Laudable Economic Stimulus Plan in Mexico

While the United States and many other countries flirt with the idea of raising barriers to trade, our enlightened neighbor to the south has a more promising response to the global economic contraction.

On January 2, the Calderon administration initiated a plan (discussed here; HT to Scott Lincicome) to unilaterally reduce tariff rates on about 70 percent of the items on its tariff schedule. Those 8,000 items comprising 20 different industrial sectors accounted for about half of all Mexican import value in 2007. When the final phase of the plan is implemented on January 1, 2013, the average industrial tariff rate in Mexico will have fallen from 10.4% to 4.3%.

The objectives of the plan are to reduce business operating costs, attract and retain foreign investment, raise business productivity, and provide consumers a greater variety and better quality of goods and services at competitive prices. Perhaps our free trade advocacy is having a positive impact on public policy after all. I suspect those objectives are very well served by the plan.

Mexico is no stranger to unilateral trade liberalization—so they’re not just grasping at straws here. This is a tried and true approach to economic growth in Mexico and throughout the world. Many of the reforms Mexico agreed to in the North American Free Trade Agreement were already undertaken before the NAFTA went into effect in 1994. They were undertaken with the same objectives in mind. So, Mexico has some experience and credibility on the issue of the benefits of unilateral trade liberalization.

Let’s hope the rest of the world is watching, if not waiting in the wings.

Now’s the Time To Pass School Choice

Gov. Mark Sanford is really on a roll lately, decrying and rejecting bailouts and now recommitting to real education reform. From the Beaufort Gazette:

The Republican governor highlighted four priorities in education reform: enacting funding that “follows the child,” charter school funding, school choice, and access to higher education.

Of course, the government school fanatics are trying to head him off again. Rep. Kenneth Hodges, D-Green Pond, for instance, thinks “now is not the time to toy around with school choice again… not in the environment that we are in now.”

Hmm. Fiscal problems, slow economy, and school choice has been shown over and over to save money. In fact, a large-scale program could save South Carolina taxpayers over $1 billion.

It’s the perfect time to pass a robust education tax credit system in South Carolina, or anywhere else for that matter.

A Question for Christian Brose

In a post at Foreign Policy magazine, former Condoleezza Rice speechwriter Christian Brose points to his participation in the drafting of a Rice speech that I’ve long found vexing.  The passage I found most puzzling was this:

William Appleman WilliamsAmerican Realism is an approach to the world that arises not only from the realities of global politics but from the nature of America’s character: From the fact that we are all united as a people not by a narrow nationalism of blood and soil, but by universal ideals of human freedom and human rights. We believe that our principles are the greatest source of our power. And we are led into the world as much by our moral ideas as by our material interests. It is for these reasons, and for many others, that America has always been, and will always be, not a status quo power, but a revolutionary power - a nation with New World eyes, that looks at change not as a threat to be feared, but as an opportunity to be seized.

Emphasis mine.  Suffice it to say that this is not the conventional view by historians of American diplomacy.  It is a revisionist view that has been advanced mostly by those on the extreme left and extreme right.  Those on the left generally believed that the economic concept of the Open Door thrust America ever outward, in search of markets for its products and to deploying force to feed the machine of American capitalism.  The right-wing interpretation basically agrees with this economically deterministic view but also overlays what, for lack of a better term, I’ll call a “neoconservative” ideological orientation onto basically the entire history of American foreign policy.  Kagan, for example, interprets the foreign policy vision of the Founders as being in general alignment with the view that it would be a good idea for the United States to unravel and reweave the social and political fabric of the Middle East.

It would be really interesting for Brose to explain what he and Rice meant by this.  Was it an endorsement of the Kagan interpretation of American diplomatic history?  Does Brose really place the revolutionary character of American diplomacy before, say, 1898?  What does he think about the book his Foreign Policy colleague Aaron Friedberg wrote about the role anti-state American ideology played in preventing the United States from even becoming a player on the world stage, much less a “revolutionary power” before 1945?  (Cf., Fareed Zakaria.)

Moreover, if, as Brose and Rice argue, the United States has “always been a revolutionary power,” wouldn’t it necessarily follow, for example, that Soviet diplomacy from 1945 onward was fundamentally defensive and that the Cold War was, itself, an American creation?  After all, how, if we were always a revolutionary power should the Soviets have responded after we dropped two nuclear weapons on Japan and began aiming our rhetorical sights on them?

Porqué Amo La Raza

Several months ago, the National Council of La Raza convened a group of health care wonks to help that organization make up its mind about how Congress should reform the tax treatment of health care.  The wonks included people from Harvard University, the Urban Institute, the Kaiser Family Foundation, Families USA, the United States Hispanic Chamber of Commerce, and elsewhere.

La Raza took the unusual step of inviting a libertarian (me) to be part of that discussion, despite our divergent views.  Where La Raza wants to expand the State Children’s Health Insurance Program, for example, I advocate repealing SCHIP.  I’m glad they invited me; it was one of the most enjoyable policy discussions I’ve ever had.

La Raza took the further unusual step of publishing a transcript of that discussion.  If you’ve ever wondered what it’s like to be a libertarian in the very un-libertarian world of health care policy – and you know you have – I recommend giving it a read.  Oh, and you’ll also learn a lot about health policy from a lot of smart people.

Here is the final product of those deliberations, La Raza’s policy paper on health tax incentives, in which La Raza plugs (without endorsement) my proposal for large health savings accounts.

Please Do Our Job, Congress Begs Executive Branch

At the Senate hearing on the nomination of Lisa Jackson to be administrator of the Environmental Protection Agency, Sen. Barbara Boxer pressed Jackson to regulate coal ash in the wake of two spills in Alabama and Tennessee. “You have the authority to regulate this,” Boxer told Jackson.

And, Boxer warned, if the unelected bureaucracy at EPA doesn’t issue a regulation soon, Congress just might have to legislate: “If we are not satisfied with action, we may move legislatively.”

As it happens, Article I, section 1, of the U.S. Constitution stipulates, ‘‘All legislative powers herein granted shall be vested in the Congress of the United States, which shall consist of a Senate and House of Representatives.’’ And as David Schoenbrod and Jerry Taylor wrote in the Cato Handbook for Congress:

For the first 150 years of the American Republic, the Supreme Court largely upheld the original constitutional design, requiring that Congress rather than administrators make the law. The suggestion that Congress could broadly delegate its lawmaking powers to others— particularly the executive branch— was generally rejected by the courts.

Today the chair of the U.S. Senate’s Environment and Public Works Committee tells a nominee for a position in the executive branch that if the bureaucracy won’t exercise Congress’s powers, Congress just may have to. (I’m not addressing here whether regulation of coal ash is a good idea, just the question of who should issue important and costly regulations.)

Of course, this comes a couple of weeks after President Bush said that if Congress wouldn’t give taxpayers’ money to General Motors and Chrysler, he would. In effect, his last grab for executive power was the power to appropriate money from the public fisc. But as Gene Healy pointed out, even here Congress was as much at fault as the president: it had effectively given him carte blanche in the TARP legislation, just as it did in the authorization for the Iraq war.

Congressional spinelessness is at least as big a factor as presidential arrogance in the rise of executive power.

Our Latest Salvo in the Battle Over Campaign Finance ‘Reform’

Today we filed an amicus brief in Citizens United v. Federal Election Commission, an election regulation/campaign finance case that will be argued before the Supreme Court in March or April.  Testing the bounds of the Court’s landmark decision in Wisconsin Right to Life II (WRTL II), the Federal Election Commission recently sought to apply certain prohibitions and disclosure requirements of the Bipartisan Campaign Reform Act of 2002 to advocacy group Citizens United’s political documentary, Hillary: The Movie, and to the group’s broadcast advertisements for the film.  Though the FEC conceded that the ads, at least, are not the functional equivalent of express campaign advocacy, as defined in WRTL II, it nevertheless determined that Citizens United must disclose the identities of its contributors. 

Cato’s brief argues that BCRA violates the First Amendment freedom of association belonging to those contributors, which freedom includes the right to associate anonymously and to control the group’s character and message free from government intervention.  For groups engaging in political speech, compelled disclosure of contributors’ identities infringes their freedom of private expressive association, a burden often no less severe than direct restraint of the group’s speech.  This type of government action must be subject to strict constitutional scrutiny—a level of scrutiny that in practice is almost always fatal.  The district court failed to afford sufficient value to associational rights and so failed to scrutinize appropriately BCRA’s unjustified infringement on those rights.

Did the New Deal ‘Help’?

While Barack Obama’s economics team hammers out its $800 billion fiscal stimulus plan, the commentariat is battling over the effectiveness of what some consider the prototype stimulus package, the New Deal.* The suppressed (and problematic) conclusion to all this punditry seems to be: Because government spending under the New Deal helped/didn’t help to end the Great Depression, the Obama stimulus plan will/won’t help to end the current recession.

One of the opening salvos was this exchange between George Will (anti-New Deal) and Paul Krugman (pro). More recently, New York Times editorial board member Adam Cohen (pro) wrote this column, responding to an op-ed by former Business Week bureau chief Andrew Wilson (anti) in the Wall Street Journal.

So who’s right? Did New Deal government spending “help,” as Cohen puts it?

To answer that, we first have to define Cohen’s term — what would it mean to say that government spending under the New Deal “helped”? Two possibilities come to mind:

  • New Deal spending boosted consumption, thereby increasing production, reducing unemployment, and ending the Depression.
  • New Deal spending aided people who would have otherwise been destitute during the Depression.

The first sense considers the New Deal as a stimulus program to revive the economy; the second considers it as a welfare program to aid the poor. The two notions are far from equivalent. My reading of the literature suggests that the New Deal did little as an economic stimulus, but it did provide welfare benefits.

The figure below sketches U.S. GDP and government spending (all levels) for the Great Depression era. The wildly fluctuating GDP line clearly marks the Great Contraction of 1929-1932, the Recession within the Depression of 1937–1938, and the return of GDP to pre-crash levels in 1940. In contrast, government spending has only a very mild upward slope over the period (until the 1941 ramping-up for World War II). In 1930, the second year of Herbert Hoover’s administration, government spending totaled $10 billion; at the height of the New Deal spending boom in 1936, government spending reached $13.1 billion. (In comparison, that rate of government spending growth is just below the average for the entire post-WWII era.) This raises the question of whether there was much New Deal fiscal stimulus at all.


We get a somewhat different view if we consider the federal budget surplus/deficit. Much of the benefit of fiscal stimulus is supposed to come from the fact that it’s deficit spending. In essence, government borrowing moves future consumption to the present and hopefully boosts the economy to a permanently higher level. As the figure below shows, the federal government dramatically ramped up deficit spending in the last year of Hoover’s administration, as tax receipts sagged and Hoover enacted his own emergency programs. FDR continued the borrowing to fund components of the New Deal.

However, this borrowing was not dramatic by today’s standards. As a share of GDP, the New Deal deficit peaked at 5.4 percent of GDP ($3.6 billion) in 1934; in dollar terms, it peaked at $5.1 billion (4.3 percent of GDP) in 1936. In contrast, President-elect Obama recently announced that he expects “trillion-dollar deficits for years to come,” even without the $800 billion stimulus package that his administration is preparing. With a U.S. GDP of roughly $13.8 trillion, the Obama-projected deficit (not counting the stimulus package) represents 7.2 percent of GDP.

Does the New Deal experience thus suggest that, when it comes to fiscal stimulus, just a little bit can have large effects? Interestingly, economic research suggests the opposite. Long before she was named chair of Obama’s Council of Economic Advisers, Christina Romer wrote a short paper for the Journal of Economic History titled “What Ended the Great Depression?” The paper provides empirical evidence that FDR’s fiscal policy provided little stimulus during the Great Depression. As shown in the figure below (reproduced from Romer’s article), the results of the New Deal’s fiscal stimulus (solid line) were little different from what she projects would have resulted from “normal fiscal policy” (dotted line). Both the deficit spending and the multiplier effect from that spending were too small to budge GDP.

What did end the Great Depression? Romer argues that another FDR policy — doubling the fixed exchange rate for the dollar relative to gold — did the trick, though the New Dealers seem to have lucked into that result rather than planned it. The rate change worked as a monetary stimulus, inducing large gold flows into the United States, where they could now buy twice as many dollars. That buttressed bank deposits and increased bank willingness to lend, encouraging investment. The lending resulted in a sharp increase in the money supply, pushing against the Depression’s price deflation and encouraging consumption. From the moment the exchange rate changed, the United States began to climb out of the Depression — albeit slowly; more slowly than many other countries.

Romer’s explanation dovetails with Milton Friedman and Anna Schwartz’s work on the root cause of the Depression: the Federal Reserve’s sharp reduction of the money supply in the late 1920s, in order to moderate the stock market boom and return the United States to the pre-WWI dollar-gold exchange rate. It also dovetails with evidence that other nations’ recoveries from the Great Contraction began soon after they abandoned efforts to return their currencies to pre-war gold exchange rates. My reading of the economic literature indicates that the “monetary policy did it” thesis has been generally accepted by economic historians (contra Cohen’s graf 9).

So it was FDR’s monetary policy that ended the Great Depression, not such New Deal initiatives as the WPA, the CCC, NIRA, and the rest of the alphabet soup. This follows the findings of a later paper that Romer co-authored with husband David Romer on U.S. recessions in the post-WWII era, which found that monetary stimulus proved superior to discretionary fiscal stimulus in restoring the economy.

What, then, to make of our warring pundits? In the fight between Krugman and Will over the stimulatory effects of the New Deal, it seems that opposing sides can both be wrong. Will was incorrect to argue that economic conditions grew worse during the New Deal era — conditions did improve, albeit slowly, and were temporarily reversed by the Recession within the Depression. Krugman, on the other hand, was wrong to argue that FDR’s fiscal stimulus helped to remedy the Depression and that only the large fiscal stimulus of WWII ended the Depression — in fact, GDP had returned to pre-Crash trend (as calculated by Romer) by 1940. And both mischaracterize the 1937–1938 Recession in the Depression. Although federal deficit spending did decrease along with the economy, the recession appears to have been largely the product of onerous new banking regulations that weakened the monetary stimulus (a point that today’s eager-to-regulate Congress should bear in mind).

Concerning Wilson and Cohen, Wilson goes too far in claiming that FDR (and Hoover) “were jointly responsible for turning a panic into the worst depression of modern times.” If anyone merits that distinction, it is the Federal Reserve for its pre-Crash contractionary monetary policy. Cohen is wrong to claim that “as a matter of economics … F.D.R’s spending programs did help the economy.” However, he does have a point that the various New Deal jobs programs provided income for many people who would have otherwise been destitute. As indicated in the figure below, at their height, the programs provided “emergency jobs” to just over 40 percent of laborers who likely would have otherwise been jobless. As state unemployment insurance and federal safety net programs largely did not exist at the time of the Crash, the New Deal jobs programs were likely a godsend for those who got the jobs (though they did little for the millions more who didn’t). Today, however, several government programs provide income and other benefits to the jobless and the poor, so the welfare benefits of the New Deal do not need to be replicated.

Where does all of this leave us in evaluating policy responses to the current recession?

First, the economic history of the New Deal and the rest of the 20th century raises serious doubts about the effectiveness of discretionary fiscal stimulus packages in reversing an economic downturn. Monetary stimulus has a far better track record (which is not to say that we shouldn’t have concerns about such policy — but that is a discussion for another blog post). And though there is no longer a fixed gold exchange rate for the dollar and the Fed has dropped nominal short-term interest rates to near zero, the Fed has other monetary weapons that it can use to fight this recession. Second, the helpful welfare benefits of the New Deal are now carried out automatically by other government programs.

This leaves us with an important question that has so far gone unasked by the commentariat: Given the above, is $800 billion in new government deficit spending worthwhile?

* As Tyler Cowen points out, it’s wrong to think of the New Deal as a comprehensive, unified set of fiscal initiatives; FDR tried many different policies, and sometimes changed approaches, to fight the Depression.