Had a recent trip to China, my first ever. Gave a university lecture on (what else?) competition for investment between Chinese province and municipalities that was well received.Took a high-speed train the equal of France's TGV, complete with "flight attendants." My actual flight was an ultra-northerly Great Circle that went closer to the North Pole than Alaska. Rode in a rickshaw and got ripped off; stuck with taxi drivers (very inexpensive) thereafter.

The oddest thing about China's internet censorship was that it made no apparent sense. I could access TPM whenever I wanted, same for Daily Kos. But Huffington Post was blocked (did Arianna say something the government didn't like sometime?), as was fivethirtyeight.com (huh?). I have no explanation for the differential access, and would be interested in hearing any theories you may have.

Did all the usual tourist stuff, this being my first trip: Great Wall, Forbidden City, Summer Palace, Bird's Nest, National Center for Performing Arts. The latter was visually stunning inside and out, a very pleasant surprise. Most thing are set up bilingual Chinese/English. The Beijing metro cost 28 cents a ride and is growing rapidly. I wouldn't mind going back again.

One danger a public plan could face is that it becomes the dumping ground for high-risk patients, suffers higher costs, raises rates, loses members, and basically replicates the process by which non-profit, community-rated Blue Cross/Blue Shield got destroyed by HMOs, transforming the Blues into the for-profit monsters they (mostly?) are today. h/t to Matt Yglesias, who flagged this important article by Paul Starr:

http://www.prospect.org/cs/articles?article=perils_of_the_public_plan

Good reading, and we need to make sure we get what we need, not just any public plan.

Today we get more news that some Democrats are freaking out about the cost of health care reform. CBO has scored the Finance Committee's bill at $1.6 trillion over 10 years, and it will only cover 2/3 of the uninsured.

I have a simple question: Why are we looking at the 10-year cost rather than the annual cost? $160 billion a year is only a little over 5% of the FY 2008 budget per Wikipedia. Relatively speaking, it's peanuts. And why doesn't someone score what individuals are going to save as a result of the spending by the federal government? $160 billion out of a $14 trillion economy is no reason to get scared, especially when the net of government plus private costs will be even lower.

If any of you have to deal with right-wing friends complaining that the stimulus package hasn't worked and that we need tax cuts, print out the chart linked below.

Paul Krugman gives a nice chart of how the unemployment rate increased about 3.5 percentage points after Reagan's tax cuts in 1981, going up steadily for 16 months after the cuts were made.

http://krugman.blogs.nytimes.com/2009/06/14/stimulus-history-lesson/

Maureen Dowd now admits that one paragraph of her Sunday column actually comes from a blog post of Josh Marshall's (as thejoshuablog first reported at TPM cafe). http://www.huffingtonpost.com/2009/05/17/maureen-dowd-admits-inadv_n_204418.html

It turns out, though, that that's not the only thing in her column that comes from Josh. Two paragraphs above the one she has changed to be a quotation from Marshall's original post, she has a phrase that also comes straight from Josh, the description of a captured Iraqi official as "an old-fashioned P.O.W." Here is Josh at http://www.talkingpointsmemo.com/archives/2009/05/bubbling.php

"(Also worth noting is that an Iraqi intelligence official captured during the invasion would, I think, very clearly be an old fashioned POW.)"

Here is Dowd in the revised online version of her column: http://www.nytimes.com/2009/05/17/opinion/17dowd.html

"Even though this man was an old-fashioned P.O.W., someone in Vice's orbit reportedly suggested that the interrogations were too gentle and that waterboarding might elicit information about the fantasized connection between Osama and Saddam."

Dowd's explanation for lifting the paragraph was that she had not read Josh's post but that a friend told her the line. Frankly, this does not sound very plausible. But when we add in that she used an additional very distinct phrase, in an entirely different paragraph, its plausibility disappears to the vanishing point. Or did her friend tell her that line, too?

This is one of the most important questions in international political economy, especially if the answer is yes at least some of the time. I have spent much of my academic career investigating competition for investment, and how to control it, precisely because it is likely the main mechanism by which races to the bottom (in wages, labor or environmental regulation, taxes, etc.) could occur.

Of course, this is really two questions: Do races to the bottom occur? If so, are they a result of globalization (or perhaps more precisely, capital mobility)? There is actually a lot of literature out there denying that races to the bottom (or "social dumping," the European term) occurs at all. In my view, this denial was convincingly refuted by Dale Murphy in his book The Structure of Regulatory Competition (Oxford University Press, 2004, http://www.oup.com/us/catalog/general/subject/Law/PublicInternationalLaw/WTOandInternationalTrade/~~/dmlldz11c2EmY2k9OTc4MDE5OTIxNjUxMg==). Murphy shows that both shipping flags of convenience and tax havens are characterized by race-to-the-bottom behavior, as well as suggesting briefly some other areas where it likely occurs or has occurred.

An important area where we don't know if races to the bottom are occurring is tax competition. On its face, this would seem to be an easy case: countries around the world are cutting their corporate income tax (CIT) rate. But, as Kenneth Stewart and Michael Webb have shown, for most countries corporate income tax as a percentage of GDP has not fallen, nor has corporate income tax as a proportion of all taxes. This is not true for the United States, however, which might on its face have more power to keep effective taxes higher than smaller countries do. There is intense debate over whether their finding proves anything. On the one hand, profits have increased their share of GDP, in the U.S. and Europe. That would tend to maintain the CIT/GDP ratio in Europe, but still doesn't say anything about its fall in the U.S. (Also anomalous, European countries have cut their CIT rate while the U.S. has remained at 35%, so why has CIT/GDP fallen here but not there?) A possible explanation for both is that in Europe, personal income tax rates are higher than corporate income tax rates, giving individuals an incentive to reclassify personal income as corporate income, whereas in the U.S., the reverse is true, as our personal income tax rates are below CIT rates. I have not seen anything yet that I consider decisive.

 Assuming we do see races to the bottom, is globalization the cause? I think there is a pretty good case for it. To take Murphy's two main examples, ships are by their very nature mobile, and liquid finance capital that finds its way to tax havens is about the most mobile kind of capital there is.

But races to the bottom don't always occur. Murphy gives an illuminating example of cases where regulatory standards have been raised, the ban on ozone-harming chloro-fluorocarbons. A key here was that one company, Dow Chemical, was in a position to benefit from a ban because it had already developed substitutes for CfC's. With a dominant industry player on board, the standards were raised.

Another way to raise standards is with enforceable agreements. Obviously it's doable domestically (think minimum wage, for example), but in the international context, enforcement is more difficult. I have long argued that the European Union has been able to cooperate to control subsidies to business, but two big elements in the EU's success are the Commission's ability to monitor what Member States do, and the European Court of Justice's willingness to enforce Commission decisions generally.

Thus, I see the answer to the question in the title as: Globalization causes pressure for races to the bottom; sometime they happen, but sometimes they don't. If we want to have high wages, decent environmental regulations, and adequate tax revenues for government programs, we need to understand what can be done to prevent these races to the bottom.

By the way, I have by no means done Murphy's argument justice, but instead focused on an important political dynamic present in several of his cases. I highly recommend his book.

Normally, I try to blog only on political economy topics, but yesterday's comments by former Vice-President Cheney have really set me off:

"We fail to recognize the fact that we're alone out there in terms of trying to achieve the objective of forcing the Iranians to give up their nuclear weapons. Everybody's in a giant conspiracy to achieve a different objective than the one we want to achieve."

What is wrong with this statement? Let me count the ways...

First, it implies that the Iranians already have nuclear weapons, since you can't "give up" something you don't have. But this claim is completely at odds with the published intelligence on the state of Iran's nuclear program.

Second, a minor point, but it is hard to believe the Israelis don't agree with us on this issue.

Third, and most important, there is an understandable reason that the Europeans (and others) don't share our obsession with the Iranian nuclear program. This is the fact that the Bush Administration, in effect, rewarded the Indian government for its own violation of the Non-Proliferation Treaty, when it reach a nuclear cooperation agreement with India. So who is Cheney to talk about non-proliferation?

Folks, do you not know who Dani Rodrik is? As I write this, he has 9 followers, compared to over 100 for Robert Reich. Yet it was Rodrik who, in 1997, published "Has Globalization Gone Too Far?" (answer: to an important degree, yes) while everyone's favorite liberal economist today, Paul Krugman, was slagging Reich with his 1996 book "Pop Internationalism." In 1997, people criticizing the "Washington Consensus" were few and far between, and Rodrik was on the cutting edge of this criticism within academia.

No one's 100% right, but when Rodrik talks, I listen. And so should you.

I recently completed a research trip to Ireland for the book I'm working on, The Political Economy of Investment Incentives. One oddity of the trip was that my favorite beers, Belgian Trappist ales, were more expensive in Dublin than St. Louis, even though Dublin is 3900 miles closer to Belgium and has no tariff on Belgian products.

The reason, of course, is taxes. Aside from the Scandinavian countries and Poland, Ireland has the highest value-added tax (VAT) in the European Union, at 21.5%. Of nearby countries, the UK has a VAT of 15%, France 19.6%, Belgium 21%, and Spain 16%. This disparity comes from Ireland's long-entrenched policy of charging a very low corporate income tax rate, currently 12.5%. It has to make up the tax revenue somewhere else, and VAT is part of that.

Ireland's corporate income tax regime is not very popular in the rest of Europe, except for the EU's new Member States, which have followed Ireland's example, with tax rates mainly in the 15-20% range. France is perhaps the most vocal in considering it unfair competition for investment, but these criticisms were muted as long as Ireland was poorer than the EU average. With the boom in Ireland's economy from the mid-1990s, the "political justification" for the low rate ceased to exist, as an official in Luxembourg's Ministry of Finance told me in 2001.

Ireland is suffering from the current economic crisis more than most countries. As Paul Krugman writes ("Erin Go Broke," http://query.nytimes.com/gst/fullpage.html?res=9A03EFDF173CF933A15757C0A96F9C8B63&sec=&spon=&pagewanted=1) Ireland's GDP is expected to fall by more than 10%, and its government finances are so bad, it is not able to borrow the money for a fiscal expansion. The government is cutting expenditures and raising taxes (though not corporate income tax), which will make the depression there even worse. No one I spoke to, across the political spectrum, thought the government had any choice on that. At the same time, Ireland is quite vulnerable to changes in U.S. tax policy, in particular the end of corporations' ability to defer tax on foreign operations until the profits are repatriated, something President Obama still says he will do. (The deferral provision makes it sensible for companies not to bring their profits home, but invest them abroad, costing untold potential jobs in the U.S.)

One scenario Krugman doesn't discuss, but that was mentioned to me several times in Ireland, is that it might seek a bailout from the EU. But between the low corporate tax rate and the country's failure to ratify the EU's Lisbon Treaty, EU policy-makers have little patience for Ireland. The speculation is that the EU might tie aid to an increase in the corporate income tax rate (the Lisbon Treaty has to be approved by referendum in Ireland, so it couldn't be part of a bailout agreement). Government officials tended to discount this, but as Ireland's downward spiral worsens, the government may have no choice but to give in on this major issue.

An aside: one of the factors contributing to Ireland's real estate bubble was that there numerous tax incentives for various kinds of property development, similar in some ways to tax increment financing in the U.S. (One tax break was for parking garages, which figured prominently in an infamous TIF in the St. Louis suburb of Des Peres.) A reporter for Ireland's RTE radio network happened to call an interviewee of mine as the interview was taking place, and I wound up commenting on the similarities in his story on "Morning Ireland" the next day. It seems to me that academics usually get their fifteen minutes of fame in 30-60 second increments. FWIW, you can listen to me here: http://www.rte.ie/news/2009/0326/morningireland_av.html?2514896,null,209

So concludes an Australian expert on tax havens, Professor Jason Sharman. By doing a simple internet search, he solicited bids to set up shell companies. He was able to set up 17 without proof of identity, which makes tax evasion ridiculously simple. He was even able to set up 5 anonymous bank accounts, in Wyoming (through a since-closed loophole), Nevada, 2 in the UK, and only 1 in a classic tax haven, Liechtenstein.

Sharman concludes, "The United States, Great Britain, and other OECD states have chosen not to comply with the international standards which they have been largely responsible for putting in place." This is truly depressing, and the Obama administration needs to do something about it. Killing off tax havens begins at home.

 http://taxjustice.blogspot.com/2009/03/new-study-britain-and-us-may-be.html

The unemployment rate that hit 8.5 percent in March is the latest reminder of the severity of our country's economic crisis. As economic activity dries up, governments across the nation are faced with growing budget shortfalls. Missouri is no exception.

In my book, "Competing for Capital," I estimated that state and local governments spent almost $50 billion annually on subsidies to business in 1996, a figure that was confirmed in 2002 by University of Iowa economists Peter Fisher and Alan Peters. According to a study by Susan Mason and myself last year, Missouri cities have given more than $5 billion in tax increment financing subsidies since the program's inception in 1982. At least $262 million in TIFs were approved in 2007, based on my compilation from the Missouri Department of Economic Development website and news reports.

Continued at St. Louis-Post Dispatch: http://www.stltoday.com/stltoday/news/stories.nsf/editorialcommentary/story/7368EF92A11F26DA8625759A00608E83?OpenDocument

My op-ed in the April 16 St. Louis Post-Dispatch:

http://www.stltoday.com/stltoday/news/stories.nsf/editorialcommentary/story/7368EF92A11F26DA8625759A00608E83?OpenDocument

Another month, another 600,000+ jobs gone. How many of those people had health insurance and how many were covered on each policy? Even though we know that many jobs don't carry health insurance, those that did likely covered a family, making it easily possible that more than 600,000 more people are uninsured. With unemployment at 8.5% and rising, our employment-based health insurance system is falling apart rapidly.

This underscores the importance of passing health insurance reform now. As I've always argued, single payer is the only way to fix the legacy costs to the Big Three automakers.

Moreover, cutting out the insurance companies will help pay for the expansion to universal insurance, a factor that could loom large since cap-and-pay and the revenue it will bring in does not appear to have enough support from Democratic Senators. If those moderates won't pass health care reform through reconciliation, millions of people will be well and truly screwed. Ask your Senators how many people have lost health insurance in your state and stay on their case. This is one battle we can't afford to wait two more years on.

As the economy continues to sour, the automakers continue to run up huge losses. Declining automotive unemployment is unavoidable in the near term, so I'd like to argue that we will get the most bang for our buck by propping up General Motors and letting Chrysler go. There are three basic reasons: size, quality, and impact on the stock market.

Size: GM employs 252,000 worldwide. Chrysler employs 58,000 worldwide and, sad to say, more jobs than that will be lost in the U.S. industry alone. Chrysler's employees deserves bailouts, but Chrysler itself is no longer too big to fail. If Fiat wants to pick up some of the pieces, that would be just fine.

Quality: Consumer Reports just came out with its annual Auto Issue, showing just how bad Chrysler is. For CR to recommend a car, it must perform reasonably well in tests and have at least average reliability.  Not a single one of Chrysler's 22 models is recommended. General Motors is not much better, as only 17% of its vehicles are recommended by Consumer Reports. However, the two companies' overall report card scores are farther apart than you'd expect on the basis of the percentage recommended. Chrysler, at 48, is far behind GM's 57, compared with top-rated Honda's 78.

Stock market: Because Chrysler is privately held, its bankruptcy would not affect anyone's mutual funds or retirement savings (though it would obviously affect its own employees' retirement). The owners, Cerebrus, can afford to lose the money. GM, of course, is a very widely held company, so if it can return to health it will help a lot of people beyond the company.

Bottom line: Neither pre-Daimler Chrysler, Daimler-Benz, nor Cerebrus has been able to return Chrysler to profitability, so it's time to pull the plug. There's no point in an unsalvageable company taking sales away from companies that aren't dead yet.

U2's new album is out today, and I'll probably buy it. But I will have to hold my nose, because U2, like Enron and AIG and most companies in the Fortune 500, has a subsidiary in a tax haven. For over 20 years, U2 benefited from Ireland's non-taxation of creative income. But in 2006, the government had the audacity to cap the tax break at 250,000 euro annually. So U2 promptly incorporated in the Netherlands, where its royalties would only be subject to a 5% tax rate as opposed to Ireland's 12.5%. Nothing illegal, but it's a little hypocritical when someone who wants developed country governments to give more money to poor countries doesn't want to pay his fair share of taxes.

Last week, Bono lashed out at critics. Friday, he said he was "stung" by criticism of U2's use of a tax haven, arguing that what was hypocritical was not his own actions, but "the idea that then you couldn't use a financial services center in Holland." Singling out the group Christian Aid, a large European anti-poverty NGO, he said, "People who don't know our music - it's very easy for them to take a position on us - they run with the stereotypes and caricature of us."

Huh?

LIke I said, I'll have to hold my nose.

http://taxjustice.blogspot.com/2009/02/boo-hoo-bono.html#links