Government infrastructure projects often go far over budget. Around the world, the costs of transit systems, energy developments, and other projects frequently soar above what was promised. One cause is the low-balling of initial cost projections to help secure public support.

A massive Australian energy project is an exemplar of runaway costs. The budget of the Snowy 2.0 power dam and energy storage project has exploded from $2 billion in 2017 to $12 billion today. The project is a reminder that taxpayers should be skeptical when governments propose large and complex construction schemes.

In the 1970s, Australia completed a system of 16 dams, seven power stations, and miles of tunnels called the Snowy Scheme. The project produces electricity and provides water for irrigated farming. It took 25 years to complete and cost $820 million, or about $8 billion in today’s Australian dollars.

In 2017, the Australian government announced Snowy 2.0, which will add tunnels, generation capacity, and large-scale power storage to the Snowy Scheme. Once completed, Snowy 2.0 is supposed to “provide an additional 2,200 megawatts of dispatchable, on-demand generating capacity and approximately 350,000 megawatt hours of large-scale storage to the National Electricity Market.”

The energy storage plan is to pump water uphill in periods of excess supply and then use the water to generate power when other supply sources—such as solar and wind—ebb. The project was “sold as a nation-building project for a low-carbon future.”

When Snowy 2.0 was announced in 2017, the government claimed it would cost $2 billion and be open in 2024. Government-owned Snowy Hydro pushed for approval saying it had completed “two years of rigorous due diligence.” But some experts warned at the time that the cost estimates were low-balled.

Over the years, the project has suffered major technical difficulties and delays. One of the project’s large tunneling machines advanced much slower than planned, created a giant sinkhole, and got stuck in soft ground for months.

Snowy Hydro announced in August 2023 that 2.0 would now cost $12 billion and be completed no earlier than 2028. If we add the costs needed to connect 2.0’s generation to the grid, the total cost could be $20 billion. An Australian dollar is about 65 cents of a US dollar.

Government dam projects are particularly prone to cost overruns. A 2014 study of 245 large dam projects found, “Large dams built in every region of the world suffer systematic cost overruns,” and the final costs of the sample projects “were on average 96% higher than estimated costs.” Snowy 2.0’s cost overrun of at least 500 percent is an extreme case but fits a common pattern.

Experts have questioned other aspects of Snowy 2.0 in addition to the soaring costs. Pumping water uphill for storage requires electric power from other sources, which in Australia includes large amounts of coal-fueled power. In the near term, Snowy 2.0 may increase the demand for coal-fueled power. Also, Snowy 2.0 will account for just a tiny fraction of Australia’s energy storage needs if the country were to fully transition to renewables. Furthermore, building vast infrastructure in a forest and re-plumbing river systems is not green. Finally, Australian regulators have sounded the alarm over Snowy’s monopoly power and rising electricity prices.

This critique of Snowy 2.0 focuses on the problems of large-scale energy projects. American policymakers would do well to heed the conclusion: “Given the pace of change, it would seem sensible to make the most of cheaper solutions which can be built quickly and don’t lock us in or out to technologies for the long term.”

This is the third of a three-part series examining US arms sales to Taiwan. The first article outlined our methodology for determining the weapons systems within the backlog and showed how traditional capabilities made up a majority of the backlog based on dollar value. The second article examined US maintenance sales to Taiwan and showed how traditional capabilities are more expensive to sustain than asymmetric capabilities.

In this article, we compare arms and maintenance sales made under the Trump and Biden administrations to show how US military support for Taiwan has changed over time.

The data used in this article came from the Defense Security Cooperation Agency’s (DSCA) notices of major arms sales. Because this article compares all sales from the Trump and Biden administrations, it does not distinguish between arms sales that have been delivered to Taiwan and those that are backlogged. For that reason, there is a small difference between the dollar amounts mentioned in the figures below and the dollar amounts for the arms sales backlog. The data were last updated on November 1, 2023.

As shown in Figure 1, the Trump administration announced more sales of weapons and maintenance to Taiwan across all four categories.

The two administrations came closest to one another on sales of maintenance items, with Trump announcing $1.9 billion and Biden announcing $1.6 billion. The Trump administration heavily favored sales of traditional weapons, selling a total of $10.4 billion in traditional capabilities. This was $6.5 billion more than the asymmetric capabilities the administration sold. The gulf between the two administrations in terms of overall arms and maintenance sales is also significant. Trump announced a total of $18.3 billion to Biden’s $4.4 billion.

Figure 1 also clearly shows that the Trump administration is primarily responsible for the current arms sale backlog to Taiwan. Based on data from the Stockholm International Peace Research Institute, nearly every US arms sale announced before the Trump administration took office is now in Taiwan’s hands. The Trump administration essentially ran up a huge arms sale tab with Taiwan. However, due to weapon production timelines, the responsibility of delivering the arms and clearing the tab falls on the Biden administration.

Figure 2 compares the arms and maintenance sales of the two administrations by both the number of sales and dollar value.

While the Biden administration has lagged behind the Trump administration in almost every respect, it has doubled the number of maintenance sales despite a slightly lower dollar value of maintenance sales. This suggests a shift in priorities for arms sales to Taiwan under Biden. Now, the focus is on sustaining what Taiwan already has instead of announcing big-ticket items that would further inflate the backlog. Biden still has time in his current term to announce more arms sales. If current trends hold, these future sales will likely come with a relatively small price tag and be focused on either maintenance or munitions.

Many of the most expensive platforms that Trump announced will begin arriving in Taiwan in the next two or three years. This will give the next administration an opportunity to set the tone for future sales as the backlog begins to diminish. Regardless of who wins the 2024 election, it will be essential for the United States to expand Taiwan’s stock of asymmetric capabilities to deter a Chinese invasion.

Taiwan Arms Sales Backlog Excel File

During Mao Zedong’s rule, there was no private housing. All private property was deemed illegal and against Marxist principles. The failure of communal property led to experiments with various forms of ownership under Deng Xiaoping. Today private ownership of housing is widespread, accounts for about 25 percent of China’s GDP, and represents the largest form of household wealth, estimated at nearly 70 percent.

However, slower economic growth, the COVID-19 lockdowns, and a drying up of credit to property developers put a sudden stop to the hot housing market. New construction starts fell by 2 percent in 2020 from the previous year, 11 percent in 2021, and 39 percent in 2022. Meanwhile, local government revenue from land sales has gone from more than 40 percent prior to 2021 to 37 percent in 2022 (He 2023).

The liquidity squeeze, initiated by China’s paramount leader Xi Jinping, late in 2020—to stem speculation in housing and excessive leverage (borrowing) by developers—has led to defaults, most of which have been on offshore debt. Of the 50 developers with the most dollar-denominated bonds issued in Hong Kong, two-thirds have defaulted on interest payments. Consequently, the market value of those bonds has largely evaporated, losing nearly 90 percent of their value ($136 billion) over the last two years (Wilkins 2023). 

The Fall of China’s Largest Developers

Two of China’s largest developers, both private, face possible liquidation. Evergrande and Country Garden have both defaulted on dollar bonds and have liabilities that have grown far beyond their assets. In December 2021, Evergrande failed to pay two dollar-bond coupons. It is the most indebted developer in China, with liabilities of nearly $330 billion, including $20 billion of offshore debt.

Evergrande chairman Hu Ka-yan has been detained for possible financial crimes, and his company faces liquidation if it cannot come up with an acceptable restructuring plan for its offshore debt by December 4 (Ao and Yu 2023). 

Financial regulations prohibit Evergrande from issuing new bonds, as it is already overleveraged, and its future looks dismal. Its financial reports for 2021 and 2022 came under scrutiny by Prism, a small accounting firm Evergrande hired in January. Upon inspection, Prism could not verify the accuracy of those reports. Moreover, it concluded that, for the first half of this year, there were too many uncertainties to issue a conclusive earnings report. This lack of transparency is endemic in China’s market socialist economy.

Country Garden, which has about $11 billion in dollar-denominated bonds, missed making a $15.4 million interest payment on its 6.15 percent dollar bond, which was due on September 17. The 30-day grace period has now ended and the company is in default. The market price of its 6.15 percent note has tanked to about 5 cents on the dollar. Consequently, a cross-payment default on other dollar bonds seems likely unless Country Garden can come up with an acceptable restructuring plan (Tobin 2023).

Another large developer, China Vanke, has seen the value of its dollar bonds fall sharply following Country Garden’s default. Vanke’s Hong Kong-listed shares have fallen by 50 percent this year as sales have slumped. Monthly contracted sales reached a high of 100 billion yuan in 2021, but are now around 30 billion yuan.

The Sources of China’s Housing Crisis

Debt-fueled development, the lack of investment alternatives for households in a socialist market economy, a thin social safety net, and government policies that helped support the housing sector all combined to create a housing bubble prior to 2020. It is estimated that 96 percent of urban households own at least one house or apartment. 

As housing demand increased and prices rose, the widespread expectation was that prices would continue to rise. That expectation was dramatically changed with Xi Jinping’s decision to impose new regulations to stem speculation.

Xi’s Three Red Lines

In August 2020, regulations called the “Three Red Lines” were enacted that required property developers to keep their liabilities (debt) at less than 70 percent of their assets; maintain a debt-to-equity ratio of less than 100 percent; and a ratio of cash to short-term debt of at least 100 percent. Banks were also heavily constrained in making loans to developers. The result was a collapse of the housing bubble as credit dried up to overleveraged developers. In September 2023, sales at China’s 100 largest developers fell by 29 percent from a year ago, with Country Garden’s sales falling 81 percent (Fung and Yoon 2023).

Slower Economic Growth

China largely escaped the global financial crisis (2007–09) by boosting domestic demand to counter the loss of exports. The housing market was an important component of China’s policy to stimulate the economy. However, with slower economic growth—due to the pandemic, inefficient state-owned enterprises, Xi Jinping’s deviation from market-based development, the aging of the population, financial repression, and the lack of capital freedom (i.e., the free flow of capital and a free market in ideas)—China’s future development faces many challenges.

Price Supports Prevent Markets from Eliminating the Excess Supply of Housing

In a free market, an excess supply of housing would be eliminated by allowing the price of housing to fall until a new equilibrium is reached at which the quantity supplied and demanded are equal. China’s adherence to market socialism has steered it toward using price supports to prevent decreases in demand (i.e., a leftward shift in the demand curve) from lowering prices to clear the market. Figure 1 shows that by putting a floor under the price of housing (at P₁), an excess supply emerges when demand falls. The price of housing must fall to P₂ if the market is to clear.

Figure 1: A Price Support Leads to an Excess Supply of Housing

Existing homeowners obviously are against any fall in the price of housing, so there is political pressure to maintain price supports. Yet, policymakers recognize that with nearly 80 million housing units now vacant, prices need to be lowered. Cao Li reports that housing authorities are beginning to allow property developers more freedom to lower prices to eliminate the large excess supply of housing. Creating a freer market in housing by ending price controls would go a long way to help stabilize the housing market. 

Financial Repression

China has long suppressed deposit rates and strictly limited investment choices by using capital controls. The lack of a free capital market supported by a genuine rule of law and a trusted, transparent financial system have made private housing one of the best alternatives to park savings. As Wall Street Journal columnist Joseph Sternberg observed, “The financial repression that suppressed interest income from household savings to subsidize lending to politically well-connected companies helped stoke outsize demand for real estate as an alternative investment.”

Faced with discriminatory policies against foreign firms, including a clampdown on access to official economic data, capital is fleeing China. Much of it is heading for the United States, prompted by a strong dollar, high US bond yields, and trusted institutions. For the first time in 25 years, China has seen overall foreign direct investment turn negative as capital outflows have exceeded inflows by nearly $12 billion in the third quarter this year.

Although China has made some progress in strengthening its financial markets, much remains to be done. Ting Lu, chief economist at Nomura Securities China, argues that “the removal of restrictions and the restoration of market-driven resource allocation, including the allocation of funds and land resources,” is of “paramount importance.”

Conclusion

China’s housing crisis is part and parcel of market socialism, which puts the power of the Chinese Communist Party (CCP) above economic and personal freedom. This was made clear at the meeting of the Central Financial Work Conference in October. As Xinhua reported, “The conference stressed the need to adhere to the centralized and unified leadership of the Party Central Committee in financial work”; be “guided by Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era”; and follow “Marxist financial theory” in developing “Chinese-style finance.”

Such vagueness allows plenty of room for the CCP to control key policy variables while paying lip service to the rule of law and open markets. It also creates great uncertainty about the fate of markets and prices in the allocation of credit. If Shanghai is to become a global financial center, China will have to institute a genuine rule of law, adopt transparent accounting standards, end price and capital controls, and move toward a free market in ideas. There is little evidence that Xi will do so. 

It is more likely that Beijing will end up bailing out the housing sector, deepening the already significant moral hazard problem, which was created by China’s debt-driven housing boom and the expectation by lenders that they would be bailed out.

As Congress considers year-end legislation, the rum cover-over program has resurfaced, sparked by the beer industry’s critique of the program’s design. It’s a good opportunity to highlight the macabre cronyism created by this little-known program that directly subsidizes a large portion of the rum consumed in the United States and around the world. 

Under federal law, distilled spirits are subject to an excise tax, which can be as high as $13.50 per proof-gallon. Most of the taxes collected on rum produced in Puerto Rico and the US Virgin Islands are returned to the respective governments. More than three-quarters of the US tax collected ($10.50 per proof-gallon) on rum produced internationally is split between the two territories based on their share of domestic production. The transfer of approximately $700 million a year in excise tax revenue from the US Treasury to the territories is called a “cover-over.”

The $10.50 cover-over has been increased temporarily to $13.25 on a recurring basis since the late 1990s, usually as part of a year-end tax extenders package. The pulsed-up amount lapsed at the end of 2021. Now, there’s a fight between the brewers and the rum distillers over whether to return to the higher cover-over.

The fight is tied up in a broader disagreement caused by poorly designed differences in how beer and spirits are taxed, creating disparities in the tax treatment of hard seltzers. The best policy would be for Congress to repeal the cover-over program (if not all federal excise taxes).

In the mid-2000s, the millions of dollars of cover-over revenue sparked a rum-subsidy war between the two territories when the Virgin Islands lured Diageo (owners of Captain Morgan) away from Puerto Rico. In 2010, Javiar Vazquez asserted that the subsidy—which included money for building a new distillery, income and property tax breaks, direct payments to cover operating expenses, and a portion of annual cover-over revenue—“is so huge that the net cost to Diageo to produce rum is zero.”

So as to not lose their share of rum tax proceeds, Puerto Rico responded with its own subsidies. According to the Center for Investigative Journalism, the cover-over program has padded the profits of Cruzan, Don Q, Club Caribe, and Bacardi, the last of which admitted the subsidies did not help create new jobs on the island. The subsidies also extend up the rum supply chain, subsidizing molasses production and sugar cane harvesting. 

The design of the cover-over program has forced Puerto Rico and the US Virgin Islands into a lose-lose competition in which they manipulate their rum industries to maximize federal subsidies—most of which are plowed back into the subsidy wars. US mainland rum distillers also lose as their large incumbent rivals receive lavish funding for production in the territories. 

Though initially framed as vital fiscal aid for the struggling territories, the cover-over program’s operation tells a different story. The cover-over payments tend to destabilize local government budgets due to fluctuating cover-over amounts and constant lobbying for additional production subsidies. The subsidies can cost more than the benefit from the cover-over, and create problems when production moves. For example, when Captain Morgan moved to the Virgin Islands, it left a hole in the Puerto Rican budget as the cover-over revenue followed the production.

At the very least, Congress should not renew the temporarily higher cover-over amount in a year-end package. The program’s uncertain and sporadic reauthorization over the past several decades has only exacerbated Puerto Rico and the US Virgin Island’s fiscal challenges.

Canada’s link tax on online news goes into effect next month, but the preemptive embargo imposed by Google and Meta on news content is already having a significant, negative effect on smaller Canadian news outlets.

As Politico details, small news outlets are desperately begging Justin Trudeau’s administration for relief after a dramatic decline in online traffic:

“Between Google and Meta announcing their intention to exit news, we now expect a catastrophic 60 percent reduction in traffic,” ZoomerMedia’s chief operating officer Omri Tintpulver wrote to the prime minister’s office and heritage officials. “Jobs are going to be lost. Soon. Entire divisions may also be lost.”

This was an entirely predictable outcome. As I noted in my link tax analysis paper earlier this year, when Spain created a link tax variant — a “snippet tax” — in 2014, Google News pulled out of the Spanish market; and all 84 major Spanish newspapers endured a significant loss of traffic and revenue. The smaller the paper, the more severe the effects.

The outcomes from a link tax aren’t much better even when the social media platforms opt to fully comply rather than embargo the news as they did in Spain and Canada. When Australia passed a link tax in early 2021, Google and Meta eventually paid off the major media conglomerates to continue operating as usual. But small outlets weren’t able to shoulder-in at the link tax trough like their larger competitors, leading to the ongoing hyper-consolidation of the Australian news industry. The Big Ink news conglomerates are hiring away journalists from small newspapers or are simply acquiring their competitors outright.

You don’t have to take my word for it. It’s two years since the Aussie link tax was implemented and the early returns are coming in. It has been a bloodbath for small, local, and independent news outlets. Just look at all the red ink on this chart of Australian news outlet openings/​closures since early 2021!

It’s not only small news outlets that are struggling. As Politico noted, Canadian news publishers are worried that the link tax embargo will fall most heavily on newspapers serving Indigenous communities. They are right to worry. While I’ve yet to see data from Australia that specifically looks at the effects of their link tax on news outlets in Aboriginal communities, there is reason to suspect that the size-favoring incentives baked into the link tax especially hurt smaller outlets serving minority communities.

Were a link tax like the Journalism Competition and Preservation Act (JCPA) passed in the US, a similar effect would likely hold for smaller, independent newspapers serving black communities. As I wrote in my analysis:

The National Newspaper Publishers Association, formed in Washington, DC, in 1940, serves more than 200 black‐​owned newspapers, many of which have existed since the era when white‐​owned newspapers explicitly excluded black journalists and were generally disinterested in reaching black audiences. … The NNPA’s CEO called the JCPA a “blank check for large corporate media” that “leaves small minority‐​owned news out in the cold.” It would be perversely ironic if the JCPA, while seeking to preserve the newspaper industry, instead ends up preserving—or even deepening—the de facto segregation of the industry.

Of course, these aren’t the intended outcomes, but the road to policy hell is paved with good regulatory intentions. For example, the Minister of Canadian Heritage, Pascale St-Onge, is responsible for implementing their link tax. But St-Onge might just end up overseeing an erasure of Canada’s distinctive regional and cultural heritages as news outlets serving those specific interests and communities shut down, merge, or shrink. 

Indeed, it’s possible that St-Onge could feel the effects in a very direct way; she represents a district in Quebec, Canada’s predominantly French-speaking province. (She only eked out a victory over the Bloc Québécois candidate in 2021.) Even if Google/​Meta ended their news embargo, a link tax regime would still favor large, national, English-language news outlets at the expense of smaller, regional, French-language ones. I can’t imagine that losing local, French-language newspapers will warm the hearts of French Canadians towards their government representative in Ottawa.

American policymakers should pay attention. We now have clear indications from three different countries — Spain, Australia, and Canada — that link taxes are a failure on their own terms. They hurt rather than help local news outlets. They act as a cross-subsidy from Big Tech to Big Ink. Ultimately, link taxes mean fewer articles from fewer newspapers reaching fewer consumers.

Crossposted from the author’s newsletter. Click through and subscribe for more posts from the intersection of history, policy, and mass media.

Amid deteriorating US-China relations, US officials have begun suggesting that a Chinese attack against Taiwan could happen soon. China’s rapid military growth is also prompting concern that the US policy of strategic ambiguity is untenable and should be replaced by a clearer US commitment to defend Taiwan.

The sense of urgency to improve Taiwan’s defenses is a welcome development. However, current policy debates focus too much on the US-China military balance and too little on Taiwan’s military efforts. While Taiwan has made commendable improvements in its self-defense posture, many years of underinvestment and poor choices will take time to correct.

In a new Cato Institute policy analysis, I argue that Taiwan should prioritize defending against a Chinese amphibious invasion using an asymmetric defense strategy.

Taiwan must prevail in two military operations that will occur in the early stages of a potential conflict: surviving China’s conventional bombardment and denying the first wave of ground forces a foothold. Even if the United States intervenes, Taiwan would be fighting these operations largely on its own given how quickly they will likely occur. Moreover, success or failure in these operations has an outsize impact on Taiwan’s prospects for the rest of the conflict.

The best way for Taiwan to prevail in these two operations is to fully embrace an asymmetric defense strategy, commonly known as a “porcupine” strategy. Taiwan would have to reduce its current dependence on traditional military capabilities which are more flexible but also more vulnerable to China’s stronger military and therefore unlikely to survive long in a conflict. 

An asymmetric defense strategy would reduce Taiwan’s ability to respond to China’s day-to-day coercive military activities. But it would improve Taiwan’s prospects against the most dangerous threat to its survival, an amphibious invasion.

To aid Taiwan’s shift to asymmetric defense while buying time for the transformation, I propose three security assistance policy adjustments and two assurances to China. 

For security assistance, first, the United States should sell more asymmetric weapons to Taiwan, refuse to sell new traditional capabilities, and make arms sales contingent on greater Taiwanese defense spending.

Second, the US military should focus joint training with Taiwan’s military on improving small unit performance while avoiding larger-scale exercises that focus on US-Taiwan interoperability.

Third, Washington and Taipei should pursue opportunities for Taiwan’s defense industries to manufacture US-designed weapons in order to help clear a $19 billion arms sales backlog.

For assurances to China, first, the United States should signal to Beijing that it will no longer sell traditional weapons to Taiwan or weapons that Taiwan could use to attack ground targets in mainland China. Second, the United States should cease taking “all style, no substance” actions, which signal deepening political ties with Taiwan but do nothing to improve Taiwan’s ability to defend itself.

Finally, it is important to note that US materiel support for Taiwan can only go so far. Only Taiwan’s government, military, and people can decide to stand firm and resist China’s aims for unification. The United States should do what it can to help Taiwan field the right capabilities to make an invasion painful for China, but the question of Taiwan’s survival will hinge on its willingness to stand and fight if deterrence fails. 

I’m proud to announce the release of a new central bank digital currency (CBDC) tracker. The interactive globe shows the status of each country’s CBDC efforts (e.g., no activity, research, pilot, or launch) and explains what the risks of CBDCs would mean in the context of each country’s treatment of human rights and civil liberties.

The tracker is a product of the Human Rights Foundation. It was announced in February that Janine Römer, Matthew Mezinskis, and I were awarded fellowships to work on and launch the tracker. Despite there being other CBDC trackers available, the Human Rights Foundation launched this project to fill a critical gap: raising awareness around the risks that CBDCs present to human rights and civil liberties.

For example, in many countries, widespread government corruption remains a major issue. In this context, the existence of pervasive corruption is a major concern with CBDCs because it calls into question any government promises to limit surveillance, control, or other risks of CBDCs. Furthermore, the existence of corruption calls into question whether CBDC policies might be designed to exert political favoritism through subsidies, price controls, or other targeted restrictions.

Elsewhere, there are concerns where governments have clamped down on protests and free expression. Unfortunately, a CBDC could be used as another tool in this effort. Across the world, governments have often turned to freezing and seizing the money of activists, political rivals, and protestors to undermine the opposition. A CBDC would make such initiatives easier by allowing governments to take direct control of each citizen’s finances.

And that’s not all. Despite the great progress that has been made around the world, there are still many issues around the treatment of human rights and civil liberties—issues that could be made worse by the launch and use of CBDCs. Luckily, the Human Rights Foundation’s CBDC tracker has what you need to get up to speed.