Political Issues

Trade tariff battle will not lead to any long-term damage

Posted on by j.giglio

President Trump’s views on trade have never been a secret. Trump finally delivered on his campaign promises by announcing unilateral tariffs on steel and aluminum imports coupled with the imposition of about $60 billion in new tariffs on China. The moves generated frightening headlines, with experts predicting they will have dire consequences for the global trading system, but such claims are exaggerated.

Trade is a competitive game and every country plays hardball. The Trump policy is supposedly designed to counter a series of unfair Chinese trade practices, such as its longstanding restrictions on American companies, the forced transfer of American intellectual property, and many cases of patent and trademark infringement. The administration has demanded that China shave $100 billion off its record $375 billion trade surplus with the United States.

U.S. firms have been unable to sell advanced goods and services to China’s rapidly expanding middle class. It is widely acknowledged that in many market segments China requires foreign firms to share proprietary technology as a  condition of market access. The firms provide innovation and their Chinese counterparts imitate foreign design.

Many of the president’s media antagonists say these actions threaten to unleash a trade war; that the  moves appease the resident’s Rust Belt constituency but are unlikely to end America’s trade deficits or bring back manufacturing jobs. They also warn of rising consumer prices and are convinced that the U.S. would lose a trade war with the emerging market giant.

Yet it is unclear whether the president and the economic  nationalists in his administration will govern as tough as they talk. It is quite possible that actual tariffs will fall short of  the threats. For example, the tensions with American allies generated by the steel and aluminum tariffs are likely to be resolved through cometic concessions.

Following the president’s tariff announcement, China initially targeted tit-for-tat tariffs to put pressure on politically sensitive states that voted for Trump, hitting him where it hurts the most ahead of mid-term elections later this year. China’s Ministry of Commerce quickly said that it would impose a 15 percent tariff on $3 billion worth of American fruit, pork, wine, seamless steel pipes and more than 100 other products that represent about 2 percent of total American exports to China.

But soon after all this huffing and puffing, China’s Premier Li Keqiang, at a conference that included global chief executive officers at the Great Hall of the People in Beijing, pledged to open markets to avert a trade war with the United States and to ease access for American businesses. Also, China offered to buy more American made semiconductors and allow foreign financial firms to take majority stakes in Chinese securities firms.

Then on April 1, the Chinese Finance Ministry said the previously announced tariffs will take effect immediately.

China is reliant on foreign trade for growth and job creation and needs to retain access to the U.S. market. The country certainly doesn’t want to engage in a trade  war with its best customer. China’s exports to the U.S. are equal to about 4.5 percent of its GDP. In contrast, U.S. exports to China are equal to about two-thirds of 1 percent of GDP. Although less important to the economy than it was, trade accounts for almost 40 percent of Chinese GDP versus less than 30 percent in the U.S.

America’s decline relative to other countries is an old story. First the Russians were going to leave the U.S. in the dust, then the Japanese. But consider the strong and intrinsic advantages America enjoys. They include being functionally energy and agriculturally independent, having more favorable demographics and a consensual society. Drug dealers still prefer suitcases full of dollars, not yuan, and global investors still seek Treasury bonds as a safe haven in times of crisis.

President Trump’s trade moves may temporarily roil U.S. markets, but there is no need to panic or bet against the United States.

Originally Published: Apr 7, 2018

The eye-for-an-eye approach to trade

Posted on by j.giglio

On March 8, America’s populist-in-chief signed an executive order slapping a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports. President Trump said he did it to protect the nation’s economic and national security. It came a little over a month after Trump said he would impose tariffs and quotas on imported solar panels and washing machines.

The United States has had the world’s largest trade deficit ever since 1975. In 2017 imports were about $2.9 trillion and exports were just over $2.3 trillion, as Americans continue to consume more than we produce.

The steel and aluminum tariffs have aroused little enthusiasm and much criticism. Naysayers argue they will do nothing to strengthen America’s economy or national security, and spark a global trade war. They say the tariffs will result in higher prices as steel users pass costs onto consumers.

Supporters claim there already is a trade war underway and it is being waged by China. That country accounts for more than two-thirds of America’s current trade deficit. We import $506 billion – mainly consumer electronics, clothing, and machinery – from China, but export only about $131 billion in goods.

China has been blocking high-value exports from the United States. For example, it charges a 25 percent import duty on cars, 10 times the 2.5 percent levy the United States puts on imported vehicles.

China also imposes steep tariffs on imported automobile parts. As Elon Musk tweeted, “No US auto company is allowed to own even 50% of their own factory in China but there are five 100% China-owned EV auto companies in the US.” Obviously, engaging in tough trade talks with China is long overdue.

It will take years for the United States, China and the global trading system to work out imbalances on a wide range of goods. America’s prosperity depends on a robust approach to correct failed trade policies, with a focus on the industries of the future. It makes no sense for America to excel at innovation without securing the domestic and foreign markets for its products.

It merits mentioning that instances in which American companies ship raw materials to China for assembly at a lower cost, then sell the finished products count as imports. American multi-national companies are happy to hire foreign workers from emerging markets with lower standards of living to keep their labor costs low and profits high. They figured out that to make income redistribution work on a global scale: American workers have to be less welloff so their overseas counterparts can be less poor.

But the new tariff on steel imports will not impact China. The United States is the world’s biggest steel importer, buying 35.6 million tons in 2017. Nearly 17 percent come from Canada, 13.2 percent from Brazil, and 9.7 percent from South Korea. Unless the Chinese are routing their steel exports through American allies, the U.S only imports about 3 percent of its steel from China.

After pushback from Canada, wiser minds prevailed within the administration and tariff sanctions were suspended indefinitely pending renegotiation of the North American Free Trade Agreement.

The tariffs may trigger reprisals. The day after President Trump signed the tariff executive order, the European Union published a 10-page list of American products that would be targets for retaliation, including peanut butter, grains, and motorcycles.

While steel and aluminum account for only a small portion of trade, the President’s rhetoric indicates that this is just the opening salvo from the White House bunker after years of benign neglect. The primary target is China. Trump has already called its unfair trading practices “an assault on our country.”

As the head of the World Trade Organization, one of the guardians of the global trading system, noted after the tariffs were announced, “Once we start down this path it will be difficult to reverse direction. An eye for an eye will leave us all blind and the world in a deep recession.”

 

Originally Published: Mar 22, 2018

Time to reform the civil service

Posted on by j.giglio

The American people are rightly fed up with an accelerating cascade of government failures. Just as one recedes from the headlines, another pops up

Most recently, Americans learned that law enforcement, including the FBI, failed to act on several detailed, credible tips about Nikolas Cruz, who went on a killing spree on February 14, killing 17 and wounding another 14 at a Parkland, Fla., high school. This was a perfect example of see something, do something, but government workers did nothing.

Their behavior validates the public’s opinion that too many government workers are just plain incompetent, and sometimes decide to ignore the public– the very people they are supposed to protect – knowing full well they will never be held accountable.

Surely it will not be long before these agencies are asking for more money and an expanded role.

The Parkland, Florida school shooting is just the latest in a series of high-profile institutional failures. They began with the September 11 attacks, when 2,977 people lost their lives because America’s intelligence and law enforcement agencies missed warning signs. Then came botched efforts to deal with the devastation of Hurricane Katrina, the inadequate financial regulation that contributed to the 2008 financial meltdown, the National Security Agency letting Edward Snowden walk away with its crown jewels, the IRS’ targeting of conservative political groups, Russian spies being allowed to meddle in U.S. elections in the midst of Cold War 2.0, and the beat goes on.

These notable public failures contribute to the unhealthy divide between citizens and their government. With evidence of failure all around, is it any wonder that the public has become disillusioned, angry, and frustrated with all levels of government?

The scandal-plagued Veterans Administration is a glaring example of how government hurts the very people it purports to help when agency employees, not the nation’s veterans, become its most important constituency.

The Veterans Health Administration, which is part of the VA, is charged with providing medical care to those who have served our country. In 2014 Americans learned VA hospitals were making military veterans wait far longer than the targeted 14-day period to receive services.

Some died while waiting for care, and some hospitals falsified records to make it look like they were meeting their targets. The Phoenix VA Hospital reported that the average waiting time for medical appointments was 24 days. According to the VA inspector general’s report, the actual time was 115 days.

Instead of being disciplined for mismanagement after the VA paid out over $200 million in wrongful death settlements over a decade, VA officials received generous bonuses.

In the most recent scandal, at the VA Medical Center in Bedford, Massachusetts, an employee allegedly steered several hundred thousand dollars in contracts for landscaping services and supplies to her brother’s landscaping business. The supplies never showed up and the work was never done. The employee was demoted one pay grade, but kept her job.

If the American public wants government to stop repeating stupid mistakes, it must recognize that civil servants act within a bureaucratic system that rewards the status quo. For decades, reforms have failed to fix a bureaucracy that is far too large to manage and adequately oversee.

Studies describe the sources of failure, including fragmentation of authority, misaligned political incentives, and the government’s size. What is often overlooked is that federal workers are almost never fired for poor performance or misconduct. They have strong civil service protections and firing processes are riddled with complex regulations and confusion over how to apply rules designed to preserve fairness and diversity.

It’s time to get real. Civil servants enjoy a level of job security that the ordinary private sector employee can’t begin to imagine. Nothing much will change until the civil service system is reformed and the notion of accountability accentuated.

To quote Plato: “What is honored in a country is cultivated there.”

Originally Published: Mar 10, 2018 at 12:16 PM

 

Next up, entitlement programs

Posted on by j.giglio

With the so-called tax reform bill behind him, House Speaker Paul Ryan wants to reform and modernize the big three entitlement programs: Social Security, Medicare and Medicaid. It’s something that needs to happen, but it won’t be easy – especially in an election year.

The speaker is under pressure from conservative House members and deficit hawks, who supported the tax reform legislation that added a whopping $1.5 trillion to the national debt in exchange for a commitment to address entitlements and deal with debt and deficits.

Entitlement costs are rising as the population grows older and sicker. Even if you assume that cutting the corporate tax rate will unleash economic growth, the tax cuts are highly unlikely to pay for themselves. We cannot grow our way out of the looming entitlement crisis.

But the speaker’s plan to overhaul entitlement programs may run into the harsh political reality that not all Republicans are on board in an election year in which control of Congress is up for grabs.

Looking to preserve the GOP’s narrow Senate margin the Senate, Majority Leader Mitch McConnell has thrown cold water on the idea of entitlement reform. He would prefer to focus on the long-awaited infrastructure funding plan, which is more of a bipartisan exercise.

During his campaign, President Trump repeatedly promised not to cut Medicare, Medicaid, or Social Security. Of course Democrats say the Republicans plan to pay for the tax bill with cuts to entitlements and the social safety net.

There is no strong constituency for the tough budget cuts needed to limit the size of government or reduce the national debt.

Broadly speaking, entitlements are government financial benefits to which beneficiaries have a legal right. The most important examples of federal entitlement programs include Social Security, Medicare, and Medicaid, unemployment compensation and food stamps. And don’t forget agricultural support programs.

You can debate the merit of these programs, but one thing is clear: entitlements are expensive, and for a long time the cost has either been ignored or passed on to future generations.

Nearly half of all U.S. households benefit from at least one federal entitlement program. Entitlement spending today is about a tenth of U.S. gross domestic product, meaning one out of every ten dollars Americans earn goes to pay for Medicaid, Medicare, or Social Security. As the government struggles to pay for these programs, the number of recipients grows as people live longer thanks to advances in medical care.

This means they are drawing more benefits over their lifetimes than the funding systems were ever designed to generate. Since Americans are having fewer children, fewer workers are paying into the system. The Affordable Care Act also increased the number of people eligible for Medicaid.

According to the Center on Budget and Policy Priorities, about half the federal budget is spent on Social Security and health care programs like Medicare.

Another 16 percent goes to national defense and 6 percent to paying interest on the national debt. That does not leave much, especially as entitlement costs rise. If these programs are not fixed, they will consume the entire budget, leaving nothing to clean the environment, repair roads and bridges, and address countless other needs.

Nobody, including Speaker Ryan, is talking about actually cutting entitlement programs. The goal is to restrain increases and make the programs sustainable going forward. On a positive note, there are approaches that enable the U.S. to fix the programs while exempting current beneficiaries.

For example, consider containing health care costs by focusing more on preventative care and improved management of chronic conditions like obesity and diabetes. As for Social Security, consider gradually raising the full retirement age and eliminating the current payroll tax cap.

If these choices don’t seem palatable, it’s important to remember that the biggest threat to the big three programs is to continue down the path of least resistance and do nothing at all.

Originally Published: January 20, 2018

 

Sham tax ‘reform’ proves more than ever that money talks

Posted on by j.giglio

The imperfect tax bill President Trump signed into law on Dec. 22 is further evidence of the rot in Washington,. The tax bill isn’t about tax reform, it’s about money and influence.

Consider the giveaway known as the carried interest rule. It’s another outrageous example of the powerful getting what they want, as they always do. This will come as no shock to anyone over the age of five.

The term “carried interest” derives from the share of profits that 12th-century ship owners and captains were given as an interest in the cargo they carried, usually a 20 percent commission to provide an incentive to keep an eye on the cargo.

Today carried interest is the 20 percent of profits from their funds with which private equity firms, venture capitalists, and real estate partnerships compensate themselves. These proceeds are taxed at a capital gains rate of 20 percent, about half the top individual income rate, which will fall to 37 percent under the new tax law. Critics argue that this money is effectively income and should be taxed at individual income tax rates. The constituents for the deduction argue that removing the incentive would reduce entrepreneurial risk taking.

The reason for the loophole’s survival comes down to campaign contributions to key lawmakers and intense lobbying to maintain the favorable tax treatment. As Gary D. Cohn, director of the White House National Economic Council said, “The reality of this town is that constituency has a very large presence in the House and the Senate and they have really strong relationships on both sides of the aisle.”

The American Investment Council, a Washington trade association that represents private equity firms, reported some $970,000 in lobbying expenditures for the first three quarters of 2017. This is in addition to the smart investment made by way of campaign contributions targeted to key lawmakers. For example, employees of the private equity firm The Blackstone Group L.P. contributed $212,000 to Senator Majority Leader Mitch McConnell in 2017 alone. In turn, politicians serve their contributors by protecting the carried interest preference.

Private equity firms have the means and vanity to get what they want. It is further proof that money is the mother’s milk of politics and that big money gets its way in Washington, D.C.

During the presidential campaign both President Trump and Secretary Clinton gave a pitch-perfect populist performance, wanting everyone to know that they were militantly opposed to this loophole, a form of welfare for the wealthy. When a politician says something like that, sports fans, try inserting a negative and you are likely to hit pay dirt. Political rhetoric is as unrelated to the truth as an advertising campaign.

The power of money seems eternal. Politicians love it like a child loves Christmas, and all are working hard to avoid reading their own political obituaries. Knowledge that it has always been this way is no consolation.

They tell pro forma lies to the public and the media, and then begin to believe what they read. Not laying blame, just putting truth into words. So House Ways and Means Committee Chair Kevin Brady (R. Texas), with a truly magnificent smile, said on the Morning Joe talk show “carried interest, we can talk about that for the next hour if you like, but for most Americans they could care less about that.”

In its pursuit of a free lunch, the public is often a bit too eager to accept the things they want to hear at face value, even though they should know that truthfulness is not a long (or short) suit for elected officials, who spin untruths with the same gusto young Abraham Lincoln supposedly split logs.

You can’t bring about change by wishing upon a star. You can run with that.

Originally Published: January 6, 2018

 

Ugly as it is, pay attention to tax bill

Posted on by j.giglio

Otto Von Bismarck, the Prussian statesman and architect of German unification, was reputed to have said, “Laws are like sausage, it is better not to see them being made.”

This cliché is relevant today as Congress plays politics with tax legislation. The House has passed a $1.4 trillion tax cut package, while the Senate will consider its version after Thanksgiving.

Comparing sausage making to how lawmakers do their work may be insulting to sausage makers, whose process is transparent and predictable. In contrast, when the intricacies of the tax legislation get too sensitive, politicians demure by claiming “it’s all part of the sausage making.” The implication is that the public would be better off not knowing the details of the legislative process.

As tax reform negotiations enter the final stage, the so-called carried interest loophole that provides preferential tax treatment for hedge funds and private equity firms remains largely untouched. When legislators are asked about closing this loophole they change the subject and recount the other loopholes they are ending.

Carried interest represents the share of profits that hedge funds, private equity, and other investment managers collect from clients. At issue is how much investors should be taxed on these profits. The managers typically take a 2 percent fee from investors and claim a share – generally 20 percent – of whatever profits they generate.

The 20 percent in profits these managers pocket, known as carried interest, is currently treated as a long-term capital gain and taxed at 23.8 percent: the capital gains rate of 20 percent plus the Obama health care surcharge of 3.8 percent on their income. That is well below the 39.6 percent rate plus the 3.8 percent surcharge they would pay if the money were treated as ordinary income.

As a candidate, President Trump repeatedly promised to close this loophole. He said, “The hedge fund guys didn’t build this country. These are guys that shift paper around and they get lucky.”

The carried interest provision is worth billions to super-rich Wall Street folks. Congress’s Joint Committee on Taxation has estimated that changing the treatment of carried interest could raise about $16 billion over the next decade. Academics claim the figure is more like $180 billion. Regardless of who is right, this is not chopped liver, so these wealthy financiers have pushed back with an army of lobbyists and sprinkled enough dollars around Washington to preserve their beloved tax break.

They argue that the lower long-term capital gains rate affords them an incentive to take investment risks that benefit the economy. This defies logic, since many of these managers are managing a pool of assets, not putting their own funds at risk.

Regardless of the merits, their efforts have yielded a handsome return. The House bill extends the period over which firms must hold an asset before it is eligible for the long-term capital gains rate from one year to three years. While that might bite some hedge fund managers, it will not touch the vast majority of private equity, venture capital, real estate investment managers.

They would still pay 23.8 percent on their income, roughly the same as someone making between $37,450.00 and $90,750.00 annually. The financiers pay taxes at a rate that is well below those that apply to much of the middle class, once again validating the influence Wall Street and wealthy investors exert in the Congressional sandbox. The strong take what they want and the weak suffer.

Meanwhile, the struggling middle and working-classes could really use the help. After adjusting for inflation, household incomes have not risen since the 1970s.

Instead the discrepancy between rich and poor has widened. Forty years ago, the richest Americans had more than 8 percent of the nation income, today it is about 20 percent. Which is why it’s so important for citizens to pay attention to the details of the legislative process.

Originally Published: Nov 25, 2017

 

The Marshall Plan and China’s “belt and road”

Posted on by j.giglio

In 1945, Europe lay in ruins. Its cities were devastated, its industries destroyed, and millions of its people homeless. The key to the recovery of Western Europe lay with the Marshall Plan, a decisive tool for the United States to rebuild Europe after World War II.

Seventy years later, history may be repeating itself. Only this time it is China that is the strategic benefactor with the United States playing the role of the post-war Soviet Union, on the outside looking in as China strategically uses its largesse to develop lucrative new markets.

In June 1947, Secretary of State George C. Marshall, gave a speech at Harvard’s commencement announcing a plan to provide economic assistance to all European nations, including the Soviet Union. Although Russia and its Eastern satellites predictably rejected the plan, 16 Western European nations eagerly participated.

The Marshall Plan, the largest peacetime foreign aid program in U.S. history, channeled over $13 billion of American aid (some $150 billion in 2017 dollars) into 16 Western European countries between 1948 and 1952, to help them rebuild their economies and normalize their societies. The Congressional Research Service estimates the plan’s 1949 appropriation accounted for 12 percent of the entire federal budget.

But the Marshall Plan was more than economic and financial aid; it was a way for the United States to promote its anti-communist agenda, rebuild the economies of the recipient countries and make them prosperous enough to buy large quantities of American goods. By the end of 1950, European industrial production had risen 64 percent, communist strength was declining in Western Europe and opportunities for American trade had revived.

The Marshall Plan boosted American exports, manufacturing, and employment, and led to the economies of the participating countries surpassing pre-war levels. In the two decades that followed, Western Europe achieved unprecedented growth and prosperity.

American goods flooded eastward and political and economic ties with Western Europe grew even stronger. One unintended consequence is that it later made it possible for Western European companies to compete against American business in the automobile and other industries.

Some observers have compared China’s ambitious new endeavor, the so-called Belt and Road Initiative unveiled in 2013, to the Marshall Plan as a game-changing effort to revolutionize trade and recast many long- standing relationships. The multi-trillion-dollar proposal is China’s largest economic and foreign policy undertaking since the founding of the People’s Republic. The infrastructure plan that spans more than 60 countries, about 65 percent of the world’s population and about one-third of the global economy, would spread Chinese investment and influence across Asia, Europe, and Africa.

The “belt” refers to a land route from western China through Central Asia to Europe; the “road” links to Europe by sea, connecting the country with Southeast Asia, the Middle East, and North Africa. The initiative has gained momentum thanks to the decline of American influence in East Asia in the wake of withdrawing first from the Trans-Pacific Partnership and then the Paris climate agreement.

After World War II, the United States needed to export excess capacity. Today, China’s economic growth is slowing and it too is looking for new markets. And just as the Marshall Plan was a blueprint for undermining the influence of the Soviet Union, so can the Belt and Road Initiative marginalize U.S. influence by improving relations with traditional American allies.

As German Chancellor Angela Merkel, Europe’s most influential leader, said after three days of trans-Atlantic meetings, “The times in which we can fully count on others are somewhat over.” She was referring to America’s positions on NATO, Russia, climate change, trade and its apparent relinquishing of a leadership role in world affairs contributing to a post-hegemonic era in which no country has a dominate role.

If she’s right, it could mark the end of 70 years of American world leadership.

originally published: June 24, 2017

Private firms offer a route to financing infrastructure

Posted on by j.giglio

President Trump and his advisors have identified recruiting private firms as active participants as one solution to the choking shortage of money to finance critical infrastructure needs. He’s right, but maximizing the private sector’s impact will require the administration to think outside the box.

If properly structured, public-private partnerships could tap into billions of dollars of private capital hungering for low-risk investment opportunities that offer decent returns. Piles of dough would be deposited on the front steps of city halls and state houses with the steely hand of the private sector at the tiller, minimizing the need for scarce taxpayer dollars to get infrastructure projects underway.

This means designing such partnerships as overtly commercial enterprises able to demonstrate reasonable prospects for earning reliable income streams large enough to pay consistent returns to their private investors. Not a simple challenge to be sure. But scarcely one that’s beyond the capabilities of Wall Street’s more innovative investment bankers.

Making this work on a sufficiently large scale would require significant rethinking of how government deals with private firms (which may be overdue anyway), since some of these partnerships may require user charges to generate the necessary income streams. If approached creatively, this could actually enhance the likelihood that the activities of these partnerships would meet environmental goals and other regulatory mandates that serve the public interest.

In many jurisdictions, the public may not sit still for turning over the responsibility to operate an infrastructure project to the private sector because they know a business’ natural instinct is to maximize profits. Government could set up some sort of regulatory commission to oversee the project like they do for utility companies. But a better approach might be to set up an independent commercial corporation fully funded by user fees to build, own, and operate the infrastructure asset so taxpayers can participate in any upside from the project.

The state or local government could solicit bids from private investors to buy shares of equity ownership in return for annual dividends paid by the corporation. That brings private equity capital to the corporate balance sheet, reducing the amount of debt capital it has to issue.

In theory, government’s incentive is to offer the most service for the lowest cost. Private investors, on the other hand, have the opposite incentive: to charge the highest user fees the market can bear while providing the least service it can get away with.

But a second class of private investors would likely purchase equity shares in the enterprise mainly because they have a vested interest in assuring better roadways or other transportation infrastructure in the area. These investors might be private utility companies, local banks, and other local firms whose future revenue growth depends heavily on rising levels of economic activity. This class of owners would push for user fees that make sense from a financial standpoint and service levels that meet public needs in a financially responsible manner.

This model may be a reliable way to ensure that, for example, the original cost of every facility is evaluated on a lifecycle basis so customers and operators alike don’t wind up being confronted by expensive ongoing maintenance nightmares. There would also be the certainty of long-term financial commitments so taxpayers never have to deal with orphaned facilities displaced by disruptive technologies such as autonomous ride sharing vehicles.

This model holds owners responsible for sound asset management in a clear and unambiguous way. Opportunities for abuse by limited-life warranties, guarantees written by “paper companies” that melt into the woodwork when push comes to shove, and the kind of multi-party finger pointing that only ends up enriching the legal profession would be minimized. These realities are unlikely to be lost on the relevant parties.

Alternative models based on elaborate legislative mandates might accomplish the same thing. That is, if you believe the necessary legislation could be passed without being riddled with compromises, trade-offs, escape clauses and weasel language.

originally published: April 15, 2017

No easy or cheap fix for America’s infrastructure

Posted on by j.giglio

Earlier this month, the American Society of Civil Engineers’ “2017 Infrastructure Report Card,” which looks at 16 categories of infrastructure from schools to airports to dams, gave the nation an overall grade of D+. Creative approaches can be used to finance some of the needed improvements, but others will need to be paid for the old-fashioned way.

The report is yet another in a series of reports making the case that America has under invested in infrastructure for decades. Such chronicles of wretched conditions are a national sport that is nearly as popular as the Kardashians. But although much of the material is familiar, infrastructure is a gift that keeps on giving; there always seems to be something new to chew on.

The report card projects that $4.59 trillion will be required to bring America’s infrastructure to a grade of B. That is more than the nation’s annual budget of about $4 trillion.

Americans can quibble about the actual size of these projections, just as maritime historians quibble about the size of the iceberg that sank the Titanic. But it scarcely matters whether the estimates are off by 5 or 10 percent (give or take). What matters are the general proportions of these needs and the risks for the U.S. economy if they are not addressed. The longer we wait, the bigger the problem becomes.

Most who deal with this issue agree that the country’s infrastructure is in a bad way, but there is much partisan disagreement over how to pay for the fix.

Using public-private partnerships to invest in infrastructure was one of President Trump’s major campaign promises, but fiscal conservatives in Congress are reluctant to back massive spending that exacerbates the federal budget deficit and skyrocketing federal debt.

Democrats, on the other hand, are for more direct federal spending. By reducing taxes on overseas profits, they believe some of the estimated $2-$3 trillion companies have kept outside the U.S. could be repatriated. The result is that the political hills come alive with the sound of heated debates over proposals to address the infrastructure gap.

The permanent political aristocracy’s failure to deal with infrastructure reflects the simple fact that talking about balancing the budget is easy, but doing the things you have to do to balance it is hard. By the very nature of the process, politicians are focused on the very near term.

Upcoming elections, like hangings, have a way of focusing the mind on the here and now. That is why the federal gasoline tax of 18.4 cents per gallon and the diesel tax of 24.4 cents per gallon, the most important sources of federal transportation funding, have not risen since 1993. During that time, they have lost about 40 percent of their purchasing power due to inflation. Fuel tax revenues can no longer keep pace with needs.

This is not just a problem with politicians, it’s also a problem with voters, who say the deficit is a major concern, yet favor lower taxes, more benefits and fixing our infrastructure. Put simply, they don’t want to pay for the government they want.

It’s time to get real. Nothing works without a funding source and we will need hard cash to correct our under-investment in infrastructure. The feds, state and local governments, and the private sector have plenty of access to capital markets to finance infrastructure; the real issue is identifying revenue sources such as user fees or taxes to repay the debt.

A partial solution is to minimize the need for scarce government dollars by recruiting private firms as partners to help start, fund, and run infrastructure projects that have predictable revenue streams, like toll roads. But a larger universe of projects such as schools, dams, and local roads, for example, cannot be monetized.

Infrastructure’s biggest challenge is funding. In the real world, that comes down to a choice between taxes and user fees. There is no free lunch.

originally published: April 1, 2017

Weighing the risks in responding to North Korea

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The Korean peninsula has been divided since the 1953 Armistice Agreement that ended the Korean War. South Korea has always faced a hostile, antidemocratic, heavily armed, nation just an hour’s drive from the capital of Seoul. Now North Korea’s pursuit of a functional warhead that can reach American shores is a major security threat to the United States.

North Korea is a highly centralized communist state with about 25 million people and almost no real GDP growth. According to the State Department, the North’s annual military expenditures average about $4 billion, which accounts for around a quarter of the country’s average $17 billion gross domestic product. China is North Korea’s most important ally, biggest trading partner and main source of food and energy.

Take away North Korea’s nuclear weapons and it would be regarded as a failed state. In contrast, South Korea is a high-tech, industrialized economic power fully integrated into the global economy.

North Korea’s nuclear threat to its neighbors, America’s interests, and the rest of the world has escalated. Earlier this month it fired four ballistic missiles into the sea off Japan’s northwest coast, provocatively landing about 200 miles from the mainland. The country’s missile program has progressed from tactical rockets in the 1960s and 70s to short-range and medium-range ballistic missiles in the 1980s and 90s.

The launches violate multiple UN Security Council resolutions and represent a direct challenge to the international community. The test launch apparently was a response to annual United States and South Korea military exercises that the North regards as a rehearsal for an invasion.

North Korea said its launches were training for a strike on U.S. bases in Japan. It appears that North Korea is on a trajectory to launch an intercontinental ballistic missile capable of reaching the continental United States, something President Trump has vowed would not happen.

The day after North Korea launched the ballistic missiles toward Japan, the United States deployed missile launchers and other military hardware needed to create an anti-missile defense system in South Korea to intercept and destroy short- and medium-range ballistic missiles.

The North’s nuclear weapons and long-range missile development and testing program pose a security threat to the region and the global order. Decades of economic sanctions, diplomacy, and sweet words have failed to topple the neo-Stalinist hermit kingdom or force a rollback of its nuclear and missile programs.

The underlying assumption behind economic sanctions is that North Korea’s leaders care about their country’s economy and the deprivations endured by their civilian population. They understand that in chess, the pawns are always sacrificed first.

Tightening the economic noose around North Korea bought time without using American muscle, but at the cost of delaying hard decisions and creating an unacceptable risk to America’s national security. In turn, the breathing space gave North Korea time to develop its weapons program. It’s wise to remember soft power is irrelevant unless underwritten by hard power.

The North Korean mess is another example of U.S. administrations kicking the can down the road, then discovering at the 11th hour that they have run out of road. President Trump is dealing with a more dangerous North Korea than did any of his predecessors and has little room to navigate.

His options are limited and all involve risks, trade-offs and hard choices. They include continuing to increase the use of sanctions and hoping the cumulative effect will work, engaging in high-pressure diplomacy with China to rein in its client state, or cutting a deal directly with North Korea. All should be weighed against the risk of a nuclear-armed North Korea.

Then there is the high-risk military option: a limited surprise attack on this rogue state. Or even allowing South Korea and Japan to develop weapons of mass destruction.

Sadly, the most likely outcome may be learning to live with a clear and present danger to the United States and its allies in northeast Asia

Originally Published: March 18, 2017