If not this TPP, then what?

Whatever the merits of the existing Trans-Pacific Partnership agreement, it might not be ratified. A number of Members of Congress who may refuse to vote for the Trans-Pacific Partnership (TPP) are avowed free traders. Free traders who find the TPP inadequate as it stands are obliged to offer a sensible alternative, because this opportunity should not be lost.

The problem: there may be no such alternative. Unfortunately, it is probably unreasonable to expect the current administration to renegotiate – this is what they achieved given their priorities.

Japan’s Economics Minister Akira Amari (L) with a journalist, next to U.S. Trade Representative Michael Froman, during a news conference after a four-day (TPP) Ministerial meeting in Singapore February 25, 2014. REUTERS/Edgar Su.

Turning to the next administration, it is hugely encouraging that the next president will have Trade Promotion Authority through his or her first term, where President Obama has only possessed it for a few months. Odds are good the next president will be interested in putting his or her own stamp on trade, as President Obama did in 2010.

The far bigger challenge is successfully renegotiating with 11 partners; they cannot simply be ordered to grant better terms. The simplest step is to renegotiate several key items, perhaps starting with converting non-conforming measures into free trade commitments with long phase-ins. Crucially, asking for more requires the president and Congress to be willing to offer more.

If this cannot work, free traders should not abandon the TPP. The next step would be to shrink the number of participants in the first round. This will harm US relations with the governments (temporarily) excluded and general American credibility to some extent.

However, these costs are far less than the cost of rejecting the TPP or signing what proves to be a weak TPP. Further, the logic of the TPP is for few members and a stronger agreement. The TPP exists in large part because the WTO has become so unwieldy as to make progress there all but impossible.

The US could shunt to a second TPP round the one or two countries which are making the most troublesome demands. It is again true that American side would have to make more concessions as well in a first round with countries more committed to free trade.

A final option is to first conclude a bilateral agreement with Japan that eliminates some flaws in the TPP. The motivation is a good chunk of the short-term benefits from the TPP for the US stems just from the inclusion of Japan. The immediate, sizable obstacle is that neither side may be truly willing, and free trade advocates should be highly cautious in touting this alternative.

Nonetheless, a major accomplishment of the Obama administration was to fold Japan into the TPP, where Japan signing a genuine free trade agreement seemed unthinkable a decade ago. It is now “thinkable” and, indeed, a good deal of work has been done. A US-Japan agreement would set terms for reciprocal access to the Japanese market and serve as the core of an improved TPP.

TPP proponents emphasize that the deal is much better than nothing. The alternative is not nothing. It will certainly not be easy to strengthen the TPP but it is possible and the US would benefit greatly from a strong TPP.

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TPP: A bronze-standard free trade agreement (go for gold)

The Trans-Pacific Partnership covers an enormous amount of ground and has important strengths and multiple weaknesses. Claims of its broad magnificence or awfulness are not credible.

The view here stems from reading all 30 chapters, the four bulky annexes, and various side letters. The first read (a longer paper will follow) says the Trans-Pacific Partnership (TPP) offers a net gain to the US but has too many long-term flaws to be considered a high-quality free trade agreement at this point.

Twelve nation members of the TPP hold a meeting in Lahaina, Maui, Hawaii July 28, 2015. REUTERS/Marco Garcia.

The key issues in reaching this conclusion:

Agriculture

Agriculture market access unquestionably improves under the TPP. Soybeans, a key American export and global foodstuff, would see open trade. This is also true for other products and, if TPP terms were extended globally, there would be hefty gains.

Most American agriculture producers will be understandably happy but, in the long term, the TPP may be seen as a lost opportunity. A number of countries, led by Japan, retain barriers that can in part be traced to retention of America’s own agriculture trade barriers. This is self-defeating behavior for the world’s largest agriculture exporter.

Intellectual Property (IP)

The IP chapter also constitutes a substantial improvement over current global treatment. In a much-needed step, the TPP extends explicit protection to digitized information and trade. And it updates IP protection elsewhere, for example with regard to geographical indications.

IP advances are unavoidably uneven and areas that lag will be keenly felt in the US, the top innovator. For instance, host countries can take up to five years to consider a patent application while protection of technical data can last as little as five years. This combination can undercut the incentive to innovate.

New Areas

The TPP breaks new ground on a number of fronts. The most obvious is e-commerce, which deservingly and beneficially gets its own chapter.

More subtle are the TPP’s broad accomplishments on transparency, which appear in a variety of chapters. With 12 economic and regulatory systems involved that can confuse individuals, companies, and even governments, transparency is the grease for progress from the TPP. This has been recognized in the terms.

Rules of Origin (ROO)

The one vital area where transparency is in question is ROO, which determine what is covered by the agreement. The ROO are generally loose, which fits with the free trade goal of promoting more exchange, not diverting existing exchange into a new bloc.

The problem is complexity. The content requirement to automatically qualify for the TPP is high and extensive rules for certain sectors look politically motivated. Some complexity is unavoidable but the TPP risks rendering firms uncertain how to take advantage of treaty terms and confusing customs agents charged with administering those terms.

State-Owned Enterprises (SOEs)

The SOE chapter sees a sharp tradeoff between present and future. It is a major step forward, especially on transparency, compared to essentially non-existent obligations for SOEs now. But it sets a dangerous precedent. There are too many ways to organize a state sector immune from TPP disciplines.

Sovereign wealth funds are immune, sub-national enterprises are largely immune, and national SOEs can fairly easily organize their subsidiaries to be immune, because a crude 50-percent rule is employed for ownership or board membership. Along these lines, the chapter erodes the argument that the US must set rules so China does not. China could game rules the US just set.

Non-conforming Measures (NCM)

The enormous amount of material on NCMs – where countries are allowed to ignore the agreement – make a case for the TPP overreaching in membership or issues or both. Non-conforming measures are unavoidable to some extent, but it is unwise to introduce new topics then allow precedents of non-compliance.

Vietnam, for example, should have been given long phase-in periods rather than outright protection from so many TPP requirements. The chapter on financial services is largely neutered by the annex on financial services NCMs. Transport services see a huge number of exemptions, possibly driven by America’s own harmful protectionism in shipping.

 

Two issues will receive more attention than they deserve:

Investor-state dispute settlement (ISDS)

Both sides of the debate exaggerate the importance of the ISDS chapter. It will not protect American companies from foreign governments if the latter wish to be predatory and it will not lead to meaningful change in American law. It matters, but not very much.

Exchange Rates

Currency is still more overblown. Japan has not been a currency manipulator for years. China is not a TPP member. Moreover, in 1994, China devalued the yuan 45% yet US unemployment fell to 4.6%. In 2005, China slowly revalued the yuan 30% and US unemployment rose. Exchange rates do not work the way protectionists insist.

 

There are groups loudly opposed to the TPP for whom the terms are a detail. For everyone else, the TPP comes down to a better trade environment in the short term versus long-term problems created by provisions that do not promote genuinely free trade.

In particular, innovation and agriculture are America’s main comparative advantages and the TPP offers notable improvement in both. It is sensible to argue these gains matter most. Against that are the painfully extensive non-conforming measures, badly inadequate treatment of state-owned enterprises, and risky rules of origin warping the future trade environment.

This may indeed have been close to the best agreement possible given the parties. But the outcome is a bronze-standard free trade agreement. The US must do better than bronze-standard free trade agreements.

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America vs. China: Showdown in the South China Sea?

“Expect more.”

That is the succinct response of a senior U.S. defense official when asked informally whether the dispatch in October of a U.S. Navy ship within 12 nautical miles of one of China’s newly constructed islands in the Spratly Island chain was a one-off event. Officials in the Obama Administration seem well aware that failure to follow on with their highly publicized freedom of navigation operations will send a signal of irresolve to China and Asia. The sail-through did little to settle the issue of Sino-U.S. tussling over the South China Sea, and the question now, is how will China respond.\

From one perspective, the length of time that it took Washington to make the decision to send the USS Lassen near Subi and Mischief Reefs itself is an admission that the Obama Administration remains wary of provoking China. Months of public comments by officials from the president on down resulted in no action until last week, and even then, it was but a lone U.S. destroyer sent to transit what until a few months ago had always been considered international waters. Even worse, claims that the destroyer engaged simply in “innocent passage” as opposed to any legally-allowed military activity on the high-seas further undermines the administration’s argument that it is not tacitly conceding China’s territorial claims.

From another angle, though, the sail-through was an acknowledgment that U.S. policy has failed. China has successfully built and militarized islands on what were formerly shallow reefs, and in doing so far dwarfed the efforts of other claimants in the disputed Spratlys. More pertinently, it has changed the “facts on the ground,” and created for itself power projection bases that greatly extend the reach of the Chinese military.

This is significant because no other nation makes claims nearly as expansive as China does, nor does any other nation have either as many territorial disputes or fields a military that it increasingly active in the region. China is qualitatively different, not just quantitatively, from its neighbors, and its policy of building militarized outposts astride the world’s most heavily-trafficked waterways must be understood as a potential threat to freedom of navigation and the maintenance of peace in Asia. By acquiescing in the existence of these outposts, the region accepts a greater degree of risk today than it did five years ago.

In many ways, the struggle over the Spratlys is less about the United States and China, than it is about China and its neighbors. Few observers expect Washington entirely to abandon its allies, reduce its presence, and alter its maritime operations. It is almost certain, moreover, that the next U.S. president will act with more firmness than the current one.

Yet China’s goal in the short-run is not to get the U.S. Navy to stop transiting the South China Sea. Rather, it is to alter the behavior of its neighbors and force the other claimants in the Spratlys to de facto surrender their positions. Such an achievement would both give China the dominant military position in the region, and also wind up isolating the Americans. After all, if other nations have given up trying to prevent China from altering the balance of power, then how can the United States act alone?

Thus, the assertion by the U.S. official above that Washington is just beginning its policy of pushing back against China. Freedom of navigation operations are as much about politics as they are about military maneuvers. Proving to allies such as the Philippines and potential partners such as Vietnam or Malaysia that the U.S. is serious about upholding international law and preserving the rules-based order that underpins Asian trade, is a crucial step to ensuring that China does not browbeat its neighbors into submission.

That is one reason that Washington needs to operate more with its allies and partners, and should conduct any future demonstrations with other nations who also feel threatened by China’s actions.

And what about increased risk, now that U.S. Pacific Command seems set on further operations? China angrily denounced the U.S. sail-through, and stated that in the future it would seek to prevent such actions. There is indeed a greater chance of an accident or skirmish between China and the United States. Both sides have ratcheted up their rhetoric to the point where even the attempt to peacefully resolve the situation can be interpreted as backing down.

Just as vexing will be “gray zone” situations. U.S. planners must prepare for a scenario where dozens of “private” Chinese fishing vessels seek to impede the safe passage of U.S. ships. Will the U.S. Navy run the risk of damaging or sinking ostensibly civilian vessels, no matter how dangerous to safe navigation?

The proof will be in the pudding. Either the U.S. Navy goes back into contested waters or it doesn’t. And either China tries to stop it or not. With the world watching, it will be very clear just who has the greater will.

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A last hurray for Republican tax slashers

The Republican party’s raison d’être is cutting taxes. It may even be its divine commission. God put Republicans on earth to cut taxes, the conservative columnist, Robert Novak, once said, and failure to do that means “they have no useful function”.

John Kasich, Jeb Bush, Marco Rubio, Donald Trump, Dr. Ben Carson, Ted Cruz, Carly Fiorina and Rand Paul pose during a photo opportunity before the debate. 11/11/2015 | Reuters

Republicans should pray for a new purpose. Their standing with middle-class voters is little improved from 2012. If Hillary Clinton becomes the 45th US president, it would be the first time since 1948 that the Republicans have lost three consecutive elections. Their “supply-side” orthodoxy would merit much of the blame. Big tax cuts, particularly for the wealthiest, do not work in an age of high inequality and heavy debt. Republicans need an economic agenda that respects markets while also recognising the challenges facing America and its anxious middle class.

Many of the party’s 2016 candidates seem to disagree that change is needed. Many have received the blessing of economist and supply-side evangelist Arthur Laffer and subjected themselves to vetting by the Committee to Unleash Prosperity, a group of era supply-siders from the era of President Ronald Reagan, including Mr Laffer and publisher Steve Forbes. Almost all have released economic plans built around “pro-growth” tax cuts costing trillions. At last month’s CNBC-hosted presidential debate, frontrunner Donald Trump dismissed a model showing his plan would reduce federal tax revenue by $10tn over the next decade: “The economy would take off like a rocket ship.”

Supply-side economics, primarily tax cuts but also deregulation and tight monetary policy, has driven Republican economics for decades, to great electoral success. But there are good reasons to view the next election as a last hurrah for Republican-style supply-side policy.

First, voters do not much care about taxes. Unlike a generation ago, more than half think their taxes are fair, according to a Gallup poll. Americans are sceptical low taxes produce broadly shared economic growth. A YouGov survey found only 29 per cent agreed lower taxes on the wealthy and business would generate higher incomes for all. The results are hardly surprising given recent history. The 1990s started booming after President Bill Clinton raised taxes. And the 2000s economy flagged despite George W Bush’s tax cuts.

Second, America’s fiscal situation makes deep tax cuts implausible. The federal debt-to-gross domestic product ratio is three times higher than when Reagan took office. There is more spending en route in the form of unfunded government pension and healthcare programmes. Starting in 2019, according to the Congressional Budget Office, such “mandatory” spending will begin an inexorable ascent as a share of GDP. Reforms to limit that rise will require higher taxes to win Democratic approval in Congress. Budget-busting tax plans seem ever more beside the point.

Third, tax cuts look like an answer desperately searching for a problem. Today’s top US marginal tax rate is 39.6 per cent, compared with 70 per cent before the 1981 Reagan tax cuts. The US is almost certainly not an example of the veracity of the Laffer curve, where lowering rates sometimes boosts tax revenue. Nearly half of households pay no federal income tax. And while targeted reform might help US economic dynamism, faster growth seems insufficient for broadly shared prosperity. Middle-class incomes have stagnated as inequality has risen.

America does need “supply-side” reform, but in ways that sync with how most economists use the term: expanding labour supply and boosting worker productivity. This would include business tax and regulatory fixes, but also policies to which Republican supply-siders give short shrift, such as education reform and public investment in infrastructure and science research.

There are signs candidates are starting to wriggle out of the supply-side straitjacket. At this week’s Republican presidential debate in Wisconsin, Marco Rubio said a larger tax credit for families was just as important as tax cuts for business. Ted Cruz would institute a value added tax, an efficient way to boost revenue for old-age prog­rammes. While 1980s-style supply-side doctrine still rules the Republican roost, it may not beyond November 2016.

The writer is a scholar at the American Enterprise Institute

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Downed plane reminds: War on terror not over

Evidence that terrorists destroyed a Russian civilian passenger plane over Egypt’s Sinai Peninsula continues to mount, although competent authorities still decline to say so definitively. It speaks volumes, however, that President Obama and British Prime Minister Cameron have already publicly mentioned the possibility of terrorist responsibility. Continued intelligence leaks about a bomb causing the crash and widespread suspensions of commercial flights to Sharm el-Sheikh, where the doomed plane originated, are also telling.

The remains of a Russian airliner which crashed is seen in central Sinai near El Arish city, north Egypt, October 31, 2015. Reuters

Accordingly, it is hardly premature to assess the consequences if investigators do decide that terrorists deliberately murdered 224 innocent civilians. Sadly reminiscent of Libya’s bombing of Pan Am 103 and UTA 772 under Moammar Qaddafi, the destruction of Metrojet Flight 9268 would prove tragically that the global terrorist threat continues to metastasize.

An ISIS affiliate in Egypt immediately claimed responsibility, but we cannot yet dismiss the Muslim Brotherhood, still locked in its decades-long conflict with Egypt’s military, as the culprit. In either case, terrorism would gravely weaken Egypt’s economy, particularly tourism, which has been struggling to emerge from the Arab Spring’s turmoil and violence. This potentially long-lasting economic damage explains Cairo’s reluctance to conclude publicly that terrorists caused the airliner’s destruction.

Metrojet’s Russian owner, by contrast, was quick to rule out mechanical failure or pilot error for the opposite but equally obvious desire, to escape responsibility. Moscow’s aviation authorities have been more circumspect, perhaps at the Kremlin’s behest.

Vladimir Putin’s bigger problem is the setback the tragedy may pose to his pursuit of a very forward Russian foreign policy, not only in the Middle East, but also in and around the former Soviet Union and even globally. In Ukraine, for example, Putin has reaped nationalist plaudits and political support in substantial part because casualties to the intervening Russian military forces have been so light. Were Moscow’s casualties to increase measurably, which could occur if NATO members were to provide Kiev with adequate weapons, training and advice, the Kremlin’s calculus would change overnight.

Putin’s considerations in the Middle East are similar, but even more problematic from the perspective of Russian domestic politics. His widespread efforts to restore Moscow’s regional influence to Cold War levels currently enjoy general popular approval. If, however, these tragic civilian deaths are in retaliation for Kremlin support to the Assad regime, as the ISIS affiliate has claimed, they directly threaten Putin’s broader strategy.

Learn more:

• 5 questions every presidential candidate should answer on ISIS

And if ISIS is responsible, it will be the biggest single mistake these terrorists have ever made. Once the crash’s cause is determined, Putin will have little choice but to inflict punishing retribution, both because he will likely believe it required geopolitically, and for his own domestic political reasons. Otherwise, the murdered civilians, and the risk of even greater anti-Russian terrorism, would call Putin’s penchant for adventurism into question, not just in the Middle East, but also in Europe.

Americans will shed no tears watching Russia destroy ISIS targets. For now, we cannot know whether Russian retribution against ISIS would be a one-time affair or would lead to protracted military conflict. Putin might satisfy his domestic political imperatives with one strike. Whatever the length and extent of the Kremlin’s response, greater Russian military conflict with ISIS does not mean Moscow will solve that problem for us. Moreover, if Putin responds with punishing force against ISIS, America’s regional allies will wonder why Obama has failed to do the same.

Learn more:

• 5 questions every presidential candidate should answer on the Putin regime

Nor will Russian military action alleviate in any way Washington’s fundamental problems in the Middle East. These remain our declining interest and influence; the growth of regional powers like Iran and ISIS that directly threaten America and its allies; and the rise of Russian influence in what was heretofore a U.S.-dominated region. If anything, Washington’s tasks are likely to be complicated by more evidence of vigorous, indeed belligerent Russian activism. And the principal regional threat will still be the terrorist-financing, nuclear-weapons aspirant Iran, which remains Putin’s most important Middle East ally.

Obama’s conduct notwithstanding, there will be no pirouette away from the Middle East for the next president. The global war on terrorism must continue, most definitely including ISIS.

John Bolton, former U.S. ambassador to the United Nations, is a senior fellow at the American Enterprise Institute.

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Senator Cruz, VATs are paid by people

As I pointed out last month, Senator Ted Cruz’s proposed 16% value added tax (VAT) and Senator Rand Paul’s proposed 14.5% VAT would be largely invisible to taxpayers because they would not be listed on customer receipts or pay stubs. And both candidates’ insistence on calling their VATs “business taxes” disguises the burden that the taxes would impose on American workers, including those at lower income levels.

Senator Cruz’s remarks at Tuesday’s Republican debate illustrate the danger of this tax camouflage. In response to a question from Fox Business Network journalist Maria Bartiromo about his plan, Cruz said, “for a family of four, for the first $36,000 you earn, you pay no taxes whatsoever. No income taxes, no payroll taxes, no nothing.”

U.S. Republican presidential candidate and U.S. Senator Ted Cruz greets supporters in Concord, New Hampshire November 12, 2015. REUTERS/Brian Snyder.

Apparently, the family’s 16% VAT burden doesn’t count. According to Cruz, this family wouldn’t pay the VAT and neither would anybody else. The revenue would simply materialize out of nowhere.

Senator Cruz’s response, which follows a similar statement in his recent Wall Street Journal op-ed, reveals that his proposed VAT’s hiddenness is a feature rather than a bug. His plan would make the tax hard to see precisely so that people could be told that they’re not paying it. The government would subtly and relentlessly tax away 16% of workers’ real wages while assuring them that they’re paying “no taxes whatsoever.”

Instead of challenging Senator Cruz’s breathtakingly false statement, Ms. Bartiromo oddly chose to press him about his plan’s revenue loss. As Cruz pointed out, though, the Tax Foundation estimates that his plan would have a smaller revenue loss than most of the other Republican candidates’ plans. At first glance, it may seem surprising that his plan would lose so little revenue while offering bigger individual income tax cuts than any of the other plans and eliminating payroll taxes, the corporate income tax, and the estate and gift tax.

But, there’s no mystery. Because the VAT is such a powerful revenue-raiser, a 16% rate would suffice to replace most of the foregone tax receipts. It also makes sense, as Cruz further pointed out, that the Tax Foundation projects a significant boost to economic growth from his plan. The VAT is growth-friendly because, unlike the individual and corporate income taxes and the estate and gift tax, it doesn’t penalize saving and investment.

It’s true that the VAT can raise large amounts of revenue without impeding the capital accumulation that helps drive economic growth. But it’s not true that VAT revenue comes out of thin air. Like other taxes, VATs are paid by people. And it’s wrong to tell the people who bear a tax that they’re not paying it.

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Minimum wage proponents narrowly focus on more money. Opponents focus more broadly on maximizing opportunities

In a Cafe Hayek post today on the minimum wage (“A Sufficient Reason to Oppose the Minimum Wage“), Don Boudreaux writes:

A sufficient reason to oppose the minimum wage is that it prices some people out of jobs that they would otherwise have voluntarily chosen to take. The number of people priced out of jobs is, for me, irrelevant to this assessment (although, of course, the greater the number of people priced out of jobs by the minimum wage, the worse is the magnitude of its undesirable and unwarrantable effects). Even if only one person is priced out of a job by the minimum wage (or more precisely, even if only one person is priced out of the job that he or she would have chosen to take in the absence of the minimum wage), I have sufficient reason to oppose it.

Nearly all politicians and popular pundits who endorse the minimum wage insist that it has no ill consequences for low-skilled workers. I have never heard the likes of Barack Obama, Hillary Clinton, Bernie Sanders, Andrew Cuomo, Jerry Brown, or Robert Reich ever, when pleading for a higher minimum wage, say something akin to “Many of you low-skilled workers will get a raise but some of you will be priced out of your preferred jobs. Indeed, some of you low-skilled workers are likely actually to be cast indefinitely into the ranks of the unemployed. But worry not, I’m guessing that each of you prefers to have a higher chance of being indefinitely unemployed because this higher chance of being unemployed comes along with a higher wage in the event that you do find jobs.”

At least the above announcement would be more honest than is the typical announcement that portrays the minimum wage either as a miraculous free lunch or as a policy the full costs of which are borne exclusively by people other than low-skilled workers. The above announcement would be even more honest if the pol or pundit making it would add that the increased prospects of being rendered unemployed by the minimum wage are not randomly distributed. In fact, those workers who are disproportionately likely to be rendered unemployed are workers who are least-attractive at the higher wage to employers (workers, say, such as inner-city minority single moms with neither high-school diplomas nor reliable means of personal transportation) while those workers who are disproportionately likely to remain employed at the higher wage are the ones who are most-attractive at the higher wage to employers (workers, say, such as retirees with long work experience who are drawn out of retirement by the higher minimum wage).

Don’s post made me think another way to view the arguments for and against the minimum wage.

Those who support increases in the minimum wage (Barack Obama, Hillary Clinton, Bernie Sanders, Andrew Cuomo, Jerry Brown, or Robert Reich) focus narrowly and almost exclusively on only one obvious and inevitable outcome — higher monetary wages for some unskilled and limited-experienced workers — while ignoring almost all other outcomes. Here’s how I would summarize the position of minimum wage proponents:

Maximize the monetary wages earned by some unskilled and limited-experience workers through government fiat, without regard to the many inevitable delayed, hard to measure, and invisible negative consequences of such policies on: a) unskilled workers and b) the companies that hire those workers.

On the other hand, I would suggest that supporters of a market-determined wage (minimum wage opponents) take a much broader and comprehensive view of the labor market for unskilled workers, and is a view that is much more humanistic and compassionate towards unskilled workers than the “greedy, grab as much money as possible” approach of Robert Reich et al. Here’s a summary of some of the goals of minimum wage opponents:

1. Maximize jobs and employment opportunities for unskilled workers.

2. Maximize the number of work-hours available to unskilled workers.

3. Maximize the chances that the highest number of unskilled workers will get the greatest amount of on-the-job training.

4. Maximize the chances that unskilled workers will get the greatest amount of non-wage fringe benefits (employee discounts, free or reduced cost meals, bonuses, raises, profit-sharing, healthcare benefits, etc.) and other non-wage job attributes (quality of workplace environment, flexibility in scheduling, upward mobility, etc.).

5. Minimize the likelihood that unskilled workers from minority groups will be victims of discrimination in the labor market.

6. Maximize the chances that existing small businesses that hire unskilled workers will prosper.

7. Maximize the chances that the greatest number of new small businesses that hire unskilled workers will emerge.

Bottom Line: Even though minimum wage proponents are generally characterized as being “compassionate” towards unskilled workers, I would suggest that they are primarily advocating a position of greed on behalf of unskilled workers by narrowly focusing on getting more money for some unskilled workers through a government mandate – without regard to the very un-compassionate long-term outcomes of such a mandate. Unskilled and limited-experience workers who want the greatest chances to gain job experience, get on-the-job training, and develop job skills that make them more marketable (and more highly paid) in the future, will be much more effectively served by the position of the supposedly un-compassionate minimum wage opponents.

In the end, unskilled workers don’t need our compassion. They need jobs. And the way to maximize employment opportunities and jobs for those workers is clearly a (compassionate) world without minimum wage laws government mandated price floors that guarantee reduced employment opportunities for low skilled and limited-experience workers, especially minorities.

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A last hurrah for Republican tax slashers

Republican U.S. presidential candidates in the debate held by Fox Business Network for the top 2016 U.S. Republican presidential candidates in Milwaukee, Wisconsin, November 10, 2015. REUTERS/Jim Young.

From my new column in the Financial Times:

The Republican Party’s raison d’être is cutting taxes. It may even be its divine commission. God put Republicans on earth to cut taxes, the conservative columnist, Robert Novak, once said, and failure to do that means “they have no useful function”.

Republicans should pray for a new purpose. Their standing with middle-class voters is little improved from 2012. If Hillary Clinton becomes the 45th US president, it would be the first time since 1948 that the Republicans have lost three consecutive elections. Their “supply-side” orthodoxy would merit much of the blame. Big tax cuts, particularly for the wealthiest, do not work in an age of high inequality and heavy debt. Republicans need an economic agenda that respects markets while also recognising the challenges facing America and its anxious middle class. …

Supply-side economics, primarily tax cuts but also deregulation and tight monetary policy, has driven Republican economics for decades, to great electoral success. But there are good reasons to view the next election as a last hurrah for Republican-style supply-side policy.

What can be done?

America does need “supply-side” reform, but in ways that sync with how most economists use the term: expanding labour supply and boosting worker productivity. This would include business tax and regulatory fixes, but also policies to which Republican supply-siders give short shrift, such as education reform and public investment in infrastructure and science research.

There are signs candidates are starting to wriggle out of the supply-side straitjacket. At this week’s Republican presidential debate in Wisconsin, Marco Rubio said a larger tax credit for families was just as important as tax cuts for business. Ted Cruz would institute a value added tax, an efficient way to boost revenue for old-age prog­rammes. While 1980s-style supply-side doctrine still rules the Republican roost, it may not beyond November 2016.

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The EU leads boldly on Israeli-Palestinian peace

Yesterday, the European Union in its infinite wisdom decided to implement a demand that all products made in Israeli settlement the West Bank and Gaza be labeled. CNN explains:

Labeling such goods as “product from Golan Heights” or “product from West Bank” would not be specific enough and therefore would not be acceptable, the commission said. Instead, the goods would have to be labeled something along the lines of “product from the Golan Heights (Israeli settlement)” or “product from West Bank (Israeli settlement),” the commission said.

This is a brilliant idea, like so many emanating from Brussels. I can think of no better way to advance the peace between the Israelis and the Palestinians than this important labeling initiative.

A worker places labels on wine bottles while packaging them for export at Shiloh Wineries, north of Ramallah on November 8, 2015. REUTERS/Baz Ratner.

But what I don’t understand is: Why stop there? There are so many problems that could be solved by taking a bold labeling stand. Consider:

• Spanish occupied Catalunya
• Indian occupied Kashmir
• Turkish occupied Cyprus
• Syrian occupied Alexandretta
• Armenian occupied Nagorno Karabakh
• Russian occupied Crimea
• Chinese occupied Tibet
• South Korean occupied Korea
• Mongolian occupied Mongolia
• Chinese occupied Scarborough Shoal
• UK occupied Gibraltar
• UK occupied Falklands

There are many, many more. And I am simply amazed that we have not seen the path towards peace in each of these, and the umptillion other territorial disputes out there.

What, you say, but there are no Jews occupying those other places? We only condemn the Jews? Well, of course. Because only the Jews are especially worthy of EU condemnation. Next, a yellow star. Now that would be bold.

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One debate, two perspectives

In contrast to the previous two Republican presidential debates, which were criticized for quirky and “gotcha” questions, the one held in Milwaukee on Tuesday night by Fox Business Network got right into meaty issues with a question on the minimum wage. Bloomberg View’s Ramesh Ponnuru and Paula Dwyer give their blow by blow of some of the issues discussed.

Dwyer: Donald Trump says he’s not sympathetic with people who want a $15 minimum wage. I wonder if that’s going to cost him support among working-class voters.

Ponnuru: Wasn’t much of his case for immigration restriction that it would raise wages? Now he says wages are too high.

Dwyer: Ben Carson says only about 20 percent of black teenagers have a job because of high wages. I’m not sure that’s the reason. I think it’s more because there are just not enough jobs available where they live.

Ponnuru: Marco Rubio is doing a nice job of sketching an alternative way of thinking about expanding opportunity, so that his hostility to raising the minimum wage does not come across as lack of sympathy for people working in low-wage jobs.

Dwyer: Jeb Bush says his economic plan would create “an explosion in investment” in part by cutting Obama’s regulations, including those for controlling carbon emissions and the Dodd-Frank financial reforms. I’m not convinced that Obama rules are strangling economic growth, judging by how profitable many companies have been the last several years.

Ponnuru: The funny thing about the prevailing line on the Fed from my fellow conservatives is that they overestimate its power. They think that low interest rates are entirely a function of Fed policy, and not larger economic conditions. It’s an assumption they rarely defend.

Dwyer: Trump applauds this week’s court decision blocking Obama’s executive order on immigration. He isn’t backing down on the wall, or on sending illegal immigrants out.

Ponnuru: Right, but he has talked out of both sides of his mouth on legal immigration — and has sometimes suggested that he would let a lot of deported illegal immigrants back in.

Dwyer: Bush says it isn’t possible to send back 12 million immigrants, that it would go against American values and tear communities apart. And even having this conversation sends a powerful signal that cheers Democrats, he says. I think he’s absolutely right, but it further makes it hard for Jeb to win over primary voters.

Ponnuru: Anti-immigration activists already hate Bush, and he’s not going to win them over by failing to make his case forcefully. It feels like Ted Cruz is setting up a contrast with Rubio on immigration, and will finish the argument later.

Dwyer: Carly Fiorina mentions state-managed high-risk pools as an Obamacare alternative. But that has been thoroughly debunked. Those pools didn’t work out in the states that tried them. Also, they require subsidies because people with pre-existing conditions face very high premiums in these pools. They are hardly an Obamacare alternative.

Ponnuru: Fiorina has, however, also talked about continuous-coverage protections, which would work alongside high-risk pools. If she also proposed tax credits along the lines of the Hatch-Upton plan, I think you could make a pretty good case that high-risk pools would work better than they have in the past. But in general, Fiorina has avoided committing to much policy substance.

Dwyer: Continuous coverage seems just as unworkable. Most workers don’t understand that, once they are fired or resign from a job, if they don’t keep up their insurance premiums (on their own, without the employer contribution), they become uncovered and have to go into the individual market. And that’s where pre-existing conditions can be devastating financially.

Ponnuru: Both Cruz and Paul are touting tax plans that involve value-added taxes, but they’re not saying so. And Paul is talking about getting rid of payroll taxes without noting that his VAT takes back most of that tax cut for workers.

Dwyer: Rubio is forced to defend his call for a $2,500 child tax credit, which would increase the deficit. He says the family is the most important institution, and is proud of being pro-family. But as Paul points out, it’s a new form of transfer payment, and doesn’t qualify as conservative.

Ponnuru: Paul does not know what he’s talking about. He says that the child credit would be a transfer payment because it doesn’t just give people their tax money back — it gives them money beyond that. That’s not true.

Dwyer: Trump calls the Trans-Pacific Partnership a horrible idea, designed to let China come in through the back door. I expected nothing less from Trump, the Ross Perot of our day. Trump doesn’t understand the $50 billion trade deficit the U.S. has with Mexico. Relative to the increase in global trade, it’s peanuts. Trump also doesn’t seem to understand, as Paul just said, that China isn’t part of the TPP deal.

Ponnuru: Yes, that was a nice moment from Paul.

Dwyer: Trump accuses other countries of manipulating their currencies to get an advantage. That may be so — and no doubt China does that, though less so now than before — but a trade agreement isn’t the place to deal with that. Imagine how handicapped the U.S. would be if a Fed interest-rate cut were judged by trading partners as prohibited currency manipulation?

Ponnuru: Right. The only way to avoid that would be to come up with a definition of manipulation that is highly unlikely to apply to us — but then, why would other countries agree?

Dwyer: Bush calls for higher capital requirements on big banks, which have control over more assets than they did pre-crisis. He’s right on that score. Carson sounds like a Democrat — Bernie Sanders even — when he says we should have policies that stop banks from getting big.

Ponnuru: I’m sure someone else will do a count, but it seems as though Bush is hitting Clinton a lot more than anyone else. The original theory of a Bush campaign was that he was going to be working harder than the rest of the Republican candidates to position himself for the general election. Tonight, at least, he is actually delivering on that promise a little.

Dwyer: Cruz says he’d let a faltering Bank of America fail. Moderator Neil Cavuto is incredulous. Now Cruz is blaming the Fed for tightening in 2008 and collapsing the real estate bubble. So he realizes he stepped into it by saying he’d let a big bank fail, with all the chaos and cascading defaults that would trigger. So he tries to recover by calling for “sound money” and a weaker central bank.

Ponnuru: Conservatives have generally (rightly in my view) criticized the Fed for being too loose from 2003-06, but almost nobody in politics, left or right, criticizes the Fed for being disastrously tight in 2008, which it was. So I was glad to see Cruz make that point.

Dwyer: Kasich says turning the Fed over to Congress scares the heck out of him. Cruz challenges Kasich for saying he’d save Bank of America but not a community bank. Kasich should (but doesn’t) say that’s exactly right — a community bank presents no systemic issues, while BofA does.

Ponnuru: I thought it was a good, relatively substantive debate. If Bush’s backers needed him to have a spectacular performance to reassure them, he failed the test. If they needed steady improvement, he passed it. Rubio and Fiorina had solid performances again. I cannot see Republicans liking what they heard from Rand Paul and John Kasich. I continue to think that Trump is getting more boring as he becomes a regular candidate. And Ben Carson’s appeal doesn’t seem to have a lot to do with his debate performances, which is lucky for him.

Dwyer: I think Rubio really outshone the others. Cruz and Carson were just OK. Bush didn’t stumble but he didn’t sparkle either. Fiorina sounded like a broken record on government-as-socialism and a three-page tax code. Kasich and Paul had their moments, but they weren’t consistent.  And Trump, as usual, faded when the debate turned to actual substance. But at least the moderators didn’t lose control of the discussion this time.

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