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Ep. 107: How to think about the Trump tax cuts - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Wed, 07/25/2018 - 13:30

The Tax Cuts and Jobs Act passed in December has been credited for kick-starting economic growth and boosting workers’ wages. It’s also been blamed for enriching the already well-off at the expense of labor, and for dooming us all to a life of perpetual deficits. Its supporters tout the bonuses many firms doled out in January as evidence of its success. Its opponents point to stock buybacks and increased dividends paid out to shareholders as proof of its failure.

But what can we really say about the tax law at this point in time? To break it all down, I’m joined by AEI tax expert Alan Viard. He earned his PhD in economics from Harvard University, has worked as a senior economist at the Federal Reserve Bank of Dallas and the White House’s Council of Economic Advisers, and has forgotten more about tax policy than most people will ever know.

You can download the episode by clicking the link above, or can subscribe to my podcast on iTunes or Stitcher. Tell your friends, leave a review.

Recent work from Alan Viard:

How the EU can master L’art du deal - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Wed, 07/25/2018 - 13:11

Everything suggests that the upcoming visit to Washington by European Commission President Jean-Claude Juncker and European Commissioner for Trade Cecilia Malmström will echo the historian Robert Kagan’s famous 2003 quip: “Americans Are from Mars, Europeans Are from Venus.”

For once, that could be good thing. With U.S. President Donald Trump seemingly set on slapping tariffs of up to 25 percent on European car imports, the Continent’s leaders should resist the temptation to respond in kind and escalate the conflict.

President Donald Trump, right, talks with European Commission President Jean-Claude Juncker, left, prior to a working session at the G-20 summit in Hamburg, Germany, July 8, 2017. Reuters

If the EU is to stop the world from returning to an era of warring trade blocs, it needs to meet Trump’s fire and fury not with retaliatory measures but with liberal leadership by example.

The threat of escalation works when policymakers are rational. But Juncker and Malmström can’t count on a rational response from the U.S. president. Whereas the EU is all about process, rules and mutually beneficial compromises, Trump is driven by a zero-sum view of the world and a desire to dominate the media cycle — regardless of practical effects of his policies.

He also harbors a strong disdain for the EU, rooted in a lack of understanding of why European nations decided to forego disruptive nationalism in favor of cooperation after World War II.

The U.S. president will be oblivious to the fact that the EU is America’s most important export market. Nor can he be expected to know that while the U.S. does indeed have a bilateral deficit in trade in goods with the EU, it has also run a current account surplus with the bloc every year since 2009. That is due to trade in services and to income generated by U.S. investment in the Old World.

Rather than regurgitating those truths to Trump, while mulling how best to retaliate when his tariffs arrive, Juncker and Malmström should preempt him — by proposing to scrap the EU’s 10 percent import duty on cars and to revise downward the heavy tariff rates imposed on agricultural products, which average 11 percent.

Not only would eliminating the car import duty be beneficial to European consumers, it would also take the wind out of Trump’s sails. The support for his plans in Congress and even within his administration is already weak. Unilateral liberalization by the EU would enable him to claim victory without doing anything.

There’d be little cost to European firms or consumers. Indeed, the overall effect of scrapping the tariff would be modest.

European consumers are not keen to buy American cars. And, even more importantly, large non-tariff barriers between the EU and the U.S. would remain in place, because of the different automobile safety and environmental regulations on the two sides of the Atlantic.

In normal situations, tariffs can be used as leverage in trade negotiations. But that becomes tenuous precisely in the case of economic sectors where regulatory compliance is a larger barrier to trade than, say, a 10 percent tariff.

In a case cited by the Alliance of Automobile Manufacturers, for instance, a U.S. company that sought to export a popular model of light truck to Europe had to create 100 new parts, spend an additional $42 million on design and development and perform rigorous tests on 33 different vehicle systems. This would come “without any performance differences in terms of safety or emissions.”

Such costs are not necessarily evidence of protectionism; they are simply the outcome of different regulatory frameworks. That is why mutual recognition arrangements are rare in heavily (and diversely) regulated fields, and those covering cars are virtually unknown “except the partial one on automotive components between the EU and Australia,” according to the OECD.

Juncker and Malmström must also remember that the diplomatic landscape in which their meeting with Trump will take place is not a normal one. Their primary aim cannot be to bring the U.S. back to the table to discuss a free-trade deal or to otherwise deepen the 1998 mutual recognition agreement between the two economic powerhouses.

It can only be to try to prevent Trump’s publicity stunts from ripping apart the transatlantic marketplace. Accomplishing that alone would exceed the benefits of any concessions the EU could expect to receive in exchange for dropping its automobile tariffs in trade negotiations with any other country in the world. True, Trump is a bully, and bullies should not be appeased. But the biggest economic threat to the EU is not Trump himself, but the risk that his economic nationalism will outlive his administration

The best way to ensure that doesn’t happen is to lead by example and reveal the flaws in the underlying zero-sum logic behind Trump’s trade policies.

Related reading:

Modeling complexity in the AT&T–Time Warner merger appeal - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Wed, 07/25/2018 - 10:00

One could be forgiven for thinking that Judge Richard Leon’s decision last month would pave the way for the long-awaited merger between AT&T and Time Warner to finally proceed. After all, the judge did warn the Department of Justice (DOJ) against seeking a stay of the ruling to delay the date on which the merger would take effect. However, undeterred, the DOJ filed an appeal against the judge’s ruling. On July 12, the federal appeals court approved the DOJ’s request for an expedited appellate hearing schedule. Legal briefs are due by October 18, and oral arguments will come “as soon as practicable.”

AT&T CEO Randall Stephenson (C) sits with David McAtee (L), SEVP and general counsel for AT&T, and Daniel Petrocelli (R), counsel from O’Melveny & Myers LLP., during a press conference in New York City, via Reuters.

To be sure, the DOJ has a right to appeal, and it has done so well within the 60 days allowed from the handing down of the Leon decision on June 12. But one wonders what grounds support the DOJ’s claims that “in approving the merger, the district court rejected fundamental principles of economics, creating uncertainty that will have an outsized effect on vertical merger analysis.”

The DOJ appears to be facing an uphill battle in the appeal as the economic models it relied on are useful only in that they are demonstrably a good approximation of the realities in the world in which the merger is grounded. As Judge Leon articulated, the DOJ “has failed to provide sufficient evidentiary support to show the Nash bargaining theory accurately reflects post-merger negotiations,” and the model itself “rests on assumptions that are implausible and inconsistent with record evidence.”

Modelling vs. reality

The reality is that models are just, well, models. They simplify an inherently complex reality down to just a few variables and interactions. They thereby try to use the outputs and outcomes to project a view of what might happen (or in the case of models that describe observed behaviors, to tease out the factors that materially contributed to the observed outcome). A key factor in the models’ usefulness is that the factors that are explicitly ignored (or assumed away) when simplifying the complex reality will not be material in the actual scenario the model is intended to provide insights into.

One major drawback of the DOJ’s models in the original hearing is that they were formulated to describe behaviors in a marketplace environment very different from the one prevailing in the modern media markets in which AT&T, Time Warner, and their competitors are operating.

The past is not the future

Once upon a time, these may have been relatively stable, oligopolistic markets with easily identifiable players where it was relatively easy to foresee how the future would play out. The simple possession of market power more or less guaranteed that it could be applied as suggested for the predictable outcome identified in the DOJ’s proposed Nash bargaining model. However, it is far from clear that these models accurately describe the options available in the current, inherently more complex markets.

First, it is not clear that the merged firm’s rivals can be clearly identified or that they will respond predictably to the behaviors predicted by the DOJ’s model. The video distribution market is awash with a huge variety of content providers and aggregators using a wide array of distribution models that differ markedly from the classic reseller model on which the DOJ’s testimony relied. This does not lend itself to a one-size-fits-all bargaining approach — different bargaining options will likely apply depending on the arrangements underpinning the different providers’ business cases.

Second, these providers have a very different relationship with their end consumers who are not simply passive “viewers” but frequently (inter)active participants and even co-producers of at least part of the content that is distributed. They also have widely different tastes and preferences and consume highly differentiated or customized content. Customer choices thus significantly affect how the market behaves. This is a long way from the oligopolistic bargaining models that presume consumers take what they are given and cannot influence outcomes.

Third, the internet has enabled different relationships to emerge between the owners of the network infrastructure over which the content is distributed and the content itself. While the AT&T–Time Warner merger may be looking to solidify a business case based on integration of the two, their rivals are not necessarily symmetrically structured. They may face different bargaining “games” with separate and distinct infrastructure providers and content distributors, once again defying the assumptions that past models will apply going forward.

And the future is complex

If the DOJ’s appeal is to be successful, then (given its articulated grounds) it must demonstrate that the judge has erred in his assessments of the facts and the applicability of the models used in the original arguments. The economics of the models may be beautiful, and correct in certain circumstances, but if those circumstances do not prevail, the models will not help.

The current reality is complex and it is posing new challenges to economists to develop new models that account for these factors. And as in the past, these new cases are providing the impetus to develop them.

Learn more:

The Femsplainers Podcast Ep. 12: The Magic World of Sally Quinn - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Tue, 07/24/2018 - 21:22

Washington’s leading hostess of Georgetown cocktail parties is also a serious student of the occult. Christina & Danielle explore both worlds with the famous & fabulous journalist as they discuss Quinn’s new memoir, Finding Magic: A Love Story.

The Philippines fought back against Islamist extremists. The battle isn’t over. - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Tue, 07/24/2018 - 20:20

Terrorist groups like al Qaeda and the Islamic State are now openly operating throughout much of Southeast Asia. While the United States is a longstanding counterterrorism partner of countries like Indonesia and the Philippines, the aftermath of a terrorist siege in the southern Philippines demonstrates why effectively countering violent extremism requires more than just military action.

Government soldiers stand in front of damaged houses and buildings in Marawi city, Philippines, October 25, 2017. REUTERS/Romeo Ranoco

This was brought home in a recent conversation I had with Cardinal Orlando Quevedo of the Philippines, who has been outspoken about the threat posed by terrorism in his country:

The friendship of Muslims and Christians and indigenous people in Mindanao, a friendship shown in the streets and markets, in offices and schools, is being destroyed by a terrorist ideology that asserts the morality and [sic] killing another in the name of God.

Cardinal Quevedo’s perspective on terrorism is based on his experience as Archibishop of Cotabato. Cotabato is less than 100 miles from Marawi City, which was the site of a pitched, months-long battle between Islamic State-affiliated militants and the Philippine Armed Forces.

In response to militant attacks in Marawi, President Rodrigo Duterte imposed martial law throughout the southern region of Mindanao. He declared that martial law would remain in place “until the last terrorist is taken out.” The fighting, which lasted from May through October 2017, displaced roughly 360,000 people. The extent of the destruction — caused by urban airstrikes and ground assaults — means that only about one-third of those displaced have been able to return. For the roughly 40,000 families who remain in nearby displaced persons camps, life is on hold.

An unfinished battle

In Marawi, Filipinos are now fighting to return to normal life. The cost of rebuilding the city ranges from $1.1 billion to $1.8 billion. Twenty-nine schools were completely destroyed, with another 47 in need of major repairs. People want to return to their homes now, but the reconstruction effort could take years. If the Philippine government does not effectively respond to this sense of urgency, it could fuel resentment and support for future political violence.

Of course, rebuilding lives is about more than just reconstructing buildings. It’s about hope, opportunity, and freedom from fear. While USAID’s June announcement of an additional $5.55 million in aid for humanitarian and recovery work in Marawi is welcome, more help is needed. Approximately 62,000 children could not attend school as a result of the siege, leaving educators and NGOs to find creative ways to adapt. The United States has long supported education programs in the Philippines. But, given the connections between education and terrorism, it is in everyone’s best interest to ensure that these children return to school soon and do not become targets for terrorist recruitment. The risk of youth radicalization is very real.

Humanitarian and other emergency aid to Marawi continues to be vital in the aftermath of the conflict. So too is the work being done by American NGOs, like Catholic Relief Services. Catholic Relief Services is a faith-based organization whose work in the southern Philippines includes engaging children in schools and madrasahs to reduce prejudice and tensions between religious communities, with the goal of reducing the likelihood of future conflict. American NGOs working with the people of Marawi deserve our support.

In Marawi, the Philippines successfully fought back against Islamist extremists, but doing so had serious costs. While the Philippine government is actively working to restore everyday life in and around Marawi, the United States still has an important role to play. If the reconstruction effort drags on and people’s immediate needs go unmet, the victory could be short-lived.

Learn more:

Testimony: Economic Coercion as a Tool in China’s Grand Strategy - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Tue, 07/24/2018 - 18:30

Mr. Chairman and Mr. Ranking Member:

Thank you for the opportunity to testify before you today.

We are slowly waking up to a set of strategies by the Chinese Communist Party (CCP) meant to enhance Party power internally and globally at our expense. The CCP has adopted a number of strategies to strengthen the Party’s grip on the country so that it can lead China back to “Middle Kingdom Centrality.” These strategies have been in place for a while, but have been accelerated by Communist Party Secretary General Xi Jinping.

The broad strategic context for Chinese economic statecraft includes:

  • China’s Grand Strategy of the China Dream of Grand Rejuvenation, which requires:
    • Building a world class military to challenge the United States and Allied military primacy;
    • Strengthening political warfare and propaganda campaigns that interfere in target nations’ politics to both block activities that the CCP does not like and to build more favorable support for China abroad.
    • Advancing unlawful claims in the South China Sea and militarizing the seas to gain control of them.
    • Challenging Japan’s lawful claims in the East China Sea
    • Building ports and facilities throughout the Indian Ocean
    • Attempting to make certain countries dependent on China’s loans and construction projects as part of the “One Belt One Road” initiative

I am not including more benign diplomatic initiatives that are also a tool in the CCP’s broader strategy. And, as you can see, when I say “China’s policies”, I mean those of the Chinese Communist Party. We do not know what “China’s policies” would be in a more pluralistic society that is not completely dominated by a Leninist regime. I imagine we would get along very well with a China that is not under the CCP’s grip.

Read the full testimony here.

The US and Germany should heed the IMF’s advice - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Tue, 07/24/2018 - 17:49

Today, the IMF released a refreshing report analyzing the world’s external imbalances and offering advice as to how those imbalances might best be cured. The timing of this report could not be more propitious. It comes on the very  eve of European Commission President Jean-Claude Junker’s visit to the United States in a last ditch effort to avert a US-European trade war.

The main finding of the IMF’s report is that, at around 3 ¼ percent of GDP, the global external imbalance is excessive by between 40 and 50 percent. It identifies Germany and China — and to a lesser extent Korea, the Netherlands, Singapore, and Sweden — as those countries with persistently large external surpluses. At the same time, it identifies the United States and the United Kingdom as those countries with excessively large external deficits.

The main merit of the IMF’s report is that it reminds us that a country’s external imbalance is arithmetically the result of an imbalance between its saving and investment rates. Those countries with excessively large external surpluses, like Germany, are those which are saving too much in relation to how much they invest. Conversely, those countries with excessively large deficits, like the United States, are those countries which are saving too little in relation to how much they invest.

Flowing from its identification of the underlying causes of the global external imbalances, the IMF advocates a cooperative solution to reducing those imbalances. The external surplus countries should take measures that discourage saving and that increase investment. Conversely, the external deficit countries should move in the opposite direction by taking measures to increase saving and reduce investment.

It is against this background that the IMF correctly takes to task the present US administration for engaging in a highly expansive budget policy at this late stage in the US economic cycle.  By increasing its budget deficit, the US is all too likely to reduce the US saving rate. That in turn will result in a further increase in its external deficit as occurred with the twin deficit problem in the 1980s.

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Similarly, the IMF is correct to take the German government to task for not using the fiscal space that it has to move toward a more expansive budget policy. By moving to a more expansive fiscal policy, Germany would help reduce that country’s excessive savings rate. That in turn would help reduce Germany’s outsized external surplus that presently amounts to a staggering 8 percent of its GDP.

Sadly, both the US and German governments are on entirely different wave lengths from the IMF on the external imbalance issue. The Trump administration has managed to convince itself that, never mind what practically every economist might say, what matters for the external imbalance is not the savings-investment imbalance but rather whether trade is fair or not. For its part, the German government is convinced that pursuit of budget balance under all circumstances has served Germany well and that a large current account surplus should be seen as a sign of virtue and not something to be corrected.

With the governments of two major countries having diametrically opposite views on the external balance issue, and with the IMF seemingly unable to broker a compromise between those two countries, one cannot help feeling that the US and Germany might be sleepwalking toward a highly damaging trade war between those two countries.

Learn more:

AEI’s Dan Blumenthal assesses China’s strategies of economic coercion and suggests a counterattack - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Tue, 07/24/2018 - 17:44

In testimony today at 2:30pm before the Senate Committee on Foreign Relations and Subcommittee on East Asia, The Pacific, And International Cybersecurity Policy, AEI Director of Asian Studies Dan Blumenthal will discuss China’s strategies of economic manipulation around the world.

He explains that the Communist Party of China (CCP) has attacked the US and its key allies with economic tactics:

  • The CCP’s unfair and illegal economic practices … gives China an unfair competitive advantage. This, coupled with the widespread theft of US intellectual property, hurts the US economy.
  • …the CCP is also pressuring international companies to not identify Taiwan by name in an attempt to erase Taiwan as a separate entity from the global “mental map.”
  • When the CCP decided to limit tourists to South Korea after announcements of the deployment of the Terminal High Altitude Area Defense anti-ballistic missile defense system, the China National Tourism Administration became a key organization in implementing the CCP’s policies.

However, Blumenthal argues that there are limits to China’s economic coercion, noting that the US is not dependent on China for as much as we think. He suggests that the US adopt its own economic strategy, beginning with:

  • Banning the worst-offending Chinese state-owned enterprises from market access (in accord with Europeans). For example, the companies that consistently engage in forced technology transfers.
  • Targeted information campaigns within China in Chinese that advertise the corrupt patronage networks.
  • Enhanced economic ties including the quick signing of a Bilateral Investment Treaty and cyber-cooperation with Taiwan.
  • Helping to build free-market trade agreements and free-market economies in Asia whose standards are so high that a government-controlled CCP will not be able to join.

Read the full embargoed testimony here.

To arrange an interview with Dan Blumenthal, please contact AEI Media Services at mediaservices@aei.org or 202.862.5829.

Pakistan reimagined | VIEWPOINT - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Tue, 07/24/2018 - 15:33

Husain Haqqani is a former Pakistani Ambassador to the United States and the Hudson Institute’s director for South and Central Asia. His new book, “Reimagining Pakistan: Transforming a Dysfunctional Nuclear State,” calls for Pakistan to redefine itself as entrepreneurial and intellectual, rather than dominated by its army and animosity toward India. With a major election looming, Haqqani discusses his vision for Pakistan with AEI’s Sadanand Dhume.

Energy bailout plan would raise consumer prices, all for nothing - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Tue, 07/24/2018 - 14:25

In an era in which “no new taxes” is a sacred cow, the Trump administration is considering other, creative ways to raise the funds it needs to save financially distressed coal and nuclear power plants, at the expense of the public.

This time, the consumer will not be victimized as a taxpayer, but rather as a utility ratepayer. Under orders from President Trump, the Department of Energy is considering immediate steps to stop the shutdown of unprofitable coal and nuclear plants. Under one plan being considered, DOE would order grid operators to buy electricity from struggling power plants for two years, using emergency authority that is normally reserved for national security crises.

Energy Secretary Rick Perry said the ongoing retirement of coal and nuclear plants, which are being pushed out of competitive electricity markets by an abundance of cheap natural gas and renewable energy, was leading to a rapid depletion of energy diversity and impacting the resilience of the power grid. Perry told the Federal Energy Regulatory Commission, which oversees regional electricity markets, that the loss of such plants would threaten “reliability and resiliency of our nation’s grid.” But FERC maintained that government intervention was unnecessary, saying that the nation’s grid currently had plenty of spare electricity capacity, even with the loss of some coal and nuclear plants.

Secretary of Energy Rick Perry gestures during a news conference in New Delhi, India, April 17, 2018. Reuters

Now, a study by the Brattle Group shows that bailing out financially ailing coal and nuclear plants could cost ratepayers $17.2 billion per year. Not only would federal intervention be costly to consumers by raising electricity prices, it would do nothing to increase the security of the nation’s electric grid.

In reality, the administration is considering an almost open-ended collection of fees from ratepayers. In other words, consumers could be heavily “taxed” through their electric bills. The assumption is that utilities, whose only source of revenue in many cases is the ratepayers, are a bottomless pit of funding. It is no wonder that the bailout idea has been rejected by a broad alliance of energy companies and consumer groups.

Given that taxes are likely to be one of the big political issues of the next few years, and maybe the biggest one, it’s worth understanding who could wind up paying for the bailout.

Although no concrete plans are in the works to collect additional fees — and the scope of the bailout being considered has yet to be announced, the reality is that struggling coal and nuclear plants would be heavily subsidized at the expense of the consumer.

Subsidizing coal and nuclear power is foolish and unnecessary. It is disconnected not only from the real interest of electricity users but also from the efficient and cost-effective operation of the electricity system itself. Economic reality, not vague arguments about the need for coal and nuclear power to protect national security, ought to influence decisions vital to the nation’s economy and energy supply.

It is time to let natural gas and renewable power earn their fair share of the electricity market, unencumbered by government interference. Those pushing for a bailout lack some essential facts, not to mention some basic common sense.

Shale has basically fueled more than a 40 percent increase in the country’s gas production over the last decade to make the U.S. the world’s leading producer of gas in recent years. The EIA says that gas will remain the biggest source of electricity generation through 2050, accounting for 35 percent of the nation’s electric power. If nothing else, the collapse of coal and nuclear power has made one thing clear: Stopping the bailout plan before it goes any further would be the right thing to do. The country should do better for its money than penalize ratepayers to artificially prop up outdated, money-losing power plants.

Related reading:

Mark J. Perry (@Mark_J_Perry) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan’s Flint campus.

Trump’s softness on Putin is forcing both parties to wake up - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Tue, 07/24/2018 - 13:18

Dismissing bipartisan criticism and intelligence-community outrage, President Trump has doubled down on rapprochement with Russian President Vladimir Putin. Trump has repeatedly surprised even his closest aides, first appearing to side with Putin over US intelligence agencies, and then failing to inform Director of National Intelligence Dan Coats that Putin would visit the United States just weeks before the midterm elections.

President Donald Trump and Russian President Vladimir Putin arrive for a joint news conference after their meeting in Helsinki, July 16, 2018. Reuters

While Trump relishes unpredictability to keep opponents on edge, his own aides’ confusion suggests there is no coherence to Trump’s strategy. That, rather than “fake news” or “Trump derangement syndrome” about which the president complains, is the real source of American frustration. Democrats and Republicans both believe Putin is outplaying the president.

And that might be the silver lining in all this — the emerging bipartisan recognition of Russia’s threat and the possibility of Congress reasserting itself to check Moscow.

It’s true that Trump’s trust in Putin is no outlier: George W. Bush gazed into Putin’s eyes and saw his soul only to be confronted with a resurgent Russian nuclear force and the invasion of Georgia. That was no matter to Barack Obama, who continued to champion a “reset” with Russia, believing Bush was too unilateral and not sophisticated enough to conduct real diplomacy.

Indeed, it was Obama who lectured in July 2007 that “the notion that somehow not talking to countries is punishment to them . . . is ridiculous” and, five years later, ridiculed Mitt Romney when Romney identified Russia as America’s top geopolitical foe. “The 1980s are now calling to ask for their foreign policy back, because, the Cold War’s been over for 20 years,” Obama quipped.

Seldom has a country managed to gain so much with as weak a hand as Russia. Putin inherited a country decimated by decades of dictatorship, corruption and mismanagement. Rather than repair problems, Putin compounded them. But even as the United States held a royal flush, wishful thinking and partisanship effectively allowed the Kremlin to triumph with a pair of twos.

The problem in Washington is that national security has become a political football. Every president since Bill Clinton has entered office believing responsibility for international crises rest more with predecessors than adversaries. Trump’s July 16 tweet that “Our relationship with Russia has NEVER been worse thanks to many years of U.S. foolishness and stupidity” is just the latest example.

What Trump misses, however, is that the true foolishness was past Russian accommodation: Bill Clinton not only allowed Russia alone among Soviet successor states to keep nuclear weapons, giving it tremendous leverage over its neighbors, but also extended hundreds of millions of dollars in loan guarantees to the Kremlin. Obama and Hillary Clinton, meanwhile, withheld reports of Russian nuclear cheating from Congress in order to win a new Strategic Arms Reduction Treaty, one which imposed more restrictions on the United States than Russia, and expelled Russian spies before thorough questioning.

Trump may believe his outreach to and praise for Putin will pay dividends, but, here too, he is wrong. Summits are a tool, not a strategy. Ronald Reagan met with Mikhail Gorbachev only after years spent building up a military advantage to use as negotiating leverage. When the two leaders did meet, Reagan refused to dismiss Soviet human-rights violations as an impediment to diplomacy, nor did he show any hesitation to walk away from the table, as he did at the 1986 Reykjavík summit.

But this is where the silver lining comes in: For the first time since the Cold War’s end, Democrats and Republicans (Trump and his most sycophantic advisers excepted) share a broad consensus that Putin is an insincere and malevolent actor who poses a grave and growing threat. Outrage after Helsinki shows Republicans will not follow Trump blindly and Democrats will be hard-pressed to return to their past naïveté.

Trump’s missteps could lay the groundwork for Congress to take the lead on an anti-Russia strategy: Bolstering aid to Eastern Europe, expanding the Magnitsky Act to hold even more Putin cronies responsible for human-rights abuses, directing the White House to report regularly and robustly on Russian cyber activities, beefing up US radio and TV broadcasts into Russia and restoring the US base in Iceland abandoned by Bush, to start; rolling back Russian influence abroad next.

Trump may deal with Putin, but Congress has the power of the purse and can play hardball in the face of a bad deal. Only one thing is certain: Partisan barbs and congressional inaction are a losing formula; they benefit only Putin. Winning will take congressional leadership, bipartisanship and proactive legislation.

Related reading:

Senate farm bill is lesser of two evils - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Tue, 07/24/2018 - 12:55

The 2018 farm bill has entered the final stretch before becoming law, with proponents of the House and Senate versions vying for legislative acceptance during the upcoming congressional conference process.

When it comes to agricultural subsidies, both the House and Senate farm bills are seriously flawed. The one positive thing that can be said about the Senate version is that it is not as bad as the bill put forward by the House Agriculture Committee. The House bill expands spending on farm subsidies and wastes American resources. It does nothing to mitigate the flow of billions of federal dollars to large scale farm business operations, reflecting successful lobbying efforts by prosperous farm interest groups and agribusinesses. Instead, the House bill continues subsidy programs that have for decades funneled about 70 percent of all payments to the largest 10 percent to 15 percent of farm businesses.


Sadly, while less harmful, even the Senate bill, passed last month on an overwhelmingly bipartisan basis, does little to change that story. In the Senate bill, an amendment put forth by Chuck Grassley (R-Iowa) may limit the flow of funds to very large agribusiness farms. His initiative ensures that only one person on any given farm is eligible for subsidies provided under price loss coverage and the agricultural risk coverage. Thanks to Pat Roberts (R-Kansas) and Debbie Stabenow (D-Mich.), respectively the chairman and ranking member of the Senate Agriculture Committee, the initiative will limit agricultural businesses to a maximum of only $125,000 from the two major subsidy programs.

The Grassley initiative is scarcely a radical and draconian proposal. It affects only a small number of very large and wealthy farm operations, and ensures that subsidy payments be given only to individuals who actually work on these farms. To put it into perspective, it is worth noting that about 80 percent of all farms in the United States receive annually no more than $10,000 from the programs that are subject to such limits. More than 50 percent of farms receive less than $2,500.

But if the past is any predictor of the future, major farm lobbies are likely to cry havoc and claim that the very foundations of our food system will be shaken by the modest Grassley proposal. If the initiative survives the forthcoming conference process between the House and Senate agriculture committees, the savings to taxpayers could reach up to $200 million a year, according to Congressional Budget Office estimates.

In contrast, the House bill ensures unlimited access to such subsidies for large farm businesses. In both the House and Senate bills, many other expensive agricultural programs have been left untouched, including the heavily subsidized federal crop insurance program. Few Americans would really believe that the federal crop insurance program is primarily a risk management program and not an income transfer program. Taxpayers cough up over 70 percent of the total cost of a crop insurance policy for a typical farm business. As a result, farm businesses receive a return of about $2.10 on every dollar they invest in premium payments.

Today, crop insurance companies make an annual average $2.5 billion in revenues funded by taxpayers, while the program hands over about $5.8 billion to farm businesses. In order to give a farm business a $1,000 premium subsidy, the federal government has to hand over an additional $400 to the insurance company selling the policy. That is an expensive way to transfer taxpayer dollars to wealthy farm businesses and land owners. Furthermore, crop insurance subsidies have no limits. The bigger the farm, the bigger the subsidy, even if it means that millions of dollars in annual government subsidies go to individual farm businesses.

What does the Senate bill do about crop insurance subsidies? Absolutely nothing. A modest amendment would have reduced premium subsidies for farm businesses owned by households with annual incomes above $700,000. While a very small number of rich farm businesses would have been affected, the amendment was killed almost immediately because of vigorous opposition from the crop insurance and farm lobbies. In the conference game between the two chambers of Congress, hopefully the Senate bill prevails. Despite all its flaws, it is still the lesser of two evils.

The Comprehensive Income Dataset - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Tue, 07/24/2018 - 12:25

On this episode of the AEI Events Podcast, AEI’s Bruce D. Meyer presents a progress report on a new data set he is developing to measure income and poverty. Dr. Meyer cites several problems with the three main data sources — surveys, tax data, and program data — currently used in income and poverty calculations. While conceding that every data set has flaws individually, he argues that aggregating the sets can lead to a greater understanding of income and poverty distribution in the United States. His new data set adjusts for discrepancies in these data. He discussed early findings showing significant overreporting of the effect of Supplemental Security Income and underreporting of the effect of public assistance in reducing poverty.

During the panel discussion that followed, experts from across the political spectrum expressed appreciation for Dr. Meyer’s work, with Ben Harris of Results for America calling it a “dizzying, overwhelming effort.” Several panelists and audience members expressed concern over the ability to match the data between sets while protecting private information. The general consensus, however, was that this new data set will underscore the safety net’s important role in the lives of low-income Americans and provide a solid base from which to frame policy priorities moving forward.

This event took place on June 28, 2018.

Watch the full event here.

Subscribe to the AEI Events Podcast on Apple Podcasts.

Running roughshod over intellectual property rights won’t lower drug prices - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Tue, 07/24/2018 - 10:00

Prescription drug prices have been in the news since long before made-for-TV villains such as Martin Shkreli, the infamous “Pharma Bro” now serving a seven-year sentence in a New Jersey federal prison for securities fraud, who gained notoriety by jacking up the price of anti-parasite drug Daraprim by over 5,000 percent.

President Trump and Secretary of Health and Human Services (HHS) Alex Azar deliver remarks about prescription drug prices at the White House, via REUTERS.

But many popular media outlets have been banging the drum against supposedly outrageous prices for decades. Case in point: the New York Times, which last month issued a provocative editorial innocuously entitled “How the Government Can Lower Drug Prices,” urging the Trump administration to use its power to summon the drug industry to the table.

Specifically, the Grey Lady pressed the government to use its power under 28 U.S.C. §1498 to bully pharmaceutical companies into lowering the prices of their products. Under this little-used statutory provision, the feds can trample the intellectual property rights of a patent owner (or, as the Times delicately puts it, “circumvent patent protections”) so long as they provide “reasonable and entire compensation for such use and manufacture.”

“In the late 1950s and 1960s,” the Times editorial claimed, “the federal government routinely used 1498 to obtain vital medications at a discount. According to a paper in The Yale Journal of Law and Technology, it enabled the Department of Defense to save a total of $21 million on 50 drugs in one three-year period.”

The editorial linked to a letter to Secretary of Health and Human Services Alex Azar from Rep. Ro Khanna (D-CA) and other congressional Democrats, noting that Gilead’s groundbreaking drug Harvoni, which effectively cures Hepatitis C, a devastating disease that claims the lives of tens of thousands of Americans each year, costs $96,000 for a 12-week treatment. (Disclosure: I have previously represented Gilead in an intellectual property case involving Harvoni.) No mention, however, of how many hundreds of millions of dollars Gilead spent researching and developing its life-saving treatment.

See also:

Of course, this wasn’t the first time the Times editorialized or printed an op-ed against supposedly egregious drug prices. Not by a long shot.

And as a general matter, the editorial’s blistering position on allegedly out-of-control drug costs is overstated. PhRMA, the trade association for US pharmaceutical manufacturers, points out that the pace of drug cost growth has slowed recently from 9 percent year-over-year in 2015 to only 1.3 percent in 2016, according to data from the Centers for Medicare & Medicaid Services (CMS). The group also rarely tires of noting that 90 percent of all medicines dispensed in the US are made by generic pharmaceutical manufacturers. With respect to Hep C drugs, competition forced drug companies to more than double their rebates in the course of a single year.

It’s also important to note that prescription medicine represents a relatively small proportion of overall public spending; CMS reports that medicines account for only 14 percent of all Medicare expenditures and a scant 7 percent of Medicaid outlays.

But specifically on the issue of Section 1498, the Times editorial gets it wrong.

First, the provision has been used only very rarely and usually in the context of national defense, such as for night-vision goggles or pharmaceuticals used by the American military, as noted in the Yale paper. While Hepatitis C is a major scourge whose abolition would save many lives, its existence doesn’t rise to the level of a national security emergency.

Second, even if the government were to invoke Section 1498 to produce generic Harvoni, it is unclear whether such an action would actually save money, since Gilead and its fellow developers of anti-Hep C drugs would sue for their “entire compensation.” While this concept hasn’t been measured much in the courts, it could amount to a sum that would cancel out any governmental savings.

Finally, relying on this nuclear option of price control would likely chill research and development spending across the industry, thereby depressing the future development of life-saving drugs and devaluing the patents covering them.

The Times did get one thing right, correctly characterizing the biotech field as “an industry that lives and dies by its patent protections.” And for that very reason, the administration should tread extremely carefully in considering whether to sacrifice IP protection on the altar of supposedly cheaper drugs.

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Discussing the FISA warrant application debate: Ornstein on MSNBC’s ‘The Last Word with Lawrence O’Donnell’ - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Tue, 07/24/2018 - 02:40
Resident Scholar Norman Ornstein discusses how Nunes's should be expelled from the House because of his repeated attacks on the US intelligence community on MSNBC's 'The Last Word with Lawrence O'Donnell.'

The perils of an ALL CAPS foreign policy - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Mon, 07/23/2018 - 21:58

Late on Sunday night when good presidents should be asleep, the Commander-in-Chief took to his Twitter to respond to a speech earlier in the day by embattled Iranian President Hassan Rouhani. Rouhani, who apparently is unhappy about renewed US pressure on Iran, seemed to predict armed conflict, and warned the United States that “Iran is the mother of all wars,” adding that President Trump should not “play with the lion’s tail, because you will regret it eternally.” Let’s set aside the fact that Rouhani, like too many in his neighborhood, doesn’t know when to ratchet back the bombast, and is more likely speaking to a domestic audience all too disenchanted with his feckless leadership. (Iran’s economy is, after all, in a state of collapse.)  Nonetheless, he was clearly threatening the US homeland. And Donald Trump responded, on Twitter as is his wont.


— Donald J. Trump (@realDonaldTrump) July 23, 2018

OK, let’s start with what was said: Don’t ever threaten the United States again. What does that mean? Who? Rouhani only? Or Khamenei too? The Islamic Revolutionary Guard Corps? Do they have to stop altogether, or in speeches? In Farsi or in English? And what about the real threats that exist? The missile program, the nuclear program, the terrorism, the regional interference, Hezbollah, Hamas, and all that? Can that continue but the rhetorical threats must stop?

You get the picture. This sort of stuff is not a great way to conduct foreign policy. Because the second there is another threat — and there will be — what will President Trump do?  Will he in fact unleash “CONSEQUENCES THE LIKES OF WHICH FEW THROUGHOUT HISTORY HAVE EVER SUFFERED BEFORE?” What are those consequences? Worse than Hiroshima? Worse than the destruction of Germany after World War II?

That’s not to say that it is right to turn the other cheek and constantly insist, Obama style, that Iranian threats to kill us are really just a cry for help. But there is a happy medium between supine quiescence and allowing Kim Jong Un to write your tweets. Donald Trump has not found that sweet spot, which is ironic, because his foreign policy is indeed hitting Iran where it hurts, and his sanctions are in fact highlighting Iran’s malign behavior. Nor is it right to ignore the threats of various and sundry — Vladimir Putin, Kim Jong Un, et al — and give them a pass. There must be consequences for even the emptiest of bombast because all too often, those blustering away do actually have the tools to inflict terrible harm on America and our allies. One of the greatest lessons of World War II was “believe the unbelievable.”

So what is the right approach? Sadly for the tweeter in chief, it’s not ALL CAPS TWEETS LATE AT NIGHT. That merely lumps Trump in the same category as our loudmouthed adversaries, a place he should not want to be. Rather, the president should take note of Iranian threats, and send out his team — John Bolton, Mike Pompeo, Jim Mattis — to carefully explain that this president takes seriously the imprecations uttered by one of the world’s most dangerous regimes. And that should we assess these threats are credible, action will be taken to preempt them. That is the smart answer to Rouhani (and, ahem, Kim Jong Un’s) provocations.

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The Curbelo Carbon Tax as wealth redistribution - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Mon, 07/23/2018 - 20:59

Environmental policy as a tool of wealth redistribution is nothing new. The latest example is a proposal for a greenhouse-gas (GHG) tax just introduced by Representative Carlos Curbelo (R., Fla.).

Curbelo’s tax would start at $24 per metric ton of GHG emissions, growing 2 percent per year above inflation and an additional $2 per ton every two years if emission-reduction goals are not met. Those goals rise from 29 percent below 2005 levels in 2020 to 33 percent below 2005 levels by 2030. If we apply the EPA climate model to those emission cuts, the predicted temperature reduction at the end of the century would be 31 one-thousandths of one degree.

Carlos Curbelo (R-FL) attends an event with the Ocean Conservancy in Washington, DC. | Curbelo.house.gov

So this proposal is preposterous as environmental policy regardless of what one assumes about the science and dangers of anthropogenic climate change. But it is serious in terms of wealth redistribution. With a 33 percent reduction, U.S. GHG emissions in 2030 would be about 4.9 billion metric tons; annual revenues from this tax would be $125-$150 billion, 70 percent of which would go to the Highway Trust Fund as a replacement for the federal fuels tax. Revenues from the latter in fiscal year 2016 were about $36.4 billion, so this proposal would double or triple annual federal receipts for the highway fund, to be paid by almost all energy-using sectors rather than the direct beneficiaries of federal highway outlays.

Would the federal government actually be able to spend all those revenues on highway construction? Or is it far more likely that Congress would siphon some large share of the money for numerous purposes beyond the mass-transit boondoggles, bicycle lanes, and other pork already funded by the federal fuels tax? Either way, because the tax would be hidden in the prices of innumerable goods and services, this proposal would reduce the political visibility of the cost of federal highway services.

States would receive 10 percent of the revenues for “low-income” households, the definition of which always allows for political favoritism. Another 5 percent would go to states, cities, and tribes for mitigation of coastal flooding; accordingly, the middle of the country would subsidize the coasts. Is it an accident that Representative Curbelo’s Florida district comprises Monroe County and parts of Miami-Dade County? (As an aside, significant parts of Miami-Dade were built on swamps elevated with fill, which over time is subsiding. Are GHG emissions responsible for that too?)

Curbelo’s legislation would impose a moratorium on enforcement of GHG-emissions regulations under the Clean Air Act through 2025, when the moratorium would be renewed for an additional four years if emissions goals have been met, and again in 2029 for four more years if the same condition obtains, meaning it would end in 2033 at latest. The upshot of this provision is enormous uncertainty about the regulatory environment affecting long-term investments, not a salutary condition for continued economic, employment, and wage growth.

The bill would also impose a border-tax adjustment (tariff) on imported goods equal to the increased costs paid by “comparable U.S. products.” This provision will yield an enormous expansion in the federal bureaucracy, as “comparability” will have to be defined and measured across a vast array of goods. Can anyone believe that political pressures will not affect such computations? Moreover, many other economies also have implemented a wide variety of GHG policies; if they do not receive credits for those costs, then there will be an incentive to move production of goods destined for the U.S. to economies lacking such GHG policies, and it almost certainly is the case that those nations will have weaker environmental controls on most ordinary (“criteria”) pollutants. So one likely outcome is a global increase in pollution, yet another example of the adverse unintended consequences of federal feel-good legislation.

If there is a credit for GHG policies enforced by exporters to the U.S., then the expansion of the bureaucracy and politicization of trade policies will be even greater. Goods imported from a given nation are likely to embody components and other inputs from other nations — perhaps many other nations — in vastly differing proportions, and those nations’ policies on GHG emissions almost certainly will vary considerably. The border adjustment would have to estimate transfer prices — always a subjective and problematic calculation — and the effects of shifting exchange rates, changing input proportions, and a host of other complexities in order to arrive at a credit for a given good from a given economy.

Crudely, the Curbelo proposal implies an increase in energy costs of at least 5 percent, driven not by stronger growth but instead by an artificial supply reduction. Given the long-term relationship of energy use and U.S. GDP and employment growth, a rough estimate of the aggregate effects of this proposal are reduced GDP and employment growth of 1 percent or more, again in exchange for no environmental benefits at all.

The comedy highlight of Curbelo’s proposal is the creation of a National Climate Commission, which after 2025 would set goals for emissions reductions based upon the “latest scientific findings.” Science is a process of repeated hypothesis and gathering of evidence — there is no final scientific “truth” — so the “latest scientific findings” will not settle the scientific debate over climate change, much less the policy debate. Nor will they affect the incentives shaping decisions forthcoming from the Commission, which will prove to be yet another federal bureaucracy driven by an interest in more rather than fewer climate regulations. Political support from the winners is understandable. But why would anyone else vote for this?

Economic success for black men in America - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Mon, 07/23/2018 - 18:57

On this AEI Events Podcast, a panel of scholars from AEI and the Institute for Family Studies presents their new research on “Black Men, Making It in America: The Engines of Economic Success for Black Men in America.” The researchers revealed good news: One in two black men in America are in the middle class, about half are middle or upper class by their 50th birthday, and only 18 percent are living in poverty. The study showed that education, military service, employment, church participation, and stable marriages were all crucial to black men’s economic success. The biggest caveat to such success, however, was contact with the criminal justice system.

A second panel emphasized the importance of using the study’s data to inform policies such as widening quality childhood education for low-income children and creating more intervention programs to help formerly incarcerated individuals find work and promote psychological stability. In addition, the panelists encouraged religious communities to increase their emphasis on the importance of two-parent families.

Personal accounts from Michelle Singletary, a columnist for The Washington Post, emphasized the need to implement the standards and model of the US military in institutions such as families and schools to provide younger generations with structures for success.


This event took place on June 26, 2018.

Watch the full event here.

Subscribe to the AEI Events Podcast on Apple Podcasts.

New AEI report on tracking prescription drug affordability - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Mon, 07/23/2018 - 17:00

American consumers and policymakers are increasingly concerned about the high cost of prescription drugs – in a recent survey, 40% of respondents said lowering prescription drug prices should be Congress’ top priority.

In a just-released report, AEI healthcare experts Joseph Antos and James Capretta analyze the major factors that affect the prices of prescription drugs for patients and purchasers:

“The research needed to develop and bring to market effective medical therapies can take many years and billions of dollars. The US has a vibrant ecosystem of researchers, private-sector entrepreneurs, and capital investors that leads to the introduction of more new therapies…conferring market exclusivity rights on an important therapy will lead to high prices for purchasers or consumers in some circumstances.

The protection of intellectual property is an important component of dynamic economic growth and medical progress in the US. However, it does create pricing power for the inventors of new therapies, which in turn makes it difficult for policymakers to ensure access to effective care is within reach for all patients and is affordable for tax-subsidized programs.

The challenge for policymakers is to try to ensure there is strong supply competition to minimize the number of monopolistic pricing situations and then to create the proper balance of financial burdens when supply competition is limited. There are no simple fixes to these challenges, but it is likely that a more systematic approach would improve on today’s ad hoc framework.”

Read the full report here: Prescription Drug Pricing: An Overview of the Legal, Regulatory, and Market Environment

To arrange an interview with Joseph Antos or James Capretta, please contact AEI Media Services at mediaservices@aei.org or 202.862.5829.

Episode 50: The British American conservatarian Florida man - AEI - American Enterprise Institute: Freedom, Opportunity, Enterprise

Mon, 07/23/2018 - 16:00

England-born newly-minted American citizen Charlie Cooke, editor of NationalReview.com, joins Jonah for the 50th episode of the Remnant. They have a merry time discussing why Charlie loves America, why he’s a conservatarian, what he thinks of Brexit, and whether it’s necessary to pledge fealty to President Trump. Jonah also forces him to read some words that Brits can’t pronounce correctly.

You can subscribe to The Remnant with Jonah Goldberg on iTunesGoogle PlayStitcher, and TuneIn. You can also download this episode here.

This podcast was originally published by National Review.