Friday, October 30, 2009

Desperate, Fearmongering DCCC: Doug Hoffman Is A Dirty Free Trader!

Well, well, well. I guess the Democratic Congressional Campaign Committee (DCCC) has decided that surging Independent Doug Hoffman is such a big threat in next week's NY-23 special elections, that it's time to resort to a classic Democrat dirty trick and label him - GASP! - a free trader. 

Here's the DCCC's disgraceful commercial (h/t HotAir):

I haven't donated to Doug Hoffman's campaign, but I certainly enjoy his independent, upstart fiscal conservatism and wish him the best in next week's special election.  But even if I didn't, this DCCC commercial is so chock-full of knowingly false statements - and so indicative of your typical DCCC/DNC protectionist fearmongering (see, e.g., here and here) - that it demands a complete and total takedown.  So let's do just that, line-by-lying-line:

ALLEGATION (1) "Millionaire Doug Hoffman's policies would send more jobs here to these countries [Graphic: map of India and China].  Hoffman wants to keep tax breaks for companies that want to ship our jobs overseas." 

FACTS:  First, the idea that hordes of American jobs are being outsourced to China or India is a complete economic fiction. As Cato's Dan Griswold explains:  
There is no evidence that expanding employment at U.S.- owned affiliates comes at the expense of overall employment by parent companies back home in the United States. In fact, the evidence and experience of U.S. multinational companies points in the opposite direction: foreign and domestic operations tend to compliment each other and expand together. ...
The fear of manufacturing jobs being shipped to China and Mexico is not supported by the evidence. While U.S. factories were famously shedding those 3 million net jobs between 2000 and 2006, U.S.-owned manufacturing affiliates abroad increased their employment by a modest 128,000 jobs.
Second, what about those evil "tax breaks"?  Turns out they actually increase American jobs.  Here's Griswold again:
Politicians are not usually specific about exactly what "tax breaks" they want to repeal. The biggest tax exemption for U.S. companies that invest abroad is the deferral of tax payments for "active" income. U.S. corporations are generally liable for tax on their worldwide income, whether it is earned in the United States or abroad. But the relatively high U.S. corporate tax rate is not applied to income earned abroad that is reinvested abroad in productive operations. U.S. multinationals are taxed on foreign income only when they repatriate the earnings to the United States. Not surprisingly, the deferral of active income gives U.S. companies a powerful incentive to reinvest abroad what they earn abroad, but this is hardly an incentive to "ship jobs overseas."

Such deferral may sound like an unjustified tax break to some, but every major industrial country offers at least as favorable treatment of foreign income to their multinational corporations. Indeed, numerous major countries exempt their companies from paying any tax on their foreign business operations. Foreign governments seem to more readily grasp the fact that when corporations have healthy and expanding foreign operations it is good for the parent company and its workers back home.

If President Obama and other leaders in Washington want to encourage more investment in the United States, they should lower the U.S. corporate tax rate, not seek to extend the high U.S. rate to the overseas activities of U.S. companies. Extending high U.S. tax rates to U.S.-owned affiliates abroad would put U.S. companies at a competitive disadvantage as they try to compete to sell their goods and services abroad. Their French and German competitors in third-country markets would continue to pay the lower corporate tax rates applied by the host country, while U.S. companies would be burdened with paying the higher U.S. rate. The result of repealing tax breaks on foreign earnings would be less investment in foreign markets, lost sales, lower profits, and fewer employment and export opportunities for parent companies back on American soil.

Politicians who disparage investment in foreign operations are wedded to an outdated and misguided economic model that glorifies domestic production for export above all other ways for Americans to engage in the global economy. They would deny Americans access to hundreds of millions of foreign customers and access to lower-cost inputs through global supply chains. In short, they would cripple American companies and their American workers as they try to compete in global markets.
Amen and hallelujah!

Third (and economics aside), let's take a practical look at the idea of "ending tax breaks for American companies that ship jobs overseas." How exactly would this policy work?  For example, if Boeing fired six people in Washington State and then hired six people in Germany for completely unrelated reasons, would that be "shipping jobs overseas" and cost Boeing billions in taxes?  Who would decide?  Where's the line?   For the DCCC's mythological policy to work, wouldn't the US Government basically need to examine - and judge! - every foreign and domestic employment decision of every company in the country?  Wow, that sounds both fantastic and totally doable!  Sign me up!

(Oh, and I love that "millionaire" is now a DCCC insult.  Speaks volumes that a self-made millionaire CPA is a Democrat bogeyman, doesn't it?  But I digress.)

ALLEGATION (2) "New York has lost 50,000 jobs due to bad trade deals." [Source: Economic Policy Institute, 2005] 

FACTS:  As far as I'm aware, there is only one "think tank" on the planet - the union-funded Economic Policy Institute - that blames FTAs like NAFTA for US job losses and counts the jobs lost.  And like clockwork, the EPI's work is cited in the DCCC's commercial (as it always is in fear-mongering protectionist hit-pieces).  The problem is that the EPI's numbers are nonsensical, and their basic methodology - simplistically tying the US trade deficit to US job losses - has been routinely debunked for almost a decade.

On the latter point, Cato's Griswold (in, among others, 2000, 2001, 2003, 2005, and again in 2007 (PDF)), AEI's Phil Levy (here), the US Chamber of Commerce (here), (here) and even your humble correspondent (here, with Cato's Dan Ikenson) have completely destroyed EPI's methodology.  The basic arguments from Griswold: 
To determine the number of jobs or potential jobs "eliminated" by the trade deficit, the EPI model compares actual U.S. employment to what it would supposedly be if the U.S. trade deficit were zero and the economy's overall growth rate unchanged. Fewer imported cars, steel slabs, shoes, toys, shirts, and other goods are then translated into more domestic production of those items and hence more jobs if exports equaled imports. In other words, every widget not imported translates into a widget produced at home and more widget workers employed. Within this model, the rising imports and trade deficits of recent years can only be bad news for output and employment. ...

The attempt to blame trade deficits for a loss of jobs founders in theory and in practice. First, the model ignores the role of international investment flows. The flip side of America's trade deficit is the net inflow of foreign investment. The extra $435 billion that Americans spent on imports over and above exports last year was not stuffed into mattresses overseas. Those dollars quickly returned to the United States to buy U.S. assets, such as stocks, bank deposits, commercial and Treasury bonds, or as direct investment in factories and real estate. A principal reason why the United States runs a trade deficit with the rest of the world year after year is that foreign savers continue to find the U.S. economy an attractive place to invest. The EPI model ignores the growth and jobs created by the offsetting inflow of net foreign investment into the U.S. economy that the trade deficit accommodates. That net surplus of investment capital buys new machinery, expands productive capacity, funds new research and development, and keeps interest rates lower than they would otherwise be. EPI counts the jobs supposedly lost when we import cars but ignores the jobs created when BMW or Toyota builds an automobile factory in the United States that employs thousands of Americans in good-paying jobs. So it is the critics of trade who are guilty of counting the withdrawals but not the deposits in our national balance of payments account.

Second, the central assumption of the EPI model--that rising imports directly displace domestic output--collides headlong with empirical reality. In fact, imports and domestic output typically rise together in response to rising domestic demand. During much of the 1990s, when imports and trade deficits were both rising rapidly, so too was domestic employment and manufacturing output. Between 1994 and 2000, when deficits supposedly claimed a "heavy toll" on U.S. employment, civilian employment in the U.S. economy rose by a net 12 million and the unemployment rate fell from 6.1 percent to 4.0 percent. During that same period, U.S. manufacturing output rose by 40 percent even though the volume of imported manufactured goods doubled. Manufacturing took a nosedive in 2001-2002, but rising imports were not the culprit. While manufacturing output was falling 4.1 percent in 2001 from the year before, real imports of manufactured goods were falling 5.4 percent after four straight years of double-digit increases....

If the trade critics were right, the recent plunge in import growth should have stimulated an increase in domestic output as U.S. factories sought to fill the gap left by the missing imports. According to the EPI model, in other words, the relation should be negative and the trend line should slope downward and not upward. Once again, reality intrudes on the protectionist story. There is no basis, in theory or experience, for the persistent allegation that trade deficits, and more specifically imports, mean fewer jobs in the U.S. economy. The reality is more nearly the opposite. As a reflection of continued domestic demand and the desire of foreign investors to acquire U.S. assets, large trade deficits are typically associated with more output and more jobs. In America today, trade and prosperity are a package deal. The more we trade, the more we prosper, and the more we prosper, the more we trade. By seeking to curb imports of manufactured goods, opponents of trade will only undermine the ability of the U.S. economy to expand output and create jobs.
On my first point (that EPI's numbers defy common sense), just step back and think about EPI's "analysis" for a second.  Without counting a single actual job, the EPI study cited in the DCCC commercial showed that by 2005 NAFTA alone had cost the state of New York exactly 51,582 jobs.  Not 51,583 or 51,581. Nope. Exactly 51,582 jobs.  Eureka!  In all seriousness, this kind of pseudo-economics is so ridiculous that it should be rejected on its face, and because most sane people probably would reject their argument if the exact number were used, the DCCC commercial said "50,000 jobs," rather than "51,582 jobs."  It sounds more plausible that way, you see?  Unfortunately, as the analysis above makes clear, it ain't.

ALLEGATION (3) "Yet Hoffman's biggest backers want more unfair trade deals." [Source: Club for Growth Press Release, 9/28/09].

FACTS:  It is true that the Club for Growth vigorously supports Doug Hoffman.  And it's also true that the Club is a vigorous supporter of all forms of trade liberalization - including free trade agreements.  And why shouldn't they be?  Free trade has lifted millions upon millions of people out of abject poverty.  It's an economic principle upon which almost every economist on the planet can agree (and that's saying something!).  It lowers prices for American families and costs for American businesses (over 50% of all imports are capital goods and equipment, afterall); it provides new markets for American products; and, perhaps most importantly, it is a a critical component of every individual's fundamental right to engage in mutually beneficial transactions with whomever he or she chooses, regardless of the country or countries involved in the transaction.  Indeed, even the founding fathers recognized free trade's immense intrinsic value, and understood that protectionism would destroy the union (hence, the Constitution's commerce clause).

On the other hand, modern protectionism is idiotic, immoral and a classic by-product of political corruption, special interest politics, and overarching government intrusion into our private lives.  So kudos to Doug Hoffman - and the Club for Growth - for supporting free trade.  And yet the DCCC wants to side with the protectionists and scare the voters of NY-23 into doing the same?  As I said, disgraceful.

Now, grizzled campaign veterans (including, unfortunately, a few that I worked with in 2008) would cite poll after poll to advise that Hoffman and other free trade candidates should avoid the DCCC ad and its ilk because that's just "smart politics."  I'd counter that it's only "smart" because conservative (typically GOP) candidates and their handlers let it be.  On this issue - and more than almost any other - the "truth" is on the good guys' side, and there's almost no debate that free trade is a very good thing for America.  Yet one (wrong) side is playing to people's fears and is literally lying to them, to their extreme detriment, and the other (right) side is staying silent because the issue doesn't poll very well.  But if free trade candidates (and elected officials) never attack their opponents' misleading fearmongering, those silly polls will never change, and the painful cycle will continue on and on (and on and on and...).  Isn't it about time that free traders - I dunno, maybe "real conservatives" like Doug Hoffman (or libertarians!) - stood up and said "enough!"?

The obvious answer is yes.  Emphatically.

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