Thursday, June 29, 2017

“One Country, Two Systems” Is Not A Durable Formula To Sustain The Autonomy Of A Small Entity That Is Embedded In A Much Larger, More Powerful Entity

“One Country, Two Systems” is the formula negotiated by Chinese leader Deng Xiaoping with British Prime Minister Margaret Thatcher in the 1980s for the transfer of sovereignty over Hong Kong from Britain to China, effective July 1, 1997.  The formula established Hong Kong as a Special Administrative Region of China, known as the HKSAR.  Deng’s “One Country, Two Systems” formula guaranteed the HKSAR a high degree of autonomy for 50 years.  China promulgated a “Basic Law”  for the HKSAR, which stipulated that Hong Kong’s social, economic, political, legal, and other institutions would remain in place unchanged, free from mainland interference, for 50 years.  China would only exercise authority in matters of defense and foreign relations.

July 1, 2017, marks the 20th anniversary of China’s resumption of sovereignty over Hong Kong.  Chinese President Xi Jinping will visit Hong Kong to note the anniversary.

China has not fully honored its promise of autonomy.  Critics have cited many examples of mainland interference in Hong Kong’s internal affairs, which have impinged on freedom of speech, the press, publishing, assembly, education, elections, and other areas of policy that were to be the sole responsibility of the HKSAR government.  Some of the more important recent encroachments was published in the Washington Post on June 23, 2017, five days before President Xi’s visit.

It is worth reading the article in full, and dozens more that are readily found in a Google search.  Here I want to reproduce the closing paragraphs from the WP article that comment on the growing loss of autonomy and Hong Kong’s future prospects.

“As China needs Hong Kong less, the reverse is also true: Hong Kong has become almost entirely dependent on the mainland for its survival.
“Well more than half of Hong Kong’s exports end up in China, and a growing share of its bank loans are to Mainland Chinese customers. Tourism and retail spending from mainland visitors account for about 10 percent of Hong Kong’s economy, propping up the shopping malls and luxury boutiques. “Red chip” stocks from mainland companies make up more than 40 percent of the Hong Kong stock market’s capitalization. Students from Mainland China are filling spaces in Hong Kong universities. And the Mandarin language is heard increasingly here, even supplanting English as the second language for Cantonese-speaking Hong Kong.

“What we are seeing now is the mainlandization of Hong Kong. It’s the gradual absorption of Hong Kong by the new sovereign [much like the Borg assimilation of other species in Star Trek].  It’s the slow erosion of the separate culture and norms that have set it [Hong Kong] apart [from China in the past]. And it’s the incremental marginalization of Hong Kong in the Chinese economy.

“Since the Occupy protests [2014], China has shown an increasing propensity to meddle directly in Hong Kong’s affairs. Chinese security agents operating in Hong Kong have abducted book publishers, as well as a reclusive Chinese billionaire secluded in a five-star hotel, and spirited them back over the border for secretive interrogations. China’s rubber-stamp assembly has short-circuited the local judicial process by making rulings on Hong Kong laws — in one case banning two elected members of the legislature from retaking their oaths.

“After the handover on July 1, 1997, there was an assumption, or hope, that the “one country, two systems” formula negotiated in the 1980s by Chinese leader Deng Xiaoping and British Prime Minister Margaret Thatcher might actually be allowed to work. Hong Kong was promised full autonomy for 50 years, which in 1997 seemed a lifetime away.  “What few predicted was Hong Kong’s slow-motion mainlandization. Hong Kong and China have been converging — just not in the direction many of us thought.”

On the general point of smaller entities embedded in larger, more powerful ones, replace “Hong Kong” with “Centers” or “Institutes” that formerly existed as separate, autonomous entities, and replace “China” with the name of the particular “University,” in which they previously existed.
Perhaps the clearest example is the late Murray Weidenbaum’s Center For The Study of American Business, which published research quantifying the costs of business regulation on the American economy.  In the fifteen years since his retirement, the new director, a professor of political science hired from Minnesota, has transformed Murray’s conservative institute into a grant-making body for Washington University’s largely liberal faculty.  The study of business regulation now constitutes only a tiny fraction of the center’s annual budget.
Could this happen to the Hoover Institution at Stanford University?  Some think the process is well underway and it’s only a matter of another 5-10 years before Hoover loses its autonomy, and what remains of it’s conservative orientation.
There are some 90 centers and institutes embedded in other U.S. universities. (See Table 39, pp. 128-30)  Some are independent in name only as a way to raise funds to support programs within the university framework.  How many of the truly independent will ultimately be absorbed into their respective universities on financial or ideological grounds, especially if they have a separate endowment and raise their own annual funds?
Given the 90% Democrat/liberal orientation among the faculty and high-level administrators in leading U.S. universities, conservatives think tanks embedded in U.S. universities may have seen their better days.  The era of Ronald Reagan is largely over within the academy, although it continues to survive in independent think tanks with no university affiliation.

Tuesday, June 6, 2017

Don’t Let The Revenue-Neutral Mongers Block Tax Cuts

We can’t have tax cuts, cry the economic naysayers, because they will explode the deficit, raise interest rates, crowd out private investment, and increase unemployment.  (Funny that these concerns never warrant reducing spending, or even stop spending increases, on politically popular infrastructure, defense, entitlements, and most other federal government programs.)

But these same naysayers tell us that we will have low interest rates as far as the eye can see (or farther, as in the 30-year T-bond rate).

In the past 15 years, the federal government‘s public debt has quadrupled from $5 trillion to $20 trillion.  But none of the alleged adverse effects of sharply rising public debt have materialized.   Indeed, the unemployment rate has fallen from 10% in late 2009 to 4.3% in May 2017, while the 30-year Treasury bond rate has declined from 5.28% in June-July 2007 to 2.8% in early July 2017.  Hmmmm!

Maybe the naysayers’ fears will materialize sometime in the not-too-distant future, but that future does not seem to be around the corner.  The above data suggest that we can have a trillion or more dollars in cuts in marginal tax rates on business and individuals in an attempt to spark growth from a paltry 2% or less over the past 10 years to a more robust 3%.  And, we will be able to sleep at night without having to worry about inflation and unemployment rearing their ugly heads.

Monday, June 5, 2017

Revenue-Neutral Tax Reform Is A Bad Joke On The American Taxpayer

On June 2, 2017, the Bureau of Labor Statistics released the May 2017 jobs report.  Against estimates of 175,000 net new jobs, it reported only 138,000. If economic forecasters are so far off on one month, how can the Congressional Budget Office produce a ten-year (120 months) forecast of revenue and expenditure that is even remotely accurate?

Answer?  It can’t.

The ten-year rule (Byrd Rule) of revenue neutrality that follows a reduction in tax rates, which determines if tax cuts expire or continue after ten years, is arbitrary.   There is no scientific way to project that revenue and expenditure will balance over one year, much less ten.  Let’s be honest about this.

Revenue-neutrality is a game Members of Congress play to pretend they are serious about not allowing tax cuts to increase public debt.  But they are rarely serious about balancing the federal budget under any circumstances. 

Congress enabled the Bush and Obama administrations to pile up $15 trillion in public debt.  Indeed, Congress has presided over a deficit-free (actually surplus) budget only 4 times since 1970. To sacrifice tax cuts on the altar of revenue neutrality, and the possibility of pushing growth up from 2%, where it has been stuck since the Great Recession of 2008, to 3%, is a case of crocodile tears

By definition, revenue neutral means no net tax cut.  In principle, broadening the tax base would permit lower tax rates with no loss in revenue, but good luck with that.  Republicans in blue states vigorously oppose eliminating the deduction for state and local taxes ($1.3 trillion in less revenue to the Treasury over 10 years), and almost no one wants to eliminate the health insurance exclusion.

In 1993, at the age of 23, Paul Ryan began working for Jack Kemp as a speechwriter and for two years at his research organization Empower America.  Ryan first entered Congress in 1999, four years later.  As Speaker, he seems to have forgotten everything Kemp taught him about tax cuts. 

Kevin Brady, for his part, is enjoying his position of power as Chairman of the House Ways and Means Committee too much to give up his love of the Border Adjusted Tax.  He projects it would collect $1 trillion in taxes over ten years facilitating revenue-neutral tax reform.

Et tu, Greg Mankiw?   (NYT, op-ed, June 3, 2017)  For Bush, tax cuts were OK but not for Trump.

Members of Congress keep searching for the Holy Grail of revenue-neutral tax cuts/tax reform, but your friendly proprietor really doubts they want to find it.  Gary Cohn, chairman of the National Economic Council in the White House, cannot answer with a straight face if he would accept a cut in the corporate tax rate if that were the only measure Congress would approve.  No, he has to maintain the fiction of comprehensive tax reform to claim that any cut in tax rates will not increase the public debt or expire over the next ten years. 

Friday, June 2, 2017

France Adopts English As Its Official Language

Really.  No kidding.  This is not an April Fool's joke.

On June 1, 2017, French President Emmanuel Macron harshly criticized President Trump's decision to withdraw the United states from the Paris Agreement on climate change. He said it was a mistake both for the U.S. and the planet.  It was an unprecedented English-language speech at the Elysee Palance.

In his speech largely addressed to Americans, he said:

"To all the scientists, engineers, entrepreneurs, and responsible citizens who were disappointed by the decision by the president of the United States, I want to say they will find in France a second homeland,...I call on them--come and work here with us, to work together on concrete solutions for our climate."

He neglected such little details as oppressive taxes, labor regulations, and a myriad of other economic problems afflicting France.  But never mind.

Imagine.  Being able to eat French food, drink French wine, and see great Art in an English-speaking France.