Rumor has it that the United States, European Union and China are looking to negotiate a deal that would settle a developing trade dispute over solar panels. According to the New York Times, the deal would require China to limit its exports of solar panels to the U.S. and Europe and would impose a minimum price for those panels. In exchange, the U.S. and EU would drop existing antidumping duties (of around 30 and 50 percent, respectively). 

You might call this an “un-trade” agreement. Rather than agreeing to lower their own barriers to trade, the U.S. and EU are convincing China to acquiesce to those barriers by altering their form. The purpose of tariffs is to impose an additional cost on foreign manufacturers that limits competition and keeps prices high. The new model also keeps prices high and limits foreign competition, but unlike tariffs, a mandated minimum price enables the foreign manufacturers to benefit from those high prices. 

The agreement would be beneficial for existing U.S. and Chinese manufacturers, but not for U.S. consumers. For consumers, the effect of this agreement would be the same as if U.S. and Chinese solar panel makers agreed to divide up the market and not to compete on price. Actually making such an agreement between themselves would, incidentally, be highly illegal. So their governments are going to arrange it for them. 

The bizarrest aspect of this new development, and indeed the entire dispute, is that the market for solar panels would hardly exist if not for government subsidies. Increasing the cost of solar panels is completely at odds with any environmental policy to decrease emission of greenhouse gases. Even if you support the creation of “green jobs”, restricting trade in panels is counterproductive because it reduces employment in downstream businesses like solar panel installation. That our government would impose artificial barriers to direct artificial demand toward favored companies highlights the follies of green industrial policy, not just as a mind-boggling waste of taxpayer money, but as an impediment to the success of the broader green energy agenda.

This:

A Fox News poll released Wednesday finds that while 26 percent of voters say their health care situation will be better under the new law, twice as many — 53 percent — say it will be worse. Another 13 percent say it won’t make a difference…

That helps explains why a 56-percent majority wants to go back to the health care system that was in place in 2009. Some 34 percent would stick with the new law. 

President Obama’s Tuesday speech was intended to convey that he is taking a more measured approach to counterterrorism, reducing drone strikes and moving toward closure of Guantanamo Bay.

In many ways, the speech is excellent. The president’s effort to put the terrorism threat in context and his argument that the war cannot be unlimited and unending are praiseworthy, as is his mention of ultimately repealing the Authorization for Use of Military Force.

That said, he still claims almost unlimited war powers based on secret legal reasoning. He still has not told us what countries and groups he claims authority to attack in the name of counterterrorism, or his administration’s legal rationale for doing so.

Members of Congress should not rest on the president’s assurance that they have been “briefed on every military action.” Presidents rarely restrain themselves. Congress should limit the president’s power to kill and detain suspected terrorists, starting by providing the legal end date for the war justifying those powers.

Although the President didn’t mention it in the speech, a big policy change accompanying it is likely to be that the standard now governing drone strikes against U.S. citizens will apply to everyone. Reports hold that this new secret guidance will “sharply curtail” or “dramatically ratchet down” strikes outside war zones, ending signature strikes (killing suspicious people with drones when we are not sure who they are). Hopefully that’s right, but it seems dubious. We do not know how restrictive the current standard is—to what extent it lets the president do what he wants. The rules, at least what leaked in February, were not minimum requirements for strikes on U.S. citizens but assurance that current procedures were legal. Nothing publicly released rules out strikes undertaken by some less restrictive process. And, as a bureaucratic procedure, not law, there is no reason that the President cannot change the standard in secret tomorrow or why the next president should use it.

Apparently, the administration will also shift control over all drone strikes from the Central Intelligence Agency to the Pentagon, meaning Joint Special Operations Command, unifying the two programs. This is minor good news. CIA is better off without paramilitary jobs. More important, the shift could improve oversight and generate greater government debate about strikes. Internal controls on Pentagon strikes are somewhat more robust. Also, while the Pentagon can avoid disclosing action to Congress more easily than the CIA by claiming that they are part of “traditional military activities” requiring no presidential finding, Congress can manage the military better. That is because the Armed Services Committees, as authorizers, have more power over the Pentagon than the Intelligence Committees have over the CIA.

Congressional oversight, however, requires Congressional interest in using its powers, which has been absent lately when it comes to foreign policy. Last week, several Pentagon officials testified before the Senate Armed Services Committee that they have nearly unlimited authority under the 2001 Authorization of Military Force (AUMF) or the president’s inherent self-defense power (they were unclear on which applies where) to use force virtually wherever they and their bosses want. The letter Eric Holder sent to the Judiciary Committee Wednesday contains similar, though more cautiously-phrased, claims. This is not new. What was surprising was that the Senators on the panel requested that the officials provide a list of groups that the AUMF supposedly allows them to attack. Apparently, the senators, like the rest of us, have no idea what groups we are now fighting.

The administration should at least tell us in what countries and against what groups we are now at war. If they won’t, Congress should require it. They should also make the administration publicize its standards for who it can kill in drone strikes rather than just demanding secret and limited access to them. Secret oversight is an oxymoron. More importantly, Congress should put some temporal or geographic limits on the war. Better yet, it should sunset the Authorization of Military Force to coincide with the drawdown in Afghanistan. That would leave substantial authority to use military and policing powers to fight terrorism. If a president wants to use wars powers in Mali, Somalia or wherever, he should have to ask, so as to force public debate.

The White House does deserve credit for renewing its effort to close the Guantanamo Bay prison (Gitmo). In 2008, both presidential candidates recognized that the prison had become a diplomatic sore and practical nightmare that should be closed. But the Obama Administration’s effort to shift its prisoners to the normal legal system or other countries has stalled. Some of this was due to political missteps, especially by the Attorney General. But the real trouble was Congressional Republicans, who made Gitmo a monument to militarized counterterrorism and demanded that even alleged American terrorists get shipped there. As the Presdient said, U.S. taxpayers now pay $150 million annually to operate Gitmo. Now, Southern Command wants almost $200 million to upgrade it. We can add fiscal prudence to the reasons to close it.

With over 150,000 participating students in 12 states, scholarship tax credit (STC) programs constitute the largest and most popular form of private school choice. STC programs have expanded rapidly in recent years with six states adopting them since 2011, including Alabama this year. So which state will be next? After yesterday’s disappointing defeat in South Carolina, the answer may lie on the opposite side of the continent.

Earlier this week, Rep. Liz Pike introduced an STC bill to the Washington state legislature. The bill would provide tax credits to corporations donating to state-approved scholarship organizations that fund children from low-income families and children with disabilities attending the schools of their choice.

Like the STC program that New Hampshire enacted last year, the WA legislation follows the best practices from STC programs around the nation and avoids the flaws of the recent bills in Virginia and Alabama. Washington’s proposed STC program would be capped at $100 million in the first year and includes an “escalator” so that the program will grow over time to meet demand and it eschews unnecessary new regulations. The $5,000 cap on scholarships is high enough to benefit low-income families but low enough that the state still has the potential to save money, as shown in this chart from the Freedom Foundation comparing the maximum scholarship size to Washington state’s total public school spending per pupil: 

The bill could go farther still by expanding the use of the scholarships to include educational expenses beyond just private school tuition. For example, under New Hampshire’s STC program, scholarships can cover expenses such as tutoring, textbooks, homeschool curricula, and online learning. Adding a similar provision would move the bill from school choice to educational choice, which would foster greater customization and innovation in the delivery of education.

But even without such provisions, school choice programs have been proven effective at improving student outcomes and adopting one would be a great leap forward for Washington’s education system.

A short 2010 article of mine in Politico, which still annoys Paul Krugman and Brad DeLong, dealt with Ireland’s brief effort to restrain spending, which (while it lasted) was smarter than imposing uncompetitive tax rates as Greece had done. 

Krugman ridiculed my Politico article in at least four columns. He imagines I predicted a “boom” in Ireland, because I wrote in June 2010 that, “the Irish economy is showing encouraging signs of recovery.” That the Irish economy was turning up at the time is undeniable. Although I did not yet have the benefit of real GDP data, Ireland’s GDP was clearly rising before the third quarter of 2010 in this Krugman graph and this one. What went wrong? Bonds and the economy collapsed after Black Thursday, September 30, when the government wasted millions on a gigantic bailout of Irish banks. My unforgivable blunder was in not predicting on June 9 what was going to happen on September 30. Mea culpa.

Ironically, Krugman and I agree Ireland should have let the banks fail. We likely agree that is has been foolhardy to enact higher income tax rates in Ireland, Portugal, Greece, Spain, France and the UK. Although Krugman wants to label me “an austerian,” I have been rebuking IMF austerity schemes since 1978 for imposing rising tax rates and falling currencies on troubled countries.

There is another important point of agreement between Krugman and I, but only in recent years. In February 2004, I debunked fears that projected budget deficits would raise interest rates in a paper presented at the U.S. Treasury. That paper was largely aimed at Brookings Institution scholars but also at Krugman, who was “terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.” He has since come around to my view.

What Krugman and I cannot agree about, however, is his fantasy about Ireland’s “harsh spending cuts.” On The Colbert Report last year, for example, Krugman said, “Ireland is Romney economics in practice. They’ve … slashed spending; they’ve had extreme austerity programs.”

As the table below the jump shows, government spending as percent of GDP nearly doubled in Ireland, from 34.3 to 66.8 percent from 2006 and 2010, with bank bailouts after September 2010 pushing the deficit to 31.2 percent of GDP. By Krugman’s definition, Ireland had extremely “stimulative” spending and deficits since 2008. Does it matter that most spending since late 2010 was for bailing out bank creditors? Krugman’s new book says, “not at all: spending creates demand, whatever it’s for.”

By contrast, Iceland did not bail out its banks and instead cut spending from 57.6 percent of GDP in 2008 to 46.1 percent by 2011, shrinking Iceland’s budget deficit from 13.5 percent in 2008 to 4.4 percent by 2011. By Krugman’s definition, Iceland’s policies were drastically austere. 

DeLong rightly complains that I “mischaracterized” the reason Krugman called Iceland’s policies “unorthodox.” I was reacting to a Krugman op ed, “Looking for Mr. Good Pain,” which again blamed Ireland’s anemic recovery on drastic spending cuts and claimed Latvia and Estonia are only examples anyone can find of spending cuts helping an economy. 

I should have recalled that Krugman’s End This Depression Now! (181) defines Iceland’s heterodoxy as currency devaluation, which supposedly made it “much easier to cut wages and prices.” But exchange rate changes are surely a minor diversion from the larger issues of whether or not Krugman has been correct to (1) mischaracterize Ireland’s near-doubling of government spending as drastic cuts, and to (2) claim advocates of restrained spending can find no significant example when spending cuts produced better economic growth. In fact, Iceland’s is a good example of spending restraint leading to a stronger economy. A better example is the U.S., where the economy grew stronger as federal spending fell from 22.1 percent of GDP in 1992 to 18.2 percent in 2000. And Canada made deeper and more durable spending cuts in the 1990s with salutary results.

Iceland’s recent devaluation was highly orthodox policy condition for wards of the IMF (strings attached to a $2 bn. loan). Unfortunately, such devaluations often backfire by inflating commodity costs, interest rates and the burden of foreign debt. The Icelandic krona fell from 64 to the dollar in 2007 to 123.6 in 2009, before strengthening with the economy to nearly 116 in 2011. 

Since oil, grains and metals are priced in dollars, the 2008–2009 devaluation inflated Iceland’s cost of production and cost of living. Inflation rose from 5.1 percent in 2007 to 12 percent or more in 2008 and 2009; real GDP fell by 6.8 percent in 2009 and 4 percent in 2010. Faced with a collapsing currency, the central bank interest rate was hiked to 18 percent by October 2008. It could have been worse. If Iceland’s Supreme Court had not nullified loans indexed to foreign currencies in June 2010, devaluation would have doubled the cost of repaying foreign debt. 

Devaluation was supposed to boost GDP by making imports costly and exports cheap, thus narrowing the trade deficit. The current account deficit did fall after 2008, but that always happens when recessions slash imports. Ireland had a current account surplus from 2010 to 2012 without devaluation, even as Iceland’s current account deficit was still 7–8 percent of GDP. 

Iceland’s economy grew by 3.1 percent in 2011 when the currency appreciated and the budget deficit was deeply cut to 4.4 percent of GDP. Devaluation explains the previous spike in inflation and interest rates, but little else. 

Krugman, not I, chose to compare the economic policies and performance of Iceland and Ireland. That comparison shows that serious spending restraint (Iceland) is clearly more helpful to heavily-indebted countries than unrestrained spending and higher tax rates (Ireland).

I hate to say “I told you so” but, well, “I told you so.”

Back in March 2010, I warned that the Trans-Pacific Partnership (TPP) agreement, a preferential trade agreement between the United States and then seven– and now 11, with the subsequent addition of Canada, Malaysia, Mexico and almost-officially Japan– other Asia-Pacific economies would be a hard slog, and that the signs towards a significant degree of liberalization were not promising. I followed that up with news about what then-United States Trade Representative Ron Kirk told a closed-door meeting with dairy lobbyists, and what it said more broadly about the administration’s commitment to free trade.

Today comes news from the latest round of TPP negotiations in Lima, Peru that industry groups have raised concerns about the way that the United States and Peru are approaching the negotiations: i.e, by negotiating with individual countries bilaterally rather than offering the same market access to all of the TPP members at once, a concept trade wonks call a “plurilateralism.” In addition, the United States is not re-negotiating market access with any of the TPP countries with which it already has an agreement (that’s six of the eleven other members).

Pluralizing the deal would be more fitting for an agreement that the Obama administration touted as being a “21st Century” agreement to reflect new world trade realities, like global supply chains. It would lessen the potential for an unholy mess that businesses find unworkable. A Wal-Mart representative said at the meeting “it’s a little hard to see how you have this very comprehensive agreement if we have bilateral market access negotiations that everybody doesn’t necessarily understand, and how you essentially plurilateralize those with common sets of rules of origin.” (Rules-of Origin are the methods by which customs officials determine the origin of a product, and thus which tariff rate should apply. They can get really messy when supply chains are complex).

So what did the U.S. and Peruvian chief negotiators say when they were called out on the self-defeating bilateral approach? They gave answers which do not pass the laugh test (the following quotes come from the same article linked to above, all emphases my added):

In response to [a] question, Weisel and Peruvian chief negotiator Edgar Vasquez both defended the bilateral approach to negotiating goods market access. Weisel argued that it makes more sense to import zero tariff rates that the U.S. already has with various TPP countries into the new agreement, rather than conducting a new market access negotiation with those countries.

Sure. It absolutely makes sense to keep already-zero tariff rates at zero. But that’s not why the United States is wanting to lock in the terms of the previously negotiated FTAs. After all, it would be relatively easy to just specify zero tariff rates again. The United States is taking a bilateral approach for one reason, and one reason only: they don’t want to risk re-opening negotiations on the decidedly non-zero tariff rates and long phase-in periods for “sensitive products,” i.e. those (like sugar, dairy, autos and clothing) that the United States keeps protected even under the terms of the trade agreements already signed.

In addition, Weisel pointed out that even if all countries took the plurilateral approach and agreed to apply the same tariff level to all other participants, they would still be faced with the conundrum of differing tariff levels because the agreement is not likely to enter into force for all TPP countries at the same time.

Why not? Because, again, the United States doesn’t actually want to open its market to goods from countries which are especially competitive in products the U.S. government wants to keep protected. At least, not for a while. Again, not exactly in keeping with a comprehensive, 21st century agreement for the new trading system.

For his part, Vasquez argued against the plurilateral approach on the grounds that it leads to tariff concessions of the lowest common denominator. For instance, it means the U.S. would extend the same long tariff phaseout on dairy to Malaysia than it does to New Zealand, even though the U.S. is not sensitive to dairy imports from Malaysia. This leads to a less ambitious outcome than the bilateral approach, Vasquez argued.

This is true as far as it goes. What Mr Vasquez is saying is that if the United States was not able to keep out products from the competitive countries alone, then they would want to “plurilateralize” (in a perverse sense) the deal by keeping out those products from all TPP countries. But how much less ambitious is that than this bilateral mess, really? What’s the point in trying to keep out, say, dairy from Brunei, or some other equally unlikely product/​origin combination? The difference in terms of the trade effect would be almost zero. Why can’t we aim for a highest common denominator, where the U.S. offers the maximum level of market access (preferably total) to all countries?

The point of trade liberalization is to increase imports precisely from those countries which are the most competitive, and therefore deliver goods and services most cheaply (and/​or at a higher quality or variety) than what we can produce ourselves. If the aim of negotiators is to carve out trade that would bring the most economic benefit, then they may as well save themselves a lot of time, hassle and jet-lag– not to mention saving taxpayers’ money–by staying home.

Politicians are having fun slapping around big corporations for supposedly not paying enough taxes. In this country, Apple is the current target, while in Europe it’s Google, Amazon, and Starbucks, according to the Washington Post today.

But there is an elephant in the room that the many reporters and politicians blustering over the issue have been too ideologically blind to see: There is no obvious harm being done by today’s corporate tax avoidance.

The first thing to note is that when investment flows through tax havens, it’s not clear that it causes any economic distortions. The Washington Post story makes a big thing out of foreign direct investment (FDI) flowing through low-tax Bermuda and the Netherlands, but then ending up funding actual factories built elsewhere. Economists worry when taxes distort real investment flows, but that does not seem to be happening here. Indeed, FDI is likely being allocated efficiently across final destination countries in these situations, and the interim trip through low-tax jurisdictions simply shaves off an extra layer of unproductive and distortionary taxes.

An even more obvious reason to question whether corporate tax avoidance is causing any harm–even from a pro-government perspective–is that corporate tax revenues have been trending upwards across the developed world. The chart below shows that corporate tax revenues as a share of GDP have been rising over the decades, despite the dramatic reductions in statutory tax rates in most countries. Revenues dipped in recent years because of the recession, but they are now trending upwards again even though growth is still very sluggish. (OECD data here).

So even if one believes the liberal view that higher government revenues are a good thing, there is no evident harm being done to government budgets from today’s supposed rampant tax avoidance. For more, see Dan Mitchell’s piece here, and Global Tax Revolution here.