Archives: 03/2018

New Zealand’s Floor System Experience

In the book I advertised in my last post, I argue that the Fed’s decision to switch to a “floor”-type operating system “deepened and prolonged the Great Recession.” Yet the Fed is only one of several central banks that have adopted floor systems for monetary control during the last dozen years. That fact raises some obvious questions: Did those other floor systems have similarly dire consequences? If not, why not?

In this post I answer these questions for one of those other cases: New Zealand’s. By doing so I also hope to shed some further light upon the U.S. floor system experience.

Um, You Missed Some Evidence: A “Thought Experiment” Fails Private Schooling

To paraphrase John Lennon, imagine there are no public schools, or private ones, too. That is what writer Julie Halpert ostensibly does in a new Atlantic article in which she purports to conduct a “thought experiment,” first imagining a world of all private schools, then one of all public. But rather than coming off as a true, objective experiment, the piece reads more like a dystopian novel depicting the horrors of an imagined all-private system, while comparatively glancing past the many real, actually experienced stains and injustices of public schooling.

It’s not auspicious that the article, before the “experiment” is even proposed, begins with a description of the posh Detroit Country Day School, which likely reinforces the impression that many people seem to have that private schools are snooty preserves of the uber-rich. Halpert notes that the price of Detroit Country Day for high school is about $30,000 per year, but doesn’t mention that the average tuition at a private high school, according to the most recent federal data, is only about $13,000. That average price is high when you’re comparing it to “free” public schools for which you’ve already paid taxes, but not Detroit Country Day high.

With commencement of the experiment we are given a little history…very little. Halpert completely bypasses American educational history prior to Horace Mann’s crusade for common schools starting in the 1830s, noting only that some of our oldest high schools, specifically tony West Nottingham Academy and Phillips Academy, date back to the 18th Century. Halpert also writes that Mann was largely responsible for “the perception of education as a public good.” She ignores the evidence the education was delivered in myriad ways and was very widespread prior to the common schooling crusade—about 90 percent of white adults were literate by 1840—or that it often had a heavily moral character geared at both the private and public good. This is a huge omission, leaving out evidence that largely private provision of education, though sometimes with a modicum of government funding, worked, at least for those who weren’t subjugated by law. Law which was, of course, promulgated by government, the entity that would supply public schools.

California’s Pension Woes Exacerbated by Politics

California governor Jerry Brown has been taking a victory lap of sorts after putting forth a budget for fiscal year 2019 that would include a $6 billion surplus, a remarkable turnaround for a state that hemorrhaged red ink in the wake of the great recession.

Of course, much of that surplus arrived via a hefty tax increase, as well as a surfeit of revenue resulting from the stock market boom via capital gains taxes, so attributing this turnaround to fiscal probity might be taking things a bit far.

However, Governor Brown does get credit for at least temporarily righting what seemed to be a sinking ship. What’s more, he seems to realize that this surplus can easily disappear, and he has warned his potential successors to resist spending that surplus. What Brown is fully aware of is that even the most spectacular stock market increase is not enough to erase the state’s most pressing financial problem—namely, its underfunded government pension.

Currently, it has enough money set aside to cover just 68% of its future obligations—certainly far from the most indebted state (that would be my own state of Illinois), but still low enough to dismiss any notion that future stock market growth can remedy the problem.

Despite this, the California Public Employees Retirement System, or CalPERS, has put politics ahead of achieving a high rate of return by insisting that the boards of the companies it invests in adhere to various social and environmental practices.

It’s nonsense, of course, and it amounts to little more than an extension of politics into a realm that doesn’t have room for it.

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U.S. and EU Trade Barriers Are Too High: Bring Back the TTIP!

In response to threats of retaliation by the EU over his announcment of steel/aluminum tariffs, President Trump has been complaining about high EU trade barriers. Here’s a recent tweet of his:

If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a Tax on their Cars which freely pour into the U.S. They make it impossible for our cars (and more) to sell there. Big trade imbalance!

And here’s something he said yesterday:

“The European Union has been particularly tough on the United States,” Mr Trump said at Tuesday’s joint press conference with the Swedish prime minister.

“They make it almost impossible for us to do business with them,” Mr Trump complained.

President Trump is right: EU trade barriers are too high. In addition, U.S. trade barriers are also too high. Here’s something I wrote a few years ago about tariffs:

In the context of the recently launced US-EU free trade talks (formally, the “Transatlantic Trade and Investment Partnership,” or TTIP), commentators have noted that tariffs between the US and EU are low, and thus the key part of the talks will deal with so-called regulatory barriers to trade. An article in Inside U.S. Trade observes: “Overall, the U.S. average tariff rate is 3.5 percent, although the average tariff rate on goods that the EU actually shipped to the U.S. last year was even lower, at 1.2 percent, … .”

But these average figures mask some significant “tariff peaks.” There are lots of individual tariff rates, so if many are low or zero, that makes the average figure fairly low; nonetheless, there are plenty of high tariffs still out there. The same article points out some US and EU tariff rates that may come up during the negotiations. Here is the US:

— U.S. light trucks tariff of 25 percent; a tariff on wool sweaters of 16 percent; a tariff on sardines of 20 percent; a tariff on tuna of 35 percent; and a tariff on leather at 20 percent

Here is the EU:

— applied tariffs on honey of 17.3 percent; carrots at 13.6 percent; potatoes at 14.4 percent; strawberries at 20.8 percent; lemons at 12.8 percent, beef at 12 percent; and lamb at 12 percent

And all of those tariffs add up:

— the U.S. collected about $4.5 billion in tariffs from EU products in 2012. … [Of this amount,] $900 million comes from imported German cars; about $260 million comes from Italian clothes and shoes; and about $72 million comes from cheese imports.” 

And regulatory trade barriers are even higher.
 
So perhaps there’s a way out of the back and forth threats of tariff retaliation going on right now: The two sides could restart the TTIP talks, and bring down barriers on both sides.
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2018: The Year of Nominal GDP Targeting?

Alternative monetary policy targets continue to gain advocates. While Chair Powell was waiting to take over leadership at the Fed, internal support for rethinking the current inflation rate target was building. And while there are various possibilities to consider — such as raising the inflation rate target, turning the inflation target into an inflation rate range, or adopting price level targeting — there are reasons to believe that the Fed may end up choosing a nominal GDP target.

Powell testified before Congress for the first time last week and affirmed the Fed’s commitment to the current framework, including the symmetric 2% inflation target. However, he also went out of his way to state that the FOMC “routinely consults” monetary policy rules in their analysis and that he finds these rules “helpful.” According to David Beckworth of the Mercatus Center, this is the strongest endorsement of rules yet from a Fed Chair. If Powell is open to an expanded role for monetary policy rules, it is reasonable to think he may be open to a superior monetary policy target as well.

“Reciprocal” Trade Demands Defy Basic Economics and Common Sense

Despite the immense benefits that Americans have derived from free trade and globalization, as well as the far-reaching costs of protectionism, a “reciprocity” argument—that foreign protectionism against U.S. exports justifies current or even new U.S. protectionism against foreign imports—persists. Indeed, one of the primary justifications for President Trump’s proposed tariffs on steel and aluminum, as well as many other Trump administration trade policy proposals, rests on the notion that it is only “fair” that foreign trade barriers—low or high—be matched by America’s trade barriers. Leaving aside these arguments’ basic factual and historical errors (indeed, most countries’ average tariffs on U.S. iron and steel exports range between 0% and 5%—far less than Trump’s proposed 25%), the President’s reciprocity demands still suffer from many flaws: 

  • Reciprocity illogically demands the United States injure its own citizens because other countries injure theirs. There is overwhelming evidence that protectionism distorts markets and reduces economic welfare. For example, last year I documented “a vast repository of academic analyses and contemporaneous reporting that show that American trade protectionism—even in the periods most often cited as ‘successes’—not only has imposed immense economic costs on American consumers and the broader economy, but also has failed to achieve its primary policy aims and fostered political dysfunction along the way.” President Trump’s own Economic Report concludes that “trade and economic growth are strongly and positively correlated…. a 1-percentage-point increase in the ratio of trade to GDP raises per capita income by between 0.5 and 2 percent.” In terms of specific products, a 2006 International Trade Administration study of U.S. sugar trade barriers found that “[f]or each one sugar growing and harvesting job saved through high U.S. sugar prices, nearly three confectionery manufacturing jobs are lost.” The study also found that sugar trade barriers had caused many sugar-using companies to close or move to foreign markets (e.g., Canada and Mexico) where sugar prices were lower. A 2013 Iowa State University report found that getting rid of the sugar program would save consumers up to $3.5 billion per year. The list goes on and on and on. It therefore defies basic common sense to argue that, just because a foreign country harms its citizens through protectionist policies, the United States should do the same.
  • Reciprocity cedes control of U.S. economic policy to other counties. The reciprocity argument maintains that the United States should not unilaterally dismantle protectionist programs while other countries maintain similar (bad) policies, but this approach cedes U.S. control over its own economic decisions to countries like China or the European Union. Yet the United States should remain free to improve its economy, without the need to wait for other countries to do likewise. It’s particularly odd to hear such an argument from “America First” proponents who decry “globalist” policies that supposedly cede control of U.S. “sovereignty” to foreign powers.
  • Reciprocity undermines reform—including through reciprocal trade agreements. The reciprocity approach also would likely prohibit trade reform in the United States—contrary to popular belief, the United States still maintains numerous tariff and non-tariff barriers to trade—or elsewhere. The WTO’s “Doha Round” of global trade negotiations, meant to update and expand the body’s trade-liberalizing agreements, spent over a decade trying, and failing, to produce an agreement among Members to reduce their trade barriers and subsidies. Among the reasons for this stasis was an unwillingness of any WTO Member (including the United States) to expend the political capital necessary to lead the way—a classic “prisoners’ dilemma.” Reciprocity promises the same inaction in the future—thus why many U.S. politicians and industries advocating import protection argue so loudly for reciprocity! Furthermore, new tariff “reciprocity” threats from the Trump administration are threatening to unravel U.S. trade agreements, like NAFTA, that actually have created reciprocal, free trade regimes—to the great benefit of all parties.
  • Reciprocity ignores the many tools that the United States has to address other countries’ protectionism without harming its own citizens. The reciprocity argument also ignores the fact that the United States could unilaterally eliminate many of its trade barriers and still have ample legal tools at its disposal to encourage others’ to follow suit. WTO negotiations, for either all Members or a select group of them (“plurilateral” talks), could introduce new, binding caps on tariff and non-tariff barriers, and the United States would, unlike the current situation, be in a superior moral and diplomatic position to demand them. The United States could also seek to renegotiate its own tariffs through the procedures set forth in GATT Article XXVIII, which would simply require it to lower U.S. tariffs on other products (or allow other Members to raise some of their own). Current and future U.S. free trade agreements could provide another venue for reforms. Finally, WTO and FTA dispute settlement disciplines permit (1) consultations with a foreign government over many of its trade-distorting measures; and (2) if such consultations fail, investigation of the alleged protectionism and eventual imposition of remedial U.S. tariffs on imports from the offending government. WTO dispute settlement has been particularly effective in this regard, as the President’s own 2018 Economic Report documents.

There is no doubt that some (but not all) nations impose higher barriers to imports of U.S. goods and services than the United States does in return. This is not, however, a weakness in the current system but rather a testament to sound American economic policy, which has generated undeniable benefits for the vast majority of Americans. In short, the United States should not start impoverishing its citizens because other nations lack the economic insight or political strength to stop impoverishing theirs. To do so would not only ignore common sense and basic economics, but also lead to higher trade barriers, fewer reforms and therefore a lower standard of living for us all.

The views expressed herein are those of Scott Lincicome alone and do not necessarily reflect the views of his employers.

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Anecdotes from Distant Countries Don’t Help the Argument against School Choice in the U.S.

Apparently, if you want to learn about school choice success in the United States, your first move should be to look to countries that are thousands of miles away. Sarah Butrymowicz from The Hechinger Report did just that. She traveled to Sweden, New Zealand, and France, talked to people about their education systems, decided that they were not perfect, and concluded that “real-life examples from around the world provide little evidence that allowing families more freedom of choice improves achievement.”

The worst part is that the conclusion – that school choice does not improve achievement – is not at all scientific.

For example, Butrymowicz pointed out that Sweden enacted a universal voucher program in 1992 and that their international test scores haven fallen since then. First, Sweden’s test scores most recently rose in math, reading, and science between 2012 and 2015. But more importantly, the simple pre-post observation does not in any way establish a causal relationship. Such a claim doesn’t even attempt to consider any control variables. For instance, immigration in Sweden also increased substantially from 1992 to 2012, which may have had a lot to do with their declining test scores. In fact, a study by Dr. Gabriel Heller-Sahlgren found that about 30 percent of the decline in Sweden’s overall PISA scores is explained by immigration patterns alone. Based on strong existing empirical evidence from Sweden, it is more likely that their PISA scores would have fallen even more without the academic benefits accrued from school choice.

We have a 2015 peer-reviewed study on what actually happened as a result of Sweden’s implementation of universal school choice. Böhlmark and Lindahl used strong econometric methods and found that school choice in Sweden improved “average short- and long-run outcomes.” Another rigorous study in a top academic journal, the Journal of Public Economics, found that Sweden’s voucher program improved academic outcomes due to competition.

Butrymowicz deserves credit for pointing out three studies that show positive effects of the Sweden program. But she points out that one of these studies finds “no positive long-term effects for students.” While that may be true, she failed to acknowledge that the same study found positive effects on student achievement.