November 17, 2011 7:49AM

PPPs and Privatization for Infrastructure

I testified to the congressional Joint Economic Committee on Wednesday regarding infrastructure, which means roads, bridges, pipelines, railroads, and other such assets. Here are some of the points I raised:

  • Private sector infrastructure spending in the United States is more than four times larger than federal, state, and local government infrastructure spending. Thus, if Congress wants infrastructure, it should remove barriers to private investment.
  • Over the past 25 years, U.S. governments have spent about the same amount on infrastructure as a share of GDP as have other OECD countries, on average.
  • Most federal infrastructure spending, outside of defense, goes toward activities that are state, local, and private in nature.
  • A key problem with federal government involvement in infrastructure is that when it makes mistakes, it replicates those mistakes across the country. Think about the disastrous high‐​rise public housing projects built in dozens of cities in the 20th century. Or consider how the Obama administration is trying to impose its misguided high‐​speed rail vision on the states.
  • Politics often results in federal infrastructure spending being misallocated. For example, a large share of Amtrak spending goes to rural states where passenger trains don’t make any economic sense.
  • The way ahead is to devolve infrastructure spending to state and local governments and the private sector.
  • The United States lags many advanced nations in the growing use of privatization and public‐​private partnerships (PPP) for infrastructure. PPP deals are basically half way to full privatization. They’ve got some drawbacks, but they are a step forward toward market‐​based investment for items such as roads and bridges.
  • The industry reference guide for tracking PPP and privatization projects, Public Works Financing, includes only 2 American companies out of the 40 global companies that lead in these innovative projects.
  • U.S. policymakers should be asking: What have other countries privatized that we can privatize in this country? The answer is: air traffic control, airports, seaports, and many other items. For roads and bridges, the states can look at Virginia’s progress in shifting toward private funding and management of its projects.
November 16, 2011 2:14PM

Pining for the Next War at the Washington Post?

If nothing else, the Washington Post is fairly consistent in its use of over‐​the‐​top headlines that promise so much more than the stories deliver. I’ve commented on this excessive reliance on hyperbole before, but today’s web page headline (at around 2:00 pm) — U.S.to Counter China with Troops in Australia* — warrants a few words.

The thrust of the story is that the U.S. military will establish a “permanent” presence of 250 troops in Darwin, Australia. Is reaffirmation of a U.S. commitment in the Pacific intended to send some kind of signal to China? Yes. But to counter what? China’s alleged expansionary designs? With 250 troops? 

Sure, the Chinese government has asserted disputable and disputed territorial claims throughout the South China Sea and sure the Aussies and Filipinos and Indonesians and Vietnamese would love to devote their resources to economic growth while U.S. taxpayers pick up their security costs, but the headline gives the impression of imminent conflagration.

I am growing more confident that any confrontation between the United States and China — should that occur in the years ahead — is more likely to be the product of provocative media sensationalism intended to arouse U.S. nationalism than any real belligerence on the part of China.

* As of 2:25, the headline has been softened somewhat to “U.S. Troops Headed to Australia, Irking China.”

November 16, 2011 12:00PM

Cutting Military Spending, Rethinking Grand Strategy

The Associated Press’s Pauline Jelinek has a story on the wires/​Interwebs today that pokes holes in Leon Panetta’s claim that Pentagon budget cuts on the order of those contemplated under the debt deal’s sequestration provisions would be “devastating to the department.” Jelinek quoted me, as well as the Center for American Progress’s Larry Korb, and the Center for Strategic and Budgetary Assessment’s Todd Harrison.

Assuming that sequestration will actually happen (a big if), I tried to put the possible cuts in perspective, given the significant increase in military spending over the past decade.

But we shouldn’t put the budgetary cart before the strategic horse. I have said on several occasions that we should not cut military spending without rethinking our strategic ends.

Although Ben Friedman recently made a strong case for using fiscal austerity to drive a change in our grand strategy, I still believe it possible — and wiser — to do this in the reverse order; rethink the strategy first, and then shape the force to fit the strategy.

As Ben has taught me, austerity is a good auditor, but it doesn’t require us to cut anything, or increase taxes on anyone. The current fiscal situation doesn’t even force us to choose to make any difficult decisions now — so long as we’re willing to borrow money to make up the difference. It is that latter point, however, that people are getting hung up on. And rightly so. We’re doing a disservice to our children and grandchildren by saddling them with these debts, and no reasonable plan for retiring them. August’s debt ceiling deal pits two different factions within the Republican Party against one another: budget hawks and tax cutters (OK to cut, not OK to raise taxes) vs. hawkish hawks (not OK to cut military spending, OK to tax increases). Within this battle, the fiscal hawks are OK with sequestration. The hawkish hawks are not.

Leaving the fiscal constraints on military spending to one side, the underlying strategic logic to my argument that we can responsibly cut military spending still holds. Cuts on the order of $800 billion, or even $1 trillion, would not pose a grave risk to U.S. security. Panetta’s claim that it would rests on the dubious assumption that a nation’s strategic ends are fixed. They are not. What the United States chooses to do to advance its security are just that: choices. Some are wise in retrospect. Others are foolish. Some are understood to be foolish before they are undertaken. But it need not be so ad hoc.

This was one of Barry Posen’s pleas in his article “The Case for Restraint.” Posen made the case for rethinking our strategic goals well before the present fiscal crisis. But he began by reminding readers of the importance of strategy, or, more simply, what grand strategy is:

A state’s grand strategy is its foreign policy elite’s theory about how to produce national security. Security has traditionally encompassed the preservation of a nation’s physical safety, the country’s sovereignty and its territorial integrity, and its power position—the last being the necessary means to the first three. States have traditionally been willing to risk the safety of their people to protect sovereignty, territorial integrity and power position. A grand strategy enumerates and prioritizes threats and adduces political and military remedies for them. A grand strategy also explains why some threats attain a certain priority, and why and how the remedies proposed could work.

Our grand strategy has done none of those things (or at least not well), because the particular strategy that we have pursued for more than two decades—primacy, benevolent global hegemony, unipolarity, pick your term—is loathe to choose. Every crisis is a primary concern for the United States. No regional conflict can be handled by regional actors. Every humanitarian disaster, manmade or heaven‐​sent, demands U.S. intervention.

The list of goals that flows from such a grand strategy is just that—a list—with little or no consideration of how these should be ranked. We must be everywhere. We must do everything. The various strategy documents, meanwhile, are all based on the assumption that primacy is the only reasonable strategy for the United States. Taking the ends and ways as a given, they begin with a force structure (the means), and work backwards. Sometimes they don’t even do that.

Most of us who believe that we can responsibly reduce military spending without undermining U.S. security argue that point from the perspective that our strategy is flawed, and, therefore, that our resources are misallocated. The alternative claim—that our strategy is sound, but we can achieve the same ends with fewer means—is not tenable.

Cross‐​posted from the Skeptics at the National Interest.

November 16, 2011 10:50AM

Another Shoe Drops: Solyndra Layoff Was Delayed until after Election Day

The Solyndra story just keeps unfolding. Even as Secretary Chu tells NPR that “no decision we made in the loan program had anything to do with who is investing in this company,” today’s papers report that the Energy Department pressured Solyndra not to announce impending layoffs until the day after the crucial 2010 election. From the Washington Post:

The Obama administration, which gave the solar company Solyndra a half‐​billion‐​dollar loan to help create jobs, asked the company to delay announcing it would lay off workers until after the hotly contested November 2010 midterm elections that imperiled Democratic control of Congress, newly released e‑mails show.…

A Solyndra investment adviser wrote in an Oct. 30, 2010, e‑mail — without explaining the reason — that Energy Department officials were pushing “very hard” to delay making the layoffs public until the day after the elections.

The announcement ultimately was made on Nov. 3, 2010 — immediately following the Nov. 2 vote.

More than a month ago, I listed some of the earlier shoes in the unfolding story. But as a friend of mine asks about the Penn State scandal, is this the “other shoe,” or is this story a centipede with lots more shoes to come?

Jerry Taylor and Peter Van Doren ignored the politics and looked at the economics of Solyndra and energy subsidies in Forbes.

November 16, 2011 7:51AM

A Potentially Fatal ObamaCare Glitch

In today’s Wall Street Journal, Jonathan Adler and I explain how a recently discovered glitch could be the undoing of ObamaCare:

ObamaCare authorizes premium assistance in state‐​run exchanges (Section 1311) but not federal ones (Section 1321). In other words, states that refuse to create an exchange can block much of ObamaCare’s spending and practically force Congress to reopen the law for revisions.

The Obama administration wants to avoid that legislative debacle, so this summer it proposed an IRS rule to offer premium assistance in all exchanges “whether established under section 1311 or 1321.” On Nov. 17 the IRS will hold a public hearing on that proposal…

Any employer whose employees receive premium assistance through a federal exchange…would have standing to challenge these illegal tax credits and outlays.

Public‐​interest lawyers could file suit as soon as the IRS rule becomes final and they find an employer that will be harmed. Any firm that doesn’t offer health benefits and that employs lots of full‐​time, low‐​skilled, young workers in a state that fails to create an exchange should suffice. A successful challenge would block the law’s employer mandate in that state.

In addition, under the Congressional Review Act, a simple (filibuster‐​proof) majority vote in each chamber of Congress could send to President Obama’s desk a resolution blocking this IRS rule. Even if Mr. Obama vetoed the resolution (taking personal responsibility for this assault on the rule of law), a future president could still rescind the rule.

According to the IRS notice, the public hearing will take place tomorrow, Thursday, November 17, “at 10 a.m., in the auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. All visitors must present photo identification to enter the building.” Those interested should consult the IRS notice (p. 50938) for more information.

November 15, 2011 4:14PM

Cry for Argentina

With Obamacare at the Supreme Court, the presidential primary debates in full swing, and the federal government’s continued unwillingness to liberate the economy and thus allow it to create jobs, it’s easy to forget that there’s a world outside America, one with its own economic issues and presidential elections.

Take Argentina, for example, a country near and dear to my heart ever since I studied abroad there nearly 15 years ago. A century ago, Argentina was emerging from oligarchic rule to an ever‐​liberalizing democracy that was one of the richest countries in the world. By 1930 it had the seventh‐​largest economy, outpacing fellow new‐​world ex‐​colonies like Canada and Australia and attracting waves of immigrants from Italy, Spain, and Eastern Europe. How did a country so rich in natural and human resources fall from that peak to become the butt of economists’ jokes? (There are four types of countries in the world: developed, developing, Japan, and Argentina.)

The answer is the autarkic corporatism that came from the rule of Juan Domingo Peron, imposing an industrial policy that destroyed the burgeoning export‐​import sector, nationalized railroads, and gave unions all the power they wanted (so much that they even began clashing with Peron — sound familiar?). Combine that macroeconomic insanity—leading inevitably to social unrest and repressive government reactions thereto—with an idiosyncratic “Third Way” foreign policy and redistributionist welfare schemes, and the jewel of Spain’s former empire came back to the pack of faltering Latin American states.

Wild populist swings of both the left and the right followed, interrupted only by a string of coup d’etats—I recall the syllabus of my Argentine history class read, “primer golpe de estado; segundo golpe de estado; tercer golpe de estado…”—resulting in a Dirty War between the ideological extremes that ended in the tone‐​deaf military triumvirate’s disastrous excursion in the Falkland Islands. (Case in point: they thought President Reagan would support them over Thatcher’s Britain.) Democracy returned for good in 1983 but, save for a brief illusory period in the 1990s, Argentina’s economic house has never been in order. Recall that the country was a poster‐​child for hyperinflation in the late 1980s and even now inflation runs north of 20 percent (nobody knows for sure because the official figures cannot be trusted).

After an economic crisis of Great‐​Depression proportions (labeled simply La Crisis) in the early 2000s gave the country an extremely painful but long‐​needed correction—unpegging the peso from the U.S. dollar among other long‐​needed reforms—an accidental president from the south, Nestor Kirchner, began reimposing his brand of Peronism. This included defaulting on sovereign debt, government control of the energy sector, expanded social programs, and rapprochement with the likes of Venezuela’s Hugo Chavez. Deciding not to run for reelection, Kirchner handed the presidency to his wife, Cristina Fernandez de Kirchner, who essentially continued his heterodox policies while governing with an increasingly heavy hand against protestors and the media.

A few weeks ago, Argentines overwhelmingly reelected Fernandez, easily beating back opposition groups that never coalesced into a single movement or candidate. This result wasn’t surprising because the economy is expected to grow by eight percent this year and the middle class has largely recovered from the crisis—though most economists consider the current situation to be unsustainable, with the country eventually headed to a reckoning akin to the one it faced at the end of the ’90s (recall the tragic cycles the country endures).

Argentina provides America a “teachable moment,” to use one of our president’s favorite expressions. Like Argentina has been many times over the last century, the United States is at a crossroads. Will it continue to stand for individual liberty, innovation, and social mobility, or will Americans trade their freedom for ever‐​larger entitlements and evanescent protections from life’s vicissitudes? As Mary Anastasia O’Grady wrote in a column that we can only hope fails to be prophetic:

On this, the experience of Mrs. Kirchner’s Argentina is instructive. It abandoned free markets, ostensibly in the interest of social justice. The predictable result has been greater injustice, more poverty, and increasing concentration of wealth and power in the hands of the political class and its friends. Efforts to make the economy competitive have repeatedly been defeated even as the standard of living declined.

Argentina tests the theory that democracies have a built‐​in capacity to correct the overreach of government. Not only has it been unable to extricate itself from the black hole of corporatism, it is getting sucked in further.

Or, as Cristina Fernandez put it on the eve of her reelection, “I don’t know if Obama has read Peron, but let me tell you, it sure seems like it.”

[Not coincidentally to the timing of this blogpost, I will be in Argentina all next week, a working vacation of sorts. I’m currently scheduled for two public talks: in Buenos Aires on Nov. 24 at 7pm at the business/​economics university ESEADE on the topic of rule of law and economic development and in Tucuman on Nov.25 at 6pm at the Catalinas Park Hotel at a conference marking the 20th anniversary of the fall of Soviet communism, sponsored by the think tank Libertad y Progreso. Both events will be in Spanish.]