Archives: 07/2012

Romney’s Foreign Policy Opportunity

Barack Obama and Mitt Romney will duel on foreign policy this week as they both address the national convention of the Veterans of Foreign Wars and Romney heads off toBritain,Israel, andPoland to burnish his foreign policy credentials.  It will be difficult for Romney to overcome Obama on this set of issues.  Denizens of neoconservatism scorn the president as a weakling on terrorism and other international issues, but that is not how most Americans see him.  The killing of Osama Bin Laden (as well as dozens of other high-level al Qaeda operatives) has largely inoculated Obama against the “weak on terrorism” allegation, and the public generally gives him decent marks on most other foreign policy issues.

In the two areas where there has been grumbling about the president’s performance—escalating and perpetuating the war in Afghanistan and doing little about the bloated Pentagon budget—Romney’s neoconservative allies advocate measures that most voters dislike even more than they do Obama’s approach.  If Romney is to seize the opportunity to score points against the president on foreign policy, he needs to break with the hawkish extremists in his party and take a very different tack than he has done so far in the campaign.  Unfortunately, his harsh statements toward China and Russia—including describing the latter as America’s principal global adversary—and his alarmingly bellicose rhetoric toward Iran suggest that he is taking his foreign policy positions from George W. Bush’s playbook.  That is a bad move both politically and in terms of good policy.

In his speech to the VFW, Romney should outline a new security strategy built on the foundation of cautious, national-interest realism—a position that once characterized the GOP and still finds some resonance among the party’s rank and file.  That move, though, would require him to challenge the neoconservative conventional wisdom on four major issues.

First, he needs to advocate a prompt withdrawal of U.S.forces from Afghanistan, even faster than the Obama administration’s alleged commitment to have U.S.forces out of that country in 2014.  The intervention in Afghanistanis the poster child for how a limited and justified punitive expedition against a terrorist adversary (al Qaeda) can morph into an open-ended, nation-building crusade on behalf of an inept, corrupt Third Worldgovernment.  Unfortunately, it is difficult to discern whether Romney has a policy regardingAfghanistan.  To the extent he has said anything substantive on the issue, it creates worries that he may want to keep American troops in that snake pit indefinitely.

Adopting a new, smarter position onAfghanistanleads to the second point Romney should emphasize in his VFW speech: a repudiation of nation building as aU.S.foreign policy goal.  It is bitterly ironic that, beginning with the Bush administration, Republicans seem to have become more enthusiastic than Democrats about humanitarian interventions and nation-building ventures.  Republicans rightly used to scorn such crusades as wasteful, utopian schemes.  Condoleezza Rice once remarked that it should not be the mission of theU.S.military to escort children to school in foreign countries.  Romney needs to return the GOP to that wise skepticism.

Third, Romney should advocate a complete reassessment ofWashington’s overgrown network of formal and informal security commitments around the world.  It is absurd for theUnited Statesto continue subsidizing the defense of allies in Europe andEast Asiatwo decades after the collapse of the Soviet empire and nearly seven decades after the end of World War II.  Those allies shamelessly free ride on America’s security exertions, choosing to under-invest in their own defenses and refusing to make a serious effort to manage the security affairs in their respective regions.  Even if theU.S.government was cash-rich and running chronic budget surpluses, the current policy toward obsolete alliances would be wasteful and ill-advised.  Maintaining such a policy whenWashingtonhas to borrow money fromChinaand other foreign creditors to do so, borders on insanity.

Reassessing alliances and other security commitments points to the final change that Romney should advocate: a willingness to cut military spending.  The United Statesspends nearly as much on the military as the rest of the world combined.  The House of Representatives just voted to appropriate $606 billion for defense—and that figure does not include $11 billion to pay for the nuclear arsenal, a budget item housed in the Energy Department.  Instead of promising to increase military spending to four percent of GDP—an extra of $2.5 trillion over ten years—Romney should reverse course and support cutting that bureaucracy’s budget as part of an overall austerity program for the federal government.  And as noted, the overseas missions should be trimmed or eliminated to match the capabilities and budget of a smaller force.

Such an agenda might not please the attendees at the VFW convention, and it certainly would not please the junior varsity from the Bush-Cheney administration that Romney has been relying upon thus far for advice on foreign policy.  But it would appeal to a wide swath of American voters and put Barack Obama on the defensive.  Most important, it would be a wise policy alternative for the American republic.

Cross-posted from the Skeptics at the National Interest.

Free Speech Trumps First Amendment

If you watch HBO’s “Newsroom,” you may have seen Cato, IJ and others get a quick namedrop in relation to the Citizens United Supreme Court case. Actor Jeff Daniels misstates the holding of the case, claiming that Citizens United “allowed corporations to donate unlimited amounts of money to any political candidate without anyone knowing where the money was coming from.”

But, you see, this just shows Aaron Sorkin’s unwavering commitment to realism in his shows. Reporters regularly get the holding of Citizens United wrong. After all, if reporters were crystal clear that Citizens United cleared the way for all manner of groups to use “corporate treasury funds” to fund broad and overtly political statements about candidates, they would inevitably conclude that their own right to make those kinds of statements would be jeopardized by much of the campaign finance regulation on the books prior to Citizens United. And it’s hard to demonize libertarians when they’re fighting for the rights of everyone, including reporters and entertainers who work for subsidiaries of Time Warner (CNN, HBO), Viacom (CBS), Disney (ABC), Comcast (NBC, MSNBC), General Electric (NBC, MSNBC), News Corp. (FOX, Fox News), etc.

If you’d like to know more about the facts of Citizens United, watch this:

As to the claims about secrecy in political speech, Cato Institute senior fellow Nat Hentoff has a few thoughts on disclosure and the jurisprudence of Clarence Thomas.

Yes, Land-Use Regulation Does Increase Income Inequality

Harvard economists have proven one of the major theses of American Nightmare, which is that land-use regulation is a major cause of growing income inequality in the United States. By restricting labor mobility, the economists say, such regulation has played a “central role” in income disparities.

When measured on a state-by-state basis, American income inequality declined at a steady rate of 1.8 percent per year from 1880 to 1980. The slowing and reversal of this long-term trend after 1980 is startling. Not by coincidence, the states with the strongest land-use regulations–those on the Pacific Coast and in New England–began such regulation in the 1970s and 1980s.

Forty to 75 percent of the decline in inequality before 1880, the Harvard economists say, was due to migration of workers from low-income states to high-income states. The freedom to easily move faded after 1980 as many of the highest-income states used land-use regulation to make housing unaffordable to low-income workers. Average incomes in those states grew, leading them to congratulate themselves for attracting high-paid workers when what they were really doing is driving out low- and (in California, at least) middle-income workers.

As Virginia Postrel puts it, “the best-educated, most-affluent, most politically influential Americans like th[e] result” of economic segregation, because it “keeps out fat people with bad taste.” Postrel refers to these well-educated people as “elites,” but I simply call them “middle class.”

Middle class doesn’t mean middle income; it means people with managerial, creative, or other jobs that require thinking, not repetitive or physical labor. As a proxy, I use college education: less than 30 percent of working-age Americans have a bachelor’s degree or better. Though some people with college degrees flip burgers just as some without such degrees gained enough knowledge on the job to be promoted into management, it seems likely that about 30 percent of the population are middle- or upper-class while 70 percent are working- or lower-class.

Census data show that, in the late 1970s, the average worker with a high school diploma but no college education earned more than 64 percent as much as the average worker with a bachelor’s degree. By 2010, it was less than 53 percent.

As I’ve pointed out elsewhere, the barrier between the 1 percent and the 99 percent is far more porous than the one between middle class and working class. The rising cost of higher education and the high cost of moving into regions with land-use regulation prevent less-educated people from bettering themselves. Increased regulation of commercial operations limit people’s ability to start small businesses. Increased traffic congestion (favored by “progressive” anti-auto cities) also hits working-class people harder than middle-class workers as the former are less likely to be able to take advantage of flex-time, telecommuting, and other ways of avoiding congestion.

Britain, which has regulated land use since 1947, is suffering many of the same problems. As the Telegraph reports, this regulation has divided “the nation between old and young, haves and have-nots.”

Of course, many urban planners still refuse to believe that land-use regulation makes housing expensive. Never mind the fact that economists at Harvard, Whartons, and a wide range of other universities agree that it does. Let’s just ignore the fact that such regulation is destroying our economy and oppressing low-income families. All that is important is that the middle-class elites who benefit are happy.

What Obama and the New York Times Don’t Understand about Worldwide Taxation

Mitt Romney is being criticized for supporting “territorial taxation,” which is the common-sense notion that each nation gets to control the taxation of economic activity inside its borders.

While promoting his own class-warfare agenda, President Obama recently condemned Romney’s approach. His views, unsurprisingly, were echoed in a New York Times editorial.

President Obama raised … his proposals for tax credits for manufacturers in the United States to encourage the creation of new jobs. He said this was greatly preferable to Mitt Romney’s support for a so-called territorial tax system, in which the overseas profits of American corporations would escape United States taxation altogether. It’s not surprising that large multinational corporations strongly support a territorial tax system, which, they say, would make them more competitive with foreign rivals. What they don’t say, and what Mr. Obama stressed, is that eliminating federal taxes on foreign profits would create a powerful incentive for companies to shift even more jobs and investment overseas—the opposite of what the economy needs.

Since even left-leaning economists generally agree that tax credits for manufacturers are ineffective gimmicks proposed for political purposes, let’s set that topic aside and focus on the issue of territorial taxation.

Or, to be more specific, let’s compare the proposed system of territorial taxation to the current U.S. system of “worldwide taxation.”

Worldwide taxation means that a company is taxed not only on its domestic earnings, but also on its foreign earnings. Yet the “foreign-source income” of U.S. companies is “domestic-source income” in the nations where those earnings are generated, so that income already is subject to tax by those other governments.

In other words, worldwide taxation results in a version of double taxation.

The U.S. system seeks to mitigate this bad effect by allowing American-based companies a “credit” for some of the taxes they pay to foreign governments, but that system is very incomplete.

And even if it worked perfectly, America’s high corporate tax rate still puts U.S. companies in a very disadvantageous position. If an American firm, Dutch firm, and Irish firm are competing for business in Ireland, the latter two only pay the 12.5 percent Irish corporate tax on any profits they earn. The U.S. company also pays that tax, but then also pays an additional 22.5 percent to the IRS (the 35 percent U.S. tax rate minus a credit for the 12.5 percent Irish tax).

In an attempt to deal with this self-imposed disadvantage, the U.S. tax system also has something called “deferral,” which allows American companies to delay the extra tax (though the Obama administration has proposed to eliminate that provision).

Romney proposes to put American companies on a level playing field by going in the other direction. Instead of immediate worldwide taxation, as Obama wants, Romney wants to implement territorial taxation.

But what about the accusation from the New York Times that territorial taxation “would create a powerful incentive for companies to shift even more jobs and investment overseas”?

Well, they’re somewhat right … and yet they’re totally wrong. Here’s what I’ve said about that issue:

If a company can save money by building widgets in Ireland and selling them to the US market, then we shouldn’t be surprised that some of them will consider that option.  So does this mean the President’s proposal might save some American jobs? Definitely not. If deferral is curtailed, that may prevent an American company from taking advantage of a profitable opportunity to build a factory in some place like Ireland. But U.S. tax law does not constrain foreign companies operating in foreign countries. So there would be nothing to prevent a Dutch company from taking advantage of that profitable Irish opportunity. And since a foreign-based company can ship goods into the U.S. market under the same rules as a U.S. company’s foreign subsidiary, worldwide taxation does not insulate America from overseas competition. It simply means that foreign companies get the business and earn the profits.

To put it bluntly, America’s tax code is driving jobs and investment to other nations. America’s high corporate tax rate is a huge self-inflected wound for American competitiveness.

Getting rid of deferral doesn’t solve any problems, as I explain in this video. Indeed, Obama’s policy would make a bad system even worse.

But, it’s also important to admit that shifting to territorial taxation isn’t a complete solution. Yes, it will help American-based companies compete for market share abroad by creating a level playing field. But if policymakers want to make the United States a more attractive location for jobs and investment, then a big cut in the corporate tax rate should be the next step.

Federal Irony Alert!

The nation’s biggest subprime student lender–your federal government!—has just called out private “subprime” lenders.

This morning the Consumer Financial Protection Bureau and U.S. Department of Education released a report examining private student loans. It concludes that private lenders were out of control, just like all of Wall Street, before the “Great Recession” hit, a fact largely evidenced by high default rates. It was, the report argues, a part of the overall subprime lending debacle and it hurt innocent students.

“Subprime-style lending went to college and now students are paying the price,” said U.S. Education Secretary Arne Duncan in a release accompanying the report.

What’s the report’s solution to the problem? Push people into federal loans to the maximum extent possible. After all, those loans have low, taxpayer-backed interest rates; generous repayment terms, including speedy forgiveness for anyone going into “public service”; and essentially no requirement that borrowers offer evidence of creditworthiness.

Wait—essentially no evidence of creditworthiness? Isn’t that subprime lending in its very purest form? Indeed it is, which is perhaps why the report offers no comparison of default rates on private and federal loans.

Basically, the report is pushing for even greater subprime lending, only with taxpayers on the hook rather than voluntary investors.

The report tries to further portray the fate of private lending as part of an exclusively Wall Street-driven recession by arguing  that a big drop in private lending between the 2007-08 and 2008-09 academic years was  entirely the result of private lenders suffering from the collapse of credit markets. No doubt that had a significant role, but the report somehow manages to not discuss numerous changes to federal law in the 2007-2010 time frame that pushed private lenders out of the way, including:

  • The College Cost Reduction and Access Act (2007), which set federal subsidized-loan interest rates on their halving path from 6.8 percent to the current 3.4 percent.
  • The Ensuring Continued Access to Student Loans Act (2008), which increased unsubsidized loan maximums, reduced eligiblity criteria for PLUS loans (the only loans requiring some demonstration of creditworthiness), and offered federal money when guaranteed lending participants couldn’t get it through capital markets.
  • The reauthorized Higher Education Act (2008), which increased Pell Grant maximums, authorized forgiveness of up to $10,000 in debt for anyone working in an area of “national need,” and added new regulations for private lending.
  • The Student Aid and Fiscal Responsibility Act (2010), which ended federal guaranteed lending in favor of federal lending directly from the U.S. Treasury

Fully private lending probably was reined in thanks to the recession, which is a good thing, with private lenders taking less risk when it didn’t pay off. But it is no doubt also important that Washington enacted many laws that made it much harder for private lenders to compete. The fact is the Feds can subprime-lend without any major concern about losing big bucks. It’s only taxpayer money, after all, and there’s always more of that! Plus the political dividends are sizable, enabling politicians to heartily and repeatedly congratulate themselves for “making sure everyone can go to college!”

That gets us to the next critical point: In addition to reinforcing the utterly discredited notion that the recession was all the fault of “greedy Wall Street fat cats,” a report focusing on private lending is just a distraction from the 800-pound gorilla in higher education: the federal government. At their peak in 2007-08, private loan originations were less than one-third the size of federal loans, and about one-fifth the size of all federal aid. Today they are slightly more than one-20th the size of federal loans, and about one-30th the size of all federal aid.

In other words, private loans are but bit players in a student-aid show dominated by Washington. It is super-abundant federal aid, not private lending, that signficantly fuels tuition inflation, enables dreadful college completion rates, and fosters a glut of degree holders. Yet it’s those same federal lenders who dare scold private companies and warn us about their subprime failures.

Oh, the irony!

The Endgame in Syria

Eventually, Syrian president Bashar-al Assad will fall from power. When that will happen has been the subject of much speculation. Appearing on NPR’s On Point, CBS News foreign correspondent Clarissa Ward, who won a 2012 Peabody Award for her reporting on the Syrian uprising, had this to say about ”the endgame and the final chapter and the final countdown” and all the other clichés we have been hearing:

[T]he reality on the ground is that the regime still has some fight left in it. They are still militarily far superior to rebel forces. Rebel forces are still desperately lacking the heavy weaponry they would need to seriously take on the regime militarily. They are still not a cohesive fighting force with a clear command structure. There is still almost no coordination among the various rebel groups. So I think it’s a little early to talk about the final countdown. But certainly what we’ve seen transpiring in Damascus over the past few days … I think it is a turning point. We have opened a new chapter even if it’s not the final chapter in this.

A Modest Victory for Transparency and Accountability in the DoD Budget

Earlier this week I wrote about the Obama administration’s proposal to shift $5.6 billion dollars out of the Pentagon’s base budget into the Overseas Contingency Operations (OCO) account. Because the OCO budget was exempted from last year’s Budget Control Act (BCA), this gimmick was clearly intended to allow the Pentagon to evade the BCA limits, and had attracted the attention of House Budget chair Paul Ryan (R-WI), Republican Study Committee chair Jim Jordan (R-OH), and a handful of budget watchers. I anticipated that one or more members would call attention to it during floor debate over the defense bill.

Sure enough, on Wednesday afternoon, Rep. Mick Mulvaney (R-SC) offered an amendment to undo the shift. Unfortunately, Mulvaney’s amendment was ruled out of order, ignoring the fact that the entire defense bill exceeded the BCA spending limits and thus also should have been ruled out of order. I thought the proposal to fix the dubious OCO shift would die there.

Not so. Undaunted, Mulvaney returned with a new amendment co-sponsored with Reps. Jordan and Peter Welch (D-VT) that did not actually transfer any funds—thus conforming to House rules—but that expressed the same goals articulated in the earlier amendment. As Mulvaney, Jordan, and Welch explained in a “dear colleague” letter:

Our amendment, similar to a Sense of the House resolution, supports the policy of moving $5.6 billion in non-war costs back to the Base Budget. It fully supports the resources our troops on the battlefield will need, but it does not actually transfer any funding. It simply highlights a non-partisan issue—accountability and transparency—by demonstrating support to move these non-war costs back to the Base Budget in the FY13 CR and future budget requests. (Emphasis in original)

The gambit worked: the resolution passed 238-178, with strong bipartisan support. House Armed Services Committee chairman Howard “Buck” McKeon (R-CA) voted no, as did Appropriations chair Harold “Hal” Rogers (R-KY) and the House Appropriations Committee-Defense Subcommittee chair C.W. Bill Young (R-FL). But 154 Republicans voted for the amendment, including Budget chairman Ryan, House whip Eric Cantor (R-VA), and Rules Committee chair David Dreier (R-CA).

It was a modest, and largely symbolic, victory for transparency and accountability. The next step is to end the war in Afghanistan and eliminate the OCO account entirely. That separate pot of money for the war(s) has served to obscure the enormous growth in the Pentagon’s base budget over the past decade.