You are browsing the archive for 2019 May 22.

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China's U.S. Debt Portfolio Will Not Be Weaponized for the Trade War

May 22, 2019 in Economics

By Daniel J. Ikenson

Daniel J. Ikenson

The U.S.-China trade war has reignited debate over the question
of whether Chinese ownership of U.S. government debt is an asset
that Beijing will weaponize. In other words, is the possibility
that the Chinese could sell off large swaths of their $1.1 trillion
holdings of U.S. treasury securities, causing bond prices to fall
and interest rates to rise, something that should concern U.S.
policymakers? Although profligate spending and an accumulating
national debt may well be the toxins that eventually destroy the
U.S. economy, the fact that the Chinese own some of that debt
neither gives Beijing leverage over U.S. policy nor does it present
a threat to the U.S. economy.

The fact that the Chinese
own U.S. government debt neither gives Beijing leverage over U.S.
policy nor does it present a threat to the U.S. economy.

For starters, consider why the Chinese buy U.S. debt in the
first place. For two decades, the Chinese have been purchasing U.S.
treasuries not as a favor to the citizens of the United States, but
because it has been in China’s interest to do so. Nobody in
Washington forces or begs the Chinese to buy U.S. debt. All by
themselves, the Chinese (like investors at home and across the
globe) see the value proposition. It just so happens that U.S.
government-issued debt securities are considered the least risky
investments in the world. Investors know their assets are safe,
accessible, and guaranteed to be repaid virtually on demand.

That’s not to say Americans haven’t benefited handsomely from
China’s investment decisions. The inflow of Chinese (and other
foreign) capital to U.S. debt and equity markets has helped keep
interest rates well below historical averages, effectively serving
to subsidize U.S. consumption, which, in turn, has kept Chinese
factories—as well as factory workers, software engineers,
designers, accountants, and sales representative in other countries
(including the United States)—humming along for decades.

Another reason for China’s appetite for U.S. treasuries is that
purchasing dollar-denominated assets helps prop up the value of the
dollar, which is an outcome that has been favorable to Beijing from
an exporting perspective because U.S. demand for Chinese goods
tends to rise with the value of the dollar. Meanwhile, over the
years, a strong or strengthening dollar has helped preserve the
value of China’s existing portfolio of U.S. debt and other
dollar-denominated assets.

In summary, U.S. treasuries are attractive investments to the
Chinese because of their limited risk, relative liquidity, impact
on U.S. interest rates (i.e. demand for Chinese goods), and impact
on the value of the dollar (i.e., demand for Chinese goods; value
of Chinese-owned U.S. asset portfolios).

Second, even if China did want …read more

Source: OP-EDS

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Trump on Tariffs: Consistent, and Consistently Wrong

May 22, 2019 in Economics

By Simon Lester

Simon Lester

Recently, a decades-old video of Donald Trump on
“Oprah” circulated, in which Trump offered up all the
same trade policy views he holds today: Our trading partners are
cheating us, bilateral trade deficits are hurting the U.S. economy,
U.S. negotiators have done a bad job with trade deals, and higher
tariffs would help the U.S. economy.

Politicians often get criticized for flip-flopping, as they
change their policy positions over time in an attempt to please
voters or interest groups. On tariffs, Donald Trump has not flipped
or flopped at all. As president, he is implementing the exact same
policies he has talked about for years. Unfortunately, they are bad
policies, based on a misreading of history and a misunderstanding
of economics.

Trump may be looking at U.S. tariff history in the following
way. In the 1800s, the United States had relatively high tariffs.
Also in the 1800s, the United States experienced strong economic
growth and industrialization. Therefore, tariffs always lead to a
good economy.

Many people —
inside and outside the administration — have explained to
Trump why he is wrong about tariffs and trade, but he does not want
to hear about it.

The reality is that economic cause and effect is much more
complicated. The telegraph also played a big role in the 1800s, but
bringing back the telegraph today would not be a boon to the
economy. In the 1800s, governments used tariffs as a primary source
of revenue. Administratively, it was easiest to collect taxes on
products as they entered a country, so for most countries tariffs
were a main source of government funding. However, over the years
governments found other alternatives, and tariffs as revenue became
less important.

Tariffs were also used to protect domestic industries. In this
way, they were the original “swamp” policy. The
Constitution gives Congress power of tariffs, and during this
period companies that wanted protection from foreign competition
would go to their member of Congress and ask them to push for
tariffs on the products of their competitors. An individual tariff
could cause harm to consumers in other districts, but all those
seeking protection would join forces: All the members looking for
protection would support each other’s tariff requests, so
that they could all deliver for the interest groups they
represented.

Of course, other groups were hurt by this: U.S. consumers, who
paid higher prices; and U.S. exporters, who were hit with
retaliatory tariffs imposed by our trading partners. But this kind
of “log-rolling” was able to generate the majority needed for
Congress to pass high tariffs.

This approach culminated in the infamous Smoot-Hawley tariffs
just after the start of the Great Depression. …read more

Source: OP-EDS

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Impeachment Should Be on the Table If Trump Bombs Iran

May 22, 2019 in Economics

By Gene Healy

Gene Healy

We’re told that the Trump administration’s
brinksmanship on Iran stems from a power grab by President Donald Trump’s
undeterrable national security advisor, John Bolton. And it’s
true that Bolton has never met a “preventive” war he didn’t
like
and that there’s every reason to suspect him of
scheming to create an excuse for one. But lately it’s getting
hard to distinguish President Trump from “President Bolton.” “If Iran
wants to fight, that will be the official end of Iran,” Trump
rage-tweeted Sunday. “Never threaten the
United States again!”

If the administration can’t be convinced to stand down,
the House of Representatives should launch a preemptive strike of
its own. They should credibly threaten to impeach the president if
he goes to war without congressional authorization.

Waging war without legal authority is an impeachable offense, if
anything is. Impeachment was designed to thwart attempts to subvert the Constitution;
congressional control of the war power was one of that
document’s core guarantees. “In no part of the
constitution is more wisdom to be found,” James Madison
affirmed, “than in the clause which confides the question of war or peace
to the legislature, and not to the executive department.”

Without Congress’s
approval, he has no legal authority to start a war, no matter what
John Bolton seems to think.

The first federal impeachment case, brought less than a decade
after the Constitution’s ratification, centered on charges of
unauthorized warmaking. In 1797, the House impeached Tennessee
Senator William Blount for conspiring to raise a private army for
“a military hostile expedition”
against Spanish-held Louisiana and Florida, “in violation of
the obligations of neutrality, and against the laws of the United
States.” In the Founding era, usurpation of the war power was
considered serious enough to merit the ultimate constitutional
remedy.

No president has yet been impeached for illegal warmaking, but
Richard Nixon came closest. In 1974, the House Judiciary Committee
debated impeaching Nixon for conducting a secret bombing campaign
in Cambodia “in derogation of the power of the Congress to
declare war.” The article never made it into the final
charges, possibly scuttled by Democratic leadership out of fear of
revealing “that a few prominent members
of their party had known about the secret bombing at the
time.” As Congressman William Hungate put it afterwards: “It’s kind of
hard to live with yourself when you impeach a guy for tapping
telephones and not for making war without authorization.”

Current members of Congress should find it hard to live with
themselves if they don’t do something …read more

Source: OP-EDS

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Analysis: What Wisconsin's Governor Gets Wrong About How Much Milwaukee’s School Voucher Program Costs — and How Much It’s Helping Students in (and out of) the Classroom

May 22, 2019 in Economics

By Corey A. DeAngelis, Will Flanders

Corey A. DeAngelis and Will Flanders

In a recent
74 Interview
, Wisconsin Gov. Tony Evers repeated a number of
misleading statements about private school choice programs in
justifying his efforts to freeze or end them. Here, we respond to three
of Evers’s claims.

“[The program is] costing hundreds and hundreds of
millions of dollars
.”

Advocates for educational
options for low-income families in Wisconsin must remain
vigilant.

Because the voucher amount is substantially less than the
funding level for traditional public schools, the program
represents a savings to taxpayers so long as a significant portion
of voucher students would have attended traditional public schools
in the absence of the voucher. The nonpartisan Legislative Fiscal
Bureau put the break-even point around 73 percent for Racine, and it would be
comparable in other districts. Dr. Robert Costrell of the School
Choice Demonstration Project at the University of Arkansas
similarly estimated the break-even to be around 74 percent and found that the program
saved around $32 million by 2008. Further, Dr. Martin Lueken of
EdChoice estimated the breakeven point to be around 75 percent for the Milwaukee voucher
program and found that the program saved Wisconsin taxpayers about
$343 million by 2015.

Given that most students using the voucher program are from
low-income households, it is likely that well over three-quarters
switch from public to private schools. In fact, the most recent experimental evaluation of the
Louisiana Scholarship Program — and the most recent experimental evaluation of the D.C.
Opportunity Scholarship Program — both found that 89 percent
of children who lost the voucher lottery attended public schools
without the voucher.

The bottom line? School choice saves taxpayer money in the
Badger State.

“The data we’ve had for 20-some years pretty
much shows that there’s not an appreciable – or any -
difference in academic achievement of kids that get a voucher and
those that go to regular public schools.”

While the inclusion of the caveat “not appreciable”
could allow for substantial hedging, the preponderance of
scientific evidence is hard to ignore. There is considerable
research on the Milwaukee Parental Choice Program – and most of the
rigorous evidence reveals benefits.

The two random assignment evaluations of the program, published
in the Quarterly Journal of Economics and Education and Urban Society, found that the
program increased students’ test scores. The more recent
longitudinal evaluation by the University of
Arkansas found that students participating in the program have
higher achievement growth in reading than their matched peers in
public schools, though similar achievement growth in math. An
evaluation …read more

Source: OP-EDS