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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.

A crucial graph in the Wall Street Journal article, “Trump Fiscal Plain Roils the GOP,” relies on estimates from the Tax Policy Center. Unfortunately, the TPC provides only static estimates of revenue effects of House Republican or Trump tax plans.  That is, they assume lower marginal tax rates on families and firms have literally no effect at all on tax avoidance or long-term economic growth. 

The Wall Street Journal graph purports to project budget deficits over the next 10 years under Congressional Budget Office (CBO) baseline, the House Republican tax plan and the Trump tax plan.  This is quite misleading, because all three scenarios treat future federal spending as given, unchangeable.  Federal spending rose from 17.6% of GDP in 2001 to 19.1% by 2007, and is now 20.7% in 2015. The 2017 Budget projects spending to reach to 22.4% by 2021 and keep rising. 

The CBO August baseline projects federal spending to total $50.2 trillion from 2017 to 2026, so a mere 5% reduction in that growth would exceed $2.5 trillion.

Under President-elect Trump’s revised tax proposal, claims the Tax Policy Center, “revenues would fall by $6.2 billion over the first decade before accounting for interest costs and macroeconomic effects. Including those factors, the federal debt would rise by at least $7 trillion over the first decade.” 

Do not confuse these alleged “macroeconomic effects” with dynamic analysis used in Tax Foundation models and academic studies. The Tax Foundation estimates, for example, that the House Republican tax plan “would reduce federal revenue by $2.4 trillion over the first decades on a static basis,” but that figure shrinks to $191 billion once they properly account for improved investment incentives,  greater labor and entrepreneurial effort and therefore faster economic growth. 

By contrast, the Tax Policy Center presents only “macro feedback” estimates for the Trump plan.  The TPC Keynesian model and Penn-Wharton models assume that revenue losses are 2.6% of GDP, the same as static estimates.  But interest rates are higher, adding to deficits and debt.

The TPC Keynesian model is all about alleged effects of budget deficits on demand and interest rates – not about supply-side microeconomic incentives to raise potential output by raising labor force participation, entrepreneurship and investment.  

According to the Tax Policy Center, “The marginal rate cuts would boost incentives to work, save and invest if interest rates do not change [emphasis added] … However, increased government borrowing could push up interest rates and crowd out private investment, thereby offsetting some or all of the plan’s positive effects on private investment unless federal spending was sharply reduced to offset the effect of the tax cuts on the deficit.” 

This is confusing or confused.  TPC begins by admitting lower marginal tax rates on labor and capital “would” provide incentive for more and better labor and capital, and therefore faster long-run growth of the economy and taxable income. In the short run, “TPC estimates that the impact on output could be between 0.4 and 3.6 percent in 2017, 0.2 and 2.3 percent in 2018 and smaller amounts in later years.”  Their mid-range estimate is that “the Trump tax plan would boost the level of output by about 1.7 percent in 2017, by 1.1 percent in 2018, and by smaller amounts in later years.”  Despite faster economic growth for 5 years, the net “feedback effect” supposedly reduces the 10-year static revenue loss by a surprisingly trivial 1.9% (from $6.15 trillion to $6.03 trillion) for reasons hidden inside the Keynesian model.

“The TPC’s Keynesian model takes into account how tax and spending policies alter demand for goods and services… and how close the economy is to full capacity.”  Despite references to supply-side incentives, the Keynesian model does not allow such incentives to enlarge “full capacity” – potential GDP: “TPC plans to build a neoclassical model of potential output whose results could be integrated with those the Keynesian model, but that work is still in progress.”  This denial of supply-side effects is a fatal flaw in the model’s revenue estimates. The Trump tax plan is assumed to raise economic growth for only five years before we bump up against “full capacity” because tax rates are assumed to affect only demand, not supply.

For example, the TPC says “allowing businesses to elect to expense investment would create an incentive for businesses to raise investment spending, further increasing demand.  These effects on aggregate demand would raise output relative to its potential for several years … [emphasis added].

On the contrary, more investment spending clearly increases supply – increasing capacity and potential GDP.  Lower marginal tax rates on added labor income likewise raise the supply of human capital (participation rates and incentives to invest in education).

If Trump’s tax policy “would boost incentives to work, save and invest” then the future economy and tax base must be larger than otherwise.  It follows that future deficits cannot be nearly as large as the static TPC estimates claim.  It also follows that there will also be more savings with which to finance both public and private borrowing.

Tax Policy Center estimate of a 10-year $6.2 trillion revenue loss is used to predict higher interest rates, and those higher interest rates prevent the economy from growing faster, which in turn vindicates the static assumption of a $6.2 trillion revenue loss.  

The circularity of this tangled fable is remarkably illogical.  How could interest rates remain higher if private investment is crowded out leaving GDP growth unchanged?

The TPC tells a similar story about the House Republican tax plan.  “Although the House GOP tax plan would improve incentives to save and invest, it would also substantially increase budget deficits unless offset by spending cuts, resulting in higher interest rates that would crowd out investment [emphasis added].”  This too is an unsupported assertion. The TPC analysis predicts more private savings and therefore cannot simply assume deficits “would crowd out investment.”

The TPC’s stubborn notion that deficits raise interest rates dates back to a 2004 Brookings paper by Bill Gale and Peter Orzsag which estimated that “a sustained 1 percent of GDP rise in projected deficits would raise current yields by between 20 and 60 basis points, holding other factors constant.”   In reality, actual and projected deficits have been much higher since 2004, yet bond yields fell dramatically.  Japan routinely runs deficits of 5-7% of GDP with bond yields near zero.

The TPC alludes to the Penn-Wharton Budget model as though it is less Keynesian than their own (or that of the CBO).  Yet the architect of that model, Kent Smetters argues that “tax cuts will lead the government to increase its borrowings, which in turn will increase the debt with the general public… Such debt will compete with private capital for household savings and international capital flows.” Like the TPC, Smetters first assumes the TPC static revenue loss is a meaningful number and then goes on to theorize about U.S. and foreign investors making fewer private investments because they (rather than U.S. and foreign central banks) must supposedly purchase more Treasury bills and bonds.  Like the TPC model, the Smetters model also assumes potential output is unaffected by greater investment and work effort, so faster growth in the first few years must supposedly be offset by slower growth after 2024. Assume slow productivity gains and slow labor force growth, then slow GDP growth must (by definition) be the best we can do.

The Tax Policy Center estimates that the revised Trump plan would reduce revenues by 2.6% of GDP (regardless of economic growth).  But it is important to realize that this “loss” is only in comparison with the rising CBO baseline.  With no change in tax policy, the CBO projects the individual income tax will rise faster than GDP every year with no adverse effects on the economy.  The individual income tax is projected to be 8.5% in 2017, then 8.7% in the following year, then 8.9%, 9.1%, 9.2% 9.3%, 9.4%, 9.5%, 9.6%, 9.7%, 9.8% and so on.  

This ever-increasing tax burden is mainly because ever-increasing real wages will supposedly push more and more families into the 35% and 39.6% tax brackets, and also subject them to Obamacare’s 0.9% surtax on labor and 3.8% surtax on investments. 

If revenues from the individual income tax instead remain at the unusually high 2003-2015 level of  8.3 percent of GDP (which would beat any previous 10-year average), then revenues over the next ten years will turn out to be $2.62 trillion smaller than the CBO projects. 

In other words, nearly half of the Tax Policy Center’s $6.2 trillion static revenue loss from the revised Trump plan is due to the CBO’s implausible assumption of endless automatic tax increases, rather than to a huge “tax cut” (at least in the House GOP plan) when compared with taxes we have actually been paying.

The Urban-Brookings Tax Policy Center produced some estimates of the tax revenues supposedly lost by the most recent (September) Trump tax plan, which raised the top tax rate from 25% to 33%.  

These estimates are being widely misunderstood by the Wall Street Journal, New York Times and others, so it may help to actually see the TPC 10-year totals organized by tax changes proposed for individuals, corporations and pass-through businesses. 

The estimates themselves are questionable as are related estimates of the distribution of tax cuts by income groups.  I will deal with those issues in separate posts.  

What most needs emphasizing at this point is that although reporters are writing as though the Trump package is about personal income tax cuts, that only accounts for 22% of the estimated revenue loss (relative to bloated CBO estimates).  Moreover, the 10-year $1.5 trillion loss of revenue from modestly lower individual income tax rates is much smaller than estimated revenue increases from repealing personal exemptions ($2 trillion) and capping itemized deductions ($559 billion).  

The only significant net reduction in taxes on non-business income is from (1) repeal of the alternative minimum tax ($413 billion), and (2) more than doubling the standard deduction ($1.7 trillion) – neither change being of any help to top-income taxpayers. 

TAX POLICY CENTER ESTIMATES OF 10-YEAR REVENUE LOSS FROM TRUMP TAX PLAN, 2016-2026, $ billions

Repeal Obamacare 3.8% investment income tax 

-145

Repeal alternative minimum tax

-413

Repeal head of household filing status

131

Repeal personal exemptions

2,000

Individual income tax rates of 12, 25, and 33 percent 

-1,490

Increase standard deduction to $35,000/couple ($24,000 in GOP plan)

-1,688

Cap itemized deductions at $100,000 ($200,000 joint return)

559

Childcare refundable tax credit

-132

Repeal estate, gift and GST taxes but tax capital gains at death.

-174

TOTAL INDIVIDUAL TAX LESS PASS-THROUGH BUSINESS = 22% of Total

-1,353

 

 

Elective flat rate of 15 percent on pass-through income  

-895

Shifting of wages and salaries to 15% business income (tax avoidance)

-649

Allow expensing of non-corp investment & disallow interest deduction for those electing to expense

-689

Tax carried interests as ordinary business income

10

Repeal certain pass-through business tax expenditures

58

TOTAL PASS-THROUGH BUSINESS = 35.2% of Total

-2,164

 

 

Reduce corporate rate to 15% & repeal corporate AMT

-2,355

Allow expensing of corp investment & disallow interest deduction for those electing to expense.

-593

Deemed repatriation 10 yrs. of untaxed foreign earnings then tax foreign subsidiaries on accrued profit

148

Repeal certain corporate tax expenditures

167

 

 

TOTAL CORPORATE BUSINESS = 43.8% of Total

-2,633

 

 

TOTAL STATIC REVENUE LOSS  

-6,150

In a recent CNBC interview, Donald Trump’s pick for Commerce Secretary, Wilbur Ross, explained why he thought the Trans-Pacific Partnership was a “horrible deal.”  His main complaint was that the agreement has “terrible rules of origin.”  Specifically, he warned, “In automotive, a majority of a car could come from outside TPP, namely could come from China, and still get all the benefits of TPP.”  Presumably this is what Trump was talking about when he said China would “come in … through the back door.”

All trade agreements have rules of origin that specify how much of a product’s manufacturing has to occur within a member country for it to qualify for tariff preferences.  These rules differ from product to product and are the result of negotiation and industry pressure.  Under the TPP’s rules of origin for automobiles and most auto parts, at least 45% of an import’s value must have been created within one or more TPP members for the good to qualify.

So, technically, Ross is correct.  A hypothetical car could contain 55% Chinese content and still be eligible for TPP preferences as long as all the rest came from Japan, Mexico, the United States, or some combination of TPP members.  What Ross is missing, however, is why this is a good thing.  

For one thing, liberal rules of origin help alleviate the problem of trade diversion.  Reducing protectionist trade barriers removes artificial impediments to economic growth by enabling greater specialization that relies on a country’s comparative advantages.  But trade agreements only remove barriers between some countries, leaving others in place.  When all countries’ exports are burdened equally, investment still flows to where products can be made most efficiently.  Tariff preferences, while better than no liberalization at all, have the downside of incentivizing investment based on where there are preferences, creating their own sort of inefficiency.

Ross himself alludes to this problem in his CNBC interview when he notes that “Mexico has 44 treaties with other countries that make it very advantageous to do international shipping from Mexico rather than from the United States.”  But if the rules of origin in Mexico’s treaties allow for high levels of non-Mexican content, some of those goods shipping out of Mexico might be largely made in America.  Mexico’s treaties could benefit American companies that use Mexican parts just as the TPP could benefit Chinese companies that use American parts.

Strict rules of origin, on the other hand, threaten to interfere with cross-border supply chains.  With or without trade agreements, the fact is that many industries have expanded beyond national borders.  Any automobile purchased in the United States, regardless of brand, is going to have lots of foreign-made parts.  The manufacturing process from raw material to pickup truck involves the labor of people in countries all around the world.  The phenomenon of global supply chains unlocks new levels of comparative advantage—instead of car-making, the relevant activities are things like engine-making, glass blowing, software design, and assembly.  Each part of the process is more valuable if the other parts are done as efficiently as possible.  U.S. autoworkers are more productive (and therefore better compensated) when these supply chains are not hindered by tariffs.

Some industries, of course, would rather have protection than efficiency.  The reason that Ross is focusing on automobiles in his criticism of the TPP is that Detroit automakers are highly invested in North American supply chains.  They benefit from tariff-free trade under NAFTA, but NAFTA has very strict rules of origin for autos—requiring over 60% of content to be from the region. 

Replacing that arrangement with the TPP’s 45% rule would open up a lot of competition not only from Japan but from China and Thailand as well.  The TPP would eliminate some of the benefits Canadian and Mexican suppliers currently enjoy under NAFTA’s preferential access.  More competition among suppliers, however, will lower costs for U.S. operations and make the industry as a whole more competitive.

Like other Trump advisors, Ross has expressed a preference for bilateral trade agreements rather than regional ones.  Combined with strict rules of origin, this strategy (if pursued) would worsen the problem of trade diversion; promote inefficient, policy-driven supply chains; enrich rent-seeking cronies at the expense of economic growth; and generate the least possible benefit from trade liberalization.  That’s why previous administrations (Obama with the TPP; George W. Bush with the Free Trade Area of the Americas) have preferred a regional approach. 

Ultimately, Ross’s analysis of the impact of the TPP is fatally flawed due to his erroneous understanding of trade as a zero-sum game.  Trade is a cooperative endeavor in which people in different countries seek mutual advantage through exchange.  Allowing people in China to benefit from trade with Americans is not a failing of the TPP.  On the contrary, it’s one of the ways the TPP would help create value for U.S. companies and better jobs for American workers.  

Cato’s forum on Capitol Hill yesterday featured Senator James Lankford of Oklahoma. The senator mainly talked about his Federal Fumbles report, but he also mentioned his proposed “Taxpayers Right-to-Know Act.”

The legislation complements the priorities of President-elect Trump who complained about “waste, fraud and abuse all over the place,” and promised “we will cut so much, your head will spin.” To know where to cut, Trump and his team will need to learn about hundreds of programs and determine which ones are the biggest failures.

The Trump team can study DownsizingGovernment.org for spending cut ideas. But it would be also useful if the Office of Management and Budget (OMB) provided better information about each federal program.

That’s the thrust of Lankford’s Right-to-Know Act. It would “require OMB to list all [federal] programs, their funding levels, the number of beneficiaries of the programs, and link each program to all related evaluations, assessments, performance reviews, or government reports.” On its website, the OMB would also list the statutes authorizing each program and the number of federal employees, contractors, and grantees who administer them.

Transparency reforms should be extended to the websites of all federal agencies. I’d like to see agencies highlight on their homepages auditor reports on the performance of each program. I’d like to see the “About” pages on agency websites discuss both the pros and cons of agency activities, and not just present one-sided visions. I’d like to see federal agencies provide detailed cost-benefit analyses of each one of their spending programs.

Federal agencies work for us. We pay the bills. Agencies should inform us about their failures as well as their successes. Lankford’s legislation would be a step forward, but more needs to be done. 

In the photo from the left: Justin Bogie of the Heritage Foundation, me, Senator Lankford, and Tom Schatz of Citizens Against Government Waste.

With school choice advocate Betsy DeVos slated to become the next U.S. Secretary of Education, the battle between regulation and freedom has suddenly become more intense, with people on both sides exchanging fire. Yesterday, Jason Bedrick weighed in against regulation, while today Jeffrey Selingo warns that a major reason “choice hasn’t necessarily led to better outcomes in higher education is the absence of a strong gatekeeper for quality control.”

This sort of assertion strikes me as more an article of intuitive faith than a conclusion based on evidence. If only some well-informed, smart group of experts decided what people could choose, choices would be much better. The problem is that no one has the omniscience to do the job, especially so effectively that the costs of bureaucracy, barriers to entry, and kneecapping of innovation don’t severely outweigh the hoped-for benefits.

The University of Arkansas’ Jay Greene tackles the omniscience problem in his response to many of the calls for heavier gates, preferably triple-locked and backed with a moat and walls with dudes on top ready to drop hot tar on anyone unsavory who might get in. Writeth Greene:

I’ve written previously about the disconnect between near-term test score gains and changes in later life outcomes. If we can’t reliably use rigorously identified test score gains to predict later life outcomes, then on what basis will regulators be able to judge quality to protect families against making bad choices?…

But let’s say you don’t believe me about the weak predictive power of test score gains and are determined to use tests as the main indicator of school quality. We are still left with the question of whether regulators are any good at identifying which schools will contribute to test score gains. Fortunately, we have a recent study that examined whether the criteria used by regulators in New Orleans are predictive of test score growth — even if we accept test gains as a reliable indicator of quality. The bottom line is that none of the factors used by authorizers to open or renew charter schools in New Orleans were predictive of how much test score growth these schools could produce later on.

Gatekeeping sounds so safe and reassuring at first: someone let us choose only good stuff, and good stuff is all we’ll get. But the reality is no one is the deity necessary to infallibly—or even close to infallibly—know good stuff when they see it.

So does higher ed offer no lesson for K-12? Hardly, but it’s the opposite of what Selingo suggests: K-12 needs to decentralize and put funding in the hands of families.

American higher education has huge problems that I’ve listed so many times I can’t bear to repeat them (though I’ll get to two big ones in a moment). But even with its mammoth flaws, our higher education system works far better than elementary and secondary schooling. Our colleges feature top faculty talent, dominate international rankings, and attract students from all around the world. Pretty sure we can’t say that for K-12!

Higher ed’s relative dynamism and international prominence is almost certainly a function of our colleges having lots of autonomy coupled with a need to compete for students.

But there are still those tremendous problems, perhaps the greatest of which are massive noncompletion and huge price inflation. Both, however, are largely functions of a funding system that is fundamentally the same as K-12 education: someone other than the consumer is paying the bill. When someone else pays—especially nameless, faceless taxpayers—consumers’ incentives to think long and hard about what they are buying, and the prices they pay, shrink.

Go ahead, pursue the Uzbekistani studies major with badminton minor, and take six years (or more) to do it—someone else is footing the bill!

Of course, public elementary and secondary schools are funded directly—not through students—so they don’t face the price-inflation problem. Such inflation is, however, a very real concern should school choice become widespread, especially through vouchers. And while American higher education shows that it is much better that schools be autonomous and forced to compete, this is reality: any big subsidies will have big, ugly side effects.

Is the higher education lesson for K-12 schooling that it needs bigger, stronger gates? No. It’s that tough gatekeeping makes worse a situation already suffering from massive subsidization.

This morning President-elect Donald Trump announced via Twitter that “I will be holding a major news conference in New York City with my children on December 15 to discuss the fact that I will be leaving my great business in total in order to fully focus on running the country in order to MAKE AMERICA GREAT AGAIN! While I am not mandated to do this under the law, I feel it is visually important, as President, to in no way have a conflict of interest with my various businesses. Hence, legal documents are being crafted which take me completely out of business operations. The Presidency is a far more important task!”

With that announcement, Trump takes one important step toward addressing both the wider problem of conflicts of interest, and within it the narrower problem—of distinct constitutional dimensions—of the Trump Organization’s complex ongoing dealings with foreign governments. On those latter entanglements, I argue in a new Philadelphia Inquirer piece that under the Emoluments Clause of the Constitution, Congress will affirmatively need to “decide what it is willing to live with in the way of Trump conflicts”—and it should draw those lines before the fact, not after. Excerpt:

…That clause reads in relevant part: “And no Person holding any Office of Profit or Trust under [the United States] , shall, without the Consent of the Congress, accept of any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State.”…

The wording of the clause itself points one way to resolution: Congress can give consent, as it did in the early years of the Republic to presents received by Ben Franklin and John Jay. …

…it can’t be good for America to generate a series of possible impeachable offenses from a running stream of controversies about whether arm’s-length prices were charged in transactions petty or grand. …

There is no doubt that doing the right thing poses genuine difficulties for Trump not faced by other recent presidents. If he signals that he understands the nature of the problem, it would not be unreasonable to ask for extra time to solve it.

For reasons that Randall Eliason outlines in this helpful explainer, Emoluments Clause issues do not map well onto the concept of “bribery.” (Payments can violate the Emoluments Clause even if made with honest intent on both sides; bribery, for its part, is subject to a separate ban.) Removing himself from day-to-day management should help Trump avoid some violations of the Clause (for example, it will become less likely that a foreign state firm will wind up compensating him for his time). Stephen Bainbridge of UCLA has suggested that if the President-elect refuses to divest ownership of his business he at a minimum “needs to create an insulation wall separating his political activities from those of the organization. Such walls were formerly known in colloquial legal speech as ‘Chinese walls.’”

Even if Trump does that, serious Emolument Clause issues will remain, especially those surrounding favorable treatment that a presidentially owned business may not have sought out but which may nonetheless constitute “presents.” Congress should expect to ramp up the expertise it can apply to these problems, and (absent divestiture) assign ongoing committee responsibility to tracking them. And it should issue clear guidelines as to what it is willing and not willing to approve. Such a policy will not only signal that lawmakers are taking their constitutional responsibilities seriously, but could also benefit the Trump Organization itself by clarifying how it needs to respond if and when foreign officials begin acting with otherwise inexplicable solicitude toward its interests.

Expanded and adapted from Overlawyered.

President-elect Trump’s pick for Secretary of Transportation, Elaine Chao, may provide some clues about his infrastructure policies. High-speed rail advocates have hoped that Trump will support their boondoggles, and his big talk about infrastructure spending as an economic stimulus has done nothing to dim those hopes. Chao may be leaning in that direction as well.

Chao was previously Secretary of Labor under George W. Bush, and prior to that served as Deputy Secretary of Transportation under George H.W. Bush. Born in Taiwan in 1953, Chao’s father was captain of a merchant marine vessal. In 1961, the family moved to the United States where her father started the Foremost Shipping Company, which now owns at least 15 ships. 

Chao received a degree in economics from Mount Holyoke College in 1973 and an MBA from Harvard Business School in 1979. Just seven years later, she was made Deputy Administrator of the Maritime Administration in the Department of Transportation. Two years after that, she became chair of the Federal Maritime Commission, and Deputy Transportation Secretary a year after that. In 1993, she married Mitch McConnell.

As deputy transportation secretary, she let it be known that she thinks the United States has built about enough highways, and she has the respect of the heavily subsidized passenger rail industry. Thus, she may be inclined to support light rail, high-speed rail, and other transportation projects that many (including this writer) consider to be obsolete in today’s world.

Digging a hole in the ground, lining it with concrete, and filling it up could be considered “infrastructure,” but it won’t contribute much to the national economy. Transportation infrastructure adds to the nation’s gross domestic product only if it increases passenger travel and/or freight shipments. Rail projects aimed at getting people out of cars, buses, and planes will actually reduce the nation’s GDP because they cost more than the forms of travel they are supposed to replace.

Meanwhile, much of the Interstate Highway System is at the end of its service life. Washington Metro recently announced it needs to spend $25 billion on “capital needs” (maintenance) over the next ten years to keep its trains going. The New York, Chicago, Philadelphia, Boston, San Francsico, and Atlanta transit systems have similar needs and similar budget shortfalls. 

Trump and Chao will have to decide if America should rebuild its existing infrastructure or let that infrastructure fall apart as it builds brand-new infrastructure that it won’t be able to afford to maintain. Even with the tax breaks proposed in Trump’s infrastructure plan, the country won’t be able to do both. While Chao may turn out to be Trump’s least controversial nomination, the actions she takes as secretary will be heavily debated.

President-Elect Trump’s selection of philanthropist and long-time school choice advocate Betsy DeVos for Secretary of Education has the public education establishment and its allies in panic mode. American Federation of Teachers President Randi Weingarten tweeted “Trump has chosen the most ideological, anti-public ed nominee since the creation of the Dept of Education.” Over at Slate, Dana Goldstein frets that “Trump could gut public education“—even though federal dollars account for less than 10 percent of district school funding nationwide. The New York Times has also run series of hand-wringing pieces about what the Trump administration has in store for our nation’s education system.

At the center of the panic over Trump’s nomination of DeVos is their support for school choice. Although light on details, Trump has pledged to devote $20 billion to a federal voucher program. As is so often the case, the most vocal opponents of federal school choice are right for the wrong reasons. Not only does the federal government lack constitutional jurisdiction (outside of Washington, D.C., military installations, and tribal lands), but a federal voucher program poses a danger to school choice efforts nationwide because a less-friendly future administration could attach regulations that undermine choice policies. Such regulations are always a threat to the effectiveness of school choice policies, but when a particular state adopts harmful regulations, the negative effects are localized. Louisiana’s folly does not affect Florida. Not so with a national voucher program. Moreover, harmful regulations are easier to fight at the state level than at the federal level, where the exercise of “pen and phone” executive authority is increasingly (and unfortunately) the norm.

Many of Trump’s critics have not addressed very real federalism concerns, but have instead used the DeVos appointment to attack school choice generally, particularly its more free-market forms.

In a New York Times blog, Kevin Carey of the left-wing New America Foundation writes:

Ms. Devos [sic] will also be hamstrung by the fact that her deregulated school choice philosophy has not been considered a resounding success. In her home state, Detroit’s laissez-faire choice policies have led to a wild west of cutthroat competition and poor academic results. While there is substantial academic literature on school vouchers and while debates continue between opposing camps of researchers, it’s safe to say that vouchers have not produced the kind of large improvements in academic achievement that market-oriented reformers originally promised.

In a Times op-ed, Tulane Professor Douglas Harris echoed these critiques, claiming that “even charter advocates acknowledge” that Detroit’s charter school system—which DeVos supposedly “devised […] to run like the Wild West”—is “the biggest school reform disaster in the country.”

Consider this: Detroit is one of many cities in the country that participates in an objective and rigorous test of student academic skills, called the National Assessment of Educational Progress [NAEP]. The other cities participating in the urban version of this test, including Baltimore, Cleveland and Memphis, are widely considered to be among the lowest-performing school districts in the country.

Detroit is not only the lowest in this group of lowest-performing districts on the math and reading scores, it is the lowest by far. One well-regarded study found that Detroit’s charter schools performed at about the same dismal level as its traditional public schools. The situation is so bad that national philanthropists interested in school reform refuse to work in Detroit. As someone who has studied the city’s schools and used to work there, I am saddened by all this.

Likewise, Harvard Professor Paul Reville decried that “in places like Michigan and Arizona where the approach to opening up choice has been a Wild West version of an unregulated free market, the results have been highly disappointing, giving school choice a bad name.”

Charter schools in Michigan and Arizona may be subject to fewer government regulations than in other states, but it’s absurd to describe the sectors as “laissez-faire” or “an unregulated free market.” For example, charter school regulations in both states, as elsewhere, limit the ability of charter schools to set their own mission (e.g., they must be secular), mandate that they administer the state standardized test, forbid them from setting their own admissions standards, forbid them from charging tuition, limit who can teach in the schools, limit the growth of the number of schools, and so on.

“Laissez-faire” indeed!

And although Michigan’s results are far from stellar, they’re also not the “disaster” that Harris depicts. Indeed, Harris links to the 2013 CREDO report, which found that, on average, Detroit’s charter schools outperformed the district schools that their students would otherwise have attended. Indeed, nearly half of Detroit’s charter schools outperformed the city’s traditional district schools in reading and math scores, while only one percent of charter schools performed worse in reading and only seven percent performed worse in math.

Source: CREDO’s 2013 report on charter schools (page 44).

CREDO’s 2015 report even called Detroit’s charter sector “a model to other communities.” I’d say that’s overstating it. Nevertheless, while Detroit’s district schools are so bad that it’s not a very high bar, Detroit does show how even a significantly regulated system of school choice can outperform the government’s system of district schools. Using the CREDO study to knock Detroit’s charter sector is, to borrow a phrase from Harris, “a triumph of ideology over evidence.” 

And since Harris mentioned the NAEP, let’s see how Arizona’s “Wild West” charter sector performs. As education analyst Matthew Ladner has detailed, Arizona’s charter sector not only outperformed the state average for gains between the 2011 4th-grade and 2015 8th-grade NAEP tests for math and language arts, but they beat the statewide average gains for every single state. The Arizona charter sector’s gains between the 2009 and 2015 NAEP science tests were at least double the statewide average gains everywhere else.

Source: Matthew Ladner.

A word of caution is in order. These comparisons don’t account for differences in demographics among states nor changes in demographics over time. The raw NAEP results cannot tell us whether a particular policy caused any improvement or decline in the scores. Moreover, as Ladner notes, it’s possible to have significant gains while simultaneously doing poorly overall. The bowler whose average score improves from a 25 to a 50 might earn the “Most Improved” trophy while still being the worst bowler in the league. That said, after controlling for demographics, Arizona’s math and language arts scores are above average (13th nationwide). Although we don’t have adjusted scores for Arizona’s charter sector, they are likely even better. Moreover, even using raw scores, Arizona charter students perform about as well as Massachusetts students on the 2015 8th grade NAEP science test. For that matter, Arizona’s charter schools topped the list for college attendance among Arizona’s 2015 graduates.

If Harris believes that supposed lack of regulation in Detroit’s charter sector (at least as compared to charter school regulations in other states) accounts for their poor performance on the NAEP, how does he explain the Arizona results?

Indeed, even without heavy top-down oversight, Arizona manages to close down poorly performing charter schools fairly quickly through a rather innovative method called “parental choice.” The average closed charter operated for only four years and had an average of only 62 students enrolled in their final year. As Ladner explains, parents put most of those charters out of business before the regulatory apparatus got around to it:

Arizona parents seem extremely adept at putting down charter schools with extreme prejudice. Arizona parents detonate far more schools on the launching pad compared to the number we see bumbling ineffectively through the term of their charter to be shut by authorities (or to give up the ghost in year 14 in an ambiguous fashion). Both of these things happen, but the former happens with much greater regularity than the latter. Having a vibrant system of open enrollment, charter schools and some private school choice means that Arizona parents can take the view that life is too short have your child enrolled in an ineffective institution.

The critics’ read of the evidence on voucher programs also leaves much to be desired. Harris points only to research on statewide voucher programs in Louisiana and Ohio that found negative impacts, but he ignores the near-consensus of more than a dozen random-assignment studies that found modest positive impacts on student performance on tests as well as on high school graduation and college matriculation. Outside of Louisiana’s heavily regulated voucher program, none were found to produce a negative impact and only one found no discernible impact. (The Ohio study was not random-assignment and its comparison group may have been severely compromised by the study’s design.) Moreover, nearly every study on the impact of private school choice policies on district school performance found a positive impact, including in Louisiana and Ohio. The one exception was Washington, D.C., where the voucher funds come from a separate source and therefore a decrease in district school enrollment does not affect their funding.

On the whole thus far, private school choice programs have been an improvement over the status quo. Nevertheless, Carey is only half right when he writes that “vouchers have not produced the kind of large improvements in academic achievement that market-oriented reformers originally promised” because no state has yet adopted the sort of large-scale, lightly regulated, universal voucher system that market-oriented reformers like Milton Friedman called for. Instead, most voucher programs are limited in scale and eligibility and subject to numerous regulations. They’re designed, essentially, to fill empty seats rather than to revolutionize the way education is delivered. Small-scale choice programs should be expected to deliver positive but small-scale results, and that is what the research has found.

Advocates of large-scale private school choice programs should be careful not to over-promise, but critics of market-oriented educational choice policies should also be careful not to cherry pick or to make claims that the research literature does not support. Outside heavily regulated environments, private school choice policies have a consistently positive track record. What we should be able to agree about is that the positive track record of state-level school choice policies does not imply that Congress should enact a federal voucher program.

Donald Trump has called the North American Free Trade Agreement the “worst trade deal ever negotiated.” If he were speaking on behalf of Canadian exporters or American consumers of softwood lumber, his point would have some validity. For more than 20 years, NAFTA has failed to deliver free trade in lumber. Instead, a system of managed trade has persisted at the behest of rent-seeking U.S. producers, egged on by Washington lawyers and lobbyists who know a gravy train when they see one.

Those who consider the United States a beacon of free trade in a swirling sea of protectionist scofflaws will be surprised by the sordid details of the decades-long lumber dispute between the United States and Canada. Among those details is the story of how the U.S. Commerce Department (DOC) ran roughshod over the rule of law to manufacture the leverage needed to extort from Canadian lumber mills a sum of $1 billion, which was used to line the pockets of American mills and the U.S. Forestry Service, while restricting lumber imports for nearly a decade through October 2015, at great expense to retailers, builders, and home buyers.

With that ugly history mostly expunged from the public’s memory, the U.S. lumber industry is back at the trough again, demanding its government intervene to restrict Canadian supply, following a whole 13 month period during which it was forced out of the nest to operate in an environment rife with real market conditions! In the quiet shadows of the Friday after Thanksgiving, U.S. softwood lumber producers filed new antidumping and countervailing duty petitions with the DOC and U.S. International Trade Commission (ITC), alleging that dumped and subsidized Canadian imports were causing material injury to the domestic industry.

Whether the DOC finds legitimate evidence of dumping or countervailable subsidization is actually beside the point here. The agency has proven itself quite capable of producing evidence it is willing to defend as legitimate, which is all that matters when the game plan is to use the specter of a long, drawn out procedural battle—a period during which importers have no certainty about whether they will have to pay duties or how large that bill will be—to arm-twist the Canadians back to the table to agree, once again, to limited U.S. access in exchange for suspension of the unfair trade petitions.

If the investigations go forward and injurious dumping and/or injurious subsidization are found—a likely outcome given the discretion DOC has to administer these laws—preliminary duties likely would be imposed in April 2017 and final duties imposed by the end of the year.  Depending on those duty rates (and how willing importers are to stomach the risk that their duty liability increases) imports of lumber from Canada could continue. But, the more likely outcome is that the two sides will reach a new agreement to limit Canadian access to the U.S. market, through quantitative restrictions, export taxes, or some combination of the two, before preliminary countervailing and antidumping duties are imposed. 

Unfortunately, this wouldn’t be the first time that the U.S. trade remedy laws have been used to extort settlements under which foreign producers agree to restrict their exports to the United States in exchange for the U.S. government dropping often spurious claims against them. But the lumber case provides an especially egregious example of how the United States—self-proclaimed champion of free trade—uses the threat of protectionism to strong arm even its closest trade partner.

(If you’re interested in diving deeper into this post, the full story is published here, on Forbes.)

At the risk of understatement, I’m not a fan of the Organization for Economic Cooperation and Development. Perhaps reflecting the mindset of the European governments that dominate its membership, the Paris-based international bureaucracy has morphed into a cheerleader for statist policies.

All of which was just fine from the perspective of the Obama Administration, which doubtlessly appreciated the OECD’s partisan work to promote class warfare and pimp for wasteful Keynesian spending.

What is particularly irksome to me is the way the OECD often uses dishonest methodology to advance the cause of big government:

But my disdain for the leftist political appointees who run the OECD doesn’t prevent me from acknowledging that the professional economists who work for the institution occasionally generate good statistics and analysis.

For instance, I’ve cited two examples (here and here) of OECD research showing that spending caps are the only effective fiscal rule. And I praised another OECD study that admitted the beneficial impact of tax competition. I even listed several good examples of OECD research on tax policy as part of a column that ripped the bureaucracy for some very shoddy work in favor of Obama’s redistribution agenda.

And now we have some more good research to add to that limited list. A new working paper by two economists at the OECD contains some remarkable findings about the negative impact of government spending on economic performance. If you’re pressed for time, here’s the key takeaway from their research:

Governments in the OECD spend on average about 40% of GDP on the provision of public goods, services and transfers. The sheer size of the public sector has prompted a large amount of research on the link between the size of government and economic growth. …This paper investigates empirically the effect of the size and the composition of public spending on long-term growth… The main findings that emerge from the analysis are… Larger governments are associated with lower long-term growth. Larger governments also slowdown the catch-up to the productivity frontier.

For those who want more information, the working paper is filled with useful information and analysis.

Here’s one of the charts from the study, showing how government spending is allocated in OECD nations.

The report also acknowledges that there’s a lot of preexisting research showing that government spending hinders economic growth.

There is a vast empirical literature investigating the relationship between the size of the government and economic growth (see Slemrod, 1995; Myles 2009; Bergh and Henrekson, 2011 for overviews). A review by Bergh and Henrekson (2011), based on papers published in peer reviewed journals after 2000, suggested a negative relationship in OECD countries. Likewise, a recent OECD study confirmed a negative relationship between the size of government and GDP growth (Fall and Fournier, 2015). …the link between the size of government and growth may vary with the income level and could be hump-shaped (Armey, 1995). A few studies have found support for the existence of a non-linear relationship between the size of government and growth (e.g. Vedder and Gallaway, 1998; Pevcin, 2004; Chen and Lee, 2005).

By the way, the reference to “hump-shaped” means that the OECD is even aware of the Rahn Curve.

The methodology in the paper is not ideal from my perspective. For all intents and purposes, the economists compare economic performance of the OECD’s big-government nations with the growth numbers from the OECD’s not-quite-as-big-government nations. But even with that limitation, the study generates some powerful results.

…the simulation assumes that in countries where the size of government is above the average level of countries in the bottom half of the sample, the government size will gradually converge to this level (36% of GDP). Similar to the spending mix reforms, this reform is phased in over 10 years. Such a reduction in the size of the government could increase long-term GDP by about 10%, with much larger effects in some countries with currently large or ineffective governments. …a reduction of the size of government has a positive, but moderate, effect on the income of the poor. The average disposable income also rises. However, the rich gain relatively more. Finally, in countries where the government is less effective (such as Italy) the growth effect dominates and a moderate reduction of the size of government would have a large growth effect, so that it would lift all boats.

And here’s a chart showing how much more growth would be possible if the countries with really-big government downsized their public sectors to the somewhat-big level.

Even with the methodology limitations I described, these results are astounding. Potential GDP gains of more than 30 percent for Greece and Italy. Gains of more than 20 percent for Slovenia, France, and Hungary. And more than 10 percent for Belgium, Czech Republic, Portugal, and Poland.

The working paper also looks at the composition of government spending. In other words, just as not all taxes are equally damaging, the same is true for spending programs.

The results from the estimation of the size of the government and the public spending mix illustrate that public spending matters for long-term growth…pension and subsidy spending [are] the two items with a significantly negative effect on growth. As each regression includes the size of government and one spending share, the estimates provide the effect of increasing this type of spending while decreasing spending on other items to keep the spending to GDP ratio unchanged… larger governments are in several specifications significantly and negatively associated with long-term growth. This is consistent with the literature… Larger governments can impede convergence (Table 8, columns 1 and 3), because they are associated with higher taxation that can discourage business investment including foreign investment and households to supply labour.

Pensions and subsidies seem to cause the most economic harm.

Reducing the share of pension spending in primary spending yields sizeable growth gains with no significant adverse effect on disposable income inequality. This reduction could be achieved by an increase in the effective retirement age or by cutting the replacement rate. …Cutting public subsidies boosts growth, as public subsidies…can distort the allocation of resources and undermine competition. …Education outcomes depend not only on education spending but also on the effectiveness of education policies, and the literature suggest the latter can be more important. Since the seminal work of Coleman (1966), a broad literature suggests that there is no clear link between education spending and education outcomes. …policies aimed at increasing education spending effectiveness can be more appropriate than an across-the-board rise of education spending. …It may be that, beyond a certain point, additional spending on investment has adverse effects, if poorly managed.

For those of you with statistical/econometric knowledge, here’s some relevant data from the study.

And you can match the numbers in Table 6 with these excerpts.

…pension spending reduces growth (Table 6, columns 2, 5, 7 and 10). Increasing the share of pension spending in primary spending by one percentage point (offset by a reduction in other spending) would decrease potential GDP by about 2%. …Public spending on subsidies also reduces growth (Table 6, columns 3, 5, 8 and 10). …increasing the share of public subsidies in primary spending by one percentage point would decrease potential GDP by about 7%.

If you’re not a stats wonk, these two charts may be more helpful and easy to understand.

What jumped out at me is how the normally sensible nation of Switzerland is very bad about subsidies. That’s a policy they obviously need to fix (along with the fact that they also have a wealth tax, which is very uncharacteristic for that country).

But I’m digressing.

Let’s return to the study. One of the interesting things about the working paper is that it notes that bad fiscal policy can be somewhat mitigated by having market-oriented policies in other areas, which is a point I always make when writing about Scandinavian nations.

…countries with a high level of public spending may also be characterised by features that partly offset the adverse growth effect of government size. …in Sweden the mix of growth-friendly structural policies…may have offset the adverse growth effect of a large government sector.

In other words, the moral of the story is that smaller government is good and free markets are good. Mix the two together and you have best of all worlds.

P.S. Even if the OECD published dozens of quality studies like this one, I would still argue that American taxpayers should no longer be forced to subsidize the Paris-based bureaucracy. And even if the OECD’s political types stopped pushing statist policies, I would still have the same view about ending handouts from American taxpayers. This has nothing to do with the fact that the bureaucrats once threatened to have me arrested and thrown in a Mexican jail. I simply don’t think taxpayers should fund international bureaucracies.

P.P.S. Other international bureaucracies, including the World Bank and European Central Bank, also have published good research about the negative effect of excessive government spending.

Yesterday the President-elect of the United States tweeted:

Nobody should be allowed to burn the American flag - if they do, there must be consequences - perhaps loss of citizenship or year in jail!

This view directly contradicts First Amendment doctrine established in the case of Texas v. Johnson (1989). Texas had outlawed desecration of venerated objects including the American flag. The state argued this prohibition protected a symbol of national unity and precluded breaches of the peace by those who would take offense at the flag being burned.

Gregory Johnson, a demonstrator at the 1984 Republican Convention, burned a flag as part of a protest. Johnson and his fellow protesters chanted “America, the red, white, and blue, we spit on you” while the flag burned. He was convicted of destroying the flag and sentenced to a year in jail and fined $2,000. Texas thus did exactly what the President-elect wants concerning flag burning.

A five-member majority of the Supreme Court ruled that flag burning constituted “symbolic speech” protected by the First Amendment. Indeed, Johnson burned the flag in 1984 to express a series of political views. The Court ruled that prohibiting this speech did not and was unlikely to prevent violence. As to national unity, Justice William Brennan noted an earlier statement by the Court:

If there is any fixed star in our constitutional constellation, it is that no official, high or petty, can prescribe what shall be orthodox in politics, nationalism, religion, or other matters of opinion or force citizens to confess by word or act their faith therein.

Concurring with the opinion, Justice Anthony Kennedy wrote:

Though symbols often are what we ourselves make of them, the flag is constant in expressing beliefs Americans share, beliefs in law and peace and that freedom which sustains the human spirit. The case here today forces recognition of the costs to which those beliefs commit us. It is poignant but fundamental that the flag protects those who hold it in contempt.

This tweet marks at least the second time the President-elect has repudiated settled First Amendment doctrine. He earlier criticized the broad protection for free speech enunciated in New York Times v. Sullivan (1964), a decision that complicated suing speakers for libel.

Donald Trump wishes to criminalize flag burning for giving offense to those who value what the American flag represents. Many others have called for limiting speech that offends religions or ethnic groups. In The Tyranny of Silence, Cato’s own Flemming Rose recounts that some Muslim clerics in Europe called for censorship of speech giving offense to Islam. No doubt Mr. Trump would not join their calls for protecting the faith. But he does agree with those radical clerics that giving offense should justify government limits on free speech.

I wonder if the President-elect understands why his comments disturb so many people who differ otherwise about so much. He appears to oppose basic ideals underpinning liberal democracy. He is also the President-elect.

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