The news right now is full of retrospective stories about 2011. Not to be left out, here are a few observations on the real if modest progress made in 2011 to expand the freedom of Americans to trade in the global economy. (I’ll add links along the way to related Cato work.)
After four years of stalemate, this fall Congress passed and President Obama signed legislation implementing three pending free-trade agreements, with South Korea, Colombia, and Panama. When fully implemented, these FTAs will eliminate just about all barriers to trade with three key allies. The U.S. International Trade Commission estimates the three agreements will boost U.S. exports and output by more than $12 billion.
Just as importantly, their passage signals that the two major parties can still work together to promote trade liberalization. Republicans voted overwhelmingly for the agreements, including freshman members connected to the Tea Party movement, and enough Democrats joined in to pass them all by comfortable margins. President Obama, to his credit, found a political path to support the agreements despite the opposition of his labor-union base.
With the passage of the agreements with Panama and Colombia, the Pacific Coast of the Americas has been effectively transformed into a free-trade area. (Ecuador is the lone hold-out.) When combined with NAFTA, CAFTA-DR, and FTAs with Peru and Chile, the United States now has free-trade agreements with neighbors that account for 87 percent of our two-way trade in the Western Hemisphere. The vision of a free trade area of the Americas from the Yukon to Tierra del Fuego has been effectively realized.
2011 also witnessed the United States and Mexico sort out the dispute over cross-border trucking---the last piece of unfinished business from the 1994 North American Free Trade Agreement. Under a pilot program put forward by the Obama administration, safety-certified Mexican trucks can now deliver goods within the United States, and U.S. trucks can do the same in Mexico. Now that the U.S. government is finally complying with its commitments, Mexico lifted sanctions on $2.4 billion of U.S. exports. This is real progress for economic freedom, the rule of law, and showing respect for our 100 million Mexican neighbors.
Last year, I came up with a saying that “Bad Government Policy Begets More Bad Government Policy” and labeled it “Mitchell’s Law” during a bout of narcissism.
There are lots of examples of this phenomenon, such as the misguided War on Drugs being a precursor to intrusive, costly, and ineffective money laundering policies.
Or how about government healthcare subsidies driving up the price of healthcare, which then leads politicians to decide that there should be even more subsidies because healthcare has become more expensive.
But if you want a really stark example of Mitchell’s Law, the Internal Revenue Code is littered with examples.
The politicians created a nightmarishly complex tax system, for instance, and then decided that enforcing the wretched system required the erosion of civil liberties and constitutional freedoms.
The latest example of this process involves the Foreign Account Tax Compliance Act, a piece of legislation that was imposed in 2010 because politicians assumed they could collect lots of tax revenue every single year by getting money from so‐called tax havens.
Over at Downsizing the Federal Government, Chris Edwards and I have regularly complained that most policymakers have been insufficiently specific when it comes to identifying spending cuts. With the Republican primaries about to get underway, it’s a good time to see what the current crop of presidential aspirants has to offer.
There are multiple ways to skin this cat, but I decided to put together a comparison table based solely on the content found on each candidate’s campaign website. I did not consider past statements or votes, the televised debates, or outside sources (unless linked to by a campaign’s website). The idea is that statements on each candidate’s website should offer the clearest indication of their intentions should they become president.
Ron Paul is the only candidate who actually produced a proposed federal budget. Therefore, I started with his template and added additional agencies/programs cited on the websites of the other candidates. Again, the idea is to show specifically what the candidates are proposing to cut. Thus, proposed spending reforms such as a Balanced Budget Amendment or a spending cap are not included.
There is a degree of subjectivity in putting this together, but I tried to be fair and consistent. It is for informational purposes only (i.e., it should not be construed as an endorsement of any candidate(s)). Finally, it is possible that proposals were missed, but that could be a reflection of a website’s accessibility to pertinent information.
The New York Times editorializes that if Ron Paul can’t separate himself from his unsavory writings and supporters, “he will leave a lasting stain on his candidacy, on the libertarian movement and, very possibly, on the Iowa caucuses.” Certainly it’s a problem Paul is struggling to deal with. As for the Iowa caucuses, if they could survive strong votes for Pat Robertson and Pat Buchanan and an actual win for Mike Huckabee, I dare say they can survive Ron Paul. But should these things “stain … the libertarian movement”? Not in a rational world.
Libertarianism is a philosophy of peace, freedom, toleration, and individual rights — just the opposite of the collectivist racist and homophobic ideas that appeared in newsletters written under Ron Paul’s signature. As I wrote in Libertarianism: A Primer, “Libertarianism is the view that each person has the right to live his life in any way he chooses so long as he respects the equal rights of others.” Those ideas have played an important role throughout American history, from the American Revolution to abolitionism to the Tea Party.
And now Ron Paul is attracting support for his advocacy of the ideas of small government and free enterprise. As the Times notes in a dispatch from Iowa, Paul “is drawing supporters for his libertarian and antiwar views. …For the students, much of Mr. Paul’s appeal derives from civil libertarian views like ending the federal ban on marijuana and other drugs, as well as his desire to end foreign wars and his small‐government credo.” That’s the message that has moved Ron Paul to the top of the polls in Iowa.
Still, he did allow associates of his to write racist and homophobic screeds in “The Ron Paul Political Report” and other newsletters. And that has created a stench around his candidacy. Some people want that stench to envelop and stain the libertarian movement. Jamie Kirchick, the anti‐Paul jihadi who brought the newsletters to light in 2008, asks, “Why Don’t Libertarians Care About Ron Paul’s Bigoted Newsletters?” But of course many libertarians have expressed revulsion at the newsletters. Ilya Somin noted at the Volokh Conspiracy (one of the few conspiracies not denounced in the Ron Paul newsletters) that he himself had condemned the newsletters in 2008, as had his co‐blogger David Bernstein. And Virginia Postrel, the former editor of Reason, and various current writers at Reason. And a leading Austrian economist, Steven Horwitz. And Ed Crane, the founder and president of Cato.
Kirchick identified Conor Friedersdorf of the Atlantic as a libertarian who supported Ron Paul despite the bigotry in the newsletters that bore his name. But in fact Friedersdorf wrote a long and tortured article acknowledging the “egregiously offensive … racially bigoted … execrable” content of the newsletters. He went on to say that there was still a good case for supporting the only candidate who has consistently opposed the Iraq War, indefinite detention, drone strikes, anti‐Muslim bigotry, and the war on drugs. Other libertarians who know about the newsletters are no doubt making similar calculations. And as David Weigel of Slate notes today, many less‐engaged voters — such as American Idol winner Kelly Clarkson — still haven’t heard about the whole issue; they like Ron Paul for the issues he talks about, smaller government, budget cuts, sound money, and noninterventionism.
I wrote about “Ron Paul’s Ugly Newsletters” in a 2008 Cato‐at‐Liberty posting:
Those words are not libertarian words. Maybe they reflect “paleoconservative” ideas, though they’re not the language of Burke or even Kirk. But libertarianism is a philosophy of individualism, tolerance, and liberty. As Ayn Rand wrote, “Racism is the lowest, most crudely primitive form of collectivism.” Making sweeping, bigoted claims about all blacks, all homosexuals, or any other group is indeed a crudely primitive collectivism.
Libertarians should make it clear that the people who wrote those things are not our comrades, not part of our movement, not part of the tradition of John Locke, Adam Smith, John Stuart Mill, William Lloyd Garrison, Frederick Douglass, Ludwig von Mises, F. A. Hayek, Ayn Rand, Milton Friedman, and Robert Nozick. Shame on them.
The fact is, there’s a small band of self‐styled “libertarians” who over the past two decades have associated the great ideas of Austrian economics and libertarianism with bigotry, reflexive anti‐Americanism, and vitriol directed at everyone from the Trilateral Commission to Cato and Reason. They have very little association with the larger libertarian movement or with such libertarian‐inspired movements as the Tea Party, the drug reform movement, or the school choice movement. Virtually their only point of contact with the broader constituency for smaller government is through Rep. Ron Paul, who, for whatever reasons, has unfortunately continued his association with the people who have tarred him and the causes that are drawing many voters to him.
Libertarians have been fighting ignorance, superstition, privilege, and power for centuries, and we will continue to do so in the future. Libertarians reject bigotry and advocate equal rights for every individual. Ron Paul’s very bad decision to outsource his writing to reprehensible characters doesn’t change that.
At a recent Capitol Hill briefing on government transparency, I made an effort to describe the importance of getting data from the government reflecting its deliberations, management, and results.
I analogized to the World Wide Web. The structure that allows you to find and then view a blog post as a blog post is called hypertext markup language, or html. HTML is what made the Internet into the huge, rollicking information machine you see today. Think of the darkness we lived in before we had it.
Government information is not yet published in useable formats—as data—for the public to use as it sees fit. We need government information published as data, so we can connect it in new ways, the way the World Wide Web allowed connections among documents, images, and sounds.
And when you connect data together, you get power in a way that doesn’t happen with the web, with documents. You get this really huge power out of it.
Tim Berners‐Lee was not thinking of wresting power from government when he said that, but the inventor of the World Web does a better job than I could of arguing for getting data and making it available for any use. We’ll look back on today with bemusement and surprise at the paucity of information we had about our government’s activities and expenditures.
Two Cato scholars have offered devastating critiques of the Federal Reserve in the op‐ed pages of the Wall Street Journal over the last two days.
This morning, in “The Fed’s Mission Impossible,” adjunct scholar John Cochrane takes a look at the latest list of bank regulations under Dodd‐Frank. Although the proposal “opens with an eloquent ode to the evils of too‐big‐to‐fail,” he writes, it then “spends 168 pages describing exactly how it’s going to stop any large financial institution from ever failing again.”
According to Cochrane, the proposal “exemplifies” the core problem withWashington’s heavy hand: “Everything under the sun gets regulated, with no attempt to measure benefits or costs.” This scenario, of course, is nothing new:
For 70 years, our government has sought to stop crises by guaranteeing more and more debts, explicitly with deposit insurance, or informally with predictable too‐big‐to‐fail bailouts. Guaranteeing debts gives obvious incentives to gamble at taxpayer expense, so we try to limit risks with regulation. But big banks still have every incentive to avoid, evade and financial‐engineer their way around the rules, and they have lots of lawyers, lobbyists and ex‐politicians to pressure regulators to use their wide discretion. The government has lost this arms race time and time again.
Unfortunately, it seems to be taking this arms race across the Atlantic. Yesterday, in “The Federal Reserve’s Covert Bailout of Europe,” Cato senior fellow Gerald P. O’Driscoll, Jr., examined the Fed’s bailout of European banks through what is called “a temporary U.S. dollar liquidity swap arrangement”—an operation that has gone “largely unnoticed here.” O’Driscoll explains:
Simply put, the Fed trades or “swaps” dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one‐half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.
Why are the two central banks doing this? O’Driscoll explains that they are engaged in this “Byzantine financial arrangement” because “each needs a fig leaf” for past transgressions:
The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.
The ECB is entangled in an even bigger legal and political mess. What the heads of many European governments want is for the ECB to bail them out. The central bank and some European governments say that it cannot constitutionally do that. The ECB would also prefer not to create boatloads of new euros, since it wants to keep its reputation as an inflation‐fighter intact. To mitigate its euro lending, it borrows dollars to lend them to its banks. That keeps the supply of new euros down. This lending replaces dollar funding from U.S. banks and money‐market institutions that are curtailing their lending to European banks—which need the dollars to finance trade, among other activities. Meanwhile, European governments pressure the banks to purchase still more sovereign debt.
I take some pride, but little satisfaction, from having tried to fix several of the systemic flaws that ultimately led to the financial crisis. I also was fortunate to spend that time serving under Senate Banking Committee leadership that was more often right than wrong. But I’m only human and did miss a few things. In the spirit of the new year, here is my, far from exhaustive, list of things I missed:
1. The extent of house price declines. While I never bought the housing industry line “prices never go down”, my sense back in 2005 was that we’d see something like a 10 to 15 percent decline. It was well known before the bubble that inflation‐adjusted home prices have declined nationally on several occasions.
2. Growth of strategic default. In previous housing busts, the percent of borrowers who simply walked away only because of their negative equity position was small. Boston Fed economists have estimated 6% during the last bust. We are likely between 20 and 30% this time around.
3. There’s no substitute for a downpayment. I served as the primary drafter of the American Dream Downpayment Act. While small in impact, it did offer an experiment in downpayment assistance. Its results have not been good in my view. That bill was a mistake.
4. Bailouts for everyone. Don’t believe the spin, the rescues of AIG, Bear, Fannie, Freddie, the autos were all bailouts of choice. While I had serious reservations about Paulson, Bernanke and Geithner, I underestimated their willingness to just throw money at every problem. Accordingly I now have far less trust in the discretion of regulators (not that I had much before).
5. Receivership doesn’t end too‐big‐to‐fail. The primary reason that Democrats, and some Republicans, opposed GSE reform beginning in 2004 was over the creation of a receivership (bankruptcy) mechanism for Fannie/Freddie. Such a mechanism was finally put into place in July 2008. It was ignored and the GSEs were rescued. It is partly for this reason that I don’t see the receivership authority in Dodd‐Frank as very credible. If we won’t wind down Fannie, why would we wind down Citi.
6. GSE role in the re‐po market. While banks regulators did nothing to reduce the exposure of the banking system to GSE debt, they at least knew about it. What was less understood was that about a third of the collateral in the overnight re‐purchase market (called by some “shadow‐banking”) was GSE debt. When hair‐cuts on GSE debt expanded in 2008, liquidity in the re‐po market contracted.
7. Level of Pure Speculation in the Housing Market. Setting aside that every home purchase entails a degree of speculation, the amount of pure investor sales as a percent of single family home sales turns out to be about double what I had thought back in 2005-06.
Obviously this doesn’t cover the things that caused the crisis which I did see coming. And perhaps an even bigger surprise to me was the degree during, and since, the crisis that many continue to hold onto certain beliefs even in the face of compelling evidence otherwise. For instance, it seemed clear to me as early as 2007 that “exploding adjustable rate mortgages” were not the primary driver of default. Anyway, we could all use a little more modesty when it comes to discussing the financial crisis.