Politics vs. Policy

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Our founders created a system of limited government to minimize our dependence on Washington. They were pragmatic, but they never intended that policy be dictated by politics. Things have changed. With a national debt of $22 trillion, unfunded liabilities exceeding $200 trillion, and U.S. troops stationed all around the world, separating politics from policy is all but impossible. We hear lots of calls for “the other side to rise above politics and do what’s right for the country,” but this rarely happens. President Trump’s address to the nation on illegal immigration (and the Democrat response) illustrate this point.

The Democrats claim that Trump is manufacturing a crisis. I don’t agree. To be fair, one could argue that problems at the southern border are not as dire as he claims, but it’s difficult to find anyone on the left actually making the case. I see the same politicians who supported physical barriers to boost border security in the past now claim that such structures are immoral, ineffective, and a waste of resources. Their position changed once Trump adopted “the wall” as a central part of his campaign in 2016. Rather than engaging in a serious debate about borders and policy, they seem focused on the 2020 election.

Past Presidents and Congresses have refused to tackle illegal immigration for years, lest they battle corporate interests, offend activists, or be tagged as racists. I give the President credit for attempting to resolve it. Trump makes a similar argument about intellectual property, state-owned enterprises (SOEs), and other trade concerns with China. Agree or disagree with his approach, he’s being proactive.

Illegal immigration is a complex issue, but unlike many issues debated in Washington, our government has a Constitutional responsibility to address it. There is no perfect solution, but it’s inexcusable that our leaders can’t seem to make any progress.

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Facebook’s dubious commitment to privacy

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Facebook founder and CEO Mark Zuckerberg has received constant criticism for his condescending view of consumer privacy. As reported in the Wall Street Journal, the U.K. Parliament last week released a trove of internal Facebook emails that suggested the tech giant provided special access to user data to certain third-party developers. Several years prior, the company even considered charging developers for such access. Such a policy would probably be legal—as long as users accept the terms—but considering one suggests a lack of genuine commitment to Facebook’s longstanding “policy” of not selling users’ personal information.

But there’s more. In an October 2012 email, Zuckerberg questioned, “I think we can leak info to developers, but I just can’t think of any instance where that data has leaked from developer to developer and caused a real issue for us. Do you have examples of this?” Stop and read this quote again. Zuckerberg is downplaying the potential adverse effects that data leaks can have on the company. Where is his concern for the effects data leaks can have on consumers?

An internal memo from 2014 also suggested that Zuckerberg maintained “a small list of strategic competitors” that could not access some services available to other developers. During a 2013 online chat, Facebook’s Justin Osofsky referenced Vine, a Twitter feature that lets users make six-second videos. Facebook allowed Vine’s users to find their friends via Facebook, but Osofsky objected, stating, “Unless anyone raises objections, we will shut down their friends’ API [application programming interface] access today…We’ve prepared PR [public relations].” Zuckerberg responded, “Yup, go for it.”

I’m not criticizing Facebook for the hard-nosed competitive tactics Osofsky suggested, but it’s just not consistent with Zuckerberg’s public statements. I’m getting tired of Zuckerberg’s posturing about Facebook’s commitment to privacy, access, and openness to others on the Web. The U.K. documents provide strong evidence that contrary to company statements, Facebook’s commitment to privacy has always been negotiable. Zuckerberg’s “don’t worry about your data” assurance to consumers has attracted them in great numbers over the years. The truth may be out now, but unfortunately, it’s too late for the globe’s 2+ billion users who trusted Facebook from the start and cannot simply retrieve their data and sign off.

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Amazon’s Headquarter Decision

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I addressed Amazon’s new $15 minimum wage in my last 2 posts. After attributing the wage hike to the firm’s commitment to social responsibility, CEO Jeff Bezos announced plans to lobby Washington to require his competitors to pay $15 as well.

Last week, Amazon announced its plans to build two new headquarters in Long Island and Crystal City (Virginia) after extracting multi-billion-dollar packages from each in direct payments, tax incentives, and other support. Both cities will be “investing” taxpayer funds in exchange for Amazon’s promise of economic development. Unlike Amazon’s new minimum wage, Bezos is not insisting that his rivals receive the same government handouts. It would be equally difficult to claim that the location decision had anything to do with “social responsibility.” Apparently, Amazon passed on Detroit and El Paso.

To be fair, this type of corporate collusion with state and local governments is not illegal. Amazon is not the first company to secure handouts, which come from both Democrats and Republicans. Taiwanese electronics manufacturer Foxconn recently received $4 billion from Wisconsin to build a new plant there. Outgoing Republican Governor Scott Walker spearheaded the deal.

But make no mistake, this is pure cronyism. When politicians make these deals, they curry favor with some voters at the expense of all taxpayers. In the instance of Amazon, local and state governments transferred tax revenues actually levied on some of Amazon’s competitors to lure the company to the region. Politicians claim that the benefits from economic development spurred by companies like Amazon will justify the “investments.” This could be true in some instances, but governments at all levels have a dismal record in the investment arena and shouldn’t be involved in such activity anyway. Politicians are famous for underestimating costs and overstating benefits of government outlays; just look at the national debt if this isn’t obvious.

Amazon’s toadies cheered when the company raised its wages for competitive reasons, while the company claimed virtue points and insisted that others follow suit. Perhaps they can justify the billions Amazon will get from taxpayers to locate facilities in two of the wealthiest cities in the US.

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Amazon’s New Minimum Wage- Part II

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Amazon’s minimum wage is now $15 per hour. CEO Jeff Bezos says the change is all about “doing the right thing,” but he also wants government to mandate the company’s new minimum wage to his competitors. I questioned his motives in my last post, but a colleague vehemently disagreed. She insisted that “companies need to be responsive to social change and their stated intentions should be taken at face value.” I don’t think she is seeing the big picture.

Earlier this year, the Seattle city council unanimously passed a measure requiring companies with revenues in excess of $20 million to pay an annual $275 tax per employee to fund “affordable housing” efforts. Amazon (and other large companies) vigorously opposed the tax and the council rescinded it the following month. Supporters assumed that companies like Amazon would simply comply, lest they be scorned for condoning homelessness. They were wrong, and Amazon was justified in its response. Bezos later tweeted a $2 billion pledge to fight homelessness by supporting efforts by nonprofits, not the city’s tax scheme.

At first glance, it appears contradictory that Bezos did not trust Seattle’s local government’s ability to use tax funds properly to address the homeless problem, but does trust government to fight poverty by mandating a higher minimum wage. Indeed, Bezos is correct not to oppose Seattle’s money grab to subsidize housing. Private sector efforts are much more effective at combatting the problem. If you need evidence, consider the longstanding rent control debacle in New York.

I’m not convinced Bezos really thinks that really thinks a higher (government-mandated) minimum wage will improve conditions for those in poverty. Most minimum wage workers aren’t the primary breadwinners in their families anyway, and requiring employers to pay above-market wages encourages them to hire fewer workers. But Bezos has two reasons to campaign for a higher (government) minimum wage. It’s a virtue signal that Amazon “really cares” about the poor, and it would also create a burden to current and potential competitors by requiring them to match Amazon’s pay level.

The same media pundits who criticize “big oil” for “deceiving” the public about climate change seem willing to accept Amazon’s support for an increase in the federal minimum wage without questioning the motives. They should apply a simple standard. Amazon and other firms should be permitted to set wages and make other strategic decisions without government interference, but they should be criticized when they lobby for government intervention that restricts competitors from doing the same.

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Amazon’s New Minimum Wage

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Effective November 1, Amazon will pay all of its employees a minimum of $15 per hour. According to CEO Jeff Bezos, “We listened to our critics, thought hard about what we wanted to do, and decided we want to lead. We’re excited about this change and encourage our competitors and other large employers to join us.” Bezos also said he will campaign for a higher federal minimum wage as well.

Many in the establishment media applauded Bezos’ “leadership” on the issue. Of course, higher wages are always welcome when they are not mandated by government. But I’m much more critical of Amazon.

Bezos claims that the decision emanated from serious contemplation about “doing the right thing.” But the U.S. economy is strong, unemployment is down, the number of unfilled jobs has increased substantially, and the Christmas shopping season is around the corner. Amazon had to address the wage issue for competitive reasons. This was an economic decision. All the talk about “wanting to lead” is dribble.

If you think I’m too hard on Amazon, consider that he is now campaigning for a higher mandated minimum wage. Lest you think this is out of a sense of “social responsibility,” recall that this political effort comes after Amazon announced its own plans to raise wages. Bezos is simply mandating that his competitors be required to do what he has now determined is best for Amazon. Why can’t other retailers make their own decisions about wages? If Walmart decides to start its workers at $18, should politicians mandate that Amazon do the same?

Amazon has grown exponentially because Bezos had the opportunity to chart a different course for the company without undue interference from Washington. But now that Amazon is better able to absorb the costs of a higher minimum wage and other political mandates, his tune has changed. It’s time to cut through executive doubletalk like this. Bezos should have the freedom to run Amazon the way he sees fit, but he should respect the rights of his competitors to do the same.

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Trade: The View from China

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I just returned from an 11-day visit in Beijing. This time I expected to hear a lot about the ongoing trade dispute between China and the US, as business between the two countries is always a hot topic. I had several interesting discussions, but heard a lot less than I expected. The graduate business students I taught knew surprisingly little about it and were largely unconcerned. It was clear that the ongoing dispute is being downplayed in the Chinese media.

There was some coverage, however. Reports on government-controlled CCTV (in English) featured select US economists chastising the Trump administration for instituting tariffs with no mention of closed markets, currency manipulation, or intellectual property. CNN’s international network was the only other English option in my hotel. Not surprisingly, most of its US coverage was negative or neutral, portraying President Trump as an uninformed, protectionist leader largely opposed by most Americans. The CCTV/CNN narrative is clear: China wants free trade while the US seeks protectionism.

It is possible to learn more about the official US position on trade, but not easy. Various US news sources (including Fox News) are available online, but many such as the Wall Street Journal are blocked in China. Media outlets are controlled by the state and commonly air comments from US politicians and business leaders who agree with the official Chinese position on an issue.

Of course, the contrast in China between our current and most recent presidents is stark. Barack Obama is widely revered in China; “Maobama” t-shirts with a picture of Obama wearing a Chinese star cap were widely seen throughout Beijing during his presidency. I didn’t see any t-shirts featuring President Trump. He is not popular, but most of the Chinese I talked with criticized his “attitude,” not policy. In fact, I raised some issues related to trade fairness with one manager and was not rebuked. The manager said he wasn’t familiar with Chinese exchange rate policy or disparate restrictions on foreign companies.

The ongoing argument is really about leveling the playing field, not the merits of free trade per se. In fact, most US economists across the political spectrum acknowledge the economic importance of global trade. Ironically, the Chinese and US media are portraying President Trump—not the Chinese—as the anti-market villain while few Americans and even fewer Chinese appear to know much about the underpinnings of China-US trade. It’s time to have a real debate on the topic.

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Jack Ma & China-US Trade

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Jack Ma is chairman on Alibaba, China’s version of Amazon. He is one of the wealthiest and most influential business executives in China and across the globe. At the World Artificial Intelligence Conference in Shanghai earlier this week, he argued for a clear demarcation between firms and governments. “I personally think that the government has to do what the government should do, and that companies do what companies should do…Protecting the backward forces who are crying out loud will be the most important factor in destroying innovation” (source: Wall Street Journal).

Ma’s comments are welcome in a world where US and European executives often hesitate to defend free markets, development, and even their own firms. Ma’s case for markets is clear, rational, common sense. There is a regulatory role for government, but it should be limited. Firms—not governments—create new products and services, hire and pay employees, and promote economic development. Protectionism cements the status quo and should be rejected.

Ma’s comments have direct relevance to the ongoing US-China trade squabble. Intellectual property, currency devaluations, and limits to American firms operating in China are legitimate US concerns. Governments should secure and enforce intellectual property rights so firms can invest in discovery without fear of well-capitalized free riders copying and monetizing their innovations. But governments should not manipulate exchange rates and arbitrarily prop up some products at the expense of others when they do so. Dollar and yuan valuations would adjust appropriately on their own if left to global traders.

Of course, excessive government intervention into business activity is not restricted to China. Federal, state and local governments in the US collude with cronies in the business community to create subsidies and restrict innovation as well. Markets are freer in the US than in China, but it is fair for China to insist on a level playing field in both countries as well. In this instance, level should be less government control and influence across the board, not more.

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Why is the economy growing?

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The US economy is heating up. Trump supporters credit the President for the growth, while many on the left struggle to accept, understand, and explain a turnaround they claimed we’d never see. In fact, many Trump detractors predicted a stock market crash and a deep global recession shortly after the election. President Trump deserves some credit, but the situation is a bit more complicated. There are three things to keep in mind going forward.

  1. Don’t get confused about trade restrictions. From an economic perspective, tariffs always impede growth by increasing prices. Some protectionists are actually claiming that current economic growth is evidence that “tariffs are working.” The direct impact of tariffs is—and always is—negative but is currently of modest consequence given policy improvements in tax, regulation, and other arenas. Tariffs and threats of tariffs might be effective negotiating tools with China, but they don’t promote economic growth. Reducing and eliminating tariffs across the board should be the end game and will drive long-term prosperity.
  2. Cronyism is alive and well. I’m all for “draining the swamp,” but there’s a long way to go and a right way to do it. Consider Tesla. Elon Musk’s ongoing extraction of billions in taxpayer subsidies requires support from our politicians. The recent tax reform passed by Congress made some incremental improvements, but the current tax code remains a redistribution haven for those seeking to circumvent market discipline. There is still a shortage of courage and political will in Washington.
  3. President Trump had an easy act to follow. President Obama abandoned the idea of economic growth early on and was intent on demonizing business and expanding wealth redistribution for eight years. President Trump and Republican majorities in the House and Senate have delivered a renewed outlook and a number of better policies. The change has been welcome, but I’m convinced the economy would have improved even if the Republicans had done nothing. Put another way, the current growth is less about Republicans in power and more about Democrats out of power.

I’ll repeat: The President deserves some credit, but let’s no go overboard. The real test is ahead of us. Economic growth increases the tax coffers and creates political opportunities to fix long-term fiscal problems. Downsizing the welfare state isn’t so threatening when 401k accounts are growing and jobs are plentiful, but doing so still requires courage. We’re not there yet.

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Incentives matter

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Much of what we see in the business and political worlds can be explained by incentives. When companies, politicians, and governments create the wrong incentives, bad things happen. Consider the following example at Uber as reported in Tuesday’s Wall Street Journal:

Unlike taxis, ride-hauling services like Uber charge fixed fares to passengers based primarily on the projected distance they will travel, not the actual distance they ride. Uber encourages drivers to take the most direct route, but they are compensated based on actual mileage, incentivizing them to take longer routes at company expense. Out-of-town passengers usually have no incentive to pay attention. The practice, known as longhauling, is clearly unethical. Nonetheless, company policy encourages it, creating what economists call a “perverse incentive.” We should not be surprised when this happens.

Of course, there is a logical reason for compensating drivers based on actual mileage. They know the conditions on the ground and should be free to select the best routes for their customers even if it means deviating from the route recommended by navigation. But this post is not about Uber’s policy; it’s about the role of incentives.

This type of incentive problem is not unique to Uber. When a company reimburses travel expenses without tight controls, employees are more likely to stay at expensive hotels and eat well while on the road. When a government employs a voluntary income tax, individuals are more likely to fudge on the numbers. When EMPTALA guarantees emergency room treatment regardless of one’s ability to pay, some Americans will not pass on health insurance, take their chances, and just ignore the bills if they get sick. The list of examples in business and government is endless. Empirical evidence helps us understand the scope of these problems after the fact, but many of them could have been minimized or avoided altogether by considering the incentives in advance.

Many of these incentive problems occur because policymakers assume that people will overlook a perverse incentive and “do the right thing.” I’m not a cynical person, but this is usually folly. Consider the 2008 financial crisis. Politicians blamed lenders for issuing questionable loans—which some did—but they were simply gaming the system government created.

When it comes to economic policy, bad incentives usually come from government intervention. Free markets promote their own incentives, usually healthy ones, with limited or no government oversight. Companies that deliver better products at lower prices are more likely to succeed, while those that do not serve their customers well will eventually fail. Well-intentioned government schemes designed to aid the poor, clean up the environment, or promote other social objectives usually limit customer choice and favor large companies that can afford the compliance costs.

Incentives matter.

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Resolving Trade Disputes: Policy vs. Strategy

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I’ve lost track of the number of times a likeminded free-marketer has chastised me for failing to oppose President Trump’s approach to trade and tariffs. The exchange usually goes something like this:

Other person: Trump says we should “put workers first” and raise tariffs to reduce the trade deficit. How can you possibly support that as economic policy?

Me: I don’t.

Other person: Then why do you support his tariffs? Remember Smoot-Hawley? Don’t you know they will start a trade war and nobody will win?

Me: So, what should we do about unfair trade practices like higher tariffs from our trading partners, China’s requirement that many US firms partner with Chinese companies in order to compete there, or China’s inability to enforce intellectual property rights?

Other person: We should resolve these issues at the negotiating table.

Me: We have been trying to do so for years, but it’s not working.

Other person: Perhaps, but we should still negotiate. We shouldn’t start a trade war over it.

I’ve been searching for a simple way to explain my position in conversations such as these. I think it can be summed up by policy vs. strategy. Free trade is the best friend of workers, consumers, businesses, and even politicians. I do not support tariffs as economic policy, but that doesn’t mean I can’t support them as political strategy.

It should be obvious that “free trade” isn’t currently a two-way street. Many of our trading partners employ restrictive trade policies that they would find unacceptable from the US. China is the most obvious example. US action can evoke retaliation and ramp up a trade war, but the battle has already started.

Some business leaders and economists correctly note that the current arrangement is still a net benefit to the US and should be allowed to fix itself slowly over time. Others agree that “something should be done” but seem afraid to take any action. The first group is engaged in wishful thinking, while the second group does not appreciate the difference between policy and strategy.

Most of our trading partners benefit from the current system and will not change course unless they are forced to do so. The existing rules have been accepted for years, so why change now? The only way to make real progress at the negotiating table is to impose tariffs and other restrictions as bargaining chips on the US side. It will require some short-term pain, but it’s the only option that works. What are the alternatives?

The US is in a strong economic bargaining position now relative to countries like China, so I believe the odds of getting an acceptable deal soon are good. If not now, when?

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