The Clearinghouse Cure. By Craig Pirrong
Regulation, Vol. 31, No. 4, Winter 2008-2009
Credit Default Swaps (CDSs) are casting an enormous shadow over the world’s crisis-plagued financial markets — as in $50 trillion-plus enormous (although the exact meaning of this oft-quoted figure is somewhat contentious). CDSs were not the source of the ongoing financial crisis (that dubious honor largely goes to complex collateralized debt obligations backed by home mortgages, especially subprime mortgages), but financial markets are filled with fear that a default by a large CDS trader would rip through the financial system, causing a cascade of defaults by other firms. The Federal Reserve and the Treasury Department have responded by bailing out big, financially troubled swaps dealers, including Bear Stearns and AIG, that had large CDS positions, and regret their decision not to bail out another large dealer, Lehman Brothers.
The dread prospect that massive defaults on CDSs could crater the world financial system has led to numerous calls for CDS market reform and regulation. Regulators on both sides of the Atlantic and many market participants have seized on the idea of a clearinghouse for these contracts as the way to make the market more secure and protect the broader banking and capital markets from the prospect of CDS contagion.
The Federal Reserve Bank of New York has held numerous meetings with major market participants and has put substantial pressure on them to create a CDS clearinghouse. Five exchanges have presented proposals to this effect. In Europe, European commissioner for the Internal Market Charlie McCreevy has publicly called for the formation of a clearinghouse to mitigate risks in the CDS market.
Advocates of clearing of “over-the-counter” derivatives (that is, derivatives that are not listed on exchanges) like CDS contracts have pointed out many virtues of central clearing and pointed to the longstanding importance of clearinghouses in organized futures markets. Those advantages cannot be gainsaid, but the testimonials beg an important question: If the benefits of centralized clearing are so great, why haven’t CDS market participants embraced the concept before now, and then only under regulatory pressure? Consideration of this question, and a serious analysis of the economics of clearing as applied to CDSs and other exotic products, demonstrate that these products and, perhaps more importantly, the kind of firms that trade them pose grave challenges to centralized clearing. As a result, clearing CDS products is likely far costlier than clearing “vanilla” instruments such as exchangetraded futures contracts. The additional costs can make it uneconomic to utilize central clearing.
Put differently, clearing is not a one-size-fits-all proposition, because not all derivatives are alike. In particular, an institution that works well for standardized products traded on liquid markets by relatively simple financial intermediaries works much less well for more heterogeneous products traded in relatively illiquid markets by complex financial firms.
This conclusion follows from a consideration of the economics of risk sharing and insurance. Central clearing is essentially a risk-sharing — an insurance — arrangement. The members of the clearinghouse share the costs when another member defaults on its obligations. Sharing risks is often economically efficient, but the costs and benefits of risk sharing depend crucially on informational considerations. To ensure an efficient allocation of risks, and to ensure that the insured face proper incentives to control risks, it is essential to price the insurance correctly. Incorrect pricing can induce the insured to take on too much (or too little) risk.
Pricing insurance properly depends crucially on information. In particular, pricing is particularly difficult when information about risks is asymmetric, especially when the insured have better information that the insurer. This can lead to adverse selection and moral hazard problems. Those problems create real costs that reduce the benefits of risk sharing. Moreover, if those problems are not appropriately addressed in pricing, the insurance mechanism can create perverse incentives that can lead to financial disasters; the savings-and-loan crisis of the 1970s and 1980s was in large part caused by inefficient pricing of deposit insurance.
The complexity of CDS contracts and the financial firms that trade them give rise to potentially severe asymmetric information problems, problems that are more severe than for standardized futures products. Participants in the CDS market and other over-the-counter derivatives markets recognize those problems and have taken measures to mitigate them in their bilateral dealings. A comparative analysis suggests that those measures may well be more efficient than sharing default risks through a clearinghouse. Hence, it is certainly plausible that the absence of a CDS clearinghouse heretofore reflects an efficient market outcome, and that a hasty imposition of a clearinghouse could actually be inefficient.
Moreover, it is by no means clear that the formation of a clearinghouse will internalize externalities that are the source of systemic risks. Systemic risks plausibly arise because large financial firms do not take into account the effect that their failure has on the stability of the financial markets and the efficient operation of the payments system. A clearinghouse does not internalize that externality.
The nature of this analysis is inherently qualitative. It is difficult for anyone, be they academics, market participants, or regulators, to determine definitively whether a clearinghouse would improve the efficiency of the CDS market. I certainly do not claim to possess such definitive knowledge. It is troubling, however, that basic considerations relating to the economics of risk sharing and information have been almost completely absent in the public discourse over CDS clearinghouses. It is also troubling that the potential pitfalls have not been fully aired. Nor has there been an extensive comparative analysis of alternative risk-sharing mechanisms. Therefore, at the very least, this article aims to raise the quality of the debate by identifying crucial issues that have been largely ignored until now, and to challenge a consensus that threatens to engineer a fundamental transformation of the financial markets without proper regard for fundamental economic issues. Moreover, the considerations identified herein should be kept in mind when designing a CDS clearinghouse to ensure that information problems do not make this prescription worse than the disease it is intended to cure.
Full text at Cato's site
Craig Pirrong is professor of finance in the Bauer College of Business at the Universityof Houston.
Friday, January 16, 2009
Al From: Safeguards needed for stimulus
Safeguards needed for stimulus, by Al From
Politico, January 14, 2009 03:43 PM EST
The size of the stimulus package seems to grow with each day’s headlines — it could total nearly $1 trillion before Congress finishes with it.
That’s why designing the stimulus carefully and overseeing its spending with vigilance should be a top priority of the next president and his economic team.
With the stock market and the economy in near collapse, unemployment rising, consumers not spending, lenders not giving credit, and state and local governments contemplating massive cutbacks, there’s good reason for alarm. Not surprisingly, there’s not much concern — nor should there be — about the deficit this year, even as we talk of spending federal dollars in amounts that would have been unimaginable even a few months ago, with the potential for a deficit of as much as $2 trillion next year.
The deficit may not matter in the short run, but the economy will recover, and the size of the deficit will matter again. So even as we pour money into the stimulus, we need to avoid unnecessary waste and keep the long-term fiscal health of the nation in mind.
The hope, of course, is that a massive infusion of federal dollars will jump-start the recovery — and smart investments in infrastructure, health care, technology and energy will build a strong foundation for long-term sustained economic growth and prosperity.
Here are three ideas that would increase the prospects of those outcomes.
First, we should create a National Infrastructure Bank to ensure that infrastructure investment is made wisely, with the long-term growth of the economy in mind. There’s always a great desire to get the money out quickly through “shovel ready” projects that the states have ready to go. To be sure, some worthy projects can quickly provide work for many people. But history should tell us that infrastructure spending is seldom fast — most projects take months or longer to start and years to complete. So it’s critical that the projects have a lasting positive effect on the long-term health of the private economy.
President-elect Barack Obama got it right in his recent interview on “Meet the Press”: “The key for us is making sure that we jump-start the economy in a way that doesn’t just deal with the short term, doesn’t just create jobs immediately, but also puts us on a glide path for long-term, sustainable economic growth.” Unfortunately, with the natural desire of Congress to spread the projects around, it’s a short distance from sound infrastructure investments to pork barrel spending and bridges to nowhere. A National Infrastructure Bank could be essential to spending the infrastructure money in the interest of the country’s long-term economic health.
Second, we need a new version of anti-recession aid to help states and local governments avoid layoffs of key employees such as police officers and firefighters and cutbacks in key services. Such countercyclical aid would complement infrastructure spending. While the infrastructure investments slowly work their way through the pipeline, the countercyclical funds would get into the economy immediately and help state and local governments avoid budget catastrophes. To ensure these funds are not wasted or do not continue after the recession is over, this anti-recession — or countercyclical — revenue-sharing program should have a national trigger so that it shuts off when the recession ends and should be carefully targeted to jurisdictions that are in the most distress.
Third, even as we move quickly to stimulate the economy, we should increase our vigilance over the federal budget. The best way to do that would be to establish a new Sunset Commission, with a mission of rooting out wasteful and outmoded government spending and unproductive tax subsidies. Similar to the Base Realignment and Closure Commission, the Sunset Commission would be charged with annually recommending to Congress expenditures or tax subsidies that could be curbed or eliminated. Congress would then have an up or down vote on the commission’s recommendations. So even as the deficit necessarily increases as the stimulus dollars are doled out, we will eliminate unnecessary and wasteful spending that would only add to the deficit in the long run.
These three steps will help get maximum benefits from the stimulus program. For in the end, the success of the stimulus will be determined not by the number of jobs it creates directly through federal projects but rather by whether it leads to long-term private-sector growth and job creation. The president-elect’s goals for the stimulus are quite modest — creating or saving 3 million jobs over the next four years. For America to prosper, our private economy must create several times that number, and a successful stimulus program can set the foundation for that.
Al From is founder and CEO of the Democratic Leadership Council.
Politico, January 14, 2009 03:43 PM EST
The size of the stimulus package seems to grow with each day’s headlines — it could total nearly $1 trillion before Congress finishes with it.
That’s why designing the stimulus carefully and overseeing its spending with vigilance should be a top priority of the next president and his economic team.
With the stock market and the economy in near collapse, unemployment rising, consumers not spending, lenders not giving credit, and state and local governments contemplating massive cutbacks, there’s good reason for alarm. Not surprisingly, there’s not much concern — nor should there be — about the deficit this year, even as we talk of spending federal dollars in amounts that would have been unimaginable even a few months ago, with the potential for a deficit of as much as $2 trillion next year.
The deficit may not matter in the short run, but the economy will recover, and the size of the deficit will matter again. So even as we pour money into the stimulus, we need to avoid unnecessary waste and keep the long-term fiscal health of the nation in mind.
The hope, of course, is that a massive infusion of federal dollars will jump-start the recovery — and smart investments in infrastructure, health care, technology and energy will build a strong foundation for long-term sustained economic growth and prosperity.
Here are three ideas that would increase the prospects of those outcomes.
First, we should create a National Infrastructure Bank to ensure that infrastructure investment is made wisely, with the long-term growth of the economy in mind. There’s always a great desire to get the money out quickly through “shovel ready” projects that the states have ready to go. To be sure, some worthy projects can quickly provide work for many people. But history should tell us that infrastructure spending is seldom fast — most projects take months or longer to start and years to complete. So it’s critical that the projects have a lasting positive effect on the long-term health of the private economy.
President-elect Barack Obama got it right in his recent interview on “Meet the Press”: “The key for us is making sure that we jump-start the economy in a way that doesn’t just deal with the short term, doesn’t just create jobs immediately, but also puts us on a glide path for long-term, sustainable economic growth.” Unfortunately, with the natural desire of Congress to spread the projects around, it’s a short distance from sound infrastructure investments to pork barrel spending and bridges to nowhere. A National Infrastructure Bank could be essential to spending the infrastructure money in the interest of the country’s long-term economic health.
Second, we need a new version of anti-recession aid to help states and local governments avoid layoffs of key employees such as police officers and firefighters and cutbacks in key services. Such countercyclical aid would complement infrastructure spending. While the infrastructure investments slowly work their way through the pipeline, the countercyclical funds would get into the economy immediately and help state and local governments avoid budget catastrophes. To ensure these funds are not wasted or do not continue after the recession is over, this anti-recession — or countercyclical — revenue-sharing program should have a national trigger so that it shuts off when the recession ends and should be carefully targeted to jurisdictions that are in the most distress.
Third, even as we move quickly to stimulate the economy, we should increase our vigilance over the federal budget. The best way to do that would be to establish a new Sunset Commission, with a mission of rooting out wasteful and outmoded government spending and unproductive tax subsidies. Similar to the Base Realignment and Closure Commission, the Sunset Commission would be charged with annually recommending to Congress expenditures or tax subsidies that could be curbed or eliminated. Congress would then have an up or down vote on the commission’s recommendations. So even as the deficit necessarily increases as the stimulus dollars are doled out, we will eliminate unnecessary and wasteful spending that would only add to the deficit in the long run.
These three steps will help get maximum benefits from the stimulus program. For in the end, the success of the stimulus will be determined not by the number of jobs it creates directly through federal projects but rather by whether it leads to long-term private-sector growth and job creation. The president-elect’s goals for the stimulus are quite modest — creating or saving 3 million jobs over the next four years. For America to prosper, our private economy must create several times that number, and a successful stimulus program can set the foundation for that.
Al From is founder and CEO of the Democratic Leadership Council.
US and China Sign Agreement to Protect Archaeological Heritage of China
United States and China Sign Agreement to Protect Archaeological Heritage of China
Media Note
US State Dept, Office of the Spokesman
Washington, DC
January 16, 2009
On January 14, the United States and China signed a Memorandum of Understanding Between The Government of The United States of America and The Government of The People’s Republic of China Concerning The Imposition of Import Restrictions on Categories of Archaeological Material from The Paleolithic Period Through The Tang Dynasty and Monumental Sculpture and Wall Art at Least 250 Years Old. Assistant Secretary of State for Educational and Cultural Affairs Goli Ameri and Chinese Ambassador Zhou Wenzhong signed for their respective countries.
Signed on the occasion of the 30th anniversary of diplomatic relations between the United States and China, the agreement establishes a means of cooperation to reduce the incentive for archaeological pillage and illicit trafficking in cultural objects that threaten China’s ancient heritage. The agreement also aims to further the international interchange of such materials for cultural, educational, and scientific purposes. To that end, China has agreed to promote long-term loans of archaeological objects to American museums. The two countries, both already signatories to the UNESCO Convention on the Means of Prohibiting and Preventing the Illicit Import, Export and Transfer of Ownership of Cultural Property, entered into the agreement following a request submitted to the U.S. Department of State by the Chinese Government for assistance under the Convention. The agreement is consistent with the recommendation of the Cultural Property Advisory Committee.
Assistant Secretary Ameri noted that the Chinese people are justly proud of their significant and unique heritage, which has enriched the development of humanity. The discovery of a flute carved from wing bone of a crane shows that humans were making music in China 9,000 years ago. Deputy Assistant Secretary of State for China John Norris noted that the agreement represents one of the many broad areas of cooperation that have expanded between the United States and China during the past three decades.
Following the signing of the agreement, the Department of Homeland Security published in the Federal Register on January 16 a list of the types of archaeological material that now require appropriate documentation to be brought into the United States. The restricted material includes objects generally associated with the Paleolithic and Neolithic periods, Erlitou Culture, and the Shang through Tang Dynasties ranging in date from approximately 75,000 B.C. to A.D. 907. The restrictions also cover monumental and wall art 250 years or older. The list is available at culturalheritage.state.gov/ch2009DLFRN.pdf.
For more information, visit culturalheritage.state.gov or contact Catherine Stearns, Bureau of Educational and Cultural Affairs, U.S. Department of State [...].
2009/062
Media Note
US State Dept, Office of the Spokesman
Washington, DC
January 16, 2009
On January 14, the United States and China signed a Memorandum of Understanding Between The Government of The United States of America and The Government of The People’s Republic of China Concerning The Imposition of Import Restrictions on Categories of Archaeological Material from The Paleolithic Period Through The Tang Dynasty and Monumental Sculpture and Wall Art at Least 250 Years Old. Assistant Secretary of State for Educational and Cultural Affairs Goli Ameri and Chinese Ambassador Zhou Wenzhong signed for their respective countries.
Signed on the occasion of the 30th anniversary of diplomatic relations between the United States and China, the agreement establishes a means of cooperation to reduce the incentive for archaeological pillage and illicit trafficking in cultural objects that threaten China’s ancient heritage. The agreement also aims to further the international interchange of such materials for cultural, educational, and scientific purposes. To that end, China has agreed to promote long-term loans of archaeological objects to American museums. The two countries, both already signatories to the UNESCO Convention on the Means of Prohibiting and Preventing the Illicit Import, Export and Transfer of Ownership of Cultural Property, entered into the agreement following a request submitted to the U.S. Department of State by the Chinese Government for assistance under the Convention. The agreement is consistent with the recommendation of the Cultural Property Advisory Committee.
Assistant Secretary Ameri noted that the Chinese people are justly proud of their significant and unique heritage, which has enriched the development of humanity. The discovery of a flute carved from wing bone of a crane shows that humans were making music in China 9,000 years ago. Deputy Assistant Secretary of State for China John Norris noted that the agreement represents one of the many broad areas of cooperation that have expanded between the United States and China during the past three decades.
Following the signing of the agreement, the Department of Homeland Security published in the Federal Register on January 16 a list of the types of archaeological material that now require appropriate documentation to be brought into the United States. The restricted material includes objects generally associated with the Paleolithic and Neolithic periods, Erlitou Culture, and the Shang through Tang Dynasties ranging in date from approximately 75,000 B.C. to A.D. 907. The restrictions also cover monumental and wall art 250 years or older. The list is available at culturalheritage.state.gov/ch2009DLFRN.pdf.
For more information, visit culturalheritage.state.gov or contact Catherine Stearns, Bureau of Educational and Cultural Affairs, U.S. Department of State [...].
2009/062
Cato: Tips for Blocking Socialized Medicine
Tips for Blocking Socialized Medicine. By Michael F. Cannon
Cato Blog, Jan 16, 2009
Prominent health economist Victor Fuchs has an article in this week’s New England Journal of Medicine that all who care about freedom and health care reform should read. He discusses the array of forces that could be — and in my view, should be — employed to stop health care reform this year:
That last item speaks to a divide among left-leaning health care reformers that was discussed by Drew Altman in a column at the Kaiser Family Foundation web site:
Cato Blog, Jan 16, 2009
Prominent health economist Victor Fuchs has an article in this week’s New England Journal of Medicine that all who care about freedom and health care reform should read. He discusses the array of forces that could be — and in my view, should be — employed to stop health care reform this year:
First, many organizations and individuals prefer the status quo. This category includes health insurance companies; manufacturers of drugs, medical devices, and medical equipment; companies that employ mostly young, healthy workers and therefore have lower health care costs than they would if required to help subsidize care for the poor and the sick; high-income employees, whose health insurance is heavily subsidized through a tax exemption for the portion of their compensation spent on health insurance; business leaders and others who are ideologically opposed to a larger role of government; highly paid physicians in some surgical and medical specialties; and workers who mistakenly believe that their employment-based insurance is a gift from their employer rather than an offset to their potential take-home pay. These individuals and organizations do not account for a majority of voters, but they probably have disproportionate influence on public policy, especially when their task is simply to block change.
Second, as Niccoló Machiavelli presciently wrote in 1513, “There is nothing more difficult to manage, more dubious to accomplish, nor more doubtful of success . . . than to initiate a new order of things. The reformer has enemies in all those who profit from the old order and only lukewarm defenders in all those who would profit from the new order.” This keenly observed dynamic, known as the “Law of Reform,” suggests that a determined and concentrated minority fighting to preserve the status quo has a considerable advantage over a more diffuse majority who favor reform but have varying degrees of willingness to fight for a promised but uncertain benefit.
Third, our country’s political system renders Machiavelli’s Law of Reform particularly relevant in the United States, where many potential “choke points” offer opportunities to stifle change. The problem starts in the primary elections in so-called safe congressional districts, where special-interest money can exert a great deal of influence because of low voter turnout. The fact that Congress has two houses increases the difficulty of passing complex legislation, especially when several committees may claim jurisdiction over portions of a bill. Also, a supermajority of 60% may be needed to force a vote in the filibuster-prone Senate.
Fourth, reformers have failed to unite behind a single approach. Disagreement among reformers has been a major obstacle to substantial reform since early in the last century. According to historian Daniel Hirshfield, “Some saw health insurance primarily as an educational and public health measure, while others argued that it was an economic device to precipitate a needed reorganization of medical practice. . . . Some saw it as a device to save money for all concerned, while others felt sure that it would increase expenditures significantly.” These differences in objectives persist to this day.
That last item speaks to a divide among left-leaning health care reformers that was discussed by Drew Altman in a column at the Kaiser Family Foundation web site:
We could be headed for a new schism in the debate about health reform. Not the
familiar gulf between advocates of the market and government, or the predictable one between deficit hawks and spenders, but a new one that crosses traditional partisan and ideological lines between advocates of long-term reform of the health care delivery system, and immediate help for the uninsured and insured struggling with health care costs. This new rift is most likely to develop if tight money and a crowded agenda force the focus to shift from comprehensive to incremental reform and choices need to be made about what goes into a smaller, cheaper legislative package. It’s a rift that could stand in the way of progress on health reform if care is not taken to avoid it.For one group, I will call them the “Delivery System Reformers,” true health reform lies in making the actual delivery of care more cost effective over the long term. Delivery System Reformers champion health IT, comparative effectiveness research, practice guidelines, and payment incentives to encourage more cost-effective care such as pay for performance . . . . Indeed some delivery reformers believe it would be a mistake to put more money into the current system through expanded coverage until more fundamental changes in the system are made.
The other group, I will call them the “Financing Reformers,” is focused on an entirely different set of problems. Its major concern is the problem of the 46 million Americans without health insurance coverage and the serious problems all Americans are having today paying for health care and health insurance . . . .
The health reform field is like a Venn diagram with circles that intersect (though not by a lot).
As an example of those conflicting priorities, Fuchs himself writes, “If the current health care reform initiative is limited to questions of coverage, without serious attention to cost control and coordination of care, the ‘crisis’ in health care will continue to plague us for years to come.” (Almost sounds like something a member of the Anti-Universal Coverage Club would say.) I would add that conflicts between delivery-system reforms and financing reforms (e.g., covering the uninsured) only arise when dealing with command-and-control approaches to reform.
Neither Fuchs nor Altman intended their articles to be used as a guide to block health care reform. But since Messrs. Obama, Baucus, Daschle, and Wyden have already given us a fairly clear picture of the shape their proposed reforms will take, free-market advocates should scour both articles in their entirety for useful tips on how to beat back the next great leap toward socialized medicine.
Mexico: unilaterally reducing tariff rates
Laudable Economic Stimulus Plan in Mexico, by Daniel Ikenson
Cato Blog, January 15, 2009 @ 11:39 am
While the United States and many other countries flirt with the idea of raising barriers to trade, our enlightened neighbor to the south has a more promising response to the global economic contraction.
On January 2, the Calderon administration initiated a plan (discussed here; HT to Scott Lincicome) to unilaterally reduce tariff rates on about 70 percent of the items on its tariff schedule. Those 8,000 items comprising 20 different industrial sectors accounted for about half of all Mexican import value in 2007. When the final phase of the plan is implemented on January 1, 2013, the average industrial tariff rate in Mexico will have fallen from 10.4% to 4.3%.
The objectives of the plan are to reduce business operating costs, attract and retain foreign investment, raise business productivity, and provide consumers a greater variety and better quality of goods and services at competitive prices. Perhaps our free trade advocacy is having a positive impact on public policy after all. I suspect those objectives are very well served by the plan.
Mexico is no stranger to unilateral trade liberalization—so they’re not just grasping at straws here. This is a tried and true approach to economic growth in Mexico and throughout the world. Many of the reforms Mexico agreed to in the North American Free Trade Agreement were already undertaken before the NAFTA went into effect in 1994. They were undertaken with the same objectives in mind. So, Mexico has some experience and credibility on the issue of the benefits of unilateral trade liberalization.
Let’s hope the rest of the world is watching, if not waiting in the wings.
Cato Blog, January 15, 2009 @ 11:39 am
While the United States and many other countries flirt with the idea of raising barriers to trade, our enlightened neighbor to the south has a more promising response to the global economic contraction.
On January 2, the Calderon administration initiated a plan (discussed here; HT to Scott Lincicome) to unilaterally reduce tariff rates on about 70 percent of the items on its tariff schedule. Those 8,000 items comprising 20 different industrial sectors accounted for about half of all Mexican import value in 2007. When the final phase of the plan is implemented on January 1, 2013, the average industrial tariff rate in Mexico will have fallen from 10.4% to 4.3%.
The objectives of the plan are to reduce business operating costs, attract and retain foreign investment, raise business productivity, and provide consumers a greater variety and better quality of goods and services at competitive prices. Perhaps our free trade advocacy is having a positive impact on public policy after all. I suspect those objectives are very well served by the plan.
Mexico is no stranger to unilateral trade liberalization—so they’re not just grasping at straws here. This is a tried and true approach to economic growth in Mexico and throughout the world. Many of the reforms Mexico agreed to in the North American Free Trade Agreement were already undertaken before the NAFTA went into effect in 1994. They were undertaken with the same objectives in mind. So, Mexico has some experience and credibility on the issue of the benefits of unilateral trade liberalization.
Let’s hope the rest of the world is watching, if not waiting in the wings.
Martin Luther King III, US Rep. John Lewis, and Herbie Hancock to Lead US State Dept Commemoration of Martin Luther King's 1959 India Journey
Martin Luther King III, U.S. Representative John Lewis, and Herbie Hancock to Lead U.S. Department of State Commemoration of the Rev. Dr. Martin Luther King's 1959 India Journey
Media Note
US State Dept, Office of the Spokesman
Washington, DC, Jan 16, 2009
The U.S. Department of State will support February 2009 celebrations in India to commemorate the tour by the Rev. Dr. Martin Luther King, Jr. 50 years ago to study Mahatma Gandhi. This tour deeply influenced the American civil rights movement. The delegation, including Martin Luther King, III; civil rights movement veteran U.S. Representative John Lewis; and legendary jazz musician Herbie Hancock, along with other distinguished Americans, will meet with counterparts in India to underscore the enduring importance of the King and Gandhi legacies.
The delegation will meet in New Delhi with government leaders, social activists, and youth, and will travel around India to some of the principal sites associated with Mahatma Gandhi’s work. There will be two special musical performances featuring Herbie Hancock and others organized by the Thelonious Monk Institute of Jazz. In Chennai, Indian musicians will conduct a special tribute, including performances of music on the theme of non-violence created by leading composer A.R. Rahman, widely acclaimed for writing the score to the current hit film “Slumdog Millionaire,” and a dramatic reading by film actor and director Kamal Haasan.
In February 1959, Dr. King and Coretta Scott King traveled throughout India in search of the roots of the nonviolent social action movement for Indian independence, studying Mahatma Gandhi’s ideals and meeting his followers around the country. Upon their return to the United States, Dr. King and other leaders of the civil rights movement drew on Gandhi’s ideas to transform American society.
2009/058
Media Note
US State Dept, Office of the Spokesman
Washington, DC, Jan 16, 2009
The U.S. Department of State will support February 2009 celebrations in India to commemorate the tour by the Rev. Dr. Martin Luther King, Jr. 50 years ago to study Mahatma Gandhi. This tour deeply influenced the American civil rights movement. The delegation, including Martin Luther King, III; civil rights movement veteran U.S. Representative John Lewis; and legendary jazz musician Herbie Hancock, along with other distinguished Americans, will meet with counterparts in India to underscore the enduring importance of the King and Gandhi legacies.
The delegation will meet in New Delhi with government leaders, social activists, and youth, and will travel around India to some of the principal sites associated with Mahatma Gandhi’s work. There will be two special musical performances featuring Herbie Hancock and others organized by the Thelonious Monk Institute of Jazz. In Chennai, Indian musicians will conduct a special tribute, including performances of music on the theme of non-violence created by leading composer A.R. Rahman, widely acclaimed for writing the score to the current hit film “Slumdog Millionaire,” and a dramatic reading by film actor and director Kamal Haasan.
In February 1959, Dr. King and Coretta Scott King traveled throughout India in search of the roots of the nonviolent social action movement for Indian independence, studying Mahatma Gandhi’s ideals and meeting his followers around the country. Upon their return to the United States, Dr. King and other leaders of the civil rights movement drew on Gandhi’s ideas to transform American society.
2009/058
Cato: Why Congress Should Turn Federal Lands into Fiduciary Trusts
A Matter of Trust: Why Congress Should Turn Federal Lands into Fiduciary Trusts. By Randal O'Toole
Cato, January 15, 2009
Policy Analysis no. 630
The Forest Service, Bureau of Land Management, National Park Service, and Fish and Wildlife Service collectively manage well over a quarter of the land in the United States. Although everyone agrees that the lands and resources managed by these agencies are exceedingly valuable, the lands collectively cost taxpayers around $7 billion per year.
Several Cato Institute studies have called for privatization of the public lands, but this idea is strongly resisted by environmentalists, recreationists, and other users of public land. An alternative policy that will both enhance the values sought by environmentalists and improve the fiscal management of the lands is to turn them into fiduciary trusts. Under this proposal, the U.S. would retain title to the lands, but the rules under which they would be governed would be very different.
Fiduciary trusts are based on hundreds of years of British and American common law that ensures that trustees preserve and protect the value of the resources they manage, keep them productive, and disclose the full costs and benefits of their management. For trust law to apply, public land trusts must be based on a law written by Congress that clearly defines the trustees, the beneficiaries, and a specific mission or missions for the trusts.
Congress should create two types of trusts. Market trusts would have a mission of maximizing revenue while preserving the productive capacity of the land. To achieve this mission, Congress should allow them to charge fair market value for all resources. Nonmarket trusts would have a mission of maximizing the preservation and, as appropriate, restoration of natural ecosystems and cultural resources on the public lands.
Each pair of market and nonmarket trusts would jointly manage all federal lands in one of about a hundred ecoregions. Each ecoregion would have about 5 to 10 million acres of federal land that might include forests, parks, refuges, and other public lands. Trustees would be elected by a friends' association that anyone would be welcome to join. Trusts would be funded out of the user fees they collect, with some retained by the market trust and some given to the nonmarket trust. In some cases, excess user fees would be returned to the U.S. Treasury.
The trust idea would significantly improve both fiscal and environmental management of the public lands. Congress should begin to implement this idea by testing it on selected national forests, parks, and other federal lands
Full text here
Cato, January 15, 2009
Policy Analysis no. 630
The Forest Service, Bureau of Land Management, National Park Service, and Fish and Wildlife Service collectively manage well over a quarter of the land in the United States. Although everyone agrees that the lands and resources managed by these agencies are exceedingly valuable, the lands collectively cost taxpayers around $7 billion per year.
Several Cato Institute studies have called for privatization of the public lands, but this idea is strongly resisted by environmentalists, recreationists, and other users of public land. An alternative policy that will both enhance the values sought by environmentalists and improve the fiscal management of the lands is to turn them into fiduciary trusts. Under this proposal, the U.S. would retain title to the lands, but the rules under which they would be governed would be very different.
Fiduciary trusts are based on hundreds of years of British and American common law that ensures that trustees preserve and protect the value of the resources they manage, keep them productive, and disclose the full costs and benefits of their management. For trust law to apply, public land trusts must be based on a law written by Congress that clearly defines the trustees, the beneficiaries, and a specific mission or missions for the trusts.
Congress should create two types of trusts. Market trusts would have a mission of maximizing revenue while preserving the productive capacity of the land. To achieve this mission, Congress should allow them to charge fair market value for all resources. Nonmarket trusts would have a mission of maximizing the preservation and, as appropriate, restoration of natural ecosystems and cultural resources on the public lands.
Each pair of market and nonmarket trusts would jointly manage all federal lands in one of about a hundred ecoregions. Each ecoregion would have about 5 to 10 million acres of federal land that might include forests, parks, refuges, and other public lands. Trustees would be elected by a friends' association that anyone would be welcome to join. Trusts would be funded out of the user fees they collect, with some retained by the market trust and some given to the nonmarket trust. In some cases, excess user fees would be returned to the U.S. Treasury.
The trust idea would significantly improve both fiscal and environmental management of the public lands. Congress should begin to implement this idea by testing it on selected national forests, parks, and other federal lands
Full text here
PPI: Recommendation for Electronic Health Records and Patient Privacy Protection in the Stimulus Bill
Recommendation for Electronic Health Records and Patient Privacy Protection in the Stimulus Bill
Progressive Policy Institute, January 15, 2009
Dear Members of the House and Senate:
As you consider investments in health information technology in the American Recovery and Reinvestment Act of 2009, we urge you to use the standards and priorities described below. These expenditures should be tied as much as possible to the development of systems that can successfully support the improvements in the quality and efficiency of health care we all desire. We have two key goals: (1) around the clock availability of a comprehensive and secure electronic health record (EHR) for each patient and his or her health care professionals and (2) protection of each patient's privacy through informed consent, transparency in the uses of each patient's information, and the development of ways for patients to implement their privacy preferences.
The standards we suggest will enable third party organizations to act on behalf of patients to assemble a comprehensive version of their records. Patients will control a comprehensive copy of their own medical record data and also have control over who has access to which portions of that copy. Patients can also use the information in their records for prevention and wellness. They can give health care professionals and third parties access to a comprehensive compilation of their records, or if the patient prefers, the minimally necessary information for a specific use.
The types of third parties that can give patients access to a comprehensive EHR are health record banks and trusts, personal health record vendors, health plans, and regional health information organizations, all of which are players in the field known as health information exchange. Patients would voluntarily choose to utilize one of these organizations based on their services. All of these organizations have a stake in reducing the barriers to patient acceptance and provider adoption of electronic health records because they succeed when more data is shared electronically. Additional public assistance will likely be needed, however, to help disabled patients, patients with chronic diseases, and patients and providers in underserved and rural areas achieve these same goals. Such assistance could also help reduce disparities in health care outcomes by deploying EHRs to help bridge language and cultural divides.
Standards for Electronic Health Records Funding
By the term EHR, we mean a digital collection of a patient's medical history including items such as diagnosed medical conditions, prescribed medications, vital signs, immunizations, lab results, and personal characteristics like age and weight.
All EHR systems supported with public funds must fulfill a patient's request for an electronic copy of all or part of their medical records, including audit trails and subsequent updates. The copy would be transmitted to the patient or a patient-designated third party. Copies and updates of EHR data must be made available within 24 hours, absent exceptional circumstances, at no charge to patients or third parties, and should be available for sharing only with the informed consent of the patient.
Where the medical record information that the patient requests is textual, the copy must be in human-readable text, formatted at a minimum using either extensible markup language (XML) or PDF with data types and formats that are recommended and maintained by the National Institute of Standards and Technology in consultation with existing standards development organizations (see attachment). Copies of images and other non-textual medical record information would be handled using existing standards.
The specific objective behind this standard for a patient copy of EHR information is to provide patients and, with a patient's explicit consent, the patient's providers, with both human and machine-readable textual representations of his or her comprehensive electronic medical record. Publicly supported EHR systems should also provide a reliable process for authentication of the identity of all their users and an audit trail of all events including all disclosures of a patient's records.
Funding for EHR systems for underserved, safety net providers, and those with disabilities should be a priority, as should funding for organizations to educate underserved, rural populations, and those with disabilities about the use of health information technology and to help them use that technology.
Priorities for Funding Health Information Exchange
Health information exchange (HIE) is the movement of patients' health care information electronically across disparate systems while preserving the meaning of the information.
Funding for organizations that undertake HIE for patients should be prioritized according to how well they can achieve, and over time in fact do achieve, the following goals:
We respectfully request that you adopt this recommendation.
Sincerely,
- American Academy of Family Physicians
- American College of Cardiology
- Cerner Corporation
- Greater Ocala Health Information Trust, Inc.
- Health Record Banking Alliance
- Information Technology and Innovation Foundation
- Louisville Health Information Exchange, Inc.
- National Alliance for Hispanic Health
- Patient Command, Inc.- Progressive Policy Institute
- Secure Services Corp.
- Self-Insurance Institute of America
Progressive Policy Institute, January 15, 2009
Dear Members of the House and Senate:
As you consider investments in health information technology in the American Recovery and Reinvestment Act of 2009, we urge you to use the standards and priorities described below. These expenditures should be tied as much as possible to the development of systems that can successfully support the improvements in the quality and efficiency of health care we all desire. We have two key goals: (1) around the clock availability of a comprehensive and secure electronic health record (EHR) for each patient and his or her health care professionals and (2) protection of each patient's privacy through informed consent, transparency in the uses of each patient's information, and the development of ways for patients to implement their privacy preferences.
The standards we suggest will enable third party organizations to act on behalf of patients to assemble a comprehensive version of their records. Patients will control a comprehensive copy of their own medical record data and also have control over who has access to which portions of that copy. Patients can also use the information in their records for prevention and wellness. They can give health care professionals and third parties access to a comprehensive compilation of their records, or if the patient prefers, the minimally necessary information for a specific use.
The types of third parties that can give patients access to a comprehensive EHR are health record banks and trusts, personal health record vendors, health plans, and regional health information organizations, all of which are players in the field known as health information exchange. Patients would voluntarily choose to utilize one of these organizations based on their services. All of these organizations have a stake in reducing the barriers to patient acceptance and provider adoption of electronic health records because they succeed when more data is shared electronically. Additional public assistance will likely be needed, however, to help disabled patients, patients with chronic diseases, and patients and providers in underserved and rural areas achieve these same goals. Such assistance could also help reduce disparities in health care outcomes by deploying EHRs to help bridge language and cultural divides.
Standards for Electronic Health Records Funding
By the term EHR, we mean a digital collection of a patient's medical history including items such as diagnosed medical conditions, prescribed medications, vital signs, immunizations, lab results, and personal characteristics like age and weight.
All EHR systems supported with public funds must fulfill a patient's request for an electronic copy of all or part of their medical records, including audit trails and subsequent updates. The copy would be transmitted to the patient or a patient-designated third party. Copies and updates of EHR data must be made available within 24 hours, absent exceptional circumstances, at no charge to patients or third parties, and should be available for sharing only with the informed consent of the patient.
Where the medical record information that the patient requests is textual, the copy must be in human-readable text, formatted at a minimum using either extensible markup language (XML) or PDF with data types and formats that are recommended and maintained by the National Institute of Standards and Technology in consultation with existing standards development organizations (see attachment). Copies of images and other non-textual medical record information would be handled using existing standards.
The specific objective behind this standard for a patient copy of EHR information is to provide patients and, with a patient's explicit consent, the patient's providers, with both human and machine-readable textual representations of his or her comprehensive electronic medical record. Publicly supported EHR systems should also provide a reliable process for authentication of the identity of all their users and an audit trail of all events including all disclosures of a patient's records.
Funding for EHR systems for underserved, safety net providers, and those with disabilities should be a priority, as should funding for organizations to educate underserved, rural populations, and those with disabilities about the use of health information technology and to help them use that technology.
Priorities for Funding Health Information Exchange
Health information exchange (HIE) is the movement of patients' health care information electronically across disparate systems while preserving the meaning of the information.
Funding for organizations that undertake HIE for patients should be prioritized according to how well they can achieve, and over time in fact do achieve, the following goals:
- The availability to patients and healthcare providers, around the clock, of XML outputs with informed patient consent, from the EHR systems of all the providers to the populations served by the HIE organization. A personal health record is one way for an HIE to provide such availability.
- The availability to patients of an audit trail that records all events in a patient's compiled HIE-EHR account in an easily understandable and searchable format.
- Reliable authentication of the identity of all users of the HIE organization;
- Service by the HIE organization to safety net providers, underserved populations, to those with disabilities; and
- A sustainable financing model to ensure that it can continue to provide its services to patients and providers alike.
We respectfully request that you adopt this recommendation.
Sincerely,
- American Academy of Family Physicians
- American College of Cardiology
- Cerner Corporation
- Greater Ocala Health Information Trust, Inc.
- Health Record Banking Alliance
- Information Technology and Innovation Foundation
- Louisville Health Information Exchange, Inc.
- National Alliance for Hispanic Health
- Patient Command, Inc.- Progressive Policy Institute
- Secure Services Corp.
- Self-Insurance Institute of America
BHO: long-term economic recovery cannot be attained unless the government finally gets control over its most costly entitlement programs
Obama Pledges Entitlement Reform. By Michael D. Shear
President-Elect Says He'll Reshape Social Security, Medicare Programs
Washington Post, Friday, January 16, 2009; page A01
Excerpts:
President-elect Barack Obama pledged yesterday to shape a new Social Security and Medicare "bargain" with the American people, saying that the nation's long-term economic recovery cannot be attained unless the government finally gets control over its most costly entitlement programs.
[...]
"What we have done is kicked this can down the road. We are now at the end of the road and are not in a position to kick it any further," he said. "We have to signal seriousness in this by making sure some of the hard decisions are made under my watch, not someone else's."
In a wide-ranging 70-minute interview with Washington Post reporters and editors, the president-elect pledged quick action on the Middle East once he takes office, promised to support voting rights for D.C. residents, and said he will consider it a failure if he has not closed the U.S. military prison at Guantanamo Bay, Cuba, by the end of his first term in office.
[...]
He said that creating jobs and maintaining national security will be his top priorities and added that his efforts as president should be measured by whether the nation can overcome predicted job losses in the months ahead.
"I don't have a crystal ball," Obama said after being asked when the economy might begin to recover. "Nobody can tell." But he added: "Even with the stuff that we are doing, I think we can still anticipate that 2009 is going to be very tough."
Obama vowed to build a new financial regulatory system that inspires clarity and transparency, and endorsed the broad direction offered yesterday by a group led by former Federal Reserve chairman Paul A. Volcker, an adviser to the incoming president.
The president-elect also gave his support for legislation that would make it easier for workers to unionize, but he said there may be other ways to achieve the same goal without angering businesses. [...]
"If we're losing half a million jobs a month, then there are no jobs to unionize, so my focus first is on those key economic priority items I just mentioned," he said. "Let's see what the legislative docket looks like."
Obama repeated his assurance that there is "near-unanimity" among economists that government spending will help restore jobs in the short term, adding that some estimates of necessary stimulus now reach $1.3 trillion.
The president-elect said he believes that direct government spending provides the most "bang for the buck" and that his advisers have worked to design tax cuts that would be most likely to spur consumer and business spending.
But he framed the economic recovery efforts more broadly, saying it is impossible to separate the country's financial ills from the long-term need to rein in health-care costs, stabilize Social Security and prevent the Medicare program from bankrupting the government.
"This, by the way, is where there are going to be very difficult choices and issues of sacrifice and responsibility and duty," he said. "You have to have a president who is willing to spend some political capital on this. And I intend to spend some."
Obama is not the first incoming president to make bold declarations about overhauling the nation's retirement and health-care systems. Both Bill Clinton and George W. Bush made similar vows.
Clinton's push for universal health care -- led by his wife, Hillary Rodham Clinton -- collapsed under opposition from insurance companies and leaders on Capitol Hill. In 1993, Clinton appointed a commission on Medicare and Social Security headed by then-Sens. Bob Kerrey (D-Neb.) and John Danforth (R-Mo.), but never implemented its ambitious recommendations.
Bush made Social Security reform a centerpiece of his domestic agenda in his second term and, like Obama, pledged to expend political capital on the issue. He recently cited his failed push to allow some younger workers to invest their Social Security money in the stock market as one of the regrets of his presidency.
Five days before taking office, Obama was careful not to outline specific fixes for Social Security and Medicare, refusing to endorse either a new blue-ribbon commission or the concept of submitting an overhaul plan to Congress that would be subject only to an up-or-down vote, similar to the one used to reach agreement on the closure of military bases.
But the president-elect exuded confidence that his economic team will succeed where others have not.
"Social Security, we can solve," he said, waving his left hand. "The big problem is Medicare, which is unsustainable. . . . We can't solve Medicare in isolation from the broader problems of the health-care system."
Medicare, the government health program for retirees and the disabled, is projected to be insolvent by 2019, according to the most recent report by the Social Security and Medicare trustees. Over the next two decades, Medicare spending is expected to double, consuming nearly one-quarter of the federal budget.
Beginning in 2011, Social Security will take in less revenue than it pays out and will be forced to dip into reserves to pay benefits. It is projected to deplete its reserves by 2041, according to the trustees.
"The longer action is delayed, the greater will be the required adjustments, the larger the burden on future generations, and the more severe the detrimental economic impact on our nation," the trustees wrote last year.
In 2007, Medicare spending consumed 3.2 percent of gross domestic product, while Social Security represented 4 percent of GDP.
Obama's call for a financial summit is in part a response to a growing anxiety in Congress, where members are being asked to approve an unprecedented amount of federal spending at a breakneck pace. Aides said it was modeled after a summit Clinton held in 1995 to discuss reforming welfare.
The president-elect has been in frequent conversation with lawmakers, including House Majority Leader Steny H. Hoyer (D-Md.) and the Blue Dog Coalition of fiscally conservative Democrats, who repeatedly told Obama they would be willing to support his stimulus package only if he pledged not to lose sight of the larger budget picture. Those who will be invited to attend the summit include the Blue Dogs, Senate Budget Chairman Kent Conrad (N.D.), ranking minority member Judd Gregg (N.H.) and a host of outside groups with expertise on the topics, the president-elect said.
Obama said he is confident that he can find a way to close the Guantanamo Bay prison while finding a way to deal with and house potentially dangerous detainees. Sources said an executive order will lay out a procedure for closing the facility, but strongly disputed reports that such an order will come on the first day of the new administration.
On Israel, Obama again declined to comment on the violence in the Gaza Strip, repeating his mantra that the United States should have only "one president at a time" when it comes to foreign policy matters. But he promised early engagement on peace in the Middle East.
"I know some people have said, 'You have this big economic crisis on your hands, and so President Obama is going to just put off issues like this until his second term or later in his first term,' " he said. "I don't think we have that luxury."
He added: "That doesn't mean that we close a deal or we have some big grand, you know, Camp David-type event early in my administration. It does mean that we have a team in place which is hitting the ground and starting to engage constructively."
Obama reacted to questions about the emerging structure of his White House by displaying confidence in his ability to manage people. He has begun assembling a powerful team of White House counselors who will compete with Cabinet secretaries for influence over the majority of domestic and foreign policy issues.
"The theory behind it is I set the tone," Obama said. "If the tone I set is that we bring as much intellectual firepower to a problem, that people act respectfully towards each other, that disagreements are fully aired, and that we make decisions based on facts and evidence as opposed to ideology, that people will adapt to that culture and we'll be able to move together effectively as a team."
He added: "I have a pretty good track record at doing that."
Staff writers Ceci Connolly and Lori Montgomery contributed to this report.
President-Elect Says He'll Reshape Social Security, Medicare Programs
Washington Post, Friday, January 16, 2009; page A01
Excerpts:
President-elect Barack Obama pledged yesterday to shape a new Social Security and Medicare "bargain" with the American people, saying that the nation's long-term economic recovery cannot be attained unless the government finally gets control over its most costly entitlement programs.
[...]
"What we have done is kicked this can down the road. We are now at the end of the road and are not in a position to kick it any further," he said. "We have to signal seriousness in this by making sure some of the hard decisions are made under my watch, not someone else's."
In a wide-ranging 70-minute interview with Washington Post reporters and editors, the president-elect pledged quick action on the Middle East once he takes office, promised to support voting rights for D.C. residents, and said he will consider it a failure if he has not closed the U.S. military prison at Guantanamo Bay, Cuba, by the end of his first term in office.
[...]
He said that creating jobs and maintaining national security will be his top priorities and added that his efforts as president should be measured by whether the nation can overcome predicted job losses in the months ahead.
"I don't have a crystal ball," Obama said after being asked when the economy might begin to recover. "Nobody can tell." But he added: "Even with the stuff that we are doing, I think we can still anticipate that 2009 is going to be very tough."
Obama vowed to build a new financial regulatory system that inspires clarity and transparency, and endorsed the broad direction offered yesterday by a group led by former Federal Reserve chairman Paul A. Volcker, an adviser to the incoming president.
The president-elect also gave his support for legislation that would make it easier for workers to unionize, but he said there may be other ways to achieve the same goal without angering businesses. [...]
"If we're losing half a million jobs a month, then there are no jobs to unionize, so my focus first is on those key economic priority items I just mentioned," he said. "Let's see what the legislative docket looks like."
Obama repeated his assurance that there is "near-unanimity" among economists that government spending will help restore jobs in the short term, adding that some estimates of necessary stimulus now reach $1.3 trillion.
The president-elect said he believes that direct government spending provides the most "bang for the buck" and that his advisers have worked to design tax cuts that would be most likely to spur consumer and business spending.
But he framed the economic recovery efforts more broadly, saying it is impossible to separate the country's financial ills from the long-term need to rein in health-care costs, stabilize Social Security and prevent the Medicare program from bankrupting the government.
"This, by the way, is where there are going to be very difficult choices and issues of sacrifice and responsibility and duty," he said. "You have to have a president who is willing to spend some political capital on this. And I intend to spend some."
Obama is not the first incoming president to make bold declarations about overhauling the nation's retirement and health-care systems. Both Bill Clinton and George W. Bush made similar vows.
Clinton's push for universal health care -- led by his wife, Hillary Rodham Clinton -- collapsed under opposition from insurance companies and leaders on Capitol Hill. In 1993, Clinton appointed a commission on Medicare and Social Security headed by then-Sens. Bob Kerrey (D-Neb.) and John Danforth (R-Mo.), but never implemented its ambitious recommendations.
Bush made Social Security reform a centerpiece of his domestic agenda in his second term and, like Obama, pledged to expend political capital on the issue. He recently cited his failed push to allow some younger workers to invest their Social Security money in the stock market as one of the regrets of his presidency.
Five days before taking office, Obama was careful not to outline specific fixes for Social Security and Medicare, refusing to endorse either a new blue-ribbon commission or the concept of submitting an overhaul plan to Congress that would be subject only to an up-or-down vote, similar to the one used to reach agreement on the closure of military bases.
But the president-elect exuded confidence that his economic team will succeed where others have not.
"Social Security, we can solve," he said, waving his left hand. "The big problem is Medicare, which is unsustainable. . . . We can't solve Medicare in isolation from the broader problems of the health-care system."
Medicare, the government health program for retirees and the disabled, is projected to be insolvent by 2019, according to the most recent report by the Social Security and Medicare trustees. Over the next two decades, Medicare spending is expected to double, consuming nearly one-quarter of the federal budget.
Beginning in 2011, Social Security will take in less revenue than it pays out and will be forced to dip into reserves to pay benefits. It is projected to deplete its reserves by 2041, according to the trustees.
"The longer action is delayed, the greater will be the required adjustments, the larger the burden on future generations, and the more severe the detrimental economic impact on our nation," the trustees wrote last year.
In 2007, Medicare spending consumed 3.2 percent of gross domestic product, while Social Security represented 4 percent of GDP.
Obama's call for a financial summit is in part a response to a growing anxiety in Congress, where members are being asked to approve an unprecedented amount of federal spending at a breakneck pace. Aides said it was modeled after a summit Clinton held in 1995 to discuss reforming welfare.
The president-elect has been in frequent conversation with lawmakers, including House Majority Leader Steny H. Hoyer (D-Md.) and the Blue Dog Coalition of fiscally conservative Democrats, who repeatedly told Obama they would be willing to support his stimulus package only if he pledged not to lose sight of the larger budget picture. Those who will be invited to attend the summit include the Blue Dogs, Senate Budget Chairman Kent Conrad (N.D.), ranking minority member Judd Gregg (N.H.) and a host of outside groups with expertise on the topics, the president-elect said.
Obama said he is confident that he can find a way to close the Guantanamo Bay prison while finding a way to deal with and house potentially dangerous detainees. Sources said an executive order will lay out a procedure for closing the facility, but strongly disputed reports that such an order will come on the first day of the new administration.
On Israel, Obama again declined to comment on the violence in the Gaza Strip, repeating his mantra that the United States should have only "one president at a time" when it comes to foreign policy matters. But he promised early engagement on peace in the Middle East.
"I know some people have said, 'You have this big economic crisis on your hands, and so President Obama is going to just put off issues like this until his second term or later in his first term,' " he said. "I don't think we have that luxury."
He added: "That doesn't mean that we close a deal or we have some big grand, you know, Camp David-type event early in my administration. It does mean that we have a team in place which is hitting the ground and starting to engage constructively."
Obama reacted to questions about the emerging structure of his White House by displaying confidence in his ability to manage people. He has begun assembling a powerful team of White House counselors who will compete with Cabinet secretaries for influence over the majority of domestic and foreign policy issues.
"The theory behind it is I set the tone," Obama said. "If the tone I set is that we bring as much intellectual firepower to a problem, that people act respectfully towards each other, that disagreements are fully aired, and that we make decisions based on facts and evidence as opposed to ideology, that people will adapt to that culture and we'll be able to move together effectively as a team."
He added: "I have a pretty good track record at doing that."
Staff writers Ceci Connolly and Lori Montgomery contributed to this report.
Washington Post: Pragmatist-in-Chief
Pragmatist-in-Chief. Washington Post Editorial
Barack Obama offers some reassuring signals about his coming presidency in a visit to The Post.
Washington Post, Friday, January 16, 2009; page A18
PRESIDENT-ELECT Barack Obama came to The Post editorial board yesterday with two messages sketchy on details yet reassuring in approach: a commitment to fiscal discipline, and a determination not to be bound by liberal, or indeed any, orthodoxy.
On the first, Mr. Obama announced his plans for a "fiscal responsibility summit" next month, even before his first budget is unveiled, "to send a signal that we are serious" about getting the long-term budget under control. These sorts of events can be window dressing, cosmetic exercises to talk about hard choices rather than make them. Yet Mr. Obama deserves the benefit of the doubt when he says that, once an economic recovery is underway, "we've got to bend the curve" of rising spending and get entitlement costs under control.
"There are going to be some very difficult choices, and issues of sacrifice and duty and responsibility are going to come in because what we have done is kick this can down the road," he said. "We are now at the end of the road and are not in a position to kick it any further." Mr. Obama declined to tip his hand about what sacrifices he envisioned, but he said a commission to make recommendations on entitlement spending that would then go to Congress for an up-or-down vote is "something worth talking about."
In any event, he said, "Whether there was a commission or not, you have to have a president who is willing to spend some political capital on this, and I intend to spend some." We look forward to that.
On the Employee Free Choice Act, which would allow unions to organize by obtaining a majority of signatures from employees in a workplace rather than having to win secret-ballot elections, Mr. Obama signaled willingness to consider other mechanisms to address the concern that employers unfairly use the current process to intimidate workers not to join unions. And he seemed in no hurry to have Congress bring it up. "If we're losing half a million jobs a month, then there are no jobs to unionize, so my focus first is on those key economic priority items," Mr. Obama said, declining to state whether he wanted to see the issue debated during his first year in office.
Asked about whether the legal system is adequate for detaining and trying alleged terrorists, Mr. Obama said that he is undecided about whether some kind of special national security courts might be needed. "I am confident that we can set up a structure," he said. "I haven't prejudged whether it's through a traditional federal court system, is it through military courts-martial, is it through some variant. I am confident that core principles of due process, habeas corpus and so forth can be put in place that insures we are prosecuting bad guys much more rapidly than we have up until now, that we are true to the Geneva Conventions and international norms, that we are true to our Constitution and that [we] keep the American people safe."
Discussing the impression that his personnel selections have indicated a centrist bent, Mr. Obama argued against such pigeonholing. "What we're trying to eliminate is thinking through that lens," he said, citing the example of his choice for education secretary, Arne Duncan. "He . . . believes that we have to have really high standards and that the status quo is unacceptable and that as a way of achieving excellence we've got to break out of some of the old dogmas," Mr. Obama said. "Is he left or right? I don't know. He's smart, and he agrees with my general assessment of where the school systems are. That's why I hired him, not because of what one wing of the education establishment or another wing thought of him."
Mr. Obama's indications of ideological flexibility are rather abstract at this point; he has not yet been called on to make the kind of difficult choices about which he speaks so eloquently. But his transition has sounded all the right themes, and, if yesterday's session is any guide, his presidency promises to begin on the same hopeful, pragmatic note.
Barack Obama offers some reassuring signals about his coming presidency in a visit to The Post.
Washington Post, Friday, January 16, 2009; page A18
PRESIDENT-ELECT Barack Obama came to The Post editorial board yesterday with two messages sketchy on details yet reassuring in approach: a commitment to fiscal discipline, and a determination not to be bound by liberal, or indeed any, orthodoxy.
On the first, Mr. Obama announced his plans for a "fiscal responsibility summit" next month, even before his first budget is unveiled, "to send a signal that we are serious" about getting the long-term budget under control. These sorts of events can be window dressing, cosmetic exercises to talk about hard choices rather than make them. Yet Mr. Obama deserves the benefit of the doubt when he says that, once an economic recovery is underway, "we've got to bend the curve" of rising spending and get entitlement costs under control.
"There are going to be some very difficult choices, and issues of sacrifice and duty and responsibility are going to come in because what we have done is kick this can down the road," he said. "We are now at the end of the road and are not in a position to kick it any further." Mr. Obama declined to tip his hand about what sacrifices he envisioned, but he said a commission to make recommendations on entitlement spending that would then go to Congress for an up-or-down vote is "something worth talking about."
In any event, he said, "Whether there was a commission or not, you have to have a president who is willing to spend some political capital on this, and I intend to spend some." We look forward to that.
On the Employee Free Choice Act, which would allow unions to organize by obtaining a majority of signatures from employees in a workplace rather than having to win secret-ballot elections, Mr. Obama signaled willingness to consider other mechanisms to address the concern that employers unfairly use the current process to intimidate workers not to join unions. And he seemed in no hurry to have Congress bring it up. "If we're losing half a million jobs a month, then there are no jobs to unionize, so my focus first is on those key economic priority items," Mr. Obama said, declining to state whether he wanted to see the issue debated during his first year in office.
Asked about whether the legal system is adequate for detaining and trying alleged terrorists, Mr. Obama said that he is undecided about whether some kind of special national security courts might be needed. "I am confident that we can set up a structure," he said. "I haven't prejudged whether it's through a traditional federal court system, is it through military courts-martial, is it through some variant. I am confident that core principles of due process, habeas corpus and so forth can be put in place that insures we are prosecuting bad guys much more rapidly than we have up until now, that we are true to the Geneva Conventions and international norms, that we are true to our Constitution and that [we] keep the American people safe."
Discussing the impression that his personnel selections have indicated a centrist bent, Mr. Obama argued against such pigeonholing. "What we're trying to eliminate is thinking through that lens," he said, citing the example of his choice for education secretary, Arne Duncan. "He . . . believes that we have to have really high standards and that the status quo is unacceptable and that as a way of achieving excellence we've got to break out of some of the old dogmas," Mr. Obama said. "Is he left or right? I don't know. He's smart, and he agrees with my general assessment of where the school systems are. That's why I hired him, not because of what one wing of the education establishment or another wing thought of him."
Mr. Obama's indications of ideological flexibility are rather abstract at this point; he has not yet been called on to make the kind of difficult choices about which he speaks so eloquently. But his transition has sounded all the right themes, and, if yesterday's session is any guide, his presidency promises to begin on the same hopeful, pragmatic note.
"Shipping Jobs Overseas" or Reaching New Customers? Why Congress Should Not Tax Reinvested Earnings Abroad
"Shipping Jobs Overseas" or Reaching New Customers? Why Congress Should Not Tax Reinvested Earnings Abroad. By Daniel T. Griswold
Cato, Free Trade Bulletin No. 36, Jan 13, 2009
Trade and globalization have become more inviting targets during the current economic downturn. As output falls and unemployment rises, politicians in Washington are questioning not only imports but U.S. companies that invest in production abroad.
The incoming president, Barack Obama, pledged during his campaign that, "Unlike John McCain, I will stop giving tax breaks to corporations that ship jobs overseas and I will start giving them to companies that create good jobs right here in America."1 That campaign refrain, echoed by a number of other successful candidates, raises three basic questions:
Why do U.S. multinational companies establish affiliates abroad and hire foreign workers? What kind of tax breaks are they receiving? And should the new Congress and new president change U.S. law to make it more difficult for U.S. multinational corporations to produce goods and services in foreign countries?
Reaching millions of new customers
To demonize U.S. multinationals operating production facilities abroad is to indict virtually every major American company. At latest count more than 2,500 U.S. corporations own and operate a total of 23,853 affiliates in other countries. In 2006, according to the U.S. Department of Commerce, majority-owned foreign affiliates of U.S. companies posted $4.1 trillion in sales, created just under $1 trillion in value added, employed 9.5 million foreign workers, and earned $644 billion in net income for their U.S.-based parent companies.2
The primary reason why U.S. companies invest in affiliates abroad is to sell more products to foreign customers. Certain services can only be delivered on the spot, where the provider must have a physical presence in the same location as its customers. Operating affiliates abroad allows U.S. companies to maintain control over their brand name and intellectual property such as trademarks, patents, and engineering expertise. U.S. companies also establish foreign affiliates because of certain advantages in the host country— lower-cost labor, ready access to raw materials and other inputs, reduced transportation costs and proximity to their ultimate customers. Yes, the motivations can include access to "cheap labor," but labor costs are not the principal motivation for most U.S. direct investment abroad.
Politicians focus most of their attention on comparing exports and imports, but the most common way American companies sell their goods and services in the global market today is through overseas affiliates. In 2006, U.S. multinational companies sold $3,301 billion in goods through their majority-owned affiliates abroad and $677 billion in services. For every $1 billion in goods that U.S. multinational companies exported from the United States in 2006, those same companies sold $6.2 billion through their overseas operations. For every $1 billion in service exports, U.S.- owned affiliates abroad sold $1.6 billion.3
Contrary to popular myth, U.S. multinational companies do not use their foreign operations as an "export platform" back to the United States. Close to 90 percent of the goods and services produced by U.S.-owned affiliates abroad are sold to customers either in the host country or exported to consumers in third countries outside the United States. Even in Mexico and China, where low-wage workers are supposedly too poor to buy American products, more than half of the products of new and existing U.S. affiliates are sold in their domestic markets, whereas customers in the United States account for only 17 percent of sales.4
More Jobs Abroad, More Jobs at Home
Investing abroad is not about "shipping jobs overseas." There is no evidence that expanding employment at U.S.- owned affiliates comes at the expense of overall employment by parent companies back home in the United States. In fact, the evidence and experience of U.S. multinational companies points in the opposite direction: foreign and domestic operations tend to compliment each other and expand together. A successful company operating in a favorable business climate will tend to expand employment at both its domestic and overseas operations. More activity and sales abroad often require the hiring of more managers, accountants, lawyers, engineers, and production workers at the parent company.
Consider Caterpillar Inc., the Peoria, Illinois-based company known for making giant earth-moving equipment. From 2005 through 2007, the company enjoyed booming global sales because of strong growth in overseas markets, especially those with resources extracted from the ground. According to the company's 2007 annual report, Caterpillar earned 63 percent of its sales revenue abroad, including $1 billion in sales in China alone. As a result, Caterpillar ramped up employment at its overseas affiliates during that time from 41,238 to 50,788, an increase of almost 10,000 workers. During that same three-year period, the company expanded its domestic employment from 43,878 to 50,545, a healthy increase of 6,667.5
Caterpillar's experience is not unusual for U.S. multinational companies. A 2005 study from the National Bureau of Economic Research found that, during the 1980s and 1990s, there was "a strong positive correlation between domestic and foreign growth rates of multinational firms." After analyzing the operations of U.S. multinational companies at home and abroad, economists Mihir A. Desai, C. Fritz Foley, and James R. Hines Jr. found that a 10 percent increase in capital investment in existing foreign affiliates was associated with a 2.2 percent increase in domestic investment by the same company and a 4 percent increase in compensation for its domestic workforce. They also found a positive connection between foreign and domestic sales, assets, and numbers of employees.6 "Foreign production requires inputs of tangible or intellectual property produced in the home country," the authors explained. "Greater foreign activity spurs higher exports from American parent companies to foreign affiliates and greater domestic R&D spending."7
The positive connection between foreign and domestic employment of U.S. multinational companies has continued into the current decade. As Figure 1 shows, parent and affiliate employment have tracked each other since the early 1980s. More recently, employment rose briskly for parents and affiliates alike in the boom of the late 1990s, fell for both during the downturn and slow recovery of 2001 through 2003, and then rose again from 2003 through 2006.8 Although the numbers have not been reported yet for 2007 and 2008, it's likely that the loss of net jobs in the domestic U.S. economy will be mirrored by much slower growth or outright decline in foreign affiliate employment.
Modest Investment in China and Mexico
Investment in China and Mexico drew the most fire on the campaign trail. In a primary debate in Texas in February 2008, then-senator Obama said, "In Youngstown, Ohio, I've talked to workers who have seen their plants shipped overseas as a consequence of bad trade deals like NAFTA, literally seeing equipment unbolted from the floors of factories and shipped to China."9 That makes for a good sound-bite in the heat of a campaign, but it does not accurately reflect the broader reality of outward foreign investment by U.S. manufacturers.
[graph in original article]
Outflows of U.S. manufacturing investment to Mexico and China have been modest by any measure. Between 2003 and 2007, U.S. manufacturing companies sent an average of $2 billion a year in direct investment to China and $1.9 billion to Mexico. That pales in comparison to the average $22 billion a year in direct manufacturing investment "shipped" to Europe during that same period, but talking about equipment being unbolted from the floors of U.S. factories and shipped to England just doesn't have the same bite.10 The modest annual outflow in investment to China and Mexico is positively dwarfed by the annual $59 billion inflow of manufacturing investment to the United States from abroad during those same years11 and the average of $165 billion per year that U.S. manufacturers invested domestically in plant and equipment.12
The fear of manufacturing jobs being shipped to China and Mexico is not supported by the evidence. While U.S. factories were famously shedding those 3 million net jobs between 2000 and 2006, U.S.-owned manufacturing affiliates abroad increased their employment by a modest 128,000 jobs. An increase in 172,000 jobs at U.S.-owned affiliates in China was partially offset by an actual decline of almost 100,000 jobs at affiliates in Mexico.13 The large majority of factory jobs lost in the United States since 2000 were not "shipped to China" or anywhere else, but were lost to automation and other sources of increased efficiency in U.S. manufacturing.
U.S. manufacturing investment in China remains modest compared to the huge political investment that candidates and pundits have made in making it an issue. U.S. direct investment in China remains a relatively small part of China's overall economy, and a small part of America's total investments abroad. Of the nearly 10 million workers that U.S. affiliates employ abroad, fewer than 5 percent are Chinese; Americanowned affiliates employed just as many manufacturing workers in high-wage Germany in 2006 as they did in low-wage China.14
"Tax breaks" Keep U.S. Companies Competitive
Politicians are not usually specific about exactly what "tax breaks" they want to repeal. The biggest tax exemption for U.S. companies that invest abroad is the deferral of tax payments for "active" income. U.S. corporations are generally liable for tax on their worldwide income, whether it is earned in the United States or abroad. But the relatively high U.S. corporate tax rate is not applied to income earned abroad that is reinvested abroad in productive operations. U.S. multinationals are taxed on foreign income only when they repatriate the earnings to the United States. Not surprisingly, the deferral of active income gives U.S. companies a powerful incentive to reinvest abroad what they earn abroad, but this is hardly an incentive to "ship jobs overseas."
Such deferral may sound like an unjustified tax break to some, but every major industrial country offers at least as favorable treatment of foreign income to their multinational corporations. Indeed, numerous major countries exempt their companies from paying any tax on their foreign business operations. Foreign governments seem to more readily grasp the fact that when corporations have healthy and expanding foreign operations it is good for the parent company and its workers back home.15
If President Obama and other leaders in Washington want to encourage more investment in the United States, they should lower the U.S. corporate tax rate, not seek to extend the high U.S. rate to the overseas activities of U.S. companies. Extending high U.S. tax rates to U.S.-owned affiliates abroad would put U.S. companies at a competitive disadvantage as they try to compete to sell their goods and services abroad. Their French and German competitors in third-country markets would continue to pay the lower corporate tax rates applied by the host country, while U.S. companies would be burdened with paying the higher U.S. rate. The result of repealing tax breaks on foreign earnings would be less investment in foreign markets, lost sales, lower profits, and fewer employment and export opportunities for parent companies back on American soil.
Politicians who disparage investment in foreign operations are wedded to an outdated and misguided economic model that glorifies domestic production for export above all other ways for Americans to engage in the global economy. They would deny Americans access to hundreds of millions of foreign customers and access to lower-cost inputs through global supply chains. In short, they would cripple American companies and their American workers as they try to compete in global markets.
[Full text w/references at the original link above]
Daniel T. Griswold is the director of the Center for Trade Policy Studies at the Cato Institute.
Cato, Free Trade Bulletin No. 36, Jan 13, 2009
Trade and globalization have become more inviting targets during the current economic downturn. As output falls and unemployment rises, politicians in Washington are questioning not only imports but U.S. companies that invest in production abroad.
The incoming president, Barack Obama, pledged during his campaign that, "Unlike John McCain, I will stop giving tax breaks to corporations that ship jobs overseas and I will start giving them to companies that create good jobs right here in America."1 That campaign refrain, echoed by a number of other successful candidates, raises three basic questions:
Why do U.S. multinational companies establish affiliates abroad and hire foreign workers? What kind of tax breaks are they receiving? And should the new Congress and new president change U.S. law to make it more difficult for U.S. multinational corporations to produce goods and services in foreign countries?
Reaching millions of new customers
To demonize U.S. multinationals operating production facilities abroad is to indict virtually every major American company. At latest count more than 2,500 U.S. corporations own and operate a total of 23,853 affiliates in other countries. In 2006, according to the U.S. Department of Commerce, majority-owned foreign affiliates of U.S. companies posted $4.1 trillion in sales, created just under $1 trillion in value added, employed 9.5 million foreign workers, and earned $644 billion in net income for their U.S.-based parent companies.2
The primary reason why U.S. companies invest in affiliates abroad is to sell more products to foreign customers. Certain services can only be delivered on the spot, where the provider must have a physical presence in the same location as its customers. Operating affiliates abroad allows U.S. companies to maintain control over their brand name and intellectual property such as trademarks, patents, and engineering expertise. U.S. companies also establish foreign affiliates because of certain advantages in the host country— lower-cost labor, ready access to raw materials and other inputs, reduced transportation costs and proximity to their ultimate customers. Yes, the motivations can include access to "cheap labor," but labor costs are not the principal motivation for most U.S. direct investment abroad.
Politicians focus most of their attention on comparing exports and imports, but the most common way American companies sell their goods and services in the global market today is through overseas affiliates. In 2006, U.S. multinational companies sold $3,301 billion in goods through their majority-owned affiliates abroad and $677 billion in services. For every $1 billion in goods that U.S. multinational companies exported from the United States in 2006, those same companies sold $6.2 billion through their overseas operations. For every $1 billion in service exports, U.S.- owned affiliates abroad sold $1.6 billion.3
Contrary to popular myth, U.S. multinational companies do not use their foreign operations as an "export platform" back to the United States. Close to 90 percent of the goods and services produced by U.S.-owned affiliates abroad are sold to customers either in the host country or exported to consumers in third countries outside the United States. Even in Mexico and China, where low-wage workers are supposedly too poor to buy American products, more than half of the products of new and existing U.S. affiliates are sold in their domestic markets, whereas customers in the United States account for only 17 percent of sales.4
More Jobs Abroad, More Jobs at Home
Investing abroad is not about "shipping jobs overseas." There is no evidence that expanding employment at U.S.- owned affiliates comes at the expense of overall employment by parent companies back home in the United States. In fact, the evidence and experience of U.S. multinational companies points in the opposite direction: foreign and domestic operations tend to compliment each other and expand together. A successful company operating in a favorable business climate will tend to expand employment at both its domestic and overseas operations. More activity and sales abroad often require the hiring of more managers, accountants, lawyers, engineers, and production workers at the parent company.
Consider Caterpillar Inc., the Peoria, Illinois-based company known for making giant earth-moving equipment. From 2005 through 2007, the company enjoyed booming global sales because of strong growth in overseas markets, especially those with resources extracted from the ground. According to the company's 2007 annual report, Caterpillar earned 63 percent of its sales revenue abroad, including $1 billion in sales in China alone. As a result, Caterpillar ramped up employment at its overseas affiliates during that time from 41,238 to 50,788, an increase of almost 10,000 workers. During that same three-year period, the company expanded its domestic employment from 43,878 to 50,545, a healthy increase of 6,667.5
Caterpillar's experience is not unusual for U.S. multinational companies. A 2005 study from the National Bureau of Economic Research found that, during the 1980s and 1990s, there was "a strong positive correlation between domestic and foreign growth rates of multinational firms." After analyzing the operations of U.S. multinational companies at home and abroad, economists Mihir A. Desai, C. Fritz Foley, and James R. Hines Jr. found that a 10 percent increase in capital investment in existing foreign affiliates was associated with a 2.2 percent increase in domestic investment by the same company and a 4 percent increase in compensation for its domestic workforce. They also found a positive connection between foreign and domestic sales, assets, and numbers of employees.6 "Foreign production requires inputs of tangible or intellectual property produced in the home country," the authors explained. "Greater foreign activity spurs higher exports from American parent companies to foreign affiliates and greater domestic R&D spending."7
The positive connection between foreign and domestic employment of U.S. multinational companies has continued into the current decade. As Figure 1 shows, parent and affiliate employment have tracked each other since the early 1980s. More recently, employment rose briskly for parents and affiliates alike in the boom of the late 1990s, fell for both during the downturn and slow recovery of 2001 through 2003, and then rose again from 2003 through 2006.8 Although the numbers have not been reported yet for 2007 and 2008, it's likely that the loss of net jobs in the domestic U.S. economy will be mirrored by much slower growth or outright decline in foreign affiliate employment.
Modest Investment in China and Mexico
Investment in China and Mexico drew the most fire on the campaign trail. In a primary debate in Texas in February 2008, then-senator Obama said, "In Youngstown, Ohio, I've talked to workers who have seen their plants shipped overseas as a consequence of bad trade deals like NAFTA, literally seeing equipment unbolted from the floors of factories and shipped to China."9 That makes for a good sound-bite in the heat of a campaign, but it does not accurately reflect the broader reality of outward foreign investment by U.S. manufacturers.
[graph in original article]
Outflows of U.S. manufacturing investment to Mexico and China have been modest by any measure. Between 2003 and 2007, U.S. manufacturing companies sent an average of $2 billion a year in direct investment to China and $1.9 billion to Mexico. That pales in comparison to the average $22 billion a year in direct manufacturing investment "shipped" to Europe during that same period, but talking about equipment being unbolted from the floors of U.S. factories and shipped to England just doesn't have the same bite.10 The modest annual outflow in investment to China and Mexico is positively dwarfed by the annual $59 billion inflow of manufacturing investment to the United States from abroad during those same years11 and the average of $165 billion per year that U.S. manufacturers invested domestically in plant and equipment.12
The fear of manufacturing jobs being shipped to China and Mexico is not supported by the evidence. While U.S. factories were famously shedding those 3 million net jobs between 2000 and 2006, U.S.-owned manufacturing affiliates abroad increased their employment by a modest 128,000 jobs. An increase in 172,000 jobs at U.S.-owned affiliates in China was partially offset by an actual decline of almost 100,000 jobs at affiliates in Mexico.13 The large majority of factory jobs lost in the United States since 2000 were not "shipped to China" or anywhere else, but were lost to automation and other sources of increased efficiency in U.S. manufacturing.
U.S. manufacturing investment in China remains modest compared to the huge political investment that candidates and pundits have made in making it an issue. U.S. direct investment in China remains a relatively small part of China's overall economy, and a small part of America's total investments abroad. Of the nearly 10 million workers that U.S. affiliates employ abroad, fewer than 5 percent are Chinese; Americanowned affiliates employed just as many manufacturing workers in high-wage Germany in 2006 as they did in low-wage China.14
"Tax breaks" Keep U.S. Companies Competitive
Politicians are not usually specific about exactly what "tax breaks" they want to repeal. The biggest tax exemption for U.S. companies that invest abroad is the deferral of tax payments for "active" income. U.S. corporations are generally liable for tax on their worldwide income, whether it is earned in the United States or abroad. But the relatively high U.S. corporate tax rate is not applied to income earned abroad that is reinvested abroad in productive operations. U.S. multinationals are taxed on foreign income only when they repatriate the earnings to the United States. Not surprisingly, the deferral of active income gives U.S. companies a powerful incentive to reinvest abroad what they earn abroad, but this is hardly an incentive to "ship jobs overseas."
Such deferral may sound like an unjustified tax break to some, but every major industrial country offers at least as favorable treatment of foreign income to their multinational corporations. Indeed, numerous major countries exempt their companies from paying any tax on their foreign business operations. Foreign governments seem to more readily grasp the fact that when corporations have healthy and expanding foreign operations it is good for the parent company and its workers back home.15
If President Obama and other leaders in Washington want to encourage more investment in the United States, they should lower the U.S. corporate tax rate, not seek to extend the high U.S. rate to the overseas activities of U.S. companies. Extending high U.S. tax rates to U.S.-owned affiliates abroad would put U.S. companies at a competitive disadvantage as they try to compete to sell their goods and services abroad. Their French and German competitors in third-country markets would continue to pay the lower corporate tax rates applied by the host country, while U.S. companies would be burdened with paying the higher U.S. rate. The result of repealing tax breaks on foreign earnings would be less investment in foreign markets, lost sales, lower profits, and fewer employment and export opportunities for parent companies back on American soil.
Politicians who disparage investment in foreign operations are wedded to an outdated and misguided economic model that glorifies domestic production for export above all other ways for Americans to engage in the global economy. They would deny Americans access to hundreds of millions of foreign customers and access to lower-cost inputs through global supply chains. In short, they would cripple American companies and their American workers as they try to compete in global markets.
[Full text w/references at the original link above]
Daniel T. Griswold is the director of the Center for Trade Policy Studies at the Cato Institute.
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