Policy Institutes

The Republican tax bill not only cuts taxes, but also increases spending through refundable tax credits. The plan will increase spending directly by increasing child tax credits, and increase spending indirectly by changing low-income provisions that affect spending on the earned income tax credit (EITC).

The chart shows estimated fiscal 2017 and 2019 outlays on the EITC, child credit, and American Opportunity Tax Credit (AOTC). The 2019 figure includes a $12.6 billion increase from the GOP tax bill, as estimated by the Joint Committee on Taxation in endnote 2 in here. (I’ve excluded the ACA piece).

Outlays on refundable credits or subsidies will jump from $85.1 billion in 2017 to an estimated $97.7 billion in 2019. This amount is not a “tax cut.” Rather, it represents taxes extracted from other workers and businesses, having all the usual negative effects.

 

See here for a critique of the EITC.

Current law spending on the EITC, child credit, and AOTC in the budget (Table 26-1). 

National security strategies are strange beasts. Their glittering generalities and kitchen sink approach to detailing threats, interests, and priorities can make it difficult to know how literally, or seriously, to take them. All strategies reflect on the importance of American leadership and bask in the warmth of American values. And thanks to the growing bipartisan consensus around primacy since the end of the Cold War all strategies have more or less looked the same. Each one promises a stronger and safer America with help from our trusted allies. Given this, most Americans would be hard pressed to tell one national security strategy from the next.

Sadly, Trump’s 2017 National Security Strategy contains not only the worst elements from the past, namely the pursuit of primacy and a commitment to an endless war on terrorism, but also charts new territory by embracing a new nationalism that unnecessarily elevates immigration to a national security threat and retreats from the post-World War II commitment to free trade.

Though Trump’s penchant for military solutions has always been obvious, the extent to which his new security strategy embraces primacy is disappointing. As a candidate, Trump railed against the war in Iraq and nation building abroad. The national security strategy, however, calls for the United States to “compete with all tools of national power to ensure that regions of the world are not dominated by one power.” The strategy also calls for an expanded – and unending – war on terrorism. In short, Trump intends to commit the United States not only to a globe-straddling military presence and to counterproductive and unending military intervention, but also to risking conflict with nations like China over regional issues that mean very little for American national security. 

Unsurprisingly, given the turn to primacy, Trump’s strategy also calls for “rebuilding” America’s military, despite the fact that the United States already possesses the world’s most powerful military, spends more on defense than the next seven nations combined, and enjoys an alliance system that far outstrips those of Russia or China. In the end, any boost in defense spending will only add to the national debt while doing little for American security.

With regard to the economic side of foreign policy, Trump’s abandonment of decades of American support for international free trade regimes signals a dangerous form of economic nationalism. Trump’s withdrawal from the Trans-Pacific Partnership, his criticism of NAFTA, and his repeated complaints about the use of unfair trading practices by China, Japan, and other trading partners, make it clear that Trump either does not understand or does not trust the process by which the United States and the rest of the world rebuilt the global economy after World War II. Contrary to Trump’s insistences, however, protectionism and trade wars will do nothing to make America great again.

Finally, Trump’s inclusion of immigration, legal and illegal, as one of the major components of the national security strategy is not only unprecedented, but it smacks of a nativism that identifies threats not based on objective metrics but on cultural differences and vague notions of “us versus them.” None of Trump’s proposed policies, from building a border wall to banning travelers from Muslim-majority nations to extreme vetting or reducing legal immigration, are based on solid evidence about likely harms to Americans. None of these policies will improve national security. Instead, Trump’s strategy is only likely to inflame tensions among races, nations, and religious groups.

Experience with previous national security documents suggests that we should treat Trump’s new strategy more as a guide than as gospel. It’s a safe bet that Trump, even more than most presidents, will deviate from the script as threats arise and opportunities emerge. But to the extent that Trump follows his new playbook, we can expect many of the same problems that have bedeviled U.S. foreign policy for the past sixteen years along with a host of new ones.

If you read the blog regularly, you might have noticed a pattern recently: Cato’s foreign policy scholars weighing in to see if Santa might be able to improve U.S. foreign policy for us. After all, American leaders seem perpetually unwilling to do so, and the Trump administration’s new National Security Strategy doesn’t seem to offer much more hope for a more realistic, sensible approach to foreign policy either.

Our scholars asked for a variety of foreign policy changes, some big and some small. Some would be relatively easy to achieve if the political will were there, such as Chris Preble’s request for a new round of Base Reallocation and Closure (BRAC), or Eric Gomez’s desire for a better North Korea strategy. Others might be more challenging, like Trevor Thrall’s call to rebalance civil-military relations in favor of civilian leadership.

But all the suggestions share one thing in common: they would all make U.S. foreign policy more rational, effective or accountable to the public. You can check them all out here, along with a more satirical take on the question in the Christmas episode of Power Problems, our foreign policy podcast.

So all we want for Christmas is…

 

…a BRAC (Chris Preble)

…Information about U.S. Military Deployments (Emma Ashford)

…to Fight Just the Necessary Wars (Erik Goepner)

Civilian Leadership of U.S. Foreign Policy (Trevor Thrall)

…the Travel Ban to End (Sahar Khan)

…a New North Korea Strategy (Eric Gomez)

…and an F-35 (or just better defense policy, budgeting and a partridge in a pear tree) 

 

Perhaps the most unusual feature of the Trump administration’s new National Security Strategy (NSS) is its heavy focus on domestic issues. Though the document covers issues from infrastructure to the manufacturing base, this is perhaps most apparent in the document’s strong focus on immigration. While previous NSS documents have briefly addressed the question of illegal immigration, this document is perhaps unique in its assertion that legal immigration is also a national security concern.

Certainly, the document does address some accurate immigration and border-related concerns, though it massively overstates their impact. Terrorism and transnational criminal networks do pose a threat to the United States, even if this threat is typically overblown. The NSS wades into murkier waters when it states that: 

“illegal immigration… burdens the economy, [and] hurts American workers…”

But while this is inaccurate, it is not entirely out-of-step with previous administrations and their approach to illegal immigration. The most jarring difference between this and prior NSS documents, however, comes in the Trump administration’s characterization of legal immigration as a national security concern, stating that:

“We will also reform our current immigration system, which, contrary to our national interest and national security, allows for randomized entry and extended-family chain migration.”

The NSS calls for increased vetting of legal immigrants and higher standards for immigration to avoid the ‘national security risks’ created by legal immigration, though the document never actually defines what these risks would be.

Perhaps most disturbing is the characterization of student visas as a potential security threat, with the NSS promising to consider restrictions on foreign students who wish to study STEM subjects in order to prevent technology transfer and intellectual property. Though the document initially places this restriction in the context of students from countries under sanctions – presumably suggesting that nuclear proliferation is a key concern – a later passage suggests that it might be applied more broadly:

“Part of China’s military modernization and economic expansion is due to its access to… America’s world-class universities.”

The implication is that it is not only sanctioned states where potential international students might be subject to such restrictions.  Chinese students are especially prominent in American universities where they make up 31 percent of all foreign students and 30 percent of all foreign-born STEM students as of May 2017.  However, they are not the source of technology breaches. Students at the University of California are not stealing F-35 blueprintshackers are.   

Even if Chinese students trained at American universities were a major source of technology for China’s military, boosting the number of skilled immigrants who can work and live here after finishing their educations will greatly diminish the number who move back to China and work in defense industries there.    

Huge percentages of Chinese skilled workers who were educated in the United States and then moved back to their homeland would return here if they had an offer of permanent residency (green card) and the better career opportunities that would undoubtedly accompany such immigration status.  According to a poll compiled by Vivek Wadhwa, a whopping 71 percent of U.S.-educated Chinese students who returned to China would either move back to the United States or seriously consider it if they could get a green card.  It is hard to see how locking skilled Chinese STEM workers and scientists in China will hamper their technological development for national security purposes.

The folly of restricting the immigration of STEM workers for national security reasons is best summarized by the tale of Qian Xuesen, a young rocket scientist who emigrated from China in 1935.  Legendary aerospace engineer, mathematician, and physicist Theodore von Karman pronounced Qian an “undisputed genius.”  He helped research jet propulsion, rockets, and then joined the Manhattan Institute during World War II.  In 1949, he was named the first Director of Caltech’s Jet Propulsion Lab (JPL) during the early years of the Cold War. 

Qian had two problems: U.S. immigration law and Cold War paranoia.  Qian never naturalized and on an immigration form in 1947, he answered that he was not a member of a group conspiring to overthrow the U.S. government.  Later unfounded allegations that he associated with Communists led to the revocation of his security clearance and his resignation from the JPL.  Despite almost no evidence and frequent denials by him and officials, the federal government ordered him to be deported for answering “no” on that 1947 form and eventually exchanged him for several downed American airmen.

John Logsdon, former director of the Space Policy Institute at George Washington University, said that “[Qian] was Joe McCarthy’s present to the Chinese.”  In Communist China, Qian is known as the Rocket King where he was foremost responsible for the research, design, and creation of Communist China’s missile and satellite launch program, including short, medium, and intercontinental ballistic missiles. After Qian’s deportation, the United States had one fewer potential subversive who could funnel secrets to the Chinese government while China gained a more advanced rocket, satellite, and nuclear program.

It seems unlikely that the Trump administration even knew about this episode, but they should.  The lesson here is not that Qian should have been deported sooner or never allowed into the country.  On the contrary, we think the lesson is that the U.S. government should not have panicked over a minor threat and deported a brilliant rocket scientist to an unfriendly power. The U.S. economy and national defense would have continued to benefit from Xuesen’s expertise, much as the United States can benefit today from the technological skills of immigrants.

In short, the Trump administration’s new National Security Strategy takes a decidedly unconventional approach to immigration, both by including it in the document in such detail, and by including various aspects of legal immigration alongside more commonly cited concerns about crime and illegal immigration. Denying America the skills and intellect of future legal immigrants is a poor way to improve our economy. And if the improving technological prowess of states such as China poses a potential threat to U.S. national security, locking more scientists inside of China seems a particularly poor way to deal with it.  

The Joint Committee on Taxation (JCT) has released its distributional analysis of the final Republican tax bill. The bill provides even larger percentage cuts for middle earners than previous versions of the legislation.

If the legislation is enacted, higher earners will pay an even larger share of the overall income tax burden than they do now. Our highly “progressive” income tax will be even more progressive. That approach is counter to sound fiscal governance and undermines the growth potential of tax reform, but that is what Republicans are delivering.

Looking at JCT’s table for 2019, second column, the percentage cuts are roughly similar across income groups from $20,000 to $1,000,000. But the JCT table slants the results by including payroll and excise taxes. The table under-measures the percentage cuts to the middle compared to the top.

The table below takes estimated payroll and excise taxes out of the JCT data. It shows individual and corporate income tax cuts as a percentage of estimated individual and corporate income taxes paid under current law. Middle-income households will receive by far the largest percentage income tax cuts in 2019.

 

Data Notes: Households less than $40,000 are shown as “n/a” because they do not pay income taxes in aggregate. JCT does not appear to publish current law estimates of individual and corporate income taxes only for 2019, so I estimated them using ratios from this TPC table

Like most Americans, I did not receive an advance copy of President Trump’s National Security Strategy. I saw it when it was released by the White House, a few hours before the president’s speech. I wanted to actually read it, or, failing that, to find certain terms, and go back and read the entire document after the president’s speech.

News stories are stressing that great power competition is back. The text of the NSS provides considerable support for that conclusion: Russia appears 15 times; China is mentioned 23 times.

I was most interested in what the president said about Russia in his speech, and how, if at all, that differed from the text of the strategy issued under his name. Before Donald Trump’s election, there was a reasonable argument to be made that the United States should improve its relationship with Russia. During the course of the 2016 election campaign, Trump often claimed that there were areas where the two countries could and should work together. In his speech today, he called attention to information provided to the Russians that allegedly helped thwart a terror attack that, the president said, might have killed thousands.

But hope for improved U.S.-Russia relations has been set back by the credible evidence of Russian interference in the 2016 election. President Trump reportedly, and understandably, hates this story and wants it to go away, as it appears to undermine the legitimacy of his election. But the story has hamstrung how the president talks about Russia, and how his administration has handled U.S.-Russia relations. It has made any actual rapprochement with Russia essentially unthinkable.

The NSS reflects that reality – not candidate Donald Trump’s aspirations.

For example:

Russia aims to weaken U.S. influence in the world and divide us from our allies and partners. Russia views the North Atlantic Treaty Organization (NATO) and European Union (EU) as threats. Russia is investing in new military capabilities, including nuclear systems that remain the most significant existential threat to the United States, and in destabilizing cyber capabilities. ­Through modernized forms of subversive tactics, Russia interferes in the domestic political affairs of countries around the world. The combination of Russian ambition and growing military capabilities creates an unstable frontier in Eurasia, where the risk of conflict due to Russian miscalculation is growing. (pp. 25-26)

[…]

Although the menace of Soviet communism is gone, new threats test our will. Russia is using subversive measures to weaken the credibility of America’s commitment to Europe, undermine transatlantic unity, and weaken European institutions and governments. With its invasions of Georgia and Ukraine, Russia demonstrated its willingness to violate the sovereignty of states in the region. Russia continues to intimidate its neighbors with threatening behavior, such as nuclear posturing and the forward deployment of offensive capabilities. (p. 47)

I also was curious to see how the NSS handled the specific question of Russian interference in politics, generally, and its use of social media, in particular. Does the document, in any way, give credence to the argument that there is something to this story, and that it shouldn’t just be swept under the rug?

Short answer: yes.

Russia uses information operations as part of its offensive cyber efforts to influence public opinion across the globe. Its influence campaigns blend covert intelligence operations and false online personas with state-funded media, third-party intermediaries, and paid social media users or “trolls.” (p. 35)

The NSS claims that the way to combat such influence operations is through a better informed public.

A democracy is only as resilient as its people. An informed and engaged citizenry is the fundamental requirement for a free and resilient nation. For generations, our society has protected free press, free speech, and free thought. Today, actors such as Russia are using information tools in an attempt to undermine the legitimacy of democracies. Adversaries target media, political processes, financial networks, and personal data. The American public and private sectors must recognize this and work together to defend our way of life. No external threat can be allowed to shake our shared commitment to our values, undermine our system of government, or divide our Nation. (p. 14)

I would like to believe that the White House actually believes what the document says. Then again, President Trump has engaged in a relentless battle against the U.S. media, at times seeming to question the value of free speech and free press.

Meanwhile, the Russians aren’t the only ones spreading blatantly false stories that undermine Americans’ confidence. There is no evidence, for example, that the Russians were behind the Maryland man who claimed to have discovered “’Tens of thousands’ of fraudulent Clinton votes in [an] Ohio warehouse.” I am not aware of Russians alleging that Hillary Clinton and John Podesta were running a child sex operation in the basement of a Northwest DC pizzeria, but members of the Trump campaign regularly promoted the views of those who did; Michael Flynn Jr had a direct hand in spreading the story. His father, retired Gen. Michael Flynn, had a history of promoting baseless conspiracy theories, and yet Donald Trump chose him to be his National Security Adviser. The president himself recently spread anti-Muslim messages from a fringe group in the United Kingdom, prompting a public rebuke from British Prime Minister Theresa May. His struggles with basic facts are legendary (in a bad way).

Such behavior doesn’t give me much confidence that the president is as committed to building a resilient country that values individual liberty and individual dignity as his NSS claims. For starters, the president could consult the source of dubious stories before hitting the RT button.

Today is not a proud day for the Washington State Department of Transportation (WSDOT). The agency spent close to $800 million of federal funds on a so-called high-speed rail project between Seattle and Portland–only “so-called” because top speeds would be just 79 mph, which is conventional rail. Much of the money was spent upgrading existing tracks to give passenger trains a shorter (but less scenic) route through and around Tacoma.

As you probably know, the very first train to use this route derailed on an overpass over Interstate 5, blocking half the freeway and killing at least six people. To make matters worse, Mayor Don Anderson of Lakewood, Washington, about 10 miles north of the crash, warned WSDOT a few weeks ago that it was not taking safety seriously enough. “This project was never needed and endangers our citizens,” he cautioned.

To be fair, Mayor Anderson was worried that grade crossings in Lakewood were inadequately protected for 79-mph trains. But his comments more generally suggest that WSDOT was putting the goal of saving Seattle-Portland passengers ten minutes of time–increasing average speeds by just 2.7 mph–ahead of safety.

In response to the accident, President Trump tweeted, “The train accident that just occurred in DuPont, WA shows more than ever why our soon to be submitted infrastructure plan must be approved quickly.” The implication was that this is an example of crumbling infrastructure, when in fact it is an example of misplaced infrastructure priorities.

In fact, what the accident shows is why the federal government should get out of the infrastructure business. As Mayor Anderson said, this project was unnecessary, and it was only done because President Obama wanted to spend billions of federal dollars on ideologically driven high-speed rail projects and WSDOT had a shovel-ready project (despite not being high-speed rail) on which to spend some of those dollars.

Trump’s inclination is to have the federal government back out of the infrastructure-funding game. But many members of Congress in both parties see infrastructure as a store full of candy they can give out to please their constituents and campaign contributors. The danger is that a hastily passed bill will end up spending more billions on unnecessary projects like the Seattle-Portland train.

No matter what speed, intercity passenger trains are obsolete and have been at least since the advent of jet airliner service. Even after hundreds of millions spent on improvements, this particular train would have been slower than driving from Seattle to Portland, but even the fastest high-speed trains are slower than flying.

One airline alone offers nearly two dozen flights a day between the Portland and Seattle airports. People who complain that Sea-Tac Airport is a long way from Seattle would do better to seek more flights out of King County Airport (aka Boeing Field), which is just four miles from downtown Seattle, than to support more trains.

Amtrak’s Seattle-Portland fare is $26 while the cheapest flights are $65. But Amtrak is heavily subsidized by both federal and state governments. Amtrak’s Seattle-Portland trains (which also go to Vancouver, BC and Eugene, OR) earned just under $30 million in ticket revenues in 2016 but cost Amtrak more than $68 million to operate not counting depreciation and other costs that Amtrak doesn’t allocate to individual trains. Meanwhile, subsidies to airlines are small and mostly go to support small-town airports.

On average and including all subsidies, airline travel costs about 16 cents per passenger mile while Amtrak costs about 60 cents per passenger mile. Higher-speed trains may attract more passengers but cost so much more that the costs per passenger mile are at least six times as much as the costs of flying.

Regardless of what you think of Amtrak, the point is that transportation spending decisions should be made by and in response to transportation users, not by politicians, and especially not by federal politicians. The accident in Dupont, Washington was a horrible tragedy, and we don’t yet know exactly what caused it. But, no matter what the cause, it never would have happened were it not for federal involvement in infrastructure spending.

The big question ahead of this year’s presidential election in Chile was whether Chileans were actually fed up with their country’s free-market model, or whether they were satisfied with it, but just indifferent to the ideological debate surrounding it. Up until yesterday’s run-off election, there were mixed signals. However, the decisive victory of center-right Sebastián Piñera over socialist Alejandro Guillier could be interpreted as a popular slap on the back of Chile’s successful economic model.

For nearly 20 years after the return of democracy in 1990, Chile enjoyed a political consensus on its liberal economic system. Successive center-left governments deepened the free market policies inherited from the military dictatorship, with evident success: Chile became Latin America’s most prosperous country. However, the free market consensus began to fray late last decade. Driven by massive student protests that demanded more government intervention in education—including universal free tuition in higher education—certain sectors of the erstwhile moderate center-left coalition began to openly question the free-market model. The first spell in opposition of the center-left coalition after the return of democracy in 2010-2014 (Piñera’s first term as president) consolidated this transformation.

When Michelle Bachelet became president again in 2014, her new left-wing coalition included for the first time the Communist Party, which now wields a lot of influence within her administration. Even though Bachelet’s platform called on simply softening the rough edges of the free-market model, some leading members of her coalition openly said the ultimate goal was its dismantlement. Bachelet’s thumping victory in 2013 (with 62.2% of the vote in the run-off and majorities in both houses of Congress) was interpreted as Chileans embracing much more government intervention in the economy. Surely so, in her second administration, Bachelet successfully pushed legislation raising taxes sharply on corporations, empowering unions, introducing new entitlements, and weakening the country’s mostly privately-run education system. In addition, the “No más AFP” movement—calling for an end to Chile’s private pension system—reached a critical mass, congregating tens of thousands of people all over the country in well-publicized protests. Chileans were reneging on their free-market model…

But, were they? Despite the wide margin of Bachelet’s victory in 2013, turnout in the runoff was only 43%. This was the first presidential election in which voting was voluntary—and Bachelet actually received less votes than in her first election in 2009. Some Chilean scholars, like Luis Larraín of Libertad y Desarrollo, a leading think tank, pointed out that surveys showed that a majority of Chileans were satisfied with how things were going in their lives. Moreover, they expressed a preference for policies that emphasize individual responsibility over government assistance. And even though Bachelet was able to pass her reforms in Congress, her government’s popularity plummeted—partly as a result of a corruption scandal that implicated her son.

Economic growth also plummeted. Whereas the economy grew on average 5.3% annually in 2010-2013, since 2014 growth averaged only 1.9% per year. Private employment collapsed and informality rose significantly. “Businesspeople are on the other side of the Andes waiting for the election,” an Uber driver in Santiago told me in October, referring to the lack of investors’ confidence in the policies of the current administration.

However, despite the fact that polls indicated that Sebastián Piñera was the overwhelming favorite to win back the presidency, he underperformed in the first round of the election in November, receiving only 36% of the vote.  More alarmingly, nearly half of voters casted votes for either left-wing or radical left-wing candidates. There again rose the perception that Chileans were indeed turning their backs on the free-market model…

After yesterday’s result, there are good reasons to believe that this is not the case. Guillier moved sharply to the left in the campaign leading to the runoff. It is safe to say that this is the first time that the leading candidate of the leftist coalition used such radical rhetoric against the free-market model. (He even rose eyebrows when he finished a high-profile speech with Che Guevara’s infamous line “Ever onward to victory.”). It is also telling that the turnout in yesterday’s runoff was higher than in the first round in November—actually, it is the highest since voluntary voting was introduced. This indicates that many Chileans believed that there was a lot at stake in this election. It is reasonable to believe that many Chileans who were previously uninterested in the presidential race decided to vote in the runoff when they perceived that Guillier meant to double down on Bachelet’s failed economic policies.

Despite this, Piñera is hardly champion of free-market policies. In his first term as president, he raised taxes on corporations and introduced a multitude of subsidies and transfers. His effort to steal the left flank of the center-left coalition on social policies only pushed if farther to the left. Piñera already announced that he does not intend to reverse Bachelet’s reforms.

Chileans might have dodged a bullet with Gullier, but Bachelet’s harmful economic legacy will stay on.

America’s North Korea strategy is failing.

The Trump administration’s “maximum pressure” approach of increasingly rigid economic sanctions and military posturing has not slowed down North Korea’s missile and nuclear testing schedule. Since Trump took office in January 2017, Pyongyang has successfully tested two different types of intercontinental ballistic missiles, a new intermediate-range ballistic missile, a solid-fuel missile based off a submarine-launched design, and its most powerful nuclear device. The Trump administration has consistently opted to increase pressure on North Korea in response to these developments rather than critically examine whether or not such pressure will change the North’s behavior.

The critical flaw in the U.S. North Korea strategy is its unrealistic objective. Washington demands complete, verifiable, and irreversible nuclear disarmament and is not willing to engage in negotiations with Pyongyang unless the latter makes progress towards this objective.

The current U.S. strategy requires offensively-oriented policy approaches in the pursuit of an unrealistic end goal. In order to achieve denuclearization, Washington must compel Kim Jong-un to part with his nuclear weapons by making the costs of possessing nukes unacceptably high. However, because Kim views nuclear weapons as necessary for the survival of his regime, he is willing to tolerate very high costs in order to keep his nuclear weapons. Short of going to war, it will be practically impossible for the United States to impose a high enough level of cost that compels Kim to denuclearize because possessing nuclear weapons is a matter of life or death in Kim’s mind.

The new sanctions enacted by the Trump administration might slow down the development of new weapons and the rate of production of current systems, but this approach will not achieve the goal of denuclearization. Escalating pressure meant to compel Kim to denuclearize will harden his resolve to keep his nuclear weapons. Moreover, given the small size of North Korea’s nuclear arsenal and the relatively poor state of its early warning and command and control systems, Kim is likely to adopt an offensive nuclear doctrine that calls for the use of nuclear weapons early in a conflict. Without a secure second-strike capability, the best option North Korea has for deterring a U.S. attack is to threaten the use of nuclear weapons before the United States can destroy them.

Washington should put aside its quixotic goal of denuclearization and focus its efforts on deterring the first use of a nuclear weapon by North Korea. Such a goal is easier to achieve and strategically wise for a number of reasons.

First, unlike compellence, deterrence is defensively-oriented and is focused on maintaining a status quo, which is generally easier to maintain than change.

Second, if the primary goal of the United States is deterring North Korea from using a nuclear weapon, then the United States should deemphasize preventive military action against North Korea’s nuclear forces. Threats of a disarming strike against North Korea are counterproductive for deterrence because they enflame crisis instability and push Kim Jong-un into a “use or lose” situation.  

Third, abandoning the objective of denuclearization creates opportunity for greater flexibility in the U.S. approach to North Korea, especially in diplomacy. After all, there is little incentive for Pyongyang to negotiate with Washington if denuclearization is the only acceptable outcome for the United States.  

Using “maximum pressure” to achieve the denuclearization of North Korea will not work. Instead, the United States should focus its efforts on deterring North Korea from using its nuclear weapons. Sanctions and military forces will still play a role in a deterrence-focused strategy, but moving away from compelling Pyongyang to denuclearize would be a wise choice. 

The Congressional Budget Office (CBO) recently released a fiscal impact score for the DREAM Act.  It found that the DREAM Act would increase deficits by about $25.9 billion over the next decade.  There are at least two problems with this CBO score and a solution that should make fiscal conservatives and DREAM Act supporters happy.    

What is the Baseline?

The CBO’s black box fiscal estimates are frequently frustrating and this one is no exception.  The biggest difficulty is telling what their baseline is.  Their baseline could be that 700,000 DACA recipients continue to work legally, which is roughly the current situation but will continue to decline rapidly over the next few years as DACA disintegrates.  The baseline could also assume zero government costs incurred while identifying and deporting immigrants who would otherwise have been legalized, an unrealistic assumption given that this administration is building up an internal deportation apparatus. 

The American Action Forum (AAF) has estimated the federal government’s cost of deportation and indirect costs on GDP.  The AAF findings suggest that removing DACA recipients and DREAMers over the next decade will increase government expenditures by $70 billion to $103 billion and lower GDP growth by about $260 billion.  Both of those swamp and fiscal effects from the DREAM Act.  If the AAF estimates are the baseline, the DREAM Act would actually save hundreds of billions of dollars over the next decade.   

It is difficult to estimate what immigration enforcement will be like over the next decade but at least some of those large costs should be included as part of the baseline in any CBO fiscal cost analysis.  The choice of baseline matters in whether the DREAM Act will be scored as fiscally positive, negative, or neutral.

The CBO versus the National Academy of Sciences

The findings of the CBO report are inconsistent with the National Academy of Sciences (NAS) fiscal cost projection for first-generation immigrants.  The age and education of the immigrants are the two biggest factors that influence their net fiscal impact.  The greater the education and younger the age at arrivals (with some caveats), the more fiscally positive the immigration is.  In contrast, the less educated and older the age at arrival (same caveats), the less fiscally positive the immigrants is.  

Applying the age and education profiles of DACA recipients to NAS findings by age and education in table 8-21 reveals startlingly different results from that of the CBO (Figure 1).  Figure 1 shows the average net fiscal impact by DREAMers by year after legalization.  Just counting the 700,000 DACA recipients should produce a fiscally positive result over the next decade of about $1.6 billion using the NAS methods.  Expanding this to the roughly 2 million or so eligible DREAMers, assuming they have about the same education and age profiles, should produce about $4.6 billion in net positive tax revenues over the next decade.      

Figure 1: Average Fiscal Impact per DREAMers by Year

 

Sources: National Academy of Sciences, Migration Policy Institute, Pew Research, and Author’s Calculations.

This result comes from the age profile of DACA recipients and DREAMers, not from assuming that they will be highly educated.  For the CBO to find that legalization will turn a $1.6 to $4.6 billion dollar surplus into a $25.9 billion deficit requires an enormous increase in benefit usage or a tremendous drop in taxable income or both at exactly the age when benefit receipts drop and taxable income rises for immigrants (Figure 2). 

Figure 2: Taxes minus Benefits for Immigrants, by Age

 

Source: National Academy of Sciences.

Either the NAS is tremendously wrong in its widely praised fiscal cost analysis or the CBO made unrealistic projections and assumptions, perhaps having to do with a possible uptick in family-sponsored immigration after the DREAM Act.  Regardless, one cannot praise the NAS findings and believe the CBO’s.     

Hedging Our Fiscal Bets

Even if you assume that the CBO’s findings are closer to reality than those of the NAS’, there is an easy solution that Republicans should leap for: welfare reform.  As Cato scholars have written about in detail, it is easy, popular, and fiscally prudent to limit non-citizen access to means-tested welfare benefits.  As part of a DREAM Act, Congress could include stricter welfare rules denying all non-citizens access to means-tested welfare, tax credits, and health insurance subsidies.  Congress could then create a special green card for DACA recipients and DREAMers, call it the DLPR, which they cannot use to naturalize for 10 years.  In such a case, they work legally and pay taxes without access to benefits for a decade when they will then have a choice.  Permanently protecting a large population from deportation while also making this fiscal cost argument moot is a good deal and should be taken regardless of CBO findings.       

During his campaign, President Trump promised to prioritize Christian refugees facing persecution, even implying that the Obama administration was actively disfavoring Christians. Many Christian refugee communities in the United States supported him based on this promise. One of his very first executive orders promised to prioritize Christian refugees. Despite these statements, however, President Trump has failed to deliver: his administration has accepted far fewer Christian refugees than in prior years.

According to figures from the U.S. Department of State, the United States accepted 3,671 Christian refugees per month from October 2015 to December 2016. President Trump assumed office on January 20, 2017 and issued his refugee executive order on January 27. The country accepted 1,280 Christian refugees per month from February to September 2017. In other words, the Obama administration was taking in almost three times as many refugees as the Trump administration has.

Figure 1
Monthly Christian Refugee Admissions, Monthly Average of 2016 and Each Month of 2017

Sources: U.S. Department of State (through December 15, 2017)

Over the last decade, the United States has averaged roughly twice as many Christian refugees per month as it is now accepting under the Trump administration. In other words, rather than rescuing more Christian refugees than prior presidents President Trump has halved their numbers. The numbers so far for Fiscal Year 2018, which started in October, are now below 1,000.

Figure 2
Monthly Christian Refugee Admissions, FY 2007 to FY 2018

Source: U.S. Department of State *2016 carries through January 2017

President Trump’s “prioritization” of Christian refugees parallels his prioritization of skilled immigrants in his chosen vehicle for legal immigration reform—the RAISE Act. RAISE simply ends most family-based categories without increasing the number of visas for skilled immigrants, so skilled immigrants are “prioritized” over others, but not in any way that actually eases immigration for them.

In this case, the so-called prioritization has increased the share of Christian refugees from a monthly average of 45 percent from October 2015 to January 2017 to 64 percent in November 2017, while dropping the absolute number. As I wrote last week, the share has increased at the expense of Muslim refugees whose numbers have dropped a staggering 94 percent over the course of this year.

President Trump is no longer a proponent of Christian refugee resettlement. I have previously detailed the administration’s efforts to deport Iraqi Christians, many of whom have lived in the United States for decades. A federal district court has temporarily paused their removals, accusing the Trump administration of impeding the refugees’ efforts to challenge their removals in courts and stating that they are “confronting a grisly fate …  if deported to Iraq.”

The problem is that the administration’s views on all immigrants too easily extend to Christians for its policies to leave them unscathed. Foreign Christians could still “steal” jobs from Americans. They could end up using welfare. They could commit crimes in the United States. Ultimately, these objections to immigration generally generate the results that are clear to all: fewer immigrants of all types.

Last week I sat down to talk tax reform with Nick Gillespie, the editor-in-chief of Reason.com and an all-around guru of libertarian policy and culture. We covered individual and corporate taxes, and then pondered whether Republicans will follow up next year with spending cuts.

The new science fiction movie Downsizing with Matt Damon opens at theaters this week. Wiki provides a summary:

Downsizing imagines what might happen if, as a solution to over-population, Norwegian scientists discover how to shrink humans to 5 inches (13 cm) tall and propose a 200-year global transition from big to small, but with one catch: the procedure cannot be reversed. People soon realize how much further money goes in a miniaturized world, and with the promise of a better life, everyman Paul Safranek (Matt Damon) and wife Audrey (Kristen Wiig) decide to abandon their stressed lives in Omaha in order to become small and move to a new downsized community—a choice that triggers life-changing adventures. To Paul’s horror and outrage, he finds out that Audrey backed out at the last second. After the couple understands that they do not have a future together, they divorce and Paul must now figure out how to start his life over in a completely different world.

That sounds interesting. But I think the following tweaks would have improved the plot:

Downsizing imagines what might happen if, as a solution to over-spending, Cato social scientists discover how to shrink the federal government to 5 percent of GDP and propose a 20-year transition from big to small, but with one advantage: the procedure cannot be reversed. People soon realize how much further money goes in a world with a miniaturized Washington, and with the promise of a better life, most Americans abandon their partisan acrimony and embrace their newly empowered local communities—a choice that triggers life-changing adventures. To widespread horror and outrage, Americans find that a few big government zealots try to sabotage the peaceful transition. After the zealots understand that Americans want freedom, they emigrate to a completely different world to impose their ideas, which are divorced from reality.

For this version, I would cast Vince Vaughn instead of Matt Damon and Julienne Davis instead of Kristen Wig.

Anyway, while we are waiting for Hollywood to make Downsizing 2 along these lines, we should ask policymakers to pursue real-life downsizing of the federal budget. The proposals here would chop spending from 23 percent of GDP to 18 percent. More cuts would be needed to reach 5 percent, but remember that defense is only 3 percent of GDP, and other spending is less important.  

DownsizingGovernment.org discusses how to miniaturize federal agencies. Rather than shrinking bureaucrats to 5 inches tall, it proposes to eliminate their programs, allowing them to start over in the completely different world of the private sector.

Cato’s new E-book, Downsizing Federal Government Spending, includes essays by Cato scholars on how to divorce federal taxpayers from farm subsidies, infrastructure spending, and other programs that shrink their wallets. 

The recently concluded tax reform conference report draft includes a one-percentage-point increase in the corporate tax rate above what both the House and the Senate passed, with some of the revenue savings being used to keep a portion of the deduction for state and local taxes as well as forego delaying its implementation until 2019, as the previous bills proposed. There remains a chance the rate may tick up yet again before negotiations are concluded, especially if other targeted tax breaks get some traction in the Congress over the next few days.

However, even this small diminution in the rate reduction is a mistake: while a one point increase may seem to be a trifle, each uptick in the corporate tax rate represents a large opportunity cost that Congress won’t be able to easily rectify in the future.

My former colleague Gordon Gray and I examined the tax code that emerged from the 1986 tax reform, as well as the various changes Congress made to the code in the subsequent thirty years, in a study published in Tax Notes, to see if we could discern some broad patterns regarding what sorts of changes proved ephemeral and which ended up being permanent.

As to the former, the list stretches a mile wide: Congress has changed the top personal tax rates four times since 1986 and seems poised to change it again. It has also tinkered with tax rates on dividends and capital gains numerous times. It has also inserted a litany of tax credits, subsidies and the like over that period as well, in order to encourage us to conserve energy, pollute less, or save more for retirement, or health care, education, or a funeral. A few years ago Rep. Thaddeus McCotter even proposed a tax break for pet expenses.

On the corporate side, Congress has done nearly as much tweaking. For instance, it tends to change the tax treatment of capital investment every business cycle, and a few years ago it created a special tax rate for manufacturers (and other industries with enough juice to be labeled as such). Congress has also modified how overseas income is taxed several times, and altered the code repeatedly to encourage environmentally sound behavior.

What hasn’t changed over the last thirty years? The corporate tax rate. A mere one point increase in 1993 marks its only alteration since the 1986 reform. In the context of our government’s predilection to conduct a wide manner of economic policy through taxes, its stickiness is remarkable.

We suspect the durability of the corporate tax rate owes to the fact that the benefits to reducing the rate can be difficult for voters to comprehend. Opponents of tax reform can simply shout that it is nothing but a giveaway to big business and that has often proven to be enough to get congressmen to back away.

Of course, it is anything but a giveaway. During the three decades of U.S. corporate tax rate stasis, literally every country in the OECD has reduced its tax rate numerous times. In 1987 we had one of the lowest corporate tax rates amongst the group, but today we have the highest by far, which has made it more difficult for U.S. companies to compete against their foreign competitors. From 2000-2012, there were 85 different corporate rate tax reductions in the OECD, I found.

The high U.S. corporate tax rate is especially pernicious, because it is a lousy way to collect tax revenue. Since a good fraction of it is borne by the workers in the form of lower wages, it’s not nearly as progressive as most people assume, and it achieves that progressivity at an extremely high opportunity cost in terms of foregone economic growth. Nobel Laureate Robert Lucas once said that eliminating the corporate tax was the closest thing to a free lunch that he has ever observed in economics.

History has shown that many other changes in the tax reform plan may be unwound in the near future, no matter what the final legislation contains. For better or worse, Congress cannot tie the hands of a future congress. But whatever happens with the corporate tax rate in the final bill will likely remain the law for the foreseeable future, so above all else we should strive to get it right.

And the right rate is the lowest rate possible. 

In their infinite wisdom, the Founding Fathers warned against the dangers of standing armies and determined that it should be civilians, not military leaders, who had final authority over the size, shape, and use of America’s armed forces. Their reasoning was simple. Without civilian control of the military there would be no bulwark against military coup or dictatorship. 

But civilian control should not stop at simple control over the armed forces. Civilian officials must provide active leadership and management of the full spectrum of American foreign policy efforts, from intelligence gathering and alliance building to arms sales and crisis diplomacy and, most importantly, the decision to make war. The old chestnut that “War is too important to be left to the generals” is an old chestnut for a reason: It’s true.

Civilian leaders have institutional incentives to be responsive to the full range of considerations that must inform foreign policy. Military leaders, as well informed and dedicated as they may be, operate with too much occupational bias to be the only source of input to the foreign policy making process. Their input on military matters is critical – but not sufficient. Socialized to look at every mission in black and white military terms, military leaders are in fact poorly suited to exercise the kind of political judgment required in a liberal democracy.

And this is where we have a problem. Since taking office, Donald Trump has made it achingly clear that he has little or no respect for the concept of civilian control, and little interest in exercising the sort of political judgment necessary from the White House.

As a candidate Trump exhibited signs of militarism, but it was his appointment of several current and former generals that signaled the coming erosion of civilian leadership. McMaster, Kelly, and Mattis are all clever and competent people, but  putting military leaders in charge of the Pentagon and the National Security Council began the tilting of the playing field, ensuring that Trump would get a larger dose of the military worldview in every conversation about world affairs.

The real proof of the loss of civilian control over foreign policy, however, has been Trump’s abandonment of diplomacy. First, Trump appointed Rex Tillerson, a man he had never met and whom he clearly did not really trust, as the Secretary of State. Then, he made sure that Tillerson’s main job would not be to act as the nation’s top diplomat and top foreign policy advisor to the president, but instead to perform radical surgery on the State Department. Tillerson’s plans to shrink and reorganize the State Department have already led a large percentage of the department’s most talented people to resign or retire. The failure to appoint new leaders for a vast number of top State Department jobs not only echoes Trump’s disinterest in diplomacy, but also undermines the broader concept of civilian control in foreign policy.

Of course, it’s not clear that Trump even thinks he needs a State Department. When Tillerson was trying to encourage North Korea to sit down for talks with the United States in late September, Trump hamstrung his efforts by issuing a contradictory pair of tweets: “I told Rex Tillerson, our wonderful Secretary of State, that he is wasting his time trying to negotiate with Little Rocket Man…” and then, “…Save your energy Rex, we’ll do what has to be done!”

The implication is clear: not only aren’t Rex Tillerson and the State Department part of the solution, Trump doesn’t even think of Tillerson as being part of his national security leadership team in the first place. It’s hard to imagine any previous president saying “we” with respect to a foreign policy issue and the Secretary of State not being part of that “we.”

Beyond the loss of diplomatic influence and engagement it portends, Trump’s breathless militarism and the loss of civilian control also puts the nation at grave risk. Less than two weeks ago one of Trump’s generals, National Security Adviser Henry McMaster, warned that the potential for war with North Korea was increasing by the day and that there “isn’t much time left” to prevent it. Rather than working with a wide range of civilian and military leaders to figure out how to make diplomacy work in North Korea, it looks like Trump has already decided that the military option is the only one that matters.

When Trump took office, many people hoped that “responsible adults” might be able to moderate his foreign policies. Without greater civilian leadership, however, the prospects for sound foreign policy look grim.

As college students across the country begin their final exams, we are reminded of the unfortunate reality that much of what we learn in school or other parts of life will eventually be forgotten. Usually, this is more of a nuisance than a problem. A failure to recall the finer points of Shakespearean literature is unlikely to trouble most accountants, nor is a marketing specialist apt to lose sleep over lost the ability to define the Pythagorean Theorem. It’s a bigger problem, however, when the Secretary of Commerce forgets some basic lessons of international trade.

Appearing at an Atlantic Council event earlier this week, Commerce Secretary Wilbur Ross argued that the Korea-U.S. Free Trade Agreement (KORUS) should address the U.S. trade in goods deficit with South Korea. Despite the fact that economists generally agree that the trade deficit is not a good indicator of a country’s economic performance—or as our colleague Dan Ikenson argues, is not a problem to solve—Secretary Ross thinks otherwise. In the context of president Trump’s recent visit to Asia, he stated the following:

President Trump…underscored the need to rebalance the KORUS free trade agreement to reduce the substantial trade deficit that we have with Korea. That deficit has nearly tripled to $27.7 billion since KORUS went into effect. Among the most important reasons for the increased deficit has been the imbalance between automotive imports and exports. Our automotive imports from Korea are almost nine times our exports of autos to them. And remarkable as it may sound, we export to Korea more dollars’ worth of corn and beef combined, than we do cars—seems strange for an industrialized economy.

The solution he offered to this “problem” was for South Korea to agree to purchase more liquefied natural gas, petroleum, food products, machinery and industrial equipment from the United States instead of other countries.

There are two basic things Secretary Ross gets wrong with this line of reasoning. First, he misunderstands the one true and nontrivial principle in the social sciences, which is Ricardo’s theory of comparative advantage. Second, by focusing only on goods—and cars in particular—he ignores the diversity of the U.S. economy, and some of its greatest strengths, such as the services industry. We address both in turn.

David Ricardo clearly explained the theory of comparative advantage in On the Principles of Political Economy and Taxation 200 years ago. He stated:

If Portugal had no commercial connexion with other countries, instead of employing a great part of her capital and industry in the production of wines, with which she purchases for her own use the cloth and hardware of other countries, she would be obliged to devote a part of that capital to the manufacture of those commodities, which she would thus obtain probably inferior in quality as well as quantity.

The quantity of wine which she shall give in exchange for the cloth of England, is not determined by the respective quantities of labour devoted to the production of each, as it would be, if both commodities were manufactured in England, or both in Portugal.

England may be so circumstanced, that to produce the cloth may require the labour of 100 men for one year; and if she attempted to make the wine, it might require the labour of 120 men for the same time. England would therefore find it her interest to import wine, and to purchase it by the exportation of cloth.

To produce the wine in Portugal, might require only the labour of 80 men for one year, and to produce the cloth in the same country, might require the labour of 90 men for the same time. It would therefore be advantageous for her to export wine in exchange for cloth. This exchange might even take place, notwithstanding that the commodity imported by Portugal could be produced there with less labour than in England. Though she could make the cloth with the labour of 90 men, she would import it from a country where it required the labour of 100 men to produce it, because it would be advantageous to her rather to employ her capital in the production of wine, for which she would obtain more cloth from England, than she could produce by diverting a portion of her capital from the cultivation of vines to the manufacture of cloth (para. 7.13-7.16).

This example highlights an important element of comparative advantage. First, even if one country is the best at everything (in other words, has an absolute advantage), it is still better served by focusing on what it produces best, and importing the remaining items. Why? Because an absolute advantage does not necessarily equal a comparative advantage, as the latter is based on the opportunity cost of making one thing over another. For instance, if planning a birthday party with a friend, and you’re better at both baking cakes and writing nice invitations but only slightly better at the invitations, it makes more sense for you to bake the cake and for your friend to send out the invites than for you to do both. It not only is more efficient, but it also spares up the time you would have spent writing those invitations to focus on making an even better cake. Essentially, comparative advantage allows for greater investment in the thing you are good at, and in turn, makes you better at it over time.

This logic is easily applied to the bilateral trade relationship between the United States and South Korea. Blessed with vast amounts of land ideally suited both for cattle grazing and growing of corn, the United States enjoys a considerable comparative advantage in such products and is the world’s largest producer of both. Lacking such geographic advantages but possessing a highly-skilled workforce and some of the world’s leading manufacturing firms, South Koreans instead specialize in the production of cars. By focusing on what each country does best, and then engaging in trade, the citizens of both countries are made better off. Rather than building cars, Iowa corn farmers raise crops, harvest them, and then send them to foreign lands where in exchange they receive cars and other needed goods. To force South Korean autoworkers to grow their own corn or Iowa farmers to build their own cars would be to live in a less prosperous world.

Also overlooked by Secretary Ross is that a country as vast and economically developed as the United States is able to enjoy comparative advantages across multiple sectors and industries. In addition to being an agricultural juggernaut, the United States is—perhaps contra the popular narrative—a manufacturing powerhouse with output near record highs. While the U.S. does indeed send large amounts of beef, corn, and other agricultural products to South Korea—$6.2 billion worth in 2016—these are dwarfed by its manufacturing exports.  Indeed, one category of manufacturing exports alone, machinery, saw exports ($6.1 billion) nearly equal to agricultural products in their entirety. In addition, the U.S. exported another $5.3 billion worth of electrical machinery, $5.2 billion in aircraft, and $2.9 billion worth of optical and medical instruments, in addition to vehicle sales of $2.2 billion.

Beyond its massive agricultural and manufacturing sectors, the United States—like most advanced economies—is also increasingly oriented towards the production of services where it possesses considerable expertise. Not mentioned by the Commerce Secretary is that the United States exported $21.6 billion in services to South Korea in 2016 and was left with a trade surplus in this sector of $10.7 billion.

Unlike the goods trade deficit, Secretary Ross has made no indication that he believes this particular trade surplus to be a problem or that he intends to pressure Americans into purchasing additional South Korean services to achieve balance. Nor should he. Rather, the citizens of both the United States and South Korea should be left to their own devices to purchase the products and services they desire and trade as they see fit with minimal interference. Instead of bemoaning a goods trade deficit that is more statistical quirk than indicator of economic vitality, or puzzling over why the United States does not export more of a particular good, Ross would do better to spend his time removing the remaining barriers to trade between the United States and South Korea and allowing the miracle of comparative advantage to work its magic. 

It was reported last week that a Republican working group is considering a proposal to link spending caps to the growth of actual or potential GDP. This is encouraging, and much more economically sensible than rigid balanced budget legislation.

I’ll write about other countries’ experiences with backward-looking rules in the future. But one country which uses forward-looking estimates of potential GDP to determine overall government spending is Chile. Indeed, economists such as Jeffrey Frankel have previously written glowingly about Chile’s fiscal rule, which Frankel concluded had constrained government debt whilst being flexible enough to allow automatic stabilizers to operate.

First, some background: in 2000 the Chilean government voluntarily adopted a structural budget surplus rule of one percent of GDP each year. This was lowered to half a percent of GDP in 2007, and then to a simple balanced structural budget rule in 2009 once government debt had essentially been paid off.

What does this mean in practice? A committee of independent experts meets once a year to provide the government with estimates of potential GDP. A separate committee assesses whether copper prices (a key driver of revenues) are higher or lower than trend. These two opinions are put together to determine an estimate of government revenues for the year if the economy was operating at its potential with copper prices at their long-term level. This determines the total maximum spending level allowed in the budget plan for the year. In other words, spending is capped based upon an estimate of tax revenues if the economy was at potential.

Unlike strict balanced budget proposals, the Chilean rule allows automatic stabilizers to operate, and the overall budget balance to fluctuate with the state of the economy. The government runs a deficit if output and revenues are below potential, and run a surplus if output and revenues rise above potential. Debt therefore acts a shock absorber for unforeseen deviations in economic activity. Provided the potential of the economy is estimated accurately, this means a balanced budget over the economic cycle. With economic growth then, such a rule theoretically means the debt-to-GDP ratio should gradually fall.

Crucial to the rule’s success, then, is accurate and unbiased estimates of the economy’s potential. Chile’s independent committees are designed to mitigate against the politicization of these. It’s hoped they reduce the incentive to be overoptimistic about the economy’s potential to justify higher spending. Given this independence, under Chile’s rule there are no sanctions if within a year the structural balance requirement is breached, and no adjustment in future budgets required from worse-than-expected deficits.

How has this framework performed since implementation? Prior to the financial crisis, Chilean central government debt fell sharply as a result of running sustained structural surpluses, and Chile’s sovereign debt rating improved. In fact, even the announcement of the rule in 2000 improved Chile’s creditworthiness. Frankel shows public spending fluctuated much less than in previous decades and GDP volatility declined substantially between 2001 and 2005.

The virtues of such a rule really became apparent though just before the financial crisis. President Michele Bachelet was pressured to substantially increase government spending given sustained strong GDP growth and a high world price of copper. Yet unlike the US in the early 2000s, IMF data shows that in 2007 Chile resisted these pressures and ran an overall budget surplus of 7.9 percent of GDP, with the independent experts judging most of the strong budget performance as resulting from the economy running above its potential.

This proved prescient. By 2009, the budget had swung to a 4.2 percent deficit as the global recession hit. General government debt increased again due to this large borrowing, but Chile had been so fiscally prudent prior to the crash that even today the IMF believes general government debt is only 21.3 percent of GDP, and net debt just 1 percent of GDP.

More recently, however, some of the difficulties of the rule have been in evidence. Chile raised its corporate income tax rate from 17 to 20 percent under President Sebastian Pinera in 2011, and has since raised the rate further to 25.5 percent under President Bachelet, with the intention to provide revenues for education and social spending. But during this period of higher taxes and steep spending increases (overall spending has increased by 3.8 percentage points of GDP since 2011), annual real GDP growth has performed consistently below expectations, and copper prices have been low. The result has been unforeseen structural deficits, with gross government debt near-doubling between 2013 and 2017, and net debt drifting back into positive territory, despite a pick up in global growth.

This highlights a key challenge of linking spending to potential GDP: it can be inherently difficult to assess, particularly when major supply-side policy changes occur. Calculating “cyclically-adjusted revenues” to determine spending caps requires accurate assessment of a) the health of the economy in real time, b) the “output gap” – i.e. how far the economy is away from its potential, c) how moving to potential affects revenues. All are highly uncertain and difficult to calculate.

Despite the existence of Chile’s fiscal rule then, and previous commitments to it, slower than expected growth after the crisis saw President Sebastian Pinera downgrade its stringency – aiming to hit a target of a 1 percent of GDP structural deficit by 2014. President Bachelet, in the face of sluggish growth and structural deficits being revised upwards, then began basing fiscal targets on a trajectory for the structural deficit (which should fall by 0.25 percent of GDP per year) rather than specific levels.  The IMF now believes that Chile’s slow growth reflects lower potential GDP, and that the country was running a structural deficit of 2.2 percent of GDP in 2016. S&P this year downgraded Chile’s credit rating.

Chile’s experience then clearly the strengths and weaknesses of fiscal rules based upon potential GDP. In theory, and when potential GDP is estimated accurately, a structural balance rule delivers counter-cyclical fiscal policy (the correlation between Chile’s budget surplus and real GDP growth since 2007 is 0.65, see the chart below), balances budgets over the economic cycle and leads to a gradual reduction in the debt-to-GDP ratio. Independent committees, in Chile’s case, likewise help to mitigate against politicians spending near-term budget windfalls or using them to justify more optimistic forecasts.

Chile’s Counter-Cyclical Fiscal Policy

Source: International Monetary Fund Fiscal Monitor October 2017

 

But potential GDP is tough to measure. Under Chile’s rule, no additional constraints are placed on government spending to correct for mistakes. Ultimately, when potential GDP was revised down, and structural deficits up, successive governments chose not to adjust spending accordingly, but aimed to return to something closer to structural balance over a longer period. This highlights the limits of fiscal rules in general, and the need for political will in ensuring they are not abandoned.

The implications of letting bygones be bygones in this way and only adjusting spending decisions on a forward-looking basis might not be significant for a country starting with low levels of government debt, such as Chile. But a rule which allowed such mistakes without consequence could cause considerably more damage for a country with already high debt-to-GDP levels, such as the US.

Rules based on potential GDP are theoretically appealing and work well if estimates of potential are accurate. But that’s a big if.

All I want for Christmas is for the U.S. to only fight the wars it has to and to stay out of all the others. The lives of young Americans are too high a price to pay for wars driven by threat inflation, ego, or fool-hardy social experiments.

First, we’re Americans. Enough of the hand wringing. Islamist-inspired terrorists do not hide around every corner. Instead, we have been and continue to be quite safe. The threat from groups operating within failed states like Afghanistan, Iraq, Syria, and so on pales in comparison to Hitler’s armies marching across Europe and our nuclear Cold War with the Soviet Union, despite President Trump’s attempts to equate the three.

Second, the unseemly traits of ego, vanity, and hubris should not push us to fight when we don’t have to. Teddy Roosevelt had it right: Walk softly and carry a big stick.

Third, American lives and financial treasure should not be spent on cool sounding social experiments like, “democracy will flourish in Muslim-majority states in response to U.S. invasions.” Since 9/11, though, all three U.S. administrations have referred to Afghan and Iraqi leaders as “reliable partners” at one time or another, while extolling democratic progress in both countries.

The data, however, provide no support for those claims. As of today, Freedom House gives both countries it’s lowest rating—“not free.” And, in terms of corruption, Iraq and Afghanistan’s governments rank worse than 94 and 96 percent of all governments worldwide.

All war is darkness. My Opa spoke those words to me 40 years ago. I remember it vividly because as he shared that one sentence, he pointed to the bullet hole in his shoulder and the shrapnel scar on his neck. He had barely survived the war as an enlisted man in the German army; and when the war ended, he found his home country had become East Germany. Three years later, he took my Oma and (then) three year old dad and they escaped to the west. Eventually, they made it to America.

My war experiences have been much briefer than my Opa’s, but I get his point. All war is darkness, so for the sake of those sent to do the fighting, the war has to be a necessary one. And our war on terror isn’t.

Let’s bring America’s sons and daughters home for the holidays. We’ll all be the better for it.

On December 4, 2017, the U.S. Supreme Court allowed the third version of the President’s travel ban, which limits the entry of citizens from eight countries, to go into effect. The White House claimed the Supreme Court decision as a victory, with spokesman Hogan Gidley saying, “The proclamation is lawful and essential to protecting our homeland. We look forward to presenting a fuller defense of the proclamation as the pending cases work their way through the courts.”

While the domestic implications of the Supreme Court’s decision will unfold in the next few weeks, the foreign policy implications will be widespread, and potentially damaging to U.S. interests and reputation.

Before delving into the foreign policy implications, however, it is important to note two important aspects of the U.S. Supreme Court that determine the impact of its decisions on U.S. foreign policy. First, even though the judiciary is constitutionally designed to check against executive power expansion, past administrations, along with the Court itself, have taken a narrow view of the Court’s authority when it comes to interpreting international laws and foreign policy. Second, and most importantly, the Supreme Court has interpreted the Case or Controversy Clause of Article III of the Constitution in a way that prohibits the courts from issuing advisory opinions. The Court’s decision on the travel ban, however, is to stay the district court’s preliminary injunction, which is a temporary maintenance of the status quo. The Court has decided to the let the ban be implemented while the merits of the ban continued to be argued in lower courts.

Yet, even though the Court’s decision does not necessarily mean that the ban will ultimately be upheld, the decision has had three immediate—and negative—foreign policy implications. 

The first, and most obvious, implication is the sustainment of the faulty link between immigration and terrorism. Cato’s Alex Nowrasteh and David Bier have written extensively on the flawed logic and harmful effects of the travel ban on immigration to the United States. One of the unintended consequences of the Court’s decision was a reinforcement of President Trump’s troublesome rhetoric on immigration, highlighted when the president commented on the most recent failed terrorist attack in New York City. President Trump argued that the current immigration system is, “incompatible with national security” and that Congress must end “chain migration,” which refers to the ability of U.S. citizens to sponsor their siblings for U.S. visas, even though there is little evidence indicating that such a measure will make America safer.

The second implication of the Supreme Court decision is connected to the growing anti-Muslim sentiment within the United States, which has entered the Trump administration’s foreign policy in the form of the travel ban and policy on refugees. Six out of the eight banned countries are Muslim-majority (Chad, Iran, Libya, Syria, Somalia, and Yemen) and the president has often referred to the ban as the “Muslim Ban.” Similarly, the president has stated that his administration will prioritize Christian refugees. While the Supreme Court decision is not a final ruling on the merits, the Trump administration has called it a victory. Thus, the Trump administration appears to have taken the Court’s decision as a signal that its third attempt at a travel ban will ultimately survive judicial review. 

The third, and final, implication of the Court decision is the worsening of U.S. relations with both Iran and North Korea at a time when tensions are already high. Anti-Americanism is steadily on the rise in Iran, while relations with North Korea have been escalating to a point where some analysts fear an onset of a nuclear war.

So for Christmas, if I could have one wish granted, it would be to end the travel ban in its entirety. Not only is the ban based on a false narrative and poor empirical analyses, but it also fails to make the United States more secure. Furthermore, it constantly undermines U.S. interests abroad. 

The Supplemental Nutrition Assistance Program (SNAP) is one of the costliest welfare programs at about $70 billion a year. Not only is it costly, but a large share of the benefits are not used as intended.

Recipients are supposed to use SNAP or food stamp benefits to “make healthy food choices” and “obtain a more nutritious diet.” But it turns out that about $15 billion of food stamp spending goes for junk food, such as candy and cola. Many recipients are not making the nutritious choices the government intends.

The Trump administration is expected to pursue welfare reforms next year, and trimming food stamp benefits is one priority. The Washington Post says that the U.S. Department of Agriculture (USDA)

is considering proposals to let states impose new restrictions on purchases of soda and candy and require SNAP candidates to apply in person, according to the Secretaries Innovation Group (SIG), which represents state social service secretaries from 20 Republican administrations. The agency is also considering a proposal to allow states to reduce payments to some groups of people, including undocumented immigrants’ citizen children.

… In the past, the USDA has rejected requests from states to take some of the actions SIG has suggested, particularly limiting the types of foods that people can buy with food stamps.

… One of the more controversial proposals involves a recommendation that the USDA ban “harmful” foods, such as soda and candy, from being purchased with food stamps. SIG also proposes that the program allow the purchase of only specific, “approved” foods, similar to what the Women, Infants and Children (WIC) program does.

“The Supplemental Nutrition Assistance Program is intended to subsidize nutrition for needy families,” reads SIG’s proposal, which was submitted to the USDA and Republican congressional leadership, and obtained by The Post. “However, too many recipients are utilizing their benefit to purchase items that are not only void of nutrition, they are damaging to their health.”

The article says “SNAP is America’s largest anti-hunger program,” but the main food-related health problem for low-income households today is not hunger, but obesity. Americans with low incomes are more obese than people with high incomes, on average. In general, people with low incomes are not suffering from too little food, but from too much of the wrong kinds of food.

So ending SNAP’s subsidies for junk food would be a pro-nutrition way to cut demand for the program and reduce taxpayer costs. Federal reforms to allow states to restrict benefits would move in the right direction. If food stamps could be only used for items such as fruits and vegetables, it is possible that fewer people would use the program and costs would fall.

For more on federal food subsidies, see here.

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