Archives: 06/2012

Is Romney Going to Defend ‘Shipping Jobs Overseas’? No Way

The lead story in today’s Washington Post accuses Mitt Romney, while at Bain Capital, of investing in firms “that specialized in relocating” American jobs overseas. This gave cause to Obama political adviser David Axelrod to accuse Romney of “breathtaking hypocrisy,” which prompted Roger Pilon to spell out some differences between economics and “Solyndranomics” for the administration. Roger’s correct. But Romney—for running away from that record and playing to that same politically fertile economic ignorance that tempts devastating economic policies—is also worthy of his scorn. Romney should have written Roger’s words.

President Obama set the tone earlier this year during his SOTU address by demonizing companies that get tax breaks for shipping jobs overseas. By “tax breaks,” the president means merely that their un-patriated profits aren’t subject to double taxation. “Shipping jobs overseas” is a metaphor you’ll hear more frequently in the coming months, and Romney is more likely to deny any association with it than to defend it. That’s just the way he rolls.

Outsourcing has been portrayed as a betrayal of American workers by companies that only care about the bottom-line. Well, yes, caring about the bottom line is what companies are supposed to do. Corporate officers have a fiduciary duty to their shareholders to maximize profits. It is not the responsibility of corporations to tend to the national employment situation. It is, however, the responsibility of Congress and the administration to have policies in place that encourage investing and hiring or that at least don’t discourage investing and hiring. But for the specific financial inducements that politicians offer firms to invest and hire in particular chosen industries—Solyndranomics—this administration (and the 110th-112th Congresses) has produced too many reasons to forgo domestic investment. Let’s not blame companies for following the incentives and disincentives created by policy.

There’s also the economics. Contrary to the assertions of some anti-trade, anti-globalization interests, countries with low wages or lax labor and environmental standards rarely draw U.S. investment. Total production costs—from product conception to consumption—are what matter and locations with low wages or lax standards tend to be less productive and thus less appealing places to produce.

The vast majority of U.S. direct investment abroad (what the president calls “shipping jobs overseas”) goes to other rich countries (European countries and Canada), where the rule of law is clear and abided, and where there is a market to serve. The primary reason for U.S. corporations establishing foreign affiliates is to serve demand in those markets—not as a platform for exporting back to the United States. In fact, according to this study by Matt Slaughter, over 93 percent of the sales of U.S. foreign affiliates are made in the host or other foreign countries. Only about 7 percent of the sales are to U.S. customers.

Furthermore, the companies that are investing abroad tend to be the same ones that are doing well and investing and hiring at home.  Their operations abroad complement rather than supplant their U.S. operations.

During his unsuccessful 2004 presidential campaign, candidate John Kerry denigrated “Benedict Arnold companies” that outsourced production and service functions to places like India. Earlier this month, Senator Kerry introduced a bill in the Senate that effectively acknowledges that anti-investment, anti-business policies may be responsible for deterring foreign investment in the United States and for chasing some U.S. companies away. Maybe he should talk to the president—and Romney.

Cato Adjunct Scholar Richard Timberlake Turns 90

There are not many scholars who at age 90 produce important books. But that is exactly what long-time Cato adjunct scholar Dick Timberlake has done with the forthcoming publication of his opus Constitutional Money, which examines Supreme Court monetary decisions and argues that the monetary clauses of the Constitution should be restored by ending fiat money and returning to convertibility. However, if practical politics prevents returning to a full-fledged commodity standard, Congress should at least end the Federal Reserve’s discretion and impose a monetary rule designed to produce long-run price stability—and stop pretending that the central bank can fine-tune the economy to bring about full employment (see Timberlake’s recent article in the Cato Journal).

Timberlake’s many contributions to monetary economics are outlined in the essay below by Kurt Schuler. Kurt notes that not only is Timberlake an accomplished scholar, he is a mentor to younger scholars and a person who practices what he preaches: hard work and honesty. Happy birthday Dick! May you have many more years to enjoy your productive work—keep flying high!

Cato Adjunct Scholar Richard H. Timberlake, Jr. turns 90 years old on June 24. His long and fruitful career as a scholar of money and banking began in 1957, when he published an article in the Review of Economics and Statistics. In 1959 he completed his Ph.D. dissertation at the University of Chicago under the guidance of Milton Friedman. His latest publication is in the current issue of the Cato Journal, and his book Constitutional Money: A Review of the U.S. Supreme Court’s Monetary Decisions is forthcoming from Cambridge University Press.

Dick’s best-known work is Monetary Policy in the United States: An Intellectual and Institutional History, published in 1993. It is a much expanded version of his 1978 book The Origins of Central Banking in the United States. Because others, notably Milton Friedman and Anna Schwartz, had focused on gathering and analyzing U.S. monetary statistics, Monetary Policy in the United States focuses on the question “What were policy-makers thinking?” It explains the ideas and experiences that influenced the choices that shaped U.S. monetary policy. It is especially useful for its emphasis on the thinking of members of Congress as they created the laws that underlie monetary policy.

Among scholars, Dick’s other most often cited work is “The Central Banking Role of Clearinghouse Associations,” a 1984 article in the Journal of Money, Credit, and Banking. It explains how in the era before the Federal Reserve System, banks across the United States banded together to provide certain services for their members and to act jointly in the face of common dangers during financial panics. In particular, during some panics, clearinghouse associations issued temporary currency that was widely accepted and acknowledged as beneficial despite being forbidden under the perverse restrictions imposed by the laws of the time. Dick incorporated the article as a chapter in Monetary Policy in the United States.

Since this is a brief appreciation of a still-active scholar rather than a full career retrospective, it suffices simply to mention a few other of Dick’s writings: Gold, Greenbacks and the Constitution, a 1991 monograph; “Gold Standards and the Real Bills Doctrine in U.S. Monetary Policy,” a 2007 article that supplies an important piece of the puzzle about the Federal Reserve’s monetary policy during the Great Depression; and They Never Saw Me Then, a 2001 book recounting his experience as a bomber co-pilot during World War II. Dick received three Purple Hearts for his wartime service.

Dick’s style is “mild in manner, strong in argument.” He writes clearly and vigorously. He salts his writing and particularly his speaking with flashes of wit. He is, to boot, generous with his knowledge. Years ago, when I was preparing an encyclopedia article on William Gouge, an early 19th century American writer on banking, I went to ask him if he had any advice. He pulled out of his file cabinet a complete microfilm file he had had made of records on Gouge from the National Archives, for possible publication in an article, and let me keep it as long as I needed. It was like a veteran prospector telling a greenhorn, “Go ahead, here’s my gold vein, and while you’re at it, why don’t you borrow my pickaxe.”

Dick has for some years been retired from the University of Georgia, the last of several universities where he taught. He and his wife, Hildegard, an economist and artist, have five children. Happy birthday, Dick!

Kurt Schuler is Senior Fellow in Financial History at the Center for Financial Stability.

William H. Peterson, RIP

We’re saddened to note that William H. Peterson, a longtime friend of the Cato Institute, died this week at 91.

Bill was a student of Ludwig von Mises at New York University, where he received his Ph.D. in economics in 1952. He was later professor of economics in the Graduate School of Business Administration at NYU;  Scott L. Probasco. Jr. Professor of Free Enterprise and director of the Center for Economic Education at the University of Tennessee at Chattanooga; and Lundy Professor of Business Philosophy at Campbell University in North Carolina. He also worked in business, consulted with governments around the world, and wrote a book review column for the Wall Street Journal. In 1982, he lectured on free-market economics in Romania, East Germany, Ireland, and Canada. He wrote an essay on Mises that appeared in the 1971 book Toward Liberty: Essays in Honor of Ludwig von Mises, edited by F. A. Hayek.

In recent years he reviewed books, including many Cato Institute books, for the Washington Times. I’m pleased to have published his article “Is Business ‘Administration’?” in Cato Policy Report in 1983, in which he made the case that business is “dynamic, competitive, synergistic, literally wealth-creating”—entrepreneurial, not merely administrative—and therefore the coveted MBA degree is misnamed and perhaps wrongly taught.

Bill’s wife of 62 years, Mary Bennett Peterson, died last year. She also studied with Mises at NYU. She worked as a stockbroker, a foundation officer, and a lobbyist for General Motors. She also wrote a book, The Regulated Consumer, that was ubiquitous among libertarians and conservatives in the 1970s. She criticized such agencies as the Interstate Commerce Commission and the Civil Aeronautics Board for harming consumers, helping to set in motion a policy agenda that resulted in deregulation of both airlines and trucking.

Europe’s Self-Inflicted Decline: French Taxing, Italian Regulating, Greek Mooching, and IMF Economic Illiteracy

Every day brings more and more evidence that Obamanomics is failing in Europe.  I wrote some “Observations on the European Farce” last week, but the news this morning is even more surreal.

Let’s start with France, where I endorsed the explicit socialist over the implicit socialist precisely because of a morbid desire to see a nation commit faster economic suicide. Well, Monsieur Hollande isn’t disappointing me. Let’s look at some of his new initiatives, as reported by

The French Minister responsible for Parliamentary Relations, Alain Vidalies, has recently conceded that EUR10bn (USD12.7bn) is needed to balance the country’s budget this year, to be achieved notably by means of implementing a number of emergency tax measures. …The government plans to abolish the exemption from social contributions applicable to overtime hours, expected to yield a gain for the state of around EUR3.2bn, and to subject overtime hours to taxation, predicted to realize approximately EUR1.4bn in additional revenues. Other proposed measures include plans to reform the country’s solidarity tax on wealth (ISF), to cap tax breaks at EUR10,000, to impose a 3% tax on dividends and to increase the inheritance tax as well as the tax on donations. …French President Hollande announced plans during his election campaign to reform ISF. Holland intends to restore the wealth tax scale of between 0.55% and 1.8%, in place before the former government’s 2011 reform, to be applied on wealth in excess of EUR1.3m. Currently a 0.25% rate is imposed on net taxable wealth in excess of EUR1.3m and 0.5% on net taxable assets above EUR3m.

France already has the highest tax burden of any non-Scandinavian nation, so why not further squeeze the productive sector? That’s bound to boost jobs and competitiveness, right? And more revenue as well!

In reality, the Laffer Curve will kick in because France’s dwindling productive class isn’t going to passively submit as the political jackals start looking for a new meal.

But while France is driving into a fiscal cul-de-sac, Italian politicians have constructed a very impressive maze of red tape, intervention, and regulation. From the Wall Street Journal, here is just a sampling of the idiotic rules that paralyze job creators and entrepreneurs:

Once you hire employee 11, you must submit an annual self-assessment to the national authorities outlining every possible health and safety hazard to which your employees might be subject. These include work-related stress and stress caused by age, gender and racial differences. …Once you hire your 16th employee, national unions can set up shop, and workers may elect their own separate representatives. As your company grows, so does the number of required employee representatives, each of whom is entitled to eight hours of paid leave monthly to fulfill union or works-council duties. …Hire No. 16 also means that your next recruit must qualify as disabled. By the time your firm hires its 51st worker, 7% of the payroll must be handicapped in some way, or else your company owes fees in kind. …Once you hire your 101st employee, you must submit a report every two years on the gender-dynamics within the company. This must include a tabulation of the men and women employed in each production unit, their functions and level within the company, details of their compensation and benefits, and dates and reasons for recruitments, promotions and transfers, as well as the estimated revenue impact. …All of these protections and assurances, along with the bureaucracies that oversee them, subtract 47.6% from the average Italian wage, according to the OECD. …which may explain the temptation to stay small and keep as much of your business as possible off the books. This gray- and black-market accounts for more than a quarter of the Italian economy. It also helps account for unemployment at a 12-year high of 10%, and GDP forecast to contract 1.3% this year.

You won’t be surprised to learn that the unelected prime minister of Italy, Mr. Monti, isn’t really trying to fix any of this nonsense and instead is agitating for more bailouts from taxpayers in countries that aren’t quite as corrupt and strangled by red tape.

Monti also is a big supporter of eurobonds, whichs make a lot of sense if you’re the type of person who likes co-signing loans for your unemployed alcoholic cousin with a gambling addiction.

But let’s not forget our Greek friends, the ones from the country that subsidizes pedophiles and requires stool samples from entrepreneurs applying to set up online companies.

The recent elections resulted in a victory for the supposedly conservative party, so what did the new government announce? A flat tax to boost growth? Sweeping deregulation to get rid of the absurd rules that strangle entrepreneurship?

Nope. In addition to whining for further handouts from taxpayers in other nations, the Wall Street Journal reports that the new government has announced that it won’t be pruning any bureaucrats from the country’s bloated government workforce:

Greece’s new three-party coalition government on Thursday ruled out massive public-sector layoffs, a move that could help pacify restive trade unions… The new government’s refusal to slash public payrolls and its demands to renegotiate its loan deal comes just as euro-zone finance ministers meet in Luxembourg to discuss Greece’s troubled overhauls—and possibly weigh a two-year extension the new government is seeking in a bid to ease the terms of the austerity program that has accompanied the bailout. …Cutting the size of the public sector has been a top demand by Greece’s creditors—the European Union, European Central Bank and International Monetary Fund—to reduce costs and help Greece meet its budget-deficit targets needed for the country to get more financing. So far, Greece has laid off just a few hundred workers and failed to implement a so-called labor reserve last year, which foresaw slashing the public sector by 30,000 workers.

Gee, isn’t this just peachy? Best of all, thank to the IMF, the rest of us are helping to subsidize these Greek moochers.

And speaking of the IMF, it just released a report on problems in the eurozone that makes zero mention of excessive government spending or high tax burdens. The tax-free IMF bureaucrats do claim that “Important actions have been taken,” but they’re talking about bailouts and easy money:

The ECB has lowered policy rates and conducted special liquidity interventions to address immediate bank funding pressures and avert an even more rapid escalation of the crisis.

And even though the problems in Europe are solely the result of bad policies by member nations’ governments, the IMF says that “the crisis now calls for a stronger and more collective effort”:

Absent collective mechanisms to break these adverse feedback loops, the crisis has spilled across euro area countries. Contagion from further intensification of the crisis—including acute stress in funding markets and tensions involving systemically-important banks—would be sizeable globally. And spillovers to neighboring EU economies would be particularly large. A more determined and forceful collective response is needed.

Let’s translate this into plain English: The IMF wants more money from American taxpayers (and other victimized producers elsewhere in the world) to subsidize the types of statist policies that I described above in places such as France, Italy, and Greece.

I’ve previously explained why conspiracy theories are silly, but we’ve gotten to the point where I can forgive people for thinking that politicians and bureaucrats are deliberately trying to turn Europe into some sort of statist dystopia.

Economic Ignorance in the West Wing

Today POLITICO Arena asks:

Bain Capital invested in a number of firms that specialized in relocating American jobs to lower-wage facilities in countries like China and India, the Washington Post has reported. Obama senior adviser David Axelrod seized on the story last night, accusing Romney of “breathtaking hypocrisy.” Romney has pledged on the campaign trail to protect American jobs from outsourcing.  Could this information be a solid nail in the coffin of Romney’s business record? Or will Obama’s economic record overshadow it?

My response:

David Axelrod, like Obama himself, is playing to the economic ignorance that afflicts a good part of the American public. Firms don’t “specialize” in outsourcing jobs. They try, rather, to produce the best products at the lowest costs—for the benefit of their owners and their customers. If that means going abroad to find the best labor at the lowest cost, so be it. What would you have them do, seek inferior labor at higher costs? How would that benefit owners, customers, or the nation as a whole? Firms are not welfare agencies.

When firms are run efficiently, everyone benefits—including those higher-wage domestic workers who would otherwise have been employed but now must seek other opportunities that will arise only under conditions of efficiency. Or, of course, we could restrict firms from going abroad, force them (by law) to be less efficient, and thus lower the standard of living for everyone. That’s the prescription implicit in the Axelrod/Obama vision. Obama’s multiple “Solyndra” fiascos have cost several million dollars per job “created” (and eventually lost). I dare say those workers would have preferred having the (taxpayer’s) money to the jobs.

As for Axelrod’s charge about Romney’s “breathtaking hypocrisy”—his pledging on the campaign trail to protect American jobs from outsourcing—there’s a perfect explanation for that, but to understand it it takes a better grasp of economics than Axelrod or Obama, by his actions, seem to have. You remove so many of the irrational, rent-seeking regulations we have today, which Romney has promised to do, and you’ll create a climate in which firms won’t have to look abroad for labor. If there’s any “breathtaking hypocrisy” at play here, it’s with Axelrod and Obama, who purport to speak for the “middle class” but whose policies for three and one-half years have driven the middle class into ever greater depths of despair. Obama’s record, as we say, speaks for itself.

The Decision Is Whether We Will Reform Health Care with Our Eyes Open

Donald Berwick may have mastered the science of health care management and delivery. (I for one would jump at the chance to enroll my family in the Berwick Health Plan.) But his recent oped in the Washington Post shows he has yet to absorb the lessons that economics teaches about government planning of the economy, such as through ObamaCare.

Berwick, whom President Obama recess-appointed to be administrator of the Centers for Medicare & Medicaid Services (CMS), sets out to defend ObamaCare from a fairly devastating critique by Robert Samuelson a few days earlier. Berwick responds, in essence, nuh-uh:

I saw how this law is helping tens of millions of families and is finally putting our health-care system on the right track…I have seen how improving care can reduce costs dramatically.

Berwick fails to see the world of difference between those two statements. Yes, in his private-sector work, Berwick has helped hospitals save more lives, kill fewer people, and save money in the process. I’m pretty sure he has saved more lives than I ever will.

But all he saw from his perch at Medicare’s helm was people happy to receive checks from the government, and a bunch of well-meaning bureaucrats setting goals. He did not see the costs imposed by those subsidies. As for goal-setting, this one sentence captures it all:

The CMS, for example, has set ambitious goals to reduce complications that, if met, would save 60,000 lives and $35 billion in just three years.

If. Met. A recent Congressional Budget Office review of Medicare pilot programs showed that Medicare bureaucrats set goals all the time. They never achieve them.

Berwick’s claim that ObamaCare “cracks down hard on waste and fraud” because “Last year the government recaptured a record $4 billion” is even more ridiculous. The official (read: low-ball) estimates are that CMS loses $70 billion per year to fraud and improper payments. The best evidence suggests that wasteful spending approaches $200 billion per year in Medicare alone. All that money that comes from you, John Q. Taxpayer. Berwick knows all these things. Yet he thinks you should be impressed that recovering a measly $4 billion is the best the government has ever done.

Berwick would never tolerate such willful blindness, shoddy reasoning, and (surprise!) poor results if it were his own money on the line. Which is exactly the point. In a free market, people spend their own money. At Medicare, Berwick spent, and ObamaCare continues to spend, other people’s money.

That is the main reason why markets are smart and government is stupid. And why otherwise smart people like Berwick can afford to keep their eyes shut.

Assange and Correa: Strange Allies?

Internet activist Julian Assange is seeking asylum at the Ecuadorian embassy in London. There is plenty of irony here. Assange, who leads an international campaign for transparency with his whistleblowing website WikiLeaks, seeks asylum in a country whose government regularly persecutes whistleblowers and the media.

Assange is not ignorant of Ecuadorian President Rafael Correa’s opinion of the media. Correa told him in an interview this past fall that the private media

defend shamelessly obvious interests, and so for the good of our democracy and true freedom of speech, it is necessary to regulate and control them. A way to do so is by creating a state-owned media.

It is worth reading the transcript of the interview. It makes clear that Assange suffers from a eurocentric perspective. While he clearly condemns censorship by rich-country governments (particularly the United States), he turns a blind eye to much more pervasive and aggressive censorship in other countries, including Ecuador under Correa’s government (see page 15 of the transcript).

It might be worthwhile to have Assange come to Ecuador and try to do here what he does best. He will find that Correa’s administration does not tolerate whistleblowers: consider Juan Carlos Calderón and Christian Zurita, journalists who exposed the president’s brother’s peculiar contracts with the government and who were thereafter sued by the president for libel. Neither does Correa take kindly to those who challenge the official version of events: consider the $80 million lawsuit he filed against local newspaper El Universo and its opinion page editor, Emilio Palacio (who remains in exile), or police officer César Carrión who spent six months in jail after contradicting the government’s version of the police strike on the 30th of September of 2010 on CNN en Español.

Assange might learn to appreciate the existing rule of law in countries like England and the United States once he tries to do his job here. In the unlikely event that he were to be treated as an ordinary citizen, he might discover that his rights to freedom of expression and of information are more vulnerable here than he felt they were in England. Furthermore, if he should ever get in trouble whistleblowing on the Ecuadorian government, he should not expect a fair trial in front of a somewhat independent judiciary, things he is more likely to receive in countries like England or Sweden. Assange need only watch this video where one of the judges in charge of El Universo’s case reveals he received a written sentence from the president’s lawyer in a pen drive.

Assange and Correa certainly appear to be strange allies. But maybe they have forged an alliance because, despite being on opposite sides of the censorship and transparency issues, they need each other. Assange needs to avoid courts in Europe and Correa would like to redeem himself with a certain segment of public opinion at home and abroad. To top it all, they both have an anti-Yankee agenda and, apparently, don’t have a problem acting against their purported principles.