Reason Foundation

We Must Take UN’s Internet Grab Seriously

Posted on June 21, 2012, 5:06pm | Steven Titch

Thanks to our friends Jerry Brito and Eli Dourado at George Mason University's Mercatus Center, and the anonymous individual who leaked a key planning document for the International Telecommunication Union's World Conference on International Telecommunications (WCIT) on Jerry and Eli's inspired WCITLeaks.org site, we now have a clearer view of what a handful of regimes hope to accomplish at WCIT, scheduled for December in Dubai, U.A.E.

Although there is some danger of oversimplification, essentially a number of member states in the ITU, an arm of the United Nations, are pushing for an international treaty that will give their governments a much more powerful role in the architecture of the Internet and economics of the cross-border interconnection. Dispensing with the fancy words, it represents a desperate, last ditch effort by several authoritarian nations to regain control of their national telecommunications infrastructure and operations

A little history may help. Until the 1990s, the U.S. was the only country where telephone companies were owned by private investors. Even then, from AT&T and GTE on down, they were government-sanctioned monopolies. Just about everywhere else, including western democracies such as the U.K, France and Germany, the phone company was a state-owned monopoly. Its president generally reported to the Minster of Telecommunications.

Since most phone companies were large state agencies, the ITU, as a UN organization, could wield a lot of clout in terms of telecom standards, policy and governance--and indeed that was the case for much of the last half of the 20th century. That changed, for nations as much as the ITU, with the advent of privatization and the introduction of wireless technology. In a policy change that directly connects to these very issues here, just about every country in the world embarked on full or partial telecom privatization and, moreover, allowed at least one private company to build wireless telecom infrastructure. As ITU membership was reserved for governments, not enterprises, the ITU's political influence as a global standards and policy agency has since diminished greatly. Add to that concurrent emergence of the Internet, which changed the fundamental architecture and cost of public communications from a capital-intensive hierarchical mechanism to inexpensive peer-to-peer connections and the stage was set for today's environment where every smartphone owner is a reporter and videographer. Telecommunications, once part of the commanding heights of government control, was decentralized down to street level.

There's no going back. Even authoritarian regimes understand this. Fifty years ago, when a third-world dictatorship faced civil strife, it could control real-time information by shutting off its international telephone gateway switch. Not so today. So much commerce, banking, transportation and logistics depends on up-to-the-second cross-border data flow that no country, save for truly isolated regimes such as North Korea, can afford to cut themselves off the global Internet, even for one day.

That's why it's no surprise that the authoritarian regimes of China and Russia, supported by even more despotic states such as Iran, are spearheading the UN/ITU effort. Their politically repressive regimes can't function with the Internet, but their economic regimes, tied as they are to world trade, can't function without it. That's why attempts at Internet control have to be more nuanced and cloaked in diplomacy. 

As we see in the leaked documents, their agenda is masked as concerns about computer security and virus and malware detection, or in arguments about how nation-states have a historically justifiable regulatory responsibility for setting technical standards for IP-to-IP connections. But dig deeper and you find their proposed solutions would give them the power to read emails, record browser habits and extort fees from web sites and services such as Google, Facebook and Twitter (if they aren't going to block them completely).

In the long run, it is doomed to fail. As an organism, the Internet defies top-down control. Every time a country attempts to impede certain types of Internet communications, via firewalls, filters, or outright domain name blocks, individuals create workarounds. It's not that difficult.

That simple fact might engender complacency among netizens here in the U.S. And besides, speaking out against ominous plots by UN agencies makes us sound too much like the nutty neighbor with the backyard bunker.

But there are serious risks to what the ITU and the UN are attempting. Even if only gets part of what it wants, the ITU's Internet grab stands to seriously damage the global free and open Internet.

First, as a multi-lateral "international" agreement, the ITU plan will give repressive regimes cover for Internet clampdowns. Even if the U.S. does not sign on, all it will take is buy-in a few other Western governments, who might just see the treaty as convenient (see the U.K.'s recent Home Office ideas), to allow the more egregious dictatorships in the world to take repressive action.  

The U.S. should be leading all democratic governments in speaking out against the ITU plan. A weak-willed "I'm-OK-you're-OK" approach, or worse, a non-judgmental relativism that suggests American ideas of Internet freedom should defer to a more repressive country's "national culture," are simply not acceptable.  

It seeks to displace multi-stakeholder development. The collaborative culture of the Internet, driven by consensus and undergirded with a commitment to open standards and platforms, is the ITU's primary target. When a nation-states make rules for phone networks, they can specify equipment, favor their domestic manufacturers, create cumbersome compliance rules, and ban possession of non-compliant devices all with the force of heavy-handed law. This is hardly far-fetched. Ethiopia has made Internet phone calls (i.e. Skype) illegal.

It seeks to normalize government regulation of the Internet. For more than 30 years, deregulation has been the predominant policy toward the Internet. This trend has managed to hold on despite numerous attempts at censorship, "neutrality" regulation and price controls. The most common proposition we hear runs to the effect of the Internet has become so important that it needs regulation. Frankly, the Internet has survived and thrived since its beginning without top-down state regulation. Worldwide access continues to grow. By and large, international data networks operate reliably and inexpensively. If anything, the burden of proof for regulation of the 'Net should be ever higher. Why, exactly, do we need an international regulatory regime for the Internet? So far those who would impose one haven't said so. And sorry to say, because citizens are taking to the streets with their iPhones and demanding basic freedoms is not an acceptable reason.

Video: French and Greek Elections Were Not Proof Austerity Doesn't Work

Posted on May 8, 2012, 10:18am | Anthony Randazzo

Over the weekend France elected a new president, the Greeks shuffled their parliamentary make up, and Germany's leading party lost some local elections. The votes are viewed as a push back against the way European governments have handled the continent's sovereign debt crisis. Some analysts have been quick to argue that this proves austerity doesn't work. 

And that is the basis of the debate in the video below, a panel discussion from RT last night. However, I argue that this doesn't prove much of anything about austerity in general. Citizenry are not to be blamed for being upset with austerity measures. The whole point is that it doesn't feel good to get your fiscal house in order after a spending binge. The democratic reaction doesn't suggest the viability of the plan's capacity to achieve its goal of reducing government debt. 

While the elections don't say anything about the viability of the idea of austerity, at least the Greek election suggests that the form that austerity has taken in Greece is not the best approach. The big winners in the parliamentary elections were groups that despise outsiders and want to take back control of their country. Their win was the Greek people (at least the very low 65 percent of them that turned out to vote) saying it is unfair for Greece to take sharp budget cuts while still being saddled by the Euro so that the rest of Europe can avoid GDP losses that would occur if Greece left the European monetary union today. Eventually they will have to leave, but for now Europe gets to wall off that threat and plan for an orderly break.

In France, the election could also be seen as a nationalistic movement. All indications are that the vote was more anti-Sarkozy then pro-Hollande. There is a bit of populism that likes his tax the rich mentality. But Hollande seem to win over France with his Mr. Normal pitch vs. Sarkozy's flashy style that has worn out its welcome in France. Moreover, there could be some frustration in France that Sarkozy allowed Germany so much run of the house on the debt crisis negotiations. Germany will now have to deal with a more nationalistic government when sorting out coordinated actions to bail each other out.

(Side note on Greece: it is unlikely they will be able to form a government that lasts. The two parties receiving the most votes only form about 30 percent of the parliament, making it necessary for a big tent coalition to work out in order to avoid a new election. And even if that happens, such a coalition will be very susceptible to the need to make big decisions on budget cuts and handling negotiations with the rest of Europe. Further complicating the matter is the scatter shot approach that the Greek populace took in their choice of representatives this year. Not only did a far-right, neo-nazi group get 20 seats, but a far-left, old line communist group also got more votes then they'd seen in a long time. History does not need to be consulted that far back to suggest that the combination these two failed ideologies mixing as one is not likely to be the chemistry needed to get Greece on solid footing.) 

Why is Europe So Delusional on Greece?

Posted on February 24, 2012, 2:32pm | Anthony Randazzo

Earlier this week I noted that Europe was trying to buy time with this bailout package offer. Here are a couple of more clarifying explanations for why the EU’s economic ministers are lying to us about this bailout of Greece having the possibility of success what Europe is trying to buy. Hans-Werner Sinn being interviewed by Spiegel Online:

SPIEGEL ONLINE: Why are the euro-zone countries so adamant that Greece must remain in the currency?

Sinn: This isn't really about the country. The Greeks are being held hostage by the banks and financial institutions on Wall Street, in London and Paris who want to make sure that money keeps on flowing from government bailout packages -- not to Greece, but into their coffers.

SPIEGEL ONLINE: What about the contagion that a bankruptcy or a Greek exit would involve? Financial markets may speculate that other countries will suffer a similar fate as Greece.

Sinn: There may be contagion effects. But I think this argument is being instrumentalized by people who are worried about losing money. People keep on saying "the world will end if you Germans stop paying." In truth only the asset portfolios of some investors will suffer.

And then there is Bill Frezza writing for Forbes about the endless attempts to avoid a “credit event”:

Now those same idiotic bankers, along with the French and German politicians they control, are conspiring with the Greek government to pretend they can fix the problem by forcing private bondholders to “voluntarily” swap one set of worthless bonds for another set of worthless bonds, without acknowledging a default that in a sane world would be all but inevitable.

The reason for this urgency? Private holders of these worthless bonds also hold hundreds of billions in insurance that would have to be paid to them should those bonds fail. And who are the sellers of these insurance policies? Why, the same idiotic bankers who control the French and German politicians!

European politicians don’t want their banks going down, and banks figure this bailout is the cheaper option. Sounds like incentives to lie.

Greece Will Default

Posted on October 13, 2011, 12:04pm | Anthony Randazzo

The Germans and French got their European Financial Stability Facility expansion last week, though details surrounding how the EFSF will operate remain murky. But now the focus returns to Greece, and whether the Greek government can satisfy demands to avoid technical default. 

The reality is, though, that Greece is going to default. As our president likes to say, its just simple math. You can take that to the bank. (Just not a Greek bank.)

Let’s start with the fact that recent projections have the Greeks missing their deficit reduction target considerably:

Greece is likely to miss the deficit targets agreed as part of July's bailout package, which would cast further doubt on its ability to steer safely through its current financial crisis and will send new tremors through global financial markets.

As the country's cabinet agreed a controversial plan to begin laying off 30,000 state workers, its latest budget plan indicated a deficit of 8.5% of GDP this year, missing the 7.6% target agreed with the European Unionand the IMF. In 2012 the deficit is expected to fall to 6.8% of GDP – above the year's 6.5% target. A recession that has been worse than expected is behind much of the increase. According to Reuters, Greece expects its economy to contract by 5.5% this year and 2% next.

But it gets worse. Suppose for a moment that the Greek government reached deeper with cuts, were able to avoid a long-term tax collector strike, and somehow make their deficit target this year. The reality is that their stack of bills are just too high to imagine getting away without getting creditors to take some kind of haircut.

Greek debt-to-GDP is currently close to 175%. To put this in context, Greek debt-to-GDP should be closer to 60% or 70%. 

The credit default swaps market is pricing the probability of a Greek default at 99.9%—a stunningly sharp bet, and potentially damning for Portugal at 62%, Ireland at 51%, Italy at 33%, and Spain at 28%. 

Reports today are that discussions are underway for an orderly default, with creditors taking a 40% haircut (more than the 21% that had been floating around in the past months). Whether or not a deal gets done in this framework, the bottom line is that Greece can not afford the interest payments on their massive debt long time. They’ve been going to the wrong way on deficits—just consider that their fiscal deficit was 2.5 billion euros higher in the first two quarters of 2011 than the same period last year—and the political will to cut everything isn’t there. And even cutting everything would probably miss a debt payment eventually.

Kyle Bass has made/is going to make a lot of money.

Congress Passes Free Trade Deals

Posted on October 13, 2011, 8:13am | Anthony Randazzo

Who says Congress can't do anything good? The House approved the three pending free trade deals yesterday, after they had already been voted through in the Senate:

The South Korea deal passed the Senate by a vote of 83 to 15, and the Panama deal passed 77 to 22. The agreement with Colombia, often considered the most controversial of the three, also passed with a solid majority with a vote of 66 to 33. The House approved the bills earlier in the evening with Korea receiving a vote of 278-151; Panama passed 300-129; and Colombia was approved by a strong margin of 262-167.

The deals will certainly be signed by the White House, so now the attention shifts to South Korea and their parliment, which has to approve the trade deal.

Of course, all this is not to say Congress can do anything perfect. In fact, the expansion of the TAA program as a part of these trade deals significantly lowers their positive impact. And there was plenty of debate on this front:

Democratic Rep. Jan Schakowsky, a friend of President Barack Obama's from his home state of Illinois, called the Korea pact a "bad deal for American workers," during debate Wednesday. Congressional Democratic leaders including Senate Majority Leader Harry Reid of Nevada and Rep. Rosa DeLauro of Connecticut opposed the president on the pacts.

Republicans and business-group backers, led by the U.S. Chamber of Commerce, were almost united in support of the agreements. "Today, the House passed on a bipartisan basis some of the most important job-creating legislation in the last several years by approving our trade agreements," said House Ways and Means Chairman Dave Camp (R., Mich.).

Yet some Republicans opposed the pacts because their states could be hurt by them. The deals will provide fresh competition to the U.S.'s already-battered textiles, electronics and manufacturing industries, a fact that drew at-times emotional protests from organized labor, factory workers and the legislators that represent them.

To soften the blow, Mr. Obama demanded that Congress renew Trade Adjustment Assistance, a program that provides enhanced unemployment benefits to workers displaced by globalization. After months of delay, legislation renewing the program in a less-costly form was fast-tracked by Congress this week.

See the whole story from WSJ here.

See our comments on the three trade deals here: South Korea, Panama, Colombia. 

Free Trade as Economic and Social Development Driver

Posted on October 7, 2011, 8:03am | Anthony Randazzo

A couple of weekends ago, Matt Ridley had a piece in the Wall Street Journal noting “that human collaboration is necessary for society to work; that the individual is not—and has not been for 120,000 years—able to support his lifestyle; that trade enables us to work for each other not just for ourselves; that there is nothing so antisocial (or impoverishing) as the pursuit of self-sufficiency; and that authoritarian, top-down rule is not the source of order or progress.”

There are currently three free trade deals pending approval from Congress. We looked at each of them this past week on the OOC blog, noting the positive and negatives in the deals.

• U.S.-South Korea Free Trade Agreement
• U.S.-Columbia Free Trade Agreement
• U.S.-Panama Free Trade Agreement

In each case, the negatives were ways in which the FTAs failed to fully advance trade and individual freedom, or overly relied on authoritarian ideas that have the effect of limiting collaboration. Still, the trade deals would do a lot of benefit the American economy and job market.

The United States should not stop with these deals. There no good reasons to oppose advancing more bilateral trade talks, such as a Transatlantic trade pact or FTA with a nation like Turkey. The problem is that the White House isn't really a big fan of free trade. Jagdish Bhagwati wrote last week:

America’s president is captive to the country’s labor unions, who buy the false narrative that trade with poor countries is increasing the ranks of the poor in the US by driving down wages. In fact, however, there is plenty of evidence for the rival narrative that rapid and deep labor-saving technological change is what is putting pressure on wages, and that imports of cheap labor-intensive goods that US workers consume are actually offsetting that distress... Again, someone needs to tell Obama that imports create jobs, too, and that his emphasis on promoting US exports alone is bad economics.

Also, see the whole Ridley piece here and check out some of Ridley’s interviews with Reason.tv:

Free Trade Agreement Review Series: Panama-U.S.

Posted on October 6, 2011, 8:57am | Anthony Randazzo and Devin Roundtree

The White House looks to be officially submitting to Congress the three pending free trade agreements (FTA) sometime next week. This is something that we and a chorus of others have argued should be a priority for the White House and we hope that Congress acts on addressing the FTAs immediately. But the trade deals are not perfect, as we noted yesterday in looking at the Colombia-U.S trade promotion agreement that included unnecessary exporting of bad American labor regulation. And earlier this week we looked at some of the benefits of pending South Korea-U.S FTA while noting Congress should avoid expanding the Trade Adjustment Assistance program as a part of ratification.  

Today we finish our three part trade agreement review series and praise the value of the Panama—U.S. Trade Promotion Agreement, but also note a key flaw in the deal that will limit its value to America that all should be aware of in ensuring we have proper expectations on what economic changes we will see if Congress ratifies this pact:

The Panama-U.S. trade pact is the third that awaits approval in Congress, and it is structured very similar to the agreements struck with South Korea and Colombia. Once ratified by Congress this FTA would immediately eliminate tariffs and quotas on 87 percent of American consumer and industrial exports to Panama, with the remaining duties to be removed over a 10-year period. Industrial and agricultural products carry a 7 percent and 15 percent average tariff respectively, and a 0 percent rate will provide a boost to American manufacturing. Given the heavy business currently being done by American firms like Caterpillar, who is heavily invested in providing equipment for the $5.25 billion expansion of the Panama Canal. In fact, construction equipment accounted for $280 million in U.S. exports to Panama last year, and American businesses in this sector stand to benefit significantly from the reduced tariffs. The FTA will also open Panama's $20.6 billion service industry to American businesses, and this will benefit numerous of industries including telecommunications, finance, and distribution. 

What makes this trade deal distinguishable from the other two at hand is that it calls for “tax transparency” on the part of Panama, and its status as a major offshore banking center turns this innocent trade deal into a backdoor for crackdowns on tax evasion. When it comes to hunting down tax evaders, the Organization for Economic Cooperation and Development (OECD) leads the way, and the trade agreement pushes Panama to conform to tax compliance rules created by the OECD.

Tax evasion is merely the practice of American firms avoiding over-burdensome tax rates in the United States—rates which are the second highest corporate tax rates in the world, and will soon be the highest when Japan goes through with its approved corporate tax rate reduction. The easiest way to get Americans to pay taxes is to simplify the code, remove double taxation provisions—like the idea of a corporate tax in the first place—and use the resources spent trying to get those using tax havens like Panama instead on ensuring that Americans at home are not straight up lying on their tax returns. 

President Obama demonizes wealthy Americans on a daily basis for not paying their “fair share” of taxes and in order for his John Hancock to appear on this trade deal, it'll probably have to provide good news for the IRS. The Associated Press did a fact check recently on the president’s definition of fair share and came up with a damning report. There is no reason for this provision in the Panama-U.S trade agreement. 

At the turn of the 20th century, the U.S. was the fastest growing economy in the world partly because it was a safe haven from taxes. There were no federal or state income taxes, no payroll taxes, no capital gains taxes, and no corporate taxes. Looking at how to go back to this era of tax policy should be the focus of the government, not provisions like this concession in the Panama-U.S. trade agreement to go after those who use Panama as a tax haven. Though all those people have probably used their money by now anyway so it might not matter. 

See our previous post on the South Korea-U.S. free trade agreement from earlier this week for more on free trade theory. Also see yesterday’s post looking at the good and bad in the Colombia-U.S. free trade agreement. 

Free Trade Agreement Review Series: Colombia-U.S.

Posted on October 5, 2011, 2:44pm | Anthony Randazzo and Devin Roundtree

The White House has said it plans tomorrow or early next week to officially submit to Congress for ratification the three free trade agreements (FTA) on which it has completed negotiations. This is something that we and a chorus of others have argued should be a priority for the White House and we hope that Congress acts on addressing the FTAs immediately. But we do feel it is important to point out that the trade deals are not perfect. In first installment in this three part series yesterday, we looked at some of the benefits of, as well as problems with, the pending South Korea-U.S. FTA. 

Today in the second installment of the trade pact review series, we praise the value of the United States—Colombia Trade Promotion Agreement, but also establish some rational expectations on what value it will bring to America:

Once approved by Congress, the Colombia-U.S. trade agreement will immediately eliminate 80 percent of tariffs on goods exported from America to Colombia, with the remaining tariffs withdrawn over a 10-year period. An estimated $1.1billion will be added to our exports, which will increase payrolls by the thousands. The trade deal is even projected to increase GDP by $2.5 billion (note: despite the government's recent track record on economic forecasting, the deal will surely bring some positive changes). But as government negotiators are accustomed to doing, the agreement also encourages the exportation of American labor regulations to Colombia—the same kind of regulations that have contributed to the decline in the number of manufacturing jobs in the U.S. as employers seek more business friendly climates elsewhere. (It is worthwhile to note that inflation, low savings, high taxes, and increased efficiency are larger contributors to the decline in the number of manufacturing jobs.)  

The specific language in the agreement that we see adding shackles to business activity includes this clause: “Colombia will change its laws to make it a crime, punishable by imprisonment, for an employer to negotiate special deals (collective pacts) with non-union workers with better terms than union contracts.” The premise for these regulations is the oft-manhandled idea of “workers' rights” yet in a free market workers' rights to demand employment from others don't exist—rather, the threat of losing all potential labor and reputational risk help keep firms from abusing workers. 

Workers have the same rights as any other human being, whether they work or not. To suggest otherwise is to assume that workers have some kind of special ownership over the ideas or employment potential of job creators/business owners. In this sense, workers' rights are nothing more than privileges granted to unions that force businessmen (and woman) to lose their individual rights as soon as they offer someone a job. By making it illegal for non-union workers to negotiate freely with employers, workers' rights ironically strip certain individuals of the right to offer and accept labor/services in a free economy. 

In absence of these regulations, worker-employer relations would be simple: if the workers don't like their employers they are free to quite and vice versa. If the employer treats their employees bad, this reputation will make it difficult for them to hire and produce. Employers that offer low wages and tough working conditions experience high turnover rates, which equates to high labor costs. Profit incentives eventually force employers to find ways to increase worker productivity so higher wages are possible. 

This also leads to safer and more enjoyable working conditions, which create careers out of jobs. All of this explains why and how Henry Ford was able to double wages to $5 a day while cutting working hours from 10 to 8; this also occurred prior to the creation of the Department of Labor. Now, however, American labor regulations turn the process of creating higher wages and better working conditions on its head, and the consequence is increasing labor costs that employers can't offset and outsourcing. 

But we have derailed a bit into labor theory. The point is that this trade pact is promoting the bad parts of labor regulation that we have in the U.S., and would not be beneficial for Colombia. It remains a question how warmly the Colombian government will enforce the provision. If they fully implement this clause of the FTA though, it will slow production of goods sent to the U.S. and raise their prices such that American consumers may never see the price reduction benefits that were a leading reason to pursue this Colombia-U.S. trade promotion agreement. 

See our previous post on the South Korea-U.S. free trade agreement from yesterday for more on free trade theory. Tomorrow we will look at the third and final FTA pending before Congress, between Panama and the U.S. 

Update 5pm:

The Senate Ways and Means Committee approved the Colombia pact 24-12 this afternoon and sent it to the Senate Finance Committee.

Free Trade Agreement Review Series: South Korea-U.S.

Posted on October 4, 2011, 7:18pm | Anthony Randazzo and Devin Roundtree

The White House is officially submitted to Congress on Monday the three free trade agreements on which it has completed negotiations for ratification. We and other groups encouraged the President to include putting a priority on ratifying the trade agreements as a part of his jobs plan announced last month (see our short-term ideas for employment growth). Federal programs are not what gets the jobs market moving again, but they will help some, and they will not hurt the long-term employment outlook in America, particularly because free trade deals allow less expensive exports (with tariffs removed) to replace less efficient production of goods in the U.S. and free up that labor for more productive capacity. 

That being said, these free trade agreements (FTA) are not perfect, and in the spirit of rational expectations, we wanted to provide a brief overview of what is in these FTAs and what we should anticipate their benefit to the American economy and jobs market will be. Today we begin a three part series, and will have a new post up tomorrow and Thursday to complete the series.

We start with United States – Korea Free Trade Agreement: 

Hailed as “the most commercially significant free trade agreement (FTA) in more than 16 years,” under the pact, 95 percent of consumer and industrial imports between the U.S. and South Korea will become free of tariffs, quotas and everything in between within 3 years. The majority of the remaining duties will be erased over a 10-year period. The U.S. International Trade Commission estimates that the FTA will increase exports by at least $10 billion, and will open up Korea's $560 billion service industry to American businesses.

In 2008, the manufacturing of goods to be exported to Korea utilized the employment of 230,000 Americans and the removal of tariffs will surely translate into more business and jobs. For instance, one of America’s top exports to South Korea is aircraft, which means more customers for Boeing as the company prepares to unveil the Dreamliner 787. American agriculture, machinery, and chemicals are also expected to see growth rates. 

Lower tariffs also will mean lower prices on goods such as Kia automobiles, exported to the U.S. Contrary to critics, this will not necessarily mean fewer sold American made cars. The money saved for consumers on the price reduction from the tariff removal can be used to consume more in the economy (possibly American made goods), driving production in general, and putting money in the pockets of other workers/consumers who may very well buy Fords or Chevys. 

Critics of the U.S.-Korea FTA also note that the textile, electronics, and floral industries will see higher competition because of the trade deal. But it's important to note that tariffs aren't a zero-sum game: free trade works because it allows the market to shift resources to companies who are more productive, and more production equates to lower prices and higher standards of living. 

The removal of trade restrictions would undoubtedly force some American businesses to either cut production or make new products as money goes to the most efficient use in the market. Some may even need to close shop, which is why the Trade Adjustment Assistance program was created to provide unemployment benefits and training for new jobs (we personally oppose at TAA program as an inappropriate use of federal resources, but we will point out that certain individual do benefit in the near-term from the program as long as it exists). TAA also helps affected businesses receive financial assistance to help with production changes. Apparently, though, this is not enough, as one of the main things stalling confirmation of this and the other three trade agreements is that the Democrats want to expand the TAA program and the GOP doesn’t want more spending. A compromise appears close on that issue, but the details are not clear yet. 

At the end of the day, the TAA program is merely welfare to businesses and jobs that benefited from tariffs at the expense of American consumers. Put another way, any workers that lose their jobs because of this FTA work for companies that do not produce efficiently, which is why they will lose business.  

The Free Trade Agreement between the US and South Korea is still a step in the right direction, but the strings attached to it will put the American economy a half step back from where it could be. Expanding the TAA program would also add millions to the deficit and boost inflation.

Next up, tomorrow we look at the Colombia-U.S. trade pact. Later on this week, we will then review the Panama-U.S. trade deal. 

Update 10/5:

In the legislation approving the Korea-U.S. trade deal, there are some tax provisions tucked deep down. First, the bill proposes federal and state prison agencies annually provide "certain information on their inmates to reduce improper payments sent to prisoners" according to Real Time Economics. Second, the bill would "increase the penalty for paid tax return preparers who don’t make all the necessary checks when applying for a refundable tax credit." Third, the deal would "increase beginning in 2013 the penalty to $500 from $100 for paid tax preparers who don’t perform all the due diligence required for the earned income tax credit." The logic behind these provisions is sensible: 

By making sure that certain tax refunds aren’t going to people who aren’t eligible, the measures are expected to offset the cost of the trade deals. The trade agreements with Panama, Colombia and South Korea would otherwise formally add to the deficit, since the deals would lower tariffs on imports from the three countries, though lawmakers from both parties have said they expect the deals to result in thousands of new jobs. Tariffs on U.S. exports would also be lowered in the agreements.

Lawmakers and Obama have long had their sights set on reducing improper tax payments. The Internal Revenue Service pays out roughly $11 billion to $13 billion per year to people who have improperly claimed the earned income tax credit, according to the agency’s estimates, cited by the Treasury Inspector General for Tax Administration. Prisoners are among those not eligible for the earned income tax credit, but some have received tax refunds by filing false returns.

See the whole post here.

Small Steps Towards Recovery: EU-US Free Trade

Posted on August 19, 2011, 8:07am | Anthony Randazzo

There is no silver bullet to fixing the economy, and focusing on jobs by itself is not the right approach. We need a series of changes that promote growth, and a willingness to accept it will take a few years to see the seeds we plant today take root.

Here is one small change that would help with economic growth:

While tariffs are already low between the U.S. and the EU, the enormous size of their economic relationship—$600 billion in trade and $2 trillion invested by companies in each other's markets every year—means that even small steps could yield significant gains in prosperity.

According to a report by the Brussels-based European Center for International Political Economy, a trans-Atlantic zero-tariffs initiative would increase combined U.S.-EU gross domestic product by $180 billion within five years. That's more added growth than either would receive from the completion of the Doha Round of multilateral trade talks. And while Doha is facing serious obstacles to its completion, a "Trans-Atlantic Zero" deal could be signed quickly. The issues that have held up bilateral trade pacts in the past—social, labor and environmental standards—should not matter between the U.S. and EU, which share roughly similar ways of organizing their societies.

Since one-third of trans-Atlantic trade occurs between branches of the same firm, eliminating tariffs on that trade would cut costs for both American and European companies and make them more competitive in global markets. That could help trans-Atlantic firms respond to the rise of Chinese, Indian, Brazilian and other emerging-market firms without resorting to protectionist measures.

Read the whole argument from Peter Rashish in the Wall Street Journal.

Is China Faltering?

Posted on May 28, 2011, 8:16am | Samuel Staley

Could China be faltering?

Chris Kuehl, chief economist for the Fabricators & Manufacturers Association, recently noted that the rapid growth of China's manufacturing base has come with costs. Moreover, Chinese productivity is still lower than the U.S. and productivity continues to improve rapidly here. According to comments reported in ThomasNet News (May 18, 2011), Kuehl sees China struggling to keep productivity up and wages low enough to compete. (See also the article here.) According to Kuehl,

China's transportation infrastructure is almost all outwardly oriented to facilitate an export economy. Transportation systems designed to grow the domestic economy are much weaker. (Based on our direct experience in China, we would concur.) 

Tracking China: Census 2010

Posted on May 4, 2011, 2:19pm | Samuel Staley

Wendell Cox has a revealing and accessible summary of the major demographic trends facing China from the nation's 2010 census. Increasing wealth and the one child policy has helped dramatically reduce population growth rates, Wendell contends. Now, 50 percent of China's population lives in cities, implying 50 million more people live in cities than the United Nations projected for 2010. Notably, the "floating population"--migrants how lack formal registration--increased by 100 million to 220 million (about two thirds of the total U.S. population).

More interestingly, 83 percent of the population migration has been to the eastern and coastal provinces. This shouldn't be a surprise since this is where the vast majority of the job growth has been since the reforms opened up China's economy in the late 1970s. What is surprising, however, is that some internal provinces and municipalities such as Chongqing (where Reason has a research project) and Chengdu (Sichuan Province) are not experiencing similar rapid growth. Their populations are falling. These provinces in Central China are targets of the national government's growth initiatives.

Japan's Economic Doldrums and Asia's Ascendance

Posted on January 2, 2011, 11:02am | Samuel Staley

Growing up in the 1970s, I heard a lot of talk about Japan's economic ascendance. This was a particularly powerful analogy for someone growing up in Ohio, where Honda established an economic foothold that allowed the company to emerge as a dominant player in the automotive industry. Honda now employs more than 15,000 people and is the largest manufacturer in Ohio ranked by employment. When I entered the employment market at the end of the last "great" recession, Japan's economic dominance of the global economy seemed like a foregone conclusion.

So, the fact Japan is entering a third decade of economic stagnation is a quite revealing, both about economic forecasts as well as analysis the presumes to understand the forces that inevitably make economies great. It's also a warning to China boosters and anyone predicting an inevitability to Asian ascendance: Growth is not inevitable in a globally competitive economy. Indeed, as my colleague Anthony Randazzo has pointed out in his analysis of Japan's "lost decade" (now decades), public policy can do a lot to derail economic prosperity.

While the fundamentals of China's economic growth are sound, it's far from clear that this nation's economic prosperity will continue. On the contrary, China's recent policy shift to bolster investment through state-owned banks and state-owned enterprises does not bode well for healthy economic growth. Most of China's recent growth has been through improvements in productivity that shifted employment from less productive rural economies to more productive urban economies. While this is an important source of growth, improvements in technical efficiency through entrepreneurship were not the key drivers in the sense (unlike recent growth in India, for example) indigenous Chinese enterprises have driven innovation. National economic policy continues to be riddled with contradictions and paradoxes that have not been resolved, including policies that both encourage car ownership (to simulate economic growth) and restricting car use (to manage congestion). Investment in the real-estate markets have created potentially volatile housing market bubbles and surpluses in major cities such as Shanghai and Shenzhen.

A worthy read for skeptics that outlines a host of challenges faced by China is John Lee's excellent and easy read Will China Fail? The Limits and Contradictions of Market Socialism published by the Centre for Independent Studies.

The bottom line is that U.S. competitive decline is not a foregone conclusion nor is China's rise as the world's dominant economy. U.S. global competitiveness in its core competencies--innovation, risk taking and entrepreneurship--will continue to be the key to its economic future. Policies that reduce the rewards to wealth creation, entrepreneurship and private investment may be the biggest threat to our ability to compete on a global stage.

Move Forward Free Trade with Turkey

Posted on December 15, 2010, 3:48pm | Joshua Newell

Pop quiz: what emerging market Islamic nation that has been an American military ally for more than half a century is not a major trading partner with the U.S.?

The answer is... Turkey. Though hopefully that answer will soon change.

The U.S. currently has Free Trade Agreements (FTA) with 17 countries. Close military allies (Israel), Muslim countries (Jordan), and emerging economies (Chile) are all represented. So, yesterday’s submission to Congress calling for an FTA with Turkey is certainly overdue. Opening up trade with a NATO member who possesses the 17^th largest economy in the world, and is being compared to rising economic powers such as Brazil, is a no-brainer for the United States, especially considering the economic benefits of free trade.

First, an FTA would lower Turkish tariffs on American goods, especially American food and agricultural products (which are currently under 18% tariffs). These decreased production costs would allow US companies to expand their business, creating jobs and stimulating the economy in the process.

As a corollary, freer trade would lower US tariffs on Turkish imports into the US. Some products such as Turkish clothing currently cost between 15-20% more because of import duties. These tariffs are laid on American consumers, so taking them away would allow Americans to pay less on everything from tennis shoes to pillows to televisions. Furthermore, many of these Turkish importers actually have stores in the US and employ Americans. Not only would an FTA allow Americans to pay less for Turkish goods, it would also allow these stores to expand their business and employ more Americans as well.

Finally, even the negotiations of such an agreement can benefit the economy, as investors and businesses realize that economic growth lies ahead in the near future. A brighter economic future translates to more bullish investment.

There is little doubt an FTA would provide a variety of benefits. And particularly given all the talk in Congress about the need to further stimulate the economy, why not try the number one recommended method of job creation and quickly move forward on free trade discussions with Turkey. 

New Trade Pact with S. Korea a Good Step

Posted on December 6, 2010, 4:17pm | Joshua Newell and Anthony Randazzo

On Friday the U.S. concluded a long-awaited free trade pact with South Korea, an early step towards achieving President Obama's goal of doubling U.S. exports within five years.  The agreement possesses several key changes from the Bush-era agreement, which was never ratified by Congress.  While generally the agreement remains similar to the Bush administration's pact, several alterations made by the Obama administration do indeed water-down President Bush's attempt to more fully embrace free trade.

For example, as The Wall Street Journal points out, a 25 percent tariff on South Korean trucks that would have been eliminated immediately will continue to negatively affect American truck consumers for another eight long years.  Furthermore, an 8 percent Korean tariff on American cars will now be continue for another five years instead of being done away with immediately. Thus, these tariffs will continue to put a damper on US economic growth at the exact moment the US needs growth the most.  

But we do applaud this agreement as a whole for eliminating 95% of tariffs on goods within five years, and believe it will have an overall positive effect on the US economy, facilitating trade, lowering costs for the American consumer, and increasing exports for the American producer.

Exports, in particular, are a focus of the administration as a way out of the recession. But if Obama is truly sincere about his pledge to boost the sale of U.S. goods to foreign markets, he should not stop at South Korea.  These free trade agreements need to continue to develop, ideally among as many countries as possible. For example, the US should pursue freer trade with Turkey. They are the 17^th largest economy in the world (Korea is 15^th), Goldman Sachs has them labeled as one of the "Next 11" world economies, and militarily they have been close to the US over the last 60 years.

Recently, much has been done to educate US and Turkish companies about each other; now the next step is incentivizing these countries to expand their business to new frontiers.  A free trade agreement would play a key role in providing those incentives, thus increasing US exports and decreasing domestic unemployment.On the flip side, cheaper Turkish imports would allow the American consumer to buy less costly products, which will then allow these consumers to either save more or spend that extra money on other goods. Either way, free trade can play an important role in improving the economy. When one takes a closer look, of course a president with the goal of doubling exports should pursue free trade with a country of 73 million consumers. It just occurred with one ally, why not another? 

U.S. Manufacturing Is Strong Despite Trade Critics

Posted on August 12, 2010, 7:53am | Samuel Staley

A common theme among critics of free trade is that the free flow of goods across borders (and oceans) has gutted America's manufacturing sector. Not so fast says an economist from the Chicago Federal Reserve Board. In a hearing in Washington, D.C., the Dayton Daily News reports that Chicago FED senior economist William Strauss had to correct some bad economic history used by the anti-trade warriors.

While the manufacturing sector has suffered like all industries from tight credit and the recession, the intermediate and short-term prospects are very good. According to the Dayton Daily News (August 9, 2010):

Strauss ticked off one statistic after another that shows the U.S. remains a manufacturing powerhouse. The nation’s factories, he testified, are just more efficient.

He said that between 1950 and 2007, manufacturing output in the U.S. increased by 600 percent. Yet the nation today has only 14 million manufacturing jobs, roughly the same number as 1950.

How can this be?

Strauss pointed to automation and increased worker productivity, telling the subcommittee that 184 workers in 2009 produced as much as 1,000 workers did in 1950.

He explained that worker productivity is the main reason why manufacturing’s share of gross domestic product has declined by pointing out that “the greater efficiency of the manufacturing sector afforded either a slower increase or an outright decline in the prices of this sector’s goods.”

“This allowed manufactured goods to be less costly to consumers and led to the manufacturing sector’s declining share of GDP,” Strauss testified.

China Loses More Manufacturing Jobs Than US

Posted on August 3, 2010, 8:22am | Samuel Staley

As background for Reason Foundation's China Mobility Project, I was reading Daniel Ikenson's excellent briefing paper on trade and the U.S. economy Manufacturing Discord: Growing Tensions Threaten the U.S.-China Economic Relationships. This is one of several notable and highly relevant passages:

"Regardless of manufacturing’s operating performance, the metric that matters most politically is the number of jobs in the sector. That figure reached a zenith of 19.4 million jobs in 1979 and has been trending downward along roughly the same trajectory ever since. China’s entry into the WTO and the subsequent increase in bilateral trade did nothing to accelerate the decline. Manufacturing job loss has very little to do with trade and a lot to do with changes in technology that lead to productivity gains and changes in consumer tastes. China has also experienced a decline in manufacturing jobs—in fact, many more jobs have been lost in Chinese manufacturing—for the same reasons. According to a 2004 study published by the Conference Board, China lost 15 million manufacturing jobs between 1995 and 2002, a period during which 2 million U.S. manufacturing jobs were lost."

Ikenson notes that the value of U.S. manufacturing output has been surprisingly stable despite concerns about outsourcing to developing countries such as China. What we fail to realize is the dynamism of the economies of developing countries and the pressures that globalization puts on every industry to remain competitive. The idea that manufacturing deceline in the U.S. is a straight-line extrapolation from outsourcing to less developing countries is much too simplistic and a poor basis for public policy.

Foreign Companies Can Create Jobs Here Too

Posted on July 27, 2010, 10:09am | Anthony Randazzo

From the WSJ:

At the ground-breaking ceremony for a new factory in Michigan this month, President Barack Obama touted the fact that 300 people will soon be employed building lithium-ion car batteries there. "These are jobs in the industries of the future," Mr. Obama said at the Compact Power Inc. plant. "You are leading the way in showing how manufacturing jobs are coming right back here to the United States of America."

Nowhere in his remarks did the president mention that Compact Power is a subsidiary of LG Chem Limited, a multinational firm headquartered in South Korea. But it is important for the administration to acknowledge explicitly that it can promote job creation by supporting investment in the U.S. by foreign companies like LG Chem. Such support should begin with free trade agreements (the U.S.-South Korean agreement remains stalled in Congress), but extend far beyond.

See here for the full piece.

China's Housing Policy Paradox

Posted on July 19, 2010, 8:00am | Anthony Randazzo

The Chinese clearly fear a bubble—Premier Wen Jiabao has commented on it himself and the sharp reactions to speculation show more than just rhetoric. However, if another monetary stimulus appears to be counterproductive to letting the air out of a bubble, that's because it is. The opposing policy aims unearth a structural conflict within China.

On the one hand, the Chinese government feels it needs to maintain at least 8 percent growth in GDP each year in order to provide enough work for its citizens. The monetary stimulus is funding waves of infrastructure projects that provide jobs and promote economic growth. On the other hand, that growth is only going to attract more Chinese looking for better jobs to the major metropolises and further widen the housing supply and demand mismatch.

Thus, China finds itself caught in a trap. Call it the Dwelling Narrowness Trap. If China continues to stimulate its economy, including tools such as currency manipulation in order to promote a robust export economy, production will grow. This is not evidence that a command-and-control economy could be successful anywhere. China has rapidly grown from a second-tier nation to third largest economy in the world in over 20 years largely due to its years of repressed consumption. The nation is so starved for infrastructure that it isn't hard for the country to throw money at the economy and find places for successful investment. The United States and other developed nations are not in the same position. As the Chinese will find out soon, economic stimulus is not a sustainable position. And the more developed a nation is, the harder it is for governments to pick winners and losers in the marketplace. For now, though, China is able to stimulate growth at will it seems.

The problem is that the productivity growth has kept the property bubble inflated, pricing out those looking to get into the housing market. Across China, new workers struggling to find affordable housing are becoming resentful. It is hard to know what will happen with this social unrest in China. However, China faces even more social unrest if the bubble bursts. The trap. Think of the millions of middle class families who have their wealth tied up in real estate. Without the real estate bubble, all that wealth could simply disappear. Furthermore, if Chinese productivity were to diminish, those hundreds of millions streaming into the cities would find it difficult to obtain work, only increasing the sectors of social unrest in China.

The Chinese government sees no immediate solution other than to maintain the stimulus. In the long-term though, there will need to be a policy course shift. All the people coming into the cities to find the work that the export economy is offering them won't be demanding the available housing. They will want housing commensurate with their low-income levels. Either massive new developments for low-income housing will need to emerge, or the prices for the available housing will have to fall to affordable levels, wiping out middle class wealth in process.

The trap is simply that needed monetary expansion of the Chinese economy continuing to grow will price out the younger population and lower-classes looking for homes as increased demand drives up prices; but once the bubble busts (with or without the Chinese government easing off the monetary pedal) they will face a social problem in that unemployment could grow rapidly in the major cities while the same time the wealthy will have much of the wealth wiped out.

The good news for China is that their economy would likely bounce back from a burst bubble quickly. Just as the U.S. recession following the dot-com bubble was short-and what pain was felt was exacerbated by the 9/11 attack-the Chinese wouldn't find their country in a debt crisis post-bubble. Sure, a lot of middle class wealth would be wiped out. The national government may need to bailout local governments that are over extended in development projects. And to do this the Chinese may need to raise cash by selling some of its $2.2 trillion in U.S. treasury bonds, which would drive up treasury yields and make it more expensive for America to borrow. 

But assuming the bubble deflates in the next one to twenty years, there will still be a lot of room for growth in China. The huge nation has a wide range of development and investment opportunities, if the Chinese government rolls back restrictions to allow the private sector to pursue them. Companies that sell commodities to China, especially construction materials, would be affected by a burst, but see resurgence in demand. This won't mean that the wealth of the families will come back, but a big resource distribution correction coming out of a bursting bubble could be the best thing for the Chinese economy. 

Source of China's Housing Bubble

Posted on July 5, 2010, 10:44am | Anthony Randazzo

The source of the Chinese housing bubble stems back to the 1990s when China began privatizing housing. The government began to sell citizens their homes for cheap and virtually overnight increase the homeownership rate from 50 percent to 80 percent. Since then, with few other investment options, the middle class has poured capital into housing. But investment has not only come from the wealthy elite or middle class families, but governments across the country. In fact, local governments own many property developers.

In many places around the country land has grown so expensive that private developers have pulled back, leaving state owned enterprises as the main investors in real estate. The national and local developers are able to operate largely apart from budgetary constraints, and are funded by state owned banks. This has left local governments exposed to potentially unsustainable debts.

While a full-on collapse of the Chinese housing bubble may be a while off, there are warning signs emerging now. For instance, despite the growth in property prices, sales volumes were down 25 percent from April to May 2010. The general consensus is that the bubble is unlikely to burst before 2011, but much depends on the success of the Chinese attempt to cool off the housing market. Beyond the down payment increases, new rules that limit the number homes that can be bought in certain cities could cause prices to drop 30 percent. Whether this triggers the loss of confidence and panic to pop the bubble depends in part on the results of the second Chinese stimulus, an 8 trillion renminbi ($1.2 trillion) monetary expansion targeted again at infrastructure set to hit in later part of 2010.

Like the U.S. housing bubble there is a difference between cities in terms of demand for different types of housing. There will be cities largely unaffected when the bubble pops, just as cities like Washington D.C. were able to largely avoid pain while Phoenix, Orlando, Las Vegas, and Los Angeles were being decimated. On a micro level the Chinese bubble is being driven by real demand in some cities, speculators in other cities, and government incentivized individual investment across the board. But on a macro level, there is a problem developing in that the supply of upper-middle class housing is high, but the supply of lower-class housing is lacking.

Why There Is a Bubble in China

Posted on July 2, 2010, 9:54am | Anthony Randazzo

While I am pretty bearish on the U.S. economy, one hope for staving of a double-dip recession is, ironically, a bearish view of China. There is a growing likelihood that the Chinese economy could see a significant slow down in its economy in the coming years, which means one less place to invest. Capital investments area great source for economic growth and can mean more jobs for the nation's businesses receiving the invested funds. With the European markets reeling, and emerging markets viewed as severely unstable, America could wind up as the only real option for investing capital. Only so much capital will wind up in Brazil, Russia, and India (and that is assuming stability in those nation's economies as well).

So why the bearish view of China? It is, admittedly, an incredibly complex nation that outsiders are fools to assume complete knowledge of. However, there are a number of trends that are pointing pretty strongly towards some serious disruptions in the coming months and years. Marc "Dr. Doom" Faber, as recently as September 2009, was cautiously optimistic about China's future. But developments over the past nine months have given him a different outlook. "China's economy will slow and possibly 'crash' within a year as declines in stock and commodity prices signal the nation's property bubble is set to burst," he said in May.

Dr. Doom isn't alone in his concerns. "House prices in Beijing, Shanghai and many other Chinese cities have risen rapidly in the course of the past few quarters," reads the most recent research report from Deutsche Bank. Citing concerns about property bubbles bursting in industrialized nations around the world, the German bank warns, "our set of valuation indicators suggests that these markets are currently overvalued. This also holds for Hong Kong and Singapore." While there remain a handful of skeptics the evidence for a real estate bubble in China is simply overwhelming.

First, property prices have been on a steady climb upwards since 2002 with just a brief dip at the end of 2008 when the world economy was in full panic mode. June 2010 data released by the National Bureau of Statistics of China (NBS) reported an annual growth rate of 12.4 percent in property prices, a near-record clip.

These prices have been boosted by expansionary monetary policy providing cheap credit. China joined the rest of the world's economies in the wake of the financial crisis in using monetary policy to stimulate growth. In 2008, Beijing announced a 4 trillion renminbi ($568 billion) stimulus that state-owned banks used to fund a host of infrastructure and development projects. By the end of 2009, state banks had 9.4 trillion renminbi ($1.4 trillion) in outstanding debt, double the previous year. Since this stimulus was not funded by cash raised in capital markets, as the U.S.'s $787 billion stimulus was, it represents a literal expansion of the money supply in the PRC.

In addition to boosting China's GDP and allowing it to meet a growth target of about 8 percent annually, the monetary stimulus helped keep the nation's real estate bubble inflated. Not only did the cheap credit enable increased speculation in housing-often times by local governments on behalf of themselves-but also by making more credit available for mortgages. The Chinese central bank, The People's Bank of China (PBC), reported that new residential mortgages quadrupled in 2009 relative to 2008. According to NBS Director Ma Jiantang, housing prices dipped 16 percent in early 2009, but rebounded 18 percent by the end of the year to continue the bubble's growth. It is unlikely that the sustained growth pattern would have been possible without the government stimulus, but it remains to be seen if the People's Bank will be able to rein in the monetary expansion to avoid troubles with inflation.

Second, the demand for housing, also boosting prices, is coming from unconventional sources. Across China, massive apartment complexes and high-rises stand empty, but largely owned. Not only wealthy investors and speculators, but millions in China's emerging middle class have bought up many of these available units to hold as a long-term investment. They are owned, but unoccupied.

Owning property is seen by most like owning gold or having money in a savings account-super safe. With a volatile, unproven stock market, restrictions on investing pretty much anywhere else in China or abroad, and poor rate of return from bank or government debt, housing stands out as the most lucrative and stable place to invest. Even the low-end middle class families likely own one to three units, bought with cash, planning to use their increased value for retirement. The very low holding costs in China-there are no property tax-make this an even more attractive investment. And there is widespread belief that prices will continue to rise and yield substantial returns.

Third, there is a growing gap between rent and housing prices in many of the major cities, a universal indicator that a bubble is forming. In February, Hong Kong real estate research group Midland Realty found price-to-rent ratios of an astonishing 546 to 1 in Beijing, and over 400 to 1 in Shenzhen. Shanghai Municipal Bureau of Statistics officials are reporting a similar 500 to 1 ratio, which is well above the 300 to 1 international alarm level. All of this is a growing indication that homeownership is getting far out of range for hundreds of millions of Chinese on the lower end of the income scale.

Finally, the Chinese government is worried about a bubble. In April, the State Council increased the minimum down payment for homes over 90 sq. meters from 20 percent to 30 percent in order to try and decrease demand and put downward pressure on prices. The government also jacked the minimum cash requirement on second homes to 50 percent of the purchase price to reign in speculators.

All totaled, rising prices supported by the government, a host of empty residential housing, and slumping rents equal a supply glut that is nothing less than a Chinese dragon about to pounce.