Share |

Liberals and Libertarians Should Unite to Block Trump’s Extremism

Brink Lindsey

Ten years ago, in an article for the New Republic, I proposed that liberal-minded people across the political spectrum should unite to create a “liberaltarian” alternative to the populist right of the George W. Bush years. Since the governing conservatism of that time no longer reflected any serious attachment to libertarian principles, it was time to explore the possibility of a new kind of center-left infused with libertarian insights.

Building on their shared cosmopolitan outlook and deep belief in individual autonomy, liberals and libertarians could develop a new public philosophy that highlighted their extensive common ground while compromising constructively on differences over fiscal and regulatory policy. The piece concluded with the following lines: “Can liberals and libertarians really learn to work together? I don’t know, but their alternative is most probably to languish separately.”

Back then the argument fell on deaf ears. Liberals thought they were strong enough to go it alone and get what they want, while libertarians still feared the left enough to convince themselves that the populist right remained their friend. And now here we are: A right-wing populist demagogue has swept into the White House, and the Republican Party he seeks to remake in his image (and which seems none too resistant to the makeover) controls both houses of Congress.

With the threat of war crimes and trade wars abroad combined with border walls, religious registries, and crony capitalism at home, liberals and libertarians are indeed languishing separately, although putting it that way today sounds absurdly understated. Not only are they out of power, but their most fundamental political commitments — to liberal democracy and the rule of law —are now threatened in a way none of us could have imagined possible just a few years ago.

In this dark and menacing environment, the liberaltarian idea is relevant again — with an entirely new sense of urgency. The first, immediate task is to forge a liberaltarian alliance that can defend American democracy from the depredations of Donald Trump. This ad hoc project requires no rethinking or blurring of existing ideological boundaries. Rather, it asks only that committed small-d democrats from the left, right, and center put aside their usual differences to stand together for basic liberal norms and institutions.

Over the longer term, though, there remains a pressing need for a new and vital synthesis of liberal and libertarian ideas. The antidote to today’s populism and us-versus-them tribalism is a policy vision that focuses on what unites us — in particular, our common interest in reviving growth and brighter economic prospects for all, which is not going to be accomplished either by Trump’s protectionism or by Bernie Sanders’s socialism.

The great stagnation of the 21st century, a product of slowing growth and high inequality, has been a breeding ground for frustrations and resentments and has sapped faith in the legitimacy of our governing institutions — making us vulnerable to a populist demagogue who proclaims, “I alone can fix it.” But there is only one viable path back to dynamism and broadly shared prosperity, and its outlines are distinctly liberaltarian.

In this hour of crisis for liberalism, not only in this country but around the world, intellectual flexibility is necessary to develop a new, revitalized conception of the liberal ideal.

Republican commitment to libertarianism waned in the Bush years

I made my original liberaltarian pitch back in late 2006. In those waning years of the Bush administration, I argued that the old Goldwater-Reagan brand of conservative “fusionism” — the alliance of free-market libertarianism and cultural traditionalism — was washed up. Rote rhetorical appeals to limited government and the free market remained, but the substance was exhausted. Social Security privatization was to have been the administration’s signature libertarian initiative, but it fizzled once it became clear that even Republican voters had no stomach for it. Virtually the only holdover from the Reagan days was support for tax cuts, now divorced from any accompanying concern for spending restraint — a caricature of free-market economics.

All the energy and passion in the movement had shifted to nationalism, culture-war agitation, and a proudly anti-intellectual populism — think hostility to immigration, opposition to same-sex marriage, the Terri Schiavo affair, and the ascendance of strident, divisive voices like Rush Limbaugh and Ann Coulter.

Libertarian ideas, and libertarian-leaning voters, were thus in need of a new home. Meanwhile, liberalism needed intellectual rejuvenation. At the time, the last two Democratic presidents had won office only by running away from the “L-word.” Liberalism had given ground to the right on a host of issues (tax rates, national security, crime, welfare); it was unable to advance social democracy when it tried (see Hillarycare); and it was resolute and effective only in defending past gains (Roe v. Wade, Social Security, and Medicare). As an alternative to that dreary status quo, I proposed a new liberal fusionism — a liberalism with libertarian characteristics.

Regarding social issues and foreign affairs, the hybrid I had in mind would maintain the commitments of contemporary liberals (if not always contemporary Democrats) —defense of civil liberties and personal freedoms at home, suspicion of military adventures abroad, relative openness to immigration, a spirit of cosmopolitan inclusiveness, and an ongoing orientation toward the welfare and aspirations of society’s least advantaged members. With respect to economic issues, the liberaltarian proposition would look more libertarian on regulation and more liberal on redistribution. It would proceed from the understanding that private-sector-led economic growth is the engine that makes social progress possible, yet at the same time it would accept that efficient economic markets have losers, and it would seek policies to cushion the blows on people who fall short.

It was a clever, provocative idea — and one went absolutely nowhere. Fred Smith, then the president of the libertarian Competitive Enterprise Institute, complained that I was basically proposing “acceptable surrender terms” to the left. And Jonathan Chait, then with the New Republic, flatly dismissed the idea that liberals needed to make any more concessions to free-market ideology than they already willingly did. Speaking of a liberal-libertarian compromise, Chait jeeringly quoted Michael Corleone: “My offer is this: nothing.”

Libertarian overconfidence, and Democratic faith in Obama, delayed the rapprochement

The reaction had to do with the historical moment. This debate was taking place shortly after the 2006 elections, in which Democrats took back both houses of Congress — a heady moment in which liberals were understandably resistant to the idea that they needed to reformulate their creed. Subsequent events, especially the emergence of the charismatic figure of Barack Obama and a financial crisis that put free-market economics on the intellectual defensive, further bolstered liberal self-confidence.

Meanwhile, libertarians and their conservative sympathizers reacted with horror to the election of Barack Obama and unified Democratic control of Congress. Some libertarians also looked with hope and enthusiasm the emergence of the Tea Party phenomenon, whose anti-government rhetoric, they believed, could be harnessed to libertarian ends. With excitement about the presidential candidacy of Rand Paul, there was even talk of a “libertarian moment.”

After the 2016 election cycle, things look oh so different. After Rand Paul couldn’t even make it out of Iowa, it was clear that the libertarian moment would have to wait. Even more disillusioning, what remained of the Tea Party movement merged seamlessly into the Trumpenproletariat, and the Republican Party, far from becoming the vessel of a libertarian renaissance, embraced a nakedly authoritarian standard bearer.

Liberals, on the other hand, remained confident that history was on their side — despite losing Congress in 2010 — until the late hours of November 8. Hillary Clinton had been poised to defeat a spectacularly incompetent opponent, and maybe take back the Senate. But not only had Donald Trump won a shocking victory, but the GOP retained both houses of Congress, held 33 governorships, and controlled the legislature in 32 states.

Standing together to defend norms and institutions

The election results mean more than a setback for liberals’ and libertarians’ policy ambitions. Indeed, worrying about mere policy defeats seems like almost quaint amid the grim exigencies of the Age of Trump. In a way that nobody alive today can remember, the basic integrity of American democracy now seems at risk.

From its scandalous opening announcement in June 2015, the candidacy of Donald Trump represented a continuous, sustained assault on the norms and institutions of liberal democracy. Since his election, the assault has gone on unabated. Trump has continued to browbeat reporters and has denounced peaceful protests. He has claimed, without a whiff of evidence, that millions of illegal ballots cast by undocumented aliens cost him the popular vote. His refusal to liquidate his business interests means no end to conflicts of interest and opportunities for corruption. The Carrier deal offers the first possible glimpse of crony capitalism to come — while his Twitter callouts of the Boeing CEO and a union official send a clear warning to all economic actors that the alternatives to being a Trump crony are dire. And his blithe dismissal of evidence that Russians interfered in the election, together with his tweeted call for a new strategic arms race, deepen fears about his judgment.

In these ominous circumstances, it is urgently necessary for liberals and libertarians to recognize the heightened stakes and act accordingly. The long-running family argument within the house of liberalism — which includes libertarianism — is all well and good, but not while the house is on fire. Far deeper than the real policy differences that divide us are the fundamental commitments to liberal democracy that we share, commitments that make it possible for us to fight it out on policy and then, win or lose, live to fight another day.

Rising to the challenge requires stout resistance against the usual partisan impulses. Already it’s clear enough that most congressional Republicans will not stand up to Trump, regardless of their private views: The lure of possible conservative policy victories, mixed with the fear of Trump’s popularity with the GOP base, will suffice to keep them in line. Democrats’ opposition can be counted on — but if early signs are any indication, much of that opposition will just end up making matters worse.

Using the fact of Russian interference to question the legitimacy of the election, hatching harebrained schemes to rob Trump of victory in the Electoral College — such trashing of democratic institutions from the left only serves to further roil the chaos within which Trump’s demagoguery thrives. And opposition that conflates the risks of conservative policies with those of democratic breakdown — say, by reacting to Betsy DeVos (who embraces vouchers for private schools) and Michael Flynn (who embraces insane conspiracy theories) as equivalent threats — trivializes constitutional concerns and makes it easier to dismiss complaints as losers’ sour grapes.

It is thus all but inevitable that a principled liberaltarian alliance in defense of liberal democracy will be a minority affair. Fortunately, when playing defense, a determined minority is often all it takes in America’s gridlock-prone political system. (In many crucial instances, persuading a handful of Republican senators to join Democrats will suffice.) In shaping and sustaining a “coalition of all democratic forces,” libertarian and liberal opinion leaders have a vital role to play. It is our job to rise above the passions of the electorate, and the calculations of politicians, and uphold democratic norms and institutions even, and especially, when doing so cuts against partisan interest.

Offering an alternative to populism

But beyond the current, pressing task of resisting Trump looms the larger, longer-term project of presenting a viable alternative to Trumpism. And by alternative I mean antithesis, not mirror image. In response to the white identity politics of the right, a focus on broadly shared interests, not a doubling down on left-wing identity politics. In response to Trump’s right-wing populism, a reform agenda centered on policies that will actually work as promised, not left-wing populist snake oil à la Sanders.

The liberaltarian alternative I have in mind should not be thought of as a political alliance between liberal and libertarian voting blocs. There aren’t enough self-identifying libertarians to matter as a potential alliance partner — and I’m sure that, even now, some members of that tiny group still regard the left as the bigger threat to liberty. What libertarians have to offer liberals isn’t votes, but ideas about how to reform the modern regulatory and welfare state to make it more effective in advancing liberal values.

What would this new liberal fusionism look like? Compared to today’s center-left, its primary distinguishing feature would be the emphasis it places on innovation and economic growth — and the degree to which it recognizes private-sector entrepreneurship and market competition as the irreplaceable engines of innovation and growth. This characteristically libertarian perspective would then be leavened by the traditional liberal reliance on social policy to ensure that the benefits of growth are widely shared.

The one great, compelling interest that unites Americans across race and class lines is a restoration of economic dynamism and broadly shared prosperity after years of slowing growth and rising inequality. Since 2000, the economy has been growing at only half the rate that prevailed over the course of the 20th century. Meanwhile, the median household income last year was lower than it was back in 2000, as the benefits of growth (such as it is) are skewed toward a relatively narrow elite.

To revive economic growth, the low-hanging fruit we need to grab is policy reform that removes regulatory obstacles to entrepreneurship and competition. Specifically, the main target of reform should be the web of regressive, special-interest privileges that stifle dynamism while redistributing wealth and income up the socioeconomic scale.

Here are a few of the more inviting targets for liberaltarian regulatory reform:

  • Low capital requirements that allow financial institutions to abuse explicit and implicit federal safety nets to engage in excessive risk-taking
  • Tight restrictions on high-skill immigration that deprive the country of valuable human capital while shielding high-end domestic professionals from competition
  • Excessive protection of patents and copyrights, which hinders innovation while delivering windfall gains for Hollywood, Big Pharma, and elements of Silicon Valley
  • Occupational licensing, which shuts off economic opportunities for the less advantaged while inflating salaries of well-to-do professionals like doctors, dentists, and lawyers
  • Highly restrictive land-use regulations, especially in big coastal cities, whose effect on housing prices has distorted the distribution of America’s population at a staggering cost to economic growth

Taking on these targets provides a bold agenda for deregulation — but one that looks very different from traditional conservative efforts along these lines. The conservative approach to deregulation looks to cut regulatory costs for existing businesses by paring back health, safety, and environmental rules. Here the main object is to remove regulatory subsidies that shield existing businesses from competition.

But a comprehensive pro-growth reform agenda will also recognize that, even where regulations serve valuable social objectives, pruning of outmoded and overgrown regulations may still sometimes be necessary. Some regulations never work as intended; others outlive their usefulness; and the steady accretion of regulations that individually make sense can add up to an ungainly whole in which costs far outweigh benefits. Those costs burden existing businesses, dampening investment and growth.

What’s more, many regulatory compliance costs are fixed — they don’t vary with the size of the enterprise. Consequently, the denser and more complex a particular regulatory regime is, the more it advantages large, established firms at the expense of new, upstart rivals, thus deterring entrepreneurship and innovation. To chip away at these ever-growing entry barriers, an aggressive mechanism to review existing regulations for growth-inhibiting overkill is needed.

None of the economic reforms I’ve discussed here represents a sharp departure from current liberal orthodoxy (at least of the Jonathan Chait variety; the story on the Sanders left is somewhat different). What is new is to gather all these reforms together into a unified agenda and to elevate their visibility and priority.

The distinctive liberaltarian approach to public policy would go beyond this new strategy for unlocking economic growth. To ensure that renewed growth translates into widely shared prosperity, sweeping reforms of social policy are also needed. These reforms would reflect the traditional liberal commitment to using government to combat poverty and expand opportunity, but they would update that commitment with libertarian ideas.

Reflecting libertarian hostility to paternalism, one guiding theme of liberaltarian safety-net reform would be to substitute simple cash transfers for in-kind benefits — liberating the poor from confusing and sometimes degrading eligibility requirements and shifting resources from poverty bureaucracies to the men, women, and children who actually need help. Reflecting the libertarian recognition of the private marketplace’s central role in advancing social progress, another guiding theme of reform would be to encourage and support employment — by ending the conditioning of benefits on joblessness (as is already the case with Social Security Disability Insurance), and by preferring work-promoting wage subsides (such as an expanded Earned Income Tax Credit) to employment-inhibiting hikes in the minimum wage.

Room for disagreement within the intellectual alliance

Although I have sketched out some specific policy ideas that I personally support, I fully expect other would-be liberaltarians to disagree here or there. Within the general framework of pro-growth economic policy and pro-work, pro-mobility social policy, there is plenty of room for rival approaches and differing priorities. And outside this common ground — on issues of foreign policy, health care financing, Social Security reform, and many others — the scope for diversity of opinion is even broader. But think of previous movements of new ideas, whether on the left or the right: supply siders, say, or New Democrats. Members of these groups didn’t agree on everything; what brought them together was a shared commitment to a few core ideas. At the heart of the liberaltarian idea is a vision of market-led growth combined with social policies that spread the benefits of growth more broadly.

The two sides of the liberaltarian policy model, pro-growth regulatory reform and pro-mobility social policy reform, are complementary and mutually reinforcing: Neither works without the other. There is no way to make current levels of social protection, much less improvements in the safety net, economically sustainable without unclogging the engines of growth through deregulation. And there is no way to make such unclogging politically sustainable without providing adequate social protection against downside risks.

In addition to achieving greater policy coherence and effectiveness, executing the liberaltarian turn would also bring clear political benefits. At present, liberalism’s besetting political weakness is its inability to offer an overarching vision of the public interest instead of just peddling a grab bag of specific benefits for specific interest-group constituencies. Liberal fusionism, with its focus on the unifying values of growth and work, would correct that shortcoming.

Many on the farther reaches of the left will never embrace this model, as hostility to corporations and commercial motives is too central to their political identity. But for those of a more pragmatic bent, the recognition that persistent slow growth makes fiscal austerity inevitable ought to provide sufficient motive for shifting to a more pro-growth, pro-market orientation. And this shift should come more easily when the nature of the regulatory reform needed to spur growth is more broadly understood. Specifically, many of the most important moves involve reducing inequality even as they unlock growth. (And if the name “liberaltarian” itself is an unmellifluous turn-off, that is certainly open for negotiation.)

Meanwhile, many contemporary libertarians will reject any acceptance of redistribution as heresy — notwithstanding the fact that the two greatest champions of libertarian ideas during the past century, Friedrich Hayek and Milton Friedman, both supported a social safety net and even a guaranteed minimum income. Insistence on ideological purity is self-defeating when the overwhelming majority of your fellow Americans reject your ideology. A strong public demand for a government backstop against economic insecurity is not going away; the campaign to roll back social spending merely pushes response to that demand underground —into the growing kludgeocracy of corporate welfare, mistargeted tax incentives, and protection of existing businesses against competition.

Is there sufficient intellectual flexibility in America today to break out of existing ideological boxes? In this hour of crisis for liberalism, not only in this country but around the world, such flexibility is necessary to develop a new, revitalized conception of the liberal ideal. Without such an effort, we will be forced to rely on conservatism-as-usual and liberalism-as-usual to fend off and beat back the temptation of authoritarian populism. Yes, we may well muddle through — but then again we may not. For those not content with such dangerous drift, working to articulate and defend a new liberaltarian synthesis offers the most promising path forward.

Brink Lindsey is vice president for research at the Cato Institute and the author, with Steven Teles, of the upcoming book The Captured Economy: How the Powerful Become Richer, Slow Down Growth, and Increase Inequality (Oxford University Press).

Share |

Rex Tillerson’s South China Sea Proposal Won’t Work

John Glaser

Secretary of State-to-be Rex Tillerson testified to Congress on Wednesday that America needs to take a harder line against China in the South China Sea. “We’re going to have to send China a clear signal that, first, the island-building stops,” Tillerson said. “And second, your access to those islands also is not going to be allowed.” This tougher stance is necessary, he says, to deter China from further “pushing the envelope.”

James Kraska, Professor in the Stockton Center for the Study of International Law at the U.S. Naval War College, agrees with Tillerson, even while admitting that this could be a dangerous policy: “Wouldn’t this raise tension in the region? It surely would, but anything other than acquiescence to China’s unlawful claims will have to take on additional risk in the short term.”

There are several strategic justifications for why America must stand up to China’s expansive territorial and maritime claims in the South China Sea. One involves defending our allies in the region and making sure China’s activities don’t threaten their security. Another is about upholding international order and freedom of the seas.

The current debate about America’s posture in the South China Sea reflects a very narrow conception of the strategic options at hand.

The first justification is weak. In this context, America’s security guarantees in the region could be more trouble than they are worth, especially if, as Kraska says, it requires the U.S. to take on additional risks with a nuclear-armed rising power. Moreover, it’s not obvious that China’s territorial and maritime claims per se threaten the security of neighbors like Japan and the Philippines. The competing claims in the South China Sea have gained considerable symbolic importance on all sides, but do not seriously undermine anyone’s security and while some view China as a regional bully, few describe it as an aggressor state. Indeed, as Thomas Christensen explains, Beijing has a “hedging strategy” that calls for avoiding “direct confrontation [with] the United States and its allies.” M. Taylor Fravel similarly argues that China “has compromised more frequently than it has used force” and “has been less belligerent than leading theories of international relations might have predicted for a state with its characteristics.”

China’s neighbors, although certainly eager to let the United States take the lead in defending their regional interests, seem to have a more sober and realistic view of China than Tillerson. They cooperate diplomatically and trade with China when it suits them, and make a fuss when China seems to push the envelope. The Philippines has recently pivoted towards better relations with China, despite the fallout over the ruling, in the Philippines’ favor, of the Permanent Court of Arbitration (PCA) at The Hague. And Japan still spends only 1 percent of its GDP on defense, less than half the global average, hardly an indication that Tokyo expects a military clash with China over the Senkaku/Diayu islands.

The second justification, that America needs to uphold international law and order, is even more dubious. First of all, as a great power, China is in good company in ignoring the precepts of international law. As the Harvard political scientist Graham Allison recently made clear: “no permanent member of the UN Security Council has ever complied with a ruling by the PCA on an issue involving the Law of the Sea. In fact, none of the five permanent members of the UN Security Council have ever accepted any international court’s ruling when (in their view) it infringed their sovereignty or national security interests.” No state has sued the United States under the UN Law of the Sea because Washington refuses to ratify it in the first place. When the PCA ruled in 2015 that the United Kingdom violated the Law of the Sea over the Chagos Islands, Britain disregarded it. And in 2013, when the PCA ruled against Russia on the Law of the Sea over its seizure of a Dutch vessel off the coast of Russia, Moscow ignored it. So when U.S. officials say military action in the South China Sea is necessary to uphold international law, they’re applying the traditional “for thee but not for me” rule.

There is a longer term question about whether the South China Sea will serve as a precedent for China’s rise to superpower status, overtaking the United States and revising the international order. China’s surpassing of the United States in relative international power is a very long way off, but even if it were more imminent, it’s not clear that China intends to upend the order that it has spent the past three decades conforming to. After all, China has gotten rich and powerful under this system. Ryan D. Griffiths, in an article in the journal Security Studies (gated) has gone so far as to argue that a Chinese-led world order wouldn’t differ fundamentally from a U.S.-led world order, though in the realm of territorial integrity it may actually be more stable.

The current debate about America’s posture in the South China Sea reflects a very narrow conception of the strategic options at hand. It shouldn’t be relegated to either (1) drawing a red line against China over remote islands of negligible strategic importance to the United States, or (2) ceding regional hegemony to Beijing. It is clearly in the interest of the nations in the region to come to a mutually beneficial agreement that establishes norms of behavior with regard to military presence, resource extraction, access to shipping lanes, and other activities in the South China Sea. And such a diplomatic achievement is perhaps possible. But by focusing solely on a crude deterrence model in which powerful adversaries meekly back down in the face of U.S. threats, we not only forgo those other peaceful diplomatic options, we make them less plausible.

John Glaser is Associate Director of Foreign Policy Studies at the Cato Institute.

Share |

As Systems Erode, User Fees Are the Key to Infrastructure Reform

Randal O’Toole

The nation’s infrastructure is being widely discussed this week, with incoming Transportation Secretary Elaine Chao’s confirmation hearing. But President-elect Trump’s infrastructure plan, which Ms. Chao and other officials will be tasked with implementing, is nothing particularly groundbreaking. Instead, it’s merely a new way of borrowing money, while offering no clear way to repay that money or to insure that it is spent on the most important projects. 

Members of Congress have their own ideas. Some are proposing a variety of new, hidden taxes to fund infrastructure construction.

Taxes, however, are the wrong way to fund infrastructure. Instead, infrastructure should be funded exclusively out of user fees for four reasons.

First, user fees are fair and equitable. Why should corporate overseas profits fund American highways? Why should toll road users pay for rail transit? Such unfair funding mechanisms encourage government waste as agencies gold plate their projects to get the most money out of taxpayers.

Infrastructure should be funded exclusively out of user fees for four reasons.

With user fees, everyone pays for the highways, transit lines, water and sewage facilities, and other infrastructure that they use. No one has to subsidize someone else and no one has an incentive to overuse a resource because the cost is shifted to someone else.

Second, user fees provide essential feedback to both infrastructure providers and users. User fees help providers set priorities for spending money. If a piece of infrastructure is highly profitable, it means we need more of it; if it loses money because users aren’t willing to pay for it, it means we shouldn’t build more.

Similarly, user fees inform consumers about the best infrastructure to meet their needs. Shall I go to work by driving on a highway, local streets, by transit bus, rail transit, or by bicycle? Correctly priced infrastructure will help people find the combination of speed, convenience, and cost that is best for them.

Third, user fees solve resource shortages such as congested highways and droughts. Traffic congestion, which is a $200 billion a year drain on our economy, is nothing more than a pricing problem. California, Oregon, and other states are experimenting with new mileage-based user fee systems that could eliminate congestion and raise revenues to expand capacity where it is needed

Droughts are also a pricing problem. Even the arid West has plenty of water, but it is currently allocated to some of the least valuable uses without regard to what users are willing to pay. User fees for water would effectively end any worries of shortages during dry years.

Finally, user fees solve the problems with crumbling infrastructure. Despite alarmist cries from those who seek to make profits from infrastructure spending, much of our infrastructure is actually in pretty good shape. In general, the infrastructure that is crumbling, such as the Washington DC Metro rail system, is infrastructure that was paid for out of tax dollars, while infrastructure paid for through user fees, such as state highways, are in better condition every year.

The reason is simple: when politicians fund infrastructure out of user fees, they direct the money to glitzy new projects that will get their names in the media rather than to maintenance of existing projects. As I recall a Department of Transportation official once saying, political leaders would rather “fund ribbons, not brooms.” Transportation agencies funded out of user fees, however, know they have to keep their infrastructure in good shape or users will stop paying.

For example, the number of bridges that are structurally deficient has declined by nearly 60 percent since 1990. Most of the decline is among bridges owned by state highway agencies funded out of gas taxes, tolls, and other user fees, while most of the remaining deficient bridges are owned by city and county road departments that are typically funded out of property taxes. 

The Washington, D.C. Metro rail system is a perfect example of how tax-funded infrastructure fails. The system has been declining for more than a decade. Yet rather than fund repairs and rehabilitation, politicians decided to build the Silver and Purple lines, both of which create more problems than they solve.

There may be a few kinds of infrastructure, such as schools, that might not be easily funded out of user fees. But these are the exceptions.

For everything else, including transportation, water, sewage, telecommunications, and the electrical grid, taxes aren’t the answer. For the sake of fairness, feedback, congestion relief, and adequate maintenance, these things can and should be funded exclusively out of user fees. Members of Congress, incoming Secretary Chao, and other officials with purview over infrastructure should look to user fees as the way forward.

Randal O’Toole is a senior fellow with the Cato Institute and author of Gridlock: Why We’re Stuck in Traffic and What to Do About It.

Share |

Dear Pound Sterling Investors, Keep Calm and Carry On

Tom Clougherty

The pound fell to a 30-year low against the dollar on Monday, after British Prime Minister Theresa May said she had no intention of keeping “bits of membership of the EU” after Brexit.

The comment was widely interpreted as meaning that Britain would leave the European Single Market as part of Brexit negotiations, and the pound’s sharp fall suggests investors see this as an economic blunder.

However, while the British electorate voted for Brexit in June 2016, nothing has actually changed yet. What’s more, the British economy has consistently defied expert predictions of post-referendum gloom — services, manufacturing, and construction sectors are all growing strongly, and the benchmark FTSE-100 share index is hitting record highs.

Britain and the EU both have a strong interest in continued trade.

In light of this, currency speculators’ pessimism seems somewhat premature. The unhappy Brexit their sterling sell-off implies is certainly a possibility, but it’s not the most likely one. So let’s step back and look at how things might play out over the months and years ahead.

The British government is awaiting a Supreme Court decision on whether it can unilaterally trigger Article 50 — the legislative clause formally signaling Britain’s intention to leave the EU, which would begin the two-year period of UK-EU negotiation — or whether parliament must have a vote. The Court is expected to rule in favor of a parliamentary vote sometime in January.

At that point, the British government will quickly bring forward Brexit legislation, aiming to trigger Article 50 before the end of March. That legislation ought to pass the House of Commons without too much trouble — not least because Theresa May could use any legislative intransigence to engineer an early general election that her party would win handsomely.

The unelected House of Lords could be a different matter, however. While the upper chamber cannot realistically block Brexit, they may seek to delay it, or else use their influence to reshape the government’s negotiating principles.

What of those principles? The government has yet to fully articulate its Brexit strategy, but the broad outline of its approach is easy enough to discern. First, the government is determined to restore national control of immigration and to end the supremacy of European Court of Justice rulings over British law.

That rules out continued membership of the Single Market, which requires free movement of people and imposes a unified regulatory regime across the European Economic Area.

Second, the government wants the freedom to negotiate new trade deals with non-EU countries. That rules out continued membership of the EU customs union, which puts a common tariff on all imports from outside the bloc.

Third, the government wants UK-EU trade in goods and services to be as free as possible after Brexit. Taken together with the preceding points, that suggests Britain will pursue an extensive bilateral trade agreement with the EU.

There’s no reason why such an agreement should not be reached. Britain and the EU both have a strong interest in continued trade. Moreover, they are starting from a position in which free trade already exists to a very large degree.

There are no significant regulatory differences to iron out and no subsidy-hungry special interest groups to placate. In other words, few of the policy issues that bedevil most trade agreements apply.

Politics may be the biggest challenge. For one thing, any bilateral agreement could require the assent of numerous national (and even regional) electorates across Europe — approval that cannot be taken for granted.

EU negotiators may also attempt to discourage other EU member states from following in Britain’s footsteps. This suggests Britain may have to suffer some form of punishment for leaving the EU, with London’s lucrative financial services sector the most likely target for continental ire.

For its part, the British government will face significant pressure from its own MPs — as well the media and the general public — not to back down easily; many would prefer that Britain walk away with no deal, rather than settle for a humiliating one.

That raises the specter of a truly “hard” Brexit — a clean break after which Britain would trade with the EU like any other country, in accordance with World Trade Organization rules.

That scenario is still unlikely to come to pass. In the short term, it would be extremely disruptive (not to mention economically damaging) for both sides; negotiators will surely work hard to avoid it.

In the long run, though, even a hard Brexit need not be disastrous for Britain — any losses it generated could be balanced out by a genuine commitment to radical policy reform at home, coupled with a concerted effort to liberalize trade overseas.

It remains to be seen whether the British government has what it takes to make necessity the mother of invention. In the meantime, however, investors would be wise to remember the old adage about keeping calm and carrying on.

Tom Clougherty is managing editor of the Cato Journal.

Share |

President-Elect Donald Trump Joins South Korea’s Left in Pushing New Korea Policy

Doug Bandow

South Korea’s political convulsions seem likely to deliver a new president sooner rather than later. Elections are scheduled for December, but if the Constitutional Court ratifies the National Assembly’s impeachment of President  the poll will come months sooner.

What remains of the devastated ruling party hopes for salvation through the candidacy of former UN Secretary General Ban Ki-moon. After massive rallies against Park even some ruling party parliamentarians voted for her impeachment. However, the opposition has the advantage, especially the sooner the vote is held.

There are plenty of contenders on the left. On the rise is Seongnam Mayor Lee Jae-myung, who has gained notoriety pushing for Park’s ouster. Lee styles himself as the Korean Bernie Sanders, railing against economic inequality and corporate privilege.

Of greater interest to Washington, however, is Lee’s perspective on security issues. The Republic of Korea’s left long has had a love/hate relationship with America. Washington’s support for the military dictatorships of Park’s father, Park Chung-hee, and Chun Doo-hwan, who emerged after Park pere’s assassination, soured many South Koreans on the alliance. Nevertheless, fear of North Korea and desire to avoid having to bear the full cost of defending against the North led even Presidents Kim Dae-jung and Roh Moo-hyun to preserve the relationship. Similarly, the main opposition party’s formal leader and current presumptive presidential nominee Moon Jae-in supports the status quo with the U.S.

Not Lee, however. He has a very different perspective on security issues, and sharply antagonistic opinions as to America’s role. He recently complained that U.S.-ROK ties had “degenerated into a subordinate relationship where we give whatever amounts of money they ask us to give.” Instead, he argued, “The U.S. should be begging us for the defense of East Asia.” He suggested defenestrating America’s nearly 29,000 troops, renegotiating the bilateral free trade agreement, and talking with North Korea’s Kim Jong-un.

Ironically, the incoming Trump administration might be sympathetic to all of these policies, though perhaps for different reasons than Lee. President-elect Donald Trump appears to be a committed protectionist and views virtually any agreement reducing any U.S. trade barriers as unfair to America; presumably he believes this applies to South Korea. He might be happy to tear up the FTA, even though Americans would pay more for imports and sell fewer exports, an economically painful combination.

Washington should bring its forces home, allowing South Koreans to do whatever they believe necessary to safeguard their own nation.

Candidate Trump also indicated his willingness to talk with Kim. The president-elect did not indicate whether he meant personally meet or governments engage, but broadly speaking it’s a sensible idea. Refusing to have diplomatic relations or other sustained contact for the last 69 years has achieved nothing. Isolation has not convinced Pyongyang to give up its nuclear and missile programs.

Engagement offers no sure path to success, of course. But regular contact might discover limited areas where agreement was possible, encourage modest confidence-building measures, reduce tensions and perceived threats, and provide a small window into an almost uniquely opaque system. Negotiations should not be seen as a reward with the North, but the best means to salvage something from years of U.S. failure in dealing with the Democratic People’s Republic of Korea.

Finally, Trump criticized America’s troop presence: “We have 28,000 soldiers on the line in South Korea between the madman and them,” yet “We get practically nothing compared to the cost of this.” His solution: “They have to protect themselves or they have to pay us.” However, he seemed to instinctively recognize that U.S. military personnel should not be hired out like mercenaries: “We are better off frankly if South Korea is going to start protecting itself.” Which should mean bringing the garrison home.

The fighting stopped more than 63 years ago. The South has raced past the DPRK in virtually every measure of national power. The former’s economy is about 40 times that of the North. The ROK overwhelmingly wins the two nations’ technology race. Pyongyang’s old allies, China and Russia, would not back the North in a war.

Indeed, U.S. policy has succeeded, providing a defense shield behind which South Korea could develop. Seoul is now capable of doing what nation states normally are expected to do: protect themselves against foreign threats. There’s no longer any reason for Americans to defend the South. Washington should bring its forces home, allowing South Koreans to do whatever they believe necessary to safeguard their own nation.

Thus, rather than wait for President Lee, or whoever else wins the South Korean election, to send the U.S. home, President Trump should begin the process as soon as he takes office. He should announce that his objective is to turn over the ROK’s conventional defense to Seoul, indicate that he will negotiate the withdrawal period for American troops with the new South Korean president, and offer to talk with Pyongyang.

However, there is one place where Trump should disagree with Lee. And that is on the defense of East Asia. Unless Lee has discovered a new way of thinking about geography, he will come to realize that the ROK actually is in the region. Thus, regional stability and security matter to his nation.

In contrast, America is thousands of miles away, on the other side of the world’s largest ocean. A total regional meltdown would cost the U.S. economically by disrupting commerce, but would not threaten America’s safety. There would be no North Korean or Chinese expeditionary force headed toward the U.S. No civil war on America’s borders. Not even a flood of refugees seeking sanctuary in the U.S.

Thus, even when it comes to East Asia the U.S. presence serves the ROK (as well as Japan and other friendly states) far more than it does America. If anyone should be paying anyone, the South should be writing Washington a check. Better, however, would be for Seoul to do more with its own resources to protect its own interests. No more relying on the U.S. for protection.

If Lee is elected and decides that the region doesn’t matter, President Trump should wave a hearty good bye as he orders America’s troops home. Washington officials should stop allowing other nations to manipulate them into serving other nations’ interests.

Indeed, it shouldn’t matter to the U.S. who ends up as South Korea’s president. The Trump administration should improve American security by pulling the U.S. out of the Korean imbroglio. It would be especially easy to do so if Lee Jae-myung is elected. Then all the Trump administration would need do is implement Lee’s election program.

Doug Bandow is a Senior Fellow at the Cato Institute and a former Special Assistant to President Ronald Reagan.

Share |

What to Expect from ObamaCare’s Replacement

Michael D. Tanner

Republicans have officially begun the long and complex road to repealing and “replacing” ObamaCare. And if you believe congressional Democrats, various special-interest groups and much of the media, the Four Horsemen of the Apocalypse are about to be unleashed.

Former Senate Minority Leader Harry Reid paused on his way out the door to warn, “People are going to die” if the health-care law is repealed. His successor, New York Sen. Chuck Schumer, was only slightly less gloomy, warning of “chaos” and claiming ObamaCare repeal would “make America sick again.” New York Times columnist Paul Krugman suggested Republicans were preparing to “snatch insurance away from millions,” while a CNN report claimed that repeal would lead to the loss of 3 million jobs.

Let’s all get a grip.

In general, most consumers will find themselves with more and better insurance choices after ObamaCare is repealed.

Initially, any changes will be very small and incremental. Repeal won’t happen overnight, or all at once. Rather, Republicans are likely to establish a sunset date, three or four years from now, allowing time to craft a replacement. Still, sooner or later, we’ll be living under a very different health-care system. Therefore, over the next few days, we’ll take a look at what it’s really going to mean for health-care consumers, patients, doctors, hospitals, insurers, businesses and taxpayers.

One of the first things most Americans are likely to find is that they’ll have more choices when it comes to buying insurance. You may have to pay more for insurance that covers some providers and conditions, but you’ll also be able to buy cheaper, less-comprehensive insurance if you want to.

ObamaCare required all insurance to cover a wide-ranging — and expensive — “essential benefits package.” Repeal will mean more of an a la carte approach to insurance, based on individual consumer preference.

In fact, this is likely to be one of the first changes to ObamaCare. While the law requires that there be an essential-benefits package, it gives the president a great deal of discretion in determining what that package should be. President Trump can take action by executive order to repeal some of the requirements that President Obama included.

People will even have the choice not to buy insurance at all, since the much-reviled individual mandate will be gone. Going without insurance may not necessarily be a wise choice, but it does re-establish a fundamental limit to state power over the individual. And it allows young and healthy people to purchase low-cost catastrophic coverage that makes much more sense for them.

Most people will find more choice to be a good thing, but there’s a downside. If people opt out of services that they won’t use — such as men choosing not to buy maternity coverage — it will drive up the price for those who do use those services.

Consumers won’t just find more options in the types of plans; there should also be more insurers to choose from. Recently, insurers have been abandoning ObamaCare exchanges in droves. Roughly a third of US counties have only one insurer participating in their exchange. Repeal will lure insurers back into the market.

Finally, a replacement plan will almost certainly let you shop for insurance out of state. Today, it’s illegal for someone living in New York to buy insurance in, say, Pennsylvania even if a plan there is cheaper. This gives a near monopoly to a small cartel of New York insurers. Allowing consumers to shop across state lines will force some much-needed competition into the insurance market. It will also help prevent New York regulators from recreating the failures of ObamaCare at the state level.

Those changes will mostly affect the individual insurance market, but the majority of Americans who get their insurance through their employer are also likely to see more choice. That’s because any ObamaCare replacement is expected to significantly expand Health Savings Accounts.

HSAs shift control of health-care spending from employers to employees. An expansion of HSAs will most likely allow much larger tax-free contributions to these accounts, and allow them to be used for more health-related expenses, including insurance premiums. That would mean that you — not your boss — would be able to choose your insurance plan.

Expanded HSAs would also mean increased portability for health insurance. Because you could use your HSA to pay your premium, you wouldn’t be as likely to lose your insurance if you changed or lost your job.

In general, then, most consumers will find themselves with more and better insurance choices after ObamaCare is repealed. Still, there are likely to be some people who face challenges, including those with low incomes and those with pre-existing conditions. Tomorrow, we’ll look at what repealing ObamaCare means for them.

Michael Tanner is a senior fellow at the Cato Institute and the author of Going for Broke: Deficits, Debt, and the Entitlement Crisis.

Share |

Obama’s Farewell Address

Walter Olson

“I wasn’t expecting to feel this way, but I’ll miss him,” was something I heard from several Republicans last night after the President’s farewell speech. They hadn’t voted for Obama nor been tempted to, but he had self-control, he kept things on an even keel, and his personal character showed many of the right priorities, starting with how he treated his family. And the way he spoke didn’t insult your intelligence.

A farewell address is no time to get into policy quarrels, and Obama understood that. His few policy remarks, notably in defense of the Affordable Care Act, were brief, if heartfelt. He let loose with no zingers and named his successor only once.

Who can blame him for keeping his distance from events of the moment? On national unity, not a new theme for him, he struck the right notes: back off from regional enmities, get out of your social media silo, stop demonizing opponents. This drew applause from his followers in the arena at McCormack Place, but outside, in the arena of clickable outrage, he might as well have been shouting into the winds. While the Twitter talk of #CaliforniaSecession had finally subsided, social media had turned to the task of sorting people who liked actress Meryl Streep from those who liked football and mixed martial arts, and woe to you if you preferred to go on liking both at once.

Obama’s words have always held broader appeal than his policies.

Even as the departing President warned against demonization, Democratic interest groups were circulating full-horns-and-tail dossiers on at least eight Trump Cabinet nominees. And this, everyone knows, is just the mildest preview of what to expect when a new Supreme Court nominee is announced.

My favorite passage in Obama’s speech — it could with few if any changes have been published by my own Cato Institute — was the one lauding the Founders’ “essential spirit of innovation and practical problem-solving,” a spirit…

“born of the Enlightenment, that made us an economic powerhouse — the spirit that took flight at Kitty Hawk and Cape Canaveral, the spirit that cures disease and put a computer in every pocket.

It’s that spirit — a faith in reason, and enterprise, and the primacy of right over might, that allowed us to resist the lure of fascism and tyranny during the Great Depression, and build a post-World War II order with other democracies, an order based not just on military power or national affiliations but on principles — the rule of law, human rights, freedoms of religion, speech, assembly, and an independent press.

That order is now being challenged — first by violent fanatics who claim to speak for Islam; more recently by autocrats in foreign capitals who see free markets, open democracies, and civil society itself as a threat to their power.”

But Obama’s words have always held broader appeal than his policies. One of his few specific bits of policy was a familiar Democratic call for new measures “to give workers the power to unionize for better wages.” That served as a reminder that his administration’s implacably pro-union policies, along with its many new mandates on employers and heavy regulatory hand in general, played a key role in driving business-oriented voters home to the Republican Party in recent elections.

The same day Obama spoke, Gov. Matt Bevin was signing a law making Kentucky the nation’s 27th right-to-work state. (Missouri may soon follow.) Right-to-work has made great strides in the past few years, led by industrial Midwestern states like Wisconsin, Michigan, and Indiana, in what in retrospect stands out as an early clue that these states had ceased to identify politically with the old Democratic coalition.

What kind of ex-presidency has Obama planned? We know it will involve promoting democracy and civic involvement and specifically a battle against gerrymandering and for redistricting reform.  As one who has been involved in redistricting reform efforts in my own state of Maryland, a state where Democrats drew the lines, I see a lot of potential there, provided Obama can resist pressure to represent the institutional interests of the Democratic Party. From what I’ve seen, a majority of voters cutting across party lines would welcome a better way of drawing lines.

Walter Olson is senior fellow at the Cato Institute. He also serves as co-chair of the Maryland Redistricting Reform Commission under Gov. Larry Hogan (R-Md.).

Share |

Will Trump Turn His Bully Pulpit Rhetoric into Policy?

Daniel J. Mitchell

For the next four years, I suspect I’m going to suffer a lot of whiplash as I yank myself back and forth, acting as both a critic and supporter of Donald Trump’s policy.

This happened a lot during the campaign, as Trump would say very good things one day and then say very bad things the next day.

And now that he’s President-Elect Trump, that pattern is continuing. Consider his approach to American businesses. In the space of just a few minutes, he manages to be a Reaganesque tax cutter and an Obamaesque cronyist.

I discussed this bizarre mix in a recent interview with Dana Loesch.

I guess the only way to make sense of Trump’s policy is that it’s a random collection of carrots and sticks. The carrots are policies to encourage companies to create jobs in America, and Trump is proposing both good carrots such as a much lower corporate tax rate and bad carrots such as special Solyndra-style handouts (except, instead of loot for green energy, firms get loot for maintaining production in America).

And the sticks are all bad, ranging for public shaming to explicit protectionism.

As I said during the interview, Trump is probably scoring political points, but what we should really care about is whether policy is moving in the right direction.

The Wall Street Journal is rather skeptical, opining that Republican-backed cronyism will be just as bad as Democrat-backed cronyism.

A giant flaw in President Obama’s economic policy has been the politicized allocation of capital, from green energy to housing. Donald Trump suffers from a similar industrial-policy temptation, as we’ve seen…with his arm-twisting of Carrier to change its decision to move a plant to Mexico from Indiana. …A mercantilist Trump trade policy that jeopardized those exports would throw far more Americans out of work than the relatively low-paying jobs he’s preserved for now in Indianapolis. Mr. Trump’s Carrier squeeze might even cost more U.S. jobs if it makes CEOs more reluctant to build plants in the U.S. because it would be politically difficult to close them. Mr. Trump has now muscled his way into at least two corporate decisions about where and how to do business. But who would you rather have making a decision about where to make furnaces or cars? A company whose profitability depends on making good decisions, or a branding executive turned politician who wants to claim political credit? The larger point is that America won’t become more prosperous by forcing companies to make noneconomic investments.

Here’s some of what Tyler Cowen wrote about Trump’s approach.

One of Donald Trump’s most consistent campaign promises has been to prevent U.S. businesses from moving good jobs to Mexico… Economists might regard this as a misguided form of protectionism, but in fact, it’s worse than that: If instituted, it could prove a major step toward imposing capital controls on the American economy and politicizing many business decisions. …Using the law to forbid factory closures would have serious negative consequences. For one thing, those factories may be losing money and end up going bankrupt. For another, stopping the closure of old plants would lock the U.S. into earlier technologies and modes of production, limiting progress and economic advancement. An alternative policy would prohibit companies from cutting American production and expanding in Mexico… The end result would be that Asian, European and Mexican investors would gain at the expense of U.S. companies. …Furthermore, if we limit the export of American capital to Mexico, the biggest winner would be China, as one of its most significant low-wage competitors — Mexico — suddenly would be hobbled.

Those are all very practical and sensible arguments against protectionism.

But Tyler points out that Trump’s agenda could lead to something even worse.

…a policy limiting the ability of American companies to move funds outside of the U.S. would create a dangerous new set of government powers. Imagine giving an administration the potential to rule whether a given transfer of funds would endanger job creation or job maintenance in the United States. That’s not exactly an objective standard, and so every capital transfer decision would be subject to the arbitrary diktats of politicians and bureaucrats. It’s not hard to imagine a Trump administration using such regulations to reward supportive businesses and to punish opponents. Even in the absence of explicit favoritism, companies wouldn’t know the rules of the game in advance, and they would be reluctant to speak out in ways that anger the powers that be. …It also could bring the kind of crony capitalist nightmare scenarios described by Ayn Rand in her novel “Atlas Shrugged,” a book many Republican legislators would be well advised to now read or reread.

Tyler’s best-case scenario is that Trump doesn’t try to change policy and instead just uses the bully pulpit to…well, be a bully.

…public jawboning also would be an unfortunate form of politicizing the economy, but at least there wouldn’t be new laws or regulations to back it up in a systematic way.

Though I’ll close by noting that this best-case scenario is still a very bad case.

The mere fact that politicians think they have the right to interfere with the internal decisions of companies is a dangerous development.

It’s cronyism on steroids.

And even if Trump somehow restrains himself (how likely is that?!?), sooner or later that bad mentality will lead to bad policy.

Yes, I’m making a slippery-slope argument. But not just because I’m a libertarian who is paranoid about government power.

My fear is based on lots of real-world evidence. It turns out that slippery slopes are very slippery.

The bottom line is that politicians don’t even do a good job of running the government. Let’s not allow them to run private companies as well. And that’s true whether they have an R after their names or a D after their names.

Daniel J. Mitchell is a senior fellow at the Cato Institute who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending.

Share |

Workers of the World Do Best in Free Markets

Daniel J. Mitchell

It’s time to channel the wisdom of Frederic Bastiat. There are many well-meaning people who understandably want to help workers by protecting them from bad outcomes such as pay reductions, layoffs and discrimination.

My normal response is to remind them that the best thing for workers is a vibrant and growing economy. That’s the kind of environment that produces tight labor markets and more investment, both of which then lead to higher pay.

Even statists sort of understand that this is true, but it’s sometimes difficult to get them to grasp the implications. They oftentimes are drawn to specific forms of government intervention, even if you explain that there are adverse unintended consequences.

** Higher minimum wages push marginal workers into joblessness.

** Pro-feminist policies make women less attractive to employers.

** Labor protection laws discourage companies from hiring workers.

Let’s explore this issue further.

If you want the best for workers, the evidence shows that unregulated markets make them better off, less likely to face discrimination, and happier overall.

In a column for the New York Times, Megan McGrath writes about a big new mining project in a remote part of Australia that “has the potential to create 10,000 jobs.” While that’s obviously good news, she worries that the company “will repeat the mistakes made by companies during the last mining boom by using workplace practices that hurt workers and their families.”

And what are these mistaken “workplace practices”? Apparently she thinks it is terrible that workers don’t want to move to the outback and instead prefer to continue living in cities and suburbs. So she think it is bad that they fly in for multi-week shifts, stay in temporary housing, and then fly back (at company expense) to their homes.

“Employees…fly to remote mines from major cities to work weeks at a time, and fly home for several days off before starting the cycle again. These so-called fly-in, fly-out jobs, which offer hefty pay, are widely known here as “fifo.” At the peak of the boom in 2012, …more than 100,000 of these held fifo positions.”

Though it seems these workers are making very rational decisions on how to maximize the net benefits of these positions.

“…fifo workers in the last boom were young, undereducated men lured by salaries that far surpassed what they could earn for similar work outside the industry — up to $100,000 a year to shift earth and drive trucks. The average full-time mining employee in 2016 earned $1,000 more per week than other Australians.”

So what’s the downside? Why are workers supposedly being exploited by these lucrative jobs?

According to McGrath, the mining camps don’t have a lot of amenities.

“…fifo life comes at a steep price. The management in many mines controls the transient workers’ schedules — setting times for meals, showers and sleep. The workers often can’t visit nearby towns and recreational facilities such as gyms and swimming pools because of a lack of transportation. Many employees have to share beds. They work 12-hour shifts, seven days a week, up to three weeks at a time.”

That doesn’t sound great, but this also explains why the mining companies have to pay a boatload of money to attract workers. This is a well-established pattern that is familiar to labor economists. If working conditions are unpalatable, then employers have to compensate with more remuneration.

But Ms. McGrath doesn’t think workers should get extra cash. She would rather the mining company compensate workers indirectly.

“A lot can be done to improve life in the camps. Shorter swings would help workers maintain bonds with their families. More stable living situations, with less sharing of living spaces, would increase a sense of value and belonging.

“Workers should be encouraged to visit nearby towns to reduce their isolation. The Adani megamine could be in operation for 60 years, experts say. Roads for the mine and the region should be improved so employees can move with their families to existing townships and drive to work.”

Of course, she doesn’t admit that she wants workers to get less cash compensation, but that would be the real-world impact of her proposed policies.

She says that the mining companies should “put people ahead of profits.” But that’s a vacuous statement. Projects like this new mine only exist because investors expect to earn a return. Otherwise, they wouldn’t take the enormous risk of sinking so much capital into such endeavors.

All this new investment is good news for unemployed or under-employed Australians since they’ll now have an opportunity to compete for jobs that pay very well, particularly for workers without a lot of education.

By the way, if workers really valued all the things that are on Ms. McGrath’s list, the company would offer those fringe benefits instead of higher wages. But that’s obviously not the case. The market has spoken.

By the way, I can’t resist pointing out that she also does not understand tax policy. In a sensible system, companies calculate their taxable profit by adding up their total revenue and then subtracting all their costs. What’s left is profit, a slice of which is then grabbed by government.

But that’s not enough for Ms. McGrath. She apparently believes that mining companies shouldn’t be allowed to subtract many of the costs associated with so-called fifo workers when calculating their annual profit. I’m not joking.

“Mining companies are encouraged through tax incentives to use the transient workers. Some costs associated with a fifo worker — meals, transportation and airline tickets — can be claimed as production expenses, helping to lower a company’s tax bill.”

I hope the Australian government isn’t dumb enough to buy this argument. Allowing a firm to subtract costs when calculating profit is simply common sense. And if doesn’t matter if those costs reflect fifo costs, investment expendituresluxury travel, or band costumes.

For what it’s worth, if the government does get pressured into forcing companies to pay tax on these various business expenses, one very safe prediction is that the net effect will be to lower the wages offered to workers. Or, if the mandates, taxes, and regulations reach a certain level, the business will simply close down or new projects will be abandoned.

And those options obviously are not good news for workers.

Let’s now shift from the specific example of fifo workers to the broader issue of labor regulation. What happens if governments listen to people like Ms. McGrath and impose all sorts of rules that prevent flexible labor markets? According to recent scholarly research from three European economists, the consequence is more unemployment.

They start by pointing out that European nations with mandates and red tape have a lot more unemployment (particularly when the economy is weak) than countries with lightly regulated labor markets.

“The Great Recession has brought a substantial increase in unemployment in Europe. Overall, unemployment rate in the euro area has grown from 8 percent in 2008 to 12 percent in 2014. The change in unemployment has been very heterogenous.

“In northern Europe, unemployment did not grow substantially or even fell: in Germany, for example, unemployment rate has actually declined from 7 to 5 percent. At the same time, in Greece unemployment has grown from 8 to 26 percent, in Spain — from 8 to 24 percent, and in Italy — from 6 to 13 percent. Why has unemployment dynamics been so different in European countries?

“The most common explanation is the difference in labor market institutions that prevents wages from adjusting downward. If wages cannot decline, negative aggregate demand shocks (such as the Great Recession) result in growth of unemployment.”

The three economists wanted some way to test the impact of regulation, so they looked at the labor market for immigrants in Italy since some of them work in the formal (regulated) economy and some of them work in the shadow (unregulated) economy.

“While this argument is straightforward, it is not easy to test empirically. Cross-country studies of labor markets are subject to comparability concerns. The same problems arise in comparing labor markets in different industries within the same country. In order to construct a convincing counterfactual for a regulated labor market, one needs to study a non-regulated labor market in the same sector within the same country.

“This is precisely what we do in this paper through comparing formal and informal markets in Italy over the course of 2004-12. We use a unique dataset, a large annual survey of immigrants working in Lombardy carried out by ISMU Foundation since 2004. …Our data cover 4000 full-time workers every year; one fifth of them works in the informal sector. The dataset is therefore sufficiently large to allow us comparing the evolution of wages in the formal and in the informal sector controlling for occupation, skills and other individual characteristics.”

And what did they find?

In the absence of regulation, labor markets can adjust. The bad news for workers is that they get less pay. But the good news is that they’re more likely to still have jobs.

“Our main result is presented in Figure 1. We do find that the wage differential between formal and informal sector has increased after 2008. Moreover, while the wages in the informal sector decreased by about 20 percent in 2008-12, the wages in the formal sector virtually did not fall at all.

“This is consistent with the view that there is substantial downward stickiness of wages in the regulated labor markets. …we find that both before and during the crisis, undocumented immigrants (those without a regular residence permit) are 9 percentage points more likely than documented immigrants to be in the labor force.”

Here’s the relevant chart from the study.

image

And here are some concluding thoughts from the study.

“…despite the substantial growth of unemployment in 2008-12, the wages in the formal labor market have not adjusted. In the meanwhile, the wages in the unregulated informal labor market have declined substantially.

“The wage differential between formal and informal market that has been constant in 2004-08 has grown rapidly in 2008-12 from 18 to 35 percentage points. …These results are consistent with the view that regulation is responsible for lack of wage adjustment and increase in unemployment during the recessions.”

For what it’s worth (and this is an important point), this helps explain why the Great Depression was so awful. Hoover and Roosevelt engaged in all sorts of interventions designed  to “help” workers. But the net effect of these policies was to prevent markets from adjusting. So what presumably would have been a typical recession turned into a decade-long depression.

So what’s the moral of the story? Good intentions aren’t good if they lead to bad results. Which brings me back to my original point about helping workers by minimizing government intervention.

Daniel J. Mitchell, a long standing contributor to The Commentator, is a Senior Fellow at the Cato Institute, the free-market, Washington D.C. think tank.

Share |

Greece Heads into Another Economic Crisis: Time to Finally Exit the European Union?

Doug Bandow

Athens, Greece—Constitution Square has been uncommonly quiet. When looking at the parliament building from my hotel window last month all I could see were cars and pedestrians. The crowds of demonstrators, so common in recent years as the Euro crisis enveloped one of Europe’s poorer states, were absent.

But maybe not for long. Athens and its creditors are at loggerheads again.

When I spoke with the Defense and Foreign Ministers in early December, the conversations focused on Turkey’s crisis, negotiations to reunify Cyprus, and security cooperation with America. The first was beyond Greece’s control. The second has been a political football for more than four decades. The third has been a positive constant for years, with the current left-wing Syriza Party government as friendly to the U.S. as any right-leaning administration.

However, with Syriza lagging in the polls, Prime Minister Alexis Tsipras recently pushed through a pension boost and VAT suspension which, in Europe’s view, violated the 2015 bailout, worth $92 billion (the value depends on changing exchange rates), by European institutions and the International Monetary Fund. Athens contended that it had met its fiscal targets while its creditors said they had to be consulted to assess the impact. They then suspended the package.

Insults started flying. The spokesman for the head of the Eurogroup of finance ministers said the moves “appear to be not in line” with the agreement. The spokesman for Wolfgang Schaeuble, Germany’s Finance Minister and chief beta noire of the Greek public, explained “In order to make the program successful, it is necessary that measures are not decided unilaterally or reversed without notice.” A member of Germany’s Bundestag complained of Greece’s “orgy of empty promises.”

The International Monetary Fund clashed with the Euro-creditors, warning that the overall program was not “credible.” The IMF indicated that additional tax hikes and pension cuts were necessary to meet program metrics and for Greece to qualify for debt relief. While the European Commission predicted that “investment is expected to take off in 2017,” the Fund concluded that “growth prospects remain weak and subject to high downside risks.”

Tsipras mocked “fool technocrats … who can’t even get their numbers right.” Looking toward a possible early election, he added: “we are not going to ask anyone about giving surplus money to those most in need.” His finance minister charged the IMF with “economizing with the truth.” The deputy education minister, representing a small, right-wing coalition partner, charged that his country was being “blackmailed.” Indeed, he added, “For centuries, Greeks have been mercilessly oppressed by the Westerners.”

Interest rates on Greek debt soared. Planned negotiations over debt relief, long demanded by Athens, were postponed. The Fund threatened to pull out of the program. Germany, the biggest bailout contributor, insists on IMF participation before any further disbursements. Moody’s warned that the spat demonstrated a “hardening in creditors’ positions toward Greece, which we expect will prolong negotiations over the second review of the program.”

Yet coming elections in France, Germany, the Netherlands, and possibly Italy could stiffen European resistance further. Kathrin Muehlbronner of Moody’s noted that Europe’s “political dynamics” and “electoral calendar” were “likely to complicate the negotiations and prevent a rapid resolution.” After all, nowhere in the EU is backing more aid for Greece a vote-winner.

However, pressure on Athens for more cuts, especially in popular social benefits, could trigger elections in Greece as early as the spring. Tsipras has proved to be an adept politician, but he now lags in the polls. He can ill afford to retreat from the recent benefit boost or impose new austerity measures.

Observers again began to wonder if Greece could, and even should, remain a member of the Eurozone.

In recent years Athens looked to America for support. The U.S. has nothing directly at stake in Greece’s economic imbroglio, but the Obama administration, like its recent predecessors, freely offered its opinion on other nation’s problems. It obviously is easy to be generous with other people’s money: Washington urged the Europeans to give to Greece while receiving little in return. That isn’t likely to be the position of the Trump administration. Candidate Trump said “I would definitely stay back. Germany is very powerful and strong. I’d let Germany handle it.” And if that didn’t work, Russia could “save the day if Germany doesn’t.”

At what point, one wonders, might economic pain cause the Greek people to reassert control over Greece’s future?

Most Greeks have had more than they want of Germany attempting to “handle it,” which meant ever more austerity. Moscow looks like an equally unlikely savior. While the Greek government officially says that it expects no change in U.S. policy, the opposition figures American pressure for debt restructuring will disappear.

Greece is a bit like your dissolute brother-in-law. A spendthrift, he gets himself into financial trouble and asks for a loan. You give it to him based on his promise to stop drinking, smoking, and romancing the ladies. He doesn’t, of course, but you really didn’t expect he would do so. However, you still want your money back. Although he promised to repay you, he doesn’t understand why you are asking. Your wife gives him some more money, based on his redoubled promise to reform his bad spending habits. And so it goes.

Greeks long have enjoyed a Mediterranean culture very different from that of the northern European states. Time is flexible, leisure is mandatory, and work is unfortunate. Government is a tool by which everyone attempts to live off of everyone else, though politics is the only sure means to succeed in doing so. Generous public benefits are the norm, irrespective of whether or not there is any money to pay them. It’s a wonderful system as long as everyone feels comfortable living a lie. And if it’s how Greeks want to live, why should anyone else complain?

The system worked for a long time. But then  along came the Euro. It seemed like a brilliant idea for encouraging a tighter political union, but in the short-term it suffered one particularly grievous flaw: the Euro tied nations together monetarily without synchronizing their fiscal policies. Which meant by joining the Eurozone Greece got to borrow money at interest rates comparable to those paid by Germany while spending money like, well, Greece.

Athens lied when it claimed to meet the Eurozone’s official economic criteria. But the rest of the Europeans knew Greece was lying when they approved its membership. Then Athens cheerfully borrowed to fund its unsustainable welfare state. The scam was truly grand, but by 2009 the good times ended. Greek leaders admitted that their economic statistics had little to do with reality. The lenders wanted to be paid and Greece was almost out of money. At particular risk were German, French, and Italian banks, which had lent the most, and German, French, and Italian politicians, who had put their people’s fiscal security at risk.

Which led in 2010 to the start of three bail-outs cumulatively worth almost $370 billion. Greece was the nominal recipient of the cash, from the infamous “Troika,” the European Commission, European Central Bank, and International Monetary Fund. To them more recently was added the European Stability Mechanism.

To solve a problem of bad loans which could not be repaid, the Troika loaded Greece up with more loans to pay. As Syriza’s original Finance Minister, Yanis Varoufakis, explained: “The Greek state became insolvent a year or so after the eruption of the 2008 global financial crisis. Against all logic, the European establishment, including successive Greek governments, and the IMF extended the largest loan in history to Greece on conditions that guaranteed a reduction in national income unseen since the Great Depression. To mask the absurdity of that decision, new loans—conditioned on more income-sapping austerity—were added.”

That’s a pretty accurate description of the Grecian mess.

Greece’s debt to GDP ratio hit about 100% in 2000, with the country preparing to replace the Drachma with the Euro. Debts began heading up in the latter part of the decade. When creditors finally noticed that Athens might be in a bit over its head back in 2009, Greece’s debt to GDP ratio was about 127%. Today Greece owes around $320 billion and its debt to GDP ratio is roughly 174%, second in the world only to far wealthier Japan. (The debt relief being discussed would only drop that by about 20 points—by 2060!)

How will Greece ever pay back all this money? Since the onset of the crisis both manufacturing and the GDP have dropped by about 30%; economists hope the economy will stabilize this year. Unemployment is at about one-quarter, with youth joblessness double that rate. Most of the unemployed have been without work for a year or more. The overall poverty rate is an astonishing one-third. While there still is money in Greece—my hotel hosted a fancy fashion show while I was there—connections often are necessary to get it. Although some creditors took a hit along the way, the primary purpose of the bailouts was to preclude Greece from lightening its economic burden by writing off its debts.

Germany, France, and Italy wanted to save their banks. European Union leaders desired to move continental consolidation ever forward. Along the way the EU and European Central Bank ignored their own rules to shovel money Athens’ way. The price paid by Athens was austerity and reform, which the Greek people greatly resented. Why should they have to pay for the party that the Europeans were well aware was likely to occur when the Eurozone inducted Athens?

Perhaps even worse, however, there has been far less reform than austerity in Greece. Economic officials talk about creating a “business-friendly environment,” but that’s not evident in practice. According to the World Bank, Greece was number 61 in the world in “ease of doing business” in 2015. It rose one place in 2016, then fell back to 61 in the 2017 rating, where it is below Kosovo, Albania, Rwanda, Serbia, Moldova, Kazakhstan, Croatia, and Russia. In Europe only Malta and Bosnia are further behind.

The Economic Freedom of the World found that Greece was number 36 in the world in 1980. It was down to 48 in 2000. It was a poor 82 in 2010. Alas, it has kept on falling, to 84 in 2013 and 86 a year later, the last year for which figures are available. Greece comes in at 92 on business regulations, 129 on overall regulation, 142 on size of government, and 143 on labor market regulations. In fact, Nikos Filippidis of the Athens Chamber of Commerce and Industry recently wrote that economic sentiment and consumer confidence have dropped “to the lowest level recorded since September 2013.”

Greece needs to free its people to be entrepreneurial. It isn’t hard to construct a detailed reform agenda. Constantine Michalos, ACCI president, called for smoother operation of the banking system, end of “hostile tax-policy treatment of entrepreneurship,” and expedited reforms “to improve the country’s investment environment,” including better public administration, judicial processes, and competition in markets. The transportation system and other infrastructure are poor and would benefit from privatization.

Nicholas Economides of the NYU Stern School of Business recently argued that “many Greeks, having tried everything else, now see reforms as the only way out of the crisis.” However, such proposals, including what the IMF has called a “herculean” transformation of labor rules, generate fierce resistance from a panoply of vested interests which profit from the existing sclerotic system. Many Greeks prefer the certainty of government dependency, irrespective of the cost. Politicians on both the right and left also benefit from the system. Explained Kerin Hope of the Financial Times: “Each government’s practice has been to delay or dilute already-agreed measures in the hope of fending off the political costs of austerity. Greece’s political leaders are particularly reluctant to adopt structural reforms that would effectively end a system of clientelism, in which the party holding power hands out public sector jobs and contracts to its own supporters.”

The traditional governing party of the left, PASOK, has essentially disintegrated. The radical left-wing Syriza Party has taken control, most recently winning the September 2015 election, but is philosophically uncomfortable with economic liberty. The right-leaning New Democracy Party is under a relatively new leader, Kyriakos Mitsotakis, and now leads the polls. It promises to fulfill the bailout conditions and enact additional reforms, but has a history of backing the status quo. And all the usual political pressures would fall upon it the moment it formed a government. Unfortunately, Greece has no strong liberal (classical) economic heritage to draw upon, let alone record of politicians courageous enough to back such policies during difficult times.

Austerity might seem to visit an element of justice on the spendthrift borrowers. However, creditors who cheerfully and wildly lent with “eyes wide shut” in expectation of being bailed out if anything went awry deserve no more sympathy. Nor the EU politicians practicing CYA with their people’s money. And without growth-inducing reforms the bailouts offer no long-term solution.

Which suggests that the system is heading toward slow-motion catastrophe. IMF economists Maurice Obstfeld and Poul Thomsen recently concluded: “We do not believe that Greece can come close to sustaining even a modest primary surplus [before debt payments] and realize its ambitious long-term growth target without a radical restructuring of the public sector.” Yet the current bailout plan envisions a 3.5% primary surplus by 2018.

Proposals to simply hack away at wages and benefits may have reached Greece’s political limit. Dimitrios Papadimoulis, a member of Syriza and vice president of the European Parliament, is not alone in his opposition to “cutting pensions, wages and further minimizing public spending on social benefits.” Filippidis explained: “Greece’s middle class is collapsing under the weight of over-taxation, plummeting savings, and further impoverishment. In today’s Greece, four workers are paying taxes and contributions in order to pay the pensions of three pensioners and cover the needs to provide public health services, education, justice, defense, etc. Obviously this model is not sustainable.”

Pensions alone accounted for about 17%of GDP in 2015, compared to an EU average of nearly 12%. Further privatization would help, but the value of state assets has dropped by about 60% since the crash and, more important, parastatals are seen a politically-popular source of jobs.

Moreover, Greek goods and services cost too much for the economy to flourish. Jim Brunsden of the Financial Times reported that Greece’s “lack of price competitiveness is cited by EU officials as one of the main factors holding the Greek economy back.” On the Global Economic Forum’s international competitiveness ranking Greece actually fell from 81 in 2015-2026 to 86 in 2016-2017. Even Papadimoulis admitted that “the Greek economy needs to be more competitive, more of the same won’t do it.”

However, most Greeks don’t want to take the painful steps necessary to create a more competitive economy. Last month the European Court of Justice voided a law requiring government approval for layoffs. In 2013 a cement maker was prevented from cutting staff and sued. The ECJ ruled that the restriction was improperly vague and broad and inhibited “the exercise of freedom of establishment in Greece.” But so far a majority of Greeks have backed parties determined to inhibit entrepreneurial freedom at every turn. No wonder Yves Lemay of Moody’s observed that Greece is “in a very unpredictable situation from the credit risk standpoint.”

Which leaves currency devaluation the best solution, but that is prevented by membership in the Eurozone. So Athens should consider doing what always seemed to make the most economic sense: abandon the Euro and repudiate the debt. The process would be messy. Wailing and gnashing of teeth would fill the halls of European banks and other financial institutions. Having squandered their people’s money on bad loans, some European politicians might lose their jobs in upcoming elections. But Greeks could get a fresh start and organize their lives as inefficiently and dissolutely as they desired, while creditors would have fair warning about the risks of lending in the future. Economides warned that “poverty and hyperinflation” would result, but pre-Euro Greece might no longer look so bad.

The Greek people aren’t sure what to do. A recent poll found that 84% of them believe the EU is moving in the wrong direction. They split 44-45% over whether membership is positive for Greece, yet a majority wished to remain part of the organization. The latter might change if the creditors demand more cutbacks in benefits and increases in taxes, however.

Forbes online columnist John Mauldin recently noted how Greece’s plight helps explain the growing challenge to the entire EU. Athens has followed the organization’s dictates, resulting in great pain, little reform, and even less respect for national sovereignty. “While Greece is on the periphery, its problems are hardwired into the entire EU, and those problems are spreading,” he concluded.

Whatever Greece’s present challenges, it is hard not to stand in awe when beholding the Parthenon atop the Acropolis, which dominates the cityscape. The “Golden Age” of Athens is long past, but the country’s history still resonates. For Greece to turn control of its economy over to foreigners capable of bringing relief would be understandable if still painful. To yield authority to those who have only delivered more hardship seems intolerable. At what point, one wonders, might economic pain cause the Greek people to reassert control over Greece’s future?

Doug Bandow is a Senior Fellow at the Cato Institute and a former Special Assistant to President Ronald Reagan.