201611

November 28, 2016 1:14PM

Understanding When China Can (and Can’t) Wield Economic Influence

China Flag Smokestacks

As China grows more economically powerful there is growing concern about how it will convert its economic power into strategic influence. In its 2016 annual report, the U.S.-China Economic and Security Review Commission recommends closer scrutiny of Chinese economic practices and advocates creating a panel to prevent China’s state-owned enterprises from gaining “effective control” over U.S. companies. Fear of China’s commercial influence has recently spread to Hollywood as well, with recent purchases of film studios and theater chains by China’s Dalian Wanda leading to a torrent of commentary warning against Beijing’s nefarious long-term intentions.

The idea that China can easily convert its economic clout into influence is attractive and intuitive given the government’s important role in the economy. In Chinese Economic Statecraft: Commercial Actors, Grand Strategy, and State Control, William J. Norris, a professor at Texas A&M University’s Bush School of Government and Public Service, casts a skeptical eye on this assumption. Norris came to the Cato Institute recently to discuss his theory of economic statecraft and shed light on the complex domestic factors that help or hinder China from using commercial actors to achieve strategic goals. (Full disclosure, as a student at Texas A&M I spent several months as Norris’s research assistant while he worked on the book.) Using a theoretical model rooted in principal-agent theory applied to several case studies, Norris is able to show that China’s political leadership and commercial actors are not always on the same page.  

Economic statecraft is the intentional manipulation of economic interaction to produce or affect some sort of strategic end. Norris finds that effective economic statecraft requires state control over commercial actors and state unity across different sectors of government. While the Chinese government may have nominal control over its state-owned enterprises, it can be very difficult to get local officials in sync with provincial or national-level officials, which impedes the effective execution of economic statecraft. In some of Norris’s case studies Chinese commercial actors made decisions with little direction or oversight from state officials that had unintended strategic effects down the road.

The most important take-away from Norris’s book is, “economic statecraft is not an easy lever of national power for [China] to wield. To be effective, many factors need to align.” China’s economy makes it easier for the government to use its companies in strategic ways, but even in the Chinese system there are numerous factors that make it difficult to use commercial actors to achieve strategic goals. While Beijing has used commercial actors to achieve strategic goals, not every move by a Chinese state-owned enterprise is a strategic master stroke designed to maximize China’s power or undermine the United States. In order to better identify the real cases of Chinese economic statecraft, it would be prudent for analysts to apply the model in Norris’s book. 

November 28, 2016 8:44AM

Fidel Castro, the Worst of the Worst

Fidel Castro died, finally. His life was consequential, but his death was anti-climactic. The world has been expecting Castro’s demise for at least 10 years when he handed power to his brother Raul because of illness, and Cubans have been waiting far longer. But like Cuban communism, Castro seemingly refused to die, even when his ideas long ago failed to inspire widespread enthusiasm, and indeed led his country to ruin and generated resignation, fear and rejection among Cubans who had to live under the only totalitarian system this hemisphere has ever seen.

Six years ago, Cuban dissident Yoani Sanchez captured the mindset that results from being forced to live according to what most Cubans considered a discredited ideology when she wrote: “Fidel Castro, fortunately, will never return.” To the vast majority of Cubans, Castro, or at least the appeal of his ideas, was already dead.

When I first visited Cuba in 2002 for a series of official and non-official meetings, it became clear to me that nobody there, except maybe two people, believed in communism. The level of cynicism was high, apparently reminiscent of the final years of Soviet socialism, and it was extensive. I met nobody who was pleased with the current state of affairs. That has not changed, though for a time Chavista Venezuela came to the rescue with oil subsidies and other support that are now unreliable with the failure of Venezuela’s own socialist experiment.

There will always be some nostalgia and belief in the region about the legend of Castro being a crusader for the poor and a champion of social equality, but fortunately, the Cuban model in today’s Latin America holds little to no appeal. And the crude reality of Castro’s legacy is more widely recognized than ever before. As the Peruvian establishment newspaper El Comercio noted, Castro was “simply, the bloodiest, most repressive and longest-lasting dictator of Latin America.” And although the authoritarian system he set up has not yet been defeated, his death marks a symbolic endpoint in the worst excesses of 20th century repression in the region.

Fidel Castro represented the worst of the worst of Latin America’s centralizing tradition. In the region’s history, nobody had so much control over so many aspects of people’s lives for so long a period as he did. He achieved it through sheer intolerance and cruelty. From the beginning of the revolution, he did not hesitate to imprison and execute his closest allies, “friends” and even children when it served his purposes. People will debate for a long time how many millions of lives he disrupted, how many thousands of political dissidents he imprisoned, and for how many tens or hundreds of thousands of lives lost he is responsible. But he was a master of deceit and a cunning manipulator of public opinion; in person, he was a “snake charmer” in the words of Peruvian novelist Mario Vargas Llosa. As Yale Professor Carlos Eire notes, “His lies were beautiful and so appealing.”

Here too, he was the most talented of Latin American dictators. Castro justified the worst crimes through the supposed achievement of the greater good—national sovereignty, universal health care and education, social equality, the fight against imperialism, etc. Never mind that the reality was quite different. With all its problems, Cuba, the most developed country in Latin America before the revolution, became relatively less developed and even more dependent on outside powers after the revolution, first on the Soviet Union, then on Venezuela. And if we are to believe Cuba’s official figures, plenty of countries around the world and in Latin America showed equal or greater gains in social development indicators without having to sacrifice civil, political or economic liberties. The extent of control that the communist nomenclatura has over others in society represents an inequality of power that Cuba had never before seen.

Castro knew that much of the outside world would overlook that reality and buy into official myths. He didn’t always lie. The use of moral equivalence in argumentation, or the old trick of suggesting that criticism of the new regime was the same as support for the old status quo went a long way. Castro knew that the world was imperfect and turned Cuba into the focal point of what Latin America had long been: a place where outsiders could project their vision of utopia or express dissatisfaction with the many things wrong in their own societies. In this way, the revolution became useful to intellectuals, journalists, activists, and countless others around the world. In this way also, Castro’s cynicism about the downtrodden, world peace or whatnot was unmatched. As my colleague Juan Carlos Hidalgo notes, just three years ago the regime hosted a summit of Latin American leaders, which called on the region to strengthen human rights and democracy.

How the future will unfold in Cuba is unpredictable, but we can expect its military dictatorship to remain in control in the short term and probably longer. The regime has been preparing for Fidel’s death for the past decade and its repression has increased over the past year. Without Fidel, though, there may be less fear to experiment with change. Whatever change comes about, however, will be undertaken by a regime intent on maintaining power. It will be a task that will be harder and harder for anybody to control.

Castro’s death gives us the opportunity to do as my friend Javier Fernandez-Lasquetty suggests, and pay homage to the millions of Cubans who have suffered under the tyranny he imposed, including writers like Heberto Padilla and Guillermo Cabrera Infante, activists like the Ladies in White or the late Oswaldo Paya, journalists and intellectuals like Antonio Rodiles, and the many, many Cuban dissenters who continue to face despotism with dignity. The world is a better place because of them.

November 23, 2016 3:47PM

Donald Trump, Stephen Bannon, Andrew Jackson, and Infrastructure

On his radio show last night, Mark Levin asked his audience whether they thought President-elect Donald Trump would turn out to be a big-government Richard Nixon or a small-government Ronald Reagan. On the infrastructure issue, I fear that we may be headed in a big government direction.

Trump, of course, is a “populist,” not a small-government conservative. His advisor, Stephen Bannon, indicated the other day what that means:

Like [Andrew] Jackson’s populism, we’re going to build an entirely new political movement,” Stephen K. Bannon told the Hollywood Reporter. “The conservatives are going to go crazy. I’m the guy pushing a trillion-dollar infrastructure plan.

Bannon should know that on fiscal policy, Jackson’s populism was anti-debt and small government. Echoing Thomas Jefferson’s views, Jackson thought that federal debt undermined liberty, and he pushed to eradicate it. Jackson’s views were in tune with the public, which strongly supported frugality in the federal government.

Jackson and his allies were dubious of federal investments in infrastructure (“internal improvements”). His vice president, Martin Van Buren, thought that “Congress had no power to construct roads and canals within the states.” He said that spending on such projects “was sure in the end to impoverish the National Treasury by improvident grants to private companies and State works, and to corrupt Federal legislation by the opportunities it would present for favoritism.”

On assuming office, Jackson made a list of his priorities, including “the Public debt paid off, the Tariff modified and no power usurped over internal improvements.” In his first inaugural address, he promised “extinguishment of the national debt, the unnecessary duration of which is incompatible with real independence.” Jackson famously vetoed funding of Kentucky’s Maysville Road in 1830, citing constitutional objections and his goal of debt elimination.

Jackson was also skeptical of federal investments for practical reasons. In his 1830 message to Congress, he said, “Positive experience, and a more thorough consideration of the subject, have convinced me of the impropriety as well as inexpediency of such investments.” One practical concern was what we now call “crony capitalism.” Jackson noted that when the government gave some initial subsidies to companies, they tended to get hooked on the hand-outs and kept coming back for more.

In his book about the Jackson era, Carl Lane concluded that federal debt elimination, “Americans in the Jacksonian era believed, would improve the material quality of life in the United States. It would reduce taxes, increase disposable income, reduce the privileges of the creditor class, and, in general, generate greater equality as well as liberty.”

Back then, the belief was that a frugal federal government that balanced its books and did not interfere in state and local matters would secure liberty and benefit average citizens. That is the type of Jacksonian populism that Bannon and Trump should pursue.

November 23, 2016 3:18PM

It’s DeVos for Boss! Hopefully, Just of the Education Department

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Betsy DeVos, who has long championed private and charter school choice, has been named the next U.S. Secretary of Education. On the spectrum of education policy people, her support for choice puts her well on the correct side. But I have concerns: especially that President-elect Trump will see Ms. DeVos—or that she will see herself—not just as the education department head, but rather as the national education boss.

As I wrote yesterday, even though choice is great, it is not something people should want Washington providing. Nor—outside of the DC voucher program, military families, and maybe Native American reservations—is it something that the feds can constitutionally provide. My fear is that DeVos and Trump might not recognize the myriad problems with taking private school choice national. More concerning, the American Federation for Children, which DeVos chairs, has tended to favor more rules and regulations on choice than I would prefer. That could become a much bigger concern were rules and regs attached to national-level vouchers.

Then there’s the Common Core. DeVos has written that she does not support it, but some organizations she has backed have. She says she wants high standards, but indicates that she thinks they should be local, or at least "driven by local voices." Assuming that means she will brook no federal influence over state standards—and I'm not sure her statement is entirely clear on that—that's good news. The Common Core should thrive or die based on proving its worth, and people freely choosing it. You couldn’t get much further from that than the federal coercion used to get states to adopt it in the first place.

Another worry is that I have no idea where DeVos stands on early childhood or higher education issues, and the latter, especially, is gigantic, with Washington furnishing tens-of-billions of dollars in student loans, among other higher ed matters. DeVos will essentially be taking over a hugely bureaucratic lending company—with lots of regulatory power—that on a day-to-day basis could prove to be a far greater burden than she expected.

Finally, where DeVos could do immediate good is in rescinding—or something akin to that—“Dear Colleague” letters that have, for instance, pushed colleges to curb legal protections for students accused of sexual assault or harassment, or tried to force national decisions on controversial issues that involve competing rights and concerns, most notably bathroom and lockerroom access. Washington has a role in combatting discrimination by state and local governments, but should tread much more lightly.

It is good news that there will be a proven school choice champion holding the highest-profile education job in the land. But it needs to be absolutely clear that that does not make Betsy DeVos the national education boss.

November 22, 2016 3:54PM

The Simple Analytics of Why President‐​Elect Trump’s Policies Will Probably Result in a Trade War with China

The United States has recorded a trade deficit in each year since 1975. This is not surprising. After all, we spend more than we save, and this deficit is financed via a virtually unlimited U.S. line of credit with the rest of the world. In short, foreigners in countries that save more than they spend (read: record trade surpluses) ship the U.S. funds to finance America’s insatiable spending appetites.

Japan and more recently China have been the primary creditors for the savings-deficient U.S. And since their exports are largely manufactured goods, the real counterpart of their buildup of dollar claims on Americans is for them to run export surpluses in manufactured goods with the U.S. The accompanying chart shows the contribution of Japan and China to the U.S. trade deficit since the late 70s.

Percentage Contribution to U.S. Trade Deficit by Country

So, the U.S. savings deficiency has contributed to the hollowing out of American manufacturing. But, you wouldn’t know it by listening to President-elect Trump. He never mentions America’s savings deficiency. Instead, he claims that American manufacturing has been eaten alive by foreigners who use unfair trade practices and manipulate their currencies to artificially weak levels. This is nonsense.

To get a handle on why the President-elect Trump – and many others in Washington, including the newly-elected Senate Minority Leader Charles Schumer – are so misguided and dangerous, let’s take a look at Japan. From the early 1970s until 1995, Japan was America’s economic enemy. The mercantilists in Washington asserted that unfair Japanese trading practices caused the trade deficit and destroyed U.S. manufacturing. Washington also asserted that, if the yen appreciated against the dollar, America’s problems would be solved.

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November 22, 2016 12:43PM

Could President‐​elect Trump’s Business Dealings Violate the Constitution?

At the New York Times, Adam Liptak has a story on whether President-elect Trump’s business dealings--in particular the possibility that he may use his presidential power to secure business advantages--would violate the obscure Emoluments Clause of Article I, Section 9 of the Constitution. Since the clause has never been directly addressed by the Supreme Court, we'll have to do some guesswork.

The short answer: very possibly, but it will depend upon the facts of the situation.

The longer answer: whether or not Trump’s dealings violate the text and original public meaning of the Emoluments Clause, it should be highly concerning to everyone that the President-elect seems committed to still being closely involved in his businesses. Unless he wants a pall of suspicion hanging over his every move and every phone call to a foreign official, the President-elect should immediately place his businesses in a blind trust in order to maintain at least the semblance of propriety.

In the text, the Emoluments Clause prohibits any Person holding “any Office of Profit or Trust” under the Constitution from accepting “any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State.” Immediately, it is clear that the text limits the clause to gifts from foreign governments and the officials.

The original public meaning of the clause also confirms this interpretation. Foreign kings and princes once gave lavish presents to American officials, for example, a diamond-studded snuff box given to Benjamin Franklin (then ambassador to France) by Louis XVI. The Framers were concerned that these gifts would corrupt our officials, and so they prohibited them.

The next relevant consideration is whether, if Trump’s businesses receive a “gift” from a foreign government, Trump himself may be violating the Emoluments Clause. There is certainly an argument for this, since he benefits from the gift, even if only by increasing the value of his brand and stock holdings.

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November 22, 2016 11:32AM

What, Me Worry…about the Secretary of Education?

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As it is for all areas in which the federal government trods—which seems to be, essentially, all areas of everything—in education the big worry right now is who will be the next U.S. Secretary of Education. I worry about that, too, but much more for what the selection will signal about the incoming administration than what the eventual secretary might choose to do.

The secretary—whoever he or she is—will almost certainly take their orders from people above them. Sure, the secretary will likely provide a lot of education guidance and advice to the president, but they will not—or at least should not—be the ultimate decision maker. Former Obama education secretary Arne Duncan, for instance, presided over deplorable baskets full of stuff I didn’t like, but I’ve never seen any indication he’d gone rogue, driving policies his boss did not support.

Whether President-elect Trump chooses hard-charging—but Common Core supporting and school-choice doubting—Michelle Rhee, or Core-despising transition team member Williamson Evers, the primary concern should be what the selection indicates about the administration’s priorities, not what the ed sec might personally like. Were a Secretary Rhee inclined to incentivize states to keep Common Core, but her boss opposed that, Rhee might not energetically do what Trump wants, but it’s hard to imagine her driving an opposing policy.

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