Do conservatives have anything to say about cities?

Democrats do better electorally where it’s crowded, Republicans where it’s less so. The greater the population density, the bluer a state, region, or city. And that’s too bad, argue Michael Hendrix and Andrew Evans in National Affairs, because “the result of this electoral reality is that Republicans rarely control the levers of power in some of the areas with the most people and greatest economic vitality.”

A more important result is that one-party, Democratic dominance means these cities are often closed to disruptive forces that could help them more fully unleash their economic potential:

As a result of decades of Democratic governance and misplaced priorities, however, American cities do not offer the opportunities for success and growth that they should, especially for those looking to climb the socio-economic ladder. In many cases, city governments are utterly dysfunctional. And the reason for this dysfunction is that our cities are too often closed — closed to businesses and closed to outsiders. For the middle class and those striving to make it up the ladder, the taxes, housing, and other costs leave cities simply too expensive to afford — especially with a family. Excessive regulation makes it difficult, if not downright impossible, to get the permits necessary to start a business. Cronyism and a lack of transparency make it difficult to know whether anyone is trying to fix the situation. The reality is that American cities — with their insufficient affordability and poor governance — suffer from a profound lack of opportunity and a surplus of problems.

Cities are important, both for the millions who live in them and the economic growth they generate for the nation as a whole. “Cities,” says Richard Florida, “spur the mixing and mingling of talented people that lead to technological inventions and the formation of entrepreneurial enterprises.” And when that mixing process is working right, everyone benefits. Research from Enrico Moretti has found that for each new innovation-job in a city, five additional jobs are created. “For each new software designer hired at Twitter in San Francisco, there are five new job openings for baristas, personal trainers, therapists and taxi drivers, ” Moretti wrote in the Wall Street Journal back in 2013.

Hendrix and Evans wants to deregulate cities to open them up to new workers, to new entrepreneurs big and small, and to more transparency and accountability. They want to make it easier to build housing, get a business permit, see online what your city government is up to. “Since cities are closed, conservatives should seek to make them open,” Hendrix and Evans write. That word, “open,” is an important one, argues Scott Beyer of the Market Urbanism blog in post about the the Hendrix and Evans essay, because it inverts political stereotypes. Beyer:

At the national level, Democrats are portrayed as the open and tolerant ones, and Republicans as the reactionary ones trying to uphold the status quo. These distinctions have been established largely because of the parties’ differing approach to social issues. But this is hardly applicable to cities, where issues are rooted more in economics and quality-of-life. A large number of urbanites—whether they want to call themselves liberals, progressives, or Democrats—are in fact quite reactionary themselves, a point emphasized by the authors. Housing regulations have been used by the urban left to restrict new construction, as if city neighborhoods are gated country clubs that should never allow change or new people. The liberal business elite have fortified the business permitting process so much that, in many cities, it is nearly-impossible for competing entrepreneurs to enter basic professions like hair-styling. And to carve out a voting bloc, the left has defended unionized public monopolies that deliver services at far higher cost, and less efficiency, than is necessary.

Some some possible elements of an urban agenda that come to mind: housing deregulation, charter schools, prison reform, occupational licensing reform, expanded income supports …

By the way, a few other posts on the housing issue:

— We need to make it easier for US workers to get to where the good jobs are

— That Financial Times study on US income inequality and housing totally misses the point

— Some smart thoughts on housing, jobs, and economic growth

— How government housing policy worsens inequality and harms economic growth

— Venture capitalist Sam Altman of Y Combinator on how to boost US innovation and growth

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The Supreme Court just slashed the odds on ESEA reauthorization

NCLB is closer to being rewritten than it’s been any time since the law was passed in 2001. The Every Student Achieves Act will go to the Senate floor in a week and is likely to pass with a healthy majority. Meanwhile, HR5 is awaiting a vote on the House floor. Both bills would represent a big improvement on current law—and a massive improvement over the Obama administration’s current waiverocracy. So, why do I put the odds of final passage at no better than 1-in-5, and why do I think that the Supreme Court just slashed them?

Remember, Republicans hold healthy majorities in both the House and Senate. Both the House and Senate bills should hold a particular appeal for conservatives: they would reduce Uncle Sam’s role in schooling, put an end to federal micromanagement of accountability systems and school improvement, go further to try to keep Washington out of state standards, and end Obama’s lawless “NCLB waivers.” But the bills would not get the federal government as far out of K-12 as conservatives would like. Meanwhile, they include lots of convoluted provisions, including more than a few that might be bent out of shape by a Secretary of Education eager to do so. This is why the House’s HR5 has struggled. After all, the bulk of the House GOP caucus didn’t run for Congress to fine-tune federal education policy—they ran to rein in Uncle Sam. And, while the Senate will prove an easier lift for ESEA, there are a number of key Republican senators (Rubio, Cruz, Paul, Lee, et al.) of whom the same is true.

Such concerns make it tough to see how one gets reauthorization through the heavily Republican House. While the fears that have hobbled HR5 in the House tend to get dismissed by mainstream education advocates, they’re understandable in the age of Obama. After all, this is a president who has granted himself the right to unilaterally ignore or rewrite statute relating to immigration, health care, education … well, pretty much whatever he’s felt like.

The ESEA bills only hold their appeal for Republicans if they trust that the law would actually rein in the federal government as promised. This means that they need to trust that the law says what they’d like it to say, and then that the law would be applied accordingly. After all, half a loaf is only appealing if you actually think you’ll get your half. For a huge number of conservatives, last week’s Supreme Court decision in King v. Burwell (especially in concert with its decisions on gay marriage and disparate impact) pretty much finished kicking the legs out from under that presumption. An increasing number of conservatives, with much justification, now see themselves in a death match with executive and judicial branches that will disregard statute when given even an inkling of an opening.

How do conservatives see things after last week? Here’s Justice Scalia in his scathing dissent: “Words no longer have meaning if an Exchange that is not established by a State is ‘established by the State’ … Under all the usual rules of interpretation, in short, the Government should lose this case. But … the Court’s decision reflects the philosophy that judges should endure whatever interpretive distortions it takes in order to correct a supposed flaw in the statutory machinery.” He continued, “More importantly, the Court forgets that ours is a government of laws and not of men. This Court ‘has no roving license … to disregard clear language simply on the view that … Congress ‘must have intended’ something broader.”

National Review’s Kevin Williamson opined, “The Supreme Court has firmly established that it does not matter what the law says or does not say… [Rule of law] would be a good idea, at least an interesting experiment. For the moment, though, there’s only power, the men who have it, and the things they do with it.” Andrew McCarthy, an influential conservative legal pundit, argued, “For all the non-stop commentary, one detail goes nearly unmentioned—the omission that best explains [the frustration]. Did you notice that there was not an iota of speculation about how the four Progressive justices would vote? There was never a shadow of a doubt … And it is not so much that they move in lockstep. It is that no one expects them to do anything but move in lockstep.”

Conservatives survey the Court and a possible Clinton victory in 2016 and worry that statutory compromises will prove a frail bulwark against the whims of a post-Obama president and the preferences of her potential Court appointees. That’s the lesson that many conservatives take from seven years of Obama and a putatively conservative Supreme Court. A broad swath of the right is increasingly inclined to conclude that there’s no point in compromising with the progressive state—that even attractive compromises will prove tantamount to defeat by the time the executive and judicial branches get through with things, so they may as well hold for total victory (however unlikely).

This kind of resignation promises doleful consequences. One of the more modest and immediate, for those involved in K-12 schooling, is that many congressional Republicans may decide that “kooky” fears about this or that provision in an ESEA reauth aren’t all that kooky after all.

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BuzzFeed shows how silly pretenses of neutrality leads to intolerant contortions

 

To explain why his website used a rainbow Twitter avatar to celebrate last Friday’s ruling that the Constitution guarantees gay marriage, BuzzFeed editor Ben Smith told his old colleagues at Politico, “We firmly believe that for a number of issues, including civil rights, women’s rights, anti-racism, and LGBT equality, there are not two sides.”

This could be a line from an Anthony Kennedy Supreme Court opinion, standing, as it does, on the border between silly idea and pleasant rhetoric. But I still think it’s important and telling in a few ways. Most importantly, it (1) reflects the ideological cloistering of our national media, and (2) shows the perils inherent in the media pretensions to objectivity and impartiality.

360b / Shutterstock.com

When Smith says there is only one side to “LGBT equality,” he is saying it in the context of his website celebrating the latest Supreme Court ruling that found, in the Constitution, an obligation that states redefine marriage to include same-sex couples.

It’s obvious that there are two sides to the legal question. Nearly half of the Supreme Court justices were on the opposite side of BuzzFeed on this issue. Many supporters of gay marriage disagree with BuzzFeed and the Supreme Court on the ruling, because the Court’s ruling was obviously policymaking from the bench covered with a paper-thin veneer of legal reasoning.

A plurality of respondents said in a recent poll that the Supreme Court shouldn’t rule that gay marriage is a constitutional right.

On the more basic policy question — should states marry same-sex couples? — BuzzFeed probably finds itself in the majority, but not an overwhelming one. That same poll found a 49 to 41 plurality in favor of gay marriage.

A vast majority of states, when allowed to settle the matter democratically, chose not to redefine marriage to include same-sex couples.

So BuzzFeed’s Smith is either denying this huge portion of the country — somewhere from 40 to 50 percent — exists, or else his “not two sides” declaration means he and his company view this chunk as holding an opinion outside the bounds of decency.

That’s quite a position.

More interesting to me, though, is how the episode highlights the impossibility of a central pretense of the American media: impartiality and objectivity.

Dylan Byers at Politico juxtaposed Smith’s quote to BuzzFeed’s standards, which read:

[W]hen it comes to activism, BuzzFeed editorial must follow the lead of our editors and reporters who come out of a tradition of rigorous, neutral journalism that puts facts and news first.

I love traditions, rigor, and when possible neutrality. But the fact is every editor and every reporter has views and biases. At the very least, everyone is reporting from a perspective. “Objectivity” is an impossibility, because we’re always a subject trying to understand and explain an object, but necessarily from the outside.

But on some issues, no decent person can be impartial, as Smith states. The New York Times doesn’t act as if there’s a legitimate debate over the propriety of the Islamic State burning someone alive. On that sort of issue, they are brought to admit what they deny in some cases: that they clearly have opinions.

The Huffington Post put up rainbows on Friday, too, and they gave Byers a perfect explanation of why. Byers reported:

Lena Auerbuch, a spokesperson for Huffington Post, which is admittedly liberal and officially came out in support of gay marriage in 2013, said Friday, “We’ve always supported marriage equality and we’re glad it’s the law of the land.”

Smith could do the same, and admit that his publication takes the liberal position on this question. Instead, in order to hold on to that imaginary chalice of objectivity, he has to pretend the other position doesn’t exist.

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Supreme Court lets Obama administration say words don’t mean what they say

For most people, words mean what they say. But not necessarily for a majority of Supreme Court justices in two important decisions handed down Thursday.

In the most prominent, King v. Burwell, Chief Justice John Roberts, writing for a 6-3 majority, ruled that the words “established by the state” mean “established by the state or the federal government.”

In a second decision, Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Justice Anthony Kennedy, writing for a 5-4 majority, ruled that the omission in the 1968 Fair Housing Act of words banning acts that have a disparate impact on people of different races didn’t matter. The plaintiff could bring a lawsuit anyway.

Shutterstock.com

Both cases were victories for the Obama administration and for the proposition that the executive branch can rewrite laws to say what they want them to say.

The results are particularly striking, since neither case was a challenge based on the Constitution. They simply required the Court to interpret the words of a statute — words that can be changed by an act of Congress.

But waiting around for Congress to act is not the modus operandi of the second-term Obama presidency. Results are what the president wants, and if the plain meaning of words has to be ignored — well, the Red Queen from Alice in Wonderland provides guidance on that.

A contrary decision in King v. Burwell would certainly have had some unpleasant consequences, as the chief justice noted. Obamacare, as passed by Congress, provided for insurance subsidies only in states which established their own health exchanges. It specifically did not authorize subsidies in states which took the other option of using an exchange set up by the federal government.

Obamacare fans dismiss this as a drafting error, an unexplainable glitch. But it’s very much in line with the way Congress has drafted numerous statutes. Under settled constitutional law, Congress can’t require state governments to do things. But it can provide money on the condition the states do what it wants.

And since the 1930s, the states have usually accepted such bargains. That’s how, for example, we had a 55 mile-per-hour speed limit for several years and have now a 21-year-old drinking age. If you don’t accept those conditions, you don’t get federal highway (and mass transit and bike path) money.

But much to the surprise of Obamacare’s framers, notably including MIT economist Jonathan Gruber, 36 states declined to establish their own health exchanges. So if the Supreme Court interpreted the words “established by the state” to mean “established by the state,” some 6 million people would have lost their health insurance subsidies.

Barack Obama rightly pointed out that in that case, Congress could restore the subsidies by adding four words — “or the federal government” — to the statute. But a Republican-majority Congress would insist on other changes, though Republicans don’t seem to have reached consensus on exactly what.

That could have meant a year-long battle between a statute-writing Congress and a veto-wielding president. The Court’s decision spares them that battle.

The chief justice’s King v. Burwell decision was crisply written and assertive. Justice Kennedy’s Inclusive Communities decision, in contrast, was almost apologetic. The issue was not whether the Fair Housing Act prohibits intentional discrimination — everyone agrees that it does. The issue was whether the fact that more monies go to heavily black (or white or Hispanic) neighborhoods than to others — “disparate impact” — was enough to trigger a lawsuit.

The Obama administration has scrambled to keep this issue away from the Court, lest it frustrate HUD’s program to “diversify” affluent neighborhoods with low-income housing.

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Ukraine must reform to free itself from dependence on Russian gas

Germany – and its chancellor Angela Merkel – deserve credit for the continuation of the EU’s sanctions regime against Russia. But Germany happens also to be home to the energy giant E.ON, which recently signed a (non-binding) memorandum, together with Russia’s Gazprom, Austria’s OMV, and Shell from the UK and the Netherlands, agreeing to the extension of the Nord Stream pipeline, which brings Russian gas into the European Union (EU).

The extension, to be completed by 2020, would double the transit capacity of the pipeline, currently at 55bn cubic meters per year. Together with Turkish Stream, another project Gazprom is toying with, it would make gas transit through Ukraine redundant by the time the country’s current contract with Gazprom expires in 2019.

That is hardly a thrilling prospect for the cash-strapped government in Kiev. But the problem extends beyond transit fees, which have fallen dramatically since the beginning of the conflict. If Gazprom can bypass Ukraine, it will be in a much stronger position in its negotiations over the supply of natural gas to Ukraine proper – including its large energy-intensive industries in eastern and southern Ukraine.

The extension of Nord Stream is bad news for the EU as well. It would cement the dependence of many of its members on Russian gas, instead of encouraging them to diversify. In fact, it appears that the European authorities were caught off guard by the deal. The EU commissioner for energy union, Maros Sefcovic, looked more than a little flustered when quizzed about the memorandum at the Globsec security conference in Bratislava. It is, however, vitally important that the Commission scrutinize the deal carefully, particularly on competition policy grounds, and stop it if necessary – even if doing that would mean going against powerful business interests.

While Russia depends on its gas exports to Europe, the frantic efforts to build alternative gas routes to Europe have little to do with economics or energy security. For the Kremlin, the enhancement of Nord Stream and the possibility of constructing Turkish Stream, leading from Russia through the Black Sea to Turkey and Greece, play the role of a bargaining chip in its dealings with Ukraine.

What is more, as the EU Observer noted, it is possible that the multitude of different plans for alternative gas routes from Russia, including South Stream, which was cancelled last year, are being presented to the west with the conscious purpose of confusing Europeans, creating divisions between member states, and identifying the ‘weakest links’ on the continent, which can be used to exercise further leverage.

Throughout the post-Soviet era, the Russian regime has used gas prices as a means of exercising leverage over Ukrainian politics and maintaining instability. Gazprom cut supplies in January 2006, following a year of threats in the aftermath of the Orange Revolution, and again in January 2009, a year before the election of Viktor Yanukovych. There is little reason to think that Vladimir Putin would hesitate to use the same tools again, if given a chance.

However, for Ukraine, there is a way out – no matter what Gazprom or the EU may do. The country needs a deep program of structural reforms. The energy-intensive sectors in the country’s south-east are hardly the industries of the future. They need to be exposed to market-based energy prices and eventually restructured. While the current government is progressively reducing energy subsidies, it still has a long way to go to eliminate them altogether and to make sure they will not be reintroduced by populist policymakers later on. This can be achieved by privatizing the energy sector, setting up an independent regulatory agency, credibly insulated from political pressures, and diversifying the country’s energy sources.

More importantly, instead of trying to sustain an economy organized around cheap Russian energy, Ukraine needs to be aggressive in attracting foreign investment. That can only be done through a far-reaching program of economic and institutional reforms. The country needs to strengthen the rule of law, fight corruption more effectively, cut unnecessary red tape, and make itself attractive both to foreign and domestic businesses.

Eighteen months since the Maidan, Ukraine is staring into an economic, political, and social abyss. One hopes that an unintended consequence of Gazprom’s current shenanigans will be to force Ukrainians to think carefully about the future of their country and emulate the success of their more affluent neighbors in the west.

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Iran nuclear talks set to go beyond deadline: Bolton on Fox News’ ‘America’s News HQ’

Senior Fellow John Bolton discusses the current state of negotiations with Iran for a nuclear deal on Fox News' ' America's News HQ.'

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Happy Birthday, Frederic Bastiat

Tomorrow, June 30, marks the 214th anniversary of the birth of the great French economist Frédéric Bastiat (born June 30, 1801) whom economist Joseph Schumpeter called the “most brilliant economic journalist who ever lived.” Celebrating Bastiat’s birthday has become an annual tradition at CD, and below I present some of my favorite quotes from the great liberty-loving, influential French economist:

1. One of Bastiat’s most famous and important writings was “The Petition of the French Candlemakers,” which is such a clear and convincing satirical attack on trade protectionism that it often appears in textbooks on economics and international trade. Here’s an excerpt from that famous 1845 essay:

We [French candlemakers] are suffering from the ruinous competition of a foreign rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival is none other than the sun.

We ask you to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds—in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat.

2. In 1845, as a solution to counteract job losses in some French domestic industries (like textiles) due to free trade, Bastiat proposed to the King of France that he “forbid all loyal subjects to use their right hands.” Bastiat predicted that:

…as soon as all right hands are either cut off or tied down, things will change. Twenty times, thirty times as many embroiderers, pressers and ironers, seamstresses, dressmakers and shirtmakers, will not suffice to meet the national demand. Yes, we may picture a touching scene of prosperity in the dressmaking business. Such bustling about! Such activity! Such animation! Each dress will busy a hundred fingers instead of ten. No young woman will any longer be idle. Not only will more young women be employed, but each of them will earn more, for all of them together will be unable to satisfy the demand.

3. Here’s Bastiat’s famous quote on legal plunder (now frequently referred to as “crony capitalism”):

Legal plunder can be committed in an infinite number of ways. Thus we have an infinite number of plans for organizing it: tariffs, protection, benefits, subsidies, encouragements, progressive taxation, public schools, guaranteed jobs, guaranteed profits, minimum wages, a right to relief, a right to the tools of labor, free credit, and so on, and so on. All these plans as a whole—with their common aim of legal plunder—constitute socialism.

But how is this legal plunder to be identified? Quite simply. See if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime.

Note: As I pointed out recently on CD, the minimum wage law is a form of legal plunder because it takes money from some persons (business owners) what belongs to them, and gives it to other persons (unskilled workers) to whom it does not belong. The minimum wage law clearly benefits some citizens (entry-level workers) at the expense of employers by doing what the workers cannot do without committing a crime of theft. So let’s put aside all of the economic arguments about what economic theory and empirical evidence show regarding the possible employment effects of government mandated minimum wages, and consider something even more basic and fundamental: the minimum wage is legalized, government-sanctioned plunder/theft from business owners, and therefore on that basis should be considered morally objectionable, unethical and unacceptable.

4. Four days before his death in 1850, Frederic Bastiat sent this message to a friend:

Treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race.

5. When a new railroad line was proposed from France to Spain, the French town of Bordeaux lobbied for a break in the tracks so that “all goods and passengers are forced to stop at that city,” which would therefore be “profitable for boatmen, porters, owners of hotels, etc.” Using reductio ad absurdum, Bastiat proposed that if a break in the tracks provided economic benefits and jobs for one town and served the general public interest, then it would be good for breaks in the tracks at dozens and dozens of other French towns, to the absurd point that there would be a railroad composed of a whole series of breaks in the tracks, so that it would actually become a “negative railway.”

6. In his famous essay “What Is Seen and What Is Not Seen,“ Bastiat was one of the first economists to make the very important distinction between the immediate, concentrated and visible effects of legislation or regulation and the delayed, dispersed and invisible effects:

In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

To illustrate the principle of “what is seen and what is not seen,” Bastiat told a story that became known as the “The Parable of the Broken Window,” which was modernized in the 1940s by Henry Hazlitt in his book “Economics in One Lesson.” Here’s a quick summary:

A baker has saved $50 to buy a new suit, but then a young hoodlum throws a brick through the shop owner’s window and the baker now has to spend $50 to replace the window and forego the purchase of the new suit. If one ignored the invisible effects of the broken window, one could argue then that the hoodlum was public benefactor by stimulating business for the window company that now receives $50 to replace the window. But instead of the baker having $50 for a new suit and a window, he now only has the window and no suit. And the invisible unseen party in the parable is the tailor, who would have benefited $50 from selling the baker a new suit, but now loses that business. Observers will see the visible new window but will never see the invisible new suit, because it will now never be made.

Here’s how Bastiat explains the unseen, invisible effects of the shopkeeper spending six francs to replace the broken window:

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

7. “The State [government] is the great fiction, through which everybody endeavors to live at the expense of everybody else.”

~The State in Journal des Débats (1848).

8. “When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it.”

~Economic Sophisms, 2nd series (1848)

9. “Everyone wants to live at the expense of the State. They forget that the State lives at the expense of everyone.”

~Source unknown

10. “Trade protection accumulates upon a single point the good which it effects [for domestic producers], while the evil inflicted is infused throughout the mass [of consumers]. The one strikes the eye at a first glance [benefits to producers], while the other becomes perceptible only to close investigation [losses to consumers].”

~Source unknown

Bottom Line: Bastiat was truly an economic giant and deserves credit for his many significant and important intellectual contributions to economic thinking that are as relevant today as they were in France in the mid-1800s when Bastiast was writing, including: a) Bastiat was one of the first economists to warn us of the dangers of legal plunder, crony capitalism and trade protectionism, b) he helped us understand the importance of looking at both the unseen and delayed effects of legislation and regulation in addition to the immediate and visible effects, c) he was one of the most eloquent and articulate defenders of individual freedom and liberty who ever lived, and d) he was probably the strongest advocate for the consumer in human history.

Happy Birthday Bastiat!

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Discussing Hillary Clinton’s emails: Thiessen on Fox News’ ‘America’s Newsroom’

Fellow Marc Thiessen discusses Hillary Clinton's email scandal on Fox News' 'America's Newsroom'

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Grexit: What might it mean for the US? 3 things to consider

Over time, a Greek exit could impose significant economic and geopolitical costs on the United States. This could occur through the following three channels. Again, from AEI’s Desmond Lachman:

1.) In the immediate aftermath of a Greek exit, one must expect a significant further depreciation of the Euro as the ECB took more forceful measure to prop up the European periphery and as investors fled to the safety of the dollar. This would have the effect of causing a further effective appreciation of the dollar that would come on top of a 15% such appreciation over the past year. As the Federal Reserve has noted, a strong dollar appreciation could constitute a significant headwind to the US economic recovery and could exert significant downward pressure on US headline inflation.

2.) Any eventual spread of the Eurozone debt crisis to other countries in the European periphery, like Italy, Portugal, and Spain, could roil global financial markets and dent European household and investor confidence. This would be bound to impact the US economic recovery considering how integrated is the global financial system and how important the European economy is to US trade.

3.) Should a Greek exit lead both to a souring of European-Greek relations and to the further erosion of Greek political stability, one could see a failed Greek state increasingly coming into the Russian orbit. Already the Syriza government is actively engaged with Moscow about the construction of a Russian gas-pipeline through Greece despite the US Administration’s objections. A deepening of the Greek economic crisis is all too likely to bring Athens and Moscow closer together.

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Puerto Rico says its debt is ‘not payable.’ Is America’s?

Via Bloomberg:

Prices on Puerto Rico’s newest general obligations sank to record lows after Governor Alejandro Garcia Padilla said investors should be prepared to sacrifice if they want the cash-strapped island’s economy to grow. … With two days left in Puerto Rico’s fiscal year, the commonwealth is struggling to pass a budget that would allow it to make payments on a $72 billion debt load. Investors should work with the commonwealth to reduce its obligations, Garcia Padilla told the New York Times in an interview. …

“The debt is not payable,” the governor said. “There is no other option.” The U.S. territory of 3.5 million people is grappling with a jobless rate double the national average and a debt load bigger than every U.S. state except California and New York. The governor’s remarks land in a jittery global debt market, as investors weigh the possibility of a Greek default and exit from the euro zone.

To put the island’s fiscal situation into perspective, it has amassed debt that is nearly half that of California’s for a population that is less than one-tenth the size, as the WSJ’s Nick Timiraos notes.

Let that sink in.

Also, its debt equals about 72% of its GDP. Now that’s about the same as the US federal government. So why isn’t Washington having a debt problem, too? Well, the US (a) has an economy that is much stronger, (b) can borrow at very low interest rates, (c) prints the currency its debt is denominated in. As for the first point, just look at this summary from Timiraos of Puerto Rico’s economy:

Puerto Rico’s problems date to the end of the Cold War, when the U.S. began closing military bases on the island, whose residents have American citizenship but don’t pay federal tax on their local income. The expiration of corporate tax breaks in 2006 prompted an exodus of pharmaceutical and other manufacturers, nudging the island into a deep recession. As the economy has worsened, migration to the U.S. mainland has accelerated, further shrinking the tax base. Puerto Rico’s population has fallen 4.7% since 2010 to 3.5 million, a period when the U.S. overall grew 3%. … The economy, meanwhile, faces big structural problems. Sprawling bureaucracy and high electricity costs stunt business investment. Tax evasion runs rampant. Unemployment is high, at 12%, and fewer than half of all civilians are in the labor force, compared with around 63% on the mainland. Economists say a bloated welfare state discourages work—the share of the working-age population on disability is nearly 50% higher than in the 50 states —while a minimum wage that is high relative to productivity and local income reduces job opportunities for young and low-skilled workers.

 

What a mess. So very similar to Greece. Deep supply-side structural problems, a currency straitjacket, brain drain. And a big helping of austerity on the way. One lesson for the US is that eventually the math stops working. And when that day comes, it won’t be a financial crisis as much as unpleasant choices in terms of raising taxes and cutting benefits. Reform sooner is better than reform later. And if you want to accelerate the day of reckoning, policies that stunt investment, work,  and immigration will get you there ASAP.

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