Share |

Trump Would Further Damage U.S. Manufacturing if He Restricts Steel Imports

Daniel R. Pearson

President Trump has asked the Department of Commerce to conduct a seldom-used Section 232 investigation to determine whether steel imports are harming U.S. national security. And although statute allows the study to be conducted over 270 days, Secretary Wilbur Ross’s stated intention is to complete the report by the end of June. The president then would have 90 days in which to decide whether and how to “adjust the imports.”

How would those adjustments look? In a recent hearing on the investigation, Secretary Ross made clear that highly protectionist measures are under consideration. What Ross didn’t address is whether additional steel import restrictions would harm the U.S. economy.

Unfortunately, they certainly would. Our country may be only weeks away from presidential action that would further damage the competitiveness of the broad manufacturing sector.

Five points are particularly relevant:

First, it’s not clear there is any legitimate national security justification for invoking Section 232. There is no doubt that much U.S. military equipment requires steel. The key question is how best to obtain specific types of steel needed for various national-security applications.

Most steel used by the military comes from domestic suppliers, such as United States Steel Corp., AK Steel Holding Corp. and Nucor Corp. or from countries with which the United States has amicable relations. Keeping the U.S. market open to steel imports would assure that the military will have access to both foreign and domestic steel products needed to maintain national security. If the Pentagon wishes to ensure domestic sources for some products, it could establish long-term contracts with U.S. mills — no import controls are required.

Second, potential Section 232 restrictions must be viewed in the context of the existing U.S. steel marketplace. Roughly 200 antidumping or countervailing duty measures already are in place on steel products, making steel one of the country’s most protected sectors. As a result, U.S. prices for many steel products are significantly higher than world prices, greatly disadvantaging American manufacturers that require steel as an input.

[pullquote]Using national security as justification isn’t credible, and retaliation would hit export-competitive industries.[/pullquote]

Third, any additional import restrictions would do far more harm to steel-using manufacturers than any benefit that could accrue to steel mills. That is simply due to the raw numbers. Steel mills employ just 140,000 workers. Manufacturers that use steel as an input employ 6.5 million, 46 times more. Steel mills account for a rather narrow slice of the overall U.S. economy: $36 billion in 2015, equaling only 0.2% of U.S. gross domestic product (GDP). By contrast, the economic value added by firms that use steel as an input was $1.04 trillion – 29 times more – or 5.8% of GDP.

Any government action to drive steel prices even higher by further restricting imports will hurt steel-consuming manufacturers. Their costs will rise, thus reducing their competitiveness relative to companies in other countries. Carrier, the company that in December said it wouldn’t shift 800 jobs from Indianapolis to Mexico after all, is hardly the only firm that could reduce its steel costs by shifting production overseas.

Fourth, other nations likely would retaliate. When a foreign power acts arbitrarily to curtail its imports, negatively affected exporting countries aren’t amused. Since the United States is only a minor exporter of steel, retaliation likely would be focused on innocent, export-competitive sectors. The United States is the world’s largest exporter of military equipment, so those firms may be targeted. The United States also is the world’s largest agricultural exporter; farm and food products would be vulnerable across the board.

Fifth, a country that imposes import restrictions always reduces its own economic welfare. This is true even if other countries don’t retaliate. Economists have understood since the work of David Ricardo that it is unwise to try to be self-sufficient when others are able to provide products at lower costs. Import restrictions lead to inefficient resource use, lowering national economic welfare in the process. In other words, consumers are hurt more than protected industries are helped.

The Section 232 process may be intended to inflict pain on foreign nations by curtailing their exports. We can’t be sure whether U.S. import restrictions will hurt other countries, but we can be certain that restrictions will hurt America. Limiting steel imports creates a genuine threat to economic growth and prosperity. It is very difficult to build a stronger national defense when the economy is getting weaker.

But shouldn’t something be done to help steel mills and their workers as they deal with import competition? The Department of Commerce should think seriously about proposing enhanced economic adjustment assistance. It would be good public policy to encourage this historically protected industry to restructure and adapt to free trade in steel.

Secretary Ross should resist the temptation to use the Section 232 report to recommend more protection for the steel market. Instead, he should advocate that President Trump seek removal of all U.S. import restrictions on steel. This would build a firm foundation for a vibrant and growing manufacturing economy that is essential to America’s national security.

Dan Pearson is a senior fellow at the Cato Institute, and served as chairman of the U.S. International Trade Commission during the George W. Bush Administration.

Share |

Student Activists Hurt the Workers They Try to Help

Chelsea Follett

During the student activity fair for freshmen, you may have
noticed organizations like United Students Against Sweatshops urging you to
protest so-called sweatshops in poor countries. Maybe you’ve
seen posters around campus calling for boycotts of goods made in
such factories. Perhaps you yourself have engaged in anti-factory
activism alongside your classmates.

Yet experts across the political spectrum—including Nobel
Prize winning economist Paul Krugman, Pulitzer Prize-winning journalist
Nicholas Kristof, and Columbia University
professor Jeffrey Sachs—have argued that opposition
to “sweatshops” in poor countries hurts the very
workers that activists seek to help. Student activists would do
well to read Benjamin Powell’s concise and persuasive defense
of such factory work, “Out of Poverty: Sweatshops in the Global
Economy
,” published by Cambridge University Press in
2014. The book focuses solely on the well-being of factory
workers—not what would be best for factory owners or economic
efficiency.

People in developing
nations deserve the chance to industrialize and achieve the same
prosperity the West gained through its own Industrial
Revolution.

Factory workers routinely garner more publicity than the
world’s poorest people, who are overwhelmingly rural and live
lives of destitution precisely because they are largely untouched
by global capitalism. Powell devotes his second chapter to showing
that anti-factory activism receives generous funding from labor
unions in the United States and Europe. These unions pay lip
service to “solidarity” with workers in poor countries
but are primarily focused on keeping manufacturing jobs away from
poor countries. Powell suggests that unions manipulate idealistic
student activists to push for high labor standards that only rich
countries can meet, including “sweat-free” labeling for
clothing made under those standards.

Powell presents two main arguments for why activists should
change their approach: (1) taking away the option of factory work
harms factory workers, and (2) factories can serve as a step in the
process of economic development that ultimately cures poverty.

If someone chooses to work in a factory, she must see that as
her best option. Taking away her best option without offering
anything better makes her worse off. As Powell shows, prematurely
raising of labor standards and wages by governments results in
worse options for factory workers. In the early 1990s, Indonesia
more than doubled the real value of its minimum wage in response to
U.S. threats of trade restrictions—a policy pushed by U.S.
student activists. This led to the closure of many manufacturing
plants, and Indonesian employment fell by at least 12 and as much as 36 percent.
Similarly, when Nike and Adidas limited working hours at Chinese
supplier factories to ease the consciences of U.S. activists,
“many workers quit, complaining that the overtime pay was no
longer enough.” In South Africa, when government officials
tried to shut down rural garment factories for failing to comply
with minimum wage laws in 2010, “desperate clothing workers threatened to assault
officials
and burn their vehicles rather than lose their
jobs.”

As Paul Krugman has eloquently put it, “Bad jobs at bad
wages are better than no jobs at all.” (Or, as in the Chinese
example, jobs at bad wages are better than jobs at even worse
wages.) Yet the campaign against factories in poor countries
routinely ignores the wishes of the workers themselves, limiting
workers’ options.

Factory work is not only a stepping-stone out of extreme poverty
for workers, but can help grow an entire economy and eradicate
extreme poverty altogether. Remember, today’s wealthy
countries once had their own factories with conditions often worse
than those in poor countries today. In the United Kingdom, the
first country to industrialize, “the process of development
involving sweatshops lasted from 130 to 160 years. In the United
States, the process was faster, taking around 100 years.”
Powell notes that legal labor standards and the introduction of a
minimum wage in those countries largely mirrored what factories
were already doing—essentially codifying preexisting norms
instead of prompting a change in industry practices.

The development process has gotten faster. In South Korea,
Taiwan, Hong Kong, and Singapore, the process of moving from
industrialization to First World living standards took less than
two generations, as opposed to a century in the United States.
Factories helped workers in those countries escape poverty and
their children achieve postindustrial prosperity. As Powell says,
“Sweatshops themselves are part of the very process of
development that will lead to their own elimination.”

Instead of opposing factories, activists might consider
campaigns to buy goods manufactured in impoverished parts of the
world, such as sub-Saharan Africa, in the name of ending poverty.
“My concern is not that there are too many sweatshops but
that there are too few,” Jeffrey Sachs has stated.
“Those are precisely the jobs that were the steppingstone for
Singapore and Hong Kong, and those are the jobs that have to come
to Africa to get them out of their backbreaking rural
poverty.” Foreign aid has never lifted a single country out
of poverty, and in Africa aid may actually discourage needed reforms by propping up
dictators. “If Africa’s economies are to take off,
Africans will have to start making a lot more things,”
The Economist declared three years ago. “Few
countries … have escaped poverty without putting a lot of workers
through factory gates.” Unfortunately, despite its growing population and need for jobs, Africa
has been deindustrializing. The continent’s poor
business environment and faulty institutions are partially to blame
for reducing Africa’s competitiveness relative to the rest of
the world.

Activists who want to help the poor should refocus their efforts
on ending forced labor (slavery), corruption, and economic
restrictions that stifle growth and perpetuate poverty. Governments
in many poor countries score poorly
in economic freedom
and may violate their citizens’
property rights. Africa, the world’s poorest continent, also
has the worst record on economic freedom and business
environment.

People in developing nations deserve the chance to industrialize
and achieve the same prosperity the West gained through its own
Industrial Revolution. Infringements upon economic freedom hinder
the process of development and prevent people from lifting
themselves out of poverty. That is an injustice worth
protesting.

Chelsea
Follett
is the managing editor of HumanProgress.org, a project
of the Cato Institute.

Share |

Does Classical Liberalism Have a Chance in South Africa?

Marian L. Tupy

Last week, the Cato Institute hosted a policy forum with Herman Mashaba, a self-made
millionaire businessman and libertarian, who serves as the
executive mayor of South Africa’s largest city, Johannesburg.
Reason interviewed him shortly after Mashaba’s
political party, the Democratic Alliance, unseated the African
National Congress in a number of South African metropolitan areas
during the 2016 local elections. Since then, Mashaba has made some
progress in tackling corruption and failing public service delivery
in Johannesburg, but he has his work cut out for him.

Over the last 23 years, South Africa has been run by a
tripartite alliance consisting of African nationalists (the African
National Congress), communists (the South African Communist Party)
and trade unionists (the Congress of South African Trade Unions).
Since 1994, the government has done some good. Millions of houses,
for example, have been built and either given or sold (at a heavy
discount) to poor Africans. Drinking water and electricity were
delivered to shantytowns and far-flung rural areas.

The bad news,
unfortunately, does not end there.

Being a relatively rich country, South Africa could afford to
finance public works out of the general tax revenue. In normal
countries, people buy houses (including piped water and
electricity) with the money they earn in the market place.
Providing jobs to the populace, alas, is something that governments
in general and South African government in particular are very bad
at doing.

The country is in a recession and the overall unemployment rate
is 36 percent. Close to 50 percent of South Africans between the
ages of 15 and 34 are unemployed. In the last 23 years, incomes per
person rose by about 1 percent per year. In neighboring Botswana,
they rose (cumulatively) by over 80 percent.

Over the same time period, life expectancy in Botswana rose by 7
years. It declined by 5 years in South Africa. Both countries were
hard hit by HIV/AIDS, but whereas the government of Botswana did
everything it could to stop the spread of the disease, the
government of South Africa denied the link between HIV and AIDS and
actively hindered the distribution of anti-retroviral drugs. (It
does not help that South Africa also has eighth highest homicide rate in the world.)

The bad news, unfortunately, does not end there. The World
Economic Forum in Davos has ranked South Africa’s healthcare as
132nd out of 144 countries surveyed. The country’s Corruption
Perception Index ranking fell from 21st in 1994 to 62nd in 2015.
And, according to The Economist, South Africa’s
education system is “one of the worst in the world.”

It is, perhaps, unsurprising that the ANC-led government is
increasingly unpopular, with much of its remaining support coming
from rural areas, where the least educated and most traditional
people live. The question on everyone’s mind, therefore, is: What
will the ANC do before the next general election in 2019? Will it
observe South Africa’s democratic Constitution, freedom of the
press, and the independence of the courts and of the Electoral
Commission?

If so, it will almost certainly be defeated and have to retreat
into opposition. A break-up of the tripartite alliance, which is
held together by political patronage, would be certain to follow.
Or, will the ANC-led tripartite alliance opt for the “Zimbabwe option” and attempt to steal the 2019
election? Either way, expect to hear more from Herman Mashaba, and
his principled stance for freedom and classical liberalism in South
Africa.

Marian L. Tupy
is a policy analyst at the Cato Institute’s Center for Global
Liberty and Prosperity and editor of www.humanprogress.org.

Share |

Trump’s Massive Afghanistan Mistake

A. Trevor Thrall and Erik Goepner

After President Trump gave Secretary of Defense Jim Mattis the
authority
to set troop levels in Afghanistan, the Pentagon
announced it will send an additional 4,000 troops to the embattled
nation. Mattis, who has acknowledged that the United States is
“not winning in Afghanistan right now,” is believed to
favor a more aggressive strategy that would require thousands more
troops beyond the 9,800 already deployed.

The goal, Mattis told Congress, is to reduce the threat to the
Afghan government to a non-existential level.

The fact that the United States has made so little progress
toward this goal in the 16 years American troops have been in
Afghanistan is bad enough. The fact that the general strategy under
consideration — surge more American forces — has yet to
achieve any enduring gains since 2001 is even worse.

The honest reason for
America’s enduring military commitment is that no President wants
to be the one who “lost Afghanistan.”

But worst of all is the fact that the Trump administration, led
by a commander in chief who campaigned for President by expressing
consistent skepticism about overseas engagements, hasn’t
offered a single serious argument for the continued U.S. mission in
Afghanistan.

The main argument advocates make for sticking it out in
Afghanistan — preventing terrorism against the U.S. —
no longer holds water. After disrupting Al Qaeda’s operations
and dispersing its members in the wake of 9/11, Afghanistan itself
represented little threat of terrorism.

This is not to say that there are no terrorists there. But
terror groups that pose a threat to America currently operate in
Iraq, Nigeria, Somalia and Pakistan at a much higher rate than in
Afghanistan. If the threat to America drives where U.S. forces are
sent, then surge forces should be sent into those four other
countries first.

Another unpersuasive argument is that the U.S. must keep troops
in Afghanistan to prevent the Taliban from ending the
country’s experiment with democracy. The truth is that even
if the U.S. is willing to make unprecedented efforts, it will have
little control in the long run over political outcomes in
Afghanistan.

Freedom House assessed Afghanistan as “Not Free”
this year, the same rating it gave Afghanistan in 2001 when the
Taliban was in control. For the brief period of 2006 to 2008, the
country was assessed as “Partly Free,” a time that
predates the U.S. surge that began in 2009.

Eventually, the U.S. will leave. The Taliban will not. A
continued U.S. military presence in the near term may give it some
leverage over any potential peace talks between the Afghan
government and the Taliban. But to date, that leverage has bought
little or no progress and has merely extended the ongoing conflict,
which killed 3,500 Afghan civilians in 2016 alone. Meanwhile, the
Taliban control more territory than at any point since 2001.

More to the point, American security does not depend on who runs
Afghanistan. The U.S. learned this lesson in Vietnam, a conflict
both Mattis and National Security Adviser H.R. McMaster have
studied extensively. Despite monumental efforts, the U.S. could not
prevent South Vietnam from falling to the Communist North. Even
though the loss was a psychological blow, the Communist dominoes
did not continue to fall, and America’s fundamental security
remained strong.

Although no one wants to see the Taliban back in control, the
hard reality is that preventing that future is not worth the costs
the U.S. has already paid, much less the additional costs that will
accrue from another surge.

The honest reason for America’s enduring military
commitment is that no President wants to be the one who “lost
Afghanistan.” Though pundits and partisans criticized both
George W. Bush and Barack Obama for their records in Afghanistan,
each of them maintained just enough of a military and rhetorical
commitment to avoid getting blamed for losing the war.

Trump thus inherits a war and nation-building project that he
had long criticized, but which he must now continue or find an
honorable way to end if he wants to avoid getting tagged with the
loser label. That conundrum may help explain why he recently gave
Mattis the authority to handle the Afghanistan strategy from the
Pentagon. That way, when progress fails to materialize or things go
south, Trump will have someone to blame.

Trevor
Thrall
is a senior fellow at the Cato Institute’s defense and
foreign policy department and associate professor at George Mason
University’s Schar School of Policy and Government. Goepner is a
retired U.S. Air Force colonel who commanded units in Afghanistan
and Iraq.

Share |

Jeff Sessions’s Reefer Madness

Trevor Burrus

Attorney General Jeff Sessions has reefer madness. It was
revealed this week that Sessions personally
asked Congress for the authority to prosecute medical marijuana
providers in the 25 states and three additional jurisdictions
(D.C., Guam, and Puerto Rico) where some form of medical marijuana
is legal. Sessions wanted Congress to repeal the broadly supported
Rohrabacher-Farr Amendment, which prohibits the Justice Department
from using federal funds to go after medical marijuana providers
and users in those states where it has been made legal.

Oddly enough, this week is also the 80th anniversary of the
House floor vote on the first major piece of federal marijuana
legislation, the Marihuana [sic] Tax Act of 1937. That was when the
whole country officially caught reefer madness. In the following
decades, a series of misguided government policies made the problem
worse, and prejudice toward marijuana and myths about the drug
still abound.

Only in the last 20 years has the country begun to get over our
self-inflicted disease. Unfortunately, there are those in whom the
condition is lingering.

In a letter, Sessions asked Congress to remove the
restriction due to the “historic drug epidemic and potentially
long-term uptick in violent crime,” showing that the attorney
general has clearly imbibed our coarsest and most antiquated form
of anti-marijuana propaganda: its supposed connection to crime and
its status as a “gateway drug.” Such rhetoric goes back to the
years before the Marihuana Tax Act, a piece of legislation that
emerged out of a haze of smoky propaganda from
the Hearst newspaper company and the unrelenting zealotry of the
Federal Bureau of Narcotics.

The bill came to the House floor late in the afternoon on
Thursday, June 10, 1937. The vote was rushed, and at least one
congressman wondered if it was “a matter we should bring up
at this late hour of the afternoon. I do not know anything about
the bill.” Another congressman reassured him that “it has something
to do with something that is called marihuana. I believe it is a
narcotic of some kind.”

At one point a group of congressmen asked that the bill’s
proponents explain the provisions in further detail. In response, a
member of Ways and Means recounted the hyperbolic testimony of
Harry Anslinger, the Commissioner of the Federal
Bureau of Narcotics and a man who zealously hated drug users. In
committee, Anslinger had presented photographs of bloody murder
scenes in order to show “the fury of the murderer” who is high on
marijuana. He recounted the “case of a 20-year-old boy who killed his
brothers, a sister, and his parents while under the influence of
marijuana,” and he testified that in “some cases” a single
marijuana cigarette “might develop a homicidal mania.” In all, the
congressional record of floor debates over the law takes up fewer
than two pages.

Only in the last 20 years
has the country begun to get over our self-inflicted disease.
Unfortunately, there are those in whom the condition is
lingering.

That’s how federal marijuana prohibition came to America.

At the time of prohibition, scientists knew very little about
how cannabis operated on the human body and whether there were any
legitimate medical uses. Six months after the Act was passed, Dr.
Herbert Wollner, a chemist at the Treasury Department (the act, as
a tax, was enforced by treasury) wrote in a memo to Anslinger: “virtually nothing is known
concerning the nature of the narcotic principle, its physiological
behavior, and the ultimate effect upon the social group.” Wollner
later complained that “ninety percent of the stuff that has been
written on the chemical end of Cannabis is absolutely wrong, and,
of the other ten percent, at least two-thirds of it is of no
consequence.”

But the Marihuana Tax Act put the mark of Cain on the drug, and
scientific interest in studying cannabis, as well as the funding,
became rare. Anslinger was highly antagonistic to any attempt to
study the drug scientifically; he preferred the debate to be
controlled by fear and ignorance. The Public Health Service
sponsored no research in the ensuing decade. Ultimately, in the
words of one historian, “the law enforcement agency [the
Federal Bureau of Narcotics] became the public’s arbiter of
scientific arguments and debates, functioning as a filter through
which scientific research had to pass on its way to the
public.”

Over the next two decades, Anslinger’s Federal Bureau of
Narcotics would help foster our reefer madness world-and Jeff
Sessions’s reefer madness mentality-by essentially controlling the
national narrative on marijuana. Anslinger asked his local
supervisors to collect any newspaper stories or reports that could
link marijuana to crime, and he directed all agents to look for any
connection between insanity and marijuana use. Despite some
researchers poking holes in Anslinger’s favorite
theories-particularly that marijuana causes crime, insanity, and
addiction-Anslinger was steadfast in his beliefs.

Anslinger left the Federal Bureau of Narcotics in 1962, but the
situation hardly improved. In the 60s, one researcher in charge of
the National Institute of Mental Health’s (NIMH) marijuana research
complained that no “employees wanted to offend
any of the Bureau of Narcotics police,” and that they “had to worry
about antediluvian congressional types that had it in their power
to smite us mightily where it hurt-right in our appropriation.” In
the 70s, after the modern Controlled Substances Act was passed and
a commission was created to study marijuana in-depth, President
Nixon was as steadfast as Anslinger: “Even if the Commission does
recommend that it be legalized, I will not follow that
recommendation.” That commission, known as the Shafer Commission, recommended decriminalization and
dispelled many myths about marijuana, concluding that “from what is known now about
the effects of marijuana, its use at the present level does not
constitute a major threat to public health.” President Nixon, of
course, ignored the recommendations.

This is our reefer madness world, fostered by fear, ignorance,
rushed lawmaking, anti-drug zealots, and a consistent
discouragement of hard facts and good science. And it is the world
still inhabited by Jeff Sessions, who cannot even bring himself to
accept the growing consensus that marijuana has many
legitimate medical applications.

Sessions’s reefer madness was once our own. Thankfully, with
61 percent of Americans supporting legalized
recreational marijuana and 80 percent supporting medical marijuana, it is
increasingly just his.

Trevor
Burrus
is a Research Fellow in the Cato Institute’s Center for
Constitutional Studies.

Share |

Here’s What the Fed Just Signaled about the Rest of 2017

Gerald P. O’Driscoll Jr.

The Federal Open Market Committee
delivered on its long-signaled quarter-point hike in the target
range for the federal funds rate
. Markets will now focus on the
committee’s next move. There are two questions to be answered.
First, will there be another rate hike this year? Second, how will
the anticipated shrinkage of the Fed’s balance sheet proceed? Thus
far, markets seem calm.

This was the fourth rate hike since December 2015. The FOMC has
signaled one more rate hike this year, but markets give it only
about a 50/50 probability. Certainly, inflation gives no reason for
the Fed to move aggressively on rates. Inflation remains below 2
percent.

The Federal Reserve has
persistently over-estimated the inflation threat and today’s FOMC
statement seems to recognize that. The yield curve has flattened
despite the anticipated rate hike at this meeting. In short,
financial markets are not signaling further Fed rate hikes. The Fed
is inclined to adjust its actions to the market’s expectations.
That suggests there will be no further rate hikes this year.

The labor market is the central bank’s other key concern. The
May jobs report once again sent mixed signals. Job creation was
weak at 138,000. Yet the unemployment rate declined to 4.3 percent,
the lowest in 16 years. These are mixed signals that can, however,
be reconciled. We are in a historically long, but subpar economic
recovery. Slow job growth accompanies slow economic growth.

The historically low unemployment rate is the seeming anomaly.
That figure is misleading on at least two counts. First, the
decline in unemployment is a consequence of the length of the
recovery rather than its strength. Second, the fall in the
unemployment rate has been affected by the decline in the
labor-force participation rate.

The decline in the overall labor-force participation rate
chiefly reflects a decline in the male labor-force participation
rate, and a flattening in the rate for women. Observers have
offered conflicting reasons for the worrisome decline in men
working.

Focusing on the prime-aged workforce, 25-54 years, eliminates
most of the demographic explanations. By this measure, nearly 7
million workers, mostly men, have dropped out of the work force in
the last 50 years. They are removed from both the workforce measure
and the measure of the unemployed. The measured unemployment rate
falls, but in a misleading way. Now the low unemployment rate is
not a sign of strength in the labor force, but of men no longer
seeking employment.

For the rest of 2017 we
are looking at likely no further rate hikes and shift in the focus
of monetary policy to the size of the Fed’s balance
sheet.

There are policy reasons for this (e.g., Social Security
Disability Insurance) and social forces, including a decline in the
work ethic among white, blue collar men. The latter has been
examined by Charles Murray in
Coming Apart: The State of White America, 1960-2010

and, more popularly, by J. D. Vance in Hillbilly Elegy.
The bottom line is that, given economic entitlements and underlying
social forces, we may be at the fullest employment possible.

Accordingly, there is a labor-market rationale for further rate
hikes. The unemployment rate has become a misleading signal,
however, and is neither a reliable target nor indicator of the
stance of monetary policy. Further, the reasons for slow-output
growth must be rethought. Slow growth in GDP reflects, at least in
part, supply constraints in labor markets. There is nothing the
central bank can do about that.

In my view, downsizing the Fed’s balance sheet is where the
important policy actions will now take place. While an unwinding
could potentially lead to instability in financial markets, the
action is long over-due. The Fed’s outsized balance sheet, with a
large amount of mortgage-backed securities, has put it in the
credit-allocation business. It needs to get out of that
business.

For the rest of 2017 we are looking at likely no further rate
hikes and shift in the focus of monetary policy to the size of the
Fed’s balance sheet. The FOMC is signaling that the unwinding will
proceed at a moderate pace. Monetary policy is once again entering
unchartered waters.

Gerald P. O’Driscoll, Jr. is a senior fellow at the Cato Institute. Formerly, he was vice president at Citigroup, and, before that, vice president at the Federal Reserve Bank of Dallas.

Share |

Despite Fear-Mongering, U.S. Is Not Beset by Grave Threats

John Glaser

With Donald Trump in the White House, political divisiveness has
reached new heights. Yet virtually everyone in Washington still
agrees about at least one thing: The United States is beset by
grave threats.

Americans are constantly bombarded with exaggerated claims about
the threat from terrorism and immigration, a nuclear North Korea,
the Iranian menace, China, Russia, and all manner of perils to
world order. Yet the truth is that America faces no major national
security threats from abroad. In fact, a much more proximate threat
Americans face comes from Washington, when policies intended to
chase after inflated threats waste money, undermine civil
liberties, and subvert the rule of law.

When it comes to terrorism and immigration, for example, the
fact is that neither poses a significant threat to Americans.
Research shows that immigrants commit less crime on average than American citizens do, and
your chance of being killed by a Muslim
terrorist is about 1 in 6 million. That’s way less than your
chances of being struck by lightning.

Politicians love to
exaggerate threats because it makes them look tough and
strong.

The same goes for supposed threats overseas. In Senate testimony
last month, Director of National Intelligence Dan Coats warned that North Korea’s nuclear program
is a “very significant, potentially existential threat to the
U.S.” Not true. Nobody welcomes nuclear weapons in
the hands of volatile dictators like Kim Jong Un, but there is no
indication that Pyongyang wants the bomb for any reason other than
to deter a U.S. or South Korean attack. Using nukes would mean
immediate retaliation and the destruction of the regime — not
a scenario North Korea is eager to bring about.

The same goes for the supposed threat from Iran. Even putting
aside the fact that Iran has rolled back its nuclear program
in compliance with international obligations
and has just reelected a moderate reformist, Iran is a
third-rate military power plagued by internal challenges and
surrounded by more powerful regional enemies, like Saudi Arabia and
Israel. In terms of military capability, they are a molehill to the American mountain
and do not represent a serious threat to U.S. security.

The hysteria over Russia and China is similarly overstated.
Moscow is a problem for some of the weaker states that border it,
but the United States’ GDP is more than 13 times
that of Russia’s, and the bulk of European economic and
military power towers over Russia’s. It is not a great power
on the order of the Soviet Union and certainly cannot threaten the
security of the United States beyond spreading fake news on the
internet.

And China has exhibited an impressively benign foreign policy,
given its growing power. The extent of the immediate peril seems to
be that Beijing claims sovereignty over a bunch of uninhabited
rocks in the South China Sea. It’s hard to see how that represents
a direct threat to the United States.

In spite of the little there truly is to fear from any of the
above, politicians love to exaggerate threats because it makes them
look tough and strong. The media love to emphasize looming dangers
because it boosts viewership. And the bureaucracies in Washington
tend to amplify meager security concerns because it sustains high
budgets and political relevance, and protects them from blame in
the event of a terrorist attack or instability overseas.

The reality, however, is that the United States is remarkably
insulated from foreign threats. We are still an economic
powerhouse, we are geographically isolated from enemies, we have a
superior nuclear deterrent and the most powerful military in the
world.

Indeed, the biggest threat comes not from ISIS, mad Iranian
mullahs, or wily autocrats. No, the real threat Americans face is
from their own government. When Washington chooses to become
entangled in unnecessary foreign wars, it imposes serious human and
financial costs. The wars in Iraq and Afghanistan have killed
hundreds of thousands, including almost 7,000 U.S. soldiers, and
along with other post-9/11 expenses, has cost more than $5 trillion. What we’ve gained
in terms of increased safety is less clear.

Likewise, when the National Security Agency infringes on our Fourth Amendment rights to
privacy in the name of protecting us, it threatens our liberties.
When the federal government takes hundreds of billions of dollars
every year from the productive sectors of the private economy to
pay for a defense budget that is more than double the combined budgets of both
Russia and China
, the next biggest military spenders, it makes
us all poorer. And when a capricious president threatens judges,
fires disloyal law enforcement officials, and denigrates American
political norms, it undermines the institutions that are designed
to prevent tyrannical abuses of power.

As Abraham Lincoln once said, “All the armies of Europe,
Asia, and Africa combined” cannot threaten America’s
survival. “If destruction be our lot we must ourselves be its
author and finisher. As a nation of freemen we must live through
all time or die by suicide.”

John Glaser is
associate director of foreign policy studies at the Cato Institute.

Share |

A Softer Brexit May Be May’s Best Hope — for Now

Ryan Bourne

It is unclear whether the Prime Minister’s position is
tenable in anything other than the short-term. But the disastrous
election result last week has thrown the previous clarity on the
government’s approach to Brexit into disarray.

Everyone now has a view on “what the result means”
for our EU exit negotiations, and no two people can be heard to
agree. The question on everyone’s lips appears to be this:
does the result suggest the public wants a “softer
Brexit”, which would see the UK remain in the Single
Market?

People always try to interpret election results to fit their own
preconceived opinions. So it’s worth pointing out a key fact:
neither of the two major parties (which combined received 82.4 per
cent of the vote) stood on a platform of remaining within the
Single Market and Customs Union, the epitome of a soft Brexit.

Opponents of May’s agenda
are now emboldened, and it is practically very difficult for her to
command a consensus behind her original plan.

The Conservatives explicitly repudiated the idea, and wanted a
deep and comprehensive free trade agreement with some customs
arrangements.

The Labour party talked up that their negotiating strategy would
have “a strong emphasis on retaining the benefits of the
Single Market and the Customs Union — which are essential for
maintaining industries, jobs and businesses in Britain”, but
also outlined intentions to control migration.

On Sunday, shadow chancellor John McDonnell confirmed that
Labour would support leaving the Single Market too.

Yet when one sees the strength of Labour in Remain-voting areas
such as London and with young people, at least a portion of their
stronger-than-expected support must surely have arisen as a
Brexit-backlash. Other opponents of May’s agenda are now
emboldened, and it is practically very difficult for her to command
a consensus behind her original plan.

For one, there is less chance of a successful outcome. With her
and her party’s position so much weaker within parliament,
the EU negotiators know that they can apply more pressure.

The other half of the pincer movement will come from the diverse
makeup of parliament itself. May’s own party was pretty
united behind her strategy, with a small vocal minority favouring
the Single Market option. But after the election she now has, by
all accounts, a slate of pro-Single Market Scottish Conservative
MPs and the DUP to contend with too — the latter of which
will demand some form of EU deal given the Ireland question.

If that was not difficult enough, Jeremy Corbyn has positioned
his more-united Labour party perfectly to capture any future
discontent arising from the negotiations.

Remain within the Single Market? Corbyn will outline how May
betrayed Brexiteers. Leave it? Corbyn will claim May did not get a
good enough deal on the economics.

It is a real mess for May. I’ve outlined on these pages
before that I think leaving the EU but remaining within the Single
Market is an unacceptable long-term solution. It means subscribing
to EU regulations, but having no say in shaping them. It makes
running an effective commercial and trade policy extremely
difficult, given the degree of EU control over service sector
regulation making it difficult to deregulate with third parties.
Membership of the Customs Union would also mean a continued need to
charge the EU’s tariffs.

Yet May now appears to not have the political capital to carry
forward her original agenda. Worse, if no deal is reached at all,
her failure to outline and obtain a mandate for rigorous
supply-side changes, stripping away EU tariffs and regulations,
means that Britain would be left with the downsides of Brexit
without realising the gains.

The real looming risk now is a future Corbyn-led government with
much more freedom to change regulation, employment law and trade
policy in an anti-market direction.

For this reason, the less risky economic path for the short-term
would be to try to come to a deal to maintain Single Market
membership explicitly for a slightly extended period, with a longer
term timetable for a free trade deal. Whether this can now be
agreed given the Article 50 process is another question for the
lawyers and politicians.

Ryan Bourne
occupies the R Evan Scharf Chair in the Public Understanding of
Economics at the Cato Institute in Washington DC.

Share |

Pittsburgh or Paris?

Walter Olson

“I was elected to represent the citizens of Pittsburgh,
not Paris,” said President Donald Trump earlier this month,
announcing his decision to withdraw from the climate treaty.
Critics immediately shot back that the city of Pittsburgh voted for
his Democratic opponent, not him, by 75 percent to 21 percent. So
there. Gotcha!

Unlike the critics, I don’t find this a particularly
clever comeback. One reason is that — as analyst Michael
Barone, ever sharp about voting patterns, has pointed out —
Trump did carry the set of counties that makes up the greater
Pittsburgh metro area, running stronger there (50 percent to
Hillary Clinton’s 46) than had most previous Republicans.
People refer to cities while meaning their metro areas all the time
— if you have an aunt in Revere or Middleborough,
Massachusetts, there’s nothing wrong with calling her your
aunt in Boston.

More fundamentally, it seems to me it is Trump’s
speechwriters rather than his critics who are showing the sounder
grasp of what “elected to represent” means. It is not
supposed to mean “elected by one faction of the country to
advance its interests as distinct from the interests of the other
faction.”

If Trump’s opponents are
smart, they will pass up the chance to fight a pointless
“Pittsburgh or Paris?” battle and engage with the question of
whether his policies will help or hurt.

In fact, we specifically shouldn’t want presidents to feel
that they have no responsibility to represent the interests and
rights of voters or regions that went strongly against them.

Trump would rightly be criticized if he gave a speech and said,
“I was elected to represent the citizens of Montana, not
Massachusetts.” He may regret that Massachusetts residents
voted against him, but as president he is responsible for sticking
up for them against the outside world.

Election winners in victory speeches often say they will be a
president (governor, mayor) for all the people, not just the ones
who voted for them. It’s a commonplace bit of civic rhetoric
but no less useful for that.

That’s one reason the slogan briefly popular among some
Trump opponents after the election, “Not My President,”
was open to question. It’s one thing to refuse to rally
around any given president. But you don’t want to do so in
words that might seem to release him from having to recognize that
you, too, are his constituent.

Of course the “Pittsburgh, not Paris” phrase can be
read at a number of rhetorical levels. Because the treaty is in
part about energy burning and heavy industry, Trump probably sought
to evoke the steel and coal industries for which Pittsburgh were so
well known. Critics point out that’s out of date — coal
has declined and there’s not much steel made around
Pittsburgh. The city has gotten back on its feet through resources
like its hospitals and its universities.

The Marcellus Shale fracking boom in Western Pennsylvania
— which is a more ambiguous thing under the Paris treaty,
since natural gas burns with much lower carbon emissions —
has helped a lot too.

Even more broadly, Trump was proclaiming that he consults
Americans’ interests rather than those of other countries
when he acts. Philosophers can debate whether it’s fair to
discount sharply, or ignore entirely, the well-being of the rest of
the world. Politicians can’t afford to, because most voters
from both parties want policy that puts American interests
first.

If Trump’s opponents are smart, they will pass up the
chance to fight a pointless “Pittsburgh or Paris?”
battle and engage with the question of whether his policies will
help or hurt.

Walter Olson
is a senior fellow at the Cato Institute’s Center for
Constitutional Studies.

Share |

One Belt, One Road: Why Trump Should Get behind China’s Economic Growth Plan

Doug Bandow

Like Hong Kong, Macau enjoys special status within China. The
Special Administrative Region is effectively governed by Beijing,
but retains liberal freedoms reflecting its Portuguese heritage.
Much smaller than neighboring Hong Kong, Macau relies on gaming
rather than finance as its economic foundation.

The Special Administrative Region took a major economic hit in
2015 in the midst of the Xi government’s crackdown on
corruption and ostentatious living. The flow of Chinese
“whales” to Macau’s casinos slowed and the
economy retrenched. Macau has since recovered, but its leaders hope
to diversify for the future. To promote that end the territory
hosted the international conference on the Belt and Road Initiative
(BRI) and Macau’s development.

The initiative, also known as One Belt, One Road, was proposed
by China’s President Xi Jinping four years ago. A priority for
Beijing, it necessarily is a priority for anyone under Beijing’s
sway. And while Western states have been understandably skeptical
of the program, Xi’s plans have been boosted by the Trump
administration’s retreat from the international marketplace.

The U.S. government’s withdrawal from the Trans-Pacific
Partnership, which it helped birth, and its talk about trashing the
free trade agreement with South Korea, have encouraged America’s
economic partners to look elsewhere to expand commerce. Beijing is
moving to fill the void, advancing other free trade agreements
along with BRI. Asian analysts and officials remain amazed at the
Trump administration’s pursuit of economic isolation. No one else
intends to follow the United States toward some variant of
protectionist autarchy.

In fact, participants at the Macau conference wanted the United
States to be involved, which is one of the reasons for why I was
invited to attend the conference. In May, President Xi spoke of
creating “a big family of harmonious coexistence.”
Whatever his ultimate ambitions, local officials, with an eye to
expanding economic opportunities, believe the more the merrier.

BRI harkens back to the fabled “Silk Road” of
ancient times. Imperial China once was a dominant presence in Asia,
before choosing isolation. The weakened state lost territory to
Western “concessions” and Japanese conquest. Last
century’s communist revolution created a new, even more
malign form of isolation, until Deng Xiaoping took control and
opened the People’s Republic of China to the world.

China should seize the
opportunity to share global economic leadership.

Since then the People’s Republic of China (PRC) has
revived the best of its ancient commercial heritage. BRI offers an
extension of Beijing’s already expansive commercial network,
with the potential of placing China even more firmly at the center
of the global economy. Weirdly, “Belt” refers to land
transport while “Road” represents sea lanes.
Nevertheless, the basic idea is to enhance old and create new
infrastructure to promote commerce among Asia, the Middle East,
Africa and Europe.

Nearly seventy countries have signed agreements with the PRC to
participate. At its most expansive, the program envisions $4
trillion in spending and could touch two-thirds of the
world’s people responsible for a third of the world’s
GDP. However, so far Western countries and companies have been
hesitant to join China’s BRI parade.

The initiative has multiple objectives. It is a geopolitical
attempt to extend Beijing’s influence. It could enhance
China’s international economic stature. BRI projects also
could strengthen the PRC’s energy supply chain. The program
might boost an economy that has been losing altitude. It offers
projects for underperforming, even underwater state enterprises and
employment for workers who have few obvious alternatives.
Similarly, the initiative could help soak up some of the
PRC’s infamous industrial surplus, particularly in steel and
cement. BRI could increase trade opportunities as China faces
protectionist pressures from America and Europe. Some Chinese even
claim a hint of enlightened self-interest, comparing BRI to the
Marshall Plan, only at thirty times the size.

To the extent that such a program succeeds in expanding global
commerce, it will be good for China and the latter’s trading
partners, as well as other nations which participate in BRI
projects. The initiative also offers opportunities for Macau, which
is why the latter hosted the forum. Having historically relied on
gambling and tourism and with its trade overwhelmingly linked to
China and Hong Kong, Macau is looking for additional economic
options. The Special Administrative Region also has some unique
advantages: a special relationship with the half dozen
Portuguese-speaking nations, an entree into Europe from its
Portugal connection, a specialized if small financial industry, and
close ties with China and Hong Kong.

Although BRI’s ambitions are grand, so far its successes
have been modest. And holding back from participating are major
economic and geopolitical players who could help make the program a
global reality. For instance, European countries have responded
with varying levels of enthusiasm to Beijing’s plans; most
did not send heads of state or government to last month’s
Beijing forum.

Russia also has exercised caution. Although hostility toward
Washington has helped draw Russia and China together, the latter
two compete for political influence and business deals in Central
Asia. Moreover, Moscow, under Western sanctions, may lack the
capital necessary for full participation in BRI.

India has been ostentatiously hostile. New Delhi was angry over
China’s planned $55 billion investment program in Pakistan,
which would include disputed territory in Kashmir. The Hindi
newspaper The Pioneer, tied to the ruling BJP, warned that
the program’s goal “is to establish Chinese mastery
over oceans and connecting routes across Asia and between Asia and
Europe.”

The United States has given off mixed signals. Last year the
Obama administration offered a tepid endorsement. Former Deputy
Secretary of State Tony Blinken said the initiative was
“consistent” with U.S. goals and could be
“complementary” with U.S. efforts. However, the Trump
administration’s Dan Coats, Director of National
Intelligence, warned of the Chinese desire to “expand their
strategic influence and economic role across Asia.” The
administration sent a lower-ranking delegation to last
month’s Beijing forum.

Washington’s reluctance in part reflects concern that the
PRC is using its economic strength for political purposes. The
Obama administration similarly refused to join the Asian
Infrastructure Investment Bank. To this issue now must be added
President Trump’s protectionist tendencies, even though BRI
theoretically offers commercial opportunities for America firms.
However, realization of those possibilities depends greatly on the
rules and terms governing projects at a time when United States
firms feel increasingly unwelcome in China.

If Xi’s program is going to attract greater participation
from these important international players, BRI must focus on
economics, not politics, and promote projects which make economic
sense for lenders/builders as well as borrowers/recipients. BRI
also needs to take into account the often complex and fragile
politics within participating states.

There are many potential pitfalls which need to be avoided. One
is that the program may have too many objectives: China and fellow
participants need to set priorities. Such a program, with high
geopolitical goals, risks encouraging projects of little economic
value. The pressure to find projects may grow particularly acute in
the least developed BRI nations, many of which remain in poverty
because of their own counterproductive policies. Indeed, nearly
half of countries eligible to participate have been judged
“high risk” by Oxford Economics, while half of those
which have accepted projects have credit ratings below investment
grade. To the extent that projects are treated more as assistance
than commerce, BRI risks repeating the unhappy experience of
manifold failed aid programs over the years.

Many of the governments involved are incompetent, unpopular and
corrupt, undermining any program. Moreover, economic projects often
have political overtones. China has found itself subject to
protests and even treated as an election issue in such nations as
Myanmar, Sri Lanka and Zambia. As noted earlier, Beijing’s
Pakistan investment has drawn it into the Kashmir imbroglio. Russia
may not react well if through BRI the PRC further attracts
countries once part of the Soviet Union.

The program’s development might suffer from China’s
own economic problems, such as banks with dangerously high-debt
burdens and the temptation for companies and provinces to relabel
most any economic development as BRI-related in order to win
subsidies and other official support. Beijing’s increasing
geopolitical aggressiveness may deter some states from
participating out of fear of exploitation. Environmental issues are
certain to arise, as well as risks of increased terrorism as
potential targets, both people and projects, spread to more at risk
countries. Finally, implementation issues are monumental: to manage
so many projects in so many nations poses unprecedented
challenges.

What of the future? There’s reason for skepticism, but
problems can be overcome. However, doing so will require restraint
and responsibility from Beijing’s nationalistic and
aggressive authorities. One step would be serious economic reform
at home, especially of state enterprises and banks, as well as
ending what appears to be a systematic campaign to harass and
disadvantage Western concerns. China also should join developed
nations by paying off debts to the World Bank and IMF, which are
artifacts of an earlier era.

The PRC should use BRI to empower poor nations. Beijing could
open its capital markets, ease import barriers and enable more
foreigners to work and do business in China. Also, Beijing should
directly address the concerns of its greatest critics, emphasizing
BRI’s economic purpose, focusing on private investment and
participation rather than government enterprises, and structure
deals to maximize international participation. The PRC could offer
formal discussions over issues of concern, such as technical
standards for projects.

Finally, China should seize the opportunity to share global
economic leadership. Beijing should point out to the Trump
administration that BRI offers the potential for the sort of
“deals” that President Trump appears to value and look
for ways to use the program as a means to expand trade with other
nations in the wake of the Trump administration’s economic
retreat.

In pushing BRI, President Xi spoke of the “great
rejuvenation of the Chinese nation.” That already has
occurred. China accounts for half of Asia’s economic
activity. The PRC is the globe’s largest merchandise trader.
In recent years it has been the largest contributor to world
economic growth. Total Chinese foreign direct investment is
estimated at a trillion dollars.

But challenges remain to Beijing’s program, most seriously
the suspicion that BRI is a political maneuver intended for the
PRC’s global advantage rather than the economic benefit of
others. China should address its critics.

Last month President Xi called on conference attendees to
“build an open platform of cooperation and uphold and grow an
open economy.” Properly structured, BRI could advance that
end. Then Beijing would be well positioned to challenge the United
States and Europe, as well as India and Russia, to join
China’s efforts. If they took up such a challenge, much could
be accomplished for the benefit of all.

Doug Bandow is
a senior fellow at the Cato Institute and a former special
assistant to President Ronald Reagan.