Tag: investment

$2 trillion: The Infrastructure Answer To What Question?

Media reports suggest President Trump and Democratic leaders have agreed in principle to a $2 trillion infrastructure plan “to upgrade the nation’s highways, railroads, bridges and broadband.”

Minor details such as how to finance it have yet to be agreed. White House Chief of Staff Mick Mulvaney doubts the deal will come to fruition anyway, given differences between the parties on environmental regulations surrounding new projects.

But it’s difficult to think of a worse way to make major policy than to dream up a big round number and then work backwards in deciding how money is spent.

Indeed, if $2 trillion is the answer, then what, exactly, is the economic question?

Is $2 trillion the amount needed to invest in targeted public goods that the market would not or could not provide? Is $2 trillion the amount the politicians think is needed for specific projects to enhance long-term economic growth? Is $2 trillion the amount politicians feel is necessary to repair existing infrastructure? Is $2 trillion what they feel the federal infrastructure contribution needs to be to alleviate negative externalities such as pollution? Or is $2 trillion maybe what they think is necessary to create shovel ready jobs to minimize unemployment?

Judging by the joint post-meeting statement from Speaker Pelosi and Senator Schumer, the Democrats have no coherent answer here. Within their 224-word statement, they outlined no fewer than 9 distinct policy aims or ambitions that any infrastructure package would be trying to meet:

  1. “creating jobs immediately”
  2. “bolstering commerce”
  3. “advancing public health with clean air and clean water”
  4. “improving the safety of our transportation”
  5. “expanding broadband to…underserved areas”
  6. “being for the future”
  7. paying “the prevailing wage”
  8. involving “women, veteran and minority-owned businesses in construction”
  9. addressing needs in “every congressional district”

Whatever the economic case for a major infrastructure program (and for my thoughts on that, read here), it should be obvious that these aims contradict one another.

Lots of projects with high returns take extensive planning and won’t “create jobs immediately.” Investment in safety might come at the expense of other projects that bolster commerce. Paying “the prevailing wage” will likely leave fewer resources to address needs in more districts. Selecting contractors based on the demographics of the owners might trade-off the safety quality of the job. Focusing on safety upgrades for existing infrastructure means fewer resources for “the future.” Addressing needs in every district and expanding rural broadband is almost certainly not the best way to bolster overall commerce. I could go on.

This plethora of aims is grist to the mill for a conclusion I reached back in 2017:

The sad truth is that infrastructure investment through the political process rarely prioritises long-term growth. Other considerations dominate, whether electoral advantage or regeneration of an area – even when market signals point to the need to expand booming regions.

And:

The conflicted role of being both the promoter of a project and being responsible for examining its failures and risks leads politicians to make over-optimistic claims about a scheme’s benefits relevant to costs.

In principle, smart investments in infrastructure can sometimes improve economic welfare. But when huge amounts of federal money is seen as a communal pot for a host of social, environmental, local and “make work” objectives, the chances that such money will be spent wisely looks slim.

The Carrier Approach Will Fail to Attract or Retain Investment and Production in the United States

Media and social media have been percolating – mostly with invective – over President-elect Trump’s “deal” to keep Carrier and its 1,000 jobs from moving to Mexico.  I am among the many critics of this ad hoc, interventionist approach to retaining or attracting companies to perform value-added, job-creating activities in the United States.
 
But there is a broader lesson in all of this, which seems to be getting overlooked: The United States (and the 50 states, individually) is competing with the rest of the world to attract and retain investment in value-added activities – factories, research centers, laboratories, etc. And, in that competition, public policies are on trial.
 
The revolutions in communications and transportation have made global capital mobile. The proliferation of transnational supply chains and cross-border investment means that businesses – entrepreneurs and other value-creators – have options like never before. Investment and production location decisions are determined by a variety of factors, including: the size of the market, access to transportation networks, wages and skills of the workforce, whether there is healthy respect for the rule of law, stability of the political and economic climates, perceptions of corruption, the magnitude and impact of regulations and taxes, trade policies, immigration policies, energy policies, and whether the general policy environment is conducive to running a successful business.

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Is the U.S. Trade Deficit a Problem to Solve?

Since 1975 – for 41 straight years – the United States has registered annual trade deficits with the rest of the world.  That means that year after year, Americans spend more on foreign-produced goods and services than foreigners spend on U.S.-produced goods and services or, put simply, the dollar value of U.S. imports exceeds the dollar value of U.S. exports.

For almost as long, some economists have been arguing that trade deficits are unsustainable – they sap economic growth, bleed jobs, and saddle our descendants with debt.  Perhaps if one looks at the trade deficit (or the slightly broader current account deficit) in isolation, these concerns might seem to have merit.  But looking at the U.S. trade or current account deficits without considering the capital account surplus is a meaningless, misleading exercise.

Yesterday, I published this piece at Forbes online, explaining why the trade deficit is not only not a problem, but that the associated capital surplus (the excess of inward investment over outward investment), which includes high-quality foreign direct investment, bestows huge advantages on the U.S. economy.  In that piece, I ask trade deficit hawks (or scolds, as I call them) to furnish their best, fact-based, comprehensive arguments – to finally step up to the plate and explain why it is that the trade deficit is a problem to solve.  

It would be of immense public policy value if we were to be able to catalogue and compare the arguments of both sides (and those who may be in the middle).  After all, one of the reasons that trade is so maligned is that the public has been lead to believe that the trade account is a scoreboard, with the deficit indicating that Team America is losing – and it’s losing on account of poorly negotiated trade deals and foreign cheating.  Helping the public reach that conclusion (rather than find the truth) may be the goal of some noisy contributors, but I suspect there are plenty of trade deficit hawks with purer motives, if not convincing arguments.

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TTIP Could Rein in the Abuse of Tax Incentives to Attract Foreign Investment

I’ve written often about the global competition to attract foreign investment, and have made the point that investment flows to jurisdictions with good policies in place. Globalization of production and the mobility of capital mean that national policies (regulations, tax policy, immigration, trade, energy, education, etc.) are on trial, with net investment inflows rendering the verdicts.

But some countries (and some U.S. states) use tax holidays and other forms of tax forgiveness, in lieu of adopting good policies, to attract investment, which burdens taxpayers and subverts the process of matching investment to its optimal location. These are subsidies – like so many other programs – that distort markets and should be discouraged.

In today’s Cato Online Forum essay, which is associated with the TTIP conference taking place on October 12, Ted Alden from the Council on Foreign Relations puts forward a strong proposal to end this madness via the Transatlantic Trade and Investment Partnership negotiations.

Read it.  Provide feedback.  And please register to attend the conference.

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At a Minimum, Transatlantic Trade Negotiations Should Ditch Investor-State Provisions

Some exaggeration notwithstanding, Harold Meyerson, with whom the occasion to agree is rare, does a reasonably good job describing some of the pitfalls of the so-called Investor-State Dispute Settlement mechanism in his Washington Post column yesterday.  ISDS has become a source of growing controversy, which threatens to derail the Transatlantic Trade and Investment Partnership negotiations, which are reported to be floundering during the seventh “round” of talks taking place this week in Chevy Chase, Maryland.

“Under ISDS,” Meyerson writes, “foreign investors can sue a nation with which their own country has such treaty arrangements over any rules, regulations or changes in policy that they say harm their financial interests.”  That is more or less correct, but the implication that the threshold for bringing a suit is simple harm to a foreign investor’s financial interests is misleading.  What is being disciplined under ISDS is not harm to financial interests of foreign investors, but harm that comes from discriminatory treatment of foreign investors.  Thus, ISDS avails foreign investors (i.e., U.S. companies invested abroad, foreign companies invested in the U.S.) of access to third-party arbitration tribunals as venues for determining whether and to what extent the plaintiff suffered economic damages on account of host-government actions or policies that fail to meet certain minimum standards of treatment.

Meyerson suggests that ISDS provisions be purged from the TTIP negotiations because they subordinate U.S. courts to unaccountable tribunals, which “invites a massive end-run around national regulations.” Though I firmly believe the U.S. economy is racked with superfluous and otherwise unnecessary regulations, I do believe that a successful foreign challenge of U.S. laws, regulations, or actions in a third-party arbitration tribunal (none has occurred, yet) would subvert accountability, democracy, and the rule of law.  For those and several other reasons, I’m on board with Meyerson’s suggestion to purge ISDS from TTIP, and would extend the purge to all trade agreements.  In fact, I developed eight reasons for purging ISDS from the trade negotiations in this paper earlier this year.

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Damning Trade with Faint Praise

A Washington Post editorial today pushes back against the argument that a Trans-Pacific Partnership agreement would exacerbate income inequality. Amen, I suppose. But in making its case, the editorial burns the village to save it by conceding as fact certain destructive myths that undergird broad skepticism about trade and unify its opponents.

“All else being equal,” the editorial reads, “firms move where labor is cheapest.”  Presumably, by “all else being equal,” the editorial board means: if the quality of the factors of production were the same; if skill sets were identical; if workers were endowed with the same capital; if all production locations had equal access to ports and rail; if the proximity of large markets and other nodes in the supply chain were the same; if institutions supporting the rule of law were comparably rigorous or lax; if the risks of asset expropriation were the same; if regulations and taxes were identical; and so on, the final determinant in the production location decision would be the cost of labor. Fair enough. That untestable premise may be correct.

But back in reality, none of those conditions is equal. And what do we see? We see investment flowing (sometimes in the form of “firms mov[ing],” but more often in the form of firms supplementing domestic activities) to rich countries, not poor. In this recent study, I reported statistics from the Bureau of Economic Analysis revealing that:

Nearly three quarters of the $5.2 trillion stock of U.S.-owned direct investment abroad is concentrated in Europe, Canada, Japan, Australia, and Singapore. Contrary to persistent rumors, only 1.3 percent of the value of U.S.-outward FDI [foreign direct investment] was in China at the end of 2011.

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A Microeconomic Look at Regulatory Overkill

In this new paper, I argue that an overly burdensome U.S. regulatory state is partly responsible for the downward trend in domestic and foreign investment in U.S. factories, professional services operations, distribution centers, and research and development facilities. EPA mandates, Obamacare’s costly, complicated new health care directives, and the slowly emerging financial services restrictions stemming from Dodd Frank, are just some of the new regulations that have thickened the Federal Register to more than 80,000 pages per year and added 16,500 new pages to the Code of Federal Regulations during the Obama presidency, undoubtedly deflecting and chasing investment and business creation to foreign shores.

Oddly, this massive expansion of federal rules has evolved as President Obama has simultaneously expressed concerns about the impacts of both declining investment and regulatory overkill on economic growth. In 2011, the president issued Executive Order 13563 under the heading “Improving Regulation and Regulatory Review.” Section 1 states:

Our regulatory system must protect public health, welfare, safety, and our environment while promoting economic growth, innovation, competitiveness and job creation. It must be based on the best available science. It must allow for public participation and an open exchange of ideas. It must promote predictability and reduce uncertainty. It must identify and use the best, most innovative, and least burdensome tools for achieving regulatory ends. It must take into account benefits and costs, both quantitative and qualitative. It must ensure that regulations are accessible, consistent, written in plain language, and easy to understand. It must measure, and seek to improve, the actual results of regulatory requirements.

The president issued this EO in the wake of his party’s mid-term election rebuke, perhaps to indicate that he understood the concerns of business. He even required that his agencies formulate plans for undertaking systematic, retrospective reviews of their rules and regulations with an eye toward making them less imposing on society:

Sec. 6. Retrospective Analyses of Existing Rules. (a) To facilitate the periodic review of existing significant regulations, agencies shall consider how best to promote retrospective analysis for rules that may be outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned…

In the words of a former chief economist at the Council of Economic Advisers:

The single greatest problem with the current system is that most regulations are subject to a cost-benefit analysis only in advance of their implementation. That is the point when the least is known and any analysis must rest on many unverifiable and potentially controversial assumptions.

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