We defeated the Soviet Union during the Cold War because our economy was relatively strong and they could not keep up. We didn’t bomb them into submission. We didn’t invade them. We simply grew economically at a rate that they could not keep up with. China hopes to do that to us. The question is will we cooperate with their goals and place ourselves in their grasp? The answer is — only if we are stupid.
Joe Biden’s and Congressional Democrat’s plan to give the United States the highest corporate tax rates in the developed world will harm America’s economy, kill American jobs, and give China a leg up in their quest for world domination. If Biden and congressional Democrats get their way, our corporate tax rate would be substantially higher than Communist China’s rate. American workers would suffer the most as their jobs are exported abroad to lower taxes and lower cost nations.
But it isn’t just corporate income taxes that the Democrats and Biden want to raise. They also want to raised taxes on Global Intangible Low Tax Income (GILTI) to 21 percent. This has the effect of imposing a minimum tax and creates a stimulus program for workers around the globe, but not in the U.S. Biden’s plan would penalize American companies with a massively higher minimum tax and at the same time exempt foreign competitors. There is no good reason to hamstring American companies, kill off incentives for good paying jobs to remain in America, or make jobs our primary export. But that is precisely what the Biden tax plan would do.
Even the left-leaning Tax Policy Center agrees that Biden’s plan will make US companies easy targets for foreign companies — including those owned or controlled by the Chinese Communist Party. They concluded that “Biden’s proposal would likely reignite corporate inversions — transactions where US multinationals become foreign multinationals, usually through acquisition by a foreign company.”
The Tax Policy Center also acknowledges that “Biden’s platform argues that a greatly strengthened foreign minimum tax is needed to prevent US firms from investing and shifting profits offshore, where taxes are lower. These practices can lower US wages and tax revenue.”
So it isn’t just right-leaning economists who see this policy as dangerous and harmful. Biden’s tax policy simply is harmful to both the US and American workers. The primary beneficiaries would be foreign competitors — China in particular. China has to be rooting for this tax plan because it will play into their hands and make their plans of world dominance much more easily achieved. If you want to know what a world dominated by the Chinese Communist Party might look like, ask Hong Kong who is being brutally repressed or ask the Uyghurs and other ethnic minorities who are being held in concentration camps and raped and murdered because the regime doesn’t like them.
It isn’t very often that people think of tax policy as a national security issue, but in this case it clearly is. Having a strong and robust economy isn’t just good for American workers or American investors, it’s good for America’s national security. Exporting jobs and economic well-being only strengthen’s China’s hand and makes it easier for them to rule the world as is their stated goal.
We defeated the Soviet Union during the Cold War because our economy was relatively strong and they could not keep up. We didn’t bomb them into submission. We didn’t invade them. We simply grew economically at a rate that they could not keep up with. China hopes to do that to us. The question is will we cooperate with their goals and place ourselves in their grasp? The answer is — only if we are stupid.
The bottom line is the Democrat tax plan is to make American companies pay higher taxes than their foreign competitors. To make matters worse, Biden wants every country to impose a minimum tax on foreign earnings of domestic companies. Why would they do this? Because Biden is promising to keep the US minimum tax higher than other nations. What does that mean? President Biden is promising that he will make American companies and workers uncompetitive in the world marketplace. He is promising to make our tax code advantageous to communist China.
These are important questions: Why do Democrats in Washington, DC, led by Joe Biden and Kamala Harris, think it is a good idea to push the US corporate tax rate higher than communist China’s tax rate? Who will benefit from this policy? Are Americans ready to return to an era where American firms are regularly downsizing and moving operations abroad? Or selling their operations to foreign companies or governments?
America must maintain its strength — both militarily and economically — if it hopes to be the victor in the 21st Century. If America thinks it would be better if China is the victor, then by all means, back the Biden-Harris tax plan. But if you think the world looks like a more free and prosperous world with America as the world’s primary power, opposing the Biden plan is a good start.
In the years after World War II, the United States dominated the world economy–so much so that no other nation came close to the U.S. in its global influence and economic might.
But this dominance meant that the United States had no concerns about competing powers or threats to U.S. prosperity. Other countries did have to worry, so they constantly worked to make their tax and regulatory system more competitive. Over time, other countries surpassed the U.S. in various ways.
A Modern Tax Code
One of the most important ways that other countries surpassed the U.S. was in modernizing their tax codes. A modern tax system avoids double taxation of capital income and has the lowest possible corporate tax rate. A modern tax system also recognized the global economy. To be strong at home, and to serve foreign markets, companies usually need to produce and build factories in the markets they serve. This does not mean moving jobs overseas. It means keeping headquarters jobs in the home country. The headquarters jobs are associated with management and R&D. Headquarters jobs produce a disproportionate share of income and represent the highest salaries and benefits. The more operations overseas, the stronger the headquarters is at home. The point of having a global operation is to support the home base.
Therefore, beginning especially in the 1970s and 1980s, countries began to adopt tax systems that encouraged their home companies to go global and earn foreign profits that could make the home companies stronger, resulting in better jobs and more R&D in the home market. The new model of taxation was territorial. Home companies paid taxes at home, and they paid taxes on their foreign operations in foreign countries. There was no barrier to bringing profits home. Also, importantly, business decisions in one country had no bearing on business decisions in another country, at least for tax purposes. Under a territorial principle, every country was independent, and so there was no need to worry that tax policy in one country would interact with another. Also, a business decision in one country would have no adverse tax consequences in another. The territorial principle is all about simplicity on one level. But it is also about growing a global network that supports the home office.
The U.S. Lags Behind
Ironically, the United States was the victor in World War II, but it saw no reason to update its pre-World War II tax system. Before World War II, the model for international business was export trade. Companies made widgets in their home countries, and they exported them overseas. For a long time, the United States was the best place and most competitive place to make widgets, so the U.S. tax system relied on taxing overseas sales. The U.S. tax system worked on what is called a worldwide principle since U.S. companies paid taxes in the U.S. on their worldwide income. This made sense when international trade was mostly about trade involving exported goods, and the U.S. was far and away the best place for manufacturing, farming, mining, and many types of business. But over time, the nature of trade changed. Trade became more about intellectual property, and international investment, to build a global network production that supported the home base, or the headquarters operation, by sending profits home. But while most other countries in the OECD adopted the territorial principle, the U.S. stubbornly insisted that U.S. companies should be taxed worldwide. One result of this was that any business decision overseas had both foreign and U.S. tax consequences, which made business planning complicated.
Then another thing happened. It was President Ronald Reagan’s Tax Reform Act of 1986. Reagan cut the corporate tax rate from 50 percent to 35 percent. At the time, this was one of the lowest corporate tax rates in the world. Suddenly other countries began to cut their corporate tax rates too and kept cutting them, to be more attractive as company headquarters. By 2017, other countries had cut their tax rates so much that the United States had the highest corporate tax rate in the OECD—and the other countries, the United States applied its corporate tax rate of 35 percent on a worldwide basis. This meant that if U.S. companies made money overseas, they had to pay U.S. tax on any profits they brought home. Since the U.S. tax rate was higher than all foreign tax rates, and sometimes much higher, this meant that companies avoided bringing profits home for reinvestment in the U.S. Instead, they declared they declared their foreign profits to be permanently reinvested overseas as a way of avoiding U.S. tax on repatriated earnings. This defeated the purpose of a tax policy to support global trade. Instead of allowing money to flow home, U.S. tax policy pushed investment dollars overseas. The U.S. had adopted a “Do Not Invest in America” policy.
Headquarters Move Overseas
There was something even worse that happened. Headquarters offices with headquarters jobs started moving overseas. This is because foreign companies were able to buy U.S. companies on a scale that had never been possible before. Foreign companies could buy U.S. companies because they could afford to pay a higher price for U.S. companies than U.S. companies or investors could. Indeed, foreign companies could pay more than U.S. companies for acquisitions outside the United States as well.
The price one pays for a company is a multiple of the after-tax income it produces. If a company produces $1 million in earnings per year, and the valuation multiple for that industry is ten times, then a foreign investor that pays no foreign taxes on its U.S. income can buy the company in the U.S. for $10 million. This is called an inbound acquisition. However, if a U.S. company wanted to buy a foreign country overseas, in an outbound acquisition, it would have to account for the difference between foreign taxes and U.S. taxes. If the tax rate in the foreign country was 20 percent, about the OECD, average, then the U.S. company would have to account for a 15 percent difference between the foreign taxes and the U.S. taxes. The U.S. company buying a foreign company would effectively pay a 15 percent tax on its purchase, whereas the foreign company buying a U.S. company would pay no additional tax at home.
By the early 2000s, foreign companies were buying U.S. companies at an impressive rate. To some extent, this reflected the globalization of the economy and increased prosperity worldwide since World War II, which is a good thing. But because of the tax differential, the number of inbound acquisitions of foreign companies buying U.S. companies far exceeded the number of comparable outbound acquisitions in which U.S. companies bought foreign companies. This had two results. One was that iconic U.S. brand names and companies started moving overseas, and the corporate headquarters jobs that had been in the U.S. moved overseas as well. Famous American companies with foreign owners now include Chrysler (French), Budweiser (Belgian), Ben & Jerry’s (Dutch), Good Humor (Dutch), Burger King (Brazilian), and even Kraft Heinz (also Brazilian). But the real impact came in pharmaceuticals, where Europeans were not far behind the U.S. and competitive to begin with. The greatest U.S. pharma companies started moving steadily to Europe. The crown jewel of America’s industrial R&D, Bell Labs, similarly became a French company with its parent, Lucent Technologies, was acquired by Alcatel in 2007. As a result, at least in part, the U.S. has no manufacturer of 5G telecom equipment.
The other impact had to do with startup companies, which are often a source of innovation, growth, and intellectual property. When a U.S. company competed with a foreign company to buy a startup, the foreign company often won because it could pay a higher price. The U.S. company could not pay as much, because it had to factor the OECD’s highest corporate tax rate into what it could afford to pay.
More recently still, China has entered the scene. Chinese companies are subsidized at home, and they pay no Chinese taxes on their foreign earnings. Chinese companies have been aggressively buying startup and mature companies alike in the U.S. and Europe.
Where has this led us? Chinese companies are buying top startups and smaller firms with attractive technology portfolios. U.S. companies have been reliant on Chinese suppliers since the U.S. tax code makes it cheaper to buy from Chinese suppliers than to build factories and facilities in the U.S., or to produce in China from U.S.-owned facilities. In the time of the covid pandemic, the U.S. is dependent on China for most of its basic medical supplies. In a world where 5G will soon dominate the airwaves, and become the basis for the Internet of Things, the U.S. has no company that produces 5G telecom equipment. It’s a tax-induced disaster, made all the more dangerous by China’s aggressive intentions to dominate the world and impose its authoritarian style of government elsewhere.
Fixing the Problem
President Donald Trump recognized the problem. President Trump’s tax reform did two things right away. First, it lowed the corporate tax to 21 percent, which is about the middle of the pack in the OECD–not the highest, not the lowest, but close to the average and competitive. Then, it adopted the same territorial principle that nearly all of the major trading partners of the U.S. in the OECD use, so the United States was suddenly more competitive that way too. In a big change from its post-war arrogance, the U.S. studied the lessons of foreign countries. It may come to the surprise of many, but Trump’s all-American, America-first tax reform was designed to make the U.S. tax code look like the tax codes of the United Kingdom and the Netherlands, which long before the United States ever existed were already among the most successful trading nations of all time, and whose Anglo-Dutch model of shareholder capitalism was the foundation of the U.S. economy as well.
But to address three uniquely American problems, President Trump built three features into his tax system. One feature was designed to make sure that income earned in the United States was actually taxed in the United States, and not exported to lower-tax countries through leaks in the nominally worldwide but also obsolete and antiquated tax code of the U.S. This was called the Base Erosion and Anti-abuse Tax (BEAT). Another feature was designed to deal with the problem of U.S. industries that were based primarily on intellectual property, such as tech and pharma, earning profits overseas but never sending these profits back to the U.S. because of U.S. tax. This was a tax on a category of income called Global Intangible Low Taxed-Income (GILTI). For example, before BEAT, the world’s most valuable company, Apple, shifted many of its U.S. profits into low-tax Ireland. Also, before GILTI, Apple made profits worldwide and moved these profits to Ireland as well, never paying U.S. tax or moving the profits back to the U.S. GILTI respects the territorial principle, and it does not tax U.S. companies making normal profits in a foreign country. However, the tax applies a test for supernormal profits, and if a company is making more than a 10 percent return in any country, GILTI assumes that some of the unusually high profits in the foreign country result from shifting profits out of the United States, and therefore it applies a certain level of U.S. tax to them. Then there is the tax on Foreign Derived Intangible Income (FDII). This is a tax on income that results from unusually high profits on export sales of goods made in the U.S. FDII assumes that some of these supernormal profits result from headquarters activity, R&D, or patents and intellectual property held in the United States, so in this case, it applies a level of U.S. tax as well.
GILTI and FDII are designed to work in complement to one another. To discourage companies from moving their patent portfolios or research operations to foreign countries, GILTI and FDII have incentives and penalties to make sure that no country in the world offers better tax treatment of intellectual property for U.S. companies, but also that the U.S. tax treatment of U.S. intellectual property is the most favorable in the world. Together, GILTI and FDII mimic something called a “patent box,” which is used in the UK and European countries to ensure that intellectual property gets a preferential rate in those countries, as long as the R&D was performed there and the resulting patents are housed there as well.
Don’t Turn Back the Clock
For a long time, the United States pursued unilateral disarmament with regard to tax policy while other countries engaged in an arms race to make their tax systems more competitive. We see the result in the loss of U.S. headquarters companies from the U.S. and the dangerous ascendancy of China, which seeks to dominate and monopolize the technologies of the future while putting them at the service of its totalitarian system. President Trump put the U.S. back on the offensive and at the top of its game.
But President Joe Biden comes to office with a different set of values, in which government supposedly drives economic growth, and the government imposes high corporate taxes to support the welfare state, redistribute income, and reward its favored constitutions such as big labor. The major reason the United States took decades to overhaul its tax system while other countries made rapid progress is that labor unions fought to keep the U.S. on a worldwide tax basis. They argued the only possible reason for a U.S. company to locate overseas was to avoid U.S. labor costs, and for that matter, U.S. labor unions. But in fact, this is a view of global business that is decades behind the times. The primary model for global business today is not the export of commodities and manufactured from products from the U.S. That is important but is even more important for U.S. industries based on intellectual property to be able to operate anywhere, and for companies that serve foreign markets to support their U.S. headquarters by building factories and facilities around the world that still get their competitive edge from the U.S. knowledge economy. Big Labor wants to turn back the clock, and retreat to an outdated economic model, while China, with a more modern tax system, threatens both U.S. prosperity and national security, and even friendly trading partners have been acquiring many of our best and brightest companies and moving their headquarters overseas in a lopsided, one-way flow of mergers and acquisitions.
The Trump tax reform is a territorial system that makes the U.S. competitive with its top trading partners. The Trump tax reform incorporates GILTI, FDII, BEAT, to make sure that the U.S. benefits from U.S. intellectual property while also enjoying the financial benefits and good jobs that come to headquarters companies at the center of a global network. But Biden’s view is different. He wants to go back to a worldwide system, where U.S. companies have the highest tax rate in the OECD at home and must pay a global minimum on their overseas earrings as well. The problem is that China has no global minimum tax, and China is the biggest threat today.
J.P. Lucier is a tax policy analyst.
The hack that shut down the Colonial Pipeline has most Americans worried about threats to the nation’s computer network. According to a recent surveyby Rasmussen Reports, 85 percent of Americans are at least “somewhat concerned” about the safety of the nation’s computer infrastructure.
Their concerns are not idle ones—they exist across vital sectors of the economy. Over the last decade, the health care industry has become increasingly vulnerable to ransomware attacks like the one we’ve just been through in the energy sector. Experts have been raising the alarm but thus far their warning cries have not received the attention they deserve.
That needs to change. Policymakers need to pay attention as these kinds of attacks become more frequent and more expensive. According to a study conducted by Comparitech, in 2020 alone 92 individual ransomware attacks occurred that cost an estimated $20 billion and affected over 600 separate clinics, hospitals and organizations and more than 18 million patient records.
Health care systems rely more and more on devices that use network-integrated software components. These machines—MRI machines, CT scanners and the like—are a vital part of 21st century health care. We cannot do without them so we must take steps to ensure they cannot be hacked. Unfortunately, despite growing vulnerabilities, hospitals and other providers are allowing cost concerns to create a serious security gap that could further jeopardize the integrity of certain medical devices, as well as health systems more broadly: third-party medical device servicing activities.
Online infrastructure must be protected from hackers who can cause life-saving technologies to crash with the push of a button. These technologies are essential to diagnostic and therapeutic services and for patient care. People literally cannot live without them yet it’s not clear they are being protected, especially when they need to be repaired. Problematically, these vulnerabilities are being studied just as intently by manufacturers and operators as they are by America’s enemies.
By way of example of how wide the problem may stretch, in contrast to repairs undertaken by the original manufacturers of the equipment, who are heavily regulated by the U.S. Food and Drug Administration and who operate within what are called “mandatory quality system requirements,” independent firms who compete in the same space at lower cost are generally allowed to operate without supervision. There are no applicable industry standards against which their work can be measured—yet their ability to do the same work cheaper makes them attractive to institutions like hospitals and clinics where cost is a primary concern.
The practical implications of this should be obvious. In an interconnected health care ecosystem which the United States has, devices and systems are constantly updating, requiring everyone from manufacturers to hospitals, doctors and clinics to those who maintain and service highly technical, life-saving devices to do their part to keep systems safe. There’s been some regulatory process recently that’s made things safer, but the job is not yet done.
Imagine if a foreign intelligence service stood up a company to repair medical devices or debug health care software for some of the nation’s biggest hospital systems. In that circumstance, the potential for chaos, even death, exists as does the chance private medical information of untold numbers of Americans could be compromised. Significant issues still exist where medical device servicing and aftermarket repairs are concerned. If an independent operator separate from the original manufacturer of a critical piece of interconnected medical hardware even inadvertently opened a backdoor to a threat by bungling a repair job or using a few unauthorized lines of code, the damage could be severe. No one likes the heavy hand of regulation, but in the interests of safety, some minimum standards are needed.
This is the kind of small issue that, when compared to his multibillion-dollar infrastructure plan, President Joe Biden could push for a solution in a bipartisan manner. He’s already issued an executive order on cybersecurity, but he needs to do more as does Congress. A thorough review of important systems that can be hacked, taken offline, or held for ransom is long overdue.
The danger is real, and the American people understand it, especially after everything we’ve been through during the pandemic. We know Russia, China, Iran and others are trying to hack our critical systems, and in a few cases, succeeded. This is a problem too important to ignore and Republicans and Democrats should come together to deal with it before it becomes a problem we can’t live with.
Let’s start with the internet.
It has its roots in a program called the ARPANET, which was established by the Defense Advanced Research Projects Agency. Private sector entrepreneurs then transformed the internet from an obscure government experiment into the cultural and economic success that it is today. It has made our technology sector the envy of the world and enables us to keep innovating and competing with the likes of South Korea, Canada, Japan, Switzerland, and China.
This matters in light of President Joe Biden’s recently unveiled American Jobs Plan. While billed as a $2.3 trillion infrastructure plan, less than 10% of allocated funds are actually for traditional infrastructure such as roads, highways, bridges, ports, airports, etc. Instead, Biden redefines infrastructure to include all sorts of things, including research and community colleges, that, while they are possibly meritorious investments, have nothing to do with infrastructure. On broadband internet services, which both parties agree isinfrastructure, Biden’s plan has a stated goal of 100% U.S. connectivity.
One problem: The plan wouldn’t actually help connect more people to the internet.
That’s because it relies on government-run broadband to improve America’s internet experience. Government-run networks have a history of failure. They tend to drive out private investment and leave taxpayers holding the bag when the plans fail — without the better broadband they were promised. A perfect example of how government often stymies innovation and entrepreneurship is found in Kentucky. Kentucky Wired, a $1.5 billion plan to improve connectivity across the state was announced under Gov. Steve Beshear. Andy Beshear, Steve Beshear’s son and the state’s current governor, vowed to complete the project by October 2020. But Kentucky Wired has failed. Lesson: Investing public money in laying cable when increasingly affordable satellite networks are at our doorstep is not only counterproductive but irresponsible.
Biden’s plan ignores the dynamics of the marketplace in a similar manner. It also signals rate regulation and arbitrary speed mandates that would discourage satellite providers such as Amazon and SpaceX (Starlink) from investing in infrastructure and creating new jobs. Instead of bridging the digital divide, Biden would widen it by hampering the free market.
Biden’s plan focuses exclusively on a single technology for providing internet access: fiber. To be clear, fiber is often the backbone of the internet and works well in densely populated areas. Private industry has invested billions in deploying fiber across the country. Yet, laying thousands of miles of fiber optic cable is very expensive. Many factors affect the cost of fiber infrastructure, but, on average, the cost of deploying fiber runs between $18,000 and $22,000 per mile. In rural areas, it is often far too expensive for most businesses to recoup their fiber deployment costs. The good news is that America uses a mix of technologies to get online — from cable and fiber to 5G and NextGen satellites. If Biden chooses not to impose a one-size-fits-all solution, the private sector can meet the challenge of closing the digital divide. But as it now stands, Biden’s plan would stop this competition between technologies. Instead, it would replace that competition with a top-down approach in which government picks the winners and losers rather than letting consumers make the choices.
A better idea would be for Biden to expand Broadband Opportunity Zones and encourage billions in investment where it is needed the most. Private enterprise will invest in solutions that work for underserved areas.
Put simply, Biden’s infrastructure bill is a bad deal for America. It is entirely reasonable to fund the building and maintenance of interstate roads, bridges, ports, and highways. It is also good to incentivize innovation and investment. Sadly, Biden’s bill discourages those imperatives without good cause and at great risk.
America’s financial elite is helping to finance America’s prime strategic adversary.
As a new, more skeptical consensus about America’s economic relationship with Beijing emerges in Washington, Wall Street is growing more tightly integrated with China than ever before. The disconnect highlights one of our nation’s biggest vulnerabilities in our confrontation with China over who will determine the course of the 21st century.
American capital markets are the most open, liquid, and valuable in the world. They are also increasingly a source of funds for China’s most strategically important companies. Chinese companies that produce surveillance technology and weapons of war that could one day kill Americans finance their investments with Wall Street capital.
Historically, both Republicans and Democrats have been weak when it comes to identifying and correcting these kinds of problems. Politicians in my own party have too often been reluctant to intervene over concerns about the “free market.” But things are changing. Faced with the catastrophic impacts of deindustrialization, which has choked opportunity for the American working class, and a growing reliance on an authoritarian regime, more of my colleagues in the GOP have awakened to the dangers of economic policymaking that prizes short-term economic efficiency over all else.
American capital markets are increasingly a source of funds for China’s most strategically important companies.
But just as many Republicans have grown more skeptical of big business’s cozy relationship with Beijing, large swaths of America’s financial and corporate sectors are making a play for a new base of political support—this time complete with deep-blue, progressive social stances on hot-button issues in our politics.
It’s the height of hypocrisy. U.S. corporations with lucrative business ties to the Chinese Communist Party will boycott states here over anti-abortion laws, while Beijing systematically sterilizes Uyghur women. They routinely inflame divisive race issues within the U.S. while marginalizing African American actors or erasing Tibetan characters to keep Chinese audiences happy.
And in instances when the U.S. government has acted, our financial sector, fearful of losing out on a lucrative investment opportunity, often intervenes to protect state-tied Chinese firms. For example, after the Trump administration called for the delisting of Chinese companies tied to Beijing’s military from the stock market last fall, it was Wall Street that initially went to bat to ensure that three Chinese telecommunications firms complicit in state censorship, China Telecom, China Mobile, and China Unicom, were spared. (After several reversals and a failed appeal process, the three ended up recently delisted.) And just this month, the Biden administration allowed one of China’s biggest companies, Xiaomi, to relist on U.S. exchanges.
Democrats should be skeptical of the opportunistic progressive social stances in our finance and tech sectors. The presence of a diversity and inclusion czar does nothing if a company is profiting off of slave labor in Xinjiang.
More fundamentally, Wall Street advances the goals of the CCP with its investment in China, which needs American capital to grow its economy. As China has evolved from an export-driven economy to one reliant on state-led investment, it needs foreign investment to help pay for its debts. Investing in China funds the Chinese companies powering Beijing’s economic strategy and industrial policy.
In 2019, the United States became a net investor in China for the first time in history. How did this happen? The answer lies with the fund managers. As China has “opened” its market to American financial companies and sought the listing of its businesses on American stock exchanges, the portfolios of American investors have been increasingly invested in Chinese companies. Many well-meaning Americans may inadvertently be propping up a genocidal regime because Wall Street does it for them.
Furthermore, Chinese firms listed on U.S. securities exchanges are widely shielded by their government from the full oversight of American financial regulators, putting teachers’ pensions and retirees at risk.
Thankfully, there are legislative solutions that both Republicans and Democrats should be able to support. First of all, we should ban any U.S. investments in Communist Chinese military companies. This is part of the reason why I first introduced my Taxpayers and Savers Protection (TSP) Act in 2019—to ensure the retirement savings accounts of federal workers and service members didn’t end up invested in Chinese companies tied to the People’s Liberation Army or engaged in human rights abuses.
In instances when the U.S. government has acted, our finan-cial sector often intervenes to protect state-tied Chinese firms.
Similarly, no Chinese company on the U.S. Department of Commerce Entity List or the U.S. Department of Defense list of Communist Chinese military companies should be allowed to access U.S. capital markets—a move that could simply be accomplished by passing my American Financial Markets Integrity and Security Act.
We can also require increased scrutiny of activist investors in companies tied to national-security work or supply chains—particularly ones related to China—through my Shareholder National Security Awareness Act. Finally, we must ensure that Chinese companies, the only ones in the world that routinely skirt U.S. regulatory oversight, are no longer welcome to publicly list on U.S. stock exchanges.
Americans from across the political spectrum should feel emboldened by the growing bipartisan awakening to the threat that the CCP poses to American workers, families, and communities. As we deploy legislative solutions to tackle this challenge, Democrats must not allow our corporate and financial sectors’ leftward shift on social issues to blind them to the enormity of China as a geo-economic threat.
U.S. Representatives Steve Scalise (R-La.) and David B. McKinley, P.E. (R-W.Va.) introduced a resolution that, if passed, would express the sense of Congress that a carbon tax would be detrimental to the United States economy and harm working-class Americans the most.
This is self-evidently true. In fact, it is so obviously true, a reasonable person might ask why such a resolution is even necessary. Do we really need a resolution that is as obvious as the sun rises in the east?
Sadly, even though the resolution’s point — that carbon taxes are harmful — is painfully obvious, the resolution is necessary. There are many voices on the national stage that support virtually any new tax and particularly any energy tax. The Biden administration has made it clear it considers the energy sector the enemy — killing pipelines, proposing new taxes, and advocating for new burdensome regulatory regimes and mandates. But this is counterproductive!
A carbon tax — no matter who they tell you will pay it — will hit the economy hard and will hit lower-income Americans the hardest. A carbon tax would increase the cost of everything Americans buy — from groceries, to electricity and gasoline, to home heating in the winter, to everyday household products. Moreover, having a reliable source of affordable energy is foundational to a strong job market and strong economic growth. The rich don’t need a strong job market or strong economic growth to build a better future for themselves and their families. They’ve already got that. But the working middle class and the working poor need a robust jobs market and economic growth to push wages higher.
The additional costs imposed on the working class by a carbon tax are difficult to bear. Their budgets are already tight. Are they going to go to work less often or heat their home less in the winter? They are kind of stuck. If you increase their energy costs, they have to give up other necessities. And if you damage the economy, their hope for better times and brighter days ahead evaporates. That’s way too high a price to pay for whatever false promises the elites are offering.
America achieved energy independence when only a few short years ago, it was widely perceived that we would always be forced to import energy and rely upon energy from hostile nations. Energy independence had obvious economic benefits, but it also had national security benefits. For much of the last two generations, American foreign policy had to worry about keeping the oil flowing from the Middle East. Given the volatility of the region, that often forced some unpleasant foreign policy considerations on American policymakers. But with energy independence, hostile powers could no longer hold us hostage or use energy as a leverage point. Thus, we were more secure. A carbon tax would put all of this at risk.
Some privileged elites see their support for a carbon tax as some sort of virtue. And they think it makes them look good. But what is there to feel so superior about in forcing working-class Americans to pay higher energy bills, transportation costs, and higher costs for food and household items — all while also being forced to suffer lower or suppressed wages?
This resolution tells Congress and the Biden administration that Americans expect accountability in their government. The Biden Administration is attacking energy through its attempts to force us into expensive electric vehicles and to use legitimate infrastructure needs as cover for redistributing taxpayer money to favored technologies like windmills and solar panels. This is all reminiscent of Solyndra, which gave away hundreds of millions of taxpayer dollars to well-heeled political donors in the guise of energy policy but was ultimately a boondoggle and nothing more.
Rather than trying to use energy policy as a way to push Americans into the buying preferences of a few political elites, let’s unleash the power of the free market and human creativity! We can have reliable, affordable energy and a clean environment. But only if we allow and encourage innovation, rather than imposing government mandates and taxes.
Several of the Biden administration’s key climate goals — particularly steps to reduce U.S. greenhouse gas emissions in the power and transportation sectors — are likely to be held hostage by China. A shift away from fossil fuels to renewables to produce electricity, and the deployment of more electrical vehicles on America’s roadways, depends upon batteries. Since China currently controls the entire life cycle of battery development, the Biden administration needs a strategy to mitigate China’s dominant position. While the president’s special envoy for climate, John Kerry, hopes to approach climate as a “critical standalone issue,” the fact is that geopolitics will shape the choices President Joe Biden will have to make. The Biden administration will not be able to “compartmentalize” its climate policies from the overall U.S.-Chinese relationship. China’s strength in the new green industries presents a strategic challenge.
Energy storage has been called the “glue” of a low-carbon economy, enabling the greater use of intermittent power sources such as wind and solar. The World Economic Forum argues that batteries are a critical factor in reaching the Paris Agreement goal of limiting rising temperatures to 2 degrees Celsius. By 2030, it stated, batteries could enable 30 percent of the required reductions in carbon emissions in the transport and power sectors.
Batteries and Bottlenecks
The battery supply chain is complex, but it can be reduced to four key elements: mining the critical minerals, processing them, assembling the battery parts, and recycling.
Under its “Go Out” investment strategy, China has spent the last two decades solidifying control over the main critical minerals for battery cells — lithium, cobalt, and graphite. Beijing now controls some 70 percent of the world’s lithium supplies, much of which is located in South America. More than two-thirds of the world’s cobalt reserves are found in the Democratic Republic of the Congo, and China has secured control over 10 of the country’s 18 major mining operations, or more than half its production. Beijing is also the world’s largest consumer of cobalt, with more than 80 percent of its consumption being used by the rechargeable battery industry. Graphite is the largest component by volume in advanced batteries, but spherical graphite, the kind that makes up the anode in electrical vehicle batteries, must be refined from naturally occurring flake graphite. And China produces 100 percent of the world’s spherical graphite.BECOME A MEMBER
Second, China has developed the largest minerals processing industry in the world. After these critical minerals are mined from the earth, they must be separated, processed, refined, and combined. This process is dirty and environmentally unfriendly. Lithium-ion batteries contain hazardous chemicals, such as toxic lithium salts and transition metals, that can damage the environment and leach into water sources. This is likely a key reason why few processing facilities are located in North America. The critical minerals the United States does mine are often shipped back to China for refining.
According to Benchmark Mineral Intelligence, Beijing also controls 59 percent of global lithium processing, 65 percent of nickel processing, and 82 percent of cobalt processing. And an important aside is that China produces roughly 90 percent of the magnets needed for the motors of electrical vehicles.
As early as 2008, China announced billions of dollars in infrastructure investments in the Democratic Republic of the Congo, by far the world’s largest cobalt producer, in exchange for mining rights. The partnership continues to flourish. In January of this year, the Democratic Republic of the Congo formally joined China’s “One Belt One Road” initiative. The Chinese mining company Tianqi Lithium has acquired stakes in major mines in Chile and Australia, giving it effective control over nearly half the current global production of lithium. China controls even more market share in the refining and processing parts of the mineral supply chain. Together, these state-backed investments have given Chinese battery makers like Contemporary Amperex Technology Co. Limited (CATL) an advantage over Japanese and American competitors.
Third, once these minerals are processed, they are packed into battery cells, which are combined into modules and which, in turn, are wrapped into battery packs. This process takes place in dedicated battery factories called “gigafactories.” Like the rest of the battery supply chain, very few of these specialized factories are located in North America. About 136 of the 181 lithium-ion battery gigafactorieseither planned or under construction worldwide are, or will be, located in China. Just 10 are planned for the United States. An important step in the right direction is General Motor’s consideration of building a second battery factory in the United States — it already has a new facility online in Ohio — but the United States needs to do more.
Finally, once batteries have reached the end of their life cycle, the critical minerals in each cell can be reused. But China dominates the battery recycling industry as well. This is partially because China has built infrastructure to recycle lithium-ion batteries for consumer electronics. In 2019, around 70 percent of lithium-ion batteries were recycled in China and South Korea. And because China is by far the world’s largest electric vehicle market, it will remain a key contributor to lithium battery waste — thus allowing Beijing to recycle at scale.
China has been strategic about building up its recycling capabilities, requiring manufacturers of electric vehicles to be responsible for setting up facilities to collect and recycle spent batteries. As a part of this initiative, automakers were required to establish a maintenance service network to allow consumers to repair or exchange old batteries.. Going forward, recycling will only become more important. By 2030, 11 million metric tons of lithium-ion batteries are expected to reach the end of their service lives. Eventually, a robust recycling process could offer a way for countries to mitigate some Chinese-controlled bottlenecks in the supply chain. But taking advantage of this will require environmentally friendly recycling facilities in the United States.
Commanding Heights: Technology and Leverage
China’s dominance across this supply chain should come as no surprise. As in other key economic and technology sectors such as flexible manufacturing, solar panels, and wind turbines, China has achieved dominance by careful planning and investments — as well as unfair practices such as those that led to the dominance of China’s solar panel manufacturing industry. (And it’s worth noting that this issue became one of the most contentious issues between the European Union and China as well.) In addition, many pointed to China’s massive intellectual property theft as a key contributor to its dominance in these key sectors.
Because China takes a strategic national approach, it has been particularly good at identifying key foundational sectors or platforms to grow or control, thereby increasing its economic and geostrategic power. For example, it has used its dominance in financial technologies across Asia to increase the power of its surveillance state by collecting the data associated with payments. It has prioritized 5G, and, with state financing and other forms of support, it has built out its network and is far ahead of the United States in land stations. Notably, this 5G infrastructure will have direct relevance to China’s ability to develop autonomous vehicles, since self-driving vehicles and other platforms, like drones, depend upon the fast connectivity 5G networks provide. (And autonomous vehicles are closely related to the electrical vehicle industry.)
Beijing’s “Made in China 2025 plan,” announced some six years ago, called for major advances in semiconductor fabrication and provided more than $150 billion to support that goal. Some recent reports suggest that China aims to produce some 70 percent of its domestic chip needs within China by 2025 and to reach parity with international technologies five years later. As Jonathan Ward has pointed out, “the mastery of advanced technologies and the creation of a powerful industrial base for civilian and military purposes” are essential pieces of China’s global strategy and activities. While the United States now increasingly recognizes this reality — with legislation such as the Creating Helpful Incentives to Produce Semiconductors for America Act (CHIPS for America Act), as well as executive branch attention by both Presidents Donald Trump and Joe Biden — there remains a far gap between strategy development, desired outcomes, and actual implementation.
Advanced energy is another key platform. Thus, it is not surprising that the “Made in China 2025” plan also included “new energy vehicles” and “new energy” as one of its 10 areas of focus. Beijing considers advanced batteries and electric vehicles a key strategic sector worthy of extensive industrial planning. One report noted that, in the science and technology sector alone, the Chinese Communist Party has issued as many as 100 plans. Several of these, including its 2011 strategic emerging industries plan, focused on key strategic sectors, including the “new energy automobile industry.” In 2017, General Secretary Xi Jinping released an Outline of the National Strategy for Innovation-Driven Development that includes differentiated strategies to produce “modern energy technologies.” And China is using its “One Belt One Road” framework to make strategic investments around the world and vertically integrate its supply chain for battery production.
The Chinese Communist Party has recognized that pressure to address climate change will prompt a shift toward renewable energy around the world. With a regulatory push across Europe, some expertsanticipate that, by 2040, about 70 percent of all vehicles sold in Europe across different segments will be electric. Others believe that the global electric vehicle market — about $250 billion today — will grow to almost $1 trillion by 2027.
China has positioned itself well for this transition. On the one hand, China will have the benefit of cheap fossil fuels. China will not even begin to reduce its own carbon emissions for another 40 years, until 2060. It continues to build coal plants around the world. (In 2016 alone, Chinese development banks invested $6.5 billion in coal infrastructure overseas, mostly in neighboring developing countries). On the other hand, the Chinese Communist Party has positioned itself at the center of a global energy revolution.
If anyone has doubts about the determination with which this might unfold, China’s automobile market was virtually nonexistent until the early 1990s but surpassed the United States in 2009 to become the world’s largest.
Rewiring the global energy economy around China would provide Beijing with massive economic benefits. Experts have pointed out that China’s focus on energy security and technological self-reliance are key factors informing Beijing’s aim to reach carbon neutrality by 2060. Chinese ministries have estimated that achieving this goal could lead to over RMB 100 trillion ($14.7 trillion) in investments over the next 30 years.
As a result, China has made significant advances in energy storage, leading Europe’s top automakers to move most of their research and development operations to China. Since 2018, the largest European carmakers (BMW, Daimler, FCA, Groupe PSA, Renault, Volkswagen, and Chinese-owned Volvo) have chosen Chinese partners for 41 cooperation projects. And European carmakers have also directly invested in their own research and development centers in China, establishing nine such centers since 2018.
Whatever the real intentions behind General Secretary Xi’s effort to put China at the center of an “an ecological civilization,” it is shortsighted and ahistorical to think that China will not use this leverage. It has done so in the past. In 2010, a Chinese fishing boat rammed two Japanese coast guard vessels in the contested waters of the East China Sea. When Tokyo arrested the fishing boat’s captain, the Chinese Communist Party retaliated by placing an embargo on rare earth sales to Japan.
More recently, in June 2019, Chinese state-controlled media threatened disruption of rare earth supplies to the United States — this time targeting U.S. defense contractors. The threat noted that “military equipment firms in the United States will likely have their supply of Chinese rare earths restricted.” This past February, China threatened to use export controls to cut off U.S. access to the equipment used for processing rare earths, a ban that would be as devastating as cutting off production of rare earths themselves. And Australia is feeling such pressure as China has restricted imports of Aussie beef, wine, and barley — and reduced the flow of Chinese students to Aussie universities — unless Australia submits to a list of 14 politicaldemands by Beijing.
This behavior is consistent with China’s use of “sharp power” — diplomatic, economic, or technological coercion — to pursue its policy objectives. This fall, China passed its first unified export control law, allowing the Chinese Communist Party to control the export of items including very broadly defined “dual-use goods” to specific foreign entities. As the Merics institute has pointed out, any exports that fall under “overall national security” — and the law appears intentionally vague — could be prevented, thus allowing Beijing to retaliate against countries or companies for policy disagreements or geopolitical reasons. Given Beijing’s designation of the electric vehicle and battery sectors as strategic industries, the Chinese Communist Party could potentially weaponize key bottlenecks in the supply chain against the United States.
For much of 21st century, the United States was dependent upon the Middle East for oil. As the Biden administration seeks to shift to renewables and reduce carbon emissions through the deployment of more electric vehicles, it should not trade one dependency for another. As one expert group put it, the modern-day arms race revolves around super-sized lithium-ion battery cell manufacturing facilities and the mineral supply chains to support them.
Any successful effort to “position America to be the global leader in the manufacture of electric vehicles and their input materials,” as Biden has stated, cannot be based on a dependency on the United States’ most serious competitor. Rather, the United States should understand that American efforts will be contested — even if they are intended to help the “global good” of reduced carbon emissions. It is highly unlikely that Beijing, which has been working for years to “seize the commanding heights” in critical technologies such as batteries, will easily watch as its advantages melt away. In the eyes of the Chinese Communist Party, the battery race means that China and the United States are locked in a battle over market share and access to scarce resources.
Chinese Foreign Ministry spokesman Zhao Lijian has already reminded U.S. leaders that U.S.-Chinese cooperation in specific areas is interrelated and subject to the overall U.S.-Chinese relationship. Maintaining dominance in battery production — particularly as the world increasingly relies on batteries — provides Beijing with valuable geopolitical leverage. While the Biden administration would like to compartmentalize climate change and geopolitics, the likelihood of China not doing so is high.
Moreover, as Biden seeks to build technology alliances with Europe and other allies to counter China, China’s efforts will constrain his leverage. With European electric vehicle manufacturers dependent upon China, it is hard to imagine that the Chinese Communist Party will not use these dependencies to ask for concessions in other domains.
To avoid a potentially debilitating dependence on China, then, the United States should treat clean energy technologies as a competitive space.
The Biden administration cannot afford to start from scratch and should build on the work of its predecessor. As it begins its new supply chain review, of which advanced batteries are one part, it should keep in mind the lessons of the Obama era battery initiative. In 2009, the Obama administration announced $2.4 billion in funding to produce next-generation hybrid electric vehicles and advanced battery components. One goal at the time, was to “end our addiction to foreign oil” through a plan that “positions American manufacturers on the cutting edge of innovation and solving our energy challenges.” As part of this, the Department of Energy offered up to $1.5 billion in grants to U.S.-based manufacturers to produce these batteries and their components. So what happened to these efforts and others like it over the past decade? Without setting forth what went right and what went wrong, it is hard to see how new initiatives can make progress.
How will Biden’s current efforts to use green technology to stimulate the economy differ from past failed efforts? Despite a string of incentives in the stimulus act in 2009, the solar supply chain largely moved to China after that country’s government invested heavily in the industry.
In addition to specifying lessons learned from past efforts, any future policy initiatives should take advantage of existing recent efforts. For example, Ellen Lord, the former undersecretary of defense for acquisition and sustainment, devoted significant time to identifying investment priorities, including the battery network. Since it takes five to seven years from the start of planning a battery-manufacturing plant and setting up a pilot production line to reach full operational capacity of a gigawatt factory that can produce several gigawatt-hours per year, the administration needs to concentrate some of its efforts on existing facilities, while encouraging new investments by U.S.- and foreign-owned suppliers.
The Biden team will also need to make choices, and fight for them internally. If the United States is to increase its processing of minerals for batteries in the United States, it will need to overcome the fact that such processing facilities are environmentally challenging. That tradeoff is worth it.
The new administration can make progress on its climate goals, but doing so will require a serious dose of climate realism, as well as a concomitant commitment to competitive policies to achieve U.S. independence from China in battery technology and manufacturing.
If President Joe Biden gets his way, the business of filing taxes in 2022 will be more complicated, more expensive, and more progressive than they’ve been in about 40 years.
Biden didn’t say much about taxes during the 2020 campaign besides his promise that those making less than $400,000 a year would not see their tax bill rise by “one thin dime.” The proposals he’s put forward as “payfors” for infrastructure, COVID relief, and other new spending programs are riddled with new taxes and hike existing levies to the point one can safely say the era of “tax and spend” has returned, in a punitive, almost vengeful way.
As the Committee to Unleash Prosperity observed Monday in its free daily Hotline, the top 5 percent of U.S. income earners pay half of all income taxes while the top 1 percent – the left’s favorite whipping post – pay more than 40 percent of the total tax intake. Meanwhile, as the chart below shows, the bottom half of income earners have an effective federal tax that’s close to zero – even when payroll and gasoline taxes are factored in. Quoting the Cato institute’s Chris Edward, “Joe Biden’s comments about the rich having low rates are clearly off base. The highest earners have tax rates twice the income of those in the middle and almost ten times the rates at the bottom.”
Biden’s plan to “soak the rich” is more about politics than economics. The numbers don’t add up and, if his tax cuts are enacted at the same time the United States is trying to emerge from a prolonged, lockdown induced recession, the results could be inflationary and job-killing rather than spark renewed growth in the economy as the 2017 Tax Cuts and Jobs Act did. Nonetheless, the Democrats are, as a party, committed to TCJA’s repeal in its entirety and, in the process, violate Biden’s campaign pledge.
Republicans on the House Ways and means Committee said Monday that if Biden gets his way on TCJA, it will do families “real harm” even at the median income level. A family of four with a household income of $73,000 could expect to see its federal taxes increased by $2,000. A single parent with one child should plan to pay $1,300 more.
Additionally, the committee said, the child tax credit would be cut in half as would the standard deduction, millions of middle-class households would again have to pay the Affordable Care Act individual mandate tax, and the American corporate tax rate would once again become the highest in the industrialized world.
The policies of tax and spend reached their apex in the 1970s under Jimmy Carter. America literally can’t afford to go back. The inflation alone would have a potentially ruinous impact on government discretionary spending. No Democrat who claims to be a moderate could go along with Biden’s plan to undo any part of tax-cutting, job-creating law Congress passed in 2017 – especially given what the president has planned for phase two. The prudent force forward is to keep the rates where they are, reduce overall federal spending, and let the U.S. economy boom. There will be plenty of money later to do the things we’ve already put off doing over the last four years, economists say, once the country is flush again.
The specter of inflation haunts Joe Biden’s presidency
Treasury Secretary Janet Yellen got into trouble Tuesday for telling the truth. That morning, at a conference sponsored by the Atlantic, she raised the possibility that one day the Federal Reserve may raise interest rates “to make sure our economy doesn’t overheat.”
Anyone with a basic understanding of economics knew what she was talking about. The combination of President Joe Biden’s gargantuan spending and the accelerating economic recovery may well lead to a rise in consumer prices and hikes in interest rates. But an end to the Federal Reserve’s program of easy money would hurt asset prices and possibly employment as well.
Which is not what most investors want to hear. When Yellen’s words reached Wall Street, the market tanked. By the afternoon she was in retreat, telling the Wall Street Journal CEO summit that she had been misunderstood. “So let me be clear,” she said. “That’s not something I’m predicting or recommending.”
No, of course not. But it still might happen anyway.
A specter is haunting the Biden administration—the specter of inflation. Past inflations have not only harmed consumers, savers, and people on fixed incomes. They have also brought down politicians. Among the risks to the Democratic congressional majority is a rise in prices that lifts inflation to near the top of voters’ concerns, coupled by the type of Fed rate increase that hits stocks and housing. Inflation is one more signpost on the road to Republican revival, along with illegal immigration, crime, and semi-closed public schools embracing far-left critical race theory.
The classic definition of inflation is too much money chasing too few goods. That might also describe America sometime soon—if not already. The economy has started its post-virus comeback. Jobs and growth are on the upswing. U.S. households sit on a trillion-dollar pile of savings. Over the last year, on top of its regular spending, the federal government has appropriated a mind-boggling amount of money: a $2 trillion CARES Act, a $900 billion COVID-19 relief bill, and a $2 trillion American Rescue Plan. And President Biden wants to spend about $4 trillion more.
Surging this incredible amount of cash into an economy that is rapidly approaching capacity may have unintended and harmful consequences. But the Biden administration is either unconcerned about inflation or afraid of bringing it up in public.
Why? Well, one reason is that earlier warnings, after the global financial crisis in particular, didn’t seem to come true. (The inflation may have shown up in the dramatic ascent in prices of stocks and bonds, as well as in odd places such as the market for high-end art.) Another reason is that some economists think a little bit of inflation would be a good thing. But the main explanation may be related to status-quo bias: Inflation hasn’t been a driving force in our economic and public life for decades, and so we blithely assume it won’t be in the future.
Which is why an experienced leader worries about repeating the mistakes of the past. And yet, for a politician who came to Washington in 1973, Joe Biden has a lackadaisical attitude toward inflationary fiscal and monetary policy. Was he paying attention? It was the great inflation of the ’60s and ’70s, caused in part by high spending, the Arab oil embargo, and spiraling wages and prices in a heavily regulated and unionized economy, that helped ruin the presidencies of Gerald Ford and Jimmy Carter.
Inflation led to bracket creep, with voters propelled into higher income tax brackets by monetary forces over which they had no control. And bracket creep inspired the tax revolt, supply-side economics, and the Reaganite idea that, “In this present crisis, government is not the solution to our problem; government is the problem.” The eventual cure for inflation was the painful “shock therapy” administered by Federal Reserve chairman Paul Volcker and what at the time was the worst recession since the Great Depression.
Why anyone would want to repeat this experiment in the dismal science is a mystery. Biden, however, is fixated not on inflation but on repudiating the legacy of the man known for describing it as “always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
Milton Friedman, whose empiricism led him to embrace free market public policy, was the most influential economist of the second half of the 20th century. But Biden has a weird habit of treating Friedman as a devilish spirit who must be exorcised from the nation’s capital. For Biden, Friedman represents deregulation, low taxes, and the idea that a corporation’s primary responsibility is not to a group of politicized “stakeholders” but to its shareholders. “Milton Friedman isn’t running the show anymore,” Biden told Politico last year. “When did Milton Friedman die and become king?” Biden asked in 2019. The truth is that Friedman, who died in 2006, has held little sway over either Democrats or Republicans for almost two decades. But Biden wants to mark the definitive end of Friedman and the “neoliberal” economics he espoused by unleashing a tsunami of dollars into the global economy and inundating Americans with new entitlements.
The irony is that Biden’s rejection of Friedman’s teachings on money, taxes, and spending may bring about the same circumstances that established Friedman’s preeminence. In a year or two, the American economy and Biden’s political fortunes may look considerably different than when Janet Yellen blurted out the obvious about inflation. Voters won’t like the combination of rising prices and declining assets. Biden’s experts might rediscover that it is difficult to control or stop inflation once it begins. And Milton Friedman will have his revenge.
The beleaguered U.S. Postal Service again comes under scrutiny this Thursday as the House Oversight and Government Reform Committee begins consideration of legislation to hopefully, once and for all, put the USPS on the path to sound footing.
The hearing will inevitably get political, and needlessly so. Too much anger remains over the 2020 presidential election (in which the USPS played a significant role thanks to the emergency procedures taken by states to permit mail-in voting on a scale never before seen) for it not to happen.
With any luck though, the committee’s chairman and ranking Republican will be able to keep things on track and prevent the hearing from denigrating into a shouting match. Everyone’s attention will be required to produce a plan to rescue the Postal Service without a bailout.
The hearing is an opportunity to examine the reforms already put in motion by U.S. Postmaster General Louis DeJoy. A controversial choice when he was selected, DeJoy has been attacked relentlessly as a “political hack” put in place by then-President Donald Trump and Republicans on the Postal Board of Governors to tilt the election in Trump’s favor.
His partisan pedigree is undeniable. He was a major donor to the GOP and to Trump, which led many high-profile Democrats to call for his ouster and, when the Board of Governors refused to remove him, for its ouster as well.
It didn’t happen but that doesn’t mean DeJoy is safe. The White House has sent the names of three labor-backed nominees to the Board that, when they’re confirmed by the U.S. Senate, would give the Democrats the majority and the ability to terminate him – even though he deserves considerable credit for having remained focused on the job at hand – keeping the USPS operating in the middle of lockdowns imposed during a pandemic – all the while cutting costs where he could.
DeJoy’s been following the plan, “Delivering for America,” a multi-faceted ten-year program to get things on track that he’s driven with the Boards’ approval. It, and he, deserve a chance to see where things go.
The plan is focused primarily on helping the USPS do what it is intended to do: deliver mail and packages efficiently to every address in America six days per week, rain or shine, sleet or snow, and, if necessary, “in the gloom of night.” By recommitting the Postal Service to this fundamental tenant and recognizing it is a core strength, DeJoy and the Board have put the USPS on the path to recovery without a taxpayer bailout.
That’s what we want – the ability to send and receive mail and packages throughout the country, direct to another address without someone at the other end having to travel to a drop-off and pick-up point, affordably and efficiently. I still send letters; and I receive lots of packages from online shopping (this year more than ever, just like most Americans). Some of my relatives receive vital medications via the Postal Service. And millions of small businesses depend on the Postal Service to ship their products – a function which will expand nearly exponentially if efforts to bring broadband to rural America happen as the White House wants.
Fortunately, neither the “Delivering for America” plan nor the draft of the legislation about to be considered in committee adopts any of the dangerous proposals to force the USPS to increase package prices by arbitrarily assigning that part of the business costs which the Postal Service then must pay for. As required by law, the Postal Service already covers cost caused by delivering packages as well as a share of the overhead. Driving artificial package price increases above levels set in the market would kill the one part of the Postal Service business that is succeeding and helping to keep mail service going – by more than $10 Billion last year over and above the costs of providing the package delivery service.
Less positive are the plan’s proposal calling for mail rates to increase several times the rate of inflation, while at the same time reducing first class mail service standards from 3 to 5 days (by substituting trucks for airplanes). People don’t want to have to pay more for less. Moreover, the actual savings from the service change are uncertain and pressure to raise mail rates would be less if USPS took a more aggressive stance on controlling labor costs.
The USPS has already begun implementing the plan taking preliminary steps to consolidate mail processing facilities and announcing planned investments to better deal with growing package volumes. It is also proceeding with the procurement of new delivery trucks (the existing ones you see on the street are over 20 years old, are falling apart, and represent a safety hazard to the people who must drive them).
Rather than being criticized, DeJoy should be commended for keeping his eye on the ball and not jumping into the political debate into which so many people tried to drag him.
Today is one hell of a hump day already: New government figures show that the Biden administration is getting it wrong on the border, getting it wrong on the economy and job creation, and getting it wrong on inflation.
No, Mr. President, This Is Not the Usual Seasonal Migration
I told you, back on April 19, that this month’s immigration numbers were going to be high, and represent a blinking red light. On May 4, I reminded Jen Rubin that no, nothing “happened” to the border crisis, the media just stopped discussing it. On Monday, I pointed out that the federal government’s official statistics were undermining Biden’s argument that what Americans were seeing on the border was just a routine seasonal pattern.
“The truth of the matter is, nothing has changed,” President Biden insisted in his press conference on March 25. “It happens every single, solitary year: There is a significant increase in the number of people coming to the border in the winter months of January, February, March. That happens every year.”
I’m sorry, Mr. President, but that is a load of bull. It is not a regular seasonal pattern to break a two-decade-old record two months in a row. In the month of April, U.S. Customs and Border Protection caught 178,622 individuals attempting to cross the U.S.–Mexico border, one month after they had caught an eye-popping 173,348 individuals.
The Biden administration is going to try to take a victory lap over the fact that the number of unaccompanied minors dropped from 159 in March to 134 in April. (That’s what NBC News chose to spotlight in this headline.)
(Over at the Center for Immigration Studies, Andrew Arthur wondered why it took until May 11 to release the numbers for April. No doubt it takes time to check and collate all of the data, and as of now, there’s no indication of any deliberate delay from CBP. But any time that new information that makes the administration look bad takes a while to get released, some people will fairly wonder if someone in the chain of command was dragging his feet.)
On April 30, when asked about March’s numbers, Biden insisted in an interview with NBC News, “Look, it’s way down now. We’ve now gotten control.” But the April numbers are not way down; they’re up a bit over the previous month’s record. At the time of that interview, did Biden genuinely believe that CBP encounters at the border had dramatically declined? (The other day a commenter on our site had a good observation: Biden’s usual reflexive denial of making a mistake and his habitual fuzziness with the facts make it very tough to tell when he’s lying, when he’s misinformed, and when he’s having any memory issues.)
Biden told NBC News that he “inherited a Godawful mess” from Trump at the border, but in January, CBP had only 78,443 encounters at the southern border. The first big jump came in February when it rose to 101,120, and then it continued rising into March. Hey, what happened in late January?
These are cold, hard numbers which prove that Biden’s assessment of the situation in late March was completely wrong. Whether or not Biden wanted to tell Central America that the border is open, his first moves on immigration — halting construction of border fencing, new guidelines to ICE agents to sharply curb arrests and deportations, an attempted moratorium on deportations, proposing a path to citizenship — all sent a signal to migrants and human traffickers that the door was wide open and everyone was welcome.
Recall this anecdote at the border, reported in the New York Times in mid March:
Jenny Contreras, a 19-year-old Guatemalan mother of a 3-year-old girl, collapsed in a seat as Mr. Valenzuela handed out hand sanitizer.
“I did not make it,” she sobbed into the phone as she spoke with her husband, a butcher in Chicago.
“Biden promised us!” wailed another woman.
Many of the migrants said they had spent their life savings and gone into debt to pay coyotes — human smugglers — who had falsely promised them that the border was open after President Biden’s election. [Emphasis added]
There is only one way that people in the poorest and most isolated communities in Central America will disbelieve the false promises of human smugglers and coyotes and understand that the border is not open. It requires the U.S. president to send a clear signal, loudly, frequently, and publicly, that U.S. immigration laws are still enforced, and that those caught crossing the border illegally will be criminally charged and quickly deported. I suspect that deep down, Biden and many other Democrats think those actions are inherently mean and unjust. This is why half the Democratic presidential field supported a repeal of the criminal statute for entering the country without permission. Additionally, almost all Democrats believe illegal immigrants should be covered by a government-run health-care plan, and they’re iffy at best on the use of E-Verify.
Many Biden supporters will insist that a continuing wave of migrants wasn’t the intended consequence of his early actions on immigration, and many Biden foes will insist this was precisely the intended consequence of his early actions on immigration. But that argument is almost moot; the waves of migrants are coming — and still coming.
Usually, a Record Number of Job Openings Would Be Good News
Yesterday, the U.S. Bureau of Labor Statistics reported that the number of job openings across the country had reached 8.1 million, the highest that the agency had ever recorded.
On Monday, President Biden said, “Families — families who are just trying to put food on the table, keep a roof over their head — they aren’t the problem. We need to stay focused on the real problems in front of us: beating this pandemic and creating jobs.”
But the BLS numbers show we’re already doing pretty darn well at creating jobs, or at least creating job openings. An economy in which there are a record number of job openings is not one that is sluggish, or struggling, or that desperately needs another round of stimulus spending. What it needs are the currently nonworking job applicants to walk through the door. Right now, in Massachusetts, the maximum weekly unemployment-benefit amount is $855 per week. In a 40-hour work week, that comes out to $21.37 per hour.
Meanwhile, Prices Keep Going Up . . .
The updated unfilled-jobs numbers released Tuesday morning were bad. The updated immigration numbers released Tuesday evening were bad. Guess how the updated inflation numbers released Wednesday morning look?
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.8 percent in April on a seasonally adjusted basis after rising 0.6 percent in March, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 4.2 percent before seasonal adjustment. This is the largest 12-month increase since a 4.9-percent increase for the period ending September 2008.
The index for used cars and trucks rose 10.0 percent in April. This was the largest 1-month increase since the series began in 1953, and it accounted for over a third of the seasonally adjusted all items increase. The food index increased in April, rising 0.4 percent as the indexes for food at home and food away from home both increased. The energy index decreased slightly, as a decline in the index for gasoline in April more than offset increases in the indexes for electricity and natural gas.
The index for all items less food and energy rose 0.9 percent in April, its largest monthly increase since April 1982. Nearly all major component indexes increased in April. Along with the index for used cars and trucks, the indexes for shelter, airline fares, recreation, motor vehicle insurance, and household furnishings and operations were among the indexes with a large impact on the overall increase.
The all-items index rose 4.2 percent for the 12 months ending April, a larger increase than the 2.6- percent increase for the period ending March.
In other news: Jennifer Granholm, during a press conference yesterday about the hack of the Colonial Pipeline, said, “We have doubled down on ensuring that there’s an ability to truck oil in — gas in. But it’s — the pipe is the best way to go. And so that’s why, hopefully, this company, Colonial, will, in fact, be able to restore operations by the end of the week as they have said.”
Oh, pipe is the best way to go, huh? Safer, more secure, more efficient, less risk of accidents? Then maybe this administration shouldn’t be canceling pipeline projects!
As slogans go, “build back better – which Joe Biden used to define his 2020 bid for the presidency – lags well behind “Happy Days Are Here Again,” “Make American Great Again,” and “I Like Ike” in clarity and vision. It’s not even close to “It’s the economy, stupid,” the unofficial campaign mantra of Bill Clinton’s successful run in 1992.
What Biden’s been doing during his first one hundred suggests even he didn’t understand what he meant. If he planned to create millions of new jobs – good jobs at good wages with good benefits as the Democrats used to say – the April jobs report indicates he’s failing.
What’s gone unreported is that jobs that are coming back – and there are some – are coming back as lockdowns are ending. The economic downturn that appears now to be ending was not the product of an expected downturn in economic activity but the direct result of state-by-state lockdowns that forced businesses to curtail operations or close as part of an ill-conceived effort to slow the spread of the coronavirus.
To supplement lost income, the Pelosi-led Congress joined first with Donald Trump and then with Biden to put the nation on relief. It’s no wonder, therefore, that business leaders are complaining they can’t find people to fill the jobs they have available once the Washington politicians incentivized joblessness instead of work by extending and enhancing unemployment benefits. It should be obvious that when you pay people not to work, they won’t work but somehow the experts in D.C. missed this.
Biden and the Democrats are nevertheless still all in. They said their $1.9 trillion “American Rescue Plan” would save the economy. Instead, it looks like it’s dragging it back down while inflation, a monster the U.S. Federal Reserve was thought to have tamed, is once again rearing its ugly head. The price of goods and services on which the American people rely are increasing, suddenly and sharply, as the impact of trillions in new spending during the pandemic comes home to roost.
Now, according to the Washington Post and other outlets, the Democrats are having trouble building support for their latest $4 trillion tax and spend program. Moreover, Democratic Congressional Campaign Committee Chairman Sean Patrick Maloney, D-N.Y., is now warning the White House its planned tax hike “could hurt vulnerable House Democrats up for re-election in 2022.”
It’s an important message for Biden – who’s apparently sending it back marked “Return to Sender.” The president, it seems, remains intent on raising taxes on as many people, goods, and services as he can convince Congress to accept.
Biden’s initial proposal to take the corporate tax rate from 21 percent to 28 percent landed with such a resounding “thud” he was forced to offer up 25 percent as a compromise. Even so, that would still move the United States back into an uncompetitive position with the world’s other industrialized economies. What is being omitted thus far from the discussion is that, when state-corporate levies are added in, the average U.S. combined national and subnational tax rises to 25.77 percent.
At 25 percent, what Biden has now put on the table, the combined rate would be 29.5 percent, higher than what is levied by China and higher than the average rate for countries in the OECD.
Moreover, says Americans for Tax Reform, a non-partisan group opposed to tax increases, “Workers, consumers, and shareholders will bear the burden of an increased corporate tax rate. Such a hike will cause businesses to invest less in the United States and more overseas, resulting in fewer job opportunities and lower wages for American workers:”
According to ATR:
–A Treasury Department study estimated that “a country with a 1 percentage point lower tax rate than its competitors attracts 3 percent more capital.” This is because raising the corporate rate makes the United States a less attractive place to invest profits.
–A 2012 Harvard Business Review piece by Mihir A. Desai notes that raising the corporate tax lands “straight on the back” of the American worker and will see a decline in real wages.
–A 2012 paper at the University of Warwick and University of Oxford found that a $1 increase in the corporate tax reduces wages by 92 cents in the long term. This study was conducted by Wiji Arulampalam, Michael P. Devereux, and Giorgia Maffini and studied over 55,000 businesses located in nine European countries over the period 1996-2003.
–Even the left-of-center Tax Policy Center estimates that 20 percent of the burden of the corporate income tax is borne by labor.
Biden’s insistence the corporate tax be raised, the cornerstone of his economic plan, will not create jobs, reduce debt, or bring increased revenues into the U.S. Treasury. It will however be a boon to almost every one of America’s competitors in the global marketplace.
Throughout the 2020 presidential campaign season, then-candidate Biden continually promised that he would not raise taxes on households making less than $400,000 per year. It was a promise echoed again by the White House just over a month ago, but the so-called American Jobs infrastructure plan rolled out by the administration pulls a bait-and-switch on the American people, particularly the working poor and ethnically diverse communities.
A key component of the Biden plan is the push for a nationwide transition to electric vehicles, which takes up some $174 billion in subsidies from the package, but one of the largest problems with the proposal is its disregard for the negative downwind effects it would have on those at the lower rungs of the economic ladder. As of 2019, the average cost of an electric vehicle was $55,600, far greater than the cost of other vehicles more affordable for lower income families. In fact, another recent study showed that the average income of electric car owners is at least $100,000 per year, well over even the middle-income line. While the Biden plan throws truckloads of money at other angles of the electric vehicle issue, it does nothing to address the fact that lower income households simply cannot afford electric vehicles. To make matters worse, electric vehicles only account for 2 percent of vehicle sales in the U.S., even though they have been an option for vehicle purchasers for a significant period of time. The Biden plan is catering to a niche segment of an industry, in a show of political nepotism for a pet campaign promise while slapping the American worker in the face in the process.
An aggressive plan like Biden’s calls for significant bumps in energy and electric grids. Even currently, with a transportation budget of $1.5 billion, electric companies have almost $1 billion more in requests for expansion, and this is the case notwithstanding the drastic increase in energy grids that the Biden plan would implement. More electric grids cost the utilities more to operate, meaning large spikes in utility costs.
California provides an example of this type of policy gone wrong, as it invests the most of any state into electric vehicle infrastructure yet has increasing issues with blackouts, high utility costs, and general cost-of-living increases. For instance, as of 2010, SDG&E, the major energy provider in the San Diego and southern California region, has seen consistent rate increases. Conversely, utility disconnections due to overdue bills and payments has also steadily climbed within this time period, suggesting that ratepayers are finding it more difficult to keep up with rising costs. Even more specifically, those burdened with these rate hikes are disproportionately minority groups in disadvantaged communities, who shoulder these costs for the benefit of disproportionately affluent areas that can afford EV’s.
Additionally, American seniors are keenly affected by these rate hikes. Per an AARP testimony in 2019 in Arizona, “twenty percent of Arizonans 65 and older rely on Social Security as their sole income source. Fifty percent get a substantial portion of their income from Social Security…[which] is about $17,500/year…Older Arizonans have much higher medical costs so many already [are forced] to choose today between, food, rent, medical care and very limited transportation…they cannot afford higher electric utility rates much less for electric vehicles.” Yet again, ratepayers are being conscripted to subsidize a service that they do not use, at the cost of their own well-being.
These specific examples are simply the tip of the iceberg. If the Biden E.V. plan is implemented, the consequences would be far more drastic than even the current rate hikes. If less fortunate groups are not benefiting from electric vehicles, why should they be forced to pay for them? Spiked electric utilities affect the poor and vulnerable more negatively than any other economic demographic. Utilities are a difficult commodity to live without, particularly within a family, and they should not be burdened with rate hikes for services they do not use. Simply put, lower income households are not driving electric vehicles, and the Biden plan not only gives them no incentive or ability to do so but punishes them for costs incurred by wealthier households, all while claiming victory because rate hikes caused by government action aren’t technically a tax. Tax or not, the cost to the American people is the same. The ploy is a cruel bait-and-switch tactic that misleads the American people and should raise red flags about the Biden administration’s friendliness to the American worker.
The COVID-19 pandemic introduced an unprecedented amount of uncertainty into transportation infrastructure planning. Travel fell significantly across all modes and remains depressed, particularly for shared transportation modes such as commercial air travel and mass transit. Changes in travel behavior may persist long after the coronavirus pandemic finally ends, particularly for commuting trips given that a large share of employees may continue working from home. Given this uncertainty, investments in new infrastructure meant to provide service for decades into the future are incredibly risky. As Congress considers surface transportation reauthorization in this low-confidence era, it should adopt a preference for the lowest-risk class of projects: maintaining and modernizing existing infrastructure under a “fix it first” strategy.
COVID-19 led to dramatic changes in travel behavior. By April 2020, when much of the country was under stay-at-home orders, road traffic fell 40%, mass transit ridership fell 95%, and air travel fell by 96%. Since then, road travel has largely recovered, with vehicle-miles traveled back to within 10% of the pre-pandemic baseline.
However, travel by shared transportation modes, such as commercial aviation and mass transit, was still down by approximately two-thirds year-over-year by the end of 2020, according to data collected by the Bureau of Transportation Statistics.
Travel is expected to continue its rebound as the number of people vaccinated grows and the pandemic wanes, but changes in travel behavior driven by factors such as the rise of remote work are likely to persist. To what degree pandemic-spurred changes in travel demand are permanent is unknown at this time, and this uncertainty has rendered pre-pandemic infrastructure planning and investment models nearly useless as accurate guides to the future.
While the drop in transportation demand and the fixed nature of transportation infrastructure supply has significantly reduced the productivity of existing transportation infrastructure, some are calling for large new investments by claiming that the nation’s infrastructure networks are crumbling. However, a review of the available evidence suggests a different and more complicated picture of infrastructure asset quality.
For example, Reason Foundation’s most recent Annual Highway Reportfound, “Of the Annual Highway Report’s nine categories focused on performance, including structurally deficient bridges and traffic congestion, the country made incremental progress in seven of them.”
Similarly, a June 2020 National Bureau of Economic Research (NBER) working paper on transportation infrastructure concluded, “Not only is this infrastructure, for the most part, not deteriorating, much of it is in good condition or improving.”
However, Reason’s Annual Highway Report shows large variation across states and the NBER analysis is limited in that it fails to account for transit infrastructure beyond rolling stock. Rail guideway assets such as tracks and signals have deteriorated in many cities. To be sure, there are sizeable transportation infrastructure needs in the United States. Reconstructing the Interstate Highway System alone has been estimated by the National Academy of Sciences to cost at least $1 trillion over two decades and mass transit’s maintenance backlog likely exceeds $100 billion.
Given all we know about existing transportation infrastructure needs and the uncertainty surrounding future travel activity, Congress should adopt a risk-minimizing “fix it first” strategy to restore our existing transportation assets to a durable state of good repair. This approach has been endorsed by organizations and think tanks across the political spectrum, from the progressive Transportation for America to the free market Competitive Enterprise Institute.
Building new infrastructure that will last three to five decades based on pre-pandemic travel modeling is fundamentally imprudent at this time. Physical capacity expansions such as highway widening and new rail lines should at the very least face heightened scrutiny from policymakers until there is more confidence in post-pandemic travel behavior that can be used in transportation infrastructure planning and investment decisions.