Archives: 06/2012

A Smart and Simple Approach to Attracting Foreign Investment

Rarely is federal legislation something other than a vehicle for government overreach and aggrandizement. Despite its populist-sounding title, the Global Investment in American Jobs Act – introduced in the Senate last week – is one of those rarities. The bill calls for an assessment of U.S. policies that influence decisions by foreigners about investing in the United States.

Properly modest in scope, the legislation simply authorizes to Commerce Department to produce a report that documents the importance of foreign investment, identifies home-grown impediments to such investment, and recommends policy changes that would make the United States a more attractive investment destination.

What is so refreshing about the bill is that its premise is not that the practices of foreign governments or the greed of U.S. corporations that allegedly “ship jobs overseas” are to blame for U.S. economic stagnation – themes so prominent in the past couple of Congresses and the current White House. Rather, the premise is that U.S. policy and its accumulated residue have created a web of impediments that discourage foreign investment in the United States, and that changes to those policies could serve to attract new investment. This kind of thinking is long overdue.

One of the themes of my 2009 Cato paper, “Made on Earth: How Global Economic Integration Renders Trade Policy Obsolete,” is that it is no longer apt to consider global commerce a competition between “Us” and “Them.” Trans-national production/supply chains and cross-border investment have blurred the distinctions between “our” producers and “their” producers. Many products and services are created along supply chains that travel from idea conception to final consumption and that include value-added activities of varying degrees of labor-, physical capital-, and intellectual capital-intensity. Furthermore, the largest U.S. steel producer, Mittal, is a majority Indian-owned company with corporate headquarters in Luxembourg. The largest “German” steel producer, Thyssen-Krupp, recently completed construction of a $4 billion production facility near Mobile, Alabama for the purpose of serving U.S. demand for finished steel, particularly from the mostly foreign nameplate auto producers dotting the landscape of the American South. And, as of 2010, our beloved General Motors produces more vehicles in China than it does in the United States. So, really, who are “we” and who are “they”?

Accordingly, instead of pursuing a 20th century trade policy model that seeks to secure market-access advantages for certain producers, policy should be recalibrated to reflect the 21st century reality that governments around the world are competing for business investment and talent, which both tend to flow to jurisdictions where the rule of law is clear and abided; where there is greater certainty to the business and political climate; where the specter of asset expropriation is negligible; where physical and administrative infrastructure is in good shape; where the local work force is productive; where there are limited physical, political, and regulatory barriers, etc.  This global competition in policy is a positive development because – among other reasons – its serves to discipline bad government policy.

We are kidding ourselves if we think that the United States is somehow immune from this dynamic and does not have to compete and earn its share with good policies.  The decisions made now with respect to our policies on immigration, education, energy, trade, entitlements, taxes, regulations, industrial management, and the proper role of government in the economic sphere will determine the health, competitiveness, and relative significance of the U.S. economy in the decades ahead.

Governments with the smartest policies will be the ones that secure the most investment, the strongest talent, and the best economic opportunities for their people.  The legislation is step in the right direction.

Join Rand Paul and Me at Cato’s Summer Conference

Sen. Rand Paul, recently hailed as “America’s most important anti-war politician,” will join the distinguished list of speakers at this year’s session of Cato University.

This year Cato University will be held for the first time in the magnificent new F. A. Hayek Auditorium at the Cato Institute in Washington. From July 29 to August 3, join fellow libertarians from around the country and the world to listen to lectures on economic, political, historical, and philosophical foundations of liberty. Speakers include

  • the widely published economist Steve Landsburg,
  • the scintillating speaker and West Point historian Rob McDonald,
  • the polymath Tom Palmer,
  • Cato scholars Roger Pilon, Bob Levy, Christopher Preble, Malou Innocent, Mark Calabria, Michael Cannon, and even me —
  • plus the special dinner address on Capitol Hill by Senator Paul.

Note that Cato University is not just for students — there will be participants from college age to retirement.

Check out Cato University here.

Food Stamp Republicans

Newt Gingrich had fun calling President Obama the “food stamp president,” but many Republicans are just as responsible for the exploding costs of this welfare state program.

The chart shows that federal outlays for food stamps (officially the Supplemental Nutrition Assistance Program) roughly doubled under President Bush and then doubled again under President Obama.

Despite the quadrupling of food stamp spending, 13 Republicans in the Senate yesterday—including supposed conservatives Bob Corker and Rob Portman—joined Democrats to defeat reforms to the program sponsored by Senator Rand Paul.

(More on food stamps here, here, and here).

Corrupt Coverage of Campaign Finance ‘Corruption’

Today POLITICO Arena asks:

 Has news coverage portraying super PAC donors as nefarious agents corrupting the political process, rather than citizens exercising First Amendment free speech rights, been fair and balanced?

My response:

Fair and balanced? Let’s just say “uneven.” Too often, however, the mainstream media’s coverage of campaign finance reflects the populist “big-guy, little-guy” theme, and the irony is rich. Editorially, The New York Times and the Washington Post have simply obsessed over the issue, especially after the Court decided Citizens United. Corporate giants themselves, they raise the First Amendment flag in defense of their own right to influence elections, even as they condemn the efforts of other corporations – and individuals – to freely do the same.

And their arguments don’t pass even the straight-face test. They’re grounded mainly in fears about “corruption,” yet they never cite any, because they can’t. As attorney Paul Sherman at the Institute for Justice writes in this morning’s Wall Street Journal, “Even before Citizens United, a majority of states allowed corporations to make unlimited political expenditures and some, including Virginia and Utah, even allowed unlimited corporate contributions directly to political candidates. Yet states that have long allowed corporations to speak freely haven’t appeared more corrupt than those that censored corporate speech, and voters in those states are no more cynical or disillusioned.”

Fortunately, the Roberts Court has been cutting through the specious arguments behind our insanely complex campaign finance law, written by incumbents to protect themselves from challengers. Concerning the mainstream media, what we have is the establishment protecting the establishment. Nothing new there.

Big Sugar Wins in the Senate

Today we have yet another example of Republicans and Democrats teaming up to protect a special interest at the public’s expense. A few hours ago the Senate voted 50-46 to kill an amendment from Sen. Jeanne Shaheen (D-NH) that would have phased out subsidies and supports for the sugar industry.

A Cato essay on agricultural regulations and trade barriers explains what 50 senators just voted to defend:

The big losers from federal sugar programs are U.S. consumers. The Government Accountability Office estimates that U.S. sugar policies cost American consumers about $1.9 billion annually. At the same time, sugar policies have allowed a small group of sugar growers to become wealthy because supply restrictions have given them monopoly power. The GAO found that 42 percent of all sugar subsidies go to just 1 percent of sugar growers. To protect their monopolies, many sugar growers, such as the Fanjul family of Florida, have become influential campaign supporters of many key members of Congress.

U.S. food industries that buy sugar are harmed by current sugar policies as well. The employment in U.S. sugar growing is 61,000, which compares to employment in U.S. businesses that use sugar of 988,000. Thus, one small industry benefits from current sugar regulations, while industries that are more than 10 times larger are damaged…

Another problem is the environmental damage caused by U.S. sugar policies. Large areas of the Florida Everglades have been converted to cane sugar production because of artificially high sugar prices. These wetlands have been greatly damaged by land drainage, habitat destruction, and the phosphorous in fertilizers used by sugar farmers.

Of the 48 Democratic senators who voted, 32 voted to kill the amendment. And here I thought Democrats were supposed to be concerned about the environment and creating jobs. The Republican side did better with “only” 16 out of 46 voting to kill the amendment. Of note, Marco Rubio (R-FL), a tea party favorite and potential running mate for Mitt Romney, was one of the 16. An obvious sop to the powerful Florida sugar lobby, Rubio’s vote in favor of maintaining the federal government’s Soviet-style sugar racket is an all-too-common example of a politician choosing parochialism over principle.

You’ve Met Julia the Moocher, Now Meet Emily

The Obama campaign’s “Life of Julia” ad is a disturbing sign. It suggests that political strategists, pollsters, and campaign advisers must think that the people living off government are getting to the point where they can out-vote the people paying for government.

If that’s true, America is doomed to become another Greece - which would be an appropriate fate since, for all intents and purposes, Julia is the fictional twin of a real-life Greek woman who thought it was government’s job to give her things.

In general, I think the best response to Julia is mockery, which is why I shared this Iowahawk parody and this Ramirez cartoon.

But we also need a serious discussion of why dependency is a bad thing, which is why I’m glad the Center for Freedom and Prosperity has produced this new “Economics 101” video.

It’s narrated by Emily O’Neill, who contrasts the moocher mentality of Julia with how she wants her life to develop. To give away the message, she wants the kind of fulfillment that only exists when you earn things.

Emily’s view could be considered Randian libertarianism, conventional conservatism, or both. That’s because there’s a common moral belief in both philosophies that government-imposed coercion and redistribution erode the social capital of a people.

This is perhaps the key issue for America’s future, which is why I hope you’ll share this video widely. Otherwise, we my face a future where this Chuck Asay cartoon becomes reality. Speaking of Asay, this cartoon is a pretty good summary of what the Julia ad is really saying.

Are Smaller Banks Better for Politics?

Earlier this week University of Chicago Professor Luigi Zingales offered an interesting, although I suspect commonly held, reason for his conversion to supporting a new “Glass-Steagall.”  For those who don’t follow banking, Glass-Steagall, passed as part of the New Deal, mandated the separation of investment and commercial banking.  This reason?  Professor Zingales asserts that Glass-Steagall “helped restrain the political power of banks.”  More fully, he argues:

Under the old regime, commercial banks, investment banks and insurance companies had different agendas, so their lobbying efforts tended to offset one another.  But after the restrictions ended, the interests of all the major players were aligned. This gave the industry disproportionate power in shaping the political  agenda.

Perhaps I’m just a little slower than the good Professor, but that seems far from obvious to me.  Unfortunately he offers no evidence.  Recall Glass-Steagall was finally repealed in 1999.  I served on the Banking Committee staff from 2001 to 2009, with a year’s break.  While I don’t have the best memory, I can recall no major legislation between 1999 and 2009 that either deregulated or gave massive benefits to the largest banks.  There were, however, several pieces of legislation that hurt the banks.  Highlights include Sarbanes-Oxley, financial reporting requirements under the Patriot Act, and the Fair and Accurate Credit Transactions Act.  None of those were favorable towards banks.  You could argue bankruptcy reform in 2005, but its hard to imagine anything beyond that.

I suspect Zingales’s views are colored by his growing up in Italy, a parliamentary system.   Ours, however, is a system of geographic representation.  What matters most for politicians is their constituents.  Under a system of geographic representation, a system of small banks is likely to have more political pull than a system of large banks.  Why?  Because a small banker will have more pull with his congressmen than a large out-of-state bank.  Anyone who thinks that say JP Morgan has a lot of pull has never gone up against the Independent Community Bankers of America (ICBA).  Believe me, from having been in those fights, ICBA makes JP Morgan look politically weak (just read all the small bank exemptions in Dodd-Frank).

Perhaps the most compelling evidence to me is that most of the really bad features of our financial regulatory system were the result of lobbying efforts by small banks.  Such disasters as Fannie Mae, Freddie Mac, the Federal Home Loan Banks, the FDIC, or restrictions on branch-banking (thankfully now gone) all came about from the demands of small banks.  The large banks (and FDR) for instance opposed the creation of the FDIC.

Zingales also ignores that in practical politics, you can only “go to the well” so many times.  The larger the number of issues a bank cares about, the actual less leverage it has on any of them.  From my experience, if a Congressman has done something once for an industry, they feel less obligated to help on another issue.  The most politically powerful industries are the ones with just a single issue of importance.

Now Professor Zingales may be correct, but as someone who’s spent his career fighting political battles with financial firms, it would be helpful to have some evidence.