Archives: 07/2012

House Freezes Pentagon Spending at Last Year’s Levels

Last night, the House approved a Pentagon budget bill of nearly $606 billion, $1.1 billion below the level recommended by the GOP leadership. Congratulations are in order for freshman Republican Mick Mulvaney (SC-5), and retiring Democrat Barney Frank (MA-4), for co-sponsoring the amendment that effectively froze spending at last year’s level.

According to Politico’s David Rogers, “the freeze marks a modest but still important turning point in the budget wars with 89 Republicans joining 158 Democrats on the key 247-167 vote.”

It is a modest step, but I’m encouraged that 88 Republicans sided with Mulvaney. This should send a message to House Armed Services Committee chairman Howard P. “Buck” McKeon and others who have claimed, falsely, that defense spending has been gutted in recent years, or who contend, absurdly, that the United States cannot maintain its safety and security with a budget that is well above post–cold war levels.

There is still much work to be done, however. The budget remains more than $6 billion above the spending caps set by last year’s Budget Control Act and doesn’t come close to meeting the levels dictated by the BCA’s sequestration provision that was supposed to go into effect when the deficit reduction supercommittee failed to hammer out a deal. Indeed, although I am encouraged by the large number of Republicans who bucked their leadership and McKeon, it is troubling that any House member who claimed to care about deficit reduction and out-of-control spending by voting for the BCA would then vote for a budget that exceeds those caps. An amendment that would conform with the BCA targets by cutting $7.5 billion from the top line garnered just 24 Republican votes. I haven’t yet bounced yesterday’s roll call against last year’s BCA vote, but members who voted for the BCA but against this amendment seem to be trying to have it both ways.

The Trouble with Zakaria’s Assessment of the Economy

Fareed Zakaria is a good journalist. But he’s also human. In his Washington Post column yesterday, Zakaria concludes that President Obama has a stronger case to make for his economic prescriptions than does Governor Romney. However, that conclusion—at least as presented in the column—is premised on a misreading of some recently published data.

Zakaria distills President Obama’s message down to the belief that investment in infrastructure, education, training, basic sciences, and technologies of the future are key to economic recovery, while Romney argues that relief from taxes and excessive regulatory burdens is the answer.

While both views have merit in Zakaria’s estimation, Obama has the stronger case. Why? Because Romney is barking about a relatively insignificant problem, concludes Zakaria:

We need a tax and regulatory structure that creates strong incentives for businesses to flourish. The thing is, we already have one.

To support that claim, Zakaria cites a figure from the 2011-12 edition of the World Economic Forum’s Global Competitiveness Report that ranks the United States 5th (out of 142 countries) and concludes that “whether compared with our own past—of, say, 30 years ago—or with other countries, the United States has become more business-friendly.” The problem is that he’s citing the wrong number and, thus, reaching the wrong conclusion.

The United States is ranked 5th on the overall global competitiveness index, which is a weighted value reflecting scores assigned for 12 broad criteria presumed to affect “competitiveness,” including: (1) institutions, (2) infrastructure, (3) macroeconomic environment, (4) health and primary education, (5) higher education and training, (6) goods market efficiency, (7) labor market efficiency, (8) financial market development, (9) technological readiness, (10) market size, (11) business sophistication, and (12) innovation.  U.S. scores on regulations and taxes contribute to that final ranking, but 5th is not where the United States ranks on those criteria.

To add another layer of complexity, the scores assigned to each of these 12 criteria are derived by weight-averaging the scores from individual survey questions. For example, there are 21 questions related to the first criteria, “institutions”—questions about property rights, public trust of politicians, judicial independence, transparency of government policymaking, etc. There are nine questions that feed into the infrastructure score; six that feed into the macroeconomic environment score, 16 that comprise the goods market efficiency score, and so on.

Zakaria errs by citing the overall, weighted average U.S. rank of 5th to support his assertion that we already have a tax and regulatory structure that creates strong incentives for business to flourish. That relatively high ranking reflects a few obvious U.S. advantages—tax and regulatory structure not being among them. The United States ranks fairly high with respect to some criteria, including “market size,” “university-industry collaboration in R&D” (which feeds into the innovation criterion), “strength of investor protection” (institutions), “availability of airline seats” (infrastructure), “inflation” (macroeconomic environment), “extent of marketing” (business sophistication), and a few others.

But on taxes and regulations, the U.S. ranks poorly. On the “Burden of Government Regulation,” the United States ranked 58th with a score of 3.4 on a scale from 0-to-7, slightly above the global average of 3.3. On the “Extent and Effect of Taxation,” the United States ranked 63rd out of 142 countries. On “Total Tax Rate, % Profits,” the United States came in 96th out of 142. On the issues that President Obama is pushing, the United States performs better than on those Romney advocates, which seriously weakens Zakaria’s argument.

The United States ranks 24th on quality of total infrastructure, better than on taxes and regulations. Likewise for “technological readiness” and “innovation.” “Higher education” (but not “job training”) generates bad scores for the United States, but clearly not for lack of spending. You can dig into the data here, and you’ll find that they tell a very different story than the one you may have read in yesterday’s Post.

Of course, Zakaria might still believe Obama has the stronger argument. But we should all be clear about the fact that regulations and taxes are real and growing problems, and that dismissing them as insignificant, even if inadvertent, doesn’t help policymakers find the solutions. Combine those impediments to investment and hiring with the growing perception that crony capitalism is on the rise (U.S. rank: 50th out of 142), that customs procedures present obstacles to global supply chains (rank: 58th of 142), that U.S. public debt weighs heavily on the economy (rank: 132th of 142), and that government spending is on a ruinous path (rank: 139th of 142 countries), and it becomes more apparent why an increasingly mobile business community often seeks the refuge and relatively warm embrace of foreign shores.

‘The Boy Scouts Have the Right to Exclude Gays, But Are Wrong to Do So’

That was the title of the contribution I submitted to the New York Times online ”debate” about the Boy Scouts of America’s decision to maintain its anti-gay membership policy.

Here’s my conclusion:

The scouts are fully within their rights to maintain that exclusive policy—private groups should be able to discriminate on whatever basis they wish—but it’s a shame that many Americans associate scouting with that constitutionally protected policy instead of the organization’s valuable core mission of providing a unique space where boys can grow and develop into honorable men.

The editors thus changed the title of my piece to “Free to Discriminate,” which is only one part of what I said, but in any event should get more people to click on my piece in anger.  Read the whole thing.

Europe’s Crisis Is Because of Too Much Government, Not the Euro Currency

The mess in Europe has been rather frustrating, largely because almost everybody is on the wrong side.

Some folks say they want “austerity,” but that’s largely a code word for higher taxes. They’re fighting against the people who say they want “growth,” but that’s generally a code word for more Keynesian spending.

So you can understand how this debate between higher taxes and higher spending is like nails on a chalkboard for someone who wants smaller government.

And then, to get me even more irritated, lots of people support bailouts because they supposedly are needed to save the euro currency.

When I ask these people why a default in, say, Greece threatens the euro, they look at me as if it’s the year 1491 and I’ve declared the earth isn’t flat.

So I’m delighted that the Wall Street Journal has published some wise observations by a leading French economist (an intellectual heir to Bastiat!), who shares my disdain for the current discussion. Here are some excerpts from Prof. Salin’s column, starting with his common-sense hypothesis.

…there is no “euro crisis.” The single currency doesn’t have to be “saved” or else explode. The present crisis is not a European monetary problem at all, but rather a debt problem in some countries—Greece, Spain and some others—that happen to be members of the euro zone. Specifically, these are public-debt problems, stemming from bad budget management by their governments. But there is no logical link between these countries’ fiscal situations and the functioning of the euro system.

Salin then looks at how the artificial link was created between the euro currency and the fiscal crisis, and he makes a very good analogy (and I think it’s good because I’ve made the same point) to a potential state-level bankruptcy in America.

The public-debt problem becomes a euro problem only insofar as governments arbitrarily decide that there must be some “European solidarity” inside the euro zone. But how does mutual participation in the same currency logically imply that spendthrift governments should get help from the others? When a state in the U.S. has a debt problem, one never hears that there is a “dollar crisis.” There is simply a problem of budget management in that state.

He then says a euro crisis is being created, but only because the European Central Bank has surrendered its independence and is conducting backdoor bailouts.

Because European politicians have decided to create an artificial link between national budget problems and the functioning of the euro system, they have now effectively created a “euro crisis.” To help out badly managed governments, the European Central Bank is now buying public bonds issued by these governments or supplying liquidity to support their failing banks. In so doing, the ECB is violating its own principles and introducing harmful distortions.

Last but not least, Salin warns that politicians are using the crisis as an excuse for more bad policy - sort of the European version of Mitchell’s Law, with one bad policy (excessive spending) being the precursor of an additional bad policy (centralization).

Politicians now argue that “saving the euro” will require not only propping up Europe’s irresponsible governments, but also centralizing decision-making. This is now the dominant opinion of politicians in Europe, France in particular. There are a few reasons why politicians in Paris might take that view. They might see themselves being in a similar situation as Greece in the near future, so all the schemes to “save the euro” could also be helpful to them shortly. They might also be looking to shift public attention away from France’s internal problems and toward the rest of Europe instead. It’s easier to complain about what one’s neighbors are doing than to tackle problems at home. France needs drastic tax cuts and far-reaching deregulation and labor-market liberalization. Much simpler to get the media worked up about the next “euro crisis” meeting with Angela Merkel.

This is a bit of a dry topic, but it has enormous implications since Europe already is a mess and the fiscal crisis sooner or later will spread to the supposedly prudent nations such as Germany and the Netherlands. And, thanks to entitlement programs, the United States isn’t that far behind.

So may as well enjoy some humor before the world falls apart, including this cartoon about bailouts to Europe from America, the parody video about Germany and downgrades, this cartoon about Greece deciding to stay in the euro, this “how the Greeks see Europe” map, and this cartoon about Obama’s approach to the European model.

P.S. Here’s a video narrated by a former Cato intern about the five lessons America should learn from the European fiscal crisis.

U.S. Postal Service Default

No, the U.S. Postal Service won’t close on August 1st because it can’t afford to make a required $5.5 billion payment into a federal fund for postal retiree health benefits. Yes, the entire situation with the USPS is a mess. But when you have politicians ultimately trying to run a commercial operation, constant clean ups in aisle four are to be expected.

Here’s the situation:

1. The USPS is bleeding billions of dollars in red ink and has just about maxed out its line of credit with the U.S. Treasury.

2. In April, the Senate passed a bill that would buy the USPS time by effectively kicking the can down the road.

3. A more aggressive bill in the House sponsored by Rep. Darryl Issa (R-CA) is unpopular with the postal unions, Democrats, and apparently enough Republicans that the votes are reportedly not there to get it passed. And if the votes are there, the House Republican leadership doesn’t appear to be interested in bringing it to the floor.

4. Even if the House passed a bill, it wouldn’t be easy for House and Senate conferees to hammer out a compromise given the differences between the two bills. Because there isn’t much space left on the legislative calendar, and it’s an election year, it’s hard to imagine that there would be enough time to get something done to avert a default.

5. It is possible that language will be added to appropriations legislation that postpones the payment. For example, every year Congress includes language requiring the USPS to deliver mail six days a week.

Again, no, the USPS won’t shut its doors in the event that it defaults on the payment. Beyond that, I’m admittedly not sure what – if anything – would happen. I operate on the assumption that the federal government can do whatever it wants. That means Congress, USPS management, and postal stakeholders will probably just continue to haggle over what to do.

The postal unions will continue to concentrate their fire on the mandatory postal retiree health benefit payments, which they argue Congress should simply make disappear. As I recently explained, however, “eliminating the payments won’t put the USPS in the black, and it would merely set the stage for a major taxpayer bailout down the road.”  In fact, I believe policymakers should be asking themselves why postal employees should continue to receive a benefit that a small – and declining – share of private sector workers enjoy.

From a Cato essay on privatizing the USPS:

Opponents of pre-funding USPS retiree health benefits argue that private companies and the rest of the federal government are not legally required to do so. That is largely irrelevant. Retiree health care coverage is an increasingly rare perk in the private sector, and the federal government’s financial management is nothing to emulate. In 2008, only 17 percent of private sector workers were employed at a business that offered health benefits to Medicare-eligible retirees, down from 28 percent in 1997.

Note: For those interested in postal policy, Michael Schuyler has a new – and very interesting – paper out on the USPS and stamp prices. Of course, I want the USPS to be privatized and the market to set postage prices. However, if given the choice between a taxpayer bailout and a postage hike, I say hike away.

U-S-A! U-S-A!

We now have the technical details of the absurd Olympic uniform controversy, as the proposed Senate legislation is available.   Some key excerpts:

(a) In General- The [United States Olympic Committee] shall adopt a policy with respect to uniforms to be worn by athletes during ceremonies that are part of the Olympic Games, the Paralympic Games, or the Pan-American Games that requires the [United States Olympic Committee]–

(1) to purchase or otherwise obtain only uniforms that meet the requirements described in subsection (b); or

(2) to make publicly available a detailed justification of the reasons the corporation purchased or otherwise obtained uniforms that do not meet those requirements.

(b) Requirements- A uniform meets the requirements described in this subsection if the uniform, including accessories, such as ties, belts, shoes, and hats, meets the standards of the Federal Trade Commission for labeling as `Made in USA’.

What I found interesting was that the U.S. Olympic Committee does not actually have to use domestically made uniforms. In fact, they have another option, which is “to make publicly available a detailed justification of the reasons” why they “purchased or otherwise obtained uniforms that do not meet those requirements.” In this regard, perhaps they can utilize this option by simply reposting some of my colleague Dan Ikenson’s recent commentary:

Trade is not a competition between “our producers” and “their producers.” In fact, U.S.-based firms benefit from collaborating with foreign firms by carving up the production process into distinct functions and processes that suit each location’s efficiencies and strengths. Just as trade enables U.S. consumers to benefit from lower-cost final goods, globalization enables U.S. producers to benefit from access to lower-cost resources put into the manufacturing system. That enables them to compete more effectively at home and abroad.

Another passage from the legislation is a bit more mysterious:

(d) Compliance With Trade Agreements- The policy adopted under subsection (a) shall be applied in a manner that is consistent with the obligations of the United States under all applicable trade agreements to which the United States is a party.

The only way I can think of to apply this policy consistently with U.S. trade obligations is not to follow it.

(For the record, with reference to the accessories described in the legislation, here is the breakdown of my outfit today. My tie was made in the USA, my shoes were made in Brazil, and my belt was made in China. I’m not wearing a hat.)


When FDA Imitates NSA

This weekend, the New York Times reports on a sweeping electronic surveillance operation carried out not by he FBI, NSA, or CIA, but by… the Food and Drug Administration.  Not only that, but correspondence from several congressional offices apparently got swept up in the dragnet—and inadvertently posted publicly:

What began as a narrow investigation into the possible leaking of confidential agency information by five scientists quickly grew in mid-2010 into a much broader campaign to counter outside critics of the agency’s medical review process, according to the cache of more than 80,000 pages of computer documents generated by the surveillance effort. [….]

Members of Congress from both parties were irate to learn that correspondence between the scientists and their own staff had been gathered and analyzed.

Representative Chris Van Hollen, a Maryland Democrat who has examined the agency’s medical review procedures, was listed as No. 14 on the surveillance operation’s list of targets — an “ancillary actor” in the efforts to put out negative information on the agency. (An aide to Mr. Van Hollen was No. 13.) [….]

Senator Charles E. Grassley, an Iowa Republican whose former staff member’s e-mails were cataloged in the surveillance database, said that “the F.D.A. is discouraging whistle-blowers.” He added that agency officials “have absolutely no business reading the private e-mails of their employees. They think they can be the Gestapo and do anything they want.”

As Marcy Wheeler notes, there’s an irony here, in that Grassley is a supporter of the FISA Amendments Act, which authorizes warrantless, programmatic surveillance by the NSA of international communications of Americans. (The NSA has never, of course, required a warrant to purely foreign communications.)  Supporters of this authority constantly insist that it is not about “spying on Americans” because the nominal “targets” of these interception programs must be located abroad—even though the authority would only be necessary when those targets were communicating with Americans. Here, it seems clear that the FDA managed to gather a good deal of information about the activities of these two members of Congress, even though it was only the correspondence of the scientists employed there that was directly monitored.  So perhaps the privacy implications of surveillance don’t stop with the formal “target”?

Historically, the improper political use of information gleaned from surveillance has often taken circuitous routes—as documented in the Church Committee Reports of the 1970s. During the Johnson administration, the FBI became curious what Anna Chennault—a close confidant of then-candidate Richard Nixon—was promising the South Vietnamese should Nixon win the White House.  But, as an internal FBI memo explained, “it was widely known that she was involved in Republican political circles and, if it became known that the FBI was surveilling her this would put us in a most untenable and embarrassing position.” Instead, they “targeted” her Vietnamese contacts, with the same effect.

In other cases, the acquisition of politically useful domestic information seems to have been more of a happy side-effect. Under John F. Kennedy, the FBI wiretapped lobbyists and lawyers employed by the Dominican Republic—as well as several Agriculture Department officials, and the secretary of  Agriculture Committee Chairman Harold Cooley—in order to investigate whether the Dominicans were using bribery to influence policy.  What they got instead, it seems, was quite a lot of helpful intelligence about who was in line with or opposed to the president’s agenda, as well as who might be persuadable—and by what means. This intelligence, the FBI later concluded in internal documents, “contributed heavily to the Administration’s success” in getting its preferred bill passed.

Here, we have a case where a “leak investigation” seems to have morphed into a broader effort to shield a government agency from criticism, including from members of Congress. Perhaps legislators show so little will to limit the NSA’s spying powers because they’re convinced nothing similar could ever happen at that agency. Or perhaps it’s that they’d prefer not to find out.