Arnold Kling  

Smooting the Weasels

PRINT
Water as a Private Good... Water Privatization, Continued...

Reason's Matt Welch comments on the story that the Bush Administration is going to refuse to allow bids for Iraqi reconstruction work from companies that are located in countries that did not support the coalition.


1) It [costs] the Iraqi people and the American taxpayer, by making them pay above-market prices for reconstruction. 2) Assuming that it is remotely possible that the United States might some day be wrong about something it cares about, the ban incentivizes allies to swallow any potentially legitimate objections to American action, thereby stunting the flow of information. 3) It confuses companies with countries, which is a concept that should make true free traders wince.

I made similar points in Don't Smoot the Weasels.


For Discussion. Would the U.S. be better off or worse off in a world in which countries based their trade policies on these sorts of political calculations?


Comments and Sharing


CATEGORIES: International Trade



TRACKBACKS (1 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/36
The author at Priorities & Frivolities in a related article titled Excluding the Unwilling writes:
    The Pentagon's directive to bar French, German, and Russian companies from bidding on $18.6 billion in prime reconstruction contracts has sparked an interesting debate. Glenn Reynolds, John Miller, and Andrew Sullivan support it. Matt Welch, David Ades... [Tracked on December 10, 2003 8:19 PM]
COMMENTS (30 to date)
Bernard Yomtov writes:

I agree with you and Welch. This action is just petty spitefulness. I am astonished that it finds supporters, and insulted that Wolfowitz claims it has something to do with national security.

Patrick R. Sullivan writes:

While Matt Welch is correct about the economics, I doubt it amounts to much, if any, inefficiency in practice. And economic efficiency is not the only consideration in international diplomacy.

In fact, this seems a rather cheap way to make a point to the rest of the world that the security of the United States is foremost. Quite typically, the Democrat candidates for the presidency don't get it.

Bob Hawkins writes:

The ban only applies to prime contractors. French companies can still get reconstruction dollars. What they can't do is run the job.

C'mon guys, pay attention to the details.

Lawrance George Lux writes:

The Bush decision was simply an excuse to hang his hat on. The Bush administration consistently utilizes an autarcky of American Corporate political Sponsors--especially Haliburton. The administration simply needed the excuse to give all Contracts to these Companies, at above-market rates. lgl

Steve writes:

I'm sure my opinion won't be very popular here, but here goes:

How can you say that the contracts are above-market rates when Congress knows they will get 39% of the profits back in the form of corporate taxes? Any "booty" won by Haliburton is immediately discounted by 31%-39% depending on the tax bracket. Then, when these profits are redistributed as dividends to shareholders, they lop off another 15% of that, too!

So, when figuring how much Haliburton, et al are screwing us, subtract nearly 1/2 of the supposed "profits" and THAT is what Congress is really paying for it. You'll quickly find that it is not above market rates.

This same analogy applies to Indiana outsourcing its unemployment system to an Indian outsourcing company, but I've wasted my fingers enough typing into here about that subject and you're all tired of reading it.

Eric Krieg writes:

Who cares about the economics of finances of the issue.

It FEELS GOOD to screw the Frogs, Krauts, and Borri. Of COURSE it is petty spitefulness.

Look, the whole reason we are in Iraq is to teach the Arabs not to f*** with us. It is about time that the Euros learned that lesson too.

Not everything we do has to be done as a matter of principle. But, as a matter of principle, the companies that made profits from Sadaam should NOT make profits from the free Iraqi people now. Surprise, surprise, it is the Euros that made money in Sadaam's Iraq, despite the smell of death there.

Of course, when your national cuisine consists of food that smells like gym socks, I suppose that you can live with almost any smell.

Bernard Yomtov writes:

Eric,

"But, as a matter of principle, the companies that made profits from Sadaam should NOT make profits from the free Iraqi people now."

If we're really interested in a free Iraq shouldn't we let Iraqis make that decision?

And by the way, the US was pretty thick with Saddam during the 80's.

Steve writes:

Eric--Don't have much respect for the Canadians and Europeans, do ya? Better get used to the Euro-folk being in control. WTO voting is something like 19 eurozone vs 1 US (with no veto power). We're going to get our butts handed to us on every single decision.

I forgot to add that the workers Haliburton brings from America will also pay taxes (over a certain $$$ in income), so you can reduce the "cost" by even more.

It's unfair to call the contracts "above market pricing" when clearly they are not.

Eric Krieg writes:

>>And by the way, the US was pretty thick with Saddam during the 80's.

"The enemy of your enemy is my friend". After the hostage crisis, we would probably have alied ourselves with Satan himself in order to get payback against the Iranians.

But even then, the Euros were tighter with Iraq than we were. Remember the Stark? A Navy Destroyer on partol in the Gulf, it was hit by an Iraqi Excocet missle in 1988. "By mistake", of course.

And who makes the Excocet? Well, they eat a lot of cheese. And don't have much of a backbone.

Screw the Euros.

Mike Lion writes:

There are reasons why this may not be a wise decision, but Welch's are trivial. The real reason has to do with building (or rebuilding) good relations with these countries. On the other hand, there should be some consequences for past obstructionism.

Since James Baker has been dispatched at the same time to negotiate cancellation of Iraqi debt, this may be part of a negotiating strategy.

Of course, it feels much better to pop off at our leaders. One doesn't need any information at all.

Boonton writes:

"I'm sure my opinion won't be very popular here, but here goes:

How can you say that the contracts are above-market rates when Congress knows they will get 39% of the profits back in the form of corporate taxes? Any "booty" won by Haliburton is immediately discounted by 31%-39% depending on the tax bracket. Then, when these profits are redistributed as dividends to shareholders, they lop off another 15% of that, too!"

1. If Haliburton got paid $1 from the US gov't, $0.31-$0.39 wouldn't be coming back but 31-39% of whatever portion of that $1 was profit. Haliburton has broad (but not infinite) ability to adjust lower profits by increasing payroll for senior mangement, utilize deductions and loopholes etc.

2. The 'money coming back' doesn't matter because if Haliburton had to earn $1 from someone else that tax money would still be 'coming back' to the US gov't.

So if limiting competition causes prices to be $1 higher than what they should have been, the US taxpayers are out $1, not a penny less!

Steve writes:

-->
1. If Haliburton got paid $1 from the US gov't, $0.31-$0.39 wouldn't be coming back but 31-39% of whatever portion of that $1 was profit.
Haliburton has broad (but not infinite) ability to adjust lower profits by increasing payroll for senior mangement, utilize deductions and loopholes
etc.

2. The 'money coming back' doesn't matter because if Haliburton had to earn $1 from someone else that tax money would still be 'coming back' to the
US gov't.

Bernard Yomtov writes:

Steve,

If in fact there are financial benefits to the US from having a US company do the work then that can be taken into acccount in the process of evaluating bids. I am not arguing that we have to award contracts to the Europeans, just that they should be allowed to bid and be given the contract if theirs is the most attractive bid.

Not only does this open up the possibility of getting a good bid, it also puts pressure on American companies to be competitive in their bids.

When you buy a car, do you just tell the dealer you're buying from him and not considering alternatives?

Steve writes:

..the auto dealer doesn't automatically pay me 35% of his profits at the end of the year...

Just like the French won't be paying 35% of THEIR profits to our government at the end of the year.

Eric Krieg writes:

>>I am not arguing that we have to award contracts to the Europeans, just that they should be allowed to bid and be given the contract if theirs is the most attractive bid.

Yeah, they could have done that. But that wouldn't have been spiteful!

There's some Sun Tzu "Art of War" stuff going on here. Dubya is sending messages. Let's hope that the Euros have their tin foil hats on and get the message.

Bernard Yomtov writes:

Steve,

Wake up. You can take the tax benefits into account in evaluating the bids.

If the auto dealer paid you 35% of his profits on your car would you not still look around. Maybe that means you get back $350, but someone else will sell you the car for $500 less. Or maybe the refund guy will come down a bit if he doesn't think he's your only choice.

Lawrance George Lux writes:

Steve,
I would advise you to defend the Bush decision, without defending Haliburton. It has already been proven Haliburton was doing business with Saddam prior, during, and after the first Gulf War, in violation of all Sanctions imposed by either the United States or the United Nations. Part of this was done during Dick Chaney's reign.

Two of Our worst enemies in Iraq are Haliburton and the House of Saud; oh, that right, they are on Our side. lgl

Welch: "It confuses companies with countries, which is a concept that should make true free traders wince."

Why should a French/ German/ Russian businessman be penalized for his country's actions?


Here's an an outsider's point of view -- many people I know are NOT fans of the French (people in HK, Thailand, India -- none of whom has any significant agenda in the Middle East) are branding this decision of the US economic colonialism. For whatever it's worth, perception and credibility of US foreign policy in Asia is going from bad to worse.

Steve writes:

..and then the greedy CEO spends the money on a new Bentley at the Bentley dealership (sales tax on $300,000 stays in the USA)
..and then the dealer spends what he earned on a sandwich at Subway (stays in the USA), a mocha at Starbucks (Stays in the USA), and maybe a USA-built Chevy Cavalier?

What happens if the French/Germans/Chinese get the money? None of these good things, that's for sure. It probably goes to pay for some 50 year old retiree to sit on his rump all day long in a subsidized apartment and watch cable TV.

If Bush keeps the money in the USA, more economic activity happens in the USA. The French be damned. same should be said about outsourcing anything off shore. It's got that "duh" factor that people seem to ignore.

Steve writes:

Prashant--

We're giving Asia all our good jobs, tons of our capital, and free military protection. In return, we're asking for true democracy (which some countries have) and respect for our patents (which NO country has).

What else do we need to do to please you?

David Thomson writes:

Matt Welch needs to take a chill pill. We are only slapping the faces of our “allies” to get their attention. This is Negotiations 101. A viable compromise will be worked out.

Bernard Yomtov writes:

"We're giving Asia all our good jobs, tons of our capital,"

No. They are "giving" us their capital, which is to say they are investing in the US.

Steve writes:

-->No. They are "giving" us their capital, which is to say they are investing in the US.

"Prashant--

We're giving Asia all our good jobs, tons of our capital, and free military protection. In return, we're asking for true democracy (which some countries have) and respect for our patents (which NO country has).

What else do we need to do to please you? "

1) How is Steve's comment related to Arnold's post, and my earlier comment (about confusing companies and countries)?

2) Not sure where the question of "pleasing me" came from?

Regardless, Steve says

"We're giving Asia all our good jobs, tons of our capital"

a) Well, last thing I checked the unemploymen rate in America was 6%, which means that 94% of the populace is working (if my math is correct ;-).

Q) Are all the 94% stuck with crappy jobs?

b) Similarly, America has a current account deficit of 5% of GDP. If my economics is correct, that means the US has a capital account surplus of 5% of GDP ie, $550 billion or so of capital is pouring into the US from foreigners. Or am I missing something?

Steve writes:

1) It relates to you lamenting the fact that Asia already hates America and that this contract dispute won't help.
2) I'm asking "what do you people want from us"?

Note: "unemployment" does not include people so discouraged by the current situation that they won't even look for work. That is about 4% of the would-be labor force, bringing the "rate" closer to 10%. Unemployment in your country is most likely including that number to come up with your percentage.

Note: At this time, the "94%" that remain are not crappy, but as you read Business Week saying things like "Levi's downfall was its devotion to US workers" and the one about India taking over all of IT, you'll soon see that the 94% will be in food service and other McJobs.

b) Yes, if by "investment" you mean "buying T-bonds to hold down the rate of one's currency".

Eric Krieg writes:

>>If my economics is correct, that means the US has a capital account surplus of 5% of GDP ie, $550 billion or so of capital is pouring into the US from foreigners. Or am I missing something?

And the federal budget defecit was like $370 billion dollars this year. Most of that debt was bought by foreigners like China, recycling their trade dollars to maintain their currency relative to the dollar.

So while the trade deficit restrains economic growth, taxes are lower than they otherwise would be because of the demand for our T-Bills. That raises economic growth.

Bernard Yomtov writes:

"So that $1 billion Ford dropped in China isn't capital?
All those buildings being built by american outsourcing companies used to steal american jobs don't take capital?"

Steve,

Please learn the difference between "net" and "gross."

And yes, buying T-bonds is investment. It holds down interest rates, among other things, stimulating domestic investment.

Boonton writes:

I had chalked the restriction up to old fashioned protectionism with just a new face of 'national security'. But the point about corporate income taxes is fascinating.

In effect, it would appear that the corporate income tax is almost like the US gov't owning dividend paying stock in every US corporation. When GM selects buyers, wouldn't it make sense to give a bias towards companies GM owns a stake in?

The other question is are foreign companies really exempt from US corporate taxes when they do business with the US gov't? Or are they required to open up US based corporations that they own. In that case the French company would pay tax on their US DOD contract just like the american company.

mcwop writes:

Last I checked, that big "evil" Halliburton company employs a lot of regular working folk.

Thorley Winston writes:

Actually if you read the directive in question (click on my name for the link) rather than the media (mis)reporting, it's clear that the contract does not forbid certain countries from every bidding as general contractors on certain reconstruction contracts.

What it does do, is create a condition that any country bidding who was not a member of the coaliton has to make a "contribution of force" (i.e. send in troops, security, and/or support personnel) to help secure Iraq.

In other words, this directive is a carrot to reward countries who are helping to secure Iraq while encouraging more nations to send help (which makes sense). If France, Germany, Russia, and any other nation want to be able to bid on these contracts, their elligibility is contingent on making a contribution to restoring order to the country.

Comments for this entry have been closed
Return to top