Kill the Jones Act; Kill It with Fire; Kill It Now

My latest in The Federalist (with help from an anonymous friend in the shipping industry):

Lost in the never-ending debate about the KeystoneXL pipeline is great news for anyone who opposes cronyism and supports free markets and lower prices for essential goods like food and energy. Sen. John McCain has offered an amendment to repeal the Merchant Marine Act of 1920, also known as the Jones Act, which requires, among other things, that all goods shipped between U.S. ports be transported by American-built, owned, flagged, and crewed vessels....  

The Jones Act and its related statutes raise the cost of essential goods for American families and businesses; strangle the life from the industries they were designed to protect; jeopardize U.S. maritime security; and exacerbate the pain of major national emergencies. (They also are major irritant in foreign trade relations.) So why hasn’t Congress repealed these laws? Maybe we should ask the politicians and well-connected cronies who benefit from the current arrangement. I’m sure they’d be happy to explain.  

McCain’s amendment to repeal the Jones Act is a common-sense solution to the problems facing a key American industry and the pain of the U.S. economy. The amendment, as well as any broader proposal to kill off the Act, deserves widespread support from conservatives and liberals alike. Efforts to dispense with this archaic protectionist boondoggle will no doubt meet fierce resistance from entrenched interests, labor unions, and opponents of free trade. However, those same groups stand only to benefit from efforts to make the U.S. fleet more competitive and less costly. American mariners have what it takes to compete on a global scale, and they should be given the chance. More competition translates to more opportunity, and perhaps the expansion and revitalization of a crucial sector of our economy. Where artificial monopolies and ancient restrictions can be removed, American labor, American business, and American consumers will have a chance to thrive.

Be sure to read the whole thing.

Senator McCain took to the Senate floor today to support his amendment and oppose the Jones Act. The text of his rousing speech is here, and video's below - definitely worth your time, and not just because the Senator entered my piece into the Congressional Record at the right at the end (sadly, not on video):

So, um, @SenJohnMcCain just put my @FDRLST piece on #JonesAct ("one of [his] favorites") in the Congressional Record pic.twitter.com/t4bE0PF2gu
— Scott Lincicome (@scottlincicome) January 22, 2015

Fun.

VIDEO: Me on Trade Politics, Messaging & Policy

The Cato Institute has (finally) published the third video that I recorded for them a few weeks ago on U.S. trade policy.  This one actually covers many of the same things that I discussed in yesterday's piece for The Federalist, so be sure to read that too for the total consumer experience.  Enjoy!

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 Folly of Bilateral Protectionism, China Solar Panels Edition

As you may recall, after a string of very public bankruptcies (*cough* Solyndra *cough*), US solar panel producers - and the Obama administration folks who happily subsidized them - were quick to blame China.  If only the Chinese cheaters were purged from the US market, they argued, America would become a global solar panel powerhouse, and the green jobs would flow like (highly subsidized) milk and honey.  To achieve this purge, the "domestic" industry (led by Germany's SolarWorld) petitioned the US government for steep anti-dumping and anti-subsidy (countervailing) duties on Chinese imports, and the administration - using US laws that tilt greatly in favor of domestic protectionism - was quite willing to oblige.

However, a new story from the Financial Times' Ed Crooks shows just how wrong-headed that move has turned out to be, and provides yet another lesson in basic trade economics.  Prices for panels have risen (slightly), but American producers and workers haven't benefited in the least.  Instead (and as I repeatedly predicted), jobs and output are down here, and other imports - not US panels - have replaced the Chinese ones that have been effectively banned from the US market.

Behold, the folly of bilateral protectionism - and the reality of trade diversion - in all of their glory:

In one respect, the duties do seem to have been effective. US imports of cells from China have dwindled, from an average of 11m per quarter in 2011 to just 900,000 in the first quarter of 2013. 

The pay-off in US manufacturing and jobs, however, has been elusive. The US has capacity to produce about 1,845 megawatts of solar panels per year, according to IHS, a research company. That is down from 2,027MW a year ago. 

The Solar Foundation, an industry-backed think-tank, found that solar companies lost about 8,200 manufacturing jobs last year, about 22 per cent of their total, and expected to regain only about 2,600 this year. 

SolarWorld itself has continued to cut jobs in Oregon.... 

Robert Petrina of Yingli Green Energy, the Chinese group that was the world’s largest solar panel manufacturer last year, said it was untrue that the duties have had no effect, citing higher cell prices in the US than in some other markets such as South Africa, as evidence of the distortions they were causing.... 

Yingli has been sourcing cells from Taiwan to avoid being caught by the duties on Chinese products. It had its second-best quarter on record in the US in the three months to March and is on track to double its sales to US utilities this year. 

Another source of supply to the US has been a surge in imports from Malaysia. The US imported almost as many Malaysian solar cells in the first three months of this year, as in the whole of 2011. 

Analysts said much of the increase was probably caused by First Solar, an Arizona company that was the world’s second-largest manufacturer of solar panels last year. It has 85 per cent of its production capacity in Malaysia, and is building several large solar plants in the US....

As I mentioned when the original decision to impose duties on Chinese solar panels, part of the reason for the trade diversion at issue here is because the Chinese producers achieved a small victory during the investigation, omitting solar panels made in third countries (like Taiwan) from Chinese parts.  This allowed a few Chinese companies to lawfully circumvent the AD/CVD order and still ship large quantities of their product to the United States.  That said, the surge of Malaysian and other imports make clear that even closing this "loophole" would do nothing to help US producers and workers for one simple reason: other countries' producers are still cheaper than their American counterparts.

Yet another reminder that protectionism doesn't work, and all those US subsidies were a horrible waste of taxpayer dollars, regardless of those dastardly Chinese cheaters.

Tackling Regulatory Protectionism, Finally

I've occasionally peered into the abyss that is the barriers to international trade imposed by the US regulatory regime, but I've never been courageous enough to tackle the very important - yet mind-numbingly difficult - task of rigorously documenting these non-tariff barriers and their deleterious effects on the US economy.  Fortunately, Cato's Sallie James and Bill Watson have proven up to the task with a brand new paper:

Despite the impressive success of trade liberalization, domestic industries continue to find ways to use the power of government to protect themselves from foreign competition. The practice of using domestic environmental or consumer safety regulation as a way to disguise protectionist policy has become a serious and growing problem in the United States. This regulatory protectionism harms the U.S. economy and violates our trade obligations.

A number of factors combine to explain the rise in regulatory protectionism. Economic globalization has provided Americans with access to a wide range of imported products. This has enabled consumers to demand not only high-quality products at low cost but also products that are produced according to consumers’ philosophical or ethical preferences. Simultaneously, domestic producers seeking protection from this influx of imports must find alternative shelters now that the use of tariffs and quotas is constrained by international law and economic good sense. The consequence is a perfect storm in which social welfare activists and special commercial interests join forces to promote regulatory regimes that unfairly and unnecessarily restrict imports.

There is already a system of laws in place to prevent regulatory protectionism. The rules of the international trading system recognize that domestic laws can be just as protectionist as tariffs. Many of the disciplines of World Trade Organization (WTO) law are embedded in the rules U.S. administrative agencies follow when setting new regulations.

But the U.S. government must take its WTO obligations more seriously. Prior to implementing a new regulation, federal agencies should be required to evaluate the possibility that less trade-restrictive alternatives could meet regulatory goals as effectively as their preferred proposal. Also, the U.S. government should not dilute or bypass the multilateral rules of the WTO through bilateral or regional negotiations that accept managed protectionism.

This paper uses a number of recent examples of protectionist regulations to show that the enemies of regulatory protectionism are transparency and vigilance. Policymakers should be skeptical of regulatory proposals backed by the target domestic industry and of proposals that lack a plausible theory of market failure. These are red flags that the proposal is the product of privilege-seeking special interests disguised as altruistic consumer advocates.

James and Watson examine such regulatory boondoggles as the Lacey Act, catfish inspection, Dodd-Frank's  provisions on "conflict minerals", the long-running ban on Mexican trucks, mandatory food labeling, prohibitions on certain flavored cigarettes, and supposed environmental protections for cute, cuddly little dolphins and sea turtles.  They demonstrate that, although these regulations might sound (or even start out as) benign or well-intentioned, they often end up undermining free trade and benefiting discrete domestic special interest groups that are, deep-down, seeking to use non-tariff barriers to thwart international competition at US consumers' expense.  They also offer up a sound critique of various anti-trade groups' criticisms of global trade (i.e, WTO and FTA) rules that discipline this discriminatory, regulatory protectionism, and offer up a nice litmus test to ensure that future regulatory adventurism doesn't thwart free trade in the process.

My favorite line comes from James' new blog post on the paper:

As we discuss in our paper, tariffs and other conventional trade barriers have fallen over the years, so the barriers that remain are more regulatory in nature, and more sensitive to negotiate. What we’re essentially left with is the difficult issues. They get to the heart of national sovereignty and, on a practical level, require the participation of regulatory administrators who may have very little or no trade negotiation knowledge or experience. They also have little incentive to concede their power. Whereas trade negotiators are paid to, well, negotiate, regulators are paid to inhibit commerce.

Indeed.  Be sure to read the whole paper here.

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.

Good Thing We Ignored Paul Krugman, Part 632

A couple days ago, Paul Krugman made a rather quiet admission: contrary to his previous histrionics, China's currency ain't a big deal anymore:

In 2010 an undervalued renminbi was a significant drag on advanced economies, including the United States. Since then, however, two big things have happened: relatively high inflation in China, and some appreciation of the renminbi against the dollar. As a result, the real exchange rate of China against the United States (based on consumer prices), has appreciated significantly:

At the same time. China’s surplus has come way down:

So this is an odd time to be making confrontation over China’s currency a centerpiece of your economic policy — unless, of course, it’s just bluster aimed at making voters think you’re tough.

I have no idea whether Mitt Romney's misguided stance on China's currency or the aforementioned facts really caused Krugman's views to change, but that's not important for tonight's purposes.  Instead, I just want to gloat examine this great transformation and the implications of Krugman's previous advice on the China currency issue.

As you may recall, in 2010 grousing about China's currency was pretty much a monthly affair for Krugman's New York Times column.  But he not only would rage about the dangerous "global imbalances" caused by Chna's currency, but also would demand that the United States adopt a severly protectionist stance in order to remedy the "problem":

In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.

I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.

When Krugman made this proposal, I and a host of other (smarter) people took to the interwebs to explain just how ridiculously awful the idea of an across-the-board 25% "currency tariff" was from a historical, legal and economic perspective.  We repeated those criticisms when he later expressed support for Senate legislation (which followed unfortunate passage of an almost-identical House bill) that would have directed the US Department of Commerce to treat currency undervaluation as a countervailable export subsidy, thereby opening the door to countervailing duties on Chinese - and other! - imports.  We even went so far as to explain that, even assuming that Krugman and others were correct that China's currency was horribly manipulated and causing dangerous global imbalances, basic economics dictates that the whole thing would work itself out, and that harmful protectionist tariffs were most definitely NOT needed to solve the so-called "problem."

So here's my basic question for Dr. Krugman - a man who, by the way, used to be one of the pre-eminent advocates for free trade:

Aren't you just thrilled that Congress didn't take your advice and open the permanent, pandora's box of currency protectionism to address a "problem" that, as you now freely admit, has fixed itself in under 2 years?

Seriously, just think of what would've happened if the Senate had bowed to Krugman's demands and passed the currency/CVD bill: we'd very likely have this messy new protectionist law on the books, leading to lord-only-knows-how-much litigation, economic harm and diplomatic tension between two of the world's biggest economies. 

Instead, the only thing damaged is Dr. Krugman's free trade and economic reputation.

Boy, did we dodge a bullet!

Countervailing Calamity: The Pandora's Box of Currency Protectionism

At tonight's much-anticipated Presidential Debate, it's quite possible that the issue of China's currency will be raised by the debate moderator or one of the candidates.  I've spilled a lot of virtual ink at this blog about trade and currency issues and the legal problems with certain politicians' desire to impose countervailing duties (CVDs) on Chinese imports due to alleged currency manipulation or undervaluation.  But my forthcoming paper, "Countervailing Calamity: How to Stop the Global Subsidies Race," zeroes in on one of the most troublesome legal and economic issues surrounding the whole currency/CVD debate: it opens the door to some serious protectionism, and not just against China. 

To understand why this is requires some quick background on how a subsidy is determined to exist under the US countervailing duty law.  As I first note in the paper, "A subsidy is defined as a 'financial contribution' by a 'government' or 'public body' that confers a 'benefit' on the recipient."  While that definition seems pretty harmless, it would be, except for the fact that the US Department of Commerce does some pretty, ahem, creative things to magically find a subsidy "benefit" where none might actually exist:

Existing U.S. law gives DOC ample discretion to measure the benefit (and thus the magnitude of an alleged subsidy), including the use of external subsidy benchmarks that have no relation to the domestic market at issue. This can lead to the imposition of CVDs that exceed the actual level of subsidization in the market and thus penalize U.S. importers and consumers rather than offset the injurious subsidies at issue. As noted above, in cases of grants or tax breaks, the calculation of benefits is straightforward—it is the amount of the grant or the tax revenue foregone. However, in many other cases (particularly for government-provided loans, goods, or services), DOC resorts to external benchmarks from other markets or world-market prices, where it determines that domestic interest rates or prices—the preferred benchmark—are unusable. These benchmarks often have little to do with the unique comparative advantages of the domestic market at issue and are expressly preferred over constructed benchmarks (e.g., cost of production plus profit) based on prevailing market conditions in the country of provision.

As a result of this policy, DOC has used external benchmarks to determine the magnitude of many subsidies, including those related to government-provided loans, land, water, stumpage (wood), and metals. The calculations resulting from DOC’s use of external benchmarks have produced subsidy amounts that often have very little to do with the market value of the actual government-provided loan or good/service at issue and negate the investigated countries’ natural comparative advantages. Thus, final CVD rates for these subsidies are often much larger than the actual benefit, if any, that an exporter has received from the government transaction.

DOC’s recent CVD investigation of aluminum extrusions from China provides an example of the difficulties involved with external benchmarks. In that case, DOC used prices for raw aluminum from the London Metal Exchange and prices for land from Thailand, rather than in-country prices for these goods. Although one could reasonably argue that London Metal Exchange aluminum prices are roughly comparable to those in China because aluminum is a globally traded commodity, no such reason applies for something so uniquely country-specific as land. Thus, any “land subsidy” found to exist in this case has little relationship to the actual subsidy, if any, conferred by the Chinese government.

Ok, so how does this all relate to currency?  Well (emphasis mine)...

Legislative proposals to address “currency misalignment” would exacerbate existing concerns because they would authorize DOC to calculate the amount of a currency’s undervaluation by using a basket of other comparable countries’ currencies as a surrogate for what that currency’s value should actually be in an uncontrolled market. Such a market benchmark would not reflect the many unique circumstances surrounding the value of a nation’s currency. Moreover, because such legislation is not limited to China (such limitation would violate WTO non-discrimination rules) and because many other countries engage in similar forms of currency management, currency/CVD proposals would open the door to copycat cases against imports from many countries other than China. For example, a recent study by the Peterson Institute alleged that counties like Switzerland, Malaysia, Algeria, Russia, and others engage in “currency manipulation.” Should a currency/CVD proposal become law, there would be nothing to stop domestic industries and unions—and their lawyers—from pursuing CVD cases against all of these countries, using external subsidy benchmarks to find a benefit where none might actually exist.

In short, once our politicians open the door to a currency tariff, there will be very little to stop protection-seeking unions, industries and (of course) their crafty lawyers from asking the US government to impose duties on imports from many other countries.  And they have plenty of empirical support (whether I agree with it or not!) from well-respected think tanks to make those scary arguments. 

Oh, goody.

And, oh by the way, after the recent QE3 announcement here in the states, several countries (most notably Brazil) have angrily accused the US government of - you guessed it - devaluing the dollar to boost exports.  Most of these countries also have CVD laws too, you know.

Those currency CVD proposals ain't looking so hot now, eh?

More tidbits from my new paper are available here, if you're interested.

Sure, You Can't Afford Food, But At Least You're Buying Local

From the New York Times travel blog comes a humorous - and totally unintentional - economics lesson in a routine story about traveling in Scandinavia on a budget:

WHY IS NORWAY SO EXPENSIVE?

Most people assume Norway costs so much because of its high tax rates. Not so, said Nils Henrik von der Fehr, chairman of the economics department at the University of Oslo. Taxes play a supporting role — there is a 25 percent value-added tax on most products, for example — but the real reasons are labor costs and agricultural protectionism.

“The most important factor is the way our labor market works: centralized bargaining,” Mr. von der Fehr said. “One has made an effort to have an egalitarian wage structure. While people like me are not well paid compared to our colleagues in other countries, people at the lower end earn much more. You don’t have cheap labor in Norway.

“All the things you want as a tourist — hotels, restaurants — are labor-intensive,” he said. “That’s why it’s nice for us to be a tourist in the U.S.: everything you want is cheap because of the abundance of cheap labor.”

Another factor is the high tariffs on agricultural imports that keep Norwegian farms in business: “We have perhaps the most protected agricultural system in the world,” he said. “It’s not a particularly easy place to grow anything. Farms are small and the season is short.”

That may mean higher food prices, but at least you are buying local.

The NYT earlier notes that a cup of coffee will cost you $4.50 in Oslo, a fast food burger and fries is a whopping 23 bucks, and - most depressing - a six-pack of "mediocre beer" goes for a buzz-killing $30!  When asked how they cope with these prices, a Norwegian pharmacist quips "It's easy. We buy everything in Sweden."

Smart dude, but I'm not so sure that's the result of a sound economic policy.

Now, I freely admit that I don't know anything about Norway's labor regulations, but the bit about agricultural tariffs finds strong anecdotal support in last December's blog post on how Norway's import-prohibitive dairy protectionism caused butter prices to spike to an insane $450 per pound, thereby threatening a "cookie-less Christmas" in the world's butter cookie capital.  And if economist Mr. von der Fehr is correct about Norway's labor regulations, you just have to love how an obsession with income inequality has - combined with fierce protectionism - created shared misery in its attempt to prevent unequal prosperity.

But, hey, at least you're buying local!

(Or rich enough to afford traveling to Sweden and smuggling back some reasonably-priced cookies.)

2012 GOP Platform on Trade: the Good, the Bad, and the Really Ugly

The Republican Party has released its 2012 Platform, and it's pretty much what you'd expect given the past few months of campaign and congressional rhetoric: it mostly supports free trade, yet does so in a mercantilist way and contains some pretty harsh - and indeed protectionist - words for today's trade bogeyman, China.  In fact, the platform seems like it was almost entirely lifted from Gov. Mitt Romney's 2011 economic plan, for the better and the worse.  Although there are various trade-related elements throughout the platform, the main "international trade" section can be found on pages 6-7 and I'll focus on it tonight:

International Trade:
More American Jobs, Higher Wages, and A Better Standard of Living

International trade is crucial for our economy. It means more American jobs, higher wages, and a better standard of living. Every $1 billion in additional U.S. exports means another 5,000 jobs here at home. The Free Trade Agreements negotiated with friendly democracies since President Reagan’s trailblazing pact with Israel in 1985 facilitated the creation of nearly ten million jobs supported by our exports. That record makes all the more deplorable the current Administration’s slowness in completing agreements begun by its predecessor and its failure to pursue any new trade agreements with friendly nations.

This worldwide explosion of trade has had a downside, however, as some governments have used a variety of unfair means to limit American access to their markets while stealing our designs, patents, brands, know-how, and technology—the “intellectual property” that drives innovation. The chief offender is China, which has built up its economy in part by piggybacking onto Western technological advances, manipulates its currency to the disadvantage of American exporters, excludes American products from government purchases, subsidizes Chinese companies to give them a commercial advantage, and invents regulations and standards designed to keep out foreign competition. The current Administration’s way of dealing with all these violations of world trade standards has been a virtual surrender.

Republicans understand that you can succeed in a negotiation only if you are willing to walk away from it. Thus, a Republican President will insist on full parity in trade with China and stand ready to impose countervailing duties if China fails to amend its currency policies. Commercial discrimination will be met in kind. Counterfeit goods will be aggressively kept out of the country. Victimized private firms will be encouraged to raise claims in both U.S. courts and at the World Trade Organization. Punitive measures will be imposed on foreign firms that misappropriate American technology and intellectual property. Until China abides by the WTO’s Government Procurement Agreement, the United States government will end procurement of Chinese goods and services.

Because American workers have shown that, on a truly level playing field, they can surpass the competition in international trade, we call for the restoration of presidential Trade Promotion Authority. It will ensure up or down votes in Congress on any new trade agreements, without meddling by special interests. A Republican President will complete negotiations for a Trans-Pacific Partnership to open rapidly developing Asian markets to U.S. products. Beyond that, we envision a worldwide multilateral agreement among nations committed to the principles of open markets, what has been called a “Reagan Economic Zone,” in which free trade will truly be fair trade for all concerned.

I've been over most of these ideas before, so there's no need to get long-winded tonight.  Instead, here's a quick summary of the good, the bad and the ugly in the GOP platform's international trade section:

The Good. The platform expresses unequivocal support for international trade and free trade agreements.  Especially noteworthy is (i) formal party support for the Trans-Pacific Partnership - something we've suspected but not really heard from the GOP's top dogs; and (ii) a loud call for restoration of Trade Promotion Authority - an absolutely critical legal tool for the President's ability to effectively negotiate new trade deals.  Although I'll start complaining in just a second, the GOP's embrace of international trade is definitely a good thing, especially given the economic anxiety out there right now and the strong anti-outsourcing and anti-trade stuff we've been hearing from most Democrats.  Maybe the Dem Platform will surprise us and not contain similar protectionist positions this time around, but until then, the GOP remains the better party when it comes to public support for good trade policy.

The Bad.  The platform continues the failed approach of selling free trade through a single-minded focus on exports and reciprocal trade (i.e., only opening our market if others open theirs).  As I've repeatedly discussed, this strategy is not only economically ignorant, but it also undermines public support for free trade by reinforcing the erroneous notion that imports - and by extension the US trade deficit - are somehow bad for the US economy.  The platform also errs in its support for Romney's "Reagan Economic Zone" - a silly idea from a practical perspective (I've yet to read serious, apolitical trade policy expert express even lukewarm support) and one that implicitly abandons the existing multilateral negotiating framework at the WTO.  That, in my opinion, is a serious mistake - the WTO is and will remain the only real mechanism for broadbased, multilateral trade liberalization, and any alternatives are dangerous non-starters.  The GOP certainly isn't abandoning the WTO altogether - the text above promotes the use of WTO dispute settlement, and the platform on page 49 supports Permanent Normal Trade Relations with Russia in order to reap the benefits of Russia's WTO accession - but the Reagan Zone strongly implies that the GOP no longer sees multilateral negotiations through the WTO as viable.  And that, in my opinion, is a mistake, regardless of the big mess that is the Doha Round.

The Ugly.  I guess it shouldn't be a surprise, but it's really a shame that America's "free market" party has warmly embraced Romney's zealous contempt for all things China trade-related.  This includes support for (i) countervailing duties on Chinese imports due to currency manipulation; (ii) mysterious "punitive measures" on foreign firms found engaging in IPR theft; and (iii) support for a "Buy AmericanAnything-But-Chinese" procurement policy.  Leaving aside for the moment the fact that each of these proposals raises serious legal and practical concerns (see, e.g., here on currency; there's not really a vehicle under US law for the second; and the third could violate WTO rules if it singled out China), there are much bigger problems with such talk: 

• First, the scary chest-thumping overshadows far more legitimate gripes about bad Chinese trade policies (like subsidies and IPR enforcement).  When you're screaming about attacking imports and investment, people tend not to notice your more subtle gripes about real problems in the Chinese market. 

• Second, and more importantly, these proposals expressly condone self-destructive retaliatory protectionism that defies economic sense and free market principles.  As I've repeatedly warned, there is absolutely no reason why such "logic" couldn't be applied to other "offending" countries, and the protectionist slope is very, very slippery.  Saying "we only meant it for China" is likely not going to serve as an adequate defense when the well-funded protectionists come knocking on the White House door.  And, by empowering these anti-trade forces, such proposals also won't help improve tepid American support for free trade.  In short, Pandora's Box has been opened, and it remains to be seen whether Republicans can control the nastiness inside.  The Democrats - who once supported things like NAFTA, China trade and the WTO (see, e.g., Bill Clinton) - sure couldn't.

Granted, each of the GOP's China trade proposals allows for ample wiggle-room, and it's very likely that a President Romney would pursue a much less aggressive approach (indeed, the platform later on page 49 states that the GOP "welcome[s] the increase in trade and education alliances with the U.S. and the opening of Chinese markets to American companies").  Regardless, "Commercial discrimination will be met in kind" is a recipe for heightened protectionism and possibly a trade war, not a responsible, economically and legally sound policy from the supposed "adult in the room" on US international trade policy and politics.  And the sign that such rhetoric - in GOP's defining policy document, no less - sends to the rest of the world is nothing short of embarrassing.  The only bright side for Republicans, I guess, is that the Democrats' platform promises to be even worse.

Hooray, lesser of two evils!

More to come, I'm sure.

Protectionism's Cool... Until It Punches You In The Mouth

One of the reasons that protectionist laws and policies - thoroughly debunked in theory and practice - stick around is the fact that the costs of such actions are diffuse (e.g., tariffs force me to pay a few bucks more for a toaster) while their benefits are highly concentrated (e.g., the toaster manufacturer, protected from foreign competition, makes millions from those higher prices).  Thus, too few people spend the time to understand why free trade is the morally and economically optimal position, even though, on the whole, they'd benefit a lot from fully liberalized trade.  This is Public Choice Theory 101.

But, lemme tell ya, the ignorant sure smarten up quickly once protectionist policies begin to hurt them more directly.  The latest example of this truth comes from the Washington Examiner's Sean Higgins, who observes that US environmentalists - longtime opponents of free trade - have suddenly changed their tune because specific anti-trade policies against solar panels are hurting their "green" objectives:

They're not quoting free market economists Friedrich Hayek or Milton Friedman yet, but some environmentalist voices are asking whether protectionist trade policies aren't undermining renewable energy. And the broader Green movement may be listening.

What has them concerned is that the escalating trade war over the China's cheap solar panels. Domestic manufacturers have pushed hard for tariffs on them, and the White House has agreed.

That threatens to put the brakes on solar panel installation in the United States, which has taken off in the last few years, thanks in large part to those same cheap imports.

"Tariffs on Chinese solar are bad for us all," warned Sierra Club blogger Garvin Jabusch in a May posting. The policy, he said, is making solar panels "much less affordable for U.S. consumers."

In a post last month on the environmental news website Grist.org, Terry Tamminen, former secretary of the California Environmental Protection Agency, wrote: "If China is subsidizing solar panels, let's thank them and ask them to do more."

Last week, Bill Waren, trade policy analyst for Friends of the Earth, concluded a lengthy blog post with this warning: "Trade complaints will not solve our problems; in fact, in the long run, they may undercut clean energy and low carbon policies globally."

It's a thorny issue for the environmentalist movement. Generally they've favored any federal action that boosts the domestic renewables industry. They've also tried to build ties with Big Labor, forming the BlueGreen Alliance. And they've tended to scorn anything that smacks of free market economics.

Consider this the green trade war's silver lining, I guess.  Maybe next time these environmentalists - having now experienced firsthand the pain and immorality of protectionism - won't be so fast to bash the WTO (which has been trying to finish a big agreement on liberalization of trade in environmental goods) or to embrace protectionism.

Maybe.

An Outsourcing and Protectionism Thought Experiment

The political news is replete these days with discussions of outsourcing and trade, and two stories are driving the chatter: (1) whether US presidential candidate Mitt Romney's firm Bain Capital outsourced US-based business operations to foreign countries; and (2) why the Ralph Lauren-designed uniforms of the US Olympic team are made in China, instead of the United States.  The political discourse on both of these issues has been soaked in economic ignorance, with a depressing, bi-partisan consensus among our political "leaders" that both foreign outsourcing and the private purchase foreign-made goods are "bad" things for America and even downright unpatriotic.  In response, President Obama and Senate Majority Leader Harry Reid have proposed legislation restricting, respectively, (i) US corporations' ability to engage in foreign outsourcing and (ii) the US Olympic Committee's purchase of foreign-made uniforms for the Games.  And, unfortunately, neither the Romney Campaign nor the Republican Party has challenged the underlying assumption in the Democrats' allegations and proposals that somehow outsourcing and free trade are bad, unpatriotic things.

I will not waste my time today again going over just how economically-ignorant these proposals are, nor will I re-hash the vast academic agreement, supported by mountains of empirical evidence, that both outsourcing and trade improve public welfare in the United States and abroad.  Instead, I simply want to pose a basic question for those who accept, promote or even consider the idea - supported by myriad politicians, journalists and pundits - that these private international transactions are somehow "wrong" and deserving of derision:

If it is unpatriotic or immoral for a private company to outsource certain operations to foreign entities or for a private organization to purchase foreign goods, is it also unpatriotic and immoral for private American citizens travel abroad?  And should the government therefore restrict that activity too?

Before you answer, let's walk this through:  Each of these activities involves an American's private, voluntary purchase of a foreign product.  In the case of outsourcing/offshoring, a private US party chooses to spend its money to purchase foreign labor.  In the case of Olympic uniforms, it's the private (remember: the USOC is a private entity) purchase of foreign goods.  And in the case of travel abroad, private citizens are choosing to directly purchase non-US goods (clothes, souvenirs, etc.) and services (hotels, rental cars, restaurants, etc.) in foreign countries, as opposed to having them shipped here.  Each activity involves a voluntary transaction between an American party and a foreign party that, theoretically, replaces the American's purchase of a similar product from a US-based competitor, be it a worker, manufacturer or service-provider.  And the only differences among these private, international transactions are the type of product purchased and the point-of-sale - neither of which should affect one's views on the subject (unless maybe he or she has an irrational hatred of container shipping).

So, again, is my private decision to travel abroad and, for example, to spend my hard-earned American dollars at EuroDisney instead of Orlando - thereby depriving Floridians of those dollars - somehow "unpatriotic" or immoral?  Obvious jokes aside, should I be prohibited from, or condemned for, going to EuroDisney?

If not, then why do politicians loudly and confidently assert - almost entirely unchallenged by the media or their political opponents - that a company's or individual's voluntary decision to purchase foreign labor or foreign goods is somehow unpatriotic or immoral?  And why do these same politicians advocate policies seeking to discourage, restrict or even ban such activities?

If so, then why don't our politicians also support government restrictions - for example, taxes or outright prohibitions - on or condemn foreign travel?  Or, at the very least, why don't they create a system to ensure "balanced trade" in tourism by, for example, passing a law permitting US citizens to travel abroad and purchase foreign goods or services only when foreign citizens purchase equal amounts of stuff when they travel to the United States? ("Sorry, sir, you can't get a federal travel permit go see the Great Wall of China because we haven't had enough Chinese citizens come here to see the Grand Canyon.")  In a similar vein, why don't President Obama and Senator Reid fight for a new law authorizing the US Department of Commerce to monitor "unfair" pricing of, of government subsidies to, foreign tourist attractions and to tax Americans traveling to these places in the amount of the "unfair" or subsidized price? ("Sorry, sir, you must pay us an extra 23% tax on your plane ticket to France because the French government unfairly subsidized the construction and maintenance of the Eiffel Tower.")

These might sound like silly questions but, really, they shouldn't be taken so lightly: we already have laws on the books restricting similar exercises of consumer freedom, and our politicians routinely propose further limits.  For example, the US government often forces American citizens to pay an extra tax on imported goods because these items are supposedly priced at hypercompetitive - and thus "unfair" - prices (aka "dumping").  Senator Reid and his colleagues routinely propose legislation limiting or restricting American purchases of certain "fairly traded" foreign goods or services - the Olympic uniforms being only the most recent example - and they also oppose efforts (e.g., free trade agreements) to eliminate these restrictions.  And, of course, President Obama has repeatedly advocated that the US government raise taxes on private American companies who purchase foreign labor (i.e., "eliminating tax breaks for companies that move jobs overseas.")

So, seriously, why don't President Obama and Senator Reid propose similar limits on Americans' foreign travel and tourism purchases?  Instead of simply demanding that US Olympic Uniforms be made in the United States, why doesn't Senator Reid also demand that all American citizens be prohibited from going to London to watch the Games at all?  Just think of all those private American Dollars that  Senator Reid's patriotic law could force to be "better" spent at Disney World or a NASCAR race, thus supporting American jobs?

And instead of only assailing Mitt Romney's patriotism for being affiliated with a company that engaged in outsourcing, why doesn't President Obama drive a few miles to Dulles International Airport and browbeat the happy American families there who are just about to enjoy a week in Europe?  

I could go on, but I think you get the idea.

The fact is that our politicians don't propose such forcible restrictions on Americans' voluntary international transactions because doing so would be political suicide.  For some reason, the American people are inherently suspicious of government restrictions on their freedom to travel abroad and thus require an immense burden of proof from the government - most notably on national security grounds - to accept any such limits.  Perhaps this is because travel restrictions are imposed directly on individual citizens (instead of in bulk to US importers at the border) or are closely associated with totalitarian/communist regimes, but for whatever reason, a majority of Americans oppose laws that forcibly limit or prohibit their freedom to leave the United States and spend their time and money abroad.  Thus, broadbased travel restrictions have have absolutely zero political support and only very limited ones exist today (e.g., to specific countries like Cuba, Iran or North Korea). 

Yet, other than the insignificant differences mentioned above, there is nothing separating foreign tourism restrictions from the limits that Senator Reid and President Obama are demanding be placed on American companies.  In this light, it's clear that such proposals are not only economically ignorant, but also quite obviously immoral.  And it's these policies, not the voluntary, private actions of their targets that deserve our derision.  Or, to put it another way, the accusers, not the accused, should be roundly criticized for their transparently cynical advocacy of restrictions on our personal freedoms.

So isn't it time Republicans stopped playing along with these offensive political ploys and started asking some very basic questions about the moral implications of their political opponents' allegations and policies?  Is this really too much to ask?

On second thought, maybe I should quit while I'm ahead.

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.

Playing with Protectionist Fire

I've frequently cautioned against supposedly free-market Republicans toying with "I'm a free trader but [blank]" protectionism on the grounds that the strategy is misguided on economic, principled and political grounds.  A new web ad from far-left Democrat Tammy Baldwin - who's running for Senate in Wisconsin - really hits this last point home, and shows that Republicans who toy with protectionism are playing with political fire:



There are a lot of substantive problems with Baldwin's anti-China demagoguery, but I'm not going to waste my time re-hashing them here.  Instead, let's just focus on the politics.  The "bi-partisan" measure which Balwdin claims she spearheaded through the House and will "punish [China] for making billions breaking trade rules" is H.R. 4105 - the legally and substantively dubious bill that overturned a US federal court ruling and allows the U.S. Department of Commerce to keep imposing countervailing duties on imports from China and other "non-market economies."  Contrary to Baldwin's claims, however, she didn't really lead the charge on H.R. 4105.  No, that inglorious distinction falls to none other than the bill's sponsor, Ways & Means Chair and sometimes-free-trader Republican Dave Camp (R-MI), who not only sponsored the bill but also, along with his fellow Republican (and mostly-free-trader) Trade Subcommittee Chair Kevin Brady from Texas loudly advocated the bill's passage and ensured its way-too-rapid passage through the U.S. House of Representatives.  Camp even went so far as to get his staff to issue a "fact" sheet which accused us critics of H.R. 4105 of peddling "myths."  As one publication wrote shortly after the House vote:

In the House – where H.R. 4105 was passed on Tuesday by a vote of 370 to 39 – the bipartisan bandwagon was driven by Representatives Dave Camp (R-Michigan), chairman of the House Ways and Means Committee, and Kevin Brady (R-Texas); as well as Sander Levin (D-Michigan) and Jim McDermott (D-Washington).

Baldwin's political fib aside, her ad remains instructive because it shows what Republican "protectionism-lite" breeds: even stronger and more onerous anti-market demagoguery from politicians - usually Republicans' opposition - who typically have no problem taking the protectionism to the next level and now have "bi-partisan" cover to do so.

In this case, Camp's and Brady's strong support for H.R. 4105 helped lay the groundwork for way-more-protectionist Baldwin's first Senate campaign ad.  And given that myriad hackish media reports emerged after the CVD/NME bill became law - here's one crediting campaigning Democratic Senator (and bigtime protectionist) Sherrod Brown for passing the Senate bill and helping save Ohio jobs - it's almost certain that we'll see more campaign ads like Baldwin's, in which anti-trade Democrats use Republican-sponsored China trade legislation to seek a "bi-partisan" advantage over their (mostly) pro-trade Republican competitors through unabashed protectionist pandering.

Thus, the Baldwin ad serves as a cautionary tale for Republican politicians who are tempted to dabble in part-time protectionism for short-term political gain: it might seem like a great, mostly-harmless idea at the time, but it could end up helping their Democrat competition - most of whom have far fewer reservations about going "full protectionist" on the campaign trail - get elected.

(Unfortunately, it doesn't appear that Governor Romney will be heeding these lessons anytime soon.  Sorry, Japan.)