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Government Debt: Jefferson and Gallatin Were Right

June 30, 2015 in Economics

By Chris Edwards

Chris Edwards

The world economy is getting rattled this week by the consequences of excessive government debt. Greece may be cut off from its international creditors, and Puerto Rico announced that it cannot make full payments on its massive debt. In both cases, years of excessive spending are sadly dealing a crushing blow to the living standards of millions average citizens.

These jurisdictions have fallen into the abyss, but debt has risen to dangerous levels in many places around the world, including in our federal government. The root of the problem is Keynesian economics, which has taught governments since the 1930s that deficit spending is good for the economy. That message has been fiscal catnip for politicians, who have eagerly run deficits year after year, and built up debt to massive levels. To compound the problem, some economists—such as Paul Krugman—have been falsely recommending that we not worry too much about rising debt because it is “money we owe to ourselves.”

The effects of Keynesianism can be seen in federal budget data. From 1791 to 1929, the federal government balanced its budget in 68 percent of the years. But from 1930 to 2015, the government balanced its budget in just 15 percent of the years. The result is that federal debt has risen to levels unprecedented in our peacetime history.

Alexander Hamilton was a brilliant man and an important Founding Father, but he was on the wrong side of the crucial debt issue.”

Economist James M. Buchanan pointed his finger squarely at Keynesianism for the decline in beneficial “Victorian fiscal morality,” which had constrained the political incentive to deficit-spend in our early history. With the rise in Keynesianism, the “modern era of profligacy” was born, he said. Looking ahead, official projections show federal debt soaring in coming decades unless we get the profligacy under control.

Battles over federal government debt go back to the beginning of our nation, as I discuss in recent testimony to the House Budget Committee. On one side in the 1790s were Treasury Secretary Alexander Hamilton and other Federalists, who favored a perpetual federal debt, believing that it would create economic and political benefits.

On the other side were Thomas Jefferson and Albert Gallatin, who were appalled by high debt, and led the opposition to Hamilton’s fiscal policies. They believed that government debt was economically dangerous and politically corruptive. And they argued that debt enriched the financial elite …read more

Source: OP-EDS

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Uber Execs Arrested in France after Luddite Protests

June 30, 2015 in Economics

By Matthew Feeney

Matthew Feeney

Yesterday, the Uber France CEO and Uber Western Europe’s general manager were arrested in Paris. Both are charged with running an illegal taxi business and will go on trial in September. News of the arrests came only a few days after violent anti-Uber protests across France. The arrests and the recent protests are only the latest examples of 21st Century Luddism and lawmakers’ unwillingness to keep up with popular and innovative technological changes.

Taxi drivers in France, who last week set at least one car ablaze, erected barricades, and attacked Uber drivers are not happy about what they see as the unfair competition posed by UberPop, Uber’s European ridesharing service. According to a representative from the FTI taxi union, French taxi drivers have experienced between a 30 percent and 40 percent decline in revenue in the last two years.

If French taxi drivers want to survive in the long term perhaps they should consider developing an app to rival Uber’s or changing their business model.”

French officials are not happy either. Following last Thursday’s protest Interior Minister Bernard Cazeneuve ordered police in Paris to implement an UberPop ban. Two hundred police officers have reportedly been tasked with tracking down drivers using UberPop. A court ruled last December that UberPop could operate in Paris. However, the French Interior Ministry claims that UberPop violates regulations that came into effect at the beginning of this year.

Uber has continued to offer UberPop in France amid the legal challenges and protests. Its behavior may be perceived by some as arrogant, but that hasn’t stopped the San Francisco-based technology company from attracting 400,000 French UberPop users. Whatever one might think about Uber’s strategy in France and elsewhere around the world, it is clear that the company is at least as good at making customers fall in love with its product as it is at frustrating regulators and taxi companies.

It is easy to see why taxi drivers in France are upset about the rise of Uber. UberPop drivers are not complying with the same regulations governing taxis. At first glance it might seem that Uber and taxi companies are basically the same and that Uber is unfairly flouting taxi regulations. But there is an important difference between Uber and taxi companies: UberPop drivers are using their own vehicles on their own time. Uber provides drivers and passengers with a technology that lets them …read more

Source: OP-EDS

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Export-Import Bank Closes: Kill Subsidies to Cut Federal Liabilities, Promote Economic Fairness

June 30, 2015 in Economics

By Doug Bandow

Doug Bandow

The Export-Import Bank dies tonight when its charter expires. After 81 years, what is commonly known as Boeing’s Bank is headed toward Washington’s trash bin.

When Congress returns it could revive Ex-Im, which primarily subsidizes big business exports. But a proper burial for what Barack Obama once called “corporate welfare” would save Americans money, reduce economic injustice, and promote economic growth.

The Bank was established in 1934 to promote trade with the Soviet Union, ExIm now is one of a score of federal agencies tasked with encouraging exports. The agency exists to borrow at government rates to provide credit at less than market rates for select exporters, mostly corporate behemoths.

ExIm claims to be friendly to small business, but cherchez the money: it goes to Big Business. According to Veronique de Rugy of the Mercatus Center, between 2007 and 2013 the Bank subsidized $66.7 billion in sales by Boeing. ExIm also underwrote $8.3 billion for General Electric, $5.2 billion for Bechtel, $4.9 billion for Caterpillar and its subsidiary Solar Turbine, $3.2 billion for CBI Americas, $3.0 for Exxon Mobil, $2.1 billion for Applied Materials, $2.0 billion for Westinghouse, and $1.4 billion for Noble Drilling. During that period Boeing enjoyed 35 percent, GE 4.4 percent, and Bechtel 2.7 percent of the Bank’s largesse.

In 2012, noted Timothy Carney of the Washington Examiner, the aircraft maker accounted for 83 percent of all loan guarantees. The following year just five firms collected 93 percent of the loan guarantees. Also in 2013 the top ten ExIm beneficiaries accounted for two-thirds of the Bank’s total activities: Boeing, General Electric, Bechtel, Applied Materials, Caterpillar, Space Systems/Loral, Komatsu America, Case New Holland, Ford, and Sikorsky Aircraft. Other frequent beneficiaries include Dow Chemical, John Deere, and Lockheed Martin.

Giants of the financial world, such as Citibank and JP Morgan Chase, also do well by the Bank. Loren Thompson of the Lexington Institute thought he was arguing in favor of ExIm when he observed: “Private lenders often don’t like the risk profile of countries seeking export assistance” and “want the kind of protections available to lenders who finance the exports of other countries.” Of course they do. But the U.S. government’s role is not to protect profit-making private firms from risks at home or abroad.

The Bank denies providing subsidies since it charges fees and interest and claims to make a “profit”—more than $1.6 billion since 2008. But if ExIm operated like a normal commercial bank there …read more

Source: OP-EDS

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Why US Allies Are Happy to Join China's AIIB

June 30, 2015 in Economics

By Swaminathan S. Anklesaria Aiyar

Swaminathan S. Anklesaria Aiyar

On June 29, representatives of 50 countries gathered in Beijing to sign the legal framework agreement to establish the $100 billion Asian Infrastructure Investment Bank (AIIB). Seven more countries are expected to sign, bringing the total number of founding AIIB members to 57. The institution will launch with China having a 30.4 percent share of the AIIB’s equity, followed by India (8.5 percent) and Russia (6.7 percent). The two notable absentees are the United States and Japan. Key NATO allies of the U.S., like Germany, France and the United Kingdom, have opted to join the AIIB. Germany will have the largest non-Asian stake (4.1 percent).

The China-led Asian Infrastructure Investment Bank (AIIB) has swept up U.S. allies.”

Of all its allies, why did only Japan stand with the United States on an issue with strategic implications? The new AIIB will symbolize China’s rise as a financial superpower, guiding the world’s biggest infrastructure financing institution. Whatever their reservations about China’s financial rise, most countries see it as a fact of life that cannot be stalled by staying out of the AIIB. They would rather be inside it, getting a share of the infrastructure orders that the AIIB will finance.

U.S. President Barack Obama says China may steer AIIB loans to meet political or strategic considerations rather than economic. So, the AIIB will have lower lending standards than existing multilateral institutions like the World Bank and Asian Development Bank, and undercut their effectiveness. Japan echoes this sentiment.

Why have other major donors shrugged away this objection? Because their diplomats smile at the notion that the World Bank or ADB have always had the highest lending standards. The U.S. as chief shareholder of the World Bank has always viewed it as a foreign policy tool. Ditto for Japan, chief shareholder of the ADB. Besides, as a development institution, the World Bank measures its success by its top line—lending volume—and not the bottom line. It has financed huge public sector undertakings of dubious quality across developing countries.

When I first worked for the Bank in 1985, one staffer explained to me the pressures to lend. “In the first quarter of the year, we promise to be really tough. By the second quarter, we worry that disbursements are behind schedule. By the last quarter, we are shoveling money as fast as possible. If we don’t meet disbursement targets, we risk losing allocations …read more

Source: OP-EDS

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The New CatoAudio App

June 30, 2015 in Economics

In one simple, innovative app, CatoAudio provides instant access to the expert perspectives, insights, and insider viewpoints offered by the Cato Institute and Libertarianism.org. The app includes favorites such as the Cato Daily Podcast, Libertarianism.org’s Free Thoughts, Cato’s event podcasts, Cato Audio Monthly recordings of event highlights and special roundtable discussions, excursions into libertarian thoughts, and more.

…read more

Source: CATO HEADLINES