs lost per year. That is a drop in the bucket in a dynamic economy like ours that creates and eliminates about 15 million jobs each year. Even when unemployment is low, 300,000 or more Americans file for unemployment insurance in a typical week. So even if true, the EPI job loss numbers amount to less than one day’s worth of job displacement for the whole year.

When we look at the actual job market performance since NAFTA was enacted, the irrelevance of the EPI model becomes plain. In the first five years after NAFTA’s passage, 1994-98, when we could have expected it to have the most impact, the U.S. economy ADDED a net 15 million new jobs, including 700,000 manufacturing jobs. In the 16 years since its passage, despite two recessions, our economy still employs 20 million more workers than it did the year before NAFTA passed. (Check out the employment tables in the latest Economic Report of the President.)

In my own April 2011 study of trade and the economy, “The Trade-Balance Creed,” I found that civilian employment in the past 30 years has actually grown quite a bit faster during periods of rising trade deficits compared to periods of declining deficits, just the opposite of what EPI’s distorted model would predict.