Archives: 10/2012

Should Trade Agreements Protect Intellectual Property?

In the Wall Street Journal, former U.S. Trade Representative Charlene Barshefsky argues for strong intellectual property protection in international trade agreements, in particular the Trans Pacific Partnership (TPP) currently under negotiation:

Every country’s competitiveness and economic well-being ultimately depends on its companies’ ability to innovate. So governments’ trade policies should help companies to successfully realize returns on their innovative capabilities so that they have the incentive to continue developing the new products that will improve consumer welfare and deliver rising wages and living standards.

The touchstone for evaluating TPP should be whether it positions the U.S. to compete on the basis of innovation. The United States trade representative has been seeking to ensure that TPP is such an agreement—but difficult work lies ahead.

To meet this test, the agreement needs strong intellectual property provisions, which several TPP negotiating parties are reportedly resisting.

U.S. companies have lots of intellectual property, and it’s not suprising that they want it protected. But this is not a free trade issue, and it does not really fit within trade agreements (despite the fact that it has been in there for more than two decades now – it didn’t fit at the beginning, and it doesn’t fit now). It’s in there because powerful interest groups want it in there, not because of any real connection to free trade.

In fact, including intellectual property in trade agreements is more akin to protectionism, as the U.S. pushes for inclusion so as to give U.S. companies an advantage in global markets. Barshefsky says:  “governments’ trade policies should help companies to successfully realize returns on their innovative capabilities.”  I don’t think that’s what trade policy should do at all. Trade policy should pursue free trade, which is in the interest of the country as a whole, not go to bat for particular domestic companies or industries.

That’s not to say there are no issues with regard to global protection of intellectual property rights. Most people would agree that intellectual property deserves some protection. The real question, though, is how much protection. The U.S., with lots of intellectual property, wants a good deal of protection. Developing countries, with less of it, want weaker protection. None of that is surprising.  The way I see it, these countries can argue about what the right level of protection is, and find an acceptable balance between the competing interests. They can negotiate this directly, or in an international forum devoted to intellectual property.  But I can’t see any good reason to do this in trade agreements.

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Trade Problems May Not Always Call for Trade Answers

The federal system of government in the United States has the invaluable consequence of enabling policy experimentation.  If a state legislature is considering adopting a particular policy, it can often look at the experiences of other states that have tried that policy before.  A recent study from the Milken Institute in California tries to take advantage of such potential comparisons to offer ways that California could increase its dwindling share of U.S. exports.  It is a valiant effort, but California’s decline is not the consequence of inadequate trade policy and no amount of export promotion is going to fix it.

The study begins by comparing California’s decline in export share to the dramatic rise in cross-border trade originating from Texas, the nation’s leader in goods exports. After using Texas’s success as an example of how California is lagging behind, the study decides not to use Texas as a model for reform and instead focuses on other states that have used export promotion (subsidy) agencies as case studies for how California can improve its bureaucracy to reverse the current trend.

If the success of Texas is what California should seek, then why not look at Texas as a model for reform? The study says that Texas is “unique” because it 1) has no export promotion agency, 2) has a low cost of doing business, and 3) has benefited from increased trade with the growing economy of Mexico by virtue of NAFTA-enabled integration. These differences seem to point to clear policy choices: don’t worry about export promotion (easy), improve your state’s business environment, and be close to Mexico (done!).

If it becomes more business-friendly, your state will have more business, export-oriented business included.  Since we’re looking at Texas as a model, may I suggest improving the business environment by lowering taxes and reducing regulation.

Now, I realize that the Overton Window for politically feasible reform proposals in California may not include lowering the cost of doing business. It makes a lot of sense for the authors of the study to point out the root causes of different outcomes in Texas and California but still seek a different solution more palatable to Californian sensibilities. I think their specific proposals for enhancing the capacity and quality of the export promotion process are insightful and well-supported.

There is a larger lesson in all of this for national economic policy. Increasing exports through the National Export Initiative has been a major goal of the Obama Administration’s economic recovery plan, and subsidizing loans through the Export-Import Bank has been a primary tool in that endeavor. But the people of the United States don’t need more bureaucracy to engage in more trade. They need policies that remove artificial barriers and decrease the cost of doing business—international and otherwise.

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ObamaCare’s ‘Essential Health Benefits’: Few States Implement, HHS ‘Is in Clear Violation of the Law’

ObamaCare directs the Secretary of Health and Human Services to define the “essential health benefits” that all consumers in the individual and small-group health insurance markets must purchase. HHS Secretary Kathleen Sebelius kicked that decision to the states, giving them a deadline of this past Friday, September 30. Kaiser Health News reports that all of 16 states submitted an Essential Health Benefits (EHB) benchmark to HHS by the deadline.

But did Sebelius have the authority to kick this decision to states? In a September 26 letter to Sebelius, Pennsylvania Insurance Commissioner Michael Consedine writes:

[T]he PPACA clearly states that the Secretary of HHS is to define the EHB package for policies offered both inside and outside of health insurance exchanges. While the language in PPACA was plain that this statutory responsibility fell on HHS, in December of last year HHS issued guidance preliminarily indicating states must select a benchmark design, with HHS potentially acting as final arbiter…of that selection. (Emphasis added.)

Is September 30 even a deadline?

Some communications from your agency indicate that this is a suggested response date while others indicate that it is a deadline of some sort. We again are asking for clarity.

Letting states make that decision will increase flexibility, though. Right?

[I]n reality the guidance placed additional restrictions on the EHB selection rather than flexibility. HHS guidance appears to render the states’ ability to innovate and to make an independent choice illusory. (Emphasis added.)

Indeed, the 16 states who have complied may be in for a rude awakening.

HHS indicated that any selection by the states will be subject to additional review, but we have no definitive guidance as to what, if any, weight will be given to a state’s selection. The minimum amount of information provided to date invites concern that your agency will alter or override a state’s submission…raising serious questions as to whether states have any meaningful ability to make a definitive selection of an EHB benchmark. (Emphasis added.)

Pennsylvania thus declined to submit one, and effectively told Sebelius to do her job.

Louisiana went a step further, threatening to hold Sebelius accountable if she doesn’t. In a September 27 letter, Louisiana’s Secretary of Health and Hospitals Bruce Greenstein and Insurance Commissioner James Donelson noted that the December 2011 “bulletin” merely stated that HHS “intend[s] to propose” a deadline of  September 30 for making that decision—meaning that the bulletin “neither… has the force of law, nor commits federal regulators to any particular course of action.” Moreover:

[I]t is our State’s conclusion that while the bulletin states a decision is to be made by [September 30], this “deadline” has never been formalized through the official rulemaking process. As long as formal rules do not exist, the federal government can change its approach. Since the federal government is not bound by these bulletins, neither are the States. As such, the State of Louisiana is not legally required to submit a benchmark preference by [September 30,] 2012. The State of Louisiana will not permit the federal government to dictate to our residents a default benchmark plan, as the federal government, in its disregard of the requirements of the Administrative Procedure Act regarding essential health benefits and other provisions of the PPACA, has no authority to do so under federal or Louisiana law until regulations are published in the Federal Register, following established notice and comment procedure.

The process developed for defining the essential health benefit benchmark has been a completely new method of establishing law without proper rulemaking. Implementation of new policies without open and public comment and publication in the Federal Register is in clear violation of the law.

The administration has charged states to build what the federal government mandates, but the federal government has provided [only] informal guidance and incomplete rules and regulations…Accordingly, there will be no essential health benefits package for the State of Louisiana, and we will pursue all avenues to prevent the federal government from selecting one on behalf of our state. (Emphasis added.)

As I have written previously, “implementing these parts of the law can only lead to more regulation, fewer choices, and higher costs. And of course, state officials will take the blame when ObamaCare starts increasing costs and denying care to people. There is simply no good reason for states to assume this impossible, harmful, and thankless task.”

Bad Signs from Mexico’s Incoming President

Last week I attended the annual meeting of the Economic Freedom Network organized by the Fraser Institute in Mexico City. But I was also on a mission: to find out what the deal is with Enrique Peña Nieto, the country’s incoming president.

After his election in July, many people asked me what to expect from Peña Nieto.  Is he committed to reforms? How’s he going to tackle drug violence? Is he an old dinosaur from the long-ruling and corrupt Institutional Revolutionary Party (PRI) with a fresh face and a good looking wife? I couldn’t come up with good answers even though I watched the presidential debates, followed the campaign closely, and read several good analyses on Peña Nieto and his team. Fortunately, I realized I wasn’t actually dropping the ball with my work. In Mexico, I could see first hand that nobody really knows what Peña Nieto is all about.

However, we might be getting some hints during this long five-month transition period. And it doesn’t look good. Reforma, a leading newspaper, reported yesterday that Peña Nieto and his team are studying the creation of six new cabinet departments for the following areas: telecommunications, women’s issues, fishing, science, and government affairs. This would be part of the first legislative initiatives that Peña Nieto would submit to Congress. Many people hoped that the new president would prioritize reforms to make Mexico’s economy more competitive. But it looks like swelling the Mexican bureaucracy will be top of the order for the incoming administration.

Perhaps the biggest test to Peña Nieto’s reformist mantle is the labor law reform introduced by outgoing president Felipe Calderón, from the conservative National Action Party (PAN). The reform aimed to loosen the country’s stringent labor laws to make it easier for employers to hire and fire workers. The law also introduced more transparency and accountability to Mexico’s powerful unions (a historic constituency of the PRI). A good analysis from the Economist Intelligence Unit can be found here.

If Peña Nieto were truly committed to reform, he would rally his PRI caucus in Congress to support the bill. Unfortunately, the PRI scrapped the parts of the bill that limited the power of the unions and watered down those that introduced more flexibility to the labor market. The bill, which passed the Chamber of Deputies and now will be discussed in the Senate, is still a step in the right direction, but it could’ve been much better. And the PRI could still make it worse in the upper house.

Mexico badly needs reforms to make its economy more competitive. The country had the second lowest per capita growth rate in Latin America in the previous decade, less than one percent per year. The economy is now picking up, but it’s still far from its potential. Mexico will not be joining the BRICs any time soon.

The main obstacle to Mexico’s economic potential is the lack of competition in key sectors: telecommunications, transportation, cement, energy, among others. According to The Economist, “opening up oil [to foreign investment] and reforming labour markets and competition law could raise the rate of growth by up to 2.5 percentage points.”

Unfortunately, Peña Nieto’s first signs as president don’t look promising. He seems committed not to reform, but to the status quo.

ObamaCare’s Authors ‘Handed Their Opponents a Weapon’

Ramesh Ponnuru writes about ObamaCare’s greatest vulnerability:

The debate over President Barack Obama’s health-care law has taken another twist. Now conservatives and libertarians are defending it, while the administration tries to toss part of the legislation out.

The reason for this role reversal is that the drafters of the law outsmarted themselves and handed their opponents a weapon. Now they would like to pretend the law doesn’t say what it does.

Obama’s plan makes tax credits available to people who get health insurance from exchanges set up by state governments. If states don’t establish those exchanges, the federal government will do so for them. The federal exchanges, however, don’t come with tax credits: The law authorizes credits only for people who get insurance from state-established exchanges. And that creates some problems the administration didn’t foresee, and now hopes to wish away…

The administration’s response to the impending failure of its signature legislation – a failure resulting entirely from its flawed design – has been to ignore the inconvenient portion of the law. In May, the Internal Revenue Service decided it would issue tax credits to people who get insurance from exchanges established by the federal government. It has thus exposed firms and individuals to taxes and penalties without any legal authorization. Obviously, that situation sets the stage for lawsuits.

The plaintiffs will have a strong case. Jonathan Adler and Michael Cannon – two libertarians, the first a law professor at Case Western Reserve University and the second a health-care analyst at the Cato Institute – have done more than anyone to bring attention to this issue. They point out that every health bill advanced by Senate Democrats clearly made tax credits conditional on [states implementing the law]. They have also uncovered that during the debate over the bill, Senator Max Baucus, a Democrat from Montana, explicitly said the same thing.

France’s Fiscal Suicide

I try to be self aware, so I realize that I have the fiscal version of Tourette’s. Regardless of the question that is asked, I’m tempted to blurt out that the answer is to reduce the burden of government spending.

But sometimes that’s exactly the right prescription, particularly for an economy weighed down by a bloated public sector. And, as you can see from this chart, the French welfare state is enormous.

Only Denmark has a bigger burden of government spending, but at least the Danes are astute enough to compensate with hyper-free market policies in other areas.

So is France also trying to offset the damage of excessive spending with good policy in other areas? Au contraire, President Hollande is compounding the damage with huge class-warfare tax hikes.

Here’s what the Wall Street Journal says about Hollande’s fiscal proposal—including the key revelation that spending will go up rather than  down.

Remember all that euro-babble before the French election about fiscal “austerity” harming growth? Well, meet the new austerity, same as the old austerity, which means higher taxes on the private economy and token discipline for the state. Growth is an afterthought. That’s the lesson of French President François Hollande’s new “fighting” budget, which is supposed to reduce the deficit to 3% of GDP from 4.5% and represent the country’s toughest belt-tightening in three decades. …More telling is that two-thirds of the €30 billion in so-called savings is new tax revenue, and one-third comes from slowing spending growth. Total public expenditure—already the second most lavish in Europe—will increase by €6 billion to 56.3% of GDP.

The spending cuts are fictional, but the tax increases are very, very real.

The real austerity will be imposed on taxpayers, and not only on the rich. Income above €150,000 will now be taxed at 45%, up from the current 41%. Mr. Hollande’s 75% tax rate on income over €1 million comes into effect for two years, reaping expected (and predictably paltry) revenue of €200 million. That’s dwarfed by the €1 billion from reducing the threshold for the “solidarity” tax on wealth to €800,000 from €1.3 million. The French Socialists will also now tax investment income at the same high rates as regular income. The rates have been 19% for capital gains, 21% for dividends and 24% for interest income. If Mr. Hollande’s goal is to send capital out of France, that should help.

Anybody want to take bets, by the way, on whether the “temporary” two-year 75 percent tax rate still exists three years from now?

I say yes, in large part because the tax almost surely will lose revenue because of Laffer Curve effects. But rather than learn the right lesson and repeal the tax, Hollande will argue it needs to be maintained because revenues are “unexpectedly” sluggish.

It’s also remarkable that Hollande wants to dramatically increase tax rates on capital gains, dividends, and interest. These are all examples of double taxation.

And when you factor in the taxes at both the personal and business level, these charts show that France already has the highest tax on dividends in the developed world and the third-highest tax on capital. And Hollande wants to make a terrible system even worse. Amazing.

I’ve already predicted that France will be the next major economy to suffer a fiscal crisis. I was too clever to give a date, but Hollande’s policies are accelerating the day of reckoning.

P.S. The WSJ also takes some well-deserved potshots at the latest fiscal plan in Spain. Since I endorsed Hollande in hopes that he would engage in suicidal fiscal policy, this post is focused on the French fiscal plan. But Spain also is a disaster.

Transparency: Obama Lags House Republicans

Maybe President Obama made a mistake during the 2008 campaign, promising great strides in government transparency as he did. Because he hasn’t delivered them.

House Republicans, on the other hand, started from a better place than President Obama, made modest claims about how they would improve, and took some steps in the direction of improvement.

This makes it pretty easy to say that the president lags House Republicans in terms of transparency.

This afternoon, I presented at an Advisory Committee on Transparency panel about how well government data is published. You can see the grades I delivered to the right and below.

When the burst of transparency effort that began in 2008 started flagging, I figured we should probably come up with something measurable. Over the last couple of years, we’ve created models of what legislative processes would look like if they were published as really good data. We’ve done the same with budgeting and spending information.

Next, we’ve been assessing how well that data is currently published. See my previous reports here and here. Some of it is the responsibility of Congress. Some is the responsibility of the White House. And some of it is a divided responsibility. The little “Capitol” and “White House” icons tell you which.

How well is all this data published? Not well at all.

The worst of it is probably this: There is still no machine-readable federal government organization chart.

What that means is that there aren’t distinct identifiers computers could use to help us in organizing our oversight of the government. That makes it really, really hard to oversee the government. It makes it hard to gather what agencies, bureaus, projects, and programs are affected by the bills in Congress.

You know how easy it is to shop on Amazon or eBay? It should be that easy to keep track of what’s going in Congress. But the data isn’t there. That’s a failure of President Obama’s, who claimed he would deliver transparent government.

So here are the report cards we’ve produced, illustrating how Congress and the White House are doing on publishing data. None of the grades are very good, but where Congress has weak grades, the Obama Administration’s grades are horrible. The conclusion? Obama lags House Republicans on transparency.