Some Updates

I know things have gotten a little quiet around here, but don't worry: I've managed to survive without you (haha).  In all seriousness, when not changing diapers or making bottles, I've definitely been keeping busy with several side projects, including:

• I've recorded several podcasts for the Cato Institute on various trade issues.  The first two of those are now out, and you can listen here (on subsidies) and here (on energy).  So sit back, relax, and let my sultry voice lull you into a deeper state of libertarian economic consciousness.

• Back in August, I penned an oped for IBD on how various US government trade and fiscal policies artificially inflate food prices and hurt American families.

• I've also started occasionally writing for the hot new web magazine The Federalist.  You can find my first couple articles (and all future ones) here.

• And last but not least, I'm very excited to announce that I've signed on to be a Visiting Lecturer at Duke University, and will be teaching "Institutions in International Trade Law" there in the Spring of 2014.  Once the course description is online, I'll be sure to share it here.  In the meantime, if you know any students at Duke who are looking to learn about trade law, economics and policy (and, of course, robots/monkeys/pirates), be sure to send 'em my way!

Enjoy!

(And if you'd like to get these (and many, many other) updates more quickly, be sure to follow me on Twitter or Facebook.)

Subsidized Stupidity

Now that America's sugar program is - like many other costly forms of corporate welfare in this time of strained federal budgets - facing increased scrutiny, the subsidy-loving folks at Big Sugar have devised a new plan to keep all of their sweet, sweet taxpayer cash flowing:

Just days before the U.S. House of Representatives voted down the latest effort to gut U.S. sugar policy, Congressman Ted Yoho (R-FL) introduced a new “zero-for-zero” sugar policy that instructs the administration to target the foreign sugar subsidies that are distorting world prices and keeping a free market from forming.

The American Sugar Alliance (ASA) praised Yoho and the nine original co-sponsors of H.Con.Res. 39, which would also advocate for the end of U.S. sugar policy once market-distorting programs in foreign countries are eliminated.... 

Co-sponsors of the zero-for-zero policy include Reps. William Cassidy (R-LA), Lois Frankel (D-FL), Alcee Hastings (D-FL), Doug LaMalfa (R-CA), Trey Radel (R-FL), Martha Roby (R-AL), Tom Rooney (R-FL), Kurt Schrader (D-OR), and Frederica Wilson (D-FL). Weston says the industry is encouraging others to cosponsor.

In addition to the ASA, free-market advocates like the American Conservative Union have publicly endorsed the Yoho legislation.

As I explained in my big Cato paper on global subsidy reform, ideas like these are, despite their uniform awfulness, par for the course from subsidy recipients and their congressional benefactors:

Politicians and rent-seeking interest groups often claim that subsidies are essential to  offset the unfair advantages bestowed on subsidized foreign competition. This illogic is pervasive among protectionists in Congress, such as Sen. Sherrod Brown (D-OH), who routinely call for new U.S. protectionism in response to China’s “improperly subsidizing manufacturing industries,” but such thinking can infect even the most fiscally conservative members. For example, tea party icon Sen. Marco Rubio (R-FL), who represents sugar-producing Florida, recently justified his vote to protect the U.S. sugar program on the grounds that it is necessary to counteract foreign subsidies. That sort of logic is what propels the spiral of tit-for-tat subsidization.

Thus, it's wholly unsurprising to see Rep. Yoho and his sugarland colleagues support the zero-for-zero idea.  However, I must say that I'm a little shocked that supposedly "conservative" non-profit organizations - folks who don't represent Floridian sugar farmers and are supposedly guided by the principles of limited government and fiscal conservatism - have signed on to Big Sugar's latest scheme.  (According to Rep. Yoho's "Dear colleague" letter urging support for this plan, the following groups are big fans of the zero-for-zero legislation: ACU, Americans for Job Security, lessgovernment.org, 60 Plus Association, Citizen Outreach, Institute for Liberty, Let Freedom Ring, Frontiers of Freedom, Institute for Policy Innovation, Americans for Limited Government.)  Indeed, as I've frequently discussed (see, e.g., above), there is absolutely nothing conservative, libertarian or "free market" about implementing or maintaining subsidies, even where other countries are dumb enough to implement/maintain their own.  And Big Sugar's "zero-for-zero" scheme in particular fails from an economic, legal and logical perspective:

• Cato's Sallie James hits on most of the economics: "The question is: what should the United States do while we are waiting for this nirvana to materialise, a process that would be very lengthy indeed? I would suggest that doing ourselves a favour and abandoning the terrible U.S. sugar policy—costing the economy billions of dollars a year through artificially high sugar prices and, now, government sugar purchases—is a good start. Let other countries distort their markets and subsidise sugar importers’ consumption, as is their wont. We don’t have to follow them, and American consumers and businesses would benefit from a freer domestic market in sugar."  I'd just add the fact that, as I recently noted, America's sugar program imposes a regressive tax (at one point almost 50%) on American families who are forced by the US government to pay higher prices in order to line Big Sugar's pockets.  And it's immoral protectionism like this that keeps US food prices high and rising.

• On the legal front, the zero-for-zero idea, just like all other forms of this trite "unilateral subsidy disarmament" argument, completely ignores the fact that there are national "countervailing duty" laws and multilateral (WTO) anti-subsidy rules that protect domestic industries from the unfair, injurious subsidization of their competitors by foreign governments.  So if, as Big Sugar claims, the Brazilian government is using billions of dollars worth of predatory subsidies to try to kill the US sugar industry, Big Sugar or its workers can lawfully seek protectionist duties against subsidized Brazilian sugar imports, or they can lobby the US government to bring a WTO dispute against Brazil.  And, of course, if we eliminated our dumb subsidies, we'd be on much stronger, more principled ground to bring such cases.  So the idea that rampant, unilateral sugar subsidies and protectionism are necessary to protect Big Sugar from evil Brazilian (or other countries') sugar exports is absolutely false.

• Finally, it is simply mind-boggling that "free market" groups fail to grasp the horrible illogic and completely un-conservative implications of Big Sugar's zero-for-zero policy: it argues against the elimination of almost every form of corporate welfare provided by the US government.  For example, China is a global leader in solar panels production and trade, and Beijing undoubtedly provides billions of dollars worth of subsidies to Chinese solar manufacturers.  So does that mean that the ACU and those other "conservative" groups will support Solyndra and the rest of the Obama administration's solar subsidies until China agrees to stop subsidizing its solar panel producers?  The same could be asked of American wind power and other "green" subsidies, steel subsidies, ethanol subsidies, automobile subsidies (hooray bailouts!) and on and on and on.  As I noted in my Cato paper last year, almost all governments (unfortunately) are guilty of throwing billions of taxpayer dollars at their industries of choice. So should the US government therefore keep all of our immoral, inefficient and distortive corporate subsidies - $98 billion in 2012 alone! - until all foreign governments around the world wise up and terminate theirs (i.e., never)?  No. Of course not.

So, really, what's going on here?  Why on earth are these "conservative" groups siding with Big Sugar and against US taxpayers (and basic economics and reason)?  Well, I can see only two options, neither of which is very flattering: either they're wholly ignorant of the economics and law of global subsidies, or... well... I'll let you draw your own conclusions about option #2.

How US Government Policies Conspire to Keep Food Prices High and Rising (and Hurt American Families in the Process)

Recent, widespread reports that US inflation remains tame in the face of ever-loose monetary policy have been met with skepticism from certain folks because the most common metric - "core CPI" - omits rising food and fuel prices.  One such critique that recently caught my eye came from Ben Domenech in his must-read newsletter, The Transom, who noted among other things that "according to BLS figures, over the past five years, the average prices for all goods are 7.7% higher; the average price of bread is 10.4% higher; and the average price of meat/poultry/fish/eggs is 16.2% higher."

In a subsequent email, Domenech sent along the following chart, which really hits his point home:

That's a pretty stark picture, and it got me thinking about what's causing the recent and alarming spike in US food prices - a problem that, of course, disproportionately hurts poor American families and stands in stark contrast to fantastic price declines for many US consumer goods (as documented repeatedly by AEI's Mark Perry).

As it turns out, there are several government policies that are conspiring to keep US food prices high and rising and thereby line the pockets of certain special interests at US consumers' expense.  I'd be remiss not to lead off with the fact that many archaic US trade barriers on certain foods thwart foreign competition and the lower prices that it facilitates. According to the US International Trade Commission's latest report on "The Economic Effects of Significant U.S. Import Restraints," these artificial barriers to free trade raise US prices of certain foods to levels that are well above global averages.  I railed against these barriers back in 2009 using the previous version of the ITC's report, and that critique unfortunately remains valid (although certain numbers obviously have changed):

The table below is from the 2009 ITC report (click to enlarge).  It shows the products that face the highest import and export tariffs in the United States, as well as the US-world price difference caused by those import barriers. 

 

As you can see, some of the highest trade barriers in the United States are on things that American families use everyday - food (cheese, butter, milk, sugar, tuna, etc.), clothing (including thread, fabric and textiles) and shoes.  The taxes on these necessities range from a few percent to almost 48 percent, and these trade barriers result in US prices that are up to 57 percent higher than prices for the same goods in other markets.  So, for example, US trade policies force American families to pay $1.57 for a stick of butter, while Canadian families pay only a dollar for the exact same thing.  Nothing like a 57% butter tax to help the Joneses really tough-out the recession, huh?  Awful.

Thus, archaic US trade barriers designed to protect certain food producers - most notably sugar and dairy farmers - from international competition inflate food prices and force American consumers to pay through the nose.  Like I said back in 2009, awful.

As bad as this protectionism is, however, it only helps to explain why US food prices are artificially high versus world market prices; it doesn't explain the dramatic spike in domestic food prices over the last several years (the protectionism isn't new).  Some of this increase is most definitely due to market forces like increasing global demand for food and recent weather problems, but there are also several non-market (read: government) factors at work here.  Perhaps the biggest one is the United States' ridiculous support for ethanol in the form of direct subsidies and the Renewable Fuel Standard which requires refiners to add steadily increasing amounts of ethanol to gasoline.  Reporting on a new study by FarmEcon LLC, the Heartland Institute summarized how these policies affect food prices:

For more than half a century, from 1950 through 2005, U.S. consumers benefited from gradually declining food prices. Since 2006, however, prices have sharply risen, with a typical family of four now paying $2,055 more in food bills than would be the case if costs had kept to the 1950-2005 trend line. 

Rapidly rising corn prices, caused primarily by ethanol subsidies and mandates, are the most important factor in rising food prices. 

“Fuel ethanol production capacity, based almost entirely on corn as a feedstock, exploded from 2006 to 2009,” the study reported. “Demand for corn to supply the new plants also exploded. Corn production did not keep up with the higher demand, and corn prices have more than tripled since the mandates came into effect.” 

“Corn is just one of many basic farm inputs used to produce the U.S. food supply. However, with increases in biofuel demand and declining corn production, corn prices have increased sharply. In turn prices of other major crops have also gone up significantly. This ranges from major field crops like soybeans and wheat, to horticultural crops such as potatoes, strawberries, and processing vegetable crops. Higher prices for other crops were necessary in order for those crops to compete with corn for land.… These higher commodity prices mean higher incomes for crop producing farmers, but also higher food production costs, higher consumer food prices, and increased food costs for family budgets,” the study explained....

Other studies - including one by the non-partisan Congressional Budget Office - come to similar, depressing conclusions: US ethanol policy forces food prices higher, benefiting a small cabal of farmers and domestic ethanol producers at the expense of American families and the economy more broadly.  Reason's Peter Suderman adds (in case you weren't offended enough already):

Last summer, three farm economists at Purdue University estimated that even if we just partially relaxed the renewables standard, corn prices could drop by as much as 20 percent. (That could also help ease the impact of rising gas prices, another factor that Karlgaard names as hurting Walmart in his oped, by increasing fuel economy.) 

It’s not just American consumers who would benefit. It would also help stop the rise of food prices worldwide, which harms poor and developing nations. The global impact is big enough that last summer, the World Bank suggested that an immediate easing of the renewables mandate could prevent a world food crisis.

But if you think that all these reports on ethanol's serious problems would somehow lead to reforms, Tim Carney helpfully instructs us today to think again:

The Iowa Renewable Fuels Association flew into D.C. this month to defend the mandate. The National Biodiesel Board has retained a new lobbyist this month - former Republican Congressman Kenny Hulshof. Poet, the country's largest ethanol producer, hired a new top lobbyist, former House Science Committee staffer Rob Walther. 

Ethanol's best asset may not be on K Street, but in the EPA: new administrator Gina McCarthy. McCarthy, confirmed by the Senate last week, is a consistent ethanol-industry defender. 

Late last year, for instance, governors from both parties and five states petitioned the EPA to waive the ethanol mandate. The governors weren't petitioning on behalf of drivers or Big Oil, but on behalf of ranchers. Feed prices were going sky-high thanks to drought, and the ethanol mandate diverts corn from cattle feed to gas stations.... 

McCarthy, then assistant administrator for EPA's Office of Air and Radiation, denied the request.

Industry, lobbyists and bureaucrats preventing much-needed reform of harmful regulations?  Shocking, I know.

Unfortunately, US ethanol policy isn't the only thing causing the recent run-up in food prices.  It turns out that a combination of easy money and federal subsidies (particularly crop insurance) has facilitated intense speculation by both farmers and investment firms in the US farmland market, with quite predictable results:

Because higher prices for crops means farmers could make more on their land, many are using their growing profits to buy more land. Investment firms have caught on -- they're buying too. 

The Kansas City Federal Reserve said irrigated cropland in its district rose 30% in 2012, while the Chicago Fed reported a 16% increase. And despite the drought in Iowa last year, farmland prices have nearly doubled since 2009 to an average of $8,296 an acre. Prices in Nebraska have also doubled during the same period. 

Analysts and economists have quietly warned of a bubble in farmland since 2011. The latest comes this week -- a group of bankers advising the Federal Reserve warned prices aren't justified and have entered bubble territory, according to records obtained by Bloomberg of meetings of the Federal Advisory Council. As investors shy away from bond markets and search for bigger returns, members say they've opted for farmland. They blame the central bank's super-low interest rate policies. 

"Agricultural land prices are veering further from what makes sense," according to minutes of the Feb. 8 gathering of the Federal Advisory Council. "Members believe the run-up in agriculture land prices is a bubble resulting from persistently low interest rates."

More on the farmland bubble and its causes is here and here.  Further encouraging these investments is the fact that they receive artificial support from federal subsidies, especially the types of crop insurance that both the House and Senate just doubled-down on in the latest Farm Bill.  So investors use dirt-cheap credit to buy land whose ever-increasing value is protected by taxpayer-subsidized insurance.  Perfect.

Also, as we've already discussed, pushing up crop prices and encouraging more farmland speculation is US ethanol policy, creating a rather vicious government-driven cycle: ethanol subsidies and mandates lead to higher crop prices, which combine with super-low interest rates and federal subsidies to encourage farmland speculation by both farmers and Wall Street investment firms, which leads to even higher food prices, thereby encouraging even more speculation.

Rinse, repeat.

Caught in the crossfire, of course, are struggling American families who don't have the luxury of being part of the ethanol con or having the spare (low-interest) cash and connections needed to invest in taxpayer-subsidized farmland.  For them, it's all downside, driven (in part) by really bad government policies.

So maybe overall inflation is in check, but that doesn't mean that federal monetary and other policies aren't causing pretty serious problems for a large portion of the citizenry, particularly those on the lower-end of the economic spectrum.  Such problems are definitely out there; you just have to look beyond the headlines.

The Deck is Depressingly Stacked Against Subsidy Reformers

It's long been known that folks who support significant reforms to state and federal subsidy programs face a really uphill battle.  They're easily demagogued as "anti-farm/environment/jobs/whatever," and taxpayer subsidies are a classic case of "concentrated benefits and diffuse costs," with subsidy recipients far more organized and motivated than reformers (and Joe Taxpayer) to push their agendas through the government.  However, there is another reason why real subsidy reform is so darn difficult: government benefactors brazenly rig the game in favor of their cronies.

And during last week's House debate on the bloated, subsidy-packed Farm Bill, we got a rare glimpse into one way that the riggers do it.

Before I get to that, however, a little background is necessary.  You may recall that in late-December of last year Congress passed a slew of temporary extensions to certain farm subsidy programs in order to avoid what the media dubbed the "Dairy Cliff."  Congress' motivation for this last-minute action was suddenly-intense media attention and fear of voter backlash to the skyrocketing milk and other commodity prices that would've resulted from the subsidies’ expiration and the resumption of a dormant 1949 farm law that fixed food prices well above current levels.  (A good summary of the mess is here, if you're interested.)

With this in mind, let's now fast-forward to last week's House debate over the new Farm Bill.  In order to avoid another "Dairy Cliff" when/if the bill expired, an enterprising congressman – Rep. Paul Broun (R-GA) – proposed an amendment to the House version of the Farm Bill that would repeal the dairy provisions of the 1949 law, thus protecting US consumers from the threat of sky-high dairy prices.  Although passage of such an amendment would seem like a no-brainer, this is Congress, and Broun's amendment was easily defeated by a bipartisan vote of 309-112.  Apparently the House has no desire to prevent another Dairy Cliff in the future, and in a rare moment of candor, Rep. Collin Peterson (D-MN) - former Chair of the House Agriculture Committee and arguably the US Farm Lobby's BFF - explained why he has worked to keep the 1949 law - a ticking time bomb embedded in US agriculture policy -  on the books.  In rising to oppose Broun's amendment, Peterson stated:

When I was chairman and did the last farm bill, we maintained the permanent law, and we did it for a reason, which is that it is very hard to get these farm bills done, and sometimes you need some motivation to get people to move. That's the main reason we left it there.

In short, Rep. Peterson admitted on the House floor that congressional refusal to repeal the 1949 law - and its hidden threat of high prices, market uncertainty and serious consumer pain - is solely intended to extort new (or extended) farm subsidies out of future Congresses.  And, as last December showed, it's quite the effective strategy.  So, it seems that, for Rep. Peterson and his subsidy-loving friends in Congress, not only do you "never let a serious crisis go to waste," but if such a crisis doesn't appear naturally, you just hardwire one into US law.  Simply amazing.

As Cato's Sallie James explained on Friday, "so long as this [1949] law is part of the national legislative fabric, we’ll have a dairy cliff (or some other commodity-themed cliff) every five years."  And, instead of actually deliberating the cost and merit of our bloated, archaic farm subsidy programs, sheepish Members of Congress will simply approve those subsidies in order to avoid the media scrutiny and voter backlash that these intentional "cliffs" inevitably produce.

More broadly, this is the uphill battle that subsidy reformers face.  Not only is the playing field severely titled in favor of subsidy recipients due to the simple nature of subsidies and politics, but many of the supposed referees in Congress have intentionally rigged the game even further in the recipients' favor.  It's this kind of institutional disadvantage that makes real change extremely difficult (if not impossible), regardless of the overwhelming evidence in support of reform.

Hopefully, a little scrutiny of revealing statements like Peterson's will help tilt the playing field back a little bit, but I'm not holding my breath.

So USDA Is Pondering a "Sugar-for-Ethanol" Program. No, Really.

From earlier this week comes news of what could quite possibly be the most cronytastic US government program of all time:

The White House will decide in coming weeks whether to attempt to blunt low prices in the U.S. sugar market by buying hundreds of thousands of tons of surplus sugar and selling it at a loss to ethanol makers.

If approved, it would be the first time the sugar-for-ethanol program, created in 2008 and known as the Feedstock Flexibility Program, has been put into operation....

Large crops in the United States and Mexico have pushed New York futures prices below the trigger price for potential forfeiture by processors of sugar to the government.

The sugar is used as collateral on USDA price-guarantee loans.

Forfeitures could begin in July, with the expiration of USDA loans that guarantee growers will get at least 20.94 cents per lb for sugar. The remainder of the loans expire in September.

"We're doing it because it's the law," U.S. Agriculture Secretary Tom Vilsack said on Monday at the North American Agricultural Journalists meeting. The tonnage purchased "is still not decided," he said....

The 2008 farm law directs USDA to make surplus sugar available to ethanol makers, a provision penned in the early days of the biofuel boom with the goal of creating feedstocks in addition to corn.

"The law makes the Feedstock Flexibility Program the first line of defense. The other main option is to reduce the volume of imports through negotiation or by buying back certificates of quota eligibility," said Tom Earley, economist and trade policy specialist with consulting firm Agralytica.

Some $864 million in loans was in danger of forfeiture, by one estimate. The USDA forecasts the sugar stockpile at the end of this marketing year at 2.4 million tons.

At 20 percent of annual use, it would be the largest carryover since 2001. The USDA will update its forecast of the sugar surplus on Wednesday....

So a 2008 law forces USDA to (i) subsidize US sugar growers by buying their product at above-market prices and then (ii) subsidize US ethanol producers by selling them the exact same sugar at below-market prices.

Ladies and Gentlemen, the United States Government.

On a more serious note, insanity like this provides a perfect example of why it's just so darn tough to eliminate US subsidies - politicians shilling for the sugar growers form an unholy, subsidy-loving alliance with their colleagues shilling for the ethanol (mostly corn) producers. These "public servants" concoct mutually-beneficial programs like the "Feedstock Flexibility Program" to line their cronies' pockets, and they agree to oppose any attempts to trim those programs or any other subsidies that they've secured.

They win; taxpayers (and markets) lose; rinse; repeat.

Hitting 'Em Where It Hurts [UPDATED]

One of the oft-heard criticisms of the WTO dispute settlement system - rightly or wrongly - is that it lacks real teeth.  Yes, a WTO Member could theoretically face retaliation if it refuses to comply with a WTO panel or Appellate Body ruling against its protectionist measures, but this mechanism often fails to push the Member into complying for two main reasons: (i) as Econ 101 teaches us, the primary means of WTO-sanctioned retaliation - increased duties on the Member's exports - also hurts the WTO Member(s) who originally complained, won and then received permission to retaliate, thereby eliminating any economic incentive to do so; and (ii) smaller - oftentimes developing country - Members import such insignificant amounts of goods and services that any retaliatory duties imposed against another Member (especially the big boys in Brussels and Washington) would fail to cause enough "pain" to affect the offending Member's trade behavior.

Thus, the primary reasons - in my opinion, at least - why nations comply with adverse WTO decisions are strategic (i.e., to maintain the legitimacy of WTO dispute settlement process, particularly given the fact that the "defendant" Members will be, or are already, complainants in other cases) and political/diplomatic (i.e., to avoid looking like an international trade scofflaw and facing all the bad press that comes along with such a title).  Such incentives have been pretty successful in holding the permissive WTO dispute settlement together, but they certainly aren't perfect.  Indeed, as Dan Ikenson unfortunately notes, the United States quite frequently ignores adverse WTO rulings, especially when sacred American cows like trade remedies are involved:

U.S. policies have been the subject of more World Trade Organization disputes (119, followed by the EU with 73, then China with 30) and have been found to violate WTO rules more frequently than any other government’s policies. No government is more likely to be out of compliance with a final WTO Dispute Settlement Body (DSB) ruling – or for a longer period – than the U.S. government. To this day, the United States remains out of compliance in cases involving U.S. subsidies to cotton farmers, restrictions on Antigua’s provision of gambling services, country of origin labeling requirements on meat products, the so-called Byrd Amendment, a variety of antidumping measures, and several other issues, some of which were adjudicated more than a decade ago. In some of these cases, U.S. trade partners have either retaliated, or been authorized to retaliate, against U.S. exporters or asset holders, yet the non-compliance continues as though the United States considers itself above the rules.

Despite all the official high-minded rhetoric about the pitfalls of protectionism and the importance of minding the trade rules, the U.S. government is a serial transgressor. Nowhere is this tendency to break the rules more prevalent than it is with respect to the Commerce Department’s administration of the antidumping law. Nearly 38 percent (45 of 119) of the WTO cases in which U.S. policies have been challenged concern U.S. violations of the WTO Antidumping Agreement.

Clearly, the United States (and, yes, many other countries) has for years been able to skirt WTO rules and adverse decisions when a protectionist measure's political value outweighs the WTO-sanctioned retaliation (or threat of retaliation) that the measure provoked.  That's certainly the government's prerogative, and I certainly wouldn't argue against the voluntary nature of WTO compliance (for reasons discussed at length here).

However, recent events do leave me wondering whether a new form of retaliation - against intellectual property rights rather than imports of goods or services - could tip the scales a little more towards "compliance" and away from "political expediency," especially for big, developed countries like the United States and the EU.  In particular, Antigua recently announced that - due to continued US non-compliance with a WTO ruling against a discriminatory American online gambling law - the island nation has sought and received permission from the WTO to infringe on US copyrights, instead of imposing duties on US goods:

In 2005 the WTO ruled that the US refusal to let Antiguan gambling companies access their market violated free-trade, as domestic companies were allowed to operate freely. In 2007 the WTO went a step further and granted Antigua the right to suspend U.S. copyrights up to $21 million annually.

TorrentFreak is informed by a source close to Antigua’s Government that the country now plans to capitalize on this option. The authorities want to launch a website selling U.S. media to customers worldwide, without compensating the makers.

The plan has been in the works for several months already and Antigua is ready to proceed once they have informed the WTO about their plan. Initially the island put the topic on the WTO meeting last month, but the U.S. blocked it from being discussed by arguing that the request was “untimely.” This month Antigua will try again, and if they succeed their media hub is expected to launch soon after.

Antigua’s attorney Mark Mendel told TorrentFreak that he can’t reveal any details on the plans. However, he emphasized that the term “piracy” doesn’t apply here as the WTO has granted Antigua the right to suspend U.S. copyrights. “There is no body in the world that can stop us from doing this, as we already have approval from the international governing body WTO,” Mendel told us.

Antigua's plan is indeed a crafty one - the tiny country with (I'm assuming) insignificant US imports can hit the United States where it actually hurts (namely, Hollywood and Silicon Valley) yet avoid imposing equivalent pain on its own citizens.  However, Mr. Mendel and his clients can't take all the credit: as you may recall, this kind of "cross retaliation" was first devised recently pushed [Ed. note: apparently Ecuador first used the IPR cross retaliation idea in the 1990s Banana dispute, back when I was still a beer-swilling frat guy; it remains uncommon, however.] by Brazil when the United States refused to scuttle cotton subsidy programs that had been repeatedly found to be WTO-illegal.  Of course, Brazil never went through with the threat because the US government agreed to pay hundreds of millions of taxpayer dollars in "technical assistance" to Brazilian cotton farmers.  (Insert appropriate sound effect.)

Maybe Antigua is angling for a similar payoff, but one thing's for sure: after years of getting the ol' brushoff, the little island has definitely gotten Washington's attention:

The United States warned Antigua and Barbuda on Monday not to retaliate against U.S. restrictions on Internet gambling by suspending American copyrights or patents, a move it said would authorize the "theft" of intellectual property like movies and music.

"The United States has urged Antigua to consider solutions that would benefit its broader economy. However, Antigua has repeatedly stymied these negotiations with certain unrealistic demands," said Nkenge Harmon, a spokeswoman for the U.S. Trade Representative's office.

The strong statement came after the tiny Caribbean country said it would suspend U.S. copyrights and patents, an unusual form of retaliation, unless the United States took its demands for compensation more seriously in a ruling Antigua won at the World Trade Organization.

"The economy of Antigua and Barbuda has been devastated by the United States government's long campaign to prevent American consumers from gambling on-line with offshore gaming operators," Antigua's Finance Minister Harold Lovell said in a statement.

"We once again ask ... the United States of America to act in accordance with the WTO's decisions in this matter."

USTR's rather, ahem, spirited response to Antigua's plan retaliation plan indicates that the tiny island may have finally hit a nerve.  And, regardless of whether Antigua will go through with its plan, this all leaves me wondering how many other WTO Members who are on the smelly-end of US (or EU or...) non-compliance have already started devising their own IPR schemes.  I would think that at least a few are considering it, given that (i) these countries can implement a "file sharing" service relatively easily (a big change from when cross retaliation was first conceived); (ii) compared to retaliatory tariffs, such schemes won't cost them or their citizens a penny; and (iii) as Brazil's and Antigua's experiences demonstrate, this approach seems to drive the United States government into an instant tizzy (or make Washington far more amenable to compliance and/or "technical assistance").

Given the large number of disputes in which the non-compliant United States is involved, this could all get quite serious quite quickly, don't you think?  And if it does, WTO compliance might just become a little more common - a good thing for free traders and consumers around the world.

Of course, this rosy scenario assumes that the WTO's big dogs don't just start offering more taxpayer-funded "technical assistance" to avoid IPR-related retaliation or take even more drastic action against the WTO system itself.

Hmm.  On second thought....

UPDATE: AEI's Claude Barfield emails with some excellent perspective: "[Y]ou could have added the irony that it was the US back in the 1990s that insisted that cross-retaliation be added to the arsenal of tools... we argued that was needed because in some cases merely raising tariff wouldn’t bring miscreant to heel."  Claude's right: a quick Google search finds John Croome's book on the history of the WTO's Uruguay Round, which describes the United States' "ambitious proposal" on cross retaliation. Adding to that irony is the fact that, according to Croome, the US proposal was most vehemently opposed by the very developing countries who now stand to benefit from using it today.  And to thicken the irony even more, I'd be remiss not to mention that it was - and remains - the United States government who most aggressively demands the inclusion of IPR disciplines in WTO and bilateral/regional FTA rules. 

I know hindsight's 20/20 and all (especially considering that rapid online filesharing was pretty much science fiction in the 1980s and early 90s), but that's gotta sting a little, don't you think?

Hostess Brands: A Case Study in Government Burdens and Global (Un)competitiveness

As most people know by now, Hostess Brands  -  the maker of such American junk food staples as Twinkies, Ding Dongs and Wonderbread - announced last week that it had failed to come to terms with the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union and its 5000 striking members, and thus would enter Chapter 11 bankruptcy to unwind the company, sell off its assets and eliminate 18,500 US jobs.  The latest news is that Hostess and the union have agreed to enter into mediation in an attempt to prevent the company's dissolution, but Hostess Brands' story remains a very useful example of how government regulations can impose huge costs on US businesses and either drive them offshore or out of business entirely.

Last week, I focused on how the United States' unreasonably high corporate taxes can hinder American companies' global competitiveness, and Hostess Brands' monthly operating report (required for bankruptcy proceedings) shows at page 15 that the beleaguered company was/is responsible for not only state, local and federal corporate income taxes, but also millions of dollars in other taxes, including (i) Federal Insurance Contributions Act (FICA); (ii) Federal Unemployment Tax (FUTA);(iii) State/Local Unemployment Tax (SUTA); (iv) State/Local Business Licenses; (v) State/Local Sales Taxes; (vi) State/Local Use Taxes; (vii) State/Local Mileage Taxes; (viii) State/Local Real Property Taxes; (ix) State/Local Personal Property Taxes; (x) State/Local Vehicle Personal Property Tax; (xi) State/Local Accrued Franchise Taxes; and (xii) State/Local Accrued Operating Taxes.

Gee, is that all?

Of course, taxes aren't the only thing that can kill a company's bottom line - regulations hurt too, and as Henry Miller notes in a recent op-ed, they're getting increasingly worse:

Stultifying, job-killing regulation has been a hallmark of the Obama administration. An analysis by Susan Dudley, director of the George Washington University Regulatory Studies Center, reveals that with respect to "economically significant" regulations, defined as impacts of $100 million or more per year, Obama has been an outlier. While Presidents George H.W. Bush, Bill Clinton and George W. Bush "each published an average of 45 major rules a year ... the outliers are Reagan, who issued, on average, a mere 23 major regulations per year; and Obama, who has published 54 per year on average, so far."

And there are many more in the pipeline: According to Dudley, fully a third of the final major rules with private-sector impacts have been postponed. And the government's spring 2012 "Unified Agenda of Federal Regulatory and Deregulatory Actions," which provides a preview of and transparency with respect to agency and OMB planning for the coming year, still has not been published.

In the case of Hostess Brands, the most obviously relevant regulations are those laws which permit or favor "closed shop" rules that force workers to join a union and pay dues (as opposed to states with Right-to-Work laws that prohibit closed shops).  It's difficult to quantify the costs that such closed rules impose on businesses and workers, but a recent examination of US job creation demonstrates that they could be significant (h/t Mark Perry):

Since the recession ended in June 2009, almost three out of every four jobs added to U.S. payrolls have been in Right to Work states (1.86 million out of 2.59 million), even though those 22 states represent only 38.8% of the U.S. population (120 million). In contrast, only about one of every four new jobs were created in forced-unionism states (730,000), even though more than 61% of Americans live in those 28 states (189 million). Relative to their population, the Right to Work states have been job-creating powerhouses during the recovery, and forced union states haven’t even come close to “carrying their weight” in terms of their share of the population. Adjusting for differences in population, Right to Work states created four new jobs for every one job added in forced union states, because those 21 RTW states created 2.54 times more jobs even though forced union states have 1.6 times as many people. 

Hostess Brands' problems provide anecdotal support for the above data on right-to-work versus closed shop states.  According to the press release announcing Hostess' bankruptcy, existing union arrangements had crippled the ability to continue its business operations:

The [union] in September rejected a last, best and final offer from Hostess Brands designed to lower costs so that the Company could attract new financing and emerge from Chapter 11. Hostess Brands then received Court authority on Oct. 3 to unilaterally impose changes to the BCTGM’s collective bargaining agreements.

Hostess Brands is unprofitable under its current cost structure, much of which is determined by union wages and pension costs. The offer to the BCTGM included wage, benefit and work rule concessions but also gave Hostess Brands’ 12 unions a 25 percent ownership stake in the company, representation on its Board of Directors and $100 million in reorganized Hostess Brands’ debt.

These views find further support in several news reports which indicate that Hostess Brands' bankruptcy will likely attract several bidders for iconic labels like Twinkies because the new owners won't have to deal with existing union obligations:

Daren Metropoulos, a principal of the Greenwich, Connecticut-based private equity firm, said of Hostess in an e-mail yesterday that ``shedding the complications of the unions and old plants makes it even more attractive.”

Tom Becker, a spokesman for Hostess, declined to comment on potential asset bids. While Hostess has seen interest in pieces of the business, its labor contracts and pension obligations have deterred offers for the whole company, Chief Executive Officer Gregory F. Rayburn said yesterday.

In short, the company is only an attractive investment without the unions.  Shocking, I know.

Unfortunately, even if Hostess Brands resolves the current union impasse through mediation, onerous labor regulations and obligations aren't the only thing raising the company's costs and hindering its competitiveness.  In fact, US sugar protectionism is also putting a serious crimp in the company's (and other American bakers' and confectioners') bottom line:

Since 1934, Congress has supported tariffs that benefit primarily a few handful of powerful Florida families while forcing US confectioners to pay nearly twice the global market price for sugar.

One telling event: When Hostess had to cut costs to stay in business, it picked unions, not the sugar lobby, to fight.

“These large sugar growers ... are a notoriously powerful lobbying interest in Washington,” writes Chris Edwards of the Cato Institute in a 2007 report. “Federal supply restrictions have given them monopoly power, and they protect that power by becoming important supporters of presidents, governors, and many members of Congress.”

Such power has been good for business in the important swing state of Florida, but it has punished manufacturers who rely on sugar in other parts of the United States, the Commerce Department said in a 2006 report on the impact of sugar prices.

Sugar trade tariffs are “a classic case of protectionism, pure and simple, and that has ripple effects through other sectors of the economy, and, for all I know, the Hostess decision is one of them,” says William Galston, a senior fellow at the Brookings Institution in Washington....

[Congressional] refusal to address tariffs that neither support infant industries nor provide national security has come despite damning reports from the Commerce Department about the impact on US jobs, including the fact that for every sugar job saved by tariffs, three confectionery manufacturing jobs are lost.

Some of those job losses came when candy companies like Fannie May and Brach’s moved the bulk of their manufacturing to Mexico and Kraft relocated a 600-worker Life Savers factory from Michigan to Canada, in order to pay global market prices for sugar.

The impending mass layoffs from 33 Hostess plants scattered around the US, economists say, might force Washington to take a more serious look at how public policy affects the ability of corporations to make money – especially in an economy where even iconic brands like Twinkies and Wonder bread aren’t safe.

“I think there are policy implications here,” says Mr. Edwards, an economist at the conservative Cato Institute. “The Department of Commerce, the Obama administration, and [Congress] need to look at Hostess as a case study: Why did this company have to go bankrupt? Why were its costs higher than it could afford? Are there regulatory issues with import barriers on sugar or unionization rules that we need to look at and change? We’ve got to understand why manufacturing in a lot of cases doesn’t seem to be profitable anymore.”

Unfortunately, congressional repeal of US sugar subsidies and protectionism doesn't look to be happening anytime soon; for example, the Senate in June voted 50-46 to maintain the sugar program in the new Farm Bill.  Thus, even if mediation saves Hostess Brands in the short term, American sugar protectionism, as well as other onerous US regulations and taxes, could still prevent the company from regaining profitability and competing at home and abroad over the long term.  As a result, Hostess - or a buyer of its most famous brands - could end up following many other US manufacturers facing competitiveness-crippling taxes and regulations:

[A]nother possible bidder hints at the future of Twinkies and maybe the US bakery business as a whole: Mexico’s Grupo Bimbo, the world’s largest bread baking firm, which already owns parts of Sara Lee, Entenmann’s and Thomas English Muffins.

Bimbo has already sniffed around the bankruptcy proceedings that have haunted Hostess for a decade, in a bid to further expand its North American portfolio and pad its $4 billion net worth. Bimbo reportedly put in a low-ball bid of $580 million a few years ago, Forbes reports, and may be rewarded for that move since the Hostess kit-and-kaboodle may fetch more like $135 million today.

But the big question is whether the same problems that haunted Hostess – high sugar prices tied to US trade tariffs, changing consumer tastes, and union pushback against labor concessions – will squeeze whatever profit is left in the brands.

Especially if a Mexican buyer is involved, production may go the way of the Brach’s and Fannie May candy concerns: south of the border. With US sugar tariffs set artificially high to protect Florida sugar-growing concerns, a non-unionized shop with access to lower-priced sugar in Mexico could be the Twinkie lifeline, economists suggest.

If Hostess or its new owners move offshore in order to avoid onerous sugar tariffs and other US regulations/taxes, Twinkies might indeed get that lifeline.  Unfortunately, the thousands of Americans who used to make them won't be so lucky.

Will Green Subsidies Be Part of a "Fiscal Cliff" Deal?

In order to avoid the political spotlight, Congress and the President have punted on all sorts of tax and spending issues until after the November elections.  The primary issue to be addressed during the short post-election legislative session is the "fiscal cliff" - an onslaught of automatic tax hikes and spending cuts that will occur on January 1, 2013 - but there are also a lot of other matters that were shelved due to political cowardice expediency.  Among them are several green subsidy programs, including a one-year extension of the wind energy production tax credit and its $12 billion price tag.  Given the many problems with US green energy subsidies, the best move would be to let this boondoggle and its brethren expire at the end of the year, but - fear not! - it ain't gonna be that easy.  In fact, BNA reports that the PTC and other green subsidies could very well end up in the fiscal cliff deal:

Legislation that would extend the wind energy production tax credit and other expiring energy incentives may be included as part of a congressional deal to avert looming tax increases and budget cuts expected by year's end, a Senate Finance Committee staffer said Oct. 17.

Ryan Abraham, a Democratic committee aide, said he is optimistic the tax credit measure (S. 3521) will be incorporated into efforts during the lame-duck congressional session to blunt the effects of the “fiscal cliff” when tax hikes and automatic spending cuts go into effect in January (see related story in this issue)....

More than $18 billion in energy-related tax incentives would be extended under S. 3521, the Family and Business Tax Cut Certainty Act of 2012, approved Aug. 2 by the Senate Finance Committee.

The majority of that spending—$12.1 billion—would fund a one-year extension of the wind energy industry's 2.2 cent per kilowatt-hour production tax credit as well as pay for a change that allows wind projects that are under construction by the end of 2013 to be eligible....

Other energy tax incentives that would be extended in the legislation include a production tax credit for other renewable energy projects, credits for energy-efficient homes and appliances, and tax incentives for cellulosic biofuel and other alternative fuels....

In addition to securing the bill in a deal to avert the fiscal cliff, Abraham said “we'll fight hard” to make sure “something that will be helpful to renewable energy,” such as tax extenders of longer duration, would be included in a longer-term budget deal that could address tax reform.

Granted, Mr. Abraham speaks only for Senate Democrats and was speaking to a room of anxious people dependent on these subsidies, so a bit of skepticism is in order here.  Then again, the Finance Committee approved the Christmas tree that contains all of these green presents with strong bipartisan support (a vote of 19-5), so it's not like there will be strong resistance in the Senate to this bill.  And do we really expect House Republicans - many of whom love green subsidies too - to stand firm when everyone starts FREAKING OUT about the oncoming fiscal cliff?  Oh, and let's not forget that we'll also have to deal with the pork-laden Farm Bill during the post-election legislative session, so it's really anyone's guess as to what gets thrown into a bipartisan deal to avert "fiscal disaster" on January 1.

In short: gird yourselves, folks.  This is going to get really, really ugly, no matter who wins in November.

I need a drink just thinking about it.

Countervailing Calamity: Our Abundant, Aggravating Ag Subsidies

The Hill reports today that, with House leadership punting on the 2012 Farm Bill until after the November elections, Democrats in both chambers are unsurprisingly using the bill's delay to batter their Republican opponents:

The legislation, which provides subsidy and aid to farmers nationwide, as well as authorizes funding for a number of nutritional programs, expires on Sept. 30. The Senate was able to pass a bill, but House Speaker John Boehner (R-Ohio) said late last week that the House would have to wait until after the election to pick back up on the legislation, despite a flurry of last-minute activity from lawmakers on both sides of the aisle in an attempt to bring it to the floor.

Democrats in states where agriculture plays a large role have been quick to launch attacks on their opponents that aimed to hang congressional inaction around their necks. Most recently, the Democratic Senatorial Campaign Committee launched a pair of ads targeting Republican Rep. Rick Berg, running for Senate in North Dakota, where agriculture remains the largest industry, on the failed farm bill.

The Hill goes on to detail how farm state Republicans are pushing back against this criticism by highlighting their vigorous support for the Farm Bill and their opposition to Speaker Boehner's decision to not schedule a floor vote.  But given America's growing and problematic obsession with subsidies - something detailed in my forthcoming paper "Countervailing Calamity: How to Stop the Global Subsidies Race" - it's clear that serious reform, not extension or expansion, of US farm subsidy programs is desperately needed. 

First, we spend a veritable fortune on these subsidies:

Perhaps no industry has attracted more taxpayer dollars (and global ire) than U.S. agribusiness. According to the Environmental Working Group’s compilation of United States Department of Agriculture data, the U.S. government has provided approximately $277.3 billion in subsidies to U.S. farms since 1995, including more than $15 billion in each of the last two years. Specific commodity subsidies under the current system include those for feed grains ($2.1 billion in 2011); wheat ($1.4 billion); rice ($364 million); upland cotton ($825 million); soybeans ($521 million); peanuts ($77 million); tobacco ($25 million); and dairy products ($30 million). Not all of these subsidies, however, constitute trade-distorting subsidies under WTO rules. For example, only $11.6 billion of $16.3 billion in total U.S. farm subsidies in 2009 constituted “amber box” subsidies (those considered under the WTO Agreement on Agriculture to distort production and trade), and United States reported only $4.3 billion of these to the WTO because of various de minimis exclusions—well under its $19.1 billion cap. The current Farm Bill expires this year and may receive a short-term extension, but it is unlikely that any new Farm Bill will significantly reduce total agriculture subsidy levels.

Along with straining federal coffers and breeding cronyism, America's farm subsidy obsession deligitimizes any US efforts to rein in global subsidies - something that, as explained in my paper, is a pretty big necessity these days.  In short, it's pretty much impossible to credibly complain about foreign subsidies when you're flooding the globe with subsidized farm (and other) products.  And, of course, the United States' refusal to commit to slashing farm subsidies is one of the primary reasons why the WTO's Doha Round of multilateral trade negotiations is dead in the water.

Second, many of the trade-distorting subsidies included in the Farm Bill attract major criticism from our trading partners, several of whom have filed (or threatened to file) anti-subsidy cases against the United States and American farm exports.  Perhaps the most notorious of such disputes is Brazil's successful WTO challenge to US cotton subsidies:

In 2004 and again in 2005, the Brazilian government challenged U.S. cotton subsidies at the WTO as violations of the SCM Agreement and the Agriculture Agreement. The WTO’s 2005 decision authorized Brazil to retaliate against U.S. goods and services, but Brazil opted instead to allow the United States time to reform its cotton program in line with international trade rules. The U.S. government never did reform the subsidy programs, so Brazil returned to the WTO in 2009 and won permission to impose almost $300 million in retaliatory trade sanctions against U.S. exports. The WTO also opened the door for other retaliatory measures against American patent and other intellectual property rights—a novel approach to addressing noncompliance. Although the U.S. government has not complied with the WTO ruling, Brazil never retaliated because, instead of reforming the program, the United States agreed to provide approximately $140 million in new subsidies to Brazilian cotton farmers. Despite this sordid arrangement, Congress has flatly refused to reform the United States’ WTO-illegal cotton subsidy programs, even in the context of a new Farm Bill. Indeed, Brazil has warned the WTO that it is prepared to retaliate against U.S. exports or by not enforcing U.S. intellectual property rights if the proposed 2012 Farm Bill takes effect.

Other US farm commodities that have faced anti-subsidy litigation and duties include sugar (by Canada), corn and other crops (also by Canada) and distillers grains (by China), and it seems that we're constantly hearing about threats of new cases against major US crops like soybeans.  Such disputes have the potential to negate these and other commodities' global competitiveness - the exact opposite of what struggling American exporters need right now.

So maybe the next time a campaigning Democrat criticizes some rank-and-file Republican for "letting" his or her leadership delay the Farm Bill, one of them might mention the undeniable fact that our farm subsidies are breaking the (already-broken) federal budget, exposing US exports to foreign retaliation and undermining global trade negotiations in the WTO and elsewhere.

I know, I know, I'm not holding my breath.

American Subsidy Madness

US policymakers and pundits often like to gripe about the abundance of market-distorting, anti-competitive Chinese industrial subsidies, and they certainly have a point.  But US calls for China and other countries to reduce or eliminate these subsidies likely fall on deaf ears for one very big reason....

Well, make that 100 billion reasons:

The federal government will spend almost $100 billion on corporate welfare in fiscal 2012. That includes direct and indirect subsidies to small businesses, large corporations, and industry organizations. These subsidies are handed out from programs in many departments, including the departments of Agriculture, Commerce, Energy, and Housing and Urban Development.

Oof.  That's from a brand new and very depressing Cato Institute study which provides topline numbers on US business subsidies for FY 2012.  After detailing the myriad economic and social reasons why such subsidies are a very bad idea, the paper rightly concludes:

Americans are sick and tired of "crony capitalism," and the way to solve the problem is to eliminate business subsidy programs.

Corporate welfare doesn't aid economic growth and it is an affront to America's constitutional principles of limited government and equality under the law. Policymakers should therefore scour the budget for business subsidies to eliminate. Budget experts and policymakers may differ on exactly which programs represent unjustified corporate welfare, but this study provides a menu of about $100 billion in programs to terminate.

Of course, not all of the programs identified by the new Cato study violate global trade rules and thus expose US exports to anti-subsidy measures (via WTO dispute settlement or national countervailing duty laws), but a bunch of them do.  As I noted a few days ago, US green energy exports are increasingly subject to countervailing duties in foreign markets due to state and federal subsidies, and I've repeatedly documented the abject ridiculousness that is current US policy regarding cotton subsidies.  On the latter score, you may recall that Brazil challenged US cotton subsidies at the WTO, and after winning the dispute was authorized to impose $300 billion worth of retaliation against US exports or intellectual property rights because the Bush and Obama administrations refused to comply.  However, Brazil never retaliated because, instead of reforming the program, the United States agreed to provide $140 million in new subsidies to Brazilian - yes, Brazilian - cotton farmers.

Congress (including the Republican-controlled House of Representatives) has flatly refused to reform our WTO-illegal cotton subsidies, and now has proposed a new Farm Bill that has the Brazilian government, well, extremely concerned:

Brazil's retaliation is being held off by a "framework agreement" that was negotiated by American and Brazilian officials in the spring of 2010. Among other things, the US agreed to tweak one of its most egregious subsidy programmes and donate nearly $150m every year to support Brazilian cotton farmers. Both sides agreed that the framework deal would hold until this year, when the next farm bill would be negotiated. Only then, the US officials said, would they have the chance to make far-reaching reforms to American cotton subsidies.

Fast-forward two years, and the 2012 farm bill is quickly taking shape. But will the new law do anything to bring US cotton subsidies in line with WTO rules?

If you ask Brazil, the answer is a resounding no. The new programmes under discussion "are not enough to satisfy Brazil's concerns", said Roberto Azevêdo, Brazil's ambassador to the WTO. Some of the proposed policies "would leave Brazilian farmers worse off than they are now", he says.

Both the House of Representatives and Senate versions of the bill include the stacked income protection programme – known as Stax – which was designed by the National Cotton Council, a lobby group for cotton farmers. Stax is effectively a crop insurance policy for cotton growers; it guarantees that farmers' incomes will not fall below the revenues expected in their regions. That is precisely what Brazil does not like.

"In our view, no farm programme can be WTO-compliant and cover 'shallow losses' – thereby insulating farmers from market forces – to the extent foreseen in the [Stax programme]," Azevêdo said in a letter to Congress in January...

While the US dallies, cotton farmers overseas are still struggling to compete with artificially cheap American exports. That is happening not only in Brazil, but also in poorer cotton-producing countries such as Burkina Faso, Mali, Benin and Chad. "Those are the big losers," said Azevêdo. "Their treasuries cannot compete with the US funds."

So what will happen if the 2012 farm bill is just like the previous one? Officials in Brasilia are weighing up whether to use their right to cross-retaliate. If they do – and they pull it off – then Brazil could set an important precedent for other countries that are looking to get the attention of the world's biggest national economy.

"[The Americans] seem to only engage when intellectual property comes into play," Azevêdo said.

Brazil recently told the WTO that it is ready to retaliate if the new Farm Bill takes effect, but it looks like a one-year extension of the current Farm Bill is now more likely than any new Farm Bill.  Thus, that sweet, sweet American hush money will continue to flow south, much to the detriment of poor cotton farmers around the world, particularly in Africa.

And speaking of poor African farmers, CQ reports today that New Jersey Senator Bob Menendez is preventing House and Senate consideration of the African Growth and Opportunity Act because of - you guessed it - cotton subsidies:

The bill would extend for three years preferential treatment of garments produced in Africa under the African Growth and Opportunity Act, or AGOA (PL 106-200), while adding South Sudan to that program. It also would modify language in the free-trade agreement with the Dominican Republic and Central America, and would renew for one year the import restrictions on Myanmar, formerly known as Burma, imposed by a 2003 law (PL 108-61).

Robert Menendez, D-N.J., has also placed a hold on the bill. He made clear in an interview last week that he would support the trade bill only if it moves with his legislation to reauthorize a cotton trust fund for American-based shirt manufacturers, a program that expired in 2009.

“I have no problem with [AGOA], but I have to have the cotton trust fund as part of the deal,” Menendez said, shortly before the Finance Committee approved his bill along with the trade package....

[Delaware Sen. Chris] Coons said there is “a moral argument here for not holding hostage the jobs of thousands of women in developing countries” such as Lesotho and Swaziland, two of the sub-Saharan countries that benefit under the current program allowing for duty-free exports to the United States of garments made from fabric produced in Third World countries.

Apparently Sen. Menendez cares more about funneling $16 million per year to his New Jersey constituents than poor African farmers and manufacturers.  But, hey, who knows?  Maybe the Senator will offer a "Brazilian-style" compromise and propose bribing the Africans instead of giving up his ridiculous subsidy demands.

(I know, I know: don't give them any more bright ideas.)

Great News: Cronyism Under Attack (UPDATED)

The last two days have seen a flurry of great writing on crony capitalism and its immense harms to the US economy.  Anti-cronyism watchdog Tim Carney - whose Washington Examiner page is an impressively depressing library of crony capitalist excess - kicks things off with a good summary of the recent conservative/libertarian uprising against the unseemly marriage of Big Business and Big Government:

The most dangerous enemies of capitalism today are capitalists. This is becoming clearer every day to people committed to free markets.

The conservative and libertarian grassroots came to deeply distrust big business after the Wall Street bailouts and Obama's stimulus and health care bills, both of which had big-business backing. Tea Party ire focused on subsidy-suckling businesses as much as at big-spending politicians.

Beltway conservatives have also joined in the fight against corporatism. Last spring, the Club for Growth, FreedomWorks and the lobbying arm of the Heritage Foundation all lined up against the Chamber of Commerce and pressed GOP congressmen to vote to kill the Export-Import Bank, which nonetheless was reauthorized by an overwhelming margin.

Republican politicians, despite being lobbied hard by their big-business donors and K Street advisers, are nevertheless moving slowly away from corporate welfare and toward free-market populism. House Budget Committee Chairman Paul Ryan wrote an op-ed in Forbes in 2009 titled "Down with Big Business" (a headline he borrowed from a 1979 Wall Street Journal op-ed).

And now academia's free-market players are getting in on the game, beginning to rebuild the intellectual infrastructure to argue against corporatism. George Mason University's Mercatus Center this week is kicking off a series of papers on cronyism and business-government collusion.

The first of those papers, "The Pathology of Privilege: The Economic Consequences of Government Favoritism" by Matthew Mitchell, was published yesterday.  Carney describes it as follows:

Mitchell's paper, drawing on the scholarly work of Milton Friedman, James Buchanan, Gordon Tullock, Joseph Schumpeter, Mancur Olson, George Stigler, Luigi Zingales and many others, outlines various types of privilege and lays out the evidence that these policies hurt the economy while benefiting the privileged.

Politically favored businesses of course benefit from direct subsidies (think agribusiness) and government loan guarantees (think Solyndra and Boeing), but Mitchell makes the important point that regulation itself creates a privileged class.

Regulation often acts directly or indirectly as a barrier to entry. The conservative and libertarian media have documented this anecdotally -- Philip Morris supported and is benefiting from Obama's tobacco regulation, for instance, because the rules allow it to lock in its dominant market share. Mitchell assembles scholarly work broadly showing regulation's anti-competitive and pro-big-business effects....

In the Obama era, as Democrats and the media try to paint deregulation as some sort of dangerous sop to big business, Mitchell's notion of "regulatory privilege" is a crucial tool for dismantling the old narrative that regulation protects the public....

The research Mitchell brings together helps show why government-granted privilege is so important to big business and so costly to the rest of society. In one key finding, he highlights research indicating that free markets, with fewer barriers to entry and fewer bailouts to prop up failed giants, make it harder for dominant businesses to maintain dominance.

Mitchell cites a 2008 study in the Journal of Financial Economics that found "big business turnover ... correlates with smaller government, common law, less bank-dependence, stronger shareholder rights, and greater openness [to trade]."

Further, in Mitchell's words, "those nations with more turnover among their top firms tended to experience faster per capita economic growth, greater productivity growth, and faster capital growth."

Big business wants safety, but big-business safety hurts the rest of the economy.

Mitchell follows up his paper with a great interactive graphic on all the forms that cronyism can take, several of which are routinely discussed on this blog:



I've long argued that protectionism is just another form of cronyism - a way that well-connected businesses and workers lobby the government to force US consumers to subsidize - via higher prices - their business activities, so it's great to see it included here.  My only quibble with Mitchell's description of protectionism in the graphic above is that, while tariffs have certainly decreased over the last several decades, trade remedies measures, regulatory protectionism (like the Lacey Act or Dodd-Frank's "conflict minerals" provisions) and other non-tariff barriers to trade have increased significantly, particularly in recent months.  Mitchell isn't blind to such measures and even mentions that they "may" have become more important over the last few years, but this troubling trend deserves more than passing mention.


But I'm clearly nit-picking.  The paper is great and well worth your time, so be sure to check it out.

Carney follows up his Sunday article with long list of recent examples of crony capitalism over the last few years.  Cato's David Boaz today hits on one such example that Carney misses, Countrywide home loans:

I was struck by this point in a Bloomberg report, about Countrywide CEO Angelo Mozilo’s close relationship with Fannie Mae chief executive Jim Johnson, former top aide to Vice President Walter Mondale and chairman of both the Brookings Institution and the Kennedy Center. Instructing his staff to give a discount mortgage loan to Johnson, Mozilo wrote in an email: "Jim Johnson continues to be a source of many loans for our company and this is just a small token of appreciation for the business that he sends to us."

Note that Jim Johnson didn’t favor Countrywide with his personal business. He didn’t invest in Countrywide. He didn’t sell houses and send the buyers to Countrywide. No, he sent loans backed by taxpayers’ money to Countrywide, and was rewarded with personal benefits. That’s crony capitalism....

Given his credit report, Countrywide underwriters didn’t want to sign off on a loan to Johnson. But Mozilo, who knew the business Countrywide was really in, told them not only to approve the loan but to give Johnson a discounted rate.

And that, kiddies, is how being involved with a highly respected politician can get you a job in Washington that pays $100 million, backed by the full faith and credit of the American taxpayers, as well as extra perks from other companies tied into the crony corporatist state.

Pretty awful stuff, and yet (as Carney's list highlights) such cronyism remains pretty widespread in DC on both sides of the aisle.

Speaking of, Heritage's Lachlan Markay gets in on the anti-cronyism action today by highlighting one of the most ridiculous aspects of the poster-child for bi-partisan trough-filling, farm subsidies:

The U.S. Department of Agriculture has doled out millions of dollars in subsidies to farms on which farming isn’t actually taking place, according a new report from government watchdogs. Billions more have gone towards supporting farms that don’t grow the crops for which they’re being subsidized.

Nice.  The latest version of the Farm Bill passed the Senate by a ridiculously large margin, and House votes begin this week.  Easy passage is expected there too... naturally.  Lord only knows what kinds of absurdities are buried in these things.

Citing the farm bill, AEI's Arthur Brooks argues in a new WSJ op-ed that the resurgence of crony capitalism is one of the main indications that the United States is heading down the inevitably-disastrous road of European social democracy:

The second force leading us down the social-democratic road is cronyism. America possesses a full-time bipartisan political apparatus dedicated to government growth and special deals for favored individuals and sectors. For example, the farm bill that just passed the Senate contains around $100 billion in subsidies, mostly for large, corporate farms that do nothing to improve nutrition or food security. Or witness the recently reauthorized Export-Import Bank, which doles out about $20 billion annually in corporate welfare.

Brooks concludes, however, that all is not lost for the country:

What is the answer? We caught a glimpse of it in 2010, when a movement of ethical populism—the tea party—mobilized millions of Americans to read the United States Constitution and demand politics that reflect the majority's values. And while woefully misguided in its diagnoses and policy solutions, the Occupy Wall Street movement was at least right to protest the malignant cronyism in our economy. That energy must re-emerge in 2012 and become a permanent part of our political landscape.

In 1787, Benjamin Franklin was asked what sort of government our new nation would have. His famous answer was, "A Republic, if you can keep it." When he said this he was envisioning a monarchist alternative, not today's noxious brew of leftism, cronyism and general inattention to public policy. But Franklin's maxim is still valid today.

Indeed it is. Fortunately, the recent attacks on crony capitalism from the grassroots, academia and, yes, even a few sitting politicians are most definitely a good sign that a growing number of us intend to fight to keep our Republic.

UPDATE: GMU today puts out a new primer on How Cronyism Is Hurting the Economy:

Even More on Protectionism's Rise and the Dearth of US Trade Leadership

Over the last few weeks, I've repeatedly asked whether the recent, troubling increase in global protectionism can be attributed, at least in part, to the absence of American leadership - long the driving force behind global trade liberalization - during the Obama administration's tenure at the helm of US trade policy.  Dartmouth's Doug Irwin - a true expert on the history of US trade policy and the rise of protectionism in the early 20th century - adds more support for my little theory in a new WSJ op-ed.  After ticking off a long list of new protectionist measures across the globe, Irwin notes that it has coincided with a significant protectionist streak in the United States--

President Obama has provided no leadership in trying to keep world markets open for trade. Out of fear of offending labor unions and other domestic constituencies, his administration long delayed submitting free trade agreements with Korea, Colombia and Panama for congressional approval. Instead of seeking to reinvigorate the languishing Doha round of trade negotiations at the WTO, it has been almost completely passive and allowed world-trade policies to drift.

Congress has also done little to help. Senate Republicans and Democrats teamed up late last month to maintain import restrictions for the sugar industry, defeating an amendment from Sen. Jeanne Shaheen (D., N.H.) that would have gradually eliminated them. Keeping domestic sugar prices at twice the world level helps a few sugar-cane and beet farmers at the expense of consumers and taxpayers, while leading to job losses in sugar-using industries, such as candy and confectionary manufacturing.

Meanwhile, Congress and the administration continue to flirt with new "Buy American" provisions, drawing the ire of Canada and other trade partners. Yet economists Laura Baughman and Joseph Francois calculated that if foreign retaliation led U.S. companies to lose just 1% of the potential sales opportunities created by foreign stimulus programs, U.S. exporters would lose over 200,000 jobs. This would far exceed the 43,000 jobs supposedly created by the "Buy American" preferences included in the 2009 stimulus bill.

He then concludes:

Any serious march backward toward protectionism would constitute a major failure of economic policy. Experience has shown that, once imposed, trade restrictions are very difficult to remove because vested interests then have a stake in perpetuating them. Protectionism also breeds foreign retaliation, making barriers doubly difficult to unwind. Now is no time to entertain dangerous illusions.

No, it certainly isn't.  If only someone - anyone -  in the White House were listening.

Guess Who's Blocking Canada's Participation in the TPP [UPDATED]

Back when Japan announced that it was interested in joining the ongoing Trans-Pacific Partnership negotiations - which currently include the United States, current US FTA partners Australia, Chile, Peru, and Singapore, as well as new FTA partners Brunei, Malaysia, New Zealand and Vietnam - I noted that admitting the economic power and close US ally was a no-brainer.  Certain TPP participants (and their political allies at home), however, weren't so gung-ho about Japan's inclusion in the agreement, and Japan has its own internal politics to sort out, so our friends in Tokyo are still waiting around to see if they're on the TPP VIP Guest List.  Joining Japan on the wrong side of TPP's velvet rope are Canada and Mexico, who announced their interest in joining the agreement shortly after Japan.  Readers of this blog know my affinity for the Harper Government's pro-market, pro-trade reforms over the last few years, so of course I think that Canada's inclusion in the TPP would be a very welcome development.

Unfortunately, however, it appears that certain members of the Obama administration don't agree, and thus the United States might just be the last holdout on Canada's TPP participation.  My source for this juicy gossip, you ask?  Well, none other than PM Harper himself:

Harper sat down with Obama and Mexican President Felipe Calderón for their first such meeting in almost two years -- and the last before Calderón leaves office this fall -- and for all the jovial friendship on display for the cameras in the Rose Garden, some issues clearly rankled.

The meeting, which came up considerably short of the advertised three hours, ended without Canada getting an invitation to join negotiations for a new Trans-Pacific Partnership....

Canada's system of supply-management of eggs, milk and other farm products is seen as a stumbling block to participation in the new free-trade zone.

In scripted remarks, Harper emerged from the meeting to say he was "especially pleased" Obama had welcomed Canada's interest in the trade talks.

But he later pointed the finger squarely at the White House for holding up Canada's formal inclusion. "Our strong sense is that most of the members of the Trans-Pacific Partnership would like to see Canada join," Harper told an audience at the Woodrow Wilson Center. "I think there's some debate, particularly within the (Obama)  administration, about the merits of that."

For his part, Obama did not duck a question that specifically asked if Canada's dairy and egg marketing boards would have to go in order for Canada to join the party.

"Every country that's participating is going to have to make some modification," Obama said, flanked by Harper and Calderón at a news conference in the Rose Garden. "That's inherent in the process because each of our countries has their own idiosyncrasies, certain industries that in the past have been protected."

The prime minister did not answer a direct question on whether he was prepared to abandon the marketing boards, but said his government would do what is needed to protect industries. "Canada will attempt to promote and to defend Canada's interests, not just across the economy but in individual sectors as well," said Harper.

Although some of Canada's agriculture policies are undoubtedly suspect, the idea that its marketing boards - which have been in place for several decades and haven't impeded NAFTA (as a new IBD editorial helpfully notes) - are preventing the United States - one of the largest agriculture-subsidizers on the planet - from signing off on Canada's TPP participation is laughable.  The laughs get even louder when one considers that the "too protectionist" Canada has been unilaterally opening large swaths of its market to imports, while the "free trade" Obama administration has been working hard, in FTA negotiations and via US trade law, to keep ours closed (and to keep those US farm subsidies firmly in place).  Or when one considers the Obama administration's long history of playing the "you're too protectionist on issue [X]" card to justify FTA-related delays (just ask South Korea or, as noted above, Japan).

Then again, if I were in the White House (stop laughing) and had to choose between (1) admitting into the TPP the unilaterally-liberalizing, corporate tax-cutting, FTA-completing Harper Government (and its directly-competitive Canadian farmers, manufacturers and service providers), or (2) just making up some silly "protectionist" excuse in order to stall Canada's admission and cover for my own government's trade/tax policy ineptitude, I'd probably be pretty darn tempted to choose Door #2 too.

Of course, if I were in the White House (seriously, stop laughing), the United States wouldn't be in this embarrassing position to begin with.

UPDATE: A reader passes along this great 2010 op-ed from Peter Clark on the United States, ahem, recalcitrance re: Canada's admission to the TPP.  Clark focuses on one reason for the White House's exasperating Canada-TPP position that I glossed over last night but deserves direct mention: rampant US mercantilism.  US exports already have mostly-duty-free access to the Canadian market through NAFTA, and, as mentioned above, if Canada is allowed into the TPP, competitive Canadian exporters would gain equal footing with their US counterparts in the rapidly-developing, high-demand TPP (especially Asian) markets.  Clark further notes that Canada would likely not support the United States' mercantilist push to retain all the sweet, sweet carveouts and import protection that are embedded in its existing FTAs with TPP participants like Australia.  His arguments seems quite logical - and depressing - to me.  Alas.  (Clark raises other issues in another good, detailed op-ed from earlier this year.)