Trade-Offs in the Middle East

During the presidential campaign, Donald Trump delighted in waving to packed crowds while the Rolling Stones’ “You can’t always get what you want” played.  At the time, the song seemed like a repudiation of the Republican elites who had failed to support his campaign. Today, as his Middle East policy careens off the rails, it’s a concept the President himself should learn to grasp.

Mere hours after Secretary of State Rex Tillerson announced that tensions between Qatar, Saudi Arabia and other regional states were negatively impacting the fight against ISIS and calling for all sides to defuse tensions, the President contradicted him, publicly castigating Qatar for terrorist financing, and backing the Saudis in their campaign against Doha. In this, as in other things, Trump appears not to understand the trade-offs inherent in his own Middle East policies.

Certainly, the rift between Qatar and other Gulf states predates Donald Trump. Tensions have been high for years, particularly during the Arab Spring, when the Gulf states often backed different sides in the political struggles and wars that convulsed the region. As I described in a Cato Policy Analysis in 2014:

“As early as June 2012, media sources reported that Saudi Arabia, Qatar, and Turkey were arming anti-regime rebels [in Syria] with both light and heavy weapons… The vast quantities of money and arms they have provided during the past three years have driven competition among Syria’s rebel groups. This competition has increased the conflict’s duration and has reduced the likelihood that the rebels will eventually triumph.”

What Do the Subsidy Recipients Think about Cutting Subsidies?

Ever since President Trump and budget director Mick Mulvaney released a proposed federal budget that includes cuts in some programs, the Washington Post has been full of articles and letters about current and former officials and program beneficiaries who don’t want their budgets cut. Not exactly breaking news, you’d think. And not exactly a balanced discussion of pros and cons, costs and benefits. Consider just today’s examples:

[O]ver 100,000 former Fulbright scholars, among them several members of Congress, are being asked to lobby for not only full funding but also a small increase.

As a former Federal Aviation Administration senior executive with more than 30 years of experience in air traffic control, I believe it is a very big mistake to privatize such an important government function. 

On Thursday, all seven former Senate-confirmed heads of the Energy Department’s renewables office — including three former Republican administration officials – told Congress and the Trump administration that the deep budget cut proposed for that office would cripple its ability to function.

This is nothing new. Every time a president proposes to cut anything in the $4 trillion federal budget — up from $1.8 trillion in Bill Clinton’s last budget — reporters race to find “victims.” And of course no one wants to lose his or her job or subsidy, so there are plenty of people ready to defend the value of each and every government check. As I wrote at the Britannica Blog in 2011, when one very small program was being vigorously defended:

Every government program is “well worth the money” to its beneficiaries. And the beneficiaries are typically the ones who lobby to create, expand, and protect it. When a program is threatened with cuts, newspapers go out and ask the people “who will be most affected” by the possible cut. They interview farmers about whether farm programs should be cut, library patrons about library cutbacks, train riders about rail subsidy cuts. And guess what: all the beneficiaries oppose cuts to the programs that benefit them. You could write those stories without going out in the August heat to do the actual interviews.

Economists call this the problem of concentrated benefits and diffuse costs. The benefits of any government program — Medicare, teachers’ pensions, a new highway, a tariff — are concentrated on a relatively small number of people. But the costs are diffused over millions of consumers or taxpayers. So the beneficiaries, who stand to gain a great deal from a new program or lose a great deal from the elimination of a program, have a strong incentive to monitor the news, write their legislator, make political contributions, attend town halls, and otherwise work to protect the program. But each taxpayer, who pays little for each program, has much less incentive to get involved in the political process or even to vote.

A $4 trillion annual budget is about $12,500 for every man, woman, and child in the United States. If the budget could be cut by, say, $1 trillion — taking it back to the 2008 level — how much good could that money do in the hands of families and businesses? How many jobs could be created? How many families could afford a new car, a better school, a down payment on a home? Reporters should ask those questions when they ask subsidy recipients, How do you feel about losing your subsidy?

THAAD Deployment Suspension: Successful Coercion or a Shot in the Foot?

Several prominent East Asia experts declared South Korean president Moon Jae-in’s decision to suspend the deployment of the Terminal High Altitude Area Defense (THAAD) antimissile system a big win for China.

Ely Ratner, a former advisor to Vice President Joe Biden, tweeted “China successfully coerces U.S. ally while U.S. has no ambassador, and no assistant secretary of Defense or State.” Tweets by Mira Rapp-Hooper, Abraham Denmark, and Kelly Magsamen echo Ratner’s view that Chinese pressure on South Korea is tied to Moon’s suspension decision. Such assessments are rooted in well-document evidence of China’s opposition to the THAAD deployment and its campaign of economic pressure against South Korea.

The argument that the THAAD suspension is a result of Chinese coercion is not without merit, but this emerging consensus ignores an alternative explanation for Moon’s decision based on domestic politics in South Korea. It is important to take domestic factors surrounding the THAAD deployment and current suspension into account as they may paint a more accurate picture of the decision to suspend the deployment.

The Jobs Conundrum

At next week’s FOMC meeting, the state of the labor market will play a key role in policy deliberations. But there’s a lot more going on underneath top line unemployment numbers that make them a bad tool for monetary policy decision-making.

The May employment report is a conundrum. Employment growth and the unemployment rate sent opposing signals about labor market conditions — much like they have been doing throughout the recovery. The economy added 138,000 jobs last month, with the three-month average only at 121,000 jobs, suggesting labor market weakness.

By contrast, the unemployment rate fell to 4.3 percent — the lowest reading in 16 years. Additionally, job openings are near an all-time high. And voluntary quit rates are up. These data all suggest tight labor market conditions.

The weak employment growth is consistent with the sub-par economic growth we have experienced since the recession. But deep recessions, like the one we just experienced, are normally followed by a stronger than average recovery, not a weak one. There has been no calendar year during the recovery in which real GDP grew at three percent — a desultory performance.

The week recovery has managed a fairly steady, if very gradual, fall in unemployment, bringing it to a 16-year low. As a result, many observers declare we are at full employment. But unemployment is so low because of the length of the recovery, not overall economic strength. We have had a long-lived, weak expansion — with unemployment statistics themselves masking weaknesses in the labor market.

How Much Infrastructure Investment Is Needed?

Goldman Sachs CEO Lloyd Blankfein tweeted Tuesday: “Arrived in China, as always impressed by condition of airport, roads, cell service, etc. US needs to invest in infrastructure to keep up.”

This raises an interesting question which I consider in my recently released paper: how do we know how much infrastructure investment is needed in the US?

From an economic perspective, the answer is certainly not “invest to the point where our airports feel as high quality as China’s.” But absent real markets, the amount “needed” is difficult to quantify - an example of the “knowledge problem” associated with central planning.

What level of congestion would drivers tolerate before they were willing to finance road expansion, for example? Eliminating all congestion would be prohibitively expensive. So how far should expansion go? How often should a road be repaired? How much transportation should be by train?

Markets are good at finding the optimal mix of infrastructure spending over time and rewarding those that are better at satisfying demand. Governments, even with the best of intentions, lack the necessary knowledge to find that mix.

Education Dollars Should Matter—but Do They?

Education reporters such as Chalkbeat’s Matt Barnum continue to cling to the idea that pouring exorbitant resources into an inefficient school system can make a sustainable difference in the lives of America’s children. To support the claim, Barnum points to a couple of recent studies examining the association between court-ordered education spending increases and student outcomes.

Jackson, Johnson, and Perisco (2016) conclude that an annual 10% increase in per pupil spending for all 12 years of schooling leads to an increase of about a third of a year of completed education. Similarly, Lafortune, Rothstein, and Schanzenbach (2016) find that court-ordered spending increases improve test scores for the least-advantaged students by a little under a hundredth of a standard deviation per year.

However, both of these studies suffer from important methodological issues that limit their ability to identify a strong causal relationship between education dollars and student outcomes.

The Paris Accord and Carbon Tariffs

Since President Trump announced the U.S. withdrawal from the Paris Accord there has been talk of other countries imposing “carbon tariffs” in response. The politics of this are hard to predict. I think (and hope) that such tariffs are unlikely, although if the United States starts imposing tariffs for “national security” reasons, the chances of other countries imposing carbon tariffs on us may go up.

But there is also an international legal question here: Wouldn’t carbon tariffs violate international trade obligations under the World Trade Organization or other trade agreements? There is some dense legal analysis of this question out there already (back when it was people in the U.S. talking about imposing these measures on others, Cato’s Sallie James published a good Policy Analysis of the issue). What I’m going to offer here is a short, non-legalistic explanation, which basically amounts to:  It depends on how exactly the other countries go about formulating these “tariffs.”

At one extreme, you can imagine some government somewhere being so angry with the U.S. withdrawal that it imposes an across-the-board import tariff on all U.S. imported products as a response. This blunt approach would almost certainly violate trade agreement rules.

At the other extreme, you can also imagine a more measured approach, under which a government comes up with objective criteria to assess each country’s climate policies and carbon emissions. Carbon taxes would then be imposed on products, both domestic and foreign, in a way that corresponds to these measurable criteria.  This non-discriminatory approach might not violate trade rules, especially if its focus is on environmental impact, rather than “competitiveness.”

The actual approach is likely to be somewhere in between, and is hard to assess in the abstract.  But in general terms, here is my view:  In theory, some form of “carbon tariff” could be done consistently with trade rules.  However, in practice such a measure is likely to violate, as governments generally aren’t very good at being precise, objective, and non-discriminatory in their laws and regulations.  But hopefully everyone will decide not to impose such measures, and the subject will remain an obscure academic one.