Tag: free market

Wikileaks Cable: Martinelli Is a Threat to the Rule of Law in Panama

Last August I warned about the troubling signs coming from Panama’s president Ricardo Martinelli. Elected in 2009 on a free market platform, Martinelli has quickly embraced interventionist economic policies (particularly a sharp increase in public spending) that sooner or later will take a toll on Panama’s macroeconomic stability. More worryingly, I pointed at a disturbing pattern of cronyism, erosion of democratic checks and balances, and harassment of the media emanating from the Martinelli administration.

A cable released by Wikileaks this week seems to confirm many of these fears. Dated August 2009 and signed by then U.S. Ambassador to Panama Barbara Stephenson, it describes Martinelli’s “autocratic tendencies” such as asking the U.S. government for help to wiretap political opponents—a request that was promptly rejected by the U.S. embassy in Panama. Stephenson goes on to say that, after meeting the Panamanian president, she is under the impression that Martinelli “may be willing to set aside the rule of law in order to achieve his political and developmental goals.”

According to the cable, Martinelli has resorted to “bullying and blackmailing” of private businesses. Stephenson describes how the Panamanian president told her that “he had already met with the heads of Panama’s four mobile phone operators and discussed methods for obtaining call data.” A bill has also been introduced in the National Assembly (where Martinelli’s coalition enjoys a large majority) that would “require registry of prepaid cell phones and compel mobile operators to submit call data to the government for criminal investigations.” Martinelli also told Stephenson that “he had twisted the arms of casino operators and threatened to cancel their concessions if they did not pay their back taxes and cut their ties to the opposition political figures who had granted their generous concessions.”

The cable ends noticing how “[m]ost of [Martinelli’s] government appointments have favored loyalty over competence.” That is, the Martinelli administration is riddled with cronyism– as I wrote back in August.

There is new evidence outside of the Wikileaks cable which confirms Martinelli’s ominous autocratic inclinations. For instance, international media organizations have lambasted the Martinelli administration in recent months for its encroachment on independent media. Reporters Without Borders dropped Panama 30 spots in its latest Press Freedom Index, noticing that the country “has taken an opposite direction, in an atmosphere growing increasingly tense between the media and the authorities.” The Interamerican Press Association says in its most recent report on Panama that “[o]ver the past six months, freedom of the press has been threatened by actions by institutions belonging to the government of President Ricardo Martinelli, as well as from the Judicial Branch and the Prosecutors’ Office.” As I pointed out in my August op-ed, Martinelli has appointed loyal (and controversial) figures to both the Supreme Court and the Prosecutors’ Office.

The diplomatic cable leaked by Wikileaks as well as these reports by international organizations lend credibility to the argument that Ricardo Martinelli is a growing threat to Panama’s rule of law and democratic institutions. Panamanians have a lot to be worried about.

Comparative Political Economy

Free-marketers often point to the varying success of pairs of countries – the United States vs. the Soviet Union, West vs. East Germany, Hong Kong and Taiwan vs. China – to illustrate the benefits of markets over planning, regulation, and socialism. Some even point out the closer but real differences in GDP per capita between the United States and Western Europe. In his 1984 book Endless Enemies (p. 380) Jonathan Kwitny added the less familiar pairs “Morocco versus Algeria, Malaysia versus Indonesia, Thailand versus Burma, Kenya versus Tanzania.” Now Rama Lakshmi reports in the Washington Post that we can see the results of two systems of political economy in one country:

It didn’t take long for the first athletes arriving in New Delhi last week for the upcoming Commonwealth Games to catch a glimpse of modern India’s two faces.

Their gateway to the country was the capital’s gleaming new international airport terminal, built by a privately led consortium and opened in June four months ahead of schedule.

But the official wristbands that the visitors were handed at the airport turned out to be an emblem of India’s famous red tape and government inefficiency. When the teams reached the athletes’ village, the police guarding the facility refused to recognize the IDs, saying that the Games Organizing Committee had not sent the required authorization order.

The jet-lagged athletes stood about under a tree for hours with their luggage, calling their embassies for help, and the problem was not finally resolved for four more days.

To observers, the incident illustrated more than just the well-documented sloppiness that has marked India’s preparations for the Games. It also underscored the gap that has emerged between a government rooted in a slower-moving, socialist era and a private entrepreneurial class that is busy building global IT companies, the world’s largest oil refineries and spectacular structures such as the $2.8 billion airport terminal.

“It is about two aspects of the India story,” said Rajeev Chandrasekhar, an entrepreneur and member of Parliament. “India’s private sector has been exposed to competition and therefore has developed capability. Accountability is firmly built into the entrepreneurial mind-set. But the government structure is a relic of the colonial past and continues to plod along.”…

For the Delhi [airport] project, [Grandhi Mallikarjuna]Rao said, his company worked with 58 government agencies.

“Our nation is in the process of transition from a command-and-control economic system to a more efficient market-driven structure,” he said. “It will take some time till this transition is complete.”

Given all this history, the interesting question is why some people in the United States want to continually transfer such vital functions as energy and health care from the competitive, accountable, capable entrepreneurial sector to the slower-moving, plodding, command-and-control bureaucratic sector. (Of course, the already-government-influenced health care and energy industries are not the most entrepreneurial sectors of the economy. But as the examples above demonstrate, even imperfect markets work better than government direction. Nor are the government-run local schools very competitive or accountable, but they are more so than they will be under tighter federal control.)

How to Explain Free Trade in Less Than Three Minutes

The professionally ignorant (and I’m thinking here of Lou Dobbs, among others) never “get it” about trade. They think it’s some complex swindle, in which we deny ourselves “jobs,” or that it should be about being “fair” or “balanced.” They don’t see how free trade creates prosperity and peace. I was inspired by the outstanding trade economist Doug Irwin of Dartmouth to explain what goes on when people trade. The challenge was to explain international trade in under 3 minutes. So here’s the result in 2:57: The Great Prosperity Machine.

Share it with your favorite protectionist, or with professors and teachers. (There’s more information at AtlasNetwork.org/BastiatLegacy.)

Watch and share:


Fannie Mae and Greece’s Problems Enabled by Basel

On the surface the failures of Fannie Mae and Freddie Mac would appear to have little connection to the fiscal crisis in Greece, outside of both occurring in or around the time of a global financial crisis.  Of course in the case of Fannie and Freddie, primary blame lies with their management and with Congress.  Primary blame for Greece’s problems clearly lies with the Greek government. 

Neither Greece or Fannie would have been able to get into as much trouble, however, if financial institutions around the world had not loaded up on their debt.  One reason, if not the primary reason, for bailing out both Greece and the US’s government sponsored enterprises is the adverse impact their failures would have on the banking system.

Yet bankers around the world did not blindly load up on both Greek and GSE debt, they were encouraged to by the bank regulators via the Basel capital standards.  Under Basel, the amount of capital a bank is required to hold against an asset is a function of its risk category.  For the highest risk assets, like corporate bonds, banks are required to hold 8%.  Yet for those seen as the lowest risk, short term government bonds, banks aren’t required to hold any capital.  So while you’d have to hold 8% capital against say, Ford bonds, you don’t have to hold any capital against Greek debt.  Depending on the difference between the weights and the debt yields, such a system provides very strong incentives to load up on the highest yielding bonds of the least risky class.  Fannie and Freddie debt required holding only 1.6% capital.  Very small losses in either Greek or GSE debt would cause massive losses to the banks, due to their large holdings of both.

The potential damage to the banking system from the failures of Greece and the GSEs is not the result of a free market run wild.  It was the very clear and predictable result of misguided and mismanaged government policies meant to create a steady market for government borrowing.

Seven (Free-Market) Ways to Boost U.S. Exports

President Obama has committed his administration to the ambitious goal of doubling U.S. exports in the next five years. I don’t believe the government should be setting such targets—the rate of growth of U.S. exports should be left to the marketplace—but I am all for the administration seeking ways to expand the freedom of U.S. companies to sell in global markets.

In the “Economic Watch” column of the Washington Times today, I suggest six policy changes that will help American producers sell more of their goods and services abroad. None of them involve subsidies, threats of sanctions, or other government involvement.

Among my suggestions: enact into law the three free-trade agreements that have already been negotiated, repeal the trade embargo against Cuba, keep trade peace with China, and set a good example by keeping the U.S. market open.

If I could have added another suggestion (alas, space in a real newspaper is limited), it would be to issue more visas for trade delegations visiting the United States. Under misguided notions of national security, we make it more difficult than it should be for delegations from China and other  markets to visit the United States to inspect U.S. goods offered for sale. But like the other suggestions, this one is politically challenging as well.

If the president wants to boost exports, he will need to show the necessary leadership to remove the government-imposed barriers that still remain.


More on Milwaukee Vouchers

Joseph Lawler and Philip Klein of the American Spectator have some helpful comments on my earlier post about the misunderstanding and misrepresentation of a recent report on Milwaukee’s voucher program. I had stated that the city’s public schools cost taxpayers about 50% more than the voucher program, and Lawler and Klein note that it’s really more like 100%. They’re right. The approved FY2010 budget is $1.073 billion and enrollment is 82,444 – for a per pupil figure of just over $13,000/pupil. The voucher is worth only $6,607.

My mistake was to rely on my recollection of the MPS spending figure used in a 2009 fiscal impact analysis of the voucher program, which turns out not to have included all the district’s revenue sources.  

But while I’m following up on this, I’d like to re-emphasize the final point of my earlier post, to which the Spectator writers did not draw particular attention: the Milwaukee voucher program is not a test of free market education. As I noted earlier, its total enrollment is legislatively limited to about 20,000 students, and in the past that limit was much lower. Additionally, there is a rigid price control on voucher schools – the voucher must be accepted as full payment, even though it is worth only half as much as public schools spend per pupil.

Think carefully about this. What entrepreneur would enter an industry whose total customer base is confined to a few thousand families in a single U.S. city and which has a rigid price control set at half the spending level of a government protected monopoly operating in that same city?

That is not test of market forces.

Atomic Dreams

Last week I was on John Stossel’s (most excellent) new show on Fox Business News to discuss energy policy – in particular, popular myths that Republicans have about energy markets.  One of the topics I touched upon was nuclear power.  My argument was the same that I have offered in print: Nuclear power is a swell technology but, given the high construction costs associated with building nuclear reactors, it’s a technology that cannot compete in free markets without a massive amount of government support.  If one believes in free markets, then one should look askance at such policies. 

As expected, the atomic cult has taken offense. 

Now, it is reasonable to argue that excessive regulatory oversight has driven up the cost of nuclear power and that a “better” regulatory regime would reduce costs.  Perhaps.  But I have yet to see any concrete accounting of exactly which regulations are “bad” along with associated price tags for the same.  If anyone out there in Internet-land has access to a good, credible accounting like that, please, send it my way.  But until I see something tangible, what we have here is assertion masquerading as fact.

Most of those who consider themselves “pro-nuke” are unaware of the fact that the current federal regulatory regime was thoroughly reformed in the late 1990s to comport with the industry’s model of what a “good” federal regulatory regime would look like.  As Oliver Kingsley Jr., the President of Exelon Nuclear, put it in Senate testimony back in 2001:

The current regulatory environment has become more stable, timely, and predictable, and is an important contributor to improved performance of nuclear plants in the United States.  This means that operators can focus more on achieving operational efficiencies and regulators can focus more on issues of safety significance.  It is important to note that safety is being maintained and, in fact enhanced, as these benefits of regulatory reform are being realized.  The Nuclear Regulatory Commission – and this Subcommittee – can claim a number of successes in their efforts to improve the nuclear regulatory environment.  These include successful implementation of the NRC Reactor Oversight Process, the timely extension of operating licenses at Calvert Cliffs and Oconee, the establishment of a one-step licensing process for advanced reactors, the streamlining of the license transfer process, and the increased efficiency in processing licensing actions.

It’s certainly possible that the industry left some desirable reforms undone, but it seems relevant to me that the Nuclear Energy Institute – the trade association for the nuclear energy industry and a fervent supporter of all these government assistance programs – does not complain that they’re being unfairly hammered by costly red-tape.

For the most part, however, the push-back against the arguments I offered last week has little to do with this.  It has to do with bias.  According to a post by Rod Adams over at “Atomic Insights Blog,” I am guilty of ignoring subsidies doled-out to nuclear’s biggest competitor – natural gas – and because Cato gets money from Koch Industries, it’s clear that my convenient neglect of that matter is part of a corporate-funded attack on nuclear power.  Indeed, Mr. Adams claims that he has unearthed a “smoking gun” with this observation.

Normally, I would ignore attacks like this.  This particular post, however, offers the proverbial “teachable moment” that should not be allowed to go to waste.

First, let’s look at the substance of the argument.  Did I “give natural gas a pass” as Mr. Adams contends? Well, yes and no; the show was about the cost of nuclear power, not the cost of natural gas.  I did note that natural gas-fired electricity was more attractive in this economic environment than nuclear power, something that happens to be true.  Had John Stossel asked me about whether gas’ economic advantage was due to subsidy, I would have told him that I am against natural gas subsidies as well – a position I have staked-out time and time again in other venues (while there are plenty of examples, this piece I co-authored with Daniel Becker – then of the Sierra Club – for The Los Angeles Times represents my thinking on energy subsidies across the board.  A blog post a while back about the Democratic assault on oil and gas subsidies found me arguing that the D’s should actually go further!  Dozens of other similar arguments against fossil fuel subsidies can be found on my publications page).  So let’s dispose of Mr. Adams’ implicit suggestion that I am some sort of tool for the oil and gas industry, arguing against subsidies here but not against subsidies there.

Second, let’s consider the implicit assertion that Mr. Adams makes – that natural gas-fired electricity is more attractive than nuclear power primarily because of subsidy.  The most recent and thorough assessment of this matter comes from Prof. Gilbert Metcalf, an economist at Tufts University.  Prof. Metcalf agrees with a 2004 report from the Energy Information Administration which contended that preferences for natural gas production in the tax code do little to increase natural gas production and thus do little to make natural gas less expensive than it might otherwise be.  They are wealth transfers for sure, but they do not do much to change natural gas supply or demand curves and thus do not affect consumer prices.  Prof. Metcalf argues that if we had truly level regulatory playing field without any tax distortions, natural gas-fired electricity would actually go down, not up!  Government intervention in energy markets does indeed distort gas-fired electricity prices.  It makes those prices higher than they otherwise would be!

The Energy Information Administration (EIA) identified five natural gas subsidies in 2007 that were relevant to the electricity sector (table 5).  Only two are of particular consequence.  They are:

  • Expensing of Exploration and Development Costs – Gas producers are allowed to expense exploration and development expenditures rather than capitalize and depreciate those costs over time.  Oil and gas producers (combined) took advantage of this tax break to the tune of $860 million per year.  How much goes to gas production rather than to oil production is unclear.
  • Excess of Percentage over Cost Depletion Deferral – Under cost depletion, producers are allowed to make an annual deduction equal to the non-recovered cost of acquisition and development of the resource times the proportion of the resource removed that year.  Under percentage depletion, producers deduct a percentage of gross income from resource production.  Oil and gas producers (combined) take advantage of this tax break to the tune of $790 million per year.  How much goes to gas production rather than to oil production is unclear. 

Even if we put aside the fact that these subsidies don’t impact final consumer prices in any significant manner, it’s useful to keep in mind the fact that the subsidy per unit of gas-fired electricity production – as calculated by EIA – works out to 25 cents per megawatt hour (table 35).  Subsidy per unit of nuclear-fired electricity production works out to $1.59 per megawatt hour.  Hence, the argument that nuclear subsidies are relatively small in comparison with natural gas subsidies is simply incorrect.

Some would argue that the Foreign Tax Credit – a generally applicable credit available to corporations doing business overseas that allows firms to treat royalty payments to foreign governments as a tax that can be deducted from domestic corporate income taxes – should likewise be on the subsidy list.  The Environmental Law Institute calculates that this credit saves the fossil fuel industry an additional $15.3 billion.  There is room for debate about the wisdom of that credit, but regardless, it doesn’t appear as if the Foreign Tax Credit affects domestic U.S. prices for gas-fired electricity.     

The bigger point is that without government help, few doubt that the natural gas industry would still be humming and electricity would still be produced in large quantities from gas-fired generators.  But without government production subsidies, without loan guarantees, and without liability protection via the Price-Anderson Act, even the nuclear power industry concedes that they would disappear.

Now, to be fair, Prof. Metcalf reports that nuclear power is cheaper than gas-fired power under both current law and under a no-subsidy, no-tax regime.  His calculations, however, were made at a time when natural gas prices were at near historic highs that were thought to be the new norm in energy markets and were governed by fairly optimistic assumptions about nuclear power plant construction costs.  Those assumptions have not held-up well with time.  For a more recent assessment, see my review of this issue in Reasonalong with this study from MIT, which warns that if more government help isn’t forthcoming, “nuclear power will diminish as a practical and timely option for deployment at a scale that would constitute a material contribution to climate change risk mitigation.”

Third, Mr. Adams argues that federal nuclear loan guarantee program is a self-evidently good deal and implies that only an anti-industry agitprop specialist (like me) could possibly refuse to see that.  “That program, with its carefully designed and implemented due diligence requirements for project viability, should actually produce revenue for the government.”  Funny, but when private investors perform those due diligence exercises, they come to a very different conclusion … which is why we have a federal loan guarantee program in the first place. 

Who do you trust to watch over your money – investment bankers or Uncle Sam?  The former don’t have the best track record in the world these days, but note that the popular indictment of that crowd is that investment banks weren’t tight fisted enough when it came to lending.  If even these guys were saying no to nuclear power – and at a time when money was flowing free and easy – what makes Mr. Adams think that a bunch of politicians are right about the glorious promise of nuclear power, particularly given the “too cheap to meter” rhetoric we’ve heard from the political world now for the better part of five decades? 

Anyway, for what it’s worth, the Congressional Budget Office has taken a close look at this alleged bonanza for the taxpayer and judged the risk of default on these loan guarantees to be around 50 percent.  They may be wrong of course, but the risks are there, something Moody’s acknowledged last year in a published analysis warning that they were likely to downgrade the credit-worthiness of nuclear power plant construction loans.

Fourth and finally, Mr. Adams cites Cato’s skepticism about “end-is-near” climate alarmism as yet more evidence that we are on the take from the fossil fuels industry.  I don’t know if Mr. Adams has been following current events lately, but I would think that we’re looking pretty good right now on that front.  Der Spiegel – no hot-bed of “Big Oil” agitprop – sums up the state of the debate rather nicely in the wake of the ongoing collapse of IPCC credibility.  Matt Ridley – another former devotee of climate alarmism – likewise sifts through the rubble that is now the infamous Michael Mann “hockey stick” analysis (which allegedly demonstrated an unprecedented degree of warming in the 20th Century) and finds thorough and total rot at the heart of the alarmist argument.  Mr. Adams is perhaps unaware that our own Pat Michaels has been making these arguments for years and Cato has no apologies to make on that score. 

Regardless, ad hominem is the sign of a man running out of arguments.  There aren’t many here to rebut, but the form of the complaints offered by Mr. Adams speaks volumes about how little the pro-nuclear camp has to offer right now in defense of nuclear power subsidies.

I have no animus towards nuclear power per se.  If nuclear power could compete without government help, I would be as happy as Mr. Adams or the next MIT nuclear engineer.  But I am no more “pro” nuclear power than I am “pro” any power.  It is not for me to pick winners in the market place.  That’s the invisible hand’s job.  If there is bad regulation out there harming the industry, then by all means, let’s see a list of said bad regulations and amend them accordingly.  But once those regulations are amended (if there are indeed any that need amending), nuclear power should still be subject to an unbiased market test.  Unlike Mr. Adams, I don’t want to see that test rigged.