Cato Op-Eds

Individual Liberty, Free Markets, and Peace
Subscribe to Cato Op-Eds feed

In a recent Wall Street Journal column defending Obamacare 3.8% surtax on investment income on joint returns above $250,000, Peggy Noonan ends by quoting Tucker Carlson’s Fox News interview with Paul Ryan which questioned the now-suspended health plan’s elimination of that surtax:

“Looking at the last election, was the message of that election really, ‘We need to help investors?’ I mean, the Dow is over 20,000. Are they really the group that needs the help?…“The overview here is that all the wealth, basically, in the last 10 years, has stuck to the top end. That’s one of the reasons we’ve had all the political turmoil, as you know. And so, kind of a hard sell to say ‘Yeah, we’re gonna repeal Obamacare, but we’re gonna send more money to the people who’ve already gotten the richest over the last 10 years.’ I mean, that’s what this does, no? I’m not a leftist, it’s just—that’s true.”

Mr. Carlson used the word “wealth” rather than income. He said, “all the wealth …  in the last 10 years, has stuck to the top end.”  He surely meant income, however, since the latest wealth estimate from the Survey of Consumer Finance was in 2013, and wealth of the top 1%, like income of the top 1%, clearly fell from 2007 to 2013. Despite “shared prosperity” Clinton campaign chatter, there were no gains to share. John Weicher at the Hudson Institute notes that, “Between 2007 and 2013, the poor became poorer, but so did the rich and the people in between.”

Tucker Carlson is not a leftist and neither is Peggy Noonan. Yet to define what is “true” about income growth over 10 years, they are relying wholeheartedly on the socialist team of French economists Thomas Piketty and Emmanuel Saez.  

When media celebrities disparage the “top end” they do not mean Fox News anchors (who earn millions); they mean the “Top 1%” who earned more than $442,900 in 2015 according to Piketty and Saez.  When claiming all the gains over the last 10 years have “stuck to” the top 1%, Carlson appears to have accepted the same source Hillary Clinton abused when she claimed “more than 90 percent of [income] gains have gone to the top 1 percent.”   

What “stuck to the top end,” to use Tucker Carlson’s phrase, is the Top 1% share of gains since 2009.  Prior losses are forgotten.  The “last 10 years” is simply redefined as starting with 2009, not 2007.

In the latest version of this ruse, Saez says, “Top 1% families … capture[d] 52% of total real income growth per family from 2009-2015.”  Of the many deceptions the Piketty-Saez team has inflicted on us over the years, this one may well be the most politically popular and most economically ridiculous. It has fooled many fools. 

What goes unmentioned, is that the Top 1% first “captured” 49% of the losses from 2007 to 2009.  Students of New Math might imagine the 52% gain from 2009 to 2015 compensated for the 49% loss from 2007 to 2009, but that deserves an “F” grade (because the 52% gain is calculated from a much smaller base).

The graph shows what actually happened to average pretax incomes of the Top 1%, as estimated by Piketty and Saez.

From 2007 to 2015, average real incomes of the Top 1% fell by 11.9%, even before taxes. 

Top incomes fell much more after taxes because top tax rates were increased from 35% to 39.6% in 2013, the arbitrary and discriminatory 1990 PEP/Pease limits on exemptions and deductions were restored, and an extra 3.8% Obamacare surtax was inflicted on those supposedly privileged stockholders.  

When conservative media commentators rely on deceptive leftist statistics to make their points, they might as well be leftists.

The simplistic notion that organisms are “dumb” when it comes to changing environments goes like this: Species X lives in a relatively stable environment and with a certain defined range of temperature. So, if the temperature changes enough, species X will go extinct.

In resuming our series on biological adaptation to environmental change, we are going to be looking in depth at the evolutionary and environmental nuances that—with some limits—invalidate the simple point of view. And, in doing so, we will discover important implications for environmental and climate-related policies.

We begin with revolutionary classic in evolutionary biology published in 1984 by Peter Hochachka and George Somero called “Biochemical Adaptation.” It summarized and expanded on much of their earlier work on what they called “phenotypic plasticity”.

Pre-Hochachka thinking had it that our DNA codes for specific proteins, which do their thing (often serving as catalysts for complex biochemical syntheses) and are pretty much static, which would lead automatically to the “dumb” organism when it comes to environmental change. But, among other things, Hochachka and Somero can show that, depending upon temperature, many critical proteins actually change their shape as temperature rises (or falls), greatly broadening the environmental range of many species.

A wonderful example of this concerns marine fish living in tropical waters, which tend to experience much smaller seasonal variations in temperature than fish inhabiting other latitudes. Without phenotypic plasticity, there are concerns that tropical fish maintain narrow temperature tolerance and that they might presently be close to their optimal temperature limit. If temperatures were to therefore rise in the future in response to CO2-induced global warming, many tropical fish species might experience widespread decline and possible extinction.

Given plasticity, does this hypothesis hold any water?

A five-member Portuguese research team of Madeira et al. (2016) examined the cellular stress response of a tropical clownfish species (Amphiprion ocellaris) exposed to elevated temperatures over a period of one month. Their experiment was conducted in a controlled laboratory setting in which they subjected juvenile A. ocellaris to either ambient (26°C) or elevated (30°C) temperatures, while examining several biomarkers (e.g., stress proteins and antioxidants) in several tissue types (brain, gills, liver, intestine and muscle) at 0, 7, 14, 21 and 28 days of temperature treatment. What did their measurements reveal?

Amphiprion ocellaris

According to Madeira et al., “results showed that exposure time significantly interacted with temperature responses and tissue-type, so in fact time influenced the organisms’ reaction to elevated temperature.” First, at day 7 they observed significantly higher levels of biomarkers in fish in the high temperature environment that was indicative of a typical thermal stress response. Thereafter, however, they report that biomarker levels stabilized, showing either “a significant decrease in comparison with controls or no significant differences from the control” through the end of the experiment, which observations they suggest are indicative of temperature acclimation.

The fact that temperatures outside the “normal” range elicited clear biochemical changes (after a period of initial stress) is clear evidence for the much more nuanced view of organismal response to change.

Commenting on their findings, Madeira et al. write that “A. ocellaris probably lives far from its upper thermal limit and is capable of adjusting the protein quality control system and enzymes’ activities to protect cell functions under elevated temperature, adding that “these results suggest that this coral reef fish species presents a significant acclimation potential under ocean warming scenarios of +4°C.”

This is very good news for those concerned about the impact of global warming on tropical reef fish, and therefore for reefs themselves, as fish are an integral part of complex reef ecology.

One could speculate that—because most species alive today evolved on a warmer (pre-ice age) planet, that the genetic material that responds to heat is maintained, only to be expressed when they go back to their future, which is what is happening as we speak.

 

References

Hochachka, P., and S. Somero, 1984 (republished in 2016). Biochemical Adaptation. Princeton Legacy Library, Princeton. 520pp.

Madeira, C., Madeira, D., Diniz, M.S., Cabral, H.N. and Vinagre, C. 2016. Thermal acclimation in clownfish: An integrated biomarker response and multi-tissue experimental approach. Ecological Indicators 71: 280-292.

At least in Serbia, people know that politicians’ promises are ridiculous. NPR reports on a satirical candidate named Ljubisa Beli Preletacevic, or just Beli for short:

A new politician is here to save you. I’m pure and clean. Whatever the other politicians promise you, I will promise you three times more.

I’ll give jobs to everyone and big pensions to everyone. I’m going to move the sea here because we need a beach.

Satire it may be, but his new party won 12 council seats in his home town, and most of his party’s candidates are seriously seeking election. Reporter Joanna Kakissis continues:

There will be no corruption, excluding my own of course, he declares to one crowd. Please send all money directly to my pockets. Drama student Danka Svetilova laughs and asks for a selfie. She says mainstream politicians have lied to Serbs for years….

So that’s why she and her schoolteacher mom are voting for Beli in this Sunday’s presidential election. Better a fake candidate who tells the truth about lying, she says, than a real one who lies about telling the truth.

The Cato Institute recently released Monetary Alternatives: Rethinking Government Fiat Money, a collection of essays 30 years in the making. As George Selgin explains in the foreword,

The complacency wrought by the Great Moderation, not to mention the limited interest in fundamental monetary reform before then, resulted in a dearth of serious inquiries into potentially superior arrangements….Cato kept the subject alive, offering a safe haven, in the shape of its Annual Monetary Conference, for the minority of experts that continued to stress the need for fundamental monetary reform. Although fundamental reform has been a consistent theme of Cato’s monetary conferences, those conferences have never been dominated by one approach to reform. The articles in this book present a variety of ideas for improving the monetary regime — including proposals for a formal “monetary constitution,” various monetary rules, competing currencies, and establishing a new gold standard.

In sum, Monetary Alternatives explores fundamental and controversial ideas that would move our monetary system and economy beyond repeated crises to sustainable stability and prosperity. The contributors to the volume energetically question the status quo and provide compelling arguments for moving to a monetary system based on freedom and the rule of law.

A limited constitutional government calls for a rules-based, free-market monetary system, not the topsy-turvy fiat dollar that now exists under central banking. When the Federal Reserve was created in 1913, its powers were strictly limited and the United States was still on the gold standard. Today the Fed has virtually unlimited power and the dollar is a pure fiat money.

Central banking, like any sort of central planning, is not a panacea.  Concentrating monetary power in the hands of a few individuals within a government bureaucracy, even if those individuals are well intentioned and well educated, does not guarantee sound money. The world’s most important central bank, the Federal Reserve, is not bound by any strict rules, although Congress requires that it achieve maximum employment and price stability. The failure of the Fed to prevent the Great Recession of 2009, the stagflation of the late 1970s and early 1980s, and the Great Depression of the 1930s, raises the question, can we do better?

In questioning the status quo and widening the scope of debate over monetary reform, the fundamental issue is to contrast a monetary regime that is self-regulating, spontaneous, and independent of government meddling versus one that is centralized, discretionary, politicized, and has a monopoly on fiat money. Free-market money within a trusted network of private contracts differs fundamentally from an inconvertible fiat money supplied by a discretionary central bank that has the power to create money out of thin air and to regulate both banks and nonbank financial institutions.

There are many types of monetary regimes and many monetary rules. The classical gold standard was a rules-based monetary system, in which the supply of money was determined by market demand — not by central bankers. Cryptocurrencies, like bitcoin, offer the possibility of a private non-commodity monetary base and the potential to realize F. A. Hayek’s vision of competitive free-market currencies. Ongoing experimentation and technological advances may pave the way for the end of central banking — or at least the emergence of new parallel currencies.

In making the case for monetary reform and thinking about rules versus discretion in the conduct of monetary policy, it is important to take a constitutional perspective. As early as 1988, James M. Buchanan argued, at an international monetary conference hosted by the Progress Foundation in Lugano, Switzerland:

The dollar has absolutely no basis in any commodity base, no convertibility. What we have now is a monetary authority [the Fed] that essentially has a monopoly on the issue of fiat money, with no guidelines that amount to anything; an authority that never would have been legislatively approved, that never would have been constitutionally approved, on any kind of rational calculus [“Comment by Dr. Buchanan,” Economic Education Bulletin 28, no. 6: 32–35].

In 1980, just after Ronald Reagan’s election, Buchanan recommended that a presidential commission be established to discuss the Fed’s legitimacy. There was some support within the Reagan camp, but Arthur Burns, a former chairman of the Federal Reserve Board, nixed it. As Buchanan explained at the Lugano conference, Burns “would not have anything to do with any proposal that would challenge the authority of the central banking structure.”

Buchanan’s aim was “to get a dialogue going … about the basic fundamental rules of the game, the constitutional structure.”  There is, he said, “a moral obligation to think that we can improve things.” That is the spirit of this volume and Cato’s recently established Center for Monetary and Financial Alternatives.

This year marks Cato’s 40th anniversary and the 35th anniversary of the Annual Monetary Conference, making it an appropriate time to bring out this collection of articles devoted to rethinking government fiat money and to offer alternatives consistent with limited government, the rule of law, and free markets.

________________

Contributors to Monetary Alternatives include: Claudio Borio, Jeffrey Lacker, John Allison, Bennett McCallum, James Buchanan, George Selgin, Peter Bernholz, Charles Plosser, Leland Yeager, John Taylor, Scott Sumner, James Dorn, Edwin Vieira, Lawrence White, Richard Timberlake, Roland Vaubel, and Kevin Dowd.

[Cross-posted from Alt-M.org]

The North Carolina legislature has passed and sent to Democratic Gov. Roy Cooper H.B. 142, unveiled last night as a compromise intended to end the state’s acrimonious year-long battle over discrimination laws and transgender persons’ access to bathrooms and changing rooms. From what I can see, it’s a basically sound measure that gives both sides much of what they legitimately asked.

HB2, the bill passed last March, was a response to a successful push in the city of Charlotte to enact anti-discrimination laws going well beyond state law in numerous areas, including making LGBT persons a protected class and regulating private actors in various ways (including bathroom policies) through employment and public accommodations laws. Opponents went to the state legislature and – as has happened in other states lately as well – proposed yanking back those portions of home rule that allowed for local ordinances to go beyond state law. (How you feel about yanking back home rule powers probably has a lot to do with how you feel about the substantive laws involved, since neither libertarians nor most other thinkers hold to a rigid always-or-never view of municipal home rule powers. Should towns in your state have the power to jail people for using alcohol or medical marijuana? Enact rent control? Ban the construction of any residence worth less than $1 million?)  

One part of HB2, then, eliminated towns’ and cities’ power to go beyond state law in some areas of employment and public accommodations law. But HB2 went a fateful step further by enacting into law the idea of some organized social conservatives that transgender persons should use the bathroom of their sex at birth, unless they succeed in jumping over the legal hurdles needed to get a changed certificate. There are all sorts of things wrong with that approach, and I said some of them in a Wall Street Journal letter last year

[The relevant section] of the bill imposes affirmative, uniform new duties of exclusion on North Carolina government entities such as schools, town halls, courthouses, state agencies and the state university system, taking away what had generally been local discretion. This not only will inflict needless burdens on a small and vulnerable sector of the public, but presumes to micromanage local governments and districts in an area where they had not been shown to be misusing their discretion. Whatever the merits of the rest of the bill, the provisions on state-furnished bathrooms are a good example of how legislation in haste from the top down can create new problems of its own.

The new HB142 compromise retreats, and rightly so, from this worst portion of HB2, but it does not retreat (or at least not very much) from the other elements, including those that are not so bad. By repealing HB2, it abandons the wretched aim of trying to prohibit transgender-friendly bathrooms. But it also takes away, for a time, local governments’ power to mandate them in the private sector. It provides that “State agencies, boards, offices, departments, institutions, branches of government, including The University of North Carolina and the North Carolina Community College System, and political subdivisions of the State, including local boards of education, are preempted from regulation of access to multiple occupancy restrooms, showers, or changing facilities, except in accordance with an act of the General Assembly.” (The pre-emption expires in 2020.)

“Regulation of access to” is not an entirely clear phrase in this context. Clearly, cities like Charlotte need to go on carrying on the “regulation of access to” their own city-run facilities. The debate in the legislature today, according to several sources, emphasized sound local discretion – Charlotte can run bathrooms in municipal buildings the way it sees fit. 

The new compromise is being met with peals of outrage from some of the predictable ultras on both sides. But it looks to me like a more careful attempt to respect the legitimate rights of both sides than we’ve seen in this controversy up to now.

I sometimes feel like a broken record about entitlement programs. How many times, after all, can I point out that America is on a path to become a decrepit European-style welfare state because of a combination of demographic changes and poorly designed entitlement programs?

But I can’t help myself. I feel like I’m watching a surreal version of Titanic where the captain and crew know in advance that the ship will hit the iceberg, yet they’re still allowing passengers to board and still planning the same route. And in this dystopian version of the movie, the tickets actually warn the passengers that tragedy will strike, but most of them don’t bother to read the fine print because they are distracted by the promise of fancy buffets and free drinks.

We now have the book version of this grim movie. It’s called The 2017 Long-Term Budget Outlook and it was just released today by the Congressional Budget Office.

If you’re a fiscal policy wonk, it’s an exciting publication. If you’re a normal human being, it’s a turgid collection of depressing data.

But maybe, just maybe, the data is so depressing that both the electorate and politicians will wake up and realize something needs to change.

I’ve selected six charts and images from the new CBO report, all of which highlight America’s grim fiscal future.

The first chart simply shows where we are right now and where we will be in 30 years if policy is left on autopilot. The most important takeaway is that the burden of government spending is going to increase significantly.

Interestingly, even CBO openly acknowledges that rising levels of red ink are caused solely by the fact that spending is projected to increase faster than revenue.

And it’s also worth noting that revenues are going up, even without any additional tax increases.

The bottom part of this chart shows that revenues from the income tax will climb by about 2 percent of GDP. In other words, more than 100 percent of our long-run fiscal mess is due to higher levels of government spending. So it’s absurd to think the solution should involve higher taxes.

This next image digs into the details. We can see that the spending burden is rising because of Social Security and the health entitlements. By the way, the top middle column on “other noninterest spending” shows one thing that is real, which is that defense spending has fallen as a share of GDP since the mid-1960s, and one thing that may not be real, which is that politicians somehow will limit domestic discretionary spending over the next three decades.

This bottom left part of the image also gives the details on built-in growth in revenues from the income tax, further underscoring that we don’t have a problem of inadequate revenue.

Here’s a chart that shows that our main problem is Medicare, Medicaid, and Obamacare.

Last but not least, here’s a graphic that shows the amount of fiscal policy changes that would be needed to either reduce or stabilize government debt.

I think that’s the wrong goal, and that instead the focus should be on reducing or stabilizing the burden of government spending, but I’m sharing this chart because it shows that spending would have to be lowered by 3.1 percent of GDP to put the nation on a good fiscal path.

Some folks think that might be impossible, but I’ll simply point out that the five-year de facto spending freeze that we achieved from 2009-2014 actually reduced the burden of government spending by a greater amount. In other words, the payoff from genuine spending restraint is enormous.

The bottom line is very simple.

We need to invoke my Golden Rule so that government grows slower than the private sector. In the long run, that will require genuine entitlement reform.

Or we can let America become Greece.

The Wall Street Journal reports: “Mr. Trump’s nominee for U.S. Trade Representative singled out Mexico and South Korea during his Senate confirmation hearing as sparking American trade deficits. ‘In some cases, the rules don’t seem to be working as well as others,’ Robert Lighthizer said. Critics say the deal has led to a flood of South Korean cars, auto parts, memory chips, motors and pumps into the U.S., weighing on American competitors and jobs. A U.S. Trade Representative report this month said the pact… doubled the U.S. trade deficit in goods with South Korea.”

National Trade Council boss Peter Navarro has likewise claimed “We lost 100,000 jobs because of that South Korean deal. Our trade deficit has doubled, and, more importantly, 75 percent of the damage that has been caused by that deal has been to the auto industry itself, which, of course, is based in Michigan.”

Navarro, Lighthizer and the Journal’s unnamed critics are entirely wrong about the March 15, 2012 Korea/U.S. Free Trade Agreement (KORUS).  

KORUS could not possibly have “led to a flood of South Korean… memory chips, motors and pumps into the U.S.” because memory chips were already duty-free before that FTA, and so were motors (HS code 8501) and pumps (8413).

KORUS could not possibly explain the post-recession 2010-2015 rise in U.S. imports from South Korea because most U.S. tariffs were scheduled to be reduced from 2016 to 2021not from 2010 to 2015. 

KORUS had precisely zero effect on U.S. imports of Hyundai and Kia vehicles before 2016 because the U.S. tariff on Korean cars (HS code 8703) was 2.5% before KORUS and remained at 2.5% through 2015.  Ironically, when U.S. tariffs on autos and other products finally did come down in 2016, total U.S. imports from South Korea fell 2.6% (by $1.9 billion).

 The Korean tariff on imports of U.S. cars was cut from 8% in 2012 to 4% in 2015 and zero in 2016 and a 10% Korean tariff on U.S. trucks was eliminated.  Even before Korea cut its tariff on U.S. cars to zero in 2016, U.S. exports of cars to So. Korea tripled from $418 million in 2011 to $1.3 billion in 2015, according to the USTR.  Incidentally the USTR also notes that “Korea is currently our fifth-largest market for agricultural exports thanks to KORUS,” with farm exports up 208% from 2011 to 2015.

What has been most changed about the auto industry since KORUS is that South Korea exported a sizable share of its auto industry to the United States, displacing previous Korean imports and adding to U.S. auto exports. More than half the Hyundais sold in the U.S. are now assembled in Alabama, and more than 40% of Kias in Georgia (contrary to Peter Navarro,  82.5% of U.S. auto industry jobs are not in Michigan). The Hyundai Santa Fe and Kia Sorento have 67% domestic content. Hyundai has invested $2.8 billion in the U.S. and plans to add $3.1 billion more. 

As the Graph shows, U.S. routinely ran sizable trade deficits with South Korea long before the FTA (and the U.S. routinely runs surpluses with other FTA countries, Australia and Singapore).  The U.S. trade deficit with South Korea and other countries came way down in 2009-2011 because deep recessions always slash U.S. imports, particularly industrial imports.

The graph includes services which, like farm products, were an important part of the deal.  The U.S. trade surplus in services with Korea rose from $6.9 billion in 2011 to $10.7 billion in 2016.  With services included, U.S. imports from South Korea did not rise at all from 2014 to 2016 ($81.4 billion in both years), and goods imports fell in 2016.

South Korea’s imports of goods from the U.S. rose from $29.7 billion in 2009 to $46.3 billion by 2014 before falling 8.4%to $42.4 billion in 2016.  Even with services included, South Korea’s imports from the U.S. fell from $66.5 billion to $63.9 billion since 2014.

KORUS could not possibly have had anything to do with the 2014-2016 drop in Korean imports from the U.S. because that agreement lowered rather than raised Korean tariffs.

South Korea’s demand for imports weakened because annual growth of industrial GDP fell to 2.5% from 2012 to 2015 – down sharply from a 6% pace from 2000 to 2011. One reason for Korea’s post-2014 import slump is that China’s imports from South Korea fell from more than $20 billion in October 2014 to $10-12 billion recently.  

The Trump Administration’s top trade advisers are entirely wrong about what happened when with respect to trade between the U.S. and South Korea.  KORUS had no effect at all on U.S. imports of auto, chips, motors or pumps between 2009 and 2015, because the U.S. auto tariff was unchanged until 2016 (when overall U.S. imports fell) and most other industrial products were already tariff-free before KORUS.

The Korea-U.S. trade deficit in goods did not rise from 2011 to 2015 (or fall in 2016) because of U.S. auto tariff cuts in 2016, but because the U.S. economy strengthened after 2010 and the Korean economy weakened after 2014.  

In numerous states and cities, taxi interests – notably unions representing taxi drivers – have come up with creative legislation to hobble the rise of ridesharing apps like Lyft and Uber. In Nevada, the taxi union recently proposed a package of measures to slam the apps good and hard, of which perhaps the most startling was this: drivers getting a rideshare booking would be required by law to wait to ensure that their fare was not picked up in less than ten minutes.  

What a great idea – all must be brought down to the level of the least able! Echoing Vonnegut’s funny-dystopian short story Harrison Bergeron, the speediest would have to sit out in artificial penalty time to ensure that they did not arrive before the poky. “In a brief interview, [union president T. Ruthie] Jones said the union only wanted a level playing field,” reports the Nevada Independent.

And it gets even better. When legislators got a look at the union’s wish list of requests, whoever was in charge of drafting apparently decided that a 10 minute wait time didn’t go far enough. So Senate Bill 485, introduced on Monday, instead upped the handicap delay to 15 minutes. Per the Nevada Independent, “Taxi companies — long an influential Nevada industry — gave to 50 legislators throughout the 2016 campaign cycle for a total of $476,200.” 

But the bill’s introduction stirred immediate and searching news coverage Tuesday. An Uber representative termed the 15 minute obligatory wait time “really absurd, frankly, on its face,” and said the service would pull out of the state if it were enacted. (That was the idea, right?) And by yesterday, Sen. Kelvin Atkinson (D-North Las Vegas), who chairs the committee on Commerce, Labor and Energy, said the bill was “bad policy,” dead and wouldn’t get a hearing. One of his opposite numbers had already commented critically:

Republican Assembly Leader Paul Anderson said in an earlier interview that the proposed restrictions were “atrocious” and said the measure was a blatant attempt to kneecap the industry.

“All it does is stifle an industry that is significantly providing a better service,” he said in a Tuesday interview.

My favorite comment came on Twitter: “I dunno, maybe the lawmakers should be forced to wait a while before they can drop this proposal…”

Imagine how many proposals of this sort would quietly slip through were it not for the vigilant, independent, and free press we are used to having in America.

The NAFTA renegotiation Donald Trump promised during his campaign may finally be getting started.  The specialty trade publication Inside US Trade (subscribers only) has a draft of the administration’s notice to Congress “that the President intends to initiate negotiations related to the North American Free Trade Agreement (NAFTA) and its architecture,” in which the administration sets out “specific objectives for negotiation.”  

At first glance, the administration’s plan looks like more than just a tweak to NAFTA, but will not come close to blowing up the system (as it sometimes sounded like during the campaign).  Things may change before the final notice is sent out, but for now a lot of what’s in there seems like an attempt to upgrade NAFTA to reflect provisions that have been developed in U.S. trade agreements over the last 15 years, including in the TPP.  In a sense, this NAFTA renegotiation is an attempt to make NAFTA more like the TPP.  Some examples are:  

  • adding rules on digital trade and cross-border data flows
  • adding enforceable provisions on labor, the environment, and state-owned enterprises
  • revising the provisions on investor-state dispute settlement
  • strengthening intellectual property rights

To the extent that the NAFTA renegotiation just incorporates TPP provisions, it is not too worrying.  That’s not to say that we in Cato’s trade policy center like all of the TPP provisions, but it would indicate that the Trump administration is not looking to do anything too radical on trade.

On the other hand, there are some proposals that could take NAFTA in a more protectionist direction.  Some examples of that are proposals to:

  • Eliminate a special procedure to have an international panel review U.S. anti-dumping/countervailing duties
  • Address the perceived unfairness of foreign border adjustment taxes (“level the playing field on tax treatment”)
  • Make sure NAFTA allows Buy America provisions (“establish rules that require government procurement to be conducted in a manner that is consistent with U.S. law and the Administration’s policy on domestic procurement preferences”)
  • Tighten up rules of origin, that is, restrict who can benefit from low NAFTA tariffs
  • Add new procedures that allow special tariffs when there are increased imports (“a safeguard mechanism to allow a temporary revocation of tariff preferences, if increased imports from NAFTA countries are a substantial cause of serious injury or threat of serious injury to the domestic industry”)

Keep in mind that this is just the draft, so the objectives stated here may change a bit.  Also, note that this is simply what the U.S. will ask for, and not necessarily what it will get after sitting down with Canada and Mexico.

All in all, it is somewhat of a relief to see that the proposed changes do not completely undermine NAFTA.  However, there will be some aspects of these proposals that we will be pushing back on, once the specifics of the proposals become more clear.

When it comes to foreign policy, the Trump administration has been engulfed in scandal and intrigue from day one. From the resignation of Michael Flynn, to a botched Yemen raid, to a U.S. bombing campaign in Mosul, Iraq that killed up to 200 civilians, to unrelenting controversy over Russian meddling in our election, it’s difficult to even keep up.

With all these distractions, it is easy to forget that there are important issues that demand thoughtful attention. High among these is the Iran nuclear deal. Not only must the Iran deal compete for attention with other controversies swirling around the White House, it has to withstand antagonism from hawks who refuse to acknowledge its success.

At the annual American Israel Public Affairs Committee conference this week, Senate Majority Leader Mitch McConnell criticized the Joint Comprehensive Plan of Action (JCPOA) for “bestow[ing] a windfall of billions for the Iranian regime to distribute to its proxies.” At the same conference, House Speaker Paul Ryan described the deal as “an unmitigated disaster” that is “dangerous for the United States and for the world.”

Actually, most of the tangible benefits in sanctions relief have gone to improving the economy for every day Iranians. And far from being a “dangerous” and “unmitigated disaster,” the deal has been successful in rolling back Iran’s nuclear program and in easing regional tensions.

The rhetorical abuse visited upon the JCPOA doesn’t bode well for the survival of the deal. And even the relative moderates in the Trump administration – people like Secretary of Defense James Mattis and Secretary of State Rex Tillerson, frequently described as the “grown-ups,” in contrast with the opposing bloc of “ideologues” – seem more hawkish than pragmatic on Iran.

In other words, the Trump White House exists in an echo chamber of negativity toward the JCPOA. The deal’s survival depends on deliberate administration support and a measured understanding of its benefits.

Sanction relief is an important part of this. The Trump administration needs to work hard to ensure that Iran sees the full benefits of sanctions relief in exchange for Iran rolling back its nuclear program, as it has done.

Unfortunately, both the Senate and the House are working to impose additional sanctions on Iran. The legislation would target people involved in Iran’s ballistic missile program and foreign entities who do business with them, while also applying terrorism sanctions to the Iranian Revolutionary Guards Corps (IRGC).

But concerns about Iran’s missile program and support for terrorism are distinct from the JCPOA. The nuclear deal was narrowly conceived as a non-proliferation agreement. Iran’s recent ballistic missile tests, which have drawn so much fire from critics of the deal, did not violate the agreement.

More to the point, Iran’s missiles aren’t a serious security threat. Iran is militarily weak compared to all of its neighboring rivals and is easily deterred from attacking its adversaries with these missiles.

As for applying terrorism sanctions to the Revolutionary Guards, this amounts to a pointless redundancy that will not yield positive results, but may make things much worse. The IRGC is “already one of the most sanctioned entities in the world” and these additional measures will have negligible impact on its activities. New sanctions could even undermine anti-ISIS operations, as the IRGC and Iranian Shiite militias are battling ISIS in Iraq and Syria. Indeed, American military and intelligence officials have warned such sanctions “could endanger U.S. troops in Iraq and the overall fight against the Islamic State, and would be an unprecedented use of a law that was not designed to sanction government institutions.”

Imposing new sanctions on Iran that are unrelated to the JCPOA and have almost zero chance of producing the desired results is needlessly antagonistic. In fact, Iran’s cheeky response this week to new U.S. sanctions was to impose “its own sanctions regime on U.S. military companies involved in supporting Israeli settlements.” This tit-for-tat dynamic risks eroding trust between Iran, the United States, and the other signatories to the deal (the U.K., France, Russia, China, and Germany), creating a disincentive for Iran to comply with the deal’s restrictions.

Most worryingly, this may even be the intention of those who oppose the deal. They recognize that pulling out of the JCPOA unilaterally would be too costly for America diplomatically, but if they can provoke violations on Iran’s part, they can destroy the deal and avoid blame.

Both the White House and Congress need to understand that the future of the Iran nuclear deal is a matter of choice. The United States can choose to uphold the deal and ensure promised sanctions relief for Iran. Or it can choose to undermine the agreement by inflating the threat from Iran and provoking tension over peripheral issues. The first choice holds back nuclear proliferation in the Middle East. The second risks disastrous conflict between the United States and Iran. 

For an economist, it’s rare that events occur enabling us to directly test our economic theories and assess them against outcomes. Britain’s Brexit vote last year was one such moment. As the formal Article 50 process for EU withdrawal begins today, it’s worth re-examining the consensus view on what a “Leave” vote would mean. Those warning of impending doom today are many of the same people who predicted a decision to exit would bring immediate economic slowdown.

The Economists for Brexit group of which I was a founding member was busy refuting anti-Brexit reports pre-referendum. Britain’s Treasury led the way, claiming GDP would be 6.2 per cent smaller after 15 years if Britain exited the EU and single market (replaced with an EU-UK bilateral trade deal, as Prime Minister Theresa May now desires). Importantly, they forecast the mere act of voting to leave would trigger an immediate 4-quarter recession with 500,000 people losing jobs, higher inflation and lower house prices. There would be a “profound economic shock.” The IMF warned that a path towards leaving the single market would mean a recession in 2017. The OECD predicted a “major negative shock.” An Economists for Remain letter signed by 12 Nobel Laureates likewise said “a recession causing job losses will become significantly more likely.”

Yet the UK economy has proven robust. Immediate financial market turbulence following the unexpected vote quickly subsided. Far from contracting at the Treasury’s forecast 0.4 per cent annualized rate, the economy is currently growing at 2.8 per cent per year. The employment rate for 16 to 64 year olds is at its highest ever level, 74.6 percent, with unemployment at just 4.7 percent. House prices are currently increasing at 6.2 per cent per year. Annual broad money growth was 6.6 percent in January – suggesting robust nominal GDP growth through 2017. Even after Theresa May pledged to leave the single market and customs union, forecasters were revising growth estimates upwards for 2017.

The economic consensus did forecast correctly the pound’s fall on a trade-weighted index (around 13 percent decline), as did the Economists for Brexit analysis. This will raise the UK inflation rate. But even the recent uptick in inflation to 2.3 percent is in part driven by increasing commodity prices affecting U.S. and German inflation rates too. The flipside has been strong export order books, highlighted by the Confederation of British Industry’s buoyant survey last week. What happens to the pound in the longer term of course depends on the economic fundamentals, but what is clear is that so far the doom-mongers have been wrong on the macroeconomic impact overall.

Some disingenuously claim they called it wrong because Article 50 was not triggered straight away, or because the Bank of England took action after the vote. But this makes little economic sense given the forward-looking nature of consumers and investors, and the lags with which monetary policy operates.

No, the faulty forecast really came about because forecasters made a host of negative political assumptions in their modelling. They implied that many of the positive pro-market policies that have taken place since the 1970s alongside EU membership would be reversed. They assumed Britain would choose to maintain EU-level tariffs on the rest of the world and fail to agree any new trade deals. They assumed an independent Britain would change no EU regulations. They assumed that Britain’s gross contribution to the EU budget, and other powers in everything from agriculture to clinical trials, would be no better used domestically.

On every major issue, they looked solely at the potential downsides of Brexit and not the opportunities. Britain in the EU was considered the peak of economic dynamism. Thinking they’d be worse off after Brexit, the British Treasury and others believed consumers and investors would tighten their belts now. The faulty forecast of an “immediate recession” stemmed directly from the assumptions the Treasury made. 

Most consumers and investors have so far shrugged off the vote though, suggesting the public believe Brexit will have little long-term economic impact. Theresa May has made strong commitments to pursue free trade (despite the lazy comparisons between Brexit and Trump) and the British Chancellor has floated the idea of moving to a Singapore-like economic model if no deal with the EU is reached. If the UK were to pursue free trade unilaterally, my Economists for Brexit colleague Professor Patrick Minford estimates GDP gains of as much as 4 percent in the long-term. Incidentally, his near-term forecast, deriving from this assumption, was much closer to outturns than the pessimistic consensus.

Even the EU Commission itself seems to think that the single market adds just 2.1 percent to EU-wide GDP overall, and you’d think that this figure would be lower for the UK given the market in services is less complete and Britain’s instincts on regulation tend to be on the liberal end. Factor in the ability to review damaging regulations on clinical trials, agricultural and financial services, and there is room for optimism for a post-EU Britain.

As Article 50 is triggered, it is time for economists to remember that there are many more options stemming from policy freeoms than many of them considered during the campaign. Brexit is a supply-side shock to the economy. Whether it is a positive or negative one depends on how Britain uses the trade, regulatory and spending powers it repatriates from the EU in the long-term. All agree that a country more open to trade and investment will, other things given, be more prosperous. The fact that some economists are so sure Brexit will be damaging reflects their own priors rather than economics.  

Yesterday morning the Supreme Court heard oral arguments in Lee v. United States, which concerns the right to counsel and the right to trial by jury.  Here is an excerpt from a piece I had published in The Hill:

Jae Lee came to the United States from South Korea in 1982. At the time, he was just a boy in the care of his parents. Now 48 years old, Lee has lived in the U.S. as a lawful permanent resident for decades. He went to school in New York, but eventually moved to Memphis and got into the restaurant business. According to federal prosecutors, Lee also became a small time drug dealer and, after his arrest, he was facing serious criminal charges.

Like many persons who are accused of a crime, the prosecution offered Lee some leniency in prison time if he would agree to surrender his constitutional right to trial by jury. Naturally, Lee wanted to know all of the legal consequences of accepting the government’s plea offer — so he asked his attorney whether he would be subject to deportation to South Korea. Lee’s attorney assured him that deportation would not be a problem and advised him to accept the plea bargain.

On that recommendation, Lee pled guilty.

As it turned out, Lee received bad legal advice. His conviction meant he was now subject to deportation under federal law. After serving several years in prison, he would eventually be deported to South Korea and essentially banished from the U.S.

On appeal, Lee argues that he only pled guilty because of the recommendation from his lawyer. He wants to take his case before a jury.

Federal prosecutors say there’s no need for a trial because the evidence against Lee is strong.  That’s a curious argument to make.  Our constitutional right to trial by jury doesn’t depend on the government’s assessment of its own case.  And, really, what kind of government would burden us with trillions of dollars of debt and then turn around and, in effect, say “Yes, this person was given incorrect legal advice, and yes, the Bill of Rights says we’re supposed to respect the accused’s right to trial by jury, but this is a situation in which we have to be mindful of the costs related to trials.  Let’s deny a trial to Mr. Lee because it would just be a waste of time and money. He should be grateful for the way his case was handled, for his prison food, and that we’re sending him to South Korea instead of North Korea.”

Here’s a link to the Cato amicus brief in the case.  And if you’d rather listen than read, here’s a link to a Cato podcast interview with Caleb Brown.

Craig Keefe was expelled from his state-funded nursing college in Minnesota because something he said was deemed unprofessional. He didn’t break any laws with what he said—there were no threats or anything like that—and wasn’t even on campus at the time. He just made a handful of rude comments on his personal Facebook page, unrelated to any curricular project.

Nevertheless, the school had adopted the American Nurses Association’s code of professional ethics, which forbids behavior “unbecoming of the profession” or that “transgresses personal boundaries,” into its student handbook, so the federal district court rejected Keefe’s challenge to his expulsion. The U.S. Court of Appeals for the Eighth Circuit affirmed that ruling, effectively holding that that any punishment of speech under the nursing code is effectively free from First Amendment review.

So now Mr. Keefe, represented by Cato adjunct scholar Robert Corn-Revere, is asking the Supreme Court to take his case. Cato, joined by the Electronic Frontier Foundation, National Coalition Against Censorship, and Student Press Law Center, and with the help of Prof. Eugene Volokh and the UCLA First Amendment Clinic, has filed a brief supporting that request.

First Amendment protection is critical at universities, where complicated and controversial ideas are supposed to be formulated and debated. If uncorrected, the Eighth Circuit opinion permitting Keefe’s expulsion will set a dangerous precedent: Colleges will be able to punish students for expressing their views, based simply on administrators’ judgments that certain speech is inconsistent with their subjective understanding of professionalism.

Many professional-ethics codes—including the one at issue here—embody specific ideological commitments that might not be shared by large numbers of students, while also containing vague requirements that members uphold those values in their daily lives. The Eighth Circuit has opened the door for professional schools, including law and business schools, to enforce ideological litmus tests under the guise of ensuring adherence to professional ethics. Indeed, we have already seen—in cases the lower court cites to defend its position—students being targeted for their beliefs (for example, Keeton v. Anderson-Wiley (11th Cir. 2011), where a student was disciplined for statements disapproving of homosexuality).

Allowing viewpoint discrimination by way of professional codes of conduct opens up a gigantic loophole in the First Amendment’s freedom of speech, and in constitutional protections for conscience rights more broadly.

The Supreme Court will decide before it breaks for the summer at the end of June whether to take Keefe v. Adams.

It is difficult to forecast what President Trump’s fiscal legacy will be. He’s sought credit for a recent reduction in public debt, but pledged not to touch the entitlement programs which are its key long-term driver, while also cutting taxes. His team has talked of the need for high-quality infrastructure investment to boost productivity, but leaked memos suggest priority projects must be “shovel ready” and “direct job creators” – different short-term aims.

Anybody hopeful that the fiscal conservative lines of this muddled agenda might win out might want to think again. It looks as if Trump has “stimulus” rather than a supply-side agenda in mind. Here’s an interview excerpt from The NYT:

Trump seemed much less animated by the subject of budget cuts than the subject of spending increases. “We’re also going to prime the pump,” he said. “You know what I mean by ‘prime the pump’? In order to get this” — the economy — “going, and going big league, and having the jobs coming in and the taxes that will be cut very substantially and the regulations that’ll be going, we’re going to have to prime the pump to some extent. In other words: Spend money to make a lot more money in the future. And that’ll happen.”

Let us presume for the sake of argument that Trump is a Keynesian who believes that government spending can be used to re-inflate the economy from downturns. Let us also assume that this kind of agenda works as Keynesian theory predicts. We can still ponder: why does the U.S. economy need a fiscal stimulus now? Theory (even Keynesian) and evidence suggests it does not.

1. Theory would suggest fiscal stimulus is not effective when there is little “spare capacity.” Whatever Trump thinks about the veracity of the statistics, the US economy is close to “full employment.” The civilian unemployment rate currently stands at 4.7 percent, only slightly above the Congressional Budget Office’s estimate for the “natural rate of unemployment.” The job openings rate is now running above that seen pre-crisis, quit rates are about the same as they were prior to the crash. The U5 unemployment rate (which adds marginally attached workers to the official rate) and the U6 unemployment rate (which adds those who are part-time for economic reasons) are at levels seen in the middle of the 2000s and construction unemployment is lower than in 2007. In such an environment, any attempted macroeconomic stimulus through infrastructure investment would be highly likely to crowd out private sector activity.

2. Theory suggests fiscal stimulus will be offset by monetary policy. Given the Fed has begun to raise its target rate, Keynesian theory would suggest monetary policy would offset any expansionary fiscal policy. Paul Krugman spelled this argument out clearly when he wrote “spending can be withdrawn later on without hurting employment, because once you’re out of the liquidity trap the Fed can offset the contractionary effects of a fiscal tightening by holding off on the monetary tightening it would otherwise have pursued.

3. Evidence suggests that any effect of government spending is very small when countries are highly indebted. US federal public debt stands at 105 percent of GDP. The long-term outlook for the public finances is dire on unchanged policies, driven by rising entitlement spending given demographic trends and rising health care costs. The federal deficit is already projected to be 2.9 per cent in 2017, but if current policies remain largely unchanged, the Congressional Budget Office projects estimates the annual deficit would rise to 5 per cent of GDP over the next decade (even with tax revenues above their average over the past five decades). In such an environment, consumers are more likely to foresee future tax increases when the federal government borrows more, and hence rein in activity today.

4. The assumptions necessary for short-term spending improving the debt-to-GDP outlook are incredible. Trump talks about spending money now to make a lot more in the future, but Larry Summers and Brad Delong outlined back in 2012 the conditions under which short-term borrowing could hypothetically improve the longer-term debt-to GDP path. As I wrote at the time, “the paper does an important public service, however. It lays out in detail the scale of the assumptions required.” They presume fiscal multipliers are large, monetary policy does not work, and that absent short-term borrowing workers and capital will become much less productive. All of these conditions are even less likely now than they were in 2012. As the FT’s Chris Giles said: “you have to have a rather weird faith in the notion that raising capital spending a bit today provides a much more powerful boost than the hit that inevitably comes next year when that temporary support is removed.”

In sum, theory and evidence suggests more government borrowing at the current time is unnecessary and would have little effect on GDP but would worsen the debt-to-GDP ratio. Sure, there might be a case for some infrastructure investment for other reasons (maintenance, alleviating damaging congestion, enabling new transport modes etc.), which I will explore in future posts, but that is a very different rationale from the pump priming put forward by the President.

A friend recently emailed me this after arriving at the Barcelona airport from Dublin:

I approve of their immigration system. I had this conversation with the agent:

Americano?

Si

You are not Trump?

Ha no.

Welcome

Gracias

Says it all.

In the political hullabaloo over efforts to shift costs of health care to someone else, the argument for keeping Obamacare’s compulsory insurance and ever-expanding Medicaid enrollment relies naïvely on notoriously comical Congressional Budget Office (CBO) 10-year “projections.” 

CBO claims the initial House Republican plan would eventually cause 3 million to “lose” health insurance simply because they would no longer be fined up to 2.5% of income for not buying a policy designed by and for politicians. This not a loss, but a gain – in freedom of choice.

CBO claims the GOP plan would “lose” another 14 million by not expanding Medicaid enrollment as rapidly as Obamacare hopes to. The federal government pays about 57% of the cost of Medicaid for poor people, but 90-93% (until 2022) to the 31 states that provide Medicaid to those earning up to 138% of the poverty line. That has added 17 million to the Medicaid rolls, and enriched big health insurers and Kaiser Permanente.

Since expanded Medicaid added only 17 million, how could the Republican plan’s modest frugality possibly subtract 14 million?  Only because CBO assumes that if nothing changes then more and more states will leap on this stalled bandwagon, thus shoving millions more on Medicaid.  This seems politically unlikely (few Republican governors have done so), but also unhealthy. All those new patients on Medicaid may have to drive very far to find an MD who accepts Medicaid. Having a third-rate health insurance card is not “health care.” It’s a card.  

Some of the biggest public policy blunders of recent years resulted from taking CBO’s crystal ball far too seriously.  Higher 1991 tax rates on high incomes and luxuries worsened the recession and lost revenue, for example, yet seemed courageous by the low standards of faulty CBO bookkeeping. 

An even better example of CBO dominating policy decisions was the foolishly phased-in and poorly-targeted 2001 Bush tax cuts.

In January 2001, CBO predicted that budget surpluses would add up to $5.6 trillion by 2011. That absurd CBO forecast made their (overestimated) $1.35 trillion 10-year revenue loss from look puny – merely nibbling away at 24% of projected surpluses.  Little wonder the 2001 law was a grab-bag of feel-good giveaways (10% tax rate, refundable credits, etc.) thanks in large part to the CBO’s blurred vision of endless surpluses.

Why does this have anything to do with health insurance policy?  Because CBO projections for the Affordable Care Act (ACA) have also been embarrassingly wrong. In March 2010 CBO estimated only 21 million would be uninsured by 2016, but the actual number turned out to be 27 million.  CBO expected 21 million policies on the Exchanges by 2016, but the actual number turned out to be 12 million.  

By using CBO projections as the baseline, as is being done with the GOP plan, it could be said that Obamacare “lost coverage” for 6 million people in 6 years –compared with 2010 CBO projections.

In short, the CBO has always grossly overestimated the success of Obamacare. And they still do.  They appear to underestimate how much larger federal subsidies to Medicaid and the Exchanges “crowd out” other insurance – luring people out of unsubsidized insurance into subsidized insurance, or into seemingly “free” expanded Medicaid in 31 states. 

The CBO’s rosy scenario about the future success of Obamacare exchanges, and about future growth of expanded Medicaid coverage, results in a grossly exaggerated estimate of the number of policies to be “lost” by reducing compulsion, mandates and taxpayer subsidies.  Good policy requires more good judgment, not more bad estimates.

Remarks made by Secretary of State Rex Tillerson in Beijing caused a collective gnashing of teeth among the foreign policy establishment this week. At least twice, Tillerson said that the U.S.-China relationship was built on “non-conflict, non-confrontation, mutual respect, and win-win solutions.” These exact words have often been used by China’s president Xi Jinping to describe a “new model of major country relations” between the United States and China.

China watchers based in D.C. rushed to criticize Tillerson’s statements for mirroring Xi’s language. Writing for Politico, Ely Ratner of the Council on Foreign Relations said, “terms like ‘mutual respect’ and ‘nonconfrontation’ are code in Beijing for U.S. accommodation of a Chinese sphere of influence in Asia.” A headline in the Washington Post said that Tillerson handed a “diplomatic victory” to China. The article featured quotes from experts such as Bonnie Glaser from the Center for Strategic and International Studies who said, “By agreeing to [mutual respect], the U.S. is in effect saying that it accepts that China has no room to compromise on these issues.” In Foreign Policy, former State Department and National Security Council official Laura Rosenberger argued that U.S. allies in East Asia “may question [U.S.] commitments given Tillerson’s wording in Beijing.”

The consensus seems to be that Tillerson’s statements are bad for the United States and good for China. But this overinflates the importance of Tillerson’s words. The reaction to then president-elect Donald Trump’s statements about the One-China policy offers a useful point of comparison to Tillerson’s statements. Hand wringing over Trump’s statements were justified, but the response to Tillerson’s statements are overblown.

In a December 2016 interview with Fox News Sunday, Donald Trump suggested that the United States would no longer be bound by its longstanding One-China policy “unless we make a deal with China having to do with other things, including trade.” Trump’s statements prompted a strong, mostly negative response from American experts, and rightly so.

The reaction to Trump’s One-China policy remarks was justified because of the circumstances at the time. The interview came shortly after news broke about a precedent-breaking phone call between Trump and the president of Taiwan, which also caused considerable angst among China watchers. The phone call and One-China policy remarks raised serious questions about the future of U.S.-China relations because there was no policy record to judge these actions against.

Supporters of Trump’s behavior argued that his status as president-elect muted the impact of his actions, and since taking office he has taken steps to reassure China that a significant change in American policy toward Taiwan is not likely. However, at the time the actions were taken it was prudent for China watchers to account for worst-case scenarios given the lack of policy to compare the actions against. Even though worst-case predictions turned out to be false, the shadow of uncertainty that loomed over the incoming Trump administration meant that such dire assessments could not be ruled out.

Tillerson’s recent statements in Beijing can be judged against Trump administration policies. When such policies are taken into account, the “diplomatic victory” won by Beijing quickly loses its significance. The first elements of the Terminal High Altitude Area Defense (THAAD) missile defense system, which Beijing stringently opposes, arrived in South Korea shortly before Tillerson’s trip to the region. A few days before Tillerson’s statements, an aircraft carrier strike group operating under the command of the U.S. Navy’s Third Fleet arrived in South Korea to conduct military exercises alongside the South Korean navy. According to U.S. Pacific Command, this marks the first time that a carrier strike group under Third Fleet command has operated alongside allies in the Western Pacific since World War II.

The Trump administration is also threatening to put greater economic pressure on China, despite its early decision to withdraw from the Trans Pacific Partnership, which many China watchers saw as a boon for Beijing. A recent report by Reuters claims the administration is considering “sweeping sanctions aimed at cutting North Korea off from the global financial system,” which could apply to Chinese banks and firms that do business with North Korea. Robert Lighthizer, Trump’s nominee for U.S. Trade Representative, said he would put more pressure on China in response to its economic practices that hurt the U.S. economy in his confirmation hearing.

The foreign policy establishment is overreacting to Tillerson’s statements in Beijing. There are plenty of U.S. policies, military movements, and economic rhetoric that point to a reality that is divorced from Tillerson’s rhetoric. Words do matter for Beijing, and it may take succor from Tillerson’s words, but this is unlikely to ease their concerns over THAAD deployment, deepening U.S.-South Korean ties, and gathering storm clouds of American trade policy. 

F. A. Hayek died 25 years ago today. His secretary called Cato Institute president Edward H. Crane, who confirmed the sad news to the New York Times.

Hayek’s life spanned the 20th century, from 1899 to 1992. In his youth he thought he saw liberalism dying in nationalism and war. Thanks partly to his own efforts, in his old age he was heartened by the revival of free-market liberalism. John Cassidy wrote in the New Yorker that “on the biggest issue of all, the vitality of capitalism, he was vindicated to such an extent that it is hardly an exaggeration to refer to the twentieth century as the Hayek century.”

Back in 2010 the New York Times said that the Tea Party “has reached back to dusty bookshelves for long-dormant ideas. It has resurrected once-obscure texts by dead writers [such as] Friedrich Hayek’s “Road to Serfdom” (1944).” I responded at the time,

So that’s, you know, “long-dormant ideas” like those of F. A. Hayek, the winner of the Nobel Prize in Economics, who met with President Reagan at the White House, whose book The Constitution of Liberty was declared by Margaret Thatcher “This is what we believe,” who was described by Milton Friedman as “the most important social thinker of the 20th century” and by White House economic adviser Lawrence H. Summers as the author of “the single most important thing to learn from an economics course today,” who is the hero of The Commanding Heights, the book and PBS series by Daniel Yergin and Joseph Stanislaw, and whose book The Road to Serfdom has never gone out of print and has sold 100,000 copies this year.

On the occasion of Hayek’s 100th birthday, Tom G. Palmer summed up some of his intellectual contributions:

Hayek may have made his greatest contribution to the fight against socialism and totalitarianism with his best-selling 1944 book, The Road to Serfdom. In it, Hayek warned that state control of the economy was incompatible with personal and political freedom and that statism set in motion a process whereby “the worst get on top.”

But not only did Hayek show that socialism is incompatible with liberty, he showed that it is incompatible with rationality, with prosperity, with civilization itself. In the absence of private property, there is no market. In the absence of a market, there are no prices. And in the absence of prices, there is no means of determining the best way to solve problems of social coordination, no way to know which of two courses of action is the least costly, no way of acting rationally. Hayek elaborated the insights of the Austrian economist Ludwig von Mises, whose 1922 book Socialism offered a brilliant refutation of the dreams of socialist planners. In his later work, Hayek showed how prices established in free markets work to bring about social coordination. His essay “The Use of Knowledge in Society,” published in the American Economic Review in 1945 and reprinted hundreds of times since, is essential to understanding how markets work.

But Hayek was more than an economist. As I’ve written before, he also published impressive works on political theory and psychology. He’s like Marx, only right. Tom Palmer noted:

Building on his insights into how order emerges “spontaneously” from free markets, Hayek turned his attention after the war to the moral and political foundations of free societies. The Austrian-born British subject dedicated his instant classic The Constitution of Liberty “To the unknown civilization that is growing in America.” Hayek had great hopes for America, precisely because he appreciated the profound role played in American popular culture by a commitment to liberty and limited government. While most intellectuals praised state control and planning, Hayek understood that a free society has to be open to the unanticipated, the unplanned, the unknown. As he noted in The Constitution of Liberty, “Freedom granted only when it is known beforehand that its effects will be beneficial is not freedom.” The freedom that matters is not the “freedom” of the rulers or of the majority to regulate and control social development, but the freedom of the individual person to live his own life as he chooses. The freedom of the individual to break old molds, to create new things, and to test new paths is the mark of a progressive society: “If we proceed on the assumption that only the exercises of freedom that the majority will practice are important, we would be certain to create a stagnant society with all the characteristics of unfreedom.”

Reagan and Thatcher may have admired Hayek, but he always insisted that he was a liberal, not a conservative. He titled the postscript to The Constitution of Liberty “Why I Am Not a Conservative.” He pointed out that the conservative “has no political principles which enable him to work with people whose moral values differ from his own for a political order in which both can obey their convictions. It is the recognition of such principles that permits the coexistence of different sets of values that makes it possible to build a peaceful society with a minimum of force. The acceptance of such principles means that we agree to tolerate much that we dislike.” He wanted to be part of “the party of life, the party that favors free growth and spontaneous evolution.” And I recall an interview in a French magazine in the 1980s, which I can’t find online, in which he was asked if he was part of the “new right,” and he quipped, “Je suis agnostique et divorcé.”

Hayek lived long enough to see the rise and fall of fascism, national socialism, and Soviet communism. In the years since Hayek’s death economic freedom around the world has been increasing, and liberal values such as human rights, the rule of law, equal freedom under law, and free access to information have spread to new areas. But today liberalism is under challenge from such disparate yet symbiotic ideologies as resurgent leftism, right-wing authoritarian populism, and radical political Islamism. I am optimistic because I think that once people get a taste of freedom and prosperity, they want to keep it. The challenge for Hayekian liberals is to help people understand that freedom and prosperity depend on liberal values, the values explored and defended in his many books and articles.

White House National Trade Council Director Peter Navarro’s views have been roundly criticized by economists and policy professionals from across the political and ideological spectra. There seems to be an emerging consensus that the more Navarro speaks and writes, the more he marginalizes his influence within the administration. It is with that cause and (positive) effect in mind that I continue pulling on this thread.

A couple of weeks ago, Navarro wrote an oped in the Wall Street Journal, offering some really unconventional perspectives about trade policy and revealing a profoundly unique understanding of economics. I replied (in long form) on the Cato blog and (in shorter form) with a letter to the editor of the WSJ.

This afternoon, the WSJ published a response from Navarro to me and the authors of the two other letters published in response to Navarro’s original oped. And in response to Navarro’s response, Cafe Hayek’s/Mercatus’s/GMU’s Don Boudreax wrote this letter to the WSJ editor:

22 March 2017

Editor, Wall Street Journal

1211 6th Ave.

New York, NY 10036

Dear Editor:

The headline is promising: “Peter Navarro Responds to His Trade Critics” (March 22). So I eagerly anticipated reading Navarro’s substantive defense, against knowledgeable critics, of his reasons for fearing trade deficits. Alas, disappointment. Navarro offers not a single relevant argument.

Typical is his contemptuous treatment of Dan Ikenson. To establish that Mr. Ikenson has an “Alice-in-Wonderland worldview,” Navarro merely lists some of Mr. Ikenson’s policy positions without offering as much as a syllable to inform us why these positions are untenable.

The closest Navarro comes to making a relevant argument is when he writes, responding to Desmond Lachman, that “if India agrees to lower its tariffs on Harley Davidson motorcycles, Indian consumers will buy more Harleys and save less while Harley will sell more Harleys and invest more.” Well, no one has ever denied that Indians would buy, and Harley would sell, more Harleys if India reduces its tariff on these bikes. But it doesn’t follow that Indians would necessarily, as a result, save less. (Does Navarro always save less when his cost of living falls?) And while more resources would indeed likely be invested in Harley’s operations, these resources would have to come from foreigners if Americans don’t increase their savings. Contrary, therefore, to the conclusion that Navarro wants us to draw from what he pretentiously (if inaccurately) calls “obvious general equilibrium effects,” a cut in India’s tariffs on Harleys is not remotely guaranteed to lead to a decrease the U.S. trade deficit.

Sincerely,

Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030 

Stay tuned!

A Washington Post story today about one of President Trump’s budget cuts reflects what can be called victim journalism. The story focuses on the proposed ending of federal funding for the Appalachian Regional Commission (ARC). The reporter presents an interesting narrative about some ARC beneficiaries, but does not provide the balance needed to judge the overall value of the program.

The story presents individuals in Appalachia as victims, and federal money as the only savior. It does not focus on personal responsibility, local government policies, or federal program failures. The reporter does not mention any studies examining the ARC’s overall effectiveness, or whether auditors have done a benefit-cost analysis to see whether the program’s benefits outweigh the costs.

However, the main problem with the Post story is a lack of appreciation for the federal structure of American government. Statements like this bewilder me: “The federal funding [for ARC] often goes toward repairing essential services rural towns cannot afford on their own, such as fixing broken sewer systems…”

Sewer systems are indeed an essential local service. As such, they should receive a high priority in state and local budgets. If sewers in Appalachia are not being fixed, then state and local governments are failing at a core responsibility. Reporters should ask why that is.

The ARC sprinkles about $150 million a year across 13 states, from New York to Mississippi. Combined state and local spending in those states (excluding federally funded spending) is more than $800 billion a year. So the supposedly crucial ARC spending represents less than 0.02 percent of the region’s own government spending. If the ARC were eliminated, those governments could easily fill the small void with their own money.

Addendum

Let’s drill down on Kentucky, which was the focus of the Post story and is in the center of the ARC region. If all the ARC money were spent just in Kentucky, it would still be only 0.5 percent of the roughly $30 billion in state/local spending in that state.

The Post story claims “so much of the Appalachian commission’s budget — $146 million in 2016 — goes toward infrastructure projects…” Assuming that is true, why doesn’t Kentucky have room in its own budget for infrastructure such as sewers? Looking at Census data for state and local governments in Kentucky suggests why. Total capital spending on sewers and solid waste was $234 million in 2014, but spending on “public welfare” was $8 billion and spending on government worker salaries was $10 billion.

Pages