Browsing the archives for the Uncategorized category.

The Argument for Tariffs on Mexico

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President Trump surprised just about everyone when he threatened to tariff Mexican imports at a rate reaching 25% by October unless they do more to halt the flow of illegal immigrants. The President was criticized harshly and immediately by leaders of both parties. The US Chamber of Commerce even threatened legal action to block the tariffs.

Trump’s critics are correct on economic grounds. Tariffs are simply taxes that increase prices and limit consumer choices. A 25% tariff would be crippling to firms in auto and other industries with strong ties to Mexico. Moreover, strengthening economic ties with our Mexican neighbors could add leverage to negotiations with the Chinese. There are lots of good reasons to avoid the tariffs. The President clearly understands the importance of North American trade or he would not have negotiated the USMCA.

But there’s more to the story than economics. Resolving the illegal immigration crisis requires common sense legislative reform, stronger enforcement and immigration processing, and genuine border security. But Mexico is the linchpin in the effort and needs to do more. Tariffs would hurt US consumers but could devastate the Mexican economy. President Lopez Obrador has threatened to retaliate if tariffs are enacted, but it’s obvious that Mexico has much more to lose. The tariff threat is a way to get their attention.

Strong North American economic interdependence is certainly in the US interest and I hope that tariffs can be avoided. Nonetheless, I support President Trump’s effort to engage the Mexican government in resolving the illegal immigration problem. He has signaled that he is willing to work with Mexico, but they must do more.

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What many commentators don’t understand about US-China trade negotiations

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Many of the commentators analyzing the US-China trade negotiations are making assumptions that are not entirely accurate. I will address 3 of them here.

First, Chinese leaders recognize that free markets drive economic growth. As a rule, Chinese leaders seek to shape markets, not follow them. They talk a lot about “free markets” and “free trade,” but Beijing controls much of production and consumption. Foreign markets (including the US) influence Chinese producers, but state control of the banking and other industries effectively prohibits Chinese firms from competing as they wish. Many Chinese companies benefit from government subsidies, but there are always strings attached.

Second, Chinese leaders are willing to adapt to the established Western understanding of global trade. This is only partially true today. Chinese goods are embedded in the global marketplace, and adding tariffs or removing these good altogether will hurt US firms and consumers. Chinese leaders accept the inevitability of negotiations, but they like their approach to managed trade. It’s benefitted them in the past, and they are not ready to abandon it.

Finally, China must agree to a free-market arrangement to get a deal. All nations would eliminate trade barriers in a perfect world, but a package that includes bona fide progress on issues like intellectual property and state subsidies can and should be acceptable even if these issues are not totally resolved. The global trajectory over the last several decades has favored free markets and will likely continue but change rarely occurs overnight.

I continue to believe that the greatest impediment to a trade deal is the 2020 elections. If President Trump is not reelected and the new administration is willing to soften the US stance, then holding out will prove to be an effective strategy for the Chinese. If only the Democrat contenders could stand with the President on this issue, the incentive to wait would be removed.

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Getting a Trade Deal with China

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Prospects of a trade deal with China are unclear. I’ve always believed there will be an agreement—and I still do—but it will require a lot of compromise. If you think about the ongoing negotiations as a poker game, both sides still hold valuable cards. Here’s how I see it.

The U.S. is in an overall position of strength. A reduction in free trade between China and the U.S. inevitably hurts both nations, but Chinese dependence on exports to the U.S. is greater than U.S. dependence on Chinese imports. The U.S. economy is growing rapidly and is better situated to absorb the negative effects of tariffs.

But the U.S. has some vulnerabilities as well. President Xi and other Chinese leaders typically stay for the long haul. President Trump is subject to a 50/50 election in 2020, and if he doesn’t win, a Democratic president could be willing to cut a better deal for Beijing. Stalling might be more costly for China in the short term, but not necessarily over the long haul.

China also wields a lot of influence over North Korea and can exercise this leverage positively or negatively to get a favorable deal. If China can help denuclearize the Korean peninsula, President Trump is likely to give more on the trade issues even if this is not an explicit part of a trade agreement. And he probably should.

There is one thing the U.S. could do to strengthen its position immensely. If leading Democrats like Biden and Sanders demonstrate unity with the President on this issue, it will send a strong message that the deal will not get better for China in 2020 regardless of who wins the White House. Of course, this issue creates a quandary for the Democrats. If supporting the President leads to a pre-election deal, then Trump gets a substantial political win on an issue pivotal to crossover Democrats and moderates. Standing with Trump on China will help his reelection effort.

I rarely agree with Chuck Schumer, but his recent support for tough negotiations with China is welcome. Wouldn’t it be great if the Democrats seeking the oval office could do the same? I’m not counting on it.

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Young Americans and Socialism

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Before Bernie’s rise in the 2016 primary, most of capitalism’s opponents tried to stake out a “middle ground” between markets and socialism. Their healthcare proposals (like Obamacare) claimed to seek universal coverage in partnership with the private sector. Their tax proposals emphasized rate hikes on the top 1% of earners. They seemed less interested in guaranteeing employment than with extending unemployment benefits.

Today’s anti-capitalism critics are a different breed. They openly advocate for single-payer healthcare, large tax increases across the spectrum, and guaranteed government jobs. Most conservatives, libertarians, and other defenders of free enterprise view these proposals as extreme and welcome a 2020 election that pits capitalism versus socialism, reasoning that the economic recovery and “common sense” should be enough to win the broader argument. Candidate personalities aside, winning this argument not be so simple, especially when you consider young Americans.

Recent surveys suggest that millennials and Gen Z are embracing socialism. Here are links to a few of the studies:

https://www.axios.com/exclusive-poll-young-americans-embracing-socialism-b051907a-87a8-4f61-9e6e-0db75f7edc4a.html

https://www.chicagotribune.com/news/opinion/chapman/ct-perspec-chapman-young-socialism-capitalism-20180520-story.html

https://www.cnbc.com/2018/08/14/fewer-than-half-of-young-americans-are-positive-about-capitalism.html

Most young Americans were born long after the cold war ended and view ongoing far-left catastrophes like Cuba, North Korea, and Venezuela as problems of corrupt leadership rather than a corrupt ideology. They see cronyism as a by-product of capitalism, not statism. They blame doctors and insurance companies, not government intervention, for the high cost of healthcare. They don’t see the recent economic turnaround as an argument for free enterprise, but rather as evidence of income inequality.

I don’t blame them for misunderstanding the economy. Many recent college graduates—and some who didn’t graduate—struggle to see past their college loan and credit card debt. They have been educated to believe that racism and bigotry separate the haves from the have nots. They have been told that capitalism is destroying the natural environment, not cleaning it up. They’ve been raised on smartphones and instantaneous communication. They want quick answers and socialism provides a lot of them.

Some of my colleagues are frustrated with the current wave of college students, but we must do a better job explaining why liberty and free enterprise are superior to government control. Flawed ideas about government takeovers of the economy should be addressed head-on. For young Americans, simple, clear explanations are the key.

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A different take on the college admission scandal

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The ongoing college admission scandal at the University of Southern California, Georgetown, and other universities has exposed the hypocrisy of some of the elites in our society. The story has been reported widely, but I want to address two angles that I’m not hearing discussed elsewhere.

First, college admission decisions should be as clear and objective as possible, but many institutions also consider ethnicity and other factors in the interest of campus diversity. This practice is discriminatory because it denies admission to some applicants whose previous academic performance and test scores should have been strong enough in favor of other applicants because of factors unrelated to ability. By reinforcing the notion that admissions criteria should extend beyond individual merit, it creates an environment where some might get involved with corrupt pay-for-play scenarios and even allow some applicants to buy their way into the university. I understand the argument for diversity and appreciate a broad mix of students on campus but including non-performance criteria in application decisions is unjust and should stop.

Second, parents who sought to circumvent the admissions process by cheating on exams apparently believe their kids should have no problem succeeding in classes alongside peers with stronger academic backgrounds. Put another way, they seem to view the college experience as an exercise in credentialing. Faking your way into a school with admissions criteria beyond one’s ability is a recipe for failure. Thomas Sowell documented the problem of race-based admission decisions years ago (see https://townhall.com/columnists/thomassowell/2003/02/07/damaging-admissions-n780078). Suffice to say that getting into a college where your peers will have better academic backgrounds will put you at a competitive disadvantage. But as far as the parents involved in the scandal are concerned, this should not be a problem. To the extent they are wrong, they are hurting their own kids by pushing them beyond their abilities. To the extent they are correct, the entire academic establishment should be called into question.

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The widening trade deficit

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The US Trade Deficit rose to $621 billion from $1027 to 2018 while the merchandise trade deficit with China increased to $419 billion. It’s interesting to see how this issue is mischaracterized by those on the left. In fact, many of the same media pundits who claimed that the President’s focus on lowering the trade deficit was misguided are now celebrating the increase as a “blow to Trump” (https://www.nytimes.com/2019/03/06/us/politics/us-trade-deficit.html). They were half-right then and are completely wrong now.

The US trade deficit has many drivers, including overall economic health, strength of the dollar, and “fair” trade policies. When President Trump laments the trade deficit, he is typically focusing on the latter. Specifically, trade policies in China and other countries that unfairly hamper US competition reduce exports and contribute to the trade deficit. The President’s emphasis on equal access to foreign markets is spot on, but his shorthand assertion that fixing these issues will eliminate the trade deficit is overly simplified.

In simple terms, the US economy is growing relative to the economies of our trade partners, and the dollar has strengthened as a currency. This means that US consumers have more to spend with dollars that buy more on the global market. Even with the tariffs, this economic strength drives consumer spending for foreign goods. In other words, the increasing trade deficit is primarily driven by a strong economy, not trade policy.

If you are not convinced of my argument, just think about the opposite scenario. If the US fell into a great recession and our trading partners did not, American consumers would have little to spend on imports. The trade deficit would fall because of the poor economy. The trade deficit reflects the ability to consume more than the ability to produce.

So how does a trade deficit affect other parts of the economy? The books always have to balance, so the difference must be made up somewhere. From a national perspective, countries like China balance the trade deficit by investing in US equities, bonds, government debt, or other assets. Put another way, countries with trade surpluses are financing the growth of those with trade deficits. A high level of foreign ownership of US assets can create problems, but a moderate level does not.

A trade deal with China that makes genuine progress on issues like intellectual property, company ownership, and currency manipulation will help curb the deficit in a meaningful way. But with a strong US economy, it will be difficult to erase the trade deficit, and doing so shouldn’t be our focus.

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Huawei’s dismal PR effort

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Huawei purchased a one-page “open letter to the US media” in yesterday’s Wall Street Journal: “Don’t believe everything you hear. Come and see us.” The Chinese company is attempting to repair its image and deflect pressure from the Trump administration.

https://twitter.com/AdamJanofsky/status/1101141848578506752

In an interview this morning with Fox Business anchor Maria Bartiromo, Huawei’s Chief Security Officer, Andy Purdy, tried to portray the company as a trustworthy, independent firm. He failed miserably.

If you’re unconvinced about the Huawei-China link or just a fan of exceptional journalistic inquiry, you’ll want to watch this video, which covers the first part of the interview.

https://www.foxbusiness.com/business-leaders/huawei-is-trustworthy-chief-security-officer-says

Excellent work, Maria.

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Why Amazon Doesn’t Love NY

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On Thursday, Amazon abandoned its plan to build a large campus in Queens and allegedly create 25,000 jobs for New Yorkers. The original deal involving $3 billion in government “incentives” was considered an economic victory by Mayor Bill de Blasio and Governor Andrew Cuomo but was derailed by a huge backlash from progressive activists and union leaders. So how did a Democrat-negotiated deal unravel at the hands of other Democrats? The answer is not difficult to understand.

First of all, I’m neither a Democrat nor a New Yorker, but I opposed this deal from the beginning. It’s entirely rational for governments to provide infrastructure when a large company comes to town, but the “extra” payouts to lure Amazon are a slap in the face to taxpayers and other businesses. The government was picking winners and losers. The “incentive package” New York offered would have given Amazon an unfair advantage over its rivals in New York and across the country. I’ll all for Amazon’s success, as long as it is attained through the marketplace.

But my views are at odds with many politicians on both sides of the traditional political spectrum. They overlook the cronyism involved when governments collude with some businesses (but not others) to locate in their cities or states. They refer to the payouts as “incentives” and “investments,” claiming that the jobs created will fuel economic development and that the tax revenues they create will more than compensate. They even use competitive lingo to justify the collusion, arguing that they must “fend off competition” from other locates to “win over” new businesses. But this logic overlooks an important principle: It’s okay and even desirable for governments to promote business activity with competitive tax policies and other inducements available to all firms, but governments should not use taxpayer funds to pick individual winners and losers.

This issue creates complications for those on the left. While defenders of liberty promote free markets and despise government intervention, socialists despise free markets and promote government intervention. Leftists don’t trust business in general and rely on heavy-handed regulation to keep it in line. But most socialists understand that the government is unable to replicate the private sector in terms of production efficiency, so they don’t want to destroy it altogether. They want some type of arrangement with quasi-free markets and big government.

The Amazon deal gave government a “seat at the business table” and some sense of control over the online behemoth, but it required a multi-billion-dollar payout to a giant corporation. Modern leftists want to control business activity in order to extract taxes and other concessions, but they don’t want to support large corporations in any way. In the end, the Democrat Mayor and Governor were willing to hand over taxpayer dollars to Amazon to “create jobs.” In the end, socialists like AOC won the battle because they don’t see why Amazon is needed in the first place.

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Takeaways from Venezuela

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If you have been following my blog, the ongoing chaos in Venezuela was entirely predictable. It remains the most underreported story on legacy media.

Here’s an abbreviated storyline: Nicolás Maduro recently won reelection in a sham vote. Two weeks after he was sworn in for a second term, Juan Guiadó assumed the interim presidency, citing constitutional authority that permits the head of the National Assembly to create an interim government and plan for new elections. The Trump administration immediately recognized Guiadó’s authority and instituted economic sanctions targeting Maduro. Guiadó has received support from most other nations as well, but Maduro has the backing of the military and hasn’t budged. Guiadó’s politics are largely moderate to left-of-center by American standards, but he supports free speech, private property, and other basic constitutional rights. His claim to the presidency is legitimate.

Venezuela was prosperous prior to Hugo Chávez’s election in 1998. The Chávez and Maduro regimes have looted and destroyed the nation in just two decades. The current situation is chaotic and heart-wrenching. Poverty is rampant. Stores are empty while many citizens scour garbage for food. Inflation is well above 100,000%. Hospitals lack basic medicine. All of this is occurring in a nation with the world’s greatest oil reserves.

Going forward, there are 3 takeaways from the situation in Venezuela:

  1. Where leaders are elected, Marxism begins with class warfare and an attack on private property. It ends with control, corruption, widespread poverty and despotism. Venezuela is a textbook case of this reality.
  2. Some Americans actively supported Chávez until he “ran out of other people’s money” and things began to unravel. Whenever socialism fails, the left blames corrupt leaders, not corrupt ideas. The problem in Venezuela—like Cuba, North Korea and the former USSR—is bad ideas, not just bad people.
  3. If applied, the bad ideas applied in Venezuela would reap havoc in the US. I wouldn’t expect the same degree of destitution, but the impact on our society could be severe. Don’t be deceived into thinking a “middle ground” is a solution and what has happened elsewhere couldn’t happen here. Whatever you think of President Trump, keep this in mind as you evaluate the rhetoric from Democrats who seek to unseat him in 2020.

It’s unclear how the current standoff in Venezuela will end, but a civil war is not out of the question. Let’s hope and pray that Maduro exits without mass bloodshed.

The Acton Institute posted a compelling interview with an economist in Caracas earlier this week if you want to see what’s going on there firsthand (https://livestream.com/ActonInstitute/VenezuelaInterview/videos/186483002).

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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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