Stifling American Businesses' Global Competitiveness

Last week the World Bank released its annual Doing Business report, which ranks 183 national economies on their ease of doing business based on an analysis of ten economic factors: Starting a Business, Dealing with Construction Permits, Getting Electricity, Registering Property, Getting Credit, Protecting Investors, Paying Taxes, Trading Across Borders, Enforcing Contracts, and Resolving Insolvency. As the Bank explains, "a high ranking on the ease of doing business index means the regulatory environment is more conducive to the starting and operation of a local firm." In short, the higher a country is on the list, the better its business environment.

The topline number for the United States isn't bad: we rank 4th on the list behind Singapore, Hong Kong and New Zealand.  However, a closer look at the US rankings reveals some serious concerns:

As you can see, the United States ranks an embarrassing 72nd globally in "paying taxes" - defined by the Bank as "the taxes and mandatory contributions that a medium-size company must pay in a given year as well as... the administrative burden of paying taxes and contributions").  Basically, US companies pay higher corporate taxes - and have a more difficult time paying them - than 71 other countries.  Such a tax burden has a crippling effect on American companies global competitiveness, and the World Bank study is further proof of just how desperately the current US tax system needs a fundamental overhaul.  The Obama administration has repeatedly promised to reform the US corporate tax system but has yet to provide even a proposal (shocking, I know).  Fortunately, there appear to be several GOP Presidential hopefuls who, unlike the current White House resident, are serious about lowering the ridiculous tax burden that US companies now face.

The United States also ranks poorly in other key economic areas, such as starting a business (13th) and trading across borders (20th) - both vitally important for business formation and global competition.  Contrary to what you might expect, the trade category doesn't analyze protectionist tariffs but instead measures the "time and cost (excluding tariffs) associated with exporting and importing a standardized cargo of goods by ocean transport."  As I've frequently discussed here, such "trade facilitation" (e.g., customs rules, export controls, etc.) issues might be boring, but they're just as important as tariffs (and sometimes even moreso).

Finally, it's important to note where some of the big developing countries rank on this list.  Brazil ranks 126th overall; India ranks a frightening 132nd; and the global powerhouse China ranks only 91st.  In short, it's far easier to do business in the United States than it is in China, and this massive divide in the costs of doing business helps explain why global companies don't all instantly move to the countries with the cheapest labor supplies (and why a lot of them are coming back to the United States after dabbling abroad).  Keep that in mind the next time you hear someone ignorantly rambling about the "race to the bottom" or some politician peddling protectionism as solution to the "inevitable decline" of America's global competitiveness.  In fact, there are a lot of obvious ways that the government could create a better business environment for American companies, and decline is anything but inevitable.

Greasing America's Competitiveness Slide

Last week the World Economic Forum announced some distressing, but not unexpected, news about the struggling US economy:

The U.S. extended its slide in competitiveness for a third year by slipping to fifth in the World Economic Forum’s rankings, which Switzerland topped. 

The U.S. fell one place, two years after losing the No. 1 position for the first time since the Geneva-based organization began its current index in 2004. Concern about public debt and deteriorating confidence in policy makers hurt the efficiency of the world’s largest economy even as faith in its financial industry rebounded, the forum said in its study of 142 nations.In the U.S., “urgent efforts need to be made in terms of macroeconomic stabilization and mapping out an exit strategy from debt,” said Jennifer Blanke, the forum’s lead economist who contributed to the annual study.... 

Switzerland, home to companies including drugmaker Novartis AG (NOVN) and food company Nestle SA (NESN), was credited for its innovation and technological skills. Singapore and Sweden trailed, with Finland leapfrogging the U.S. into fourth place. Germany, the Netherlands and Denmark followed with Japan sliding three places to ninth. The U.K., ranked 12th last year, swapped places with Canada to take 10th.... 

China climbed one level to 26th and Brazil rose to 53rd from 58th while India fell five slots to 56th and Russia dropped to 66th from 63rd.... 

The U.S. ranked 89th for macroeconomic stability amid a record budget deficit, while running 50th for trust in its politicians, the forum said. The survey suggested its government wastes resources and regulation has become more burdensome. A gauge of financial-market development indicated improvement, with the U.S. rising to 22nd from 31st last year. It was ninth in 2008.... 

The report -- published each year by the organizers of the annual conference of business leaders, politicians and entertainers in Davos, Switzerland -- is based on measures of competitiveness and an opinion poll of more than 14,000 business leaders.

The full WEF report is available here, and, while it's always a little tricky to talk about "national competitiveness" (rather than companies' competitiveness), the survey is still a valuable way to measure which governments are implementing the best policies to make their domestic companies more globally competitive.  And speaking of such policies, Cato's Dan Ikenson took to the pages of the WSJ over the weekend to explain a simple policy that could instantly improve American companies' ability to compete in the global economy:

If the president is genuinely committed to spurring economic growth and job creation, he will take the lead on reducing or eliminating duties that U.S. producers pay on imported raw materials and components they need for manufacturing. This would instantly boost the competitiveness of U.S. products at home and abroad. 

The same demographics that have created growing foreign markets also mean there are more foreign suppliers of raw materials, industrial inputs, and other intermediate goods used by U.S. producers in their own production processes. Last year, U.S. Customs and Border Patrol collected $30 billion in duties on $2 trillion of imports, 55% of which were ingredients for U.S. production—such as chemicals, minerals and machine parts. Purchases of imported inputs accounted for more than $1 trillion of U.S. production costs, a price tag that was roughly $15 billion higher than it might have been without U.S. import duties. 

What is the point of negotiating a 5% reduction in a foreign tariff on behalf of certain U.S. exporters while ignoring the fact that, to produce those exports as domestic manufacturers, they are required to pay a 50% import tax on the most crucial raw materials? Reducing import barriers has the same effect on profit as does improving market access abroad, but with the added benefit of increasing U.S. competitiveness. And it can be achieved without waiting for consent from abroad....

Now the president should push Congress to reduce or eliminate, on a permanent basis, all tariffs on industrial inputs so that U.S. producers are more competitive in the global economy and so that America is a more appealing destination for foreign direct investment. That approach has produced good results in Canada, where the government has been reducing tariffs on manufacturing inputs for the past few years. 

Meanwhile, some import duties can be eliminated with a stroke of the president's pen. First should be antidumping duties, imposed on inputs needed by U.S. producers. The antidumping law is purported to penalize foreign producers accused of injuring U.S. firms by selling in the United States at lower prices than they charge at home. Some U.S. industries lobby vigorously for such duties simply because they hobble the foreign competition. 

Yet more than 80% of the nearly 300 U.S. antidumping measures in force today restrict imports of raw materials and intermediate goods, thus penalizing U.S. producers. Antidumping duties on magnesium or polyvinyl chloride or hot-rolled steel may allow domestic producers of those inputs to raise prices and reap greater profits. But they hurt many more downstream U.S. producers of auto parts, paint and appliances, who consume those inputs in their own manufacturing processes and who are more likely to export and create new jobs than are the firms that seek trade restrictions.

Unfortunately, Ikenson notes in a separate blog post last week that the Obama administration is actually pondering the implementation of policies that would lead to higher, not lower, tariffs on US imports:

As the president was pitching his jobs plan last night, his current policies were hard at work discouraging job creation and incentivizing layoffs.

One of innumerable such policies concerns the treatment of imported raw materials and other intermediate goods that are subject to antidumping or countervailing duty measures, but needed by U.S. producers to make their final products. It almost defies comprehension that, in a modern, interdependent economy characterized by transnational supply chains and cross-border investment, over 80 percent of all U.S. antidumping and countervailing duty measures are imposed on these ingredients of U.S. production. This policy drives up the cost of production for downstream U.S. industries, making it more difficult for them to compete in the United States and abroad, curtailing profits, investment, and hiring.

However, under the U.S. Foreign Trade Zones program, some of the costs inflicted on downstream, import-consuming firms can be mitigated. (Of course, the program wouldn’t be necessary if U.S. duties were recognized as just another cost of production and set, optimally, at zero.) Among the aims of the FTZ program is to encourage manufacturing activity in the United States (and to discourage manufacturers from shuttering domestic operations and moving offshore as a result of the burden of paying U.S. customs duties).

FTZs are usually manufacturing plants or facilities physically located within the United States, but considered outside U.S. territory for the purpose of customs duty payment. Goods that enter FTZs are not subject to customs duties (including antidumping or countervailing duties) until they leave the zone and are formally entered into the commerce of the United States. If those goods are used as inputs to a further manufacturing process, the rate of duty applicable to the final product is assessed. If the goods are exported from a FTZ, with or without further processing, no duties are imposed because the product never officially “entered” the United States.

With respect to products made from materials and components subject to AD or CVD duties, the standing regulations require FTZ operators to get advance approval from the Foreign Trade Zones Board if the intention is to sell those final products in the United States. That requirement does not apply when the final product is going to be exported from the FTZ, which provides some incentive to downstream U.S. firms to keep production in the United States by operating as a FTZ.

But now the Obama administration—at the behest of the antidumping petitioners’ bar and organized labor, and despite its own exhortations to U.S. companies to double exports, invest in America, and put Americans back to work—is proposing to seal off that channel of sanity and compromise. New regulations would require advance approval even if the final product was going to be exported.

The requirement of advance approval from the FTZ Board, which is administered within the Import Administration—the same agency at the Commerce Department that simultaneously assists protection-seekers in crafting their AD/CVD petitions, while gleefully implementing and administratively adjudicating the antidumping and countervailing duty laws—will tip the balance in favor of outsourcing production for many firms in many industries. Any benefits of continuing to produce in the United States will be diminish next to the rising costs and uncertainty of doing so.

Thus, companies like Dow Corning, which uses silicon metal to produce silicone components for solar panels, will have that much more incentive to shutter operations in Kentucky and set up shop in Canada or elsewhere, where silicon metal is available at lower world market prices, so that it can compete in foreign solar panel markets with Chinese, Japanese, Canadian, and European rivals.

According to the WEF, the United States is currently the fourth-most competitive economy in the world.  I guess the Obama administration's really gunning for Number 5 in 2012.

The Rapid Descent from State Capitalism to Protectionism

Solyndra, the poster-child for President Obama's big plans to magically convert the American economy into a "green technology" powerhouse through massive government subsidies, declared bankruptcy today.  As I've noted repeatedly here, Solyndra received a $535 million federal loan guarantee from the Department of Energy but has faced serious financial problems for over a year, so its failure is hardly surprising (unless, of course, you think that Presidential pep-talks can save a struggling business).  What's also not surprising - at least for the 12 people who read this blog regularly - is the administration's highly troubling response to Solyndra's announcement, one which perfectly demonstrates how "state capitalism" breeds economic nationalism and, in many cases, protectionism (emphasis mine):

Since 2009, the Department of Energy’s Loan Program has supported a robust, diverse portfolio of more than 40 projects that are investing in pioneering companies as we work to regain American leadership in the global race for clean energy jobs. These projects include the world’s largest wind farm, several of the world’s largest solar generation facilities, one of the country’s first commercial-scale cellulosic ethanol plants, and the first new nuclear power plant in the U.S. in the last three decades. Collectively, the projects plan to employ more than 60,000 Americans, create tens of thousands of indirect jobs, provide clean electricity to power three million homes, and save more than 300 million gallons of gasoline a year.

Our loan program catalyzes American innovation and private sector investment behind promising companies -- so that American workers have a chance to compete against China and other countries that much more heavily subsidize clean energy companies. While each transaction undergoes months of extensive and careful expert review to minimize risk, there will always be an element of risk with investments in the most innovative companies. The alternative is simply walking off the field and letting the rest of the world pass us by.

Solar panel manufacturing is a growing international market, with increasingly intense competition from Chinese manufacturers who are supported in many cases by interest free government financing that is much more generous than what the U.S. provides. The price for solar cells has fallen 42 percent since the beginning of the year -- even as European countries, currently the largest market for solar panels, are facing economic turmoil and have greatly reduced subsidies for solar power. The changing economics have affected a number of solar manufacturers in recent months, including unfortunately, Solyndra, a once very promising company that has increased its sales revenue by 2000 percent in three years and sold more than 1000 installations in 20 countries. As a result, Solyndra now plans to suspend its manufacturing operations and file for bankruptcy protection.

Now, leaving aside the bizarre fact that the US Department of Energy has apparently now become an investment bank and jobs program, what the bolded passages above make clear is that the Obama administration is blaming China, not DOE's bad investment decisions or the clear inability of solar power to survive without federal assistance, for Solyndra's failure.  No, it's China and its "heavily subsidized" companies who receive "interest free government financing" that caused Solyndra to collapse, so angry American taxpayers should direct their ire at the Chinese and their subsidies, not the Obama administration (and, umm, its subsidies), for Solyndra's demise and the flushing of millions of taxpayer dollars down the collective (pun intended) toilet.  It's also that dastardly China who threatens "American leadership in the global race for clean energy jobs" and "projects [that] plan to employ more than 60,000 Americans... [and] create tens of thousands of indirect jobs."  (Yes, "other countries" were also noted, but none by name, so let's not be naive here; the target is clear.)

Such a response is not only kinda pathetic (DOE also fingered the Bush administration and Congress), but also highly troubling because it could easily stoke nationalist and protectionist sentiment in government and the general public.  Indeed, by shifting the political blame to China, the press release seems intended to do just that (and, of course, to argue that future green "success" just requires bigger truckloads of borrowed taxpayer money).  But as disturbing as DOE's statement is, not a word of it should be surprising because economic nationalism and (sometimes) outright protectionism are the inevitable outcomes of state capitalism.  Indeed, I warned of this very thing just a few months ago when commenting on an op-ed by economist Art Carden on government "investment" and the President's call to "win the future":

Carden's explanation of the pernicious side effects of government "investment" deserves further discussion. He does a great job laying out how special interests inevitably distort government investment plans, but I think he glosses over perhaps the bigger problem with state meddling in the private sector: it breeds economic nationalism.

As Carden rightly notes, government "investors" (i.e., elected officials subsidizing commercial enterprises with your and my tax dollars) respond to political, rather than market, incentives and can easily throw more money (again, our tax dollars) at a project regardless of the economic return on that investment. In short, as long as the political returns - be they votes or campaign contributions - remain high, then the government investor has an incentive to keep on investing. It's this troubling dynamic that has given us more than three decades of government "investment" boondoggles in corn ethanol and other "green" technologies. (To see just how long we've sucked at "investing" in environmental technologies, Google "carter synfuels" some time.)

At some point, however, the money does run out, and that's where things can get really scary. As we've learned during the current state and federal budget crises, government funds aren't truly unlimited (thank goodness). But, even though the state/federal coffers are dry(er), the political incentives remain equally strong - government investors still have a serious political stake (read: re-election) in seeing their investments be successful. Without a limitless supply of money to throw at a politician's chosen company/industry, he will almost inevitably seek other means to ensure the political returns on his "investments." And, unlike private investors, he has at his fingertips the full force of the government to improve his investments' prospects should things go sour.

Of course, when it comes to government "investment," things almost always go sour (see above).
So not only do we get bajillions of tax dollars thrown down the toilet for government projects captured by special interest lobbying, but we also get a healthy dose of government coercion to tilt the playing field in those projects' favor. Sometimes, this coercion rears its head through top-down usage mandates like the gas/ethanol mix. More often, it appears in the form of economic nationalism - particularly trade protectionism - because in today's global economy eliminating foreign competition is one of the easiest ways to improve your investment's chances. (See, e.g., the current tariff on sugar ethanol.) Of course, when a government official can't do that, she can at least blame the foreigners for the failure of her blessed programs and convince the public that "free trade," not her programs, caused all of their economic ills.

And that brings us back to the troubling protectionist implications of the President's repeated calls for more government "investment" during the SOTU...

So if/when President Obama's "investments" in green technology and other industries fail (as they probably will), and when the federal budget (and House Republicans) simply can't tolerate even more money being thrown at these failed investments, where will he turn? Will he cut his losses and admit failure? Will he force Americans to buy/use these failed products regardless of their economic (and environmental) value? Or will he blame the country's "adversaries" (i.e., foreign competition) and attempt to erect trade barriers?

According to the [Michigan ex-Governor Jennifer] "Granholm model," it'll be the last option, and, really, we shouldn't be surprised if/when that happens. I mean, it's the natural result of an economic model based on national "competitiveness" and government "investment," now isn't it?

Sounds familiar, doesn't it?

At this point, we're clearly out of money and the House GOP isn't breaking out the credit card anytime soon, so DOE's implicit calls for more green energy subsidies are almost certainly going to go unheeded (thank goodness).   And with very-public failures like Solyndra putting a very-public spotlight on the Obama administration's green energy money pit, scapegoats are going to be needed.  On green technology, China has clearly become the President's first choice: indeed, the Energy Department has been left to implicitly deride Chinese subsidies instead of openly praising the significant proliferation in "cheap" solar power that's mentioned in its very own press release!  But one must wonder whether, if/when several other of President Obama's green poster children go belly up, will the "China blame game" be enough to salvage the President's political prospects?  Or will protectionism - and an inevitable confrontation with one of America's largest trading partners - be the administration's next move?

I don't know the answer to these questions; nobody does.  But last sentence of the DOE release could be a warning as to which way the Obama administration is leaning: "While we are disappointed by this outcome, we continue to believe the clean energy jobs race is one that America can, must and will win."

Shudder to think how they'll try to rig the game to ensure that "victory."

ObamaCare and America's Global Competitiveness, ctd.

It's been a while since I last checked in on the effects of ObamaCare (a moniker that the President supports, btw) on American companies' global competitiveness.  As you may recall, one of the administration's more, ahem, creative arguments in support of passing health care legislation was that it was absolutely essential to securing American companies' continued economic domination (no, seriously).  I, of course, provided the blatantly obvious rebuttal to this silly argument by noting (repeatedly) that it was utterly impossible that 1200 pages of new taxes, spending and regulations were going to somehow supercharge the global competitiveness of US manufacturers and service providers, and that it was far more likely that the new regulations would hurt, not help, American businesses.  Now comes a fantastic depressing new video of CKE Restaurants CEO Andy Puzder explaining just how devastating ObamaCare, and other regulatory adventurism practiced by the executive branch, have been for American businesses (i.e., the people who, you know, create jobs):



The stuff on health care starts at about 1:20, but the entire video is worth your time.  It provides a very clear an concise explanation of how bad regulations and their awful implementation by the agencies like the EPA and the NLRB hamstring America's job creators (something I've also lamented).  My favorite line:

It's very hard to model the costs [of ObamaCare] because the bill was so complex.... We have a national healthcare advisor... that we use, and the range that they gave on our health care costs increasing at CK Restaurants was between 7.3 and 35.1 million dollars.... Their [new] estimate was that it would increase our health care costs by about 18 million dollars.  We spent about 9 million dollars last year building new restaurants; that would be totally wiped out.

Yikes.  Although Pudzer's company operates US restaurants (and thus isn't directly facing foreign competition), the regulatory pains he discusses are similarly felt by American manufacturers and service providers who do regularly compete in, and in some cases rely upon, the global economy.  And until the US government provides a less burdensome and uncertain regulatory environment, all US companies will continue to suffer.

And so will their current - and potential - employees.

Trade Remedies and US Competitiveness

Today Cato's Dan Ikenson published a new paper on the US antidumping law and American competitiveness.  Here's the paper's setup in Ikenson's Forbes op-ed on the same subject:

During the decade from January 2000 through December 2009, the U.S. government imposed 164 antidumping measures on a variety of products from dozens of countries. A total of 130 of those 164 measures restricted (and in most cases, still restrict) imports of intermediate goods and raw materials used by downstream U.S. producers in the production of their final products. Those restrictions raise the costs of production for the downstream firms, weakening their capacity to compete with foreign producers in the United States and abroad.

In all of those cases, trade-restricting antidumping measures were imposed without any of the downstream companies first having been afforded opportunities to demonstrate the likely adverse impact on their own business operations. This is by design. The antidumping statute forbids the administering authorities from considering the impact of prospective duties on consuming industries—or on the economy more broadly—when weighing whether or not to impose duties.

That asymmetry has always been insane, but given the emergence and proliferation of transnational production and supply chains and cross-border investment (i.e., globalization)—evidenced by the fact that 55% of all U.S. import value consists of raw materials, intermediate goods, and capital equipment (the purchases of U.S. producers)—it is now nothing short of self-flagellation.

Here's my favorite part:

If you need more evidence that the antidumping status quo is weighted heavily against import-consuming U.S. industries, consider this gem: three of the nine mineral raw materials that are the subject of the U.S. case against China in the WTO (magnesium, silicon metal, and coke) are simultaneously subject to U.S antidumping restrictions. That’s right! With our own import restricitons firmly in place, the United States is suing China to remove its export restrictions on the same products. That sounds like an excellent use of resources.

And here's the paper's basic conclusions:

The NEI should include a serious commitment to antidumping reform. At a minimum, consuming industries should be given legal standing to participate fully in antidumping proceedings, antidumping measures should be rejected if the projected costs of those restrictions on those firms and on the broader economy exceed some reasonable threshold, and any duties applied should not exceed the level found necessary to remedy injury to the petitioning domestic industry.

Be sure to read the whole thing here.

Caterpillar CEO on Trade and How to (Really) Win The Future

President Obama and his underlings just love to talk about improving American competitiveness in order to Win the Future.  But what does the US business community - well, those not on the milky-end of the government teet - think about the current state of American policy and its impact on our companies' future global competitiveness?  Courtesy of HotAir comes a fantastic CNBC interview with the CEO of Caterpillar - one the shining stars of America's thriving manufacturing sector - on just those issues.  It's well worth your 15 minutes:



In short, Mr. Oberhelman sees the global economy not as a threat, but as a great business opportunity.  He's smartly positioned Caterpillar to take full advantage of both foreign and domestic market conditions - through things like advocating robust trade liberalization, currency hedging and maintaining near-total control over business operations in interventionist foreign markets - and he sees competitiveness-killing US government policies, not free trade or low-cost competitors in China or Brazil, as the greatest threat to his company's viability and the future of the American economy.

And what kind of US government policies are undermining our global competitiveness and thus jepoardizing our companies and jobs?  I'll let Oberhelman explain:



My favorite quote:

We've announced three or four arguably brand-new facilities [in the United States] bringing work in from outside. And frankly we weigh all of these things in which state is the most business friendly. It's not a question of labor cost or who's cheaper. If you chase cheap labor around the world, you're never going to win. It's a lot more than that. The state's got to be competitive.  The country's got to be competitive....  You see states going the other way [from Illinois], where they're very pro-business and reducing taxes, and guess where we land our plants that are very competitive.... The latest and greatest is in Texas.  We brought a plant that in the past has assembled hydraulic excavators in Japan for shipment to the U.S.... we've moved that plant to south Texas... 5,000 to 6,000 units a year, 600 to 700 high-paying assembly jobs.

Nice.  And how exactly does Mr. Oberhelman think the current administration is doing to keep American companies strong and competitive?  Well, the answer to that is in the second video, but I'll let HotAir spell it out for you.

(Hint: it's not good.)

Weekend Quick Hits

Apologies for the light blogging this week - it's been a brutally long one for your humble correspondent.  But here's a treasure-trove of headlines to make up for my absence:

• Alternate headline: Former USTR Portman Joins Gaggle of Protectionist Senators to Ask Current USTR Kirk to Pursue Silly Protectionist Policy that USTR Can't Actually Achieve. (Silly letter available here.)

• Must-read WSJ analysis: Blather in Washington won't affect the US-China exchange rate; Chinese inflation will.  (Yes, this should sound very familiar.)

• In case you missed it, AEI's Claud Barfield ably responds to my blog post on the United States' sordid history of "FTA bullying."  His future analysis on this issue promises to be great.

• Forbes analysis: US corporations pay a LOT of taxes, especially those dastardly oil companies!

• Shocker: "Both the European and global carbon markets could significantly increase costs for EU steelmakers, while at the same time reducing the potential for offsetting those costs, speakers at Steel Business Briefing’s Green Steel Strategies conference in Brussels argued.  European Union Allowance (EUA) prices are expected to rise to around €40/tonne by 2020, according to forecasts presented by Carine Hemery of carbon market analysts Orbeo. Moreover, the amount by which steelmakers can cut their costs by offsetting with UN carbon credits, called Certified Emissions Reductions (CERs), could fall from around €3-4/t currently to just €1-2/t in 2013-2020, she adds."  Me: Is lobbying for carbon tariffs soon to follow?

• Vladimir Putin puts on a clinic on "How Not to Improve Your Country's Chances of Getting Into the WTO Anytime Soon."

• According to a new report by sympathetic environmentalists, governments and industries are lying to us about the efficacy of wind power generation.  I'm shocked!

• Cato's Dan Griswold deflates the silly White House rhetoric that we're "on track" to double US exports in the next 5 years.

• WorldTradeLaw.net's Simon Lester has an insightful blog post about the "dangers of talking about competitiveness" in the context of international trade rules (and disputes).  I agree.

• China's commerce ministry (MOFCOM) announced preliminary anti-dumping and countervailing duty rates for sedans and SUVs from the United States.  As you'll recall, this case started back in 2009 as a not-so-subtle response by the Chinese government to the President's decision to impose safeguards duties on Chinese tires under Section 421 of US trade law.  Final rates in the China AD/CVD case will be out in a few months.

• US-China business Council released state-by-state data on US exports to China between 2000 and 2010.  The results are pretty staggering.  For example, exports to China from my home state of North Carolina - a place that's unfortunately (and irrationally) represented by many a protectionist politician - increased over 500% since 2000 and now stand at over $2.2 billion. 

• Arnold Kling discusses a new paper on trade and US employment trends that's (rightfully) getting a lot of buzz.  Tyler Cowen has more praise and discussion here.

• The 2011 Name of the Year bracket is out, and it is as awesome as ever.

• Finally, ReasonTV follows my lead but enlists the far-more-persuasive Sallie James to implode Bernie Sanders' insane war on the imported trinkets that are were sold at the Smithsonian giftshops:

Global Corporate Tax Revenues Are a Total Laffer

The Economist points us to a rather telling chart about the amount of revenue (as a percentage of total GDP) that major industrialized nations collect from corporate taxes:

The story accompanying the chart makes two very important points.  First, they talk about the impact of global tax competition on corporate tax rates, and what happens in a modern, globalized economy if a typical nation tries to tax its way to revenue abundance:

Two countries stand out from the top of the table – Australia and Norway. Both have the benefit of natural resources and can thus get tax revenue from “captive” companies. Other countries have to compete to attract manufacturing and service companies; their take from the corporate sector thus hovers between 2-4% of GDP. America is at the bottom of the range, although its tax take from this area is not as exceptional as for consumption. (An important caveat is that total tax revenue in the US is around 10 percentage points below the OECD average, so one would expect it to lag behind in individual categories.) Some will cite this table as an argument for taxing profits more heavily, by closing loopholes and eliminating tax breaks. The counter-argument is that companies have three options: to pass on the taxes in the form of higher prices; to offset the effect on their margins by employing fewer workers, or paying existing workers lower wages; or by moving to a more tax-friendly domicile.

In short, if a nation raises corporate taxes on "non-captive" manufacturing and service industries, the victimized companies will eventually just leave (and take their jobs and revenues with them).  And I'd be remiss to not mention the embarrassing little fact that the United States has the highest statutory (and effective) tax rate in the industrialized world:

It is simply unfathomable that this chart has nothing to do with the first chart, wouldn't you agree?  But hey:  We're number 1!  We're number... oh, wait.

Second, and on a very related point, the Economist highlights the extreme fallacy that global tax competition starves national budgets of sweet, sweet tax revenue:

Note, by the way, that there is a big difference between tax rates and tax take. The French complain about unfair tax competition from the Irish (the latter have a 12.5% rate) but the Irish actually get a higher proportion of their GDP in tax revenue than the French. And note also that there may not be scope to raise huge amounts from this area, unless you are as lucky as the Norwegians. Even if America were to move to the OECD average, that would only boost the tax take by around 1% of GDP, when the deficit is in double digits.

So much for the pervasive argument from those on the left that America's insane budget problems can be solved by just taxing evil corporations (and rich people), eh?  But here I'm a little confused: despite the great data showing that (i) global tax competition can have dire revenue consequences for countries with itchy taxing fingers; and (ii) lower corporate tax jurisdictions often raise higher amounts of total revenue, not once does the Economist mention the Laffer curve, which posits that higher taxes can (i) reduce work effort, (ii) cause other inefficient distortions, and (iii) reduce the size of the tax base (thus often reducing total tax revenues).  A generic representation of the Laffer curve is as follows:

Higher taxes can cause individual taxpayers to slack off or figure out ways to report less taxable income.  But most people don't make life decisions based only on tax rates, and only the wealthiest folks can up and leave a high-tax jurisdiction (at the national level, that is - New Jersey and Maryland, among others, are losing millionaires by the yacht-load).  Thus, the "tax elasticity" in the individual case is less severe.  Corporations, on the other hand, are far more rational (i.e., driven by the bottom line) and mobile, and they therefore can, and often do, vote with their feet.  The Economist's data make these facts abundantly clear (as do myriad studies on corporate taxes in a modern globalized economy).

I'll leave it to others to question why the Economist didn't bring up the Laffer curve when the evidence so strongly points to it.  Instead, I just have one, more pointed closing question:  Why on earth does the United States have such ridiculously high corporate tax rates?  Is it because we just have too many darn jobs and too much economic growth?  Or is our economy just too darn competitive?

Or is awful ideology standing in the way of obvious and much needed tax reform?

I think the answer there is as obvious as the charts above.

How Government "Investment" and National "Competitiveness" Quickly Turn Into Protectionism

My round-up of State of the Union commentary had a fairly consistent theme: that the President's push for national "competitiveness" and government "investment" was misguided and dangerous because it often lead to anti-market, anti-growth and anti-trade policies.  In a great Forbes op-ed, Art Carden discusses two big problems with these themes:

First, while a group of White House speechwriters apparently thought that “win the future” would have the same rhetorical resonance as “yes we can,” the Address conveyed an incorrect zero-sum worldview in which what others gain comes at our expense. As economics has shown over and over and over and over again, trade creates wealth. Voluntary exchange is a positive-sum game. If China gets richer, it doesn’t imperil our ability to get richer, too.

Second, I have always been struck by how politicians refer to spending programs that almost inevitably turn into special interest bonanzas as “investments.” President Obama exalted the teaching profession, but let’s not be naïve: teachers’ unions are some of the biggest spenders in politics, almost all of their money goes to Democrats, and they fight educational innovations like vouchers and charter schools at almost every turn.

More fundamentally, governments don’t get the kind of feedback on the success or failure of their “investments” that private firms get. Private firms can tell from their profits and losses whether they are creating value. A firm that earns a profit is using resources to produce something that people value more highly than anything else that could be done with those resources. A firm that earns a loss is using resources to produce something that people value less than at least one other thing that could be done with those resources.

Governments respond to political incentives rather than market incentives, and perhaps most importantly, they can’t go out of business. A government can acquire resources. A government can spend money. There is no way to know whether that spending really qualifies as “investment” or not.

Consider biofuels, high-speed rail, and other “green economy” initiatives. I was excited when the President mentioned getting rid of oil subsidies, but my excitement turned to disappointment when he said he wanted to spend more to subsidize things like biofuels and high-speed rail....

I’m extremely skeptical of the government’s ability to make these kinds of “investments” without turning them into massive giveaways to powerful special interests. As Steven Horwitz wrote recently on the prospect of a Libertarian-Progressive alliance, the tendency for government to serve powerful interests is a feature of politics rather than a bug. When we give people the power to rule others, we shouldn’t be surprised that people use that power to benefit themselves and their friends.

I've addressed the first problem that Carden identifies - how an adversarial approach to international economics is wrong and troublesome - many times, and the post-SOTU articles I listed the other day also make this point clear.  I've also briefly addressed the obvious differences between government "investment" and private investment.  So there's no need - for now at least - to elaborate on those points.  On the other hand, Carden's explanation of the pernicious side effects of government "investment" deserves further discussion.  He does a great job laying out how special interests inevitably distort government investment plans, but I think he glosses over perhaps the bigger problem with state meddling in the private sector: it breeds economic nationalism.

As Carden rightly notes, government "investors" (i.e., elected officials subsidizing commercial enterprises with your and my tax dollars) respond to political, rather than market, incentives and can easily throw more money (again, our tax dollars) at a project regardless of the economic return on that investment.  In short, as long as the political returns - be they votes or campaign contributions - remain high, then the government investor has an incentive to keep on investing.  It's this troubling dynamic that has given us more than three decades of government "investment" boondoggles in corn ethanol and other "green" technologies.  (To see just how long we've sucked at "investing" in environmental technologies, Google "carter synfuels" some time.)

At some point, however, the money does run out, and that's where things can get really scary.  As we've learned during the current state and federal budget crises, government funds aren't truly unlimited (thank goodness).  But, even though the state/federal coffers are dry(er), the political incentives remain equally strong - government investors still have a serious political stake (read: re-election) in seeing their investments be successful.  Without a limitless supply of money to throw at a politician's chosen company/industry, he will almost inevitably seek other means to ensure the political returns on his "investments."  And, unlike private investors, he has at his fingertips the full force of the government to improve his investments' prospects should things go sour.

Of course, when it comes to government "investment," things almost always go sour (see above).

So not only do we get bajillions of tax dollars thrown down the toilet for government projects captured by special interest lobbying, but we also get a healthy dose of government coercion to tilt the playing field in those projects' favor.  Sometimes, this coercion rears its head through top-down usage mandates like the gas/ethanol mix.  More often, it appears in the form of economic nationalism - particularly trade protectionism - because in today's global economy eliminating foreign competition is one of the easiest ways to improve your investment's chances.  (See, e.g., the current tariff on sugar ethanol.)  Of course, when a government official can't do that, she can at least blame the foreigners for the failure of her blessed programs and convince the public that "free trade," not her programs, caused all of their economic ills.

And that brings us back to the troubling protectionist implications of the President's repeated calls for more government "investment" during the SOTU.  Henry Payne over at NRO deftly pointed out that Obama's speech closely paralleled that of former Michigan governor Jennifer Granholm back in 2006:

Former Michigan governor Jennifer Granholm has yet to start teaching her new Cal-Berkeley course on green governing — but she already has a devoted student in the White House.

President Obama’s State of the Union speech Tuesday night was eerily similar to the failed economic vision that Granholm laid out in her State of the State address exactly five years ago: It even included her rhetorical ruse substituting “investments” for “spending.”

“If the states are the laboratories of democracy,” Granholm wrote in the Huffington Post last December, “Washington can take a lesson from what is happening in Michigan.” Sadly for the nation, Obama listened to his teacher.

“We need a moon shot,” said Granholm in the Huffington Post. “This is our Sputnik moment,” echoed the president on Tuesday. Granholm envisioned a transformation of Michigan from “Rust Belt to Green Belt” with massive, European-style public investments in infrastructure and alternative energy. “In five years, you’ll be blown away,” she predicted, in what would become her signature line.

It was, in fact, thousands of state jobs that were blown away, as Granholm’s vision diverted pols’ attention from much-needed reforms to the state’s budget and business climate. Since her speech in 2006, the state’s unemployment rate has exploded from 7.4 percent to 11.4.

Now Obama wants to take the Granholm model national. “The 21st Century Jobs Fund [is] the largest investment in diversifying our economy this state has ever seen,” said Granholm in her 2006 SOS. “It’ll create tens of thousands of new jobs. We’ll invest more than $2 billion in public and private funds to develop new sectors of our economy: Advanced manufacturing. Homeland security and defense. Life sciences. Alternative energy.”

“We’ll invest in biomedical research, information technology, and especially clean-energy technology — an investment that will strengthen our security, protect our planet, and create countless new jobs for our people,” mimicked Obama in this year’s SOTU.

Like Granholmnomics, Obamanomics is not only unsustainable — it diverts important investment dollars from the private sector. Welcome to Michigan, America.

What Payne doesn't point out, however, is that the failure of Granholmnomics' state-capitalist model caused her to become one of the loudest protectionists in the country.  As I noted last year, "Michigan Governor Jennifer Granholm went on CNN this morning to discuss President Obama's new trade initiative and to explain away her administration's dreadful, job-killing policies by - you guessed it - scapegoating free trade (start at about 1:00)":



So if/when President Obama's "investments" in green technology and other industries fail (as they probably will), and when the federal budget (and House Republicans) simply can't tolerate even more money being thrown at these failed investments, where will he turn?  Will he cut his losses and admit failure?  Will he force Americans to buy/use these failed products regardless of their economic (and environmental) value?  Or will he blame the country's "adversaries" (i.e., foreign competition) and attempt to erect trade barriers?

According to the "Granholm model," it'll be the last option, and, really, we shouldn't be surprised if/when that happens.  I mean, it's the natural result of an economic model based on national "competitiveness" and government "investment," now isn't it?

UPDATE: Looks like Michigan's new governor is going in a different - and far better - direction.  Good riddance.

SOTU Round-up

There's far too much good commentary on last night's Go America Pep RallyState of the Union Address for me to list it all here, but these are the ones that I liked the best (other than mine, of course):

• Cato's Sallie James briefly explains why the President's "competitiveness" theme is misguided and dangerous.  She even channels the Sane Paul Krugman of Yesteryear ("SPKY"): "When it became clear that President Obama would make 'competitiveness' a theme of his SOTU address, I looked forward to seeing Paul Krugman’s statement pointing out how much nonsense that is. Here he is, after all, in his excellent 1997 book, Pop Internationalism (MIT Press): 'International trade, unlike competition among businesses for a limited market, is not a zero-sum game in which one nation’s gain is another’s loss. It is [a] positive-sum game, which is why the word 'competitiveness' can be dangerously misleading when applied to international trade.' Sure enough, President Obama’s speech last night was peppered with references to 'the competition for jobs,' 'new jobs and industries take root in this country, or somewhere else,' 'the competition for jobs is real,' etc. And of course there was a healthy dose of the usual mercantalist obsession with exports."  I'd only add that this type of "adversary economics" - i.e., discussing the global economy as a war to be won against our trading partners - is nothing new for this President, and I've critiqued it many times on this blog.  No need to do it again tonight, but I'm sure I'll be hitting it again soon.

• Cafe Hayek's Don Boudreaux provides some must-read clarity for those poor, misguided soles out there who thought that Obama's "pro-business" and jibberjabber would be warmly welcomed by those who believe in and support free markets.  My favorite lines: 

"In a free market, businesses profit only by pleasing consumers. But a business that obtains special favors from government can profit without pleasing consumers. And it’s here that trouble starts. Consider Obama’s commitment to make America more 'competitive.' (He used variations of the word 'compete' nine times in his address as part of his argument that American firms and workers are threatened by their foreign counterparts.) 'Competition' sounds good. But businesses don’t like competition; they like protection from competition – along with subsidies, special tax breaks, and other government favors that relieve them from the need to cater energetically to consumer demands. So a pro-business president is prone to curry favor with businesses by shielding them from competition."

"Did you know that in the decade from 2000 through 2009, the total amount of foreign direct investment (FDI) received by China was $686 billion, while the total amount of FDI received by the U.S. was $1.8 trillion – by far the largest inflow of capital from foreigners received by any country on earth? America’s receipt of FDI dollars exceeded China’s by 162 percent. On a per-capita basis, the figure is even greater: The amount of FDI America received per person from 2000 through 2009 was ten times (!) greater than was received by China. So when Obama said in his speech on Tuesday night that 'We need to out-innovate, out-educate, and out-build the rest of the world,' he wrongly implied that America currently doesn’t do so well in the international economy. But it does – which is not to say that there isn’t a lot of room for improvement. The president is correct that tax and regulatory reforms – along with reining in Uncle Sam’s deficit spending – are in order. Especially welcome is his call to lower corporate tax rates. And if calling such reforms 'competitiveness policies' improves their chances of being implemented, I’m all for it. But let’s not be fooled into thinking that America’s current economic troubles are caused by America’s open participation in global trade."

• AEI's Phil Levy succinctly labels it A Disappointing Speech and - gasp! - also channels SPKY: "In advance of the president’s State of the Union speech, I wrote about the need for difficult choices and serious stances on trade and the deficit. I didn’t hear any of that in the address. On trade, the president’s positive agenda was largely limited to endorsing his minor reworking of the three-year-old free trade agreement with Korea. He also mentioned vague plans to rework the Colombia and Panama agreements (after only two years of inaction!). I heard no mention of seeking trade negotiating authority, despite the recent efforts of Senator Rob Portman (R-Ohio) to get it for him. Nor was there any initiative to advance the global trade talks that the president has repeatedly pledged to conclude. Instead, there was an unhelpful jingoistic refrain about international competitiveness and economic threats from abroad (see Paul Krugman for why this is misguided)."

• And speaking of SPKY, since all the cool kids seem to be quoting him, I guess I will too: "The view that nations compete against each other like big corporations has become pervasive among Western elites, many of whom are in the Clinton administration. As a practical matter, however, the doctrine of "competitiveness" is flatly wrong. The world's leading nations are not, to any important degree, in economic competition with each other. Nor can their major economic woes be attributed to "losing" on world markets. This is particularly true in the case of the United States. Yet Clinton's theorists of competitiveness, from Laura D. Andrea Tyson to Robert Reich to Ira Magaziner, make seemingly sophisticated arguments, most of which are supported by careless arithmetic and sloppy research. Competitiveness is a seductive idea, promising easy answers to complex problems. But the result of this obsession is misallocated resources, trade frictions and bad domestic economic policies."  Sadly, that was written in 1994, and SPKY is today little more than a collection of words on the InterTubes.  And even more sadly, our current President, despite all his talk of "winning the future" and dominating the 21st century, is, as deftly pointed out by the AmSpec's Phil Klein sounding a lot like his Democratic predecessor back in 1994.

• Finally, Judy Shelton of the Atlas Economic Research Foundation has an excellent op-ed on the problems with the President's approach to doubling exports and "investing" in the future.  She wisely notes: "The only way to increase real wealth is through productive activity that generates true gains in economic output leading to higher future living standards; if wages are going up while purchasing power is going down due to inflation caused by government deficit spending, the gains are illusory.  If you have faith that America can compete in the global marketplace without resorting to monetary artifice, you will not be quick to embrace a strategy that elevates government industrial policy over private sector decision-making and free-market outcomes."  Exactly.

Christmas Quick Hits

Things are about to get realllly slow in anticipation of the Big Guy's arrival on Saturday, so here's a cavalcade of reading material to tide you over:

• Cato vs. the US Antidumping Law.  Advantage: Cato.

• Rep. Michelle Bachmann (R-MN) comes out swinging against the United States' embarrassing, anti-competitive corporate tax rate.

• The 111th Congress is over, and so is China currency legislation (until the next election season, natch).

• At literally the 11th hour, Congress extended trade benefits for Andean countries and US consumers of goods from those countries.  But by failing to extend the Generalized System of Preferences, Congress screwed over other developing countries and US consumers (who saved $577 million in 2009 due to the program).  Gee thanks, Sen. Sessions.   By the way, be sure to check out that USTR press release: Amb. Kirk talks about import benefits and tariff savings.  Nice!

• Great essay by GMU's Don Boudreaux on tariffs, freedom and that age-old canard that protectionism propelled the US to glorious heights in the late 1800s. 

• Free trade helps ensure peace on earth (and goodwill towards men, I'm sure).

• An excellent defense of those dastardly market speculators.

• And, finally, a Christmas monkey message:

Merry Christmas, everyone.

The Real Enemies of American Business

Ask a lot of American politicians why many US businesses are suffering, and they'll give you some recycled garbage about dirty rotten foreign cheaters and greedy US businessmen who happily outsource American jobs in order to buy a new golden jet.  Ask any (legitimate) small businessman the same question, and you get this:



As I've said a million times on this blog and elsewhere, protectionism sucks not only because it restricts individual liberty, promotes cronyism and harms the US (and global) economy, but also because it retards real policy reforms by allowing smarmy politicians to blame voiceless foreigners for economic problems actually caused by their awful tax and regulatory policies.

Videos like this help shine much-needed light on the fact that America's economic problems lie not in China or India or Mexico, but in Washington, DC and statehouses across the country.  Please share it with everyone you know, because the more attention that it gets, the quicker it'll be the political scapegoaters, not American workers, out of a job.

Monday Quick Hits

Lots of interesting links over the last few days, so let's get right to 'em:

• Lifelong Democrat laments his party's anti-innovation agenda.

• WSJ's Strassel: why the GOP needs to take on the government's misguided "green energy" movement.

• AEI's Nick Schulz on why a revised American immigration policy must be a central feature of its future competitiveness policy.

• Korean negotiators to their US counterparts: "Hey, if you guys want to re-open the KORUS FTA for autos and beef, then we'd like to re-visit some of your most important/untouchable issues."

• Not all Dems are against free trade and American competitiveness; unfortunately, this important Dem isn't, you know, an elected official anymore.

• Don Boudreaux quickly explains the illogic of mercantilism.

• Russ Roberts so wants to explain the problems with Ben Bernanke's recent China criticisms that he's willing to give away part of his new book for free.

Now, if you'll excuse me, I need to get back to my intense turkey-ingestion training regimen.

A Big Reason Why Politicians Attack "Outsourcing"

Many campaigning politicians love to blame "outsourcing" for the woes of the US job market, and to brand their opponents as supporting policies - like US FTAs and blanket opposition to tax hikes on US multinational corporations - that "send American jobs overseas."  Indeed, the "outsourcing" bogeyman has become an express part of the Democratic Party's "Make It in America" campaign platform, and "pro-outsourcing" accusations are a staple of Democrats' campaign advertisements for the 2010 mid-term elections.

Now, there are plenty of economic and historical facts undermining these politicians' anti-outsourcing demagoguery - something that Democrats themselves have recently admitted.  And these same Democrats have also acknowledged that one of their primary motivations for pushing the outsourcing meme - despite its, ahem, factual limitations - is because the issue polls well (i.e., most Americans are scared of, and/or confused about, outsourcing).

But that's not the only reason our elected officials like to blame outsourcing for the troubled American economy.  Indeed, as today's IBD editorial demonstrates, pols also like to focus on offshoring because it diverts voters' attention away from what actually causes American companies to move offshore: a startling decline in the American economy's global competitiveness caused by our elected officials' awful tax and regulatory policies.  IBD makes this clear in its comparison of Sen. Barbara Boxer's (D-CA) attempts to tar her opponent, Carly Fiorina, as a dirty rotten outsourcer with Boxer's actual record of uniform support for policies that destroy American companies' ability to compete in the global economy.  Among Boxer's biggest "job-killing votes":

The corporate tax. Boxer claimed in Wednesday's debate that she wants to "incentivize" U.S. companies not to ship jobs overseas. Maybe she was referring to her yes vote on S. 3816, which ends the tax deferral for multinational firms. The idea was to hike taxes on companies' overseas operations so they would hire more here. Instead, we've "incentivized" companies to move headquarters and jobs to low-tax countries. Even the Democrat-led Senate knew it was a job killer. Boxer didn't.

Free trade. In the debate, Boxer patronizingly said Mexico was important to California because it was a top trading partner. No kidding. California's economy is steeped in foreign trade, accounting for 11.4% of U.S. exports, which underperforms its 14% slice of the economy.

Maybe that's because Boxer has steadfastly kept California out of foreign trade. She opposed NAFTA with Mexico and Canada in 1993 and continues to oppose all free trade. She voted no on trade deals with some of the state's most logical, natural trading partners — Singapore, Chile, Peru, the Dominican Republic, El Salvador, Honduras, Guatemala and Costa Rica, to name a few.

In last year's supplemental stimulus package she voted to shut Mexican trucks out of the U.S., a move that so angered Mexico it imposed retaliatory tariffs on states like California because of her stance. Even today, Boxer opposes selling her state's goods tariff-free in new markets like Colombia, Panama and Korea.

Radical environmentalism. Boxer says her top priority is cap-and-trade legislation, an energy tax that would saddle California's businesses with high costs based on questionable science. California will pay for this in thousands of lost jobs and billions of dollars of investment that will move to friendlier states and countries.

Boxer also opposes offshore drilling on environmental grounds — and the jobs it would create. Fiorina "stands with Big Oil; she doesn't stand with the people of California," Boxer declared, not getting that Big Oil and its suppliers could provide 70,000 new and well-paid jobs for her state if it could drill from the vast 10.5 billion barrels of oil reserves sitting idle off California's coast.

Worst of all, Boxer has declined to waive the Endangered Species Act against California's own breadbasket, the Central Valley. She approved a waiver for a similar case in New Mexico, but denied it to California. Fiorina condemned Boxer's callous indifference, pointing out that "a nameless, faceless bureaucrat decided the smelt was endangered" and 90,000 jobs were lost.

As water was cut to the southwest Central Valley in 2007, unemployment rates rose above 16% in Fresno and as high as 40% in Mendota; agricultural operations fled to Mexico. Mendota's jobless farmworkers were reduced to accepting charity food from China — outsourcing that came because of Boxer's vote.

One big thing that IBD failed to mention (although with a competitiveness-killing laundry list like that, maybe they just ran out of space) was Boxer's vote for ObamaCare.  As I've noted several times, that law's new tax burdens on American businesses, when coupled with the fact that we already have the world's second-highest corporate tax rate, are a recipe for the further erosion of these businesses' global competitiveness and the loss of companies and jobs to an increasing number of countries that understand simple economics and have thus adopted more business-friendly tax and regulatory policies.

In short, Boxer and her buddies in Congress have squeezed the US economy as hard as they can, and they then have the audacity to complain when American jobs and companies overflow to other, less-pressurized markets.  They refuse to acknowledge that their hyper-aggressive tax and regulatory actions have caused these natural, opposite reactions, and they instead propose physics-defying ways to "seal" the economy (through protectionism) that either are totally unworkable or exacerbate the job/company-losses they're allegedly trying to stop.

It'd be funny if it weren't so darn devastating for the US economy.

But, hey, maybe Sen. Boxer and her buddies will learn this simple lesson when American voters outsource their jobs to more qualified candidates.

Awesome: The Daily Show on Unions, Hypocrisy and Competitiveness

Once again the folks at The Daily Show convey in one 5-minute skit what I couldn't do in 30 blogposts:

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Working Stiffed
www.thedailyshow.com
Daily Show Full Episodes Political Humor Tea Party

I'll again be the stick-in-the-mud and mention that this great skit, while certainly hilarious, also provides several fine examples of things that I've been trying to explain here for a while now:

• Most obviously, unions are self-interested organizations that, contrary to their statements about "greed" or "fairness" or "sticking up for the common worker," are readily willing to jettison their alleged principles when they don't benefit the union.  We've recently seen this union hypocrisy on the trade front, as the United Steelworkers loudly complained about Chinese "green energy" subsidies while conveniently forgetting to mention the billions than Uncle Sam has sent their way.

• Perhaps more interestingly, however, is that when push comes to shove, unions are rational employers that respond to market realities rather than vague concepts like "fairness."  This fact is made clear by the frank admissions of the UFCW's (rather unwitting) leader, Mike Gittings, about why they have hired temporary, non-union workers (and have given them part-time hours and no benefits) to protest Wal-Mart (starting at about 3:55): "Our union members are working.... We don't have union members that are able to go down there on a daily basis.... The alternative to the way that we do it would be to not do it...  We're doing the best we can with our limited resources..."  In short, the UFCW, as an employer without magically unlimited resources, is responding to market realities about its labor needs and costs, and if it adopted a "fairer" approach, simply wouldn't be able to hire ANYONE and thus would have to get out of the protesting business altogether.

• And thus brings us to our last lesson: the result of non-market demands on American employers erodes their global competitiveness and leads to their (a) going out of business in the face of foreign competition; or (b) offshoring of their labor force or hiring of illegal, off-book workers.  Don't believe me that a zany comedy show like TDS is providing this final lesson?  Well, check out correspondent Aasif Mandvi's "solution" to getting the "protesters" he needs at the right (non-government-mandated) price: picking up illegals to do the job.  In fact, Stewart rather coyly introduces the whole skit with an aside about "The American labor movement, sometimes criticized for driving jobs overseas with some outdated demands...."  Pretty clever, eh?  Yet labor unions don't recognize these obvious economic realities and instead choose to blame free trade for offshoring and job losses rather than look in the mirror.  And unfortunately, that's no laughing matter.

Considering that the union's behavior here - treating its own employees far more shabbily than the businesses it routinely demonizes - is hardly an isolated occurrence, these three lessons are broadly applicable.  So hopefully the millions of youngsters who watch The Daily Show instead of the real news absorbed the message.  

I'm not holding my breath, but a guy can dream.

On Global Competitiveness, Investment and Jobs

Dismal news arrived last week from the World Economic Forum: the United States has dropped from second to fourth place on the WEF's Global Competitiveness Report 2010-11 - a comprehensive annual survey of public data and the opinions of the world's top business executives.  The report explains why the US dropped (emphasis mine):

The United States continues the decline that began last year, falling two more places to 4th position. While many structural features that make its economy extremely productive, a number of escalating weaknesses have lowered the US ranking over the past two years.

US companies are highly sophisticated and innovative, supported by an excellent university system that collaborates strongly with the business sector in R&D. Combined with the scale opportunities afforded by the sheer size of its domestic economy—the largest in the
world by far—these qualities continue to make the United States very competitive.  Labor markets are ranked 4th, characterized by the ease and affordability of hiring workers and significant wage flexibility.

On the other hand, there are some weaknesses in particular areas that have deepened since our last assessment.  The evaluation of institutions has continued to decline, falling from 34th to 40th this year.  The public does not demonstrate strong trust of politicians (54th), and the business community remains concerned about the government’s ability to maintain arms-length relationships with the private sector (55th) and considers that the government spends its resources relatively wastefully (68th). There is also increasing concern related to the functioning of private institutions, with a measurable weakening of the assessment of auditing and reporting standards (down from 39th last year to 55th this year), as well as corporate ethics (down from 22nd to 30th). Measures of financial market development have also continued to decline, dropping from 9th two years ago to 31st overall this year in that pillar.

A lack of macroeconomic stability continues to be the United States’ greatest area of weakness (ranked 87th). Prior to the crisis, the United States had been building up large macroeconomic imbalances, with repeated fiscal deficits leading to burgeoning levels of public indebtedness; this has been exacerbated by significant stimulus spending. In this context it is clear that mapping out a clear exit strategy will be an important step in reinforcing the country’s competitiveness going into the future.

Unfortunately, it gets worse.  Not mentioned in the WEF report, but shown in the accompanying US factsheet, are the horrible United States' rankings in "burden of government regulation" (49th) and "transparency in government policymaking" (41st).   According to the Washington Post, these regulatory burdens, along with access to credit, were the top problems that global CEOs see in the US today.  Not good.

Of course, anyone who regularly follows this blog already knows that bad US government regulation and regulatory uncertainty, particularly the new (and often unknown) burdens of ObamaCare and Financial Regulatory Reform, are doing a number on American businesses' ability to compete in the global economy.   But it's certainly not just ObamaCare that's salting the regulatory earth here in the USA.  Indeed, just last week the Post wrote about how draconian environmental regulations have all but extinguished domestic manufacturing of the incandescent lightbulb and the jobs that go with it:

The last major GE factory making ordinary incandescent light bulbs in the United States is closing this month, marking a small, sad exit for a product and company that can trace their roots to Thomas Alva Edison's innovations in the 1870s.

The remaining 200 workers at the plant here will lose their jobs.

"Now what're we going to do?" said Toby Savolainen, 49, who like many others worked for decades at the factory, making bulbs now deemed wasteful.

During the recession, political and business leaders have held out the promise that American advances, particularly in green technology, might stem the decades-long decline in U.S. manufacturing jobs. But as the lighting industry shows, even when the government pushes companies toward environmental innovations and Americans come up with them, the manufacture of the next generation technology can still end up overseas.

What made the plant here vulnerable is, in part, a 2007 energy conservation measure passed by Congress that set standards essentially banning ordinary incandescents by 2014. The law will force millions of American households to switch to more efficient bulbs.

The resulting savings in energy and greenhouse-gas emissions are expected to be immense. But the move also had unintended consequences.

Rather than setting off a boom in the U.S. manufacture of replacement lights, the leading replacement lights are compact fluorescents, or CFLs, which are made almost entirely overseas, mostly in China.

Consisting of glass tubes twisted into a spiral, they require more hand labor, which is cheaper there. So though they were first developed by American engineers in the 1970s, none of the major brands make CFLs in the United States.

Another big problem, as highlighted by Ed Morrissey over at HotAir, is the distressing fact that the United States has dropped to 40th(!) place on protecting basic property rights:

If readers aren’t stunned by the nations listed, then they’ll be stunned by the length of the list, at least. No one will be terribly put out to see Canada (10), Austria (9), or Switzerland (1) ahead of the US. But what about Saudi Arabia (28)? China (38)? Jordan (30)? The US got edged out by Gambia, which relies on foreign aid to deal with high unemployment and underemployment, according to the CIA factbook.

If we want to improve our economy, we need to improve our competitiveness. If we want to improve competitiveness, we need to protect property rights and get the federal government out of the redistribution business. Property rights are the first rights mentioned in the Constitution (Article I, Section 8) for a reason. It’s the basis of prosperity and opportunity, and also the basis of a free, self-governing people. Falling behind China in property rights should be a national embarrassment, and a reminder of just how far we have traveled from our founding principles. And that journey didn’t start with Barack Obama, even if he’s been busy hitting the accelerator.

Everything Morrissey says is definitely correct, but he misses a more basic point that is, I think, most important for the present competitiveness discussion (the whole point of WEF survey, afterall): why regulatory burdens and ineffective protection of property rights hinder a nation's global competitiveness and, even more broadly, why declining competitiveness is even a problem.  Fortunately, the answers to both of these questions are actually pretty simple, especially when you consider the folks who form the basis of the WEF's survey - global business leaders.  You see, it's these guys (and gals) who make the really big and tough decisions about where to invest their companies' (and shareholders') money in things like factories or banks or tanning salons or... well, you get the idea.  Coming to that decision is no easy task, and CEOs have a fiduciary duty to their shareholders (read: you and me) to make the best decision possible based on all possible facts - a calculus which includes, among many factors, the likelihood that the host government is going to interfere in, and thus diminish or destroy, the value of that investment after it's been made.

And, of course, an unlimited, overburdensome, opaque and/or uncertain regulatory environment is a very big "minus" in that calculus.  For example, who would want to spend a billion dollars on a steel plant if there's a reasonable chance that the domestic government might pass some crazy regulation that would make steel production at that plant impossibly expensive (or outright illegal)?  Or who would want spend another billion to buy land or mineral rights in a country whose leader might suddenly decide that the land and all its minerals belong to his croniesthe People?  The answer: nobody, and it's for these reasons that the very first pillar of the WEF's competitiveness analysis is "institutions" (and its 21 subcategories!).

In these examples we also see one of the biggest reasons why the rapid decline in a nation's global competitiveness is a big problem - it discourages domestic and foreign investment in the declining country, and thus curtails economic activity and new jobs.  And that's why the United States' decline in the aforementioned competitiveness categories is so alarming.

These problems are also a big reason why governments and corporations have developed modern global investment rules - to limit the potential for government intrusion in their lawful investments.  As I said the other day:

FTA investment provisions... are actually designed to encourage mutual investment in FTA partner countries - i.e., to help the countries give each other money for silly things like factories and jobs - by providing certain basic protections for that investment. And against what exactly are these rules protecting, you ask? Well, for one, they help discourage guys like Hugo Chavez from forcibly taking the land or facilities that a foreign company has fairly purchased because those rules would obligate ol' Hugo to compensate the company in the amount of its stolen investment. The horror! These rules also prevent governments from passing protectionist laws that will harm an FTA partner company's investment where the company proves that those laws are actually disguised restrictions on trade or violate due process. For example, if American ScottCo buys a Mexican widget factory and then Mexico passes a "health regulation" prohibiting the domestic use of only ScottCo widgets (but not Mexican widgets), Mexico would have to compensate ScottCo where the company showed that the Mexican regulation had no rational, scientific basis. And, of course, by seeing this type of sane, rules-based investment protection, companies like ScottCo are more inclined to invest in Mexico in the first place.

Now, I'd never attempt to claim that global investment rules are perfect or that they don't occasionally produce some odd, even unseemly, disputes (as I noted in the comments to my post above).  Such criticism is entirely fair.  But to claim, as some folks seem to do, that global investment protections don't help encourage foreign investment (and thus job creation) by limiting naughty governments' ability to thwart that investment is to completely ignore reality and surveys of actual business decision-making like the WEF's.  Does anyone really think that, if the United States had a long history of confiscating foreign (or domestic) investors' property or whimsically regulating them out of existence (and no limits on its power to do these troubling things), Toyota would have decided to invest $1.3 billion in a new automobile factory in Mississippi (2000 new jobs), or Germany's ThyssenKrupp would have invested almost $5 billion in a new stainless steel plant in Alabama (2700 new jobs)?

Of course they wouldn't, and the struggling American workforce be almost 5000 jobs smaller (not to mention all the indirect jobs created from these investments).

Now, the United States has (had?) a longstanding history of reasonably sound domestic regulation and basic property rights protections (among other things), so the external limits on government meddling imposed by international investment treaties are the icing, rather than the cake, for foreign investors deciding whether to invest in the US market.  But plenty of other, especially developing, countries don't have this history, and often don't even have a short history of peaceful, seamless transfer of power.  So by providing an external check on these big institutional risks, investment treaties provide a small "plus" in that aforementioned CEO calculus about where and whether to invest that shareholder money.  In short, by limiting governments' ability to infringe on foreign investment, no matter how big or small, these treaties enhance the countries' global competitiveness and ability to attract that investment.  They provide a small bit of clarity and consistency - an absolute imperative for investment (and law) - where little if any exists.  And that environment benefits everyone, particularly those workers whose jobs result from that new investment.

Now if only the US government would remember these lessons.