Russian President Vladimir Putin has issued a clear warning to the United States: If Washington deploys new intermediate-range missiles in Europe, Moscow will, too.
The context behind this threat is President Donald Trump’s withdrawal from the Intermediate-Range Nuclear Forces Treaty. Negotiated in 1987 by President Ronald Reagan and Soviet leader Mikhail Gorbachev, the INF was a fairly successful arms-control agreement in which each party agreed to eliminate a whole class of missiles.
In recent years, both sides accused each other of failing to fully uphold the agreement. Instead of pursuing diplomacy to resolve the dispute, Trump ordered a unilateral withdrawal, accompanied by a promise to start deploying the prohibited weapons.
Putin’s threat might seem like cause for alarm, but Americans should keep two things in mind.
First, hard-line policies against Russia increase the likelihood that Russia will respond in kind. From Moscow’s perspective, this is a reaction to an onslaught of provocations from Washington. For all the allegations of Trump’s weakness on Russia, the administration’s official strategy documents single out Russia as a principal threat to U.S. security.
Washington tends to inflate the threat from Moscow, while simultaneously ignoring U.S. policies that exacerbate tensions.
In addition to withdrawing from the INF, Washington has imposed harsh economic sanctions on Moscow as punishment for meddling in Ukraine. Other U.S. policies contribute to Russian feelings of insecurity. Trump has increased troop deployments in Europe and is considering opening a new military base in Poland.
Second, Putin’s threat is just not all that threatening. For starters, the threat was conditional: He vowed that Russia will not be the first to deploy new intermediate-range missiles, but it will do so if the United States does first. He also expressed a willingness to return to the negotiating table, insisting that “we don’t want confrontation.”
More to the point, Russian military power hardly presents a direct threat to America. Its gross domestic product is about $1.6 trillion, less than a 10th of ours, and its annual military spending is a mere< a href=”https://www.reuters.com/article/us-military-spending/russian-military-spending-falls-could-affect-operations-think-tank-idUSKBN1I24H8”> $66.3 billion, compared with the more than $700 billion that we spend. Russia has nukes but possesses limited power-projection capabilities and few allies that can aid its out-of-area ambitions.
Russia certainly acts aggressively in its near abroad, but Europe can easily deter it. Europe vastly outspends Russia on defense, at almost $285 billion per year.
Washington tends to inflate the threat from Moscow, while simultaneously ignoring U.S. policies that exacerbate tensions. A new arms race in Europe was a predictable consequence of Trump’s withdrawal from the INF. Luckily, there’s still time for peaceful diplomacy to mitigate these risks. Whether the political will exists is another question entirely.John Glaser is director of foreign policy studies at the Cato Institute.
Americans would probably be surprised to learn that, at least in the energy sector, the island of Puerto Rico is currently under a de facto embargo imposed by Congress. Incredibly, Puerto Rico finds it impossible to import U.S. liquefied natural gas — not despite being part of the United States, but because of it.
Earlier this month, senior Democrats and Republicans sent a letter to the Trump administration demanding that this proverbial embargo be kept in place. If that sounds unbelievable, you’re probably not familiar with an obscure shipping law called the Jones Act.
Passed in 1920, the Jones Act mandates that ships transporting goods between two points in the United States must be U.S.-built, U.S.-owned, U.S.-crewed and U.S.-flagged. Of the 478 ships in the world capable of transporting liquefied natural gas, however, none meet these requirements.
Democrats and Republicans are aligned on a law that denies Puerto Rico’s access to U.S. energy supplies and condemns them to purchasing more expensive LNG from elsewhere.
That’s a problem for Puerto Rico, which relies on LNG for 34 percent of its electricity generation and would like to use more to replace some of the oil and coal that produce 64 percent of its electricity. But with no ships to transport it, cheap U.S.-produced LNG has effectively been placed off limits.
And so, even while neighboring countries such as Barbados and the Dominican Republic import U.S.-produced LNG, the economically struggling U.S. territory must make do with more-expensive natural gas imported from abroad. Much of the LNG that Puerto Rico uses comes from Trinidad and Tobago, and according to a senior Puerto Rican government official, some of it even comes from Russia.
Absent government action, this will not change anytime soon, with almost zero prospect of a Jones Act-qualified LNG carrier coming into existence. According to a 2015 U.S. Government Accountability Office report, if a Jones Act-compliant LNG carrier were to be built, it would likely cost up to $475 million more than one built in South Korea.
Of course, no one knows exactly what the price differential would be, since an LNG carrier hasn’t been built in this country since 1980. As the GAO points out, it’s possible American shipyards no longer possess the know-how to build such a ship, and South Korean workers may need to be brought over to ensure the work was done correctly.
Faced with such eye-popping prices and the lack of skilled U.S. labor to build such vessels, U.S. energy exporters instead content themselves with exporting LNG all over the world aboard foreign-flagged ships. Everywhere, of course, except other parts of the United States such as Puerto Rico.
To help address this absurd situation, the government of Puerto Rico applied in December for a waiver from the Jones Act so that the territory can import LNG from the U.S. mainland aboard foreign-flagged ships. This eminently sensible step, however, has been met with a swift bipartisan backlash.
Rep. Peter DeFazio (D-Ore.) and Rep. Sam Graves (R-Mo.), the chairman and ranking member of the House Transportation and Infrastructure Committee, dispatched the aforementioned letter urging the Trump administration to reject the waiver application.
Never mind the fact that expanded access to natural gas would help replace dirtier fuels like oil and coal. Never mind that the Jones Act effectively condemns cash-strapped Puerto Rico to paying more for natural gas imported from abroad. Never mind that the waiver would not displace a single U.S. ship, as none are capable of transporting LNG in large quantities.
So what’s going on here? It helps to first understand that the Jones Act is among Washington’s most sacred cows. Virtually untouched for almost all of its nearly 99 years of existence, the special interests that support the law — including shipyards dependent on the U.S.-build requirement and carriers shielded from foreign competition — exert a truly stunning level of sway.
While the waiver would not generate any immediate harm to these interests, it would provide a tantalizing glimpse of a post-Jones Act world with greater competition and lower costs. Once that genie is out of the bottle, Puerto Ricans — and others — may no longer want it put back in.
And so it is that Democrats and Republicans, who struggle to muster the comity and common ground necessary to keep the federal government open, are aligned on a law that denies Puerto Rico’s access to U.S. energy supplies and condemns them to purchasing more expensive LNG from elsewhere. This is where true bipartisanship is found.
This shameful state of affairs must not be allowed to continue. It’s time for the Trump administration to grant the waiver and Congress to repeal the Jones Act.Colin Grabow is a policy analyst at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies.
Of many bold ideas pitched in Rep. Alexandria Ocasio-Cortez’s proposed “Green New Deal,” the boldest may be her plan for paying its multitrillion-dollar price tag.
We can do it, she said in a blog post that has since been removed from her website, “in the same ways that we paid for the 2008 bank bailout and the extended quantitative easing programs, the same ways we paid for World War II and many other wars.” In other words, we can have the Federal Reserve pay for it.
Wouldn’t having the Fed pick up the tabs for multitrillion-dollar projects cause inflation? Not long ago, it would have. But during the subprime crisis, the Fed took steps that severed the once relatively tight link between the amount of government debt it took on and the tendency of prices to increase. As a result, it’s now more tempting than ever for politicians to expect the Fed to serve not just as the banking system’s lender of last resort, but as the government’s financier of first resort.
It’s now more tempting than ever for politicians to expect the Fed to serve not just as the banking system’s lender of last resort, but as the government’s financier of first resort.
The Fed used to have a good excuse for not financing big projects
Before the crisis, the Fed kept a lid on inflation by limiting the supply of bank reserves, meaning the actual cash banks keep in their tills, vaults and cash machines, together with deposit credits they can draw on at their district Federal Reserve Banks.
Banks need reserves to meet minimum legal requirements and to settle accounts with one another at the end of each business day. Generally, the more deposits and loans banks have to manage, the more reserves they need. So long as they also keep no more reserves on hand than they need, as is the case when reserves don’t pay interest, the Fed can control inflation by making reserves more or less plentiful. To combat deflation before the crisis, the Fed created fresh reserves by buying government securities in the open market. The sellers of those securities then deposited the proceeds with their banks, adding to their reserves. To combat inflation, it unloaded securities from its portfolio, taking back an equal sum of reserves.
Under this traditional setup, if the Fed bought too many securities, inflation would break loose. Consequently, whenever Congress, or some president, pressured Fed officials for funding, they had a ready answer: They could only do so much without violating the Fed’s mandate.
Sometimes the excuse didn’t work
During both world wars, and again during the spending surge accompanying the Vietnam War and the Great Society, the Fed yielded to government pressure. But the consequences were as predicted: rising prices or (in the case of World War II) strict wage and price controls, with their attendant shortages. Still, fear of these consequences made it relatively easy for the Fed to resist peacetime demands that it buy up government debt.
Now the game has changed
A dramatic change came with the September 2008 collapse of Lehman Bros. Fearing that its post-Lehman emergency lending would cause it to blow past its inflation goal, the Fed deliberately severed the link connecting reserve creation to inflation by starting to pay interest on bank reserves. The idea was to get banks to sit on extra reserves that came their way, instead of using them to grow their own balance sheets. The change meant that the stance of monetary policy no longer depended on how many reserves the Fed created, or how many securities it purchased. Instead, it depended on how high or low the Fed set the interest rate it paid on bank reserves.
Although the Fed soon switched from fearing inflation to fighting recession, it kept on paying banks to hoard reserves, and did so even as other central banks turned to negative interest rates. Instead of going negative itself, the Fed resorted to unprecedented purchases of long-term government securities, in a policy that became known as “quantitative easing,” in the hope that such purchases would boost the economy despite banks’ tendency to stockpile cash.
A temporary fix has become permanent
Although the Fed’s unconventional post-crisis system was originally supposed to be temporary, it officially became permanent when Chairman Jerome H. Powell announced, at his Jan. 30 news conference, the Fed’s “decision … to continue indefinitely using our current operating procedure for implementing monetary policy … so that active management of reserves is not required.”
That “active management of reserves is not required” means, among other things, that the Fed can create any quantity of reserves, and, hence, purchase any amount of government debt, without losing control of inflation. Were inflation to break out, it could check it by further raising the interest rate it pays banks to hold reserves. That’s assuming, of course, that the government itself doesn’t check inflation by raising taxes or spending less.
Because inflation still has to be guarded against somehow, the Fed’s newfound ability to stock up on government debt doesn’t add up to a free lunch. It does give politicians whose pet projects come with big price tags more reason than ever to suggest that the Fed can pay for them.George Selgin is professor emeritus of economics at the University of Georgia and director of the Cato Institute’s Center for Monetary and Financial Alternatives. He is the author of “Floored! How a Misguided Fed Experiment Deepened and Prolonged the Great Recession.”