Archives: 11/2016

Donald J. Trump and the Future of Transatlantic Relations

The German Marshall Fund has just published an essay that I wrote in conjunction with a conference convened in Berlin six weeks ago. For a few hours in September, as Donald J. Trump’s poll numbers hovered around parity with Hillary Clinton’s (that is, before they fell and rose again), an array of American and European scholars contemplated Trump’s emergence as the de facto leader of one of the United States’ two major political parties.

What, if anything, did Trump’s rise portend for the future of transatlantic relations?

“Not much,” would be the safe, short and simple answer. After all, quite a number of GOP national security officials have raised the #NeverTrump banner. One group openly doubts that Trump has the “qualifications, the judgment or the temperament” to be president. Others bristle at his claim that U.S. allies are feckless free-riders, and reject his call for making them pay for the protection that they receive under the U.S. security umbrella. Hillary Clinton is even more adamant that NATO and other Cold War-era alliances should never be subject to scrutiny. As she said several years ago, American global leadership, which manifests in such alliances, “is in our DNA.

In short, if Trump loses next week, it isn’t obvious that his ideas will outlast his unconventional campaign. The reigning transatlantic consensus, in which U.S. taxpayers subsidize European countries that might otherwise be inclined to spend slightly more on defense, will survive, and foreign policy elites in both the Democratic and Republican parties will work hard to ensure that no one like Trump ever emerges to challenge them.

However, as I note in the piece:

The mere possibility that America’s obligation within the NATO alliance might be open to interpretation should…serve as a powerful incentive for European countries to hedge their bets and get serious about developing a credible defense capability, one that is capable of acting without the United States in the lead.

Regardless of whether that occurs, it was probably unwise for Europeans to have relied so much on a U.S. political system over which they had no control. The fact that a bipartisan consensus among U.S. foreign policy elites sustained the transatlantic bargain for decades didn’t mean that that consensus was permanent.

Defenders of the status quo, whether they call it primacy, deep engagement, or simply American leadership, often claim that our dominant position in the world order will never be challenged because the United States is uniquely poised to reassure others. Core classical liberal principles, such as the importance of the rule of law, and governmental transparency and accountability, make Uncle Sam a reliable partner. Checks and balances between competing branches supposedly ensure that no one individual is able to effect dramatic changes in the way that the United States conducts its affairs.

Governing in Ignorance

Last night Jimmy Wales, the founder of Wikipedia, delivered the first Joseph K. McLaughlin Lecture at the Cato Institute. He talked about the vision, history, organization, and impact of Wikipedia, and the influence of F. A. Hayek and his essay “The Use of Knowledge in Society” on his own initial conception of a crowdsourced encyclopedia. He also discussed Wikipedia’s occasional influence on public policy decisions, such as the defeat of the Stop Online Piracy Act (SOPA) in 2012. But I was particularly struck by this line (about 43:00 in the video):

Far too often lawmakers propose laws, and it’s fairly clear that they do not even have the most rudimentary understanding of how the internet works.

It reminded me of something Bill Clinton said at the Clinton Global Initiative in 2010:

Do you know how many political and economic decisions are made in this world by people who don’t know what in the living daylights they are talking about?

That’s a lesson policymakers ought to keep in mind whenever they contemplate legislating about health care, marriage, minimum wage laws, net neutrality, banking regulations, overtime pay, or anything else. Do they really understand how the particular market or industry works? Do they really understand how the impact of a new law or regulation will ripple through affected industries? In most cases they don’t, as Aaron Powell wrote about the lessons of SOPA:

SOPA was not the exception to the rule. Instead, it was just how things are done in Washington.

NYT Article Understates the Benefits of GMOs

An Oct. 29, 2016, article by Danny Hakim in The New York Times gives a decidedly skewed view of the benefits of agricultural biotechnology. It is based on the author’s presumption that genetically modified organisms (GMOs) were supposed to accomplish two things: (1) increase crop yields; and (2) reduce the use of chemical pesticides.  In essence, Hakim sets up two straw men and proceeds to knock them down using questionable analysis.

Hakim compares crop yields in the United States and Canada, where GMO use is widespread, with yields in Western Europe, where GMOs generally are not allowed.  He finds that North America had “gained no discernible advantage in yields” relative to France, Germany, and other European countries.

As an example, Hakim includes a chart showing that the trend lines for yield increases of rapeseed in Europe and canola (a variety of rapeseed) in Canada are parallel, so that both added a similar amount of output per hectare. What he neglects to explain (or perhaps doesn’t appreciate) is that the percentage increase in European yield from 1995 to 2014 was modest. It rose from about 3.1 metric tons (MT) to 3.7 MT per hectare, an increase of approximately 19 percent.[i] Canada’s yield grew about the same quantity per hectare – from 1.4 MT to 1.9 MT – but the percentage increase was much greater at roughly 36 percent.  This is because Europe grows winter rapeseed under conditions that allow for high yields, while Canada grows spring canola under conditions in which lower yields are the norm.

So which farmers experienced a greater increase in profitability? Compared to their 1995 earnings (assuming constant prices), European famers managed to increase their per-hectare revenues by 19 percent. Canadian famers, on the other hand, achieved an increase that was almost twice as high – 36 percent. Casual observation would suggest that Canadian canola growers have become relatively more profitable over time than their European colleagues. One factor that appears to have increased Canadian profitability is the planting of GMO seeds.

As for Hakim’s argument that herbicide use has increased in the United States, especially on soybeans, it’s not clear that this is a bad thing. Most of the soybeans grown in North America have been genetically modified so that they are not harmed by Roundup (glyphosate), an herbicide that kills many weeds. Roundup has the advantage of being less toxic than some other herbicides, and it breaks down quickly in the soil. Anyone who has spent hours in a soybean field on a hot, humid day pulling weeds by hand is not likely to object to the idea that the same result could be achieved by modern biotechnology.

The bottom line is that Hakim largely ignores the reality that many thousands of individual farmers make decisions each year regarding which seeds to plant and which agronomic practices to use. The fact that so many farmers choose to plant costly GMO seeds (in countries where they are allowed) indicates that the added expense produces a real benefit. It seems improbable that those agricultural entrepreneurs all are making poor decisions about what is best for their businesses. The safe assumption is that users of biotechnology expect it will lead to a marginal increase in revenue that is greater than the marginal increase in cost. In the real world, it looks like the use of GMOs is being driven by favorable economics.

Mr. Hakim may think that GMO “technology has fallen short of the promise.”  The marketplace, however, understands things very differently.

[i]The data included in the article are in graphic form, so it’s not possible to determine precise numbers.

These Scope of Practice Laws Don’t Improve Health Outcomes, Serve Mainly as Barriers to Entry

Scope of practice (SOP) restrictions in health care professions are often portrayed as a necessary intervention to protect consumer health and safety. Given how common this argument is, there have been surprisingly few studies trying to determine whether SOP restrictions actually have any impact on such outcomes. A new working paper seeks to fill this gap in the literature by determining whether SOP laws for certified nurse midwives (CNMs) affect health outcomes. On average, it turns out that the restrictions do not have a significant impact on maternal behaviors or infant health outcomes. Instead, they “primarily serve as barriers to practice and removing these restrictions has the potential to improve the efficiency of the health care system for delivery and infant care.”

SOP laws are determined at the state level, and regulate which activities and tasks certain professions can perform within the state. Physicians are generally unaffected, but other health practitioners are—in this case, CNMs specifically. Their level of restriction ranges from states with “no barriers,” where CNMs do not have oversight requirements, to states with “high barriers,” where they have to be under the direct supervision of a physician and may not write prescriptions. In heartening news, more states seem to be recognizing the wasteful nature of these laws. The recent trend for this specific case has been a move towards a more relaxed scope of practice environment.  

Scope of Practice for Certified Nurse Midwives by State, 1994 vs. 2013

Source: Markowitz et al.

Does Monetary Policy Have a Future?

I have chosen a provocative title, but it is fully justified. Fed officials are flying on autopilot, but the controls don’t work anymore, or at least not reliably. Fed watchers are largely clueless. The investment community and the economy may be collateral damage.

Let me begin by briefly reviewing the recent past. All through last year, Fed officials were signaling they would begin a program of rate increases. At first, there were going to be 8 increases of one quarter point. As the year progressed, the first increase faded into the future. Finally, in December 2015, the Fed finally hiked its new interest-rate targets by 25 basis points. In my opinion, the FOMC did so largely to keep its credibility.

At the time, I wrote that “the chief effect of Wednesday’s action and accompanying statement is to once again increase uncertainty in financial markets” (O’Driscoll 2015). I became convinced that, promises to the contrary notwithstanding, the Fed would not raise interest rates again before December 2016. Instead, policymakers would dither all year. I forecast the earliest rate hike would be in December 2016. Note, I did not predict the Fed would actually raise rates this December, just that they would not do so before. I think I have been vindicated.

Fact-Checking the Dallas Morning News on School Choice

In a recent editorial, the Dallas Morning News inveighed against expanding educational choice in Texas, arguing that legislative leaders should “focus on improving public schools” instead. What the DMN editorial board means, of course, is “spend more money,” as they make clear in the penultimate paragraph. Yet although the national average annual expenditure per pupil for district school students has, after adjusting for inflation, nearly tripled in the last forty years, student performance remains flat. Moreover, there is little evidence that merely increasing spending improves school performance or student outcomes. Nevertheless, the DMN has reservations about the possible effects of expanding educational choice:

One proposal would create education savings accounts. If a parent decides against public schools, the money that would have gone with the student to the local school district would instead go to the account, for parents to use on private school.

That could decimate public schools. What about the quality of education for the students left behind?

Have Central Bankers “Lost the Plot?”

Recently, the UK Daily Telegraph ran a remarkable Op-Ed written by William Hague, the just-retired Conservative politician and former UK Foreign Secretary. The title alone was startling: “Central bankers have collectively lost the plot. They must raise interest rates or face their doom.”

Now I confess that I may be a little biased. Lord Hague’s article made many of the same points that Martin Hutchinson and I set out in a paper we have just prepared for Cato’s 34th Annual Monetary Conference next month, “From excess stimulus to monetary mayhem,” and I am pretty confident that he hasn’t seen our draft. What encourages me most about his piece is that it hints that the monetary policy Zeitgeist is changing — the failures of recent central bank policies are becoming increasingly obvious to anyone without a completely closed mind. The Overton Window might at last be moving in our direction.

In this post, I would like to summarize his argument and offer a few observations of my own.