13 Questions That Advocates of Free Markets and Limited Government Should Be Asking

On January 20, Barack Obama was sworn in as the 44th president of the United States. The president and the Congress face a daunting economic situation. The previous president and Congress responded to collapsing credit markets by offering up taxpayer guarantees worth approximately half the annual gross domestic product of the U.S. economy. With an avowedly more liberal president and Congress in charge, the prospects for free markets and limited government seem dubious. We asked some of the most knowledgeable experts to give us the outlook on 13 of the most important policy issues. Here is what they told us. —Editor


Will Workers Have a Secret Ballot?

By Diana Furchtgott-Roth, Hudson Institute

IN DEMOCRACIES ALL OVER THE WORLD, millions of citizens go to the polls to exercise their fundamental right to cast secret ballots for political representatives. But President Obama has vowed to sign the misnamed Employee Free Choice Act, and thus to take away the right to secret ballots for workers deciding whether to join unions.

Contrary to its name, the main thrust of the bill is not to increase employees’ choices, but to limit them. Currently, if a sufficient number of workers petition the National Labor Relations Board to join a union, a private ballot election is held, which diminishes opportunities for intimidation by the employer or the union.

The Employee Free Choice Act would allow workplaces to be unionized without private ballots. Under this law, if a majority of the employees’ bargaining unit sign a “valid authorization,” then the workplace can be unionized.

A “valid authorization” is a signed card indicating that workers desire to join the union, providing opportunity for intimidation and corruption by exposing workers’ votes to employers, colleagues, and union officials.

Jennifer Jason, who spent four years organizing Unite Here, a union representing textile and hotel workers, described such intimidation tactics to the House Subcommittee on Health, Employment, Labor, and Pensions.

While visiting homes of workers to get cards signed, she “personally heard from workers that they signed the union card simply to get the organizer to leave their home and not harass them further.”

Although many workers subsequently changed their minds and asked to have the cards destroyed, this was never done, she testified. Ms. Jason quit because “these types of union practices pointed to a culture of corruption, and I was no longer willing to participate.”

The bill also requires binding arbitration if employers and unions cannot reach an agreement on compensation and working conditions. Firms and employees could be forced into unacceptable terms of work or pay. This unprecedented provision revokes the basic principle of collective bargaining—that employers and unions are free to disagree unless they voluntarily accept arbitration.

Why the rush to get rid of private ballots and impose mandatory, binding arbitration?

With union membership dropping to a record low of 7 percent of private sector workers, regaining membership is unions’ fundamental goal—hence Congress’s haste.

Fewer workers belong to unions because many unions price their workers out of jobs, sending jobs overseas or to more efficient non-unionized firms. Unionized Ford, General Motors, and Chrysler are demanding government bailouts, in contrast to Toyota, Nissan, and Honda.

Non-union firms have more flexibility to adapt to changing conditions than do unionized firms. States with laws protecting workers from being compelled to join unions as a condition of employment saw increases in nonagricultural employment of 70 percent over the past 25 years, double the 35 percent increase in states with no such worker protection.

We rightly castigate those countries that do not have fair secret ballot elections. President Obama should vow to preserve the secret ballot in America.


Will a Weak Economy Be Saddled with Greenhouse Gas Regulations?

By Iain Murray, Competitive Enterprise Institute

PRESIDENT OBAMA WILL FIND he faces two main problems in relation to greenhouse gas emissions, a domestic one and an international one.

Domestically, Mr. Obama the candidate promised to regulate carbon dioxide as a pollutant if Congress does not take action. This will be a real problem. The current rule proposed by the EPA to do exactly that will undoubtedly create regulatory chaos. As over 30 free-market groups have noted, the rule “would trigger a regulatory cascade throughout the [Clean Air] Act, imposing potentially crushing burdens on regulated entities and the economy.” So President Obama will be dependent on Congress taking action to avoid such a disaster.

The sort of Congressional action President Obama had previously backed as a Senator was a “cap and trade” program for greenhouse gas emissions, a form of disguised tax on energy use. This comes in two versions: a weak version in which emissions permits are distributed to emitting industries for free, and a strong version in which the permits are auctioned. Industry, especially power utilities, is actually quite keen on the weak version. The EU has adopted a weak scheme, which has led to windfall profit for utilities, increased bills for consumers, and—crucially—no reduction in emissions. This last point is why Senator Obama supported a strong cap-and-trade scheme in his campaign. However, a strong scheme will be strongly opposed by the same industry forces that support a weak scheme. It is unlikely to gain majority support in the Senate and will therefore force Mr. Obama either to adopt a weak scheme or to fall back on regulatory action.

Meanwhile, internationally there is strong pressure for the United States to agree to join a successor to the Kyoto Treaty at the planned Copenhagen summit in December 2009. Given the problems surrounding Kyoto, however, President Obama is unlikely to sign an international treaty before having a domestic program in place (although there are indications that he is seeking ways to agree to an international pact that does not rise to treaty status, requiring Senate ratification). This places the 2009 date in serious jeopardy, perhaps meaning that once again the United States will be viewed as delaying international action.

Moreover, there are two serious geopolitical problems that stand against a new treaty. First, developing nations refuse point blank to consider any emissions reductions, and they are rapidly overtaking the developed world as the primary source of emissions. Secondly, European nations are beginning to realize they are hurting themselves by adopting emissions restrictions. Italy has threatened to veto a new internal European Union deal, while Germany has insisted on exemptions for its large industries. It is therefore possible that the United States will again be the outlier on a climate deal, although this time pushing for stronger action rather than weaker.


Will More and More Business Mistakes Be Met with Jail Time?

By Andrew Grossman, The Heritage Foundation

“OVERCRIMINALIZATION”—WHEN LEGISLATORS USE the criminal law to address every perceived ill in society—is already a direct threat to free markets and limited government. Unless Americans speak out, the problem could get worse.

More than ever, Congress is keen to see businessmen (especially from Wall Street) behind bars, and seems likely to take a counterproductive “tough on crime” approach to addressing the financial crisis. And with tight budgets ahead, criminal laws are a cheap way to take a stand. The new administration’s inclinations could be the same, so don’t be surprised to see more executives in the dock at a time when the economy can least afford it.

This is a relatively recent problem. Not so long ago, only morally wrong acts, like murder and theft, could lead to criminal sentences, but those days are long past. Today, the federal code contains nearly 4,500 criminal offenses, and many of them have nothing to do with moral wrongs. Indeed, a good number even encompass behavior that is actually productive. Individuals have been prosecuted for packing lobster tails in plastic bags instead of cardboard boxes and for shipping minerals without a federally mandated sticker on the box.

This trend of overcriminalization imperils free markets, because it dramatically increases the costs of business and deters innovation. Under Sarbanes-Oxley, for example, executives of public companies face criminal liability for accounting misstatements, regardless of whether they knew or should have known about the errors. The result: Fewer talented individuals are willing to serve as CEOs, those who do demand more pay and insurance, and businesses spend more time and money on compliance than on their core activities. Overcriminalization also has social costs. In particular, “vicarious” criminal liability threatens entire companies with severe punishment, even their demise, due to employees’ bad acts. To avoid prosecution, some companies waive their rights, such as the rights to counsel and the attorney-client privilege, and demand that their employees do the same.

In this way, over-broad criminal liability gives the government enormous leverage to control businesses and individuals. For example, state attorney generals have recently used this power to coerce lenders into relaxing mortgage terms—to the detriment of future borrowers.

But over the long run, there is reason to hope. More people are realizing that using the criminal law to punish every bad thing or unpopular person has real consequences for individual rights and prosperity. Even some members of Congress have begun to get the message. Addressing overcriminalization will be a multi-year project, but the foundation is being laid now for bipartisan solutions at the federal level.


Will Fannie Mae and Freddie Mac Be Revived?

By Ronald D. Utt, The Heritage Foundation

CREATED IN 1936 TO SUPPORT the new-fangled, fixed-rate, level-payment, fully amortized mortgage offered by the newly created Federal Housing Administration (FHA), the Federal National Mortgage Administration (Fannie Mae) offers a wonderful case study in Ronald Reagan’s observation that a federal program is the closest thing we have to perpetual life. Ten years after its creation, as the post-war housing market embarked upon a 20-year boom that would lift homeownership rates to record levels, government had succeeded in making the new type of mortgage the market norm. Yet Fannie Mae and FHA continued on, largely because the influential mortgage finance industry became dependent upon their subsidies.

During the early post-war years, Fannie Mae was a minor player in the residential mortgage market, and its young brother, Freddie Mac, did not exist until the early 1970s. Nonetheless, despite the minor role Fannie played, the homeownership rate rose from 44 percent in 1940 to 63.3 percent in 1965.

While the homeownership rate held steady between 1965 and 1995—edging up to just 64.7 percent by 1995—the growth of the two government-sponsored enterprises (GSEs) soared, and by 1995 they controlled more than half the mortgage market, compared to just 6 percent in 1965. But again, despite the huge growth in the federal presence in the mortgage finance market, there were only minimal gains in the homeownership rate. A 2003 study by the Federal Reserve Board found that “the GSEs’ implicit subsidy does not appear to have substantially increased home-ownership.”

At the same time, skeptics argued that the GSEs imposed considerable risks and costs on taxpayers and the economy by concentrating so much power in highly leveraged, unsupervised banks controlling half the world’s largest housing finance market. In 2008, the worst-case scenario occurred when a wave of defaults rendered them insolvent, necessitating a costly federal takeover.

The Bush administration offered no plan for the future of the GSEs, leaving it up to the next administration, which has yet to indicate its intentions. Many in Congress and industry want to restore them to their previous status and continue their subsidies.

Given their minimal benefits, the better alternative is to prohibit them from making new loans and require them to wind down their portfolios through asset sales and the amortization of their holdings. As this is occurring, federal regulations must be reformed to restore the private mortgage business, which earlier federal regulations had destroyed during the 1960s and 1970s by severely limiting mortgagees’ ability to raise funds and diversify their loan portfolios.


Will Regulations Quash Political Dissent on the Airwaves?

By Brian Anderson, Manhattan Institute; and Adam Thierer, The Progress & Freedom Foundation

THERE ARE FEW BETTER EXAMPLES of the unintended consequences of government regulation than the hideously misnamed “Fairness Doctrine,” a regulation requiring balanced treatment of public affairs on the airwaves enforced by the Federal Communications Commission from the 1940s until the Reagan administration finally abolished it in 1987.

It would be better named the Censorship Doctrine. Despite the noble intention of promoting robust discussion of different viewpoints about issues of public importance, the rule has had the exact opposite effect. By setting up federal regulators as the ultimate arbiter of what people could or could not say on the airwaves, it stifled the robust exchange of views on broadcast television and radio, so much so that even the FCC eventually realized that it had a “chilling effect” on public speech and debate. As how could it not? Stations did not want to deal with government regulators looking over their shoulders, stopwatches out, determining whether various personalities or issues had received “fair” treatment, so they shied away from divisive opinion. “Timid, don’t-rock-the-boat coverage,” as one journalist put it, was the order of the day. From the outset, too, Washington politicians—both Democrat and Republican—used the regulation to hassle their critics on radio and television. It invited abuse.

The doctrine’s speech-chilling effect became abundantly clear after the doctrine was discarded and talk radio exploded—going from 100 or so talk radio programs nationwide in the early eighties to the thousands broadcasting today. The deregulation of the radio dial, moreover, opened the way for an abundance of conservative and libertarian viewpoints on the air.

The Left has been clamoring for the Fairness Doctrine’s reinstatement ever since, with many leading Democratic politicians, including Nancy Pelosi, endorsing the idea. When Air America struggles relative to Rush and Co., liberals claim a “structural imbalance” in the media marketplace and counsel more regulation as the answer. And it is not just the Fairness Doctrine we need to worry about. The Left also advocates, among other new media regulations, expanding “localism” mandates, with “community oversight” committees getting involved in the relicensing of stations—a kind of community organizing applied to media. If the Fairness Doctrine suppresses speech outright, localism simply compels speech that liberal political activists approve of. Yet in a world of limited broadcast hours, compelling one sort of speech means sacrificing the speech of another—and it would be right-of-center speech on the chopping black. This measure—aimed in particular at national syndicators that make conservative shows available from coast to coast—is a Fairness Doctrine by subterfuge.

For good measure, once they succeed in regulating private media back into the Stone Age, liberals also propose a significant ramping up of subsidies for public radio and television stations. One leading leftist proposal would even force private broadcasters to fund public broadcasters!

These proposals expose the Left’s true goal: to regulate private media outlets comprehensively and drive out those owners who dare to offer right-leaning alternatives.


Will “Fixing” Entitlements Mean New Taxes?

By Andrew G. Biggs, American Enterprise Institute

THE MAJOR ENTITLEMENT PROGRAMS—Social Security, Medicare, and Medicaid—constitute 40 percent of total federal spending. As entitlement spending increases, each year without action raises the cost of reform. As Federal Reserve Chairman Ben Bernanke told Congress last year, “The right time to start is 10 years ago.”

Social Security’s finances will decline due to a combination of over-generosity to early beneficiaries and changing demographics. Falling birth rates mean fewer new workers paying into the system, while rising life spans will increase the number of retirees claiming benefits. Between today and 2050, for instance, the United States will add 2.5 seniors over age 85 for each American under age 20, according to Americans for Generational Equity. As a result, Social Security’s benefit costs will exceed its annual tax revenues beginning in 2017. By the late 2020s the system will run annual deficits exceeding $200 billion (in today’s dollars) and the Social Security Trust Fund is projected to be exhausted by 2041.

Medicare and Medicaid face the same demographic problems as Social Security, plus one additional challenge: rapid increases in health care costs. Over the past three decades, health care costs have grown 2 percentage points faster each year than the economy as a whole. Health care cost inflation is a result of improved technology that makes new treatments available, rising incomes, and declining shares of total health spending paid out of pocket. Even without demographic changes, Medicare and Medicaid would face multi-trillion dollar deficits.

Closing Social Security’s deficits will require a reduction in benefit growth, increases in taxes, or a rising eligibility age. President Obama’s plans have focused on taxes. He proposes imposing a new payroll tax of between 2 percent and 4 percent on earnings over $250,000. In addition to the economic drag, this plan would solve only 15 percent of Social Security’s long-term shortfall.

On health care, Mr. Obama has focused on increasing coverage among the working age population, not on restraining cost increases in Medicare and Medicaid. Mr. Obama aims to generate $2,500 in annual savings per family through better management and quality control in health care, but outside analysts are skeptical regarding how much and how quickly these reforms could produce savings.

President Obama has brought on a strong economic policy team. While health and pension reform is a daunting task, if the Obama administration works in good faith with Congressional Republicans and outside stakeholders, then progress on fixing the major entitlement programs is possible.


Will Consumers Be Allowed to Choose Their Own Health Care?

By Grace-Marie Turner, Galen Institute

IF PRESIDENT OBAMA WERE PROMOTING a full-scale government takeover of the health sector, supporters and opponents alike would call the plan revolutionary. But because he has promised that nothing will change for people who like their coverage now, most people are unaware of the sweeping implications of what he is proposing.

His plan would in fact lead to the deterioration of the private health insurance market, with the federal government—read: taxpayers—financing health care for a growing share of the U.S. population.

ObamaCare would create a new National Health Insurance Exchange (NHIE) that would function as a clearinghouse for people buying insurance. Through the NHIE, participants would be able to purchase private coverage or buy into a new federal insurance plan.

This supposedly offers consumers choice, but Mr. Obama’s plan would also stipulate what type of coverage the private plans must offer. It would be a generous plan that today costs federal workers $14,000 a year for family coverage.

The new government health insurance plan poses the biggest danger to private insurance: The government would offer its own plan through the Exchange, and there would not be a level playing field. The government would be the referee as well as a player, able to change the rules to stay ahead.

This federal plan would have the benefit of government price-control and policing authority, as well as taxpayer-subsidized administrative overhead. The government plan would surely under-price private plans, putting them at a disadvantage.

In addition, Mr. Obama would issue rules that would further destabilize private insurance: He would require insurers to accept all applicants regardless of their health status and require insurers to charge higher premiums to younger people so older people would not have to pay so much for their coverage—called “community rating.”

The six states that have “guaranteed issue” laws have the six highest average premium prices. Of those, the three that also have community-rating laws—Massachusetts, New York, and New Jersey—have average annual family premiums roughly double the national average.

If the Obama plan were implemented, Americans would naturally flock to the new public insurance program, which at least initially would have a lower premium. Slowly but surely, private insurers would be supplanted by the public program. And the private coverage that Mr. Obama promises we can keep would vanish, leaving the American people with few options besides government-run health insurance.


Will Broadband Be Spread Through Subsidies and Mandates or Private Investment?

By Randolph J. May, The Free State Foundation

WIDESPREAD BROADBAND AVAILABILITY and usage increases productivity and benefits the nation’s economy. President Obama has said as much. Unfortunately, the policies he proposes tilt toward new regulations and government subsidies. If adopted, these policies will deter private investment in new broadband networks and waste public funds.

Mr. Obama has said he favors “net neutrality” regulations to ensure that the Internet remains “open” and “nondiscriminatory.” And he favors expanding the existing universal service system, developed in the analog age to subsidize the availability of voice service, to promote ubiquitous broadband deployment.

“Net neutrality” has a superficially appealing ring. But enforcement of new regulations that prohibit all discrimination by broadband providers against applications and content providers and require providers to allow any equipment to be attached to their networks will likely lead to traditional public utility regulation of broadband providers. While such regulation may have been appropriate during much of the last century when AT&T possessed monopoly power over narrowband analog communications, it is not appropriate in today’s competitive digital broadband environment. To a significant extent, cable operators, telephone companies, satellite firms, and wireless providers all compete in the broadband marketplace. If consumers are unhappy with their service, they will switch providers. By putting providers in a regulatory straightjacket, net neutrality mandates discourage investment in new facilities. This works against the goal of achieving ubiquitous broadband—and it is not helpful during a severe economic slump.

The goal of making broadband available everywhere is meritorious. But FCC data indicate there already are two or more broadband providers in 96 percent of the nation’s zip codes. Nevertheless, there remain communities, especially rural ones, without broadband. The way to address unserved communities is not by expanding the existing inefficient, untargeted “universal service” subsidy system that funnels subsidies to areas and persons that do not need them. Assuming subsidies are needed at all, they should be targeted narrowly only to unserved areas and funded from the general treasury, not from taxing selected communications services as is the case now. Reverse auctions should be held to determine the least-cost provider. At least then, a market mechanism would be introduced to make the subsidy regime operate more efficiently.


Will Energy Policy Continue to Be an Obstacle to Energy?

By H. Sterling Burnett, National Center for Policy Analysis

PRESIDENT OBAMA HAS STRESSED the need to create green jobs—primarily in the energy sector. This means expanded subsidies and grants to renewable energy providers (both factories and utilities) as well as money for automakers to retool and produce electric, hybrid-electric, and hydrogen fuel cell vehicles. In addition, as part of a public works program, Congress and the administration might include money for the construction of a national grid—power lines stretching from the Midwest (where the new renewable energy will be built) to the East and West coasts.

Renewable energy sources already receive more dollars in subsidies per the amount of energy delivered than any other source of electricity, and they still cannot compete in the marketplace. A national grid would be both a further subsidy for renewable energy producers and a danger to property rights. It will not always make sense to run power lines across public lands, but even when that is the best route, environmentalists will likely fight it, which leaves only private property. In such instances, the rights of landowners may be threatened by eminent domain proceedings.

While it is unlikely that Congress or the administration will have the political stomach to ban all new offshore exploration and production completely (as the recently lapsed moratoria did, outside of select areas in the Gulf of Mexico and off Alaska’s coast), one should not be surprised to see them attempt to implement a more limited ban on new offshore production. With dramatically lower oil prices and an expanded Democratic majority, Congress and the administration will likely try to place at least some areas off limits—e.g.,  within 50 miles of the U.S. coast, and off the West coast and the Northeastern seaboard entirely.

Finally, though President Obama recently withdrew his support for a windfall profits tax on the oil industry, if prices rise again, one should not be surprised to see Congress and the administration hold a new spate of hearings into “profiteering” by big oil and renewed calls for a windfall profits tax as a way to force the industry to shift its focus to different sources of energy.

The common thread of these proposals is that the cost of each will likely exceed its benefits. In addition, they will result in unintended negative environmental and economic consequences while producing insufficient, and insufficiently reliable, energy to meet the needs of a growing economy.


Will Corporate Taxes Remain High?

By Scott Hodge, The Tax Foundation

WE ARE NOW IN A RECESSION, and the discussion centering on policies that act as economic “Band-Aids” is not adequate as we enter a new year and a new administration. While Washington is mired in discussions of how far government should go in bailing out certain industries, a very important discussion about taxes and how it affects America’s economic global competitiveness is being ignored.

An August study from the OECD shows that the U.S. corporate tax rate is now 50 percent higher than the average among our counterparts in the industrialized world. In a Tax Foundation study done that same month, even our effective marginal corporate tax rate was only average among those same countries. This comes on the heels of another recent OECD study showing that corporate taxes are the single most harmful tax to economic growth, more so than personal income taxes or consumption taxes.

According to a KPMG survey released in September, 23 countries have lowered their corporate tax rates this year, and no nation has raised its rate since last year. Sweden announced a series of proposals to improve its business climate, including a plan to cut its corporate tax rate from 28 percent to 26.3 percent to help Swedes return to the job market instead of living off of subsidies. Can American policymakers do the same?

One of the problems is a lack of understanding that, ultimately, people pay all taxes. Politicians like to make corporations appear unworthy of any tax relief, but workers and families ultimately bear the burden of our business taxes. The federal corporate income tax quietly taps family pocketbooks for nearly $370 billion per year in the form of higher prices, lower wages, and poorer return on investment. In 2006, that burden averaged $3,190 per household. That is more than the average household spends on restaurant food, gasoline, or home electricity in a year.

There is a real impact for Americans as we continue to sit idly by while other countries improve the way they do business, and we should be very concerned about jobs, capital, and investments moving from high-tax countries to low-tax countries. This is a long-term problem that needs long-term vision to solve. America can no longer afford to have a stagnant business-tax system that threatens our position within the global marketplace.


Will Educational Choice Be Preserved?

By Matthew Ladner, Goldwater Institute

PARENTAL CHOICE IN EDUCATION faces formidable political enemies (led by the education unions and other education reactionaries). But we should not fail to take note of the real gains achieved over the last 18 years since the creation of the first modern choice programs. Nationally, nearly one-fourth of K–12 students attend schools other than their zoned public schools, opting instead for an array of public and private options—open enrollment, magnet, charter, private, and home schools.

Supporters of parental choice find themselves trapped in a slow war of attrition with defenders of the status quo. But it’s a war they are winning.

Lawmakers created the first charter school law and modern voucher programs in the early 1990s. On the private school choice side, lawmakers have created 24 separate school voucher and tax credit programs around the nation, aiding hundreds of thousands of students. Today, 4,500 charter schools educate 1.3 million students. Even more families (some estimates exceed 2 million students) have chosen to home-school their children.

The major challenge to the choice movement will continue to be resistance from the reactionary public school establishment, including but by no means limited to the education unions.

Choice faces other, more subtle obstacles. Most of the voting public has already exercised pocket book choice—carefully selecting their house according to public school attendance boundaries. African-Americans and Hispanics, stuck with the most dysfunctional public schools, show stronger support. Public support has begun to translate into supportive votes among African-American and Hispanic legislators. Half of all African-American Florida legislators voted for a major expansion of private choice in 2008. And African-American Democrats played a leading role in the creation of Louisiana’s voucher program for failing schools in 2008.

The parental choice movement will face many obstacles: We are likely to see a pattern of two steps forward, one step back. The late Daniel Patrick Moynihan noted “if [parental choice] prevails only as a conservative cause, it will have been a great failure of American liberalism not to have seen the essentially liberal nature of this pluralist proposition.”

Over the next four years, this hypothesis will be put to the test, as Congressional Democrats debate whether to preserve a voucher program for low-income District of Columbia children. The fates of almost 2,000 children will hang in the balance, including the classmates of Barack and Michelle Obama’s children.


Will New Barriers to Free Trade Be Erected?

By Fran Smith, Competitive Enterprise Institute

SPECIAL INTERESTS ARE DEMANDING that President Obama back up his campaign promises on international trade—including renegotiating the North American Free Trade Agreement (NAFTA), inserting stringent labor and environmental standards in existing and future trade pacts, and enacting carbon tariffs on countries deemed not to be doing enough to curb their greenhouse gas emissions.

The new president cannot completely renege on these protectionist campaign pledges. His labor and environmental allies will not allow that. However, other realities—the worsening financial situation, the Detroit automakers’ crisis, and the specter of a long and deep recession—may temper many of those policies.

President Obama will likely focus his early efforts on domestic policy on devising economic stimulus packages and job creation schemes, and providing more assistance to workers who ostensibly lose their jobs because of trade. However, he may be constrained in moving beyond that.

Some trade observers have said that President Obama may move quickly to end tax breaks for companies that outsource jobs overseas and reopen NAFTA. Were the Obama administration to pull back from NAFTA, how would Canada and Mexico, our two biggest oil suppliers, retaliate?

Mexico is also a strong U.S. ally—along with Colombia—in a region where many countries are going increasingly leftist. Turning against our Latin American allies with new trade demands would foment more anti-Americanism and play into the hands of populist demagogues like Hugo Chávez of Venezuela.

Asian countries also have concerns about future U.S. trade policy—the threatened renegotiation of the U.S.–South Korea Free Trade Agreement, a push for China to loosen currency controls, and a possible increase in duties on certain Chinese imports. Also, Asia’s major trading countries have regional and bilateral free trade agreements concluded or under negotiation with each other.

The new president cannot ignore such developments; to do so would set up the United States as more isolationist than its major trading partners. In recent years, the sustained growth of U.S. exports has been one of the few positive economic developments in a faltering economy. If closer ties with trading partners are not negotiated, the United States stands to lose out on increased economic growth through trade.

Despite his past pronouncements, President Obama may yet eschew such proposals from the more radical wing of his party. He has assembled a formidable economic team. Given the country’s current economic situation and long-term interests, they should abandon protectionist trade policies that would further harm our fragile economy and isolate the United States internationally.


Will Taxpayers Be Forced to Subsidize Fiscally Irresponsible States?

By Jonathan Williams, American Legislative Exchange Council

FIRST IT WAS $700 BILLION for the financial sector, then auto industry executives pounded a path from Detroit to Washington, seeking billions in taxpayer dollars to assist their ailing industry. Then, in early December, the National Governors Association convened a meeting with President Obama in Philadelphia to discuss the economic downturn and lobby for a federal bailout of the states.

There is little question many states are in dire financial straits today. Roughly 41 states faced budget deficits for fiscal year 2009 or are projecting deficits for fiscal year 2010, which starts on July 1 for most states. Analysts are projecting a cumulative deficit of $97 billion for the states during that period.

While the rosy fiscal times enjoyed by the states over the past few years have clearly disappeared, important questions need to be addressed before rubber stamping a multi-billion-dollar bailout of the states: (a) What was the cause of the current budget problems in the states? (b) Should the federal government spend taxpayer dollars to bail out the states in this economic downturn?

States are not facing budget deficits because they don’t tax enough. The real problem facing states is too much spending. State spending has grown at an unsustainable rate over the past decade. In fact, state spending is up 124 percent over where it was just 10 years ago, and state debt increased by 95 percent during that same period.

In many cases, the states that are facing the worst fiscal climates are the very same states that engaged in reckless spending. The federal government should not be in the business of rewarding states that have simply overspent taxpayer dollars.

There is another very good reason why state officials should be worried about a federal bailout: When has the federal government ever given money to the states without countless strings attached? A study conducted by the American Legislative Exchange Council during the post-9/11 economic downturn estimated that “every one dollar more of federal assistance increases state and local budget deficits by over 62 cents.” It is clear that the many strings accompanying federal dollars impose significant burdens on the states.

State budgets have faced financial duress many times before because of overspending, and probably will again in the future. History suggests federal bailouts are not the answer, as they decrease state sovereignty, incentivize future fiscal irresponsibility, and reward fiscally imprudent states at the expense of fiscally responsible states.

Unfortunately, the “do something” disease will continue to plague Washington for the foreseeable future. If this results in spending additional taxpayer dollars to rescue states who mismanaged taxpayer dollars in the first place, it will only spiral them into a cycle of federal dependency, further encouraging fiscal irresponsibility. Let’s hope that is not the case.