201510

October 31, 2015 7:26AM

The Courage to Refuse

Last week I attended a talk and panel discussion at Brookings, in which Roger Lowenstein discussed his new book on the Fed's origins. I have much to say about that book, and I eventually plan to say some of it here. But for the moment my concern is with another book, this one concerning, not the Fed's origins, but its recent conduct. I mean Ben Bernanke's The Courage to Act.

So why bring up the Brookings event? Because, in the course of that Federal Reserve love-fest, someone made a passing reference to those crazy people who actually want to limit the Fed's emergency lending powers. Having seen the Fed save the economy from oblivion, such people, one of the panelists observed (I believe it was former Fed Vice Chairman Donald Kohn), are determined to make sure it can never save it again! At this, the audience chuckled approvingly.

Well, mostly it did. My own reaction was more like a bad attack of acid reflux. Is it really possible, I asked myself (as I struggled to keep my gorge from rising), that nobody here takes the moral hazard problem seriously? Do they really suppose that Senators Warren and Vitter and others seeking to limit the Fed's bailout capacity are doing so because they like financial meltdowns and couldn't care less if the U.S. economy went to hell in a hand-basket?

To his credit, Ben Bernanke does understand the problem of moral hazard. Moreover, he claims, in his long but very readable memoir, to have struggled with it repeatedly over the course of the financial crises. "I knew," he writes at one point, "that financial disruptions" could

send the economy into a tailspin. At the same time, I was mindful of the dangers of moral hazard — the risk that rescuing investors and financial institutions from the consequences of their bad decisions could encourage more bad decisions in the future (p. 147).

Faced with this dilemma, what's a responsible central banker to do? The classic answer — and one that Bernanke has long endorsed — is what he calls "Bagehot's dictum," after Walter Bagehot, the Victorian polymath (and opponent of central banking) who set it forth in Lombard Street. According to Bernanke's own summary of that dictum, central bankers faced with a crisis should "lend freely at a high interest rate, against good collateral" (p. 45).

Did Bernanke's Fed follow Bagehot's advice? To answer, it helps to first consider Bagehot's own elaboration of his rules:

First. That these loans should only be made at a very high rate of interest. This will operate as a heavy fine on unreasonable timidity, and will prevent the greatest number of applications by persons who do not require it. The rate should be raised early in the panic, so that the fine may be paid early; that no one may borrow out of idle precaution without paying well for it; that the Banking reserve may be protected as far as possible.

Secondly. That at this rate these advances should be made on all good banking securities, and as largely as the public ask for them. The reason is plain. The object is to stay alarm, and nothing therefore should be done to cause alarm. But the way to cause alarm is to refuse some one who has good security to offer… No advances indeed need be made by which the Bank will ultimately lose. The amount of bad business in commercial countries is an infinitesimally small fraction of the whole business… The great majority, the majority to be protected, are the 'sound' people, the people who have good security to offer. If it is known that the Bank of England is freely advancing on what in ordinary times is reckoned a good security — on what is then commonly pledged and easily convertible — the alarm of the solvent merchants and bankers will be stayed. But if securities, really good and usually convertible, are refused by the Bank, the alarm will not abate, the other loans made will fail in obtaining their end, and the panic will become worse and worse.

Plainly, Bagehot's reasons for insisting on good collateral ("good banking securities") are, first, to protect the central bank itself against losses, and, second, to make sure that only "sound" institutions benefit from the central bank's protection.

The Fed's first, extraordinary use of its last-resort lending power during the subprime crisis consisted of its decision, on March 15, 2008, to assist JPMorgan's purchase of Bear Stearns by arranging for the purchase, through Maiden Lane, a limited liability company formed for the purpose, of $30 billion worth of Bear's mortgage-related securities. Although Bernanke claims that those securities were "judged by the rating agencies to be investment-grade" (that is, rated BBB- or higher) (p. 219), their value when the Fed acquired them was anything but certain, which is why JPMorgan was determined to limit its exposure to losses on them to $1 billion — its share of the Maiden Lane purchase.

Moreover, thanks to Bloomberg's having forced the Fed to disclose the contents of all three Maiden Lane portfolios, we now know that, by April 3, 2008, when Bernanke made the same "investment grade" claim in testifying before the Senate Banking Committee, some Maiden Lane securities had already been downgraded to below investment grade. Furthermore we know that Maiden Lane I's portfolio was chock-full of toxic securities. Reacting to these disclosures, Ohio Senator Sherrod Brown, a member of the Senate Banking Committee, opined that “Either the Fed did not understand the distressed state of some of the assets that it was purchasing from banks and is only now discovering their true value, or it understood that it was buying weak assets and attempted to obscure that fact."

That Bernanke should repeat the "investment grade" claim in his book, after the true nature of the Fed's purchases has been disclosed, seems pretty surprising. So, for that matter, does his admission — offered in defense of the Fed's subsequent decision to let Lehman go under — that the Fed "had no legal authority to overpay for bad assets." If the Fed really lacked such authority, then its purchase of Bear's assets wasn't legal. If it did have permission to overpay, then the reason Bernanke gives for the Fed's having let Lehman Brothers fail — a reason he only started referring to when questioned by the Financial Crisis Inquiry Commission (FCIC), almost two years after the rescue — is phony.

If saying that the the Fed's Bear bailout was secured by "investment grade" collateral is a stretch, calling the assets in question "sound banking securities" or "commonly pledged" ones requires an impossible leap: even the Fed itself commonly accepts only AAA-rated CDOs and MBSs as collateral for its discount-window loans.

Yet perhaps the biggest problem with the Bear loan was, oddly enough, the fact that its providers did not consistently maintain that Bear was being rescued only because it had plenty of good collateral. Instead, in explaining the Bear rescue to the JEC, Bernanke argued that Bear had to be saved because its sudden failure "could have severely shaken confidence." Tim Geithner made similar claims; and Hank Paulson, in justifying the rescue to the FCIC, actually scoffed at the suggestion that Bear might have been solvent at the time. "We were told Thursday night," Paulson testified, "that Bear was going to file for bankruptcy Friday morning if we didn't act. So how does a solvent company file for bankruptcy?" How indeed. In short, far from insisting that they were rescuing Bear because, though illiquid, it was fundamentally sound, those concerned made it clear that they were rescuing it because it was Too Big (or Too Systematically Important) to Fail.

Peruse the pages of Lombard Street all you like. You will find no equivalent to the contemporary notion that some firms are Too Big (or Systemically Important) to Fail. Nor will you discover any other exception to the rule that emergency lending ought to be confined to "sound institutions." Suppose one recklessly-managed, gigantic firm to be in danger of going under, and of ruining 1000 sound firms in the process, unless the central bank intervenes. Lombard Street offers grounds for having the central bank lend generously to the sound 1000, but none at all for having it lend to the unsound one, however gigantic it may be.

Why not lend to unsound firms, or at least to gigantic (or Systematically Important) ones? Because, if you do, every gigantic firm will come to expect similar aid, and so will be inclined to take risks it would not take otherwise. (Notice how this isn't the case if lending is confined to "sound" firms.) Of course the moral hazard problem had been present before the Bear rescue. But until then it was mainly confined to commercial banks, which had so far been the only recipients of the Fed's largesse. Although the 13(3) loophole had been present since the 1930s, the Fed hadn't dared to make much use of it even then, and made none at all for decades afterwards.

The Bear rescue convinced surviving investment banks that they'd suddenly been moved from beyond the school-ground fence to the head of the Systematically-Important class. As Michael Lewis put it not long after Bear was saved:

Investment banks now have even less pressure on them than they did before to control their risks. There's a new feeling in the Wall Street air: The big firms are now too big to fail. Already we may have seen some of the pleasant effects of this financial order: the continued survival of Lehman. What happened to Bear Stearns might well already have happened to Lehman. Any firm that uses $1 of its capital to finance $31 of risky bets is at the mercy of public opinion… Throw its viability into doubt and the people who lent them the other $30 want their money back as soon as they can get it — unless they know that, if it comes to that, the Fed will make them whole. The viability of Lehman Brothers has been thrown into serious doubt, and yet Lehman Brothers lives, a tribute to the Fed's new policy.

Lewis wrote in June 2008. And he was far from being alone in his sentiments. (See also Joe Nocera's exit interview of Sheila Bair.) Lehman filed for bankruptcy in September 2008. These facts must be kept in mind in assessing Bernanke's own assessment of the Fed's action:

Some would say in hindsight that the moral hazard created by rescuing Bear reduced the urgency of firms like Lehman to raise capital or find buyers. … But in hindsight, I remain comfortable with our intervention. … Our intervention with Bear gave the financial system and the economy a nearly six-month respite, at a relatively modest cost (pp. 224-5; my emphasis).

What Bernanke calls "a six-month respite" is what some others might be inclined to call a six-month period during which failing firms, instead of either looking for more capital wherever they could get it, including from prospective purchasers, or planning for bankruptcy, could become more deeply insolvent.

Bernanke goes on to say that Lehman did, after all, raise some capital that summer, and that it ultimately suffered runs that proved that at last some of its creditors worried that it would not be rescued (ibid.). But these facts prove no more than that the market put the probability of a Fed rescue at something less than 100 percent. In fact they don't even prove that much, for as Bernanke observes elsewhere (p. 252), Lehman, besides refusing to consider selling itself, acquired more capital only after being heavily pressured by both the Fed and the Treasury to do so; and Lehman first confronted a broad-based run on September 12, when it finally became evident that the Fed might not rescue it after all (p. 258). Moreover it's clear from the Fed's internal email communications, as disclosed by the FCIC, that the decision to not rescue Lehman was a last-minute one, and one that came as a surprise even to employees at the New York Fed, who reported in favor of a bailout.

Besides allowing an insolvent firm to go on placing risky bets with other people's money, the expectation of Fed support makes both troubled firms themselves and their prospective buyers unwilling to clinch a deal until the pot has been sweetened. Had Bear been allowed to fail, or had Bernanke and company somehow been able to persuade larger investment banks that despite the Bear bailout their still greater Systematic Importance was no guarantee of Fed support, Lehman might have felt compelled to grab one of the lifelines thrown to it by CITIC securities and the Korean Development Bank, instead of waiting for the USS Fed to toss it a thicker one. Whether any of Lehman's prospective, later purchasers were also holding out for such a deal isn't clear, although Bernanke acknowledges that at one point both Bank of America and Barclay's, having found Bear's losses to be much bigger than had previously been assumed, "were looking for the government [i.e., the Fed] to put up $40-$50 billion in new capital" (p. 263), and that he worried at the time that the firms might be "overstating the numbers as a ploy to obtain a better deal."

In the case of AIG's rescue, it's even harder to avoid seeing a moral-hazard-inspired game of chicken being played out between the lines of Bernanke's account. "Every time we heard from the company and its potential private-sector rescuers," Bernanke writes, "the amount of cash it needed [from the Fed] seemed to grow" (p. 275). When two firms finally made offers, AIG's board "rejected them as inadequate," and then made sure its representatives let Fed Board members know that "it would need Fed assistance to survive" (p. 276). A day later AIG executives "were hoping for a Federal Reserve loan collateralized by a grab bag of assets ranging from its airplane-leasing division to ski resorts" (p. 127). Would those executives have entertained such hopes if Bear hadn't been rescued, or if the Fed had been prohibited by statute from rescuing potentially insolvent firms, or ones lacking "good banking securities" in the strict sense of the term?

The $85 billion loan that the Fed ended up making to AIG was in any case even less justifiable on Bagehotian grounds than its loan to Bear had been. As Bernanke acknowledges, the collateral for the AIG loan consisted, not of any sort of securities but of "the going concern value of specific businesses," the value of AIG's marketable securities having been "not nearly sufficient to collateralize…the loan it needed" (p. 281). Even granting Bernanke's claim that such collateral met the Fed's own legal requirements — a claim that is one of many reasons for entertaining serious doubts concerning Bernanke's insistence that the Fed could not legally have rescued Lehman Brothers — it certainly couldn't be said to consist of "good bank securities." On the contrary, it was so bad that when the Fed was forced to disclose its Maiden Lane holdings, those of Maiden Lane II and III, which held AIG's troubled assets, were worth 44 and 39 cents on the dollar, respectively.

Although the Fed's defenders, Bernanke among them, are quick to note that all three Maiden Lane portfolios eventually recovered, so that the Fed (or rather taxpayers) bore no losses, the fact that they did doesn't at all suffice to square the rescues in question with Bagehot's well-considered advice. That advice simply doesn't allow central banks to place risky bets on troubled firms. Bagehot never says that it's OK for a central bank to set his advice aside provided that its gambles end up paying off.* The Fed's apologists also fail to consider that, while the Fed itself may have come out of the deals it made smelling like roses, the same cannot be said for several of the private firms that took part in them.

And what about the moral hazard consequences of the AIG bailout? Time will tell, but at very least the bailout set the dangerous precedent of having the SIFI ("Systemically Important Financial Institution") stamp applied to non-financial firms. And although Bernanke assures his readers that the bailout's "tough" terms were such as would not "reward failure or…provide other companies with an incentive to take the types of risks that had brought AIG to the brink" (p. xiii), he fails to point out that the terms, though "tough" on AIG's shareholders, let its creditors, including Goldman Sachs, go Scot-free, instead of insisting that they accept haircuts. The trouble is that, unless creditors bear some part of the risk of failure, they will chase after high non-risk-adjusted returns, even if that means depriving safer firms of credit.

The plain truth is that, despite his professed devotion to Bagehot, Ben Bernanke was never able to heed the principles laid down by that great authority on last-resort lending.** Nor is it hard to see why. When confronted by a failing SIFI, it generally takes more courage for a central banker to refuse aid than to grant it. After all, if the SIFI survives, the central banker can claim credit, whereas if it doesn't he can at least claim to have "acted." On the other hand, if the SIFI is left to fail, the costs are obvious and immediate, whereas the benefits are largely invisible and remote. Bad as it was, the drubbing Bernanke took for bailing out Bear and AIG was nothing compared to the horsewhipping he received, even from some people whose opinions he had reason to care about, after he let Lehman fold. The usual public choice logic applies. In any event, no one knows how to calculate the net present value of present and future financial losses. And who, in the midst of a crisis, would pay attention if someone managed to do it?

And that is why it makes little sense, after all, to blame Ben Bernanke for the Fed's irresponsible bailouts. Apart from allowing Lehman Brothers to fail, he only did what just about any central banker would have done under the same circumstances. For among that tribe, the courage to act is one thing; the courage to refuse to rescue large, potentially insolvent firms is quite another. And that is why we need laws that make such rescues impossible.

_______________________

*Bernanke himself appears to confuse loans paid in full with loans made to solvent institutions when he observes that "Nearly all discount window loans [are] to sound institutions with good collateral. Since its founding a century ago, the Fed has never lost a penny on a discount window loan" (p.149). Apparently he is unaware of, or has forgotten about, the House Banking Committee's study of Fed discount window lending during the late 1980s and Anna Schwartz's St. Louis Fed article on the same subject.

**The conclusions appears to hold, not just for the Fed's more notorious rescues during the crisis, but also for its lending through the Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF), both of which lent on toxic and systematically overvalued collateral.

[Cross-posted from Alt-M.org]

October 30, 2015 6:03PM

More Mission Creep in an Illegal War

In the 15 months since the president unilaterally launched our latest war in the Middle East, he's repeatedly pledged that he wouldn't put U.S. "boots on the ground" in Syria. As he told congressional leaders on September 3, 2014, "the military plan that has been developed" is limited, and doesn't require ground forces. 

Alas, if you liked that plan, you can't keep it. Earlier today, the Obama administration announced the deployment of U.S. Special Forces to Northern Syria to assist Kurdish troops in the fight against ISIS. U.S. forces will number "fewer than 50," in an "advise and assist" capacity; they "do not have a combat mission,” according to White House press secretary Josh Earnest. Granted, when "advise and assist" missions look like this, it can be hard for us civilians to tell the difference.  

Asked about the legal authorization for the deployment, Earnest insisted“Congress in 2001 did give the executive branch the authority to take this action. There’s no debating that.”

It's true that there hasn't been anything resembling a genuine congressional debate over America's war against ISIS. But the administration's legal claim is eminently debatable. It's based on the 2001 authorization for the use of military force, or AUMF, the Congress passed three days after 9/11, targeting those who "planned, authorized, [or] committed" the attacks (Al Qaeda) and those who "aided" or "harbored" them (the Taliban).



 

In 2013, Obama administration officials told the Washington Post that they were “increasingly concerned the law is being stretched to its legal breaking point.” That was before they’d stretched it still further, 15 months later, to justify war against ISIS, a group that's been denounced and excommunicated by Al Qaeda and is engaged in open warfare with them. Headlines like "ISIS Beheads Leader of Al Qaeda Offshoot Nusra Front," or "Petraeus: Use Al Qaeda Fighters to Beat ISIS" might give you cause to wonder--or even debate!--whether this is the same enemy Congress authorized President Bush to wage war against, back before Steve Jobs unveiled the first iPod

In the Obama theory of constitutional war powers, Congress gets a vote, but it’s one Congress, one vote, one time. This is not how constitutional democracies are supposed to go to war. But it's how we've drifted into a war that the Army chief of staff has said will last "10 to 20 years." Sooner or later, we'll have cause to regret the normalization of perpetual presidential war, but any congressional debate we get will occur only after the damage has already been done.

October 30, 2015 5:55PM

Printers Shouldn’t Be Forced to Print Messages They Don’t Agree With

Hands On Originals, a t-shirt printing company in Kentucky, refused to print t-shirts promoting a gay-pride event, the Lexington Pride Festival. Its owners weren’t objecting to any customers’ sexual orientation; instead, they objected only to the ideological message conveyed by the shirts.

The Gay and Lesbian Services Organization nevertheless filed a complaint with the Lexington-Fayette Urban County Human Rights Commission under an antidiscrimination ordinance that bans public accommodations from discriminating against individuals based on sexual orientation. The Commission ruled against Hands On Originals, but the state district court reversed on free speech and free exercise grounds.

The case is now before the Kentucky Court of Appeals, where Cato filed an amicus brief, drafted by Prof. Eugene Volokh and UCLA’s First Amendment clinic. Our brief urges the court to uphold the right of printers to choose which speech they will help disseminate and which they won’t.

In Wooley v. Maynard (1977)—the “Live Free or Die” license-plate case—the Supreme Court held that people may not be required to display speech with which they disagree because the First Amendment protects the “individual freedom of mind.” Wooley’s logic applies equally to Hands On Originals’ right not to print messages with which they disagree, which is an even greater imposition than having to passively carry the state motto on your car’s tag.

Thanks to Prof. Volokh and his student, Ashley Phillips, for their work on the brief, and on this blogpost.

October 30, 2015 3:37PM

GMOs and the EU Parliament

The European Union (EU) and its member states have had a difficult time dealing with the politics of genetically modified organisms (GMOs).  Despite the fact that the European Food Safety Authority (EFSA) has determined numerous GMO products to be safe, only one currently is allowed to be planted.  MON 810 corn (maize) resists insects, such as the European corn borer.  Although this type of corn is widely grown around the world, it is planted on only 1.5 percent of the land area devoted to corn production in the EU.  The main reason is a decision by the EU to allow individual member states to forbid the planting of crops that have been enhanced through genetic engineering. Member states now banning the planting of GMOs include Austria, France, Germany, Greece, Hungary, Italy, Luxembourg, and Poland. 

Regardless of the EU’s reluctance to allow GMO crops to be grown, importation of GMO soybeans and soybean meal has been a commercial necessity.  In 2014 the EU consumed the protein equivalent of 36 million metric tons of soybeans for livestock feeding.  Roughly 97 percent of those soybeans were imported.  The three largest soybean producing and exporting countries – the United States, Brazil, and Argentina – each devote more than 90 percent of their plantings to GM varieties.  It simply isn’t possible to buy enough non-GMO soybeans in today’s world to meet the protein needs of the EU livestock sector. 

Apparently it also isn’t possible for the European Commission to achieve agreement among member countries to authorize new GMOs for importation as human food or livestock feed.  Since the regulations for considering GMO applications went into effect in 2003, a qualified majority of member states has never agreed to approve a new food or feed product.  When the outcome among member states is “no opinion,” the decision on whether to allow a product containing GMOs to be imported reverts to the Commission.  Perhaps with some reluctance, the Commission has approved the importation of around 50 genetically modified products. 

Not pleased to be in a situation in which opponents of GMOs criticize it every time a new application gets approved, the European Commission proposed in April 2015 to pass the buck and allow individual member countries to ban the importation of GMO foods and feed ingredients that they don’t like.  The EU Parliament, a popularly elected legislative body, voted on Oct. 28 to reject the proposal by a convincing 577-75 margin.  Among the reasons for disapproval are that it would fracture the EU internal market, violate World Trade Organization rules, and impose huge costs on livestock producers. 

It is gratifying to see legislators acting in support of sound science, economic integration, and the rules-based global trading system.  It would be nice to think that the Parliament’s strong rejection of the proposal would mean the end of it.  Not so fast, though.  The Commission still is hoping for an affirmative decision by the European Council, which includes the heads of state of EU member countries.  If the Council decides to approve it, the measure would go back to the Parliament to be considered once again.

Even though this particular proposal does not seem likely to be adopted, the question of how best to regulate GMOs in the EU is far from settled.  In the United States, there has been a general consensus that approved GMOs should be allowed to be marketed, but debate continues on whether they should carry special labeling.  The political process in the EU still is wrestling with the basic question of whether the government should prevent people from purchasing products that are recognized as safe, but are opposed by some members of society.  A libertarian approach would be to ensure that people are free to exercise their rights to buy – or to refrain from buying – whatever they wish.  The EU still has some distance to go to achieve that degree of individual liberty and consumer choice.

October 30, 2015 2:37PM

Zombie Corporate Welfare

By Charles Hughes

Perhaps in anticipation of Halloween, two components of corporate welfare have been doing their best impression of a Hollywood monster that refuses to die.

The Export-Import Bank (Ex-Im) seems poised to come back from the grave, and promises have already been made to reverse the minor cuts to the crop insurance subsidy program agreed to in this week’s budget deal. These cases give some insight into just how difficult it is to actually get rid of corporate welfare.

Cato has long criticized both corporate welfare and crony capitalism, which benefit the few, the powerful, and the politically connected at the expense of everyone else. These policies introduce distortions into the market and limit competition, all at taxpayer expense. Despite their many harmful effects, the nature of these programs, with concentrated benefits and dispersed costs makes it hard to root out corporate welfare from the budget. The groups and companies that benefit are highly motivated to make sure they continue, while ordinary people who all bear a smaller share of the cost are more focused on other things like the practical concerns of providing for their families. This can explain part of why it’s so hard to end any of the many programs that make up the web of corporate welfare.

Ex-Im provides financing and loan guarantees for foreign customers of certain U.S. companies. While proponents argue that Ex-Im is critical to exports and helps American businesses, the vast majority of these benefits flow to a handful of major corporations, and roughly 98 percent of U.S. exports do not get any kind of Ex-Im assistance at all. As Cato’s Dan Ikenson has shown, these subsidies also harm “competing U.S. firms in the same industry, who do not get Ex-Im backing, and U.S. firms in downstream industries, whose foreign competition is now benefiting from reduced capital costs courtesy of U.S. government subsidies.” Given these inefficiencies and distortions, opponents of Ex-Im cheered when the bank’s charter lapsed this summer, but unfortunately that was not the last chapter in this saga. Earlier this week, the House, in a discouraging instance of bipartisanship, voted to reopen Ex-Im by a 331-118 margin. While it still has to get past the Senate, a similar bill passed that chamber earlier this year, and the measure will likely be included in the coming highway bill. So after a prolonged battle to shut down this one small component of corporate welfare, the hard-fought victory for Ex-Im opponents will probably be short-lived.

Tucked into this week’s very disappointing budget deal was one minor positive aspect: modest cost savings from making changes to the subsidized crop insurance program. In this program, farmers can purchase insurance from approved private insurance companies, and the federal government reimburses these insurance companies for administrative and operating costs in addition to reinsuring their losses. The tweak in the budget deal wouldn’t even achieve savings by increasing the insurance premiums paid by farmers, but by merely lowering the rate of return for the insurance companies from 14.5 percent of premiums to 8.9 percent.  It’s worth noting that the Congressional Budget Office estimated that this change would save about $3 billion through 2025, and that these savings would not really start to materialize until 2019. Perhaps unsurprisingly, Roll Call reports that “[f]arm-state lawmakers have been assured by leaders that a provision in the bipartisan budget deal that would trim the federal crop insurance subsidy program will be replaced down the road.” This modest change was years away from even taking effect and the savings were extremely modest over a decade, but there have already been promises to reverse them, citing the potential for “dramatic” consequences.

Past Cato research has analyzed the amount of corporate welfare in the federal budget, estimating that it consistently accounts for more than $100 billion (in inflation-adjusted dollars) each year.

Media Name: corporate_welfare_by_year.png

Sources: Author’s calculations using Office of Management and Budget, “Public Budget Database, Outlays,” https://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/outlays.xls and Office of Management and Budget, “The Appendix, Budget of the United States Government, Fiscal Year 2016,” https://www.whitehouse.gov/omb/budget/Appendix; Tad DeHaven, “Corporate Welfare in the Federal Budget,” Cato Institute Policy Analysis No. 703, July 25, 2012; Stephen Slivinski, “The Corporate Welfare State: How the Federal Government Subsidizes U.S. Businesses,” Cato Institute Policy Analysis No. 592, May 14, 2007.

The developments with Ex-Im and crop insurance subsidies are just the two most recent examples of why corporate welfare keeps coming back like a Hollywood monster, costing taxpayers and introducing economic distortions, year after year. Even so, opponents of corporate welfare need to continue to expose the flaws, costs and harmful effects of these programs, otherwise they will always be with us.

October 30, 2015 1:17PM

The TPP Is Already Poised to Grow

The Trans-Pacific Partnership negotiations have just concluded and the parties are about to begin a very long process of ratification and implementation. Once all of that is complete, the TPP will be ready and willing to accept new members. There’s a pretty long list of countries ready to join.

The president called the TPP America’s chance to “write the rules” instead of China. That’s an unfortunately confrontational way to sell international commercial cooperation. Certainly, the TPP is an effort to circumvent gridlocked negotiations at the World Trade Organization and establish new norms while lowering trade barriers. It’s not clear yet whether the proliferation and growth of megaregional agreements like the TPP will help or hinder the broader and more valuable goal of global trade liberalization.  

In practice, having America “write the rules” mostly means (1) lower tariffs; (2) more rules on things like intellectual property, state-owned enterprises, and labor and environment protection; and (3) less pressure to eliminate America’s own protectionist policies like outrageous farm subsidies, shipping restrictions, and abusive antidumping laws. 

But if the TPP is going to be a vehicle for exercising American influence over global economic governance, it will surely need to expand beyond its current 12 members. 

Since the negotiations concluded a few weeks ago, half a dozen governments in the region have expressed or reiterated their interest in joining the TPP. These include Indonesia, South Korea, Colombia, Thailand, the Philippines, and Taiwan. The fact that so many countries are eager to join an agreement they haven’t seen and had no role in drafting says a lot about the politics of international trade.

Once the TPP text is released, we will have a better idea of what these countries will be required to do to gain entry to the agreement. Will they need unanimous approval from existing members? Will they be required to accept additional obligations beyond the current text? Will Congress and other legislatures have to ratify each accession? The answers to these questions could have a big impact on the future of the global trading system.

October 30, 2015 10:01AM

The Politics of the TPP

In the trade policy world, everyone is eagerly awaiting the release of the full text of the Trans Pacific Partnership (TPP) agreement, but trade news sources say this is still several weeks away. My colleague Bill Watson has done a nice job with the one chapter, on intellectual property, that is available in mostly final form through a leak, but for the rest of the text, it is hard to say too much at this point.

But if we can't talk much about substance yet, what we can talk about is the politics of the TPP: What are its chances in Congress?  The Obama administration has taken a somewhat creative approach to assembling a coalition from across the political spectrum in support of the TPP.

They have tried to appeal to free market conservatives by talking about how the TPP would involve "18,000 tax cuts," in the form of lower tariffs on U.S. exports.

They have tried to bring in liberal support by calling it the "most progressive trade agreement in history."

And some people have portrayed the TPP as having a security component, in order to bring security hawks on board.

But here's a key question related to the first two: Can they bring in supporters without creating new opponents?  For example, with regard to the TPP's "progressive" nature, the administration says the TPP would do the following on labor protections: "Require laws on acceptable conditions of work related to minimum wages, hours of work, and occupational safety and health."  Focusing on the first one, what exactly would the TPP require with a minimum wage?  If it requires that all TPP countries have a minimum wage -- either set at a particular level, or just having one at all -- some Republicans in Congress might object.

With trade agreements these days addressing so many aspects of social policy, assembling a package of provisions that Congress will support is a challenge. Putting aside the substance, which we will get to once the text is released, the politics of the TPP are going to be very interesting.