Policy Institutes

Whenever I write about Hispanic immigration to the United States, I am greeted with some variation of the “they’re all socialists” line. These commenters typically point to the fact that a majority of Hispanics vote for Democrats. Yet as Alex Nowrasteh has written, the Republican Party’s antagonism toward Hispanics plays an important role in that outcome. The reality is that Hispanics disproportionately backed the libertarian presidential candidate this election and, as I have described before, are America’s most libertarian major ethnic group on a variety of specific issues. Now, thanks to Donald Trump’s recent actions, we have more evidence for this fact.

The Economist magazine teamed up with the survey outfit YouGov to ask Americans how they felt about trade, tariffs, subsidies, and free markets following President-elect Trump’s recent decision to intervene to prevent Carrier from relocating production to Mexico. Support for the deal should be a telling indicator of a person’s views on capitalism, as it clearly shows contempt for the market system and free trade. As Vice President-elect Mike Pence told The New York Times, he supported the deal because “the free market has been sorting it out and America’s been losing.”

The first question in the poll on the issue asked respondents whether they agreed with Pence’s statement, but did not reveal its origin to avoid allowing partisanship to impact the responses. Figure 1 provides the breakdown of the responses by ethnicity. As it shows, Hispanics were the least likely to agree with Pence’s statement—a full twenty percentage points less likely. In case you think that this result might still be pure partisanship, barely half of Hispanics had even heard anything about the Carrier deal, let alone the Pence remark.

Figure 1: Share agreeing with the statement that “the free market has been sorting [the economy] out and America’s been losing.”

Source: Economist–YouGov

While this certainly implies that Hispanics are also the least likely to agree that the free market has been leading to a worsening economy, perhaps it could be argued that Pence’s statement is unclear. I disagree with that. I think it would be obvious to respondents that they are supposed to connect the free market with a poor economy. Fortunately, the survey asked other questions that support the idea that Hispanics correctly interpreted Pence’s comment as being anti-free market.

The survey followed up by asking respondents whether they supported “special tax breaks to companies in order to keep jobs in those communities.” Hispanics were the least likely to support such tax breaks. Only 1 in 3 Hispanics considered such tax breaks legitimate. Again, as Figure 2 shows, this is 19 percentage points less than whites.

Figure 2: Share supporting “special tax breaks to companies in order to keep jobs in those communities”

Source: Economist–YouGov

Finally, the survey asked whether the respondents favored “stiff tariffs or other taxes on U.S. companies that relocate jobs from the U.S. to foreign countries.” On this question, the difference in opinion is the most dramatic. Only 37 percent of Hispanics want to punish companies for these business decisions. This is an astounding 26 percentage points less than whites, who overwhelmingly favored government interference.

Figure 3: Share supporting stiff tariffs or other taxes on U.S. companies that relocate jobs from the U.S. to foreign countries

Source: Economist–YouGov

This result corresponds with Hispanics’ strongly pro-free trade sentiments, as expressed in polls by the Pew Research Center. It appears that their views on free trade will hold under both the Democrat and Republican administrations. On the Carrier deal itself, Hispanics who knew about the deal were overwhelmingly not supportive, but a plurality had no opinion as they had not heard enough about it.

These three questions address a broad understanding of the government’s role in the economy. The first focuses on a general sentiment about the current market economy in the United States, the second on corporate welfare and government intervention, and the last on punitive taxation, free trade, and government intervention. Overall, they show that Hispanics are not “socialists”—indeed, on these questions, they are much less supportive of a planned economy than white Americans.

Donald Trump’s campaign has certainly galvanized feelings of nationalism and patriotism.  John Fonte and John O’Sullivan even wrote that Trump’s election victory represent a “return of American nationalism.”  It’s no coincidence then that he spoke about immigration as much as he did.  There is a common belief that immigrants and their descendants are less patriotic than other Americans. Yet rarely do proponents of this idea bring facts to the table to support their claims. 

A prominent academic paper by Jack Citrin and others challenges the idea that Hispanic Americans are less patriotic.  On the opposite side, responses from a Harris Interactive Survey purport to show less patriotism among immigrants.  Fortunately, the General Social Survey asks many questions about patriotism in 2004 and 2014.  The questions generally show that immigrants and Hispanics have patriotic feelings virtually identical to those of other Americans.

The first question is:  “How much do you agree or disagree with the following statement:  Generally speaking, America is a better country than most other countries.”  The responses show a remarkable consistency across the four groups of all immigrants, all natives, all Hispanics, and all non-Hispanics (Figure 1).  The last two combine those who are foreign-born and native-born.   Those four groups all have almost exactly the same opinion on whether America is better than most other countries.

Figure 1: America Is a Better Country than Most Other Countries

 

Source: General Social Survey.

The second question is: “How much do you agree or disagree that strong patriotic feelings in America are needed for America to remain united?”  This question judges whether immigrants and Americans even care about patriotism anymore, a concern for those concerned about patriotic assimilation.  The responses between immigrants and natives do vary in this question (Figure 2).  Virtually all of the difference is between whether they “strongly agree” or just “agree” (Figure 3).  Immigrants and Hispanics are about as likely to “strongly disagree” or “disagree” with the statement.   

Figure 2: Patriotic Feelings Are Needed for America to Remain United

 

Source: General Social Survey.

Figure 3: Patriotic Feelings Are Needed for America to Remain United, Simplified

 

Source: General Social Survey.

The third question is, “How much do you agree or disagree that strong patriotic feelings in America strengthen America’s place in the world?”  This is a natural follow-up question that seeks to understand how the respondents view the utility of patriotism.  The responses show that immigrants and Hispanics are less likely to “strongly agree” but more likely to “agree” with the statement compared to natives and non-Hispanics (Figure 4).  The difference disappears entirely when the responses are shrunk to just “agree,” “neither,” or “disagree” (Figure 5).   

Figure 4: Strong Patriotic Feelings Strengthen America’s Place in the World

 

Source: General Social Survey.

Figure 5: Strong Patriotic Feelings Strengthen America’s Place in the World, Simplified

 

Source: General Social Survey.

The last two questions concern the potential downsides of patriotism.  If immigrants or Hispanics are more likely to see the costs of patriotism then they might be less willing to be patriotic either now or in the future.  The next question asks whether the respondents agree that patriotism leads to intolerance amongst Americans.  The responses are virtually identical among all of the groups surveyed (Figure 6).  Immigrants and Hispanics see about as much of a downside to patriotism as natives and non-Hispanics do. 

Figure 6: Patriotism Leads to Intolerance

 

Source: General Social Survey.

The last question is the most personal.  It asks whether respondents agree that patriotism leads to negative feelings about immigrants.  Immigrants and Hispanics either do not connect opinions that are anti-Hispanics or anti-immigration to patriotism, do not believe such a connection actually exists, or they do not care as they appear to have the exact same opinions as the rest of Americans on that issue (Figure 7).

Figure 7: Patriotism Leads to Negative Feelings about Immigrants

 

Source: General Social Survey.

The number of Hispanic respondents is small in every question so their responses should be taken with a grain of salt.  Furthermore, controls for age, education level, and geography would help to create a complete picture of patriotic feelings but the number of respondents in this portion of the General Social Survey limits that type of analysis.  Based on the data here, immigrants and Hispanics look about as patriotic as other Americans.   

On Sunday Anderson Cooper at CBS “60 Minutes” covered one of our favorite topics: the way lawyers and clients sue retail businesses by the dozens or hundreds over defects in ADA accessibility compliance and then cash in the complaints for quick settlements. Actually entering the business is not always necessary: it can be enough to drive around the parking lot spotting technical violations, in what is known as a “drive-by lawsuit.”

South Florida store owner Mike Zayed says before the complaint arrived “no disabled customer had ever complained about the ramp, the sign, or the parking space.” Zayed “doesn’t think the person who sued him was a real customer because the man claimed he encountered barriers inside the store that didn’t exist.” And now we’re beginning to see “Google lawsuits” in which the complainant consults online aerial maps to discover, for example, which motel owners haven’t yet installed the pool lifts that federal law recently made obligatory. The same attorney using the same client sued more than 60 defendants in 60 days over lack of pool lifts. “At last count, that attorney has sued nearly 600 businesses in just the last two years, many for not having pool lifts.” [Dec. 4 segment and script; full show here (segment begins 32:47).

[adapted from Overlawyered]

Over at Cato’s Police Misconduct web site, we have selected the worst case for the month of November: The Albuquerque Police Department, (APD) which is now under investigation, once again, for misconduct.

Here’s the background.  A few years ago, after numerous complaints from community leaders, the Department of Justice (DOJ) launched an investigation of the APD.  In April 2014, the DOJ announced its finding that there was indeed a pattern of excessive force by officers with the APD.  Police officials promised to change and improve.

Shortly thereafter, an APD officer shot and killed 19 year old Mary Hawkes.  It looks like Hawkes stole a car and the police were trying to catch her.  The police said she was a threat and so deadly force was necessary.  Hawkes’ family sued the city for excessive force.  Prior to trial, lawyers asked to see any police body camera footage from the incident.

Now we come to the latest news reports of APD misconduct.  Reynaldo Chavez was an employee of the City of Albuquerque and his job was handling records requests.  Chavez says he was aware that the police department had a peculiar policy regarding police body camera footage.  When the footage helped the police, it was released to the public.  When the footage hurt the police, such as showing excessive force, the footage was altered or destroyed.  In other words, the APD had a policy of tampering with evidence, which is a crime.

Chavez reportedly turned over incriminating body camera footage to the lawyers representing the Hawkes family.  Chavez then lost his job and he is now fighting to get his job back because he says he was punished for doing what he was legally supposed to do.

The APD has denied any wrongdoing, but the state attorney general has seen enough to launch yet another investigation into APD practices.

Last week and this morning the results of two major international exams came out: the Trends in International Mathematics and Science Study (TIMSS) and the Program in International Student Assessment (PISA), respectively. Together, they offer a mixed bag of overall mediocre news for the United States.

On TIMSS—an exam that tends to use “traditional” questions such as directly multiplying two numbers—American students saw 4th grade math scores dip a bit between 2011 and 2015, 8th grade math scores rise a statistically significant amount, and 4th and 8th grade science scores rise slightly. We also placed pretty high compared to other countries, though we finished behind Kazakhstan on all tests. On the whole, that’s decent news (Kazakhstan notwithstanding).

PISA would probably be best characterized the opposite way: bad news. Scores on the exam—which is more focused on solving “real world” problems, akin to multi-step word problems, and is only for 15-year-olds—were all down.  Science, math, and reading, as you can see below, all dropped. And our placement among other participating countries? Well below average for advanced countries in math, slightly above in science and reading.

Taking PISA and TIMSS together, the news isn’t great, especially considering that we spend more on K-12 education than almost any other country in the world.

That said, these scores only tell us so much, and it is impossible to definitively place blame or credit for them on any particular policy: school choice, Common Core, bilingual education, etc. It will be interesting to see, though, how groups like the Collaborative for Student Success will handle PISA. The Collaborative recently argued that adopting “high standards”—read: the Common Core—is clearly working because state test scores have gone up in many Core states. But it is quite possible that scores in Core states have risen largely because those states have adjusted to the Core, not because students are better educated. The target may have moved to the left, or even down, but scores will lag until sights are adjusted. Tests like PISA can serve as something of a check against using one exam to proclaim policy success.

Speaking of poorly grounded proclamations, the darling of progressive educators, Finland, continues to sink after its heady days atop the rankings about a decade ago. Its PISA science, math, and reading scores have all dropped since the early-to-mid 2000s. Meanwhile, the Finns ranked below the U.S. in 4th grade math on the most recent TIMSS, but above us in 4th grade science.

How about another country with somewhat mythical status: China. In the last two PISA iterations only students in elite Shanghai participated, and they scored very well. Alas, many commentators spoke as if atypical Shanghai represented all of China. This time around three other provinces participated, and scores plummeted.

What does all this tell us? First, that nothing clearly dramatic has happened in American education over the last few years, at least as reflected in scores on two international tests. That makes it especially hard to declare any particular policy proven good or bad, though the temptation to seize on test scores and make sweeping declarations is powerful. The scores also furnish a highly cautionary tale about picking the top-placing, country du jour—looking at you now, Kazakhstan!—and obsessing over what it has done and how we can do the same thing. It may not be so magical after all.

These tests tell us something. But what it is—and is not—can be tough to figure out. All we can say with some certainty is that the latest international exams, taken together, suggest mediocre American performance, especially for the money we spend.

President-elect Donald Trump has claimed victory in his effort to preserve employment for Carrier workers in Indiana.  Assisted by $7 million in tax incentives provided by the State of Indiana, Mr. Trump persuaded the company not to move 800 furnace manufacturing jobs to Monterrey, Mexico.  This works out to a taxpayer-funded subsidy of $8750 per job. 

Another 1300 Carrier jobs still will move to Mexico between now and 2019.  Published reports have indicated that the company anticipated cost savings of some $65 million per year from moving all 2100 positions to Monterrey.  So Carrier is taking at least a partial step toward maintaining its global competiveness, while at least partially appeasing the incoming president.

I wrote an op-ed in Forbes on August 22, 2016, in which I argued that Carrier no doubt had quite good business reasons for planning the move to Mexico.  Carrier’s February 2016 announcement of the decision said that it was due to “ongoing cost and pricing pressures driven, in part, by new regulatory requirements.”  

Carrier has been manufacturing products in Monterrey for some years.  The company certainly has a clear understanding of why moving production of some air conditioning units makes business sense.  It would not be wise for them to explain their reasoning in public because such proprietary knowledge would be of great interest to their competitors. 

Some commentators have opined that the decision was driven largely by lower labor costs.  Carrier’s expenses for employee salary and benefits average about $34 per hour in Indiana, while those costs in Mexico are only around $6 per hour.  It’s possible the move was prompted primarily by labor cost savings, although my analysis of data compiled by The Conference Board suggests otherwise.  The value generated by an hour worked in the United States has risen by 40 percent over the past 22 years of NAFTA.  In Mexico, the gain has been only 10.5 percent.  Productivity has grown faster in the United States, so the incentive to shift production to Mexico today ought to be weaker than it was 10 or 20 years ago.  (Note:  Those figures apply to the productivity of all workers.  If it was possible to analyze just the manufacturing sector, perhaps the findings would change.)

There is little doubt that Carrier could escape some other costs by moving away from the United States.  As I wrote in August:

 

What other factors could have inspired Carrier’s move?  U.S. businesses frequently are critical of what they see as burdensome regulations imposed by government.  Those range from policies dealing with energy and the environment, to rules pertaining to labor relations and taxation.  One often overlooked issue is the burden placed on manufacturing firms by antidumping and countervailing duty (AD/CVD) measures.  AD/CVD duties are imposed to provide protection for U.S. companies that face import competition.  Many industries that seek AD/CVD protection are in the business of making basic products that are used as inputs by downstream manufacturers.  The simple reality of the marketplace is that protected firms tend to receive higher prices.  Those higher prices translate directly into higher costs for value-added manufacturers that use the protected product as an input. 

Steel provides a great example. The United States has imposed roughly 150 AD/CVD orders to limit imports of steel from numerous countries.  The extra duties help steel mills to compete, but they also reduce the competitiveness of steel-consuming firms that must pay those extra costs.  AD/CVD measures cause a few steel producers to be winners, while a whole lot of other firms end up as losers. 

Since steel is required to make air conditioners, there is little doubt that Carrier is one of the losers from AD/CVD policies.  Perhaps more important than steel, AD/CVD measures also apply to imports of copper tubing and aluminum extrusions, both of which are used to accomplish the essential heat-exchange function.  Carrier can avoid those policy-imposed costs simply by moving to Mexico.

It may be helpful to look at steel trade remedies in a broader perspective.  Downstream manufacturers that use steel as an input are a much larger factor in the U.S. economy than are steel producers.  Department of Commerce statistics indicate that “primary metal manufacturing,” which includes steel, copper, aluminum, magnesium, etc., added about $60 billion of value to the economy in 2014.  Downstream manufacturers that utilize steel as an input generate value added of $990 billion, more than 16 times larger.  Employment by primary metal manufacturers was 400,000, while downstream manufacturers employed 6.5 million, also 16 times greater.  (Employment by U.S. steel mills is somewhere around 100,000.)

Steel import restrictions have made the United States a high-priced island in an ocean of low-priced steel.  U.S. prices are high enough to give imported manufactured goods an advantage when competing in the U.S. market against domestic firms.  How many of the 6.5 million workers employed by value-added manufacturers are vulnerable to import competition from foreign companies that have access to world-price steel?  It’s not clear.  What is clear is that if only 2 percent of those workers (130,000 people) lose their jobs, more people would be unemployed due to steel import duties than are now employed in the entire U.S. steel mill workforce.

Will the new administration be interested in reforming AD/CVD laws so that an action intended to help one industry does not inadvertently damage another?  If so, it should pursue legislation that would balance the potential help provided by such measures against the potential harm they might do.  Trade remedy measures should be prevented from going into place whenever quantitative analysis shows that they would have an overall negative effect on the U.S. economy.  Although this approach makes great sense, it may not be welcomed by members of the incoming administration’s transition team, some of whom have connections to the steel industry.

One unfortunate aspect of the president-elect’s foray into Carrier’s business decisions is that he missed the opportunity to focus the public’s attention on the need to improve the U.S. business climate.  Government policies play important roles in determining whether firms can remain competitive.  Non-competitive companies aren’t able to thrive, grow, or hire more workers.  The incoming administration would do well to focus on reforming poorly conceived U.S. laws and regulations that make it unnecessarily difficult to conduct business in this country.

The Washington Post has a blockbuster story today documenting vast overhead costs in the Department of Defense (DoD). Experts often lambast the DoD’s excessive bureaucracy, and I have charted the growth in the number of civilian DoD workers.

But the Post reveals remarkable new measures of the department’s bloat, based on a leaked study it obtained:

The Pentagon has buried an internal study that exposed $125 billion in administrative waste in its business operations amid fears Congress would use the findings as an excuse to slash the defense budget, according to interviews and confidential memos obtained by The Washington Post.

Pentagon leaders had requested the study to help make their enormous back-office bureaucracy more efficient and reinvest any savings in combat power. But after the project documented far more wasteful spending than expected, senior defense officials moved swiftly to kill it by discrediting and suppressing the results.

The study was produced last year by the Defense Business Board, a federal advisory panel of corporate executives, and consultants from McKinsey and Company. Based on reams of personnel and cost data, their report revealed for the first time that the Pentagon was spending almost a quarter of its $580 billion budget on overhead and core business operations such as accounting, human resources, logistics and property management.

The data showed that the Defense Department was paying a staggering number of people — 1,014,000 contractors, civilians and uniformed personnel — to fill back-office jobs far from the front lines. That workforce supports 1.3 million troops on active duty, the fewest since 1940.

The DoD’s effort to bury the study is appalling, but Pentagon waste is a complex problem. You can’t just chop $125 billion worth of “back office” jobs overnight. However, it is also true that the 1,014,000 such jobs—in logistics, procurement, and other activities—are the exact types of functions that have become vastly more efficient in the private sector.

One of the core problems in the DoD and other federal departments is the excessive layering that has accumulated over time. American businesses have become much leaner in recent decades, with flatter management structures. But the federal workforce has become top-heavy with excessive layers of management, and the DoD is no exception.

Former Defense Secretary Robert Gates complained that the Pentagon is a “gargantuan, labyrinthine bureaucracy” with 30 layers of staff under the secretary. And John Lehman explained: “With so many layers and offices needed to concur on every decision, it now takes an average of 22½ years from the start of a weapons program to first deployment, instead of the four years it took to deploy the Minuteman ICBM and Polaris submarine missile system in the Cold War era.”

The Post says that the DoD’s “cost-cutting study could find a receptive audience with President-elect Donald Trump.” The real estate developer may be particularly struck by the size of one overhead activity: 192,000 workers just to handle the department’s “real property management.”

For more on the root causes of federal bureaucratic inefficiency, see this essay.    

In 2014, the Pentagon commissioned a study to identify wasteful practices and improve efficiency, but when the researchers found too much waste – approximately $125 billion worth – the officials who asked for the report tried to bury the findings. As reported in the Washinton Post, Pentagon officials worried that “Congress would use the findings as an excuse to slash the defense budget.”

The Pentagon imposed secrecy restrictions on the data making up the study, which ensured no one could replicate the findings. A 77-page summary report that had been made public was removed from a Pentagon website.

Particularly telling are a series of comments by Deputy Defense Secretary Robert O. Work, the Pentagon’s second-highest-ranking official, and Frank Kendall III, the Pentagon’s chief weapons-buyer. 

“At first,” the Post explains: 

Work publicly touted the efficiency drive as a top priority and boasted about his idea to recruit corporate experts to lead the way.

After the board finished its analysis, however, Work changed his position. In an interview with The Post, he did not dispute the board’s findings about the size or scope of the bureaucracy. But he dismissed the $125 billion savings proposal as “unrealistic” and said the business executives had failed to grasp basic obstacles to restructuring the public sector.

Kendall, meanwhile, wasn’t buying what the researchers were selling almost from the very beginning. He “challenged the board’s data and strenuously objected to the conclusion that his offices were overstaffed.”

Mostly, however, he worried about what it would mean for extracting more money from Congress for military spending.

Kendall knew that lawmakers might view the study as credible. Alarmed, he said, he went to Work and warned that the findings could “be used as a weapon” against the Pentagon.

“If the impression that’s created is that we’ve got a bunch of money lying around and we’re being lazy and we’re not doing anything to save money, then it’s harder to justify getting budgets that we need,” Kendall said.

President-elect Donald Trump largely bought into the notion that the U.S. military has been gutted by the supposedly devastating effects of the bipartisan Budget Control Act. This is a myth, as my colleague Benjamin Friedman explained at a Capitol Hill briefing last month. The U.S. military remains eminently capable of defending the United States and U.S. vital interests. The greatest threat to American security is U.S. officials’ collective inability to prioritize, and their tendency to be drawn into others’ disputes.

Still, Mr. Trump has pledged to rebuild the military, and dismissed critics who scoffed at his claim that he could find the money that he needs without raising taxes or cutting other popular domestic programs. The key, he said, was  “eliminating government waste and budget gimmicks.”

He should thank the Pentagon for helping to identify some of that waste, and the Washington Post’s Craig Whitlock and Bob Woodward for making the findings public. Actually extracting the savings, including by getting Congress to stop treating the Pentagon as a particularly inefficient jobs program, is likely to prove tougher.

 

In a new report for the Heritage Foundation, Michael Sargent summarizes what we need on infrastructure from the incoming Trump administration. I agree with all of Michael’s points, which I paraphrase here:

Ignore rhetoric about crumbling highways and falling-down bridges. America’s infrastructure needs improvements, but the scare stories are off-base.

  • Reduce government red tape to speed investment.
  • Repeal harmful labor rules, which raise the costs of infrastructure construction.
  • Embrace privatization.
  • Approve energy projects blocked by the Obama administration.
  • Repeal the net neutrality regulations on the Internet.
  • Limit regulations on emerging technologies.
  • Cut the federal highway gas tax, end spending on urban transit, and reduce the federal role in highways.
  • Privatize air traffic control, eliminate subsidies for airports, and remove barriers for the states to restructure airports as self-funded businesses.
  • Do not pass a federal infrastructure spending stimulus.
  • Do not use repatriated corporate earnings for a government stimulus. If such revenues arise from corporate tax reform, use them to reduce the corporate tax rate.
  • Do not create new tax loopholes or subsidies for infrastructure.
  • Do not create a federal infrastructure bank. That would lead to more bureaucracy, subsidies, and central control.

I would add to Michael’s points that I share concerns expressed by Trump and others that America should have world-class infrastructure. But the way to get it is not through subsidies, regulations, and centralization. Instead, the incoming administration should focus on market-based reforms to privatize facilities, reduce subsidies and regulations, and increase competition.

For more information on infrastructure reforms, see here, here, here, and here.

According to Wall Street Journal writer Laura Saunders, future Treasury Secretary Mnuchin must be wrong because Tax Policy Center experts say so. Actually, Mr. Mnuchin may be partly right, but the experts are almost entirely wrong.

“Steven Mnuchin, the likely next Treasury secretary, this week said rich U.S. taxpayers won’t get “an absolute tax cut” under President-elect Donald Trump,” writes Ms. Saunders; “But that is not what Mr. Trump says in his taxation plan. In fact, under his approach the wealthy would receive an average tax cut of about $215,000 per household, experts say.” 

“What Mr. Trump says” is not at all the same as what some “experts say.” Expert or not, Tax Policy Center (TPC) estimates of who pays what under different tax rates are distressingly capricious.

Mr. Mnuchin appeared to be talking only about individual income taxes. That is why he suggested that lower marginal tax rates for high earners “will be offset by less deductions.” So long as we focus only on non-business taxes (including high salaries and dividends), Mr. Mnuchin was probably right. Indeed, according to Ms. Saunders’ experts, the lost revenue from lower tax rates over 10 years totals $1.49 trillion plus $145 billion from eliminating the 3.8% Obamacare surtax.  Yet those individual tax cuts are more than offset by $2.6 trillion in added revenue from Trump’s cap on itemized deductions and the loss of personal exemptions. More than doubling the standard deduction loses considerable revenue, but not from high-income taxpayers.

Ms. Saunders mentions only the loss of itemized deductions—not exemptions—and concludes “these limits don’t fully offset the effects of income- and estate-tax cuts for high earners proposed by Mr. Trump, according to experts.” 

Repealing the estate tax loses very little revenue, but it is arbitrary for the TPC to assign that lost revenue to people with high incomes because the estate tax is borne by heirs and charities—not dead people.

With estate tax repeal included, only 22% of the Trump tax cut goes to households (including investors) according to the TPC, with 44% of Trump tax cuts going to corporate earnings (and the rest to unincorporated business). 

In the estimates Ms. Saunders presents as facts, her experts claim to estimate how the corporate income tax is distributed among households, even though they know they have no proof of the actual incidence of the corporate tax. If the corporate tax reduces capital formation, for example, then the relative scarcity of capital would raise pretax returns to capitalists while reducing productivity and real wages.  

Those squeamish about watching sausage being made should not look closely at how distribution estimates are concocted.  

A suspicious hint (from the Wall Street Journal graph) is that the Top 1% are defined as those earning more than $699,000 in 2017. By contrast, the Top 1% in the famed Piketty and Saez estimates started at $442,900 in 2015. The $699,000 figure is 24% larger than TPCs estimate of Adjusted Gross Income needed in 2017 to be among the Top 1%. That huge difference is because the TPC has lately opted to compare taxes with a big stew called Expanded Cash Income (ECI)

The main reason TPC estimates of “Expanded” Top 1% income are 24% larger than AGI is that the TPC assumes that 60% of the corporate tax is borne by owners of capital. Before 2012 they assumed 100% was borne by capital. It’s all quite hypothetical and arbitrary:

“We define ECI to be adjusted gross income (AGI) plus: above-the-line adjustments (e.g., IRA deductions, student loan interest, self-employed health insurance deduction, etc.), employer paid health insurance and other nontaxable fringe benefits, employee and employer contributions to tax deferred retirement savings plans, tax-exempt interest, nontaxable Social Security benefits, nontaxable pension and retirement income, accruals within defined benefit pension plans, inside buildup within defined contribution retirement accounts, cash and cash-like (e.g., SNAP) transfer income, employer’s share of payroll taxes, and imputed corporate income tax liability” [emphasis added].

It takes a lot of “imputation” (heroic guesswork) to assemble this plump sausage. Nobody has credible data on the ever-changing “inside buildup” within private IRA and 401(k) plans, or how all that unseen wealth is distributed among constantly changing annual income groups.  

Nobody knows how to “impute corporate income tax liability” and the related corporate income to income groups either.

Since TPC claims 60% or 100% of the corporate tax is born by domestic (not foreign) owners of capital, this assumption invites them to add most corporate profits to the pretax incomes of the Top 1%. To do that, TPC (and CBO) examine shares of capital income reported on income tax forms to infer that most capital must be owned by the Top 1%. Emmanuel Saez and Gabriel Zucman made a similar mistake when basing wealth estimates on individual income tax returns.

The trouble is that most middle-income Americans keep trillions of dollars in tax-free retirement accounts, which means taxable investment income reported on their tax returns tell us absolutely nothing about what assets they own. As Tax Foundation economist Alan Cole noted, “Much capital income—especially capital income in tax-free middle-class retirement accounts—goes uncounted in income data, heavily distorting the measurement and making people appear poorer than they are. Thomas Piketty’s income inequality data leaves out $19 trillion of pension assets, which are yet to be attributed to any individual.” 

Another big problem is that the expensing of business investment and deep cuts in business tax rates are sure to have huge dynamic effects on investment and economic growth, yet “by convention, TPC distributes only the static impacts of tax changes.” An OECD study finds “lowering statutory corporate tax rates can lead to particularly large productivity gains in firms that are dynamic and profitable, i.e. those that can make the largest contribution to GDP growth.” It makes no sense to talk about who benefits from lower tax rates without including workers who benefit from “large productivity gains.”

Even the static distribution is another arbitrary guess. “Although firms pay the corporate income tax, the economic incidence of the tax falls on individuals. TPC’s tax model therefore distributes the burden of the tax to individuals. The incidence of the corporate tax, however, is an unsettled theoretical issue. The tax could be borne by the owners of corporate stock, or passed on in part to labor in the form of lower real wages, to consumers in the form of higher prices, or to the owners of some or all capital in the form of lower real rates of return.”  

The TPC static estimate of the Trump tax cut is twice as large for corporations as it is for individuals, yet their allocation of the corporate tax is (1) completely static “by convention,” and (2) completely erroneous in using shares of taxable capital income as a proxy for wealth, and (3) completely arbitrary in assuming corporate taxes are mostly born by capital. For such reasons, the TPC distribution estimates cannot be credibly cited to “prove” Trump or House Republican tax plans are too generous to those who pay the most taxes or too stingy to those who pay the least. 

The truth is these “experts” simply do not know who will benefit most from a low corporate rate. What they do know, or should, is that a low corporate tax cut will greatly improve the growth of jobs and real wages for many ordinary Americans. Unfortunately, their static methodology stubbornly refuses to take that into account.

 

 

 

 

 

 

 

 

Last week I wrote about the unintended consequences of the proposed DC family leave benefit, which is to be financed by a payroll tax on all employers in the District. 

My objections were that the tax increases the cost of operating in the District and that this will likely push some businesses contemplating opening in DC to Maryland or Virginia instead. The other objection I had was that it specified a benefit to be provided that not all companies may want to provide. In an ideal world companies would pay wages to workers and then allow workers to get their own insurance, pensions, transportation, food, and the like on their own and not have these things provided by their workplace. Today, the tax breaks afforded most fringe benefits behoove companies to give many of these things to their workers in lieu of wages, and that’s not efficient. 

I received a surprising amount of feedback from my article, most of which was positive—a first for me—and some readers suggested that I missed a couple issues relevant to the benefit. The first is that while tying the tax to payroll may make sense as far as this benefit is concerned, it also tends to make it more difficult for people to understand the true cost involved. 

A tax that’s .62% of payroll may not seem like a lot, but for a restaurant that has $1 million of revenue that translates to a tax of $2,100 a year, assuming that payroll is one-third of total revenue. For businesses other than restaurants, where payroll typically equals two-thirds of revenue, double that number. That amounts to 2.2% instead of 4.4% of profits, on top of the 8.95% DC corporate profits tax on revenue over $1 million. If they expand the tax to cover medical leave as well—which is on the table—that would add another thousand dollars or so to a restaurant’s cost of doing business. In fact, a better way to see this is as a 50% increase on the tax on business profits, except that this doesn’t vary much with the business cycle.

The other point a restaurant owner suggested to me is that their workers are typically young and part-time, and often have another job. In short, they see this as a benefit few of their twenty-something employees would claim, yet they still would be paying for it. Fortune 500 companies may find the tax easy to swallow, but not so for businesses like my local kebab house that are on the verge of hanging on. This tax, combined with a sharply higher minimum wage and other government mandates—such as the city’s inexplicable refusal to charge for-profit food trucks to use city-owned property for their business, increasing restaurants’ competition further—are hurting their bottom lines, and life is getting more precarious for businesses on the margins. 

Businesses that want to offer this benefit can already do so. A new company called Freya Solutions allows them to purchase insurance to cover such a benefit for their employees, and the company has the ability to tweak the replacement rate and the length of the benefit so as to maximize the bang for the buck the business gets from the service in terms of employee recruitment and retention. 

David Brunari wrote today in the Washington Business Journal that this tax will generate $420 million a year—or about how much the corporate income tax currently raises for the District. He also noted that a majority of the benefit would go to people who live outside of Washington DC.

Governments interfere too much in compensation decisions as it is. Mandating an entirely new benefit exacerbates an already-difficult problem for employers in the District

Over the course of the presidential campaign, and even more intensely after the election, Donald Trump has made it very clear that he does not like it when U.S. companies invest abroad rather than here at home (except for his companies, of course). His response has been a mixture of pushing state government tax incentives to keep them at home and general haranguing of the companies (as he did with Carrier), as well as threats of tariffs to convince companies not to leave (this sounds like one of those statements that should be taken “seriously but not literally,” but we’ll see).

With regard to the general policy issues here, my colleague Dan Ikenson has been taking on misguided concerns about outsourcing for a while now.

In terms of the legality of a company-specific tariff, we would need to see a specific proposal—is this going to be done via statute? by Presidential proclamation?—but there would certainly be some serious domestic and international legal hurdles if Trump actually tries to pursue this. I’m not sure what Trump’s economic policies will do for the economy as a whole, but the field of international trade law will be booming.

But there’s also a flip side to the issue of foreign investment that I want to raise here: What does Trump think about foreign companies who want to invest in the United States? This question may seem like a no-brainer: Who would object to new investment? But in recent years, the Obama administration has looked skeptically at some of the investment coming from China, on purported national security grounds. Here’s the latest, from the Wall Street Journal:

President Barack Obama on Friday took the rare step of forbidding a foreign company from buying a firm with U.S. assets, telling a Chinese investment fund that it cannot complete a deal for German technology company Aixtron SE.

Mr. Obama’s move, only his second outright ban on a foreign acquisition, shows the increasing suspicion the U.S. harbors toward Chinese acquisitions of certain U.S. firms, even before the arrival of President-elect Donald Trump, who made criticism of Beijing a cornerstone of his campaign.

In a statement released on Friday, the Treasury Department said Mr. Obama had issued an order barring Fujian Grand Chip Investment Fund LP, part-owned by the Chinese government, from buying Aixtron. The ban follows a recommendation from the Committee on Foreign Investment in the U.S., or CFIUS, which confidentially reviews foreign acquisitions solely on national-security grounds.

U.S. officials have also intervened in Chinese deals involving real estate near strategic military installations. In 2012, Mr. Obama barred Chinese-owned Ralls Corp. from purchasing wind farms in Oregon near a sensitive military facility, the only other recent example of a president forbidding a deal before Friday.

What are Trump’s views on Chinese foreign investment in the U.S.? The WSJ article notes:  

During the 2016 primary season Mr. Trump appeared to criticize a Chinese bid for a small U.S. stock exchange, but his transition team hasn’t publicly spelled out its attitude toward foreign investment.

Still, Mr. Trump, who has extensive foreign investments himself, has indicated he would use all available levers against harmful trade practices from China and other countries. CFIUS under Mr. Trump could also expand the definition of national security to include food security and oppose deals from countries that don’t allow comparable U.S. investments, according to a memo obtained by CNN.

In the background of this issue is a bilateral investment treaty that has been under negotiation between the United States and China for many years, and that until recently some people were suggesting could be completed this year. The basic idea is that, through this treaty, China would promise to open up its market to foreign investment in currently closed sectors, and also that there would be an international dispute mechanism under which foreign investors could sue the host country government if certain rights were violated.

Trade agreements have gotten all the attention recently, both what does Trump think of investment treaties? They have been part of U.S. international economic policy since the late 1970s/early 1980s (traditionally, investment obligations were part of standalone treaties, but now they are often included as chapters in free trade agreements), but it is easy to imagine that Trump would oppose them. He may not want to make it easier for U.S. companies (again, other than his) to invest abroad, and he would not want Chinese companies suing the U.S. government in an international court. Will Trump therefore put an end to investment treaties and investment chapters of trade agreements?

Beyond these international investment rules, what does Trump think of Chinese investment in the US more generally? Will he use national security as a justification for rejecting it, as the Obama administration has done? 

As with all things Trump, there’s a lot we don’t know, and we will have to wait and see. But hopefully he will be less hostile to foreign investment in the U.S. than he has been to U.S. investment abroad.

You Ought to Have a Look is a regular feature from the Center for the Study of Science. While this section will feature all of the areas of interest that we are emphasizing, the prominence of the climate issue is driving a tremendous amount of web traffic. Here we post a few of the best in recent days, along with our color commentary.

While “climate fretting” has become a pastime for some—even more so now with President-elect Trump’s plans to disassemble much of President Obama’s “I’ve Got a Pen and I’ve Got a Phone”-based Climate Action Plan—climate reality tells a much different story.

For example, a new analysis by Manhattan Institute’s (and YOTHAL favorite) Oren Cass looks into the comparative costs of climate changevs. climate action. His report, “Climate Costs in Context” is concise and to-the-point, and finds that while climate change will impart an economic cost, it is manageable and small in comparison to the price of actively trying to mitigate it. Here’s Oren’s abstract:

There is a consensus among climate scientists that human activity is contributing to climate change. However, claims that rising temperatures pose an existential threat to the human race or modern civilization are not well supported by climate science or economics; to the contrary, they are every bit as far from the mainstream as claims that climate change is not occurring or that it will be beneficial. Analyses consistently show that the costs of climate change are real but manageable. For instance, the prosperity that the world might achieve in 2100 without climate change may instead be delayed until 2102. [emphasis added]

In other words, the economic impacts of climate change aren’t something worth fretting over.

Next up is a contribution (at Judith Curry’s blog, Climate Etc.) from Nic Lewis showing more evidence that the temperature response in most climate models is too sensitive to changes in atmospheric carbon dioxide concentrations. Nic reviews a new paper that suggests the paltry increase in global average temperature in recent decades may continue for another decade or more from forces of natural variability alone, and then adds his own analysis showing that an alternative view supported by the paper is that the transitive climate sensitivity (TCS; how much the global average surface temperature rises at the time of a doubling of the atmospheric carbon dioxide concentration) is rather low. Instead of the climate model average TCS of around 1.8°C, Nic finds observational support for a TCS of about 1.35°C. From this information, he concludes:

Based on these estimates, the average TCR [transient climate response] of [current climate] models likely exceeds that in the real world by about 30%…the future warming projected by [these] models is on average 65% or more above that projected by simple but physically-consistent models with a TCR of ~1.35 K.

Rather than fret about high-end climate change scenarios, folks ought embrace lukewarming as the way of the future.

And finally this week, Ron Bailey produces a dose of reality in his latest article for Reason.comEnergy Poverty Is Much Worse for the Poor Than Climate Change.” In his piece, Ron reviews a recent report, “Energy for Human Development” from The Breakthrough Institute that argues for prioritizing energy access over climate concerns. According to Ron:

[T]he Breakthrough writers call for prioritizing energy development for productive, large-scale economic enterprises. Copious and reliable energy will accelerate the creation and spread of higher-productivity factories and businesses, which then will generate the opportunities for a better life; that, in turn, will draw poor subsistence farmers into cities. They further note that energy access and electricity access are not the same thing. In fact, in 2012 electricity accounted for only about 18 percent of the energy consumed globally. “Efforts to address energy poverty must address needs for transportation fuels and infrastructure, and for fertilizer and mechanization of agriculture,” they argue.

But what about climate change? Current renewable sources of energy are not technologically capable of lifting hundreds of millions of people out of energy poverty. Consequently, the Breakthrough writers see “no practical path to universal access to modern levels of energy consumption” that keeps the projected increase in global average temperature below the Paris Agreement on climate change goal of 2 degrees Celsius above the pre-industrial level. This implies that atmospheric concentrations of carbon dioxide will exceed 450 parts per million.

Ron continues:

They correctly point out that forcing poor people to forego economic development in order to prevent climate change is a “morally dubious proposition.” They additionally observe that the wealth and technology produced by economic growth increases resilience to climatic extremes and other natural disasters. When bad weather encounters poverty, disaster ensues.

The overarching conclusion from all of the above is one that we have championed since the start—what’s really worth fretting about is climate policy (not climate change). To this end, the Trump Administration ought to ease such fretting.

As the Venezuelan bolivar collapses, the hype about Venezuela’s alleged hyperinflation becomes more intense. Most of the commentary is literally fantastic, suggesting that the authors are unfamiliar with the subject of hyperinflation and the arithmetic of inflation.

For example, DolarToday.com – which publishes reliable black-market exchange rate data, as well as the Johns Hopkins-Cato Institute annual inflation estimates – claims that the bolivar has depreciated by over 100 percent this month. This is wrong because DolarToday’s arithmetic is wrong. DolarToday’s mistake represents a common error. It fails to transform the bolivar-U.S. dollar exchange rate into dollars and cents. At the start of the month, the VEF/USD black market rate was 1,501.17, and as of November 29th, it was 3,744.52. The correct arithmetic to calculate the deprecation of the bolivar between those two dates is ((1/3,744.52) - (1/1,501.17)) / (1/1,501.17) = 59.9 percent  depreciation. 

The accompanying charts illustrate the correct arithmetic and the linkage between black market exchange rates and annual inflation rates. For Venezuela’s inflation to hit the International Monetary Fund’s (IMF) 720 percent inflation forecast for 2016, the bolivar would need to depreciate by 44 percent from today’s rate of 3,744 to 6,735 VEF/USD. Furthermore, for Venezuela to hit hyperinflation, which is an annual inflation rate of 12,875 percent, the bolivar would need to collapse by 97 percent from today’s rate to 106,565 VEF/USD. 

During the past year, the Chinese yuan (CNY) has shed a bit more than 7 percent of its value against the greenback. That’s only one aspect of the CNY’s weakness. Another concerns the quality of the CNY.

As Jerry Jordan pointed out recently at the Cato Institute’s 34th Annual Monetary Conference, a central bank is a balance sheet. Among other things, the People’s Bank of China’s balance sheet contains information that indicates the quality of the CNY.

While the monetary liabilities (read: monetary base) of the bank have remained rather constant since late 2014, their composition has changed. The assets, which are the counterparts to the monetary liabilities, have changed dramatically. The net foreign assets have fallen and been replaced by net domestic assets. In consequence, the quality of the CNY has deteriorated. In this light, the recent tightening of China’s capital controls on outbound foreign investment is nothing more than an attempt to preserve foreign exchange and reverse the deterioration in the CNY’s quality.  

Over the past year, we have observed a depreciation of the CNY against the greenback, a reduction in the CNY’s quality, and the imposition of even more restrictive capital controls – an embarrassing state of affairs for a country that was beating its breast just two short months ago about joining the International Monetary Fund’s elite Special Drawing Rights (SDR) currency basket.

President-elect Donald Trump has promised large increases in infrastructure investment. He has not proposed a detailed plan yet, but $1 trillion in new investment is being discussed as a target.

Actually, Trump has already made a specific proposal that would increase investment by far more than $1 trillion: his tax cut plan. His proposed corporate tax rate cut from 35 percent to 15 percent would increase the net returns to a vast range of infrastructure, including pipelines, broadband, refineries, power stations, factories, cell towers, and other hard assets. With higher net returns, there would be more capital investment across many industries.

How much more? The Tax Foundation estimated that the overall Trump tax cut would expand the U.S. capital stock by 20 percent above what it would otherwise be within 10 years. TF economists tell me that private capital stock is about 189 percent of gross domestic product under the baseline, which would be about $35 trillion this year and more than $50 trillion in 2026. If the Trump tax cut was enacted and the capital stock grew as TF projects, the capital stock would be $10 trillion or more higher than otherwise by 2026.

Other economic models have produced different estimates of the Trump plan’s effects. However, if the tax cut produced anywhere near the benefits projected by TF, then it would amount to a huge multi-trillion-dollar “infrastructure plan.”

Some models show that the Trump plan would not have such large positive effects. They typically hinge on the assumption that “higher budget deficits will crowd out private investment and slow the economy,” as the Wall Street Journal noted. There is disagreement about the size of the crowd-out effect, but the way to avoid it is to match the Trump tax cuts with spending cuts. Both tax cuts and government spending cuts are good for the economy, so such a plan would spur the most growth.

I have focused on private infrastructure here, which is a much larger part of the economy than is government infrastructure. Nonetheless, we need cost-efficient and high-quality government infrastructure as well, and I discuss here how to get it.

For more information on Trump and infrastructure, see here, here, here, and here.

Media and social media have been percolating – mostly with invective – over President-elect Trump’s “deal” to keep Carrier and its 1,000 jobs from moving to Mexico.  I am among the many critics of this ad hoc, interventionist approach to retaining or attracting companies to perform value-added, job-creating activities in the United States.

But there is a broader lesson in all of this, which seems to be getting overlooked: The United States (and the 50 states, individually) is competing with the rest of the world to attract and retain investment in value-added activities – factories, research centers, laboratories, etc. And, in that competition, public policies are on trial.

The revolutions in communications and transportation have made global capital mobile. The proliferation of transnational supply chains and cross-border investment means that businesses – entrepreneurs and other value-creators – have options like never before. Investment and production location decisions are determined by a variety of factors, including: the size of the market, access to transportation networks, wages and skills of the workforce, whether there is healthy respect for the rule of law, stability of the political and economic climates, perceptions of corruption, the magnitude and impact of regulations and taxes, trade policies, immigration policies, energy policies, and whether the general policy environment is conducive to running a successful business.” v:shapes=”Picture_x0020_1”>

The United States has long been the premiere destination for foreign direct investment. FDI in U.S. manufacturing operations in 2015 reached $1.2 trillion – by far, the most FDI in any country’s manufacturing sector (and approximately double the amount in China’s manufacturing sector).  But, whereas the United States accounted for 39 percent of the world’s stock of FDI in 1999, today it accounts for about 21 percent. The United States has, to some extent, lost its relative luster as a place to set up shop.

One reason for this is that the rest of the world has come on line – more countries have achieved greater stability, better education levels, work-force skills, transportation systems, etc. – so there are alternatives for investment that didn’t exist 20 years ago. All of that is good news. But a second reason reflects poorly on the United States. To some extent, foreign and U.S. investment is being chased from U.S. shores because of a relatively declining environment.  In recent years, the regulatory environment has become more restrictive; corporate tax rates in the United States are higher than most other countries (certainly, highest among OECD countries); there has been a prolonged period of regime uncertainty with respect to trade, energy, immigration, and other policies.  Perceptions of the existence of corruption and crony capitalism are on the rise.  And companies are often berated and threatened by policymakers (including presidential candidates) for their choices – to perform some of their operations abroad or to keep their profits off-shore, rather than repatriating them at near confiscatory rates, to give some examples.

Many companies worry about these threats. Sometimes they react by making “political considerations” a more important determinant of their investment/production location decision.  Carrier may have done this, worrying about repercussions.  Certainly, a strong case can be made that General Electric’s decision to bring jobs back from Mexico and China a few years ago, after President Obama made a pitch to U.S. companies to “resource” in the United States, had something to do with expectations of political dividends.

One major takeaway is that political considerations become more important as the size of government increases.  Instead of investing in economic activity in the Rust Belt or the Heartland, companies are incented to invest on K Street because the political investments pay higher returns.  This is among the greatest threats that worry limited government advocates.  

But the main point here is that companies have choices and their decisions to locate in Indiana or Mexico, for example, are influenced by policy.  Carrier is a big consumer of steel sheet and other steel products in its manufacturing operation.  Perhaps the fact that there are numerous and increasing trade restrictions on imported steel has something to do with their original decision to move to Mexico.

Instead of threatening companies with repercussion for outsourcing – hell, they can pick up and leave altogether – or inducing them to stay with tax holidays and other subsidies, U.S. policy in the Trump administration and beyond should be to make sure the United States ticks the most important boxes when companies compare it to other investment location alternatives.

“We are going to appoint ‘Mad Dog’ Mattis as our secretary of defense,” President-elect Donald Trump told a crowd in Cincinnati last night. He added, “They say he’s the closest thing to Gen. George Patton that we have.”

To be successful, James Mattis will also have to be this generation’s George Marshall, and perhaps its Dwight Eisenhower and George Washington, too.

Which, of course, is impossible. The problems that afflict this nation’s foreign policy are too daunting to be repaired by a single man, even one as remarkable as Gen. Mattis. But within the Trump administration he could be a critical voice of caution with respect to the wisdom or folly of the use of force going forward.

Mattis exudes a combination of toughness and thoughtfulness. His voracious appetite for reading is the stuff of legend. The “Warrior Monk” has a deep knowledge of history which could serve him well, if President Trump is inclined to listen to his SecDef. 

Early signs suggest that he will. For example, during the campaign, Trump spoke blithely about bringing back torture. After the election, Mattis apparently convinced him to reconsider

Even before Trump’s announcement of Mattis as SecDef, a number of commentators despaired over the president-elect’s apparent fixation with filling civilian offices with military officers. This included several people who admitted to loving Gen. Mattis. The principle of civilian control, they explained, is more important than any one man. 

I share those concerns. I’m particularly worried that the one common trait among the officers that have caught Trump’s eye is their willingness to challenge their commander-in-chief at the time, Barack Obama. It seems unlikely that Trump will value that same independent spirit when he’s in charge. 

On the other hand, as public trust in a number of institutions has cratered, respect for the military remains high. This is true despite the fact that the public also senses that our wars haven’t served the country’s interests. In other words, Americans are holding accountable the civilians that sent the country to war with dubious rationales, not the men and women in uniform who have answered the call. Up this point, Mattis has been on the receiving end of these orders. Going forward, he would be the one giving them, or at least advising those who do.

In addition, in my experience, men and women who have served in the military are less likely to support military interventions than those who have never worn the uniform. They are especially wary of wars fought for questionable reasons, or where the means don’t align with the ends. Robert Gates commented on this in his memoir, From the Shadows, long before his tenure as Secretary of Defense (H/T Micah Zenko).

There are exceptions, to be sure: John McCain and Tom Cotton, both combat veterans, remain strong advocates of the use of force. Both have called for American no-fly zones over Syria, and Cotton claimed that war with Iran would only take “several days.” I have no idea whether Jim Mattis is more like them, or more like Gens. Zinni, or Shinseki, or a number of other generals who quietly (or not so quietly) questioned the wisdom of invading Iraq in 2002. 

However, within the small circle of foreign policy advisors in any given administration, the president is most likely to hear from those making the case for action – recall Madeleine Albright during Bill Clinton’s administration, or Hillary Clinton during Obama’s first term. That is why it is so important for any administration to have a strong contingent of intervention skeptics, or at least a few people who are willing to ask tough questions.

A brief clip near the tail end of the documentary “American Umpire” (starts at 46:34) suggests that James Mattis, if confirmed as the country’s next Secretary of Defense, could play that role.

As I look back over these wars since World War II – Korea, Vietnam, Iraq, dare I say Afghanistan, stick Somalia in there somewhere, other expeditions – when America goes to war with murky political end states, then you end up in a situation where you are trying to do something right, but you’re not sure if it’s the right thing. And suddenly you end up with a situation where the American people say “what are we doing here?” And “what kind of people are we that we do this sort of thing?”

If you don’t know what it is that you’re going to achieve, then don’t be surprised that eventually you’ve wasted treasure, lives, and the moral authority of the United States.

The United Nations Security Council has approved another round of sanctions against North Korea in response to its latest nuclear test. No one really believes that the new penalties, focused on Pyongyang’s coal and other exports, will have any effect. In fact, it is doubtful that China, which purchases most of the North’s goods, will fully enforce the new resolution.

Still, with most policymakers giving up any hope that the so-called Democratic People’s Republic of Korea will voluntarily negotiate away its nuclear program, Beijing remains the best option for constraining the DPRK’s nuclear ambitions. The People’s Republic of China so far has refused to play its assigned role, but Washington continues to press the PRC to act.

Getting Beijing to take strong action against North Korea is a long-shot, as I explain in an upcoming Policy Analysis, but worth serious effort by Washington. What that would involve is the subject of a forum at Cato at noon on December 8. Susan Glaser of the Center for Strategic and International Studies and Scott Snyder of the Council of Foreign Relations will join me in a panel discussed moderated by Cato Vice President Christopher Preble to discuss the challenges and possibilities of engaging China over the issue.

One thing is clear. Washington and its East Asian allies need to persuade rather than demand that the PRC act. How best to convince Beijing, and what mix of carrots and sticks would be most effective in doing so, will be among the issues discussed on the 8th. I hope you can join us: the details, including where to RSVP, are included here.

A new study from the Center for Strategic and Budgetary Assessments, “How Much is Enough? Alternative Defense Strategies,” reports on military spending plans produced by teams from five think tanks, including Cato. CSBA asked each team to use its “Strategic Choices” software to make hundreds of choices amounting to a ten-year budget plan for the Pentagon and to provide a brief statement of their strategic rationale. The report includes those rationales, summaries of each budget, and comparative analysis of them.

As you can tell from the chart below, the Cato team’s answer was that way less is enough. We cut $1.1 trillion over the period. We’d have cut even more had the software allowed us to target all the spending going to “Overseas Contingency Operations,” intelligence programs and nuclear weapons. You can also see that our plan was the outlier. The others all raised spending—in AEI’s case, massively, by $1.3 trillion.

Why did our budget so diverge from the others? The simple answer is that our defense strategies diverge. Our teams’ choices follow a grand strategy of restraint. The others differ on details but accept the current grand strategy of primacy or liberal hegemony, which holds that U.S. security requires global stability maintained everywhere by U.S. military activism—alliances backed by garrisons and threats, naval patrols, and continual warfare, at least. As we put it in the report, the restraint strategy follows from four underlying claims:

First, U.S. geography, wealth, and technological prowess go far to secure the United States from attack, especially considering our historically weak enemies. Second, we should generally avoid wars meant to stabilize fractured states or to liberalize oppressive ones because they tend to backfire at tragic cost. Third, while allies can be useful in balancing the power of a threatening hegemon, like Nazi Germany or the Soviet Union, alliances should not be permanent. Today no such threat exists, and vast chunks of U.S. military spending goes to maintaining forces meant to defend states that can afford to defend themselves. Our protection can also encourage allies to avoid accommodating rivals and instead to heighten conflicts that can entangle U.S. forces. Fourth, while U.S. forces, especially the Navy, should protect trade routes from disruption during conflict, almost nothing threatens peacetime trade. Overseas garrisons and naval patrols are not needed to protect it.

The other groups’ shared desire to increase spending reflects rejection of those claims—with some dissent on the second.

Their budgets also suggest a deficiency of primacy. Strategy, by definition, is logic for choice, a means to prioritize resources. In defense, that means choosing among threats to confront, types of warfare, and weapons programs. Because primacy sees the U.S. military power as necessary to peace everywhere, it suggests a force that is always busy and nearly ubiquitous—either present or capable of being there fast. Primacy is then less a strategy than a sophisticated way of answering “faster, better, more” whenever military spending choices arise. That’s one reason why the other groups increase spending and say little about what our military can safely not do.

A more general explanation for the plans’ divergence is the complexity of defense budgeting. It is impossible to precisely calculate how much defense is enough, let alone achieve agreement on a figure. In his classic work on the subject, Warner Schilling attributes the difficulty to uncertainty—about future threats, what defense goals best meet threats, which military means best serve those goals, and how to compare the value of military and other spending. The result of this complexity, Schilling writes, is that:

A multiplicity of answers, all of them “right,” must be admitted to the question of how much it is rational to spend on defense. The opportunities for reasoned and intelligent conflict with regard to the factual premises involved are legion. The questions of value involved are, in the final analysis, matters of personal preference…Choice is unavoidable: choice among the among the values to be served, and choice among the divergent conceptions of what will happen if such and such is done. It is for this reason that the defense budget, while susceptible to rational analysis, remains a matter for political resolution.

The report’s competing expert advice shows why the question of how much defense is enough is best answered through democratic politics, not military judgement or expert analysis, even ours. Outside expertise is useful less as guidance for policy choice than to frame it by revealing tradeoffs that political rhetoric obscures.

The report’s conclusion points to a current example. Congressional leaders and the president-elect suggest that global military dominance and fiscal prudence, even liberally defined, are compatible. They aren’t. That’s one point of agreement among the report’s contributors, at least.

Pages