Welcome to Cato Audio for February 2024. I'm Caleb Brown. In this month's offering, a challenge to growing skepticism toward globalization in the halls of Congress from Dr. Ngozi Okonjo-Inuela, the Director General of the World Trade Organization, with Cato's Scott Lincecum. Author David McLean discusses shareholder capitalism in an age of ESG. Victoria Coates of the Heritage Foundation and foreign policy scholar Brandon Buck discusses the future of Republican thinking on foreign policy. And I speak with Cato's Daniel Raisbeck for the Cato Daily Podcast about a fiery speech from newly minted President of Argentina, Javier Malay, offering a warning to the West. First up, this month's Cato Roundtable.
How free is your state? States, we're told, are laboratories of democracy. And we are joined by the authors of Freedom in the 50 States, a Cato Institute report that details the level of freedom that you enjoy in your state or, in my case, the Commonwealth. And I guess, gentlemen, you're speaking with me from a Commonwealth as well. As I like to say, Westmost Commonwealth is bestmost Commonwealth in the Commonwealth of Kentucky. But so I want to understand this project a little better. And why is it helpful to know?
Why is it helpful for either residents or policymakers to know about the level of freedom that exists within a state? And why is it helpful to know about the levels of freedom in especially surrounding states? Yeah. I mean, first of all, you want to know what your state government is up to, what's been changing, whether that's a positive thing or not. I mean, are studies useful to people who don't necessarily want all of the freedoms that we measure because they can still look at the data and say, hey, I want more policies going against freedom in this direction if that's what they want. But most of us at least value freedom for its own sake. If you can achieve the same objective with policy but not take away people's freedom, that seems better. So freedom does seem valuable to pretty much everyone. So yeah, you want to take a look at how your state is doing on freedom, how surrounding states are doing, make those comparisons and see if your state is falling behind because states do compete.
And if your state's falling behind on freedom, that could mean some negative things for your state's economy and its attractiveness to new residents. It's also helpful for businesses when they make decisions about whether they might like to relocate, whether within a region or nationally. And I think if you're, say, from the Midwest, for example, if you're in Illinois, you might look at what states around you are doing, like Indiana, and decide, among other reasons, why it might be better to relocate if you're thinking about doing so, or for citizens in terms of voting with their feet. And that's been a big part of the American experience is that foot voting. And we've seen a lot of it, particularly since the beginning of COVID. And states that are freer are seeing more people move to those states and away from the states that are less free, both within regions and nationally. So New Yorkers moving to Florida and not just older New Yorkers, like it's traditionally been the case for decades, but younger New Yorkers as well. And in our study, we show that freedom, among other things, is one of the reasons why they're moving. But it's also regionally in the case of, say, Illinois to Indiana or Massachusetts or Connecticut to New Hampshire or California to Arizona or Nevada.
I'm looking at two states, Vermont and New Hampshire. Yeah. And one is right at the top and one is pretty close to the bottom. How do states compete? I mean, it seems like Vermonters are probably pretty happy with what they've got. And it seems like people in New Hampshire are pretty happy with what they've got. How do states that border each other impact each other and how do they compete? Yeah. So part of that is that people who want a certain mix of taxes and public services will...
all else equal on the margin move to those jurisdictions that provide that mix. So the types of people who've moved to New Hampshire have been those who actually prefer a low tax burden and not a lot of public services. And the people who've chosen to stay in Vermont tend to be those who value the public services. Still, over time, you can see that these states have differed tremendously in their population growth. Vermont and New Hampshire about 100 years ago were about the same population. And today,
New Hampshire is more than twice as big. So definitely New Hampshire has been attractive to more people than Vermont has. And Vermont, as a state government, simply has not really responded to that. And part of that may be that, as you say, the people in Vermont are pretty happy with what they've got, certainly politically. They seem to vote for these policies. But some of it also may be that there are some state governments that are just a little bit more responsive to those competitive pressures. So Massachusetts, for example, is maybe not as low on the Freedom Index as some people might.
might expect. It ends up being number 26 on freedom. And it ends up being number 18 on fiscal policy. So Massachusetts is not exactly taxachusetts, in fact. Its tax burden is about average for the country as a whole.
And why is that? Probably Massachusetts is being more responsive to that competitive pressure coming from New Hampshire. You know, the states like New York and Connecticut have not been as responsive to that. And we already mentioned Vermont. They actually have seen their tax burdens rise quite a bit over the last couple of decades. But for whatever reason, Massachusetts has kind of held the line on that. And I would add on New York.
especially given the magnet that New York City is globally. It's remarkable that New York State as a whole has been losing population for decades. And in fact, in this study from 2020 to 2022, they lost 3.4% of their population. That's a pretty massive change, especially for a state that has certain attractions. I mean, you know, you're not talking about a state that has very little going on, either in terms of the arts and culture or in terms of having a big magnet city or in terms of recreational opportunities. And so I think it really shows you that policies do matter.
And on the margins, of course, but those margins matter quite a bit to the decisions that individuals make. New York should be attracting people in reality, and their policies are pushing people away. I was going to ask about California and some recent changes that California has made that bear both on specifically population and a great deal on the freedom of the people who might choose to live there, and that is on housing. California has radically altered. And some might say, when we complain in other states about California-style housing policies, that's not necessarily really true anymore. A lot of people have been departing California because of the high cost of housing. But that has been something that I think states like California has recognized. We have to do something.
It bears directly on people's ability to live here. And of course, it bears directly on the freedom of property owners to do what they want with their own property. That's right. And land use regulation, particularly affecting home construction, is our number one category in regulatory policy, our most important category. We weight these policies by their dollar terms impact on the people whose freedoms are at stake. And so, yeah, this is a big issue and it is one of the things that's been driving people away.
from California. The housing prices are so high in so much of the state because they haven't been building enough. And at the state level, they've started to do some significant reforms. We'll have to see still what the impact of those reforms truly is. They have a state ADU law that's gone pretty far, so accessory dwelling units. Now homeowners can build two accessory dwelling units on their lot. So these are sort of in-law apartments that they can then rent out. That has resulted in a lot of new construction. You are also seeing the state government starting to...
require towns to zone more for their kind of fair share of housing. Unfortunately, a lot of what California has done really is freeing up just kind of the right housing at the right rates for the right people and not kind of letting the market govern the types of housing that are going to be built. So they're allowing for developments that have rent-controlled units, so-called inclusionary zoning, for that to kind of trump environmental barriers. And so it has freed things up for developers a little bit, but it's not a kind of free market approach quite yet. I'm really optimistic about some states like Montana and actually Vermont that have taken more kind of market-oriented housing reform. So we are seeing states push back against this, but the overall story over the last couple of decades around the country has been that land use regulation has gotten more and more intense, even in parts of the South where we didn't used to see that.
And on California, there's a lot of focus on housing for a good reason. But the fact is, is it does poorly across the board in economic freedom. So it's number 48 on fiscal policy and number 49 on regulatory policy. So it's much more than just the housing component. It's high taxes. It's a number of regulatory barriers to businesses.
adding value to society and to their customers writ large. And it's one of the reasons why, again, just like with New York, California has so many reasons why people want to live there, and yet it is still pushing people away. It still has a negative migration rate. And that's just hard to imagine, given that California was kind of the golden state, right? The state that so many people in American history have wanted to move to. And yet now it's shedding citizens. In some ways, it's becoming a place where it's great if you're rich.
And it's not so bad if you're relatively poor. The question is whether you can have a robust economy with a middle class that is able to prosper despite all these barriers. How cognizant are politicians of this information? I know Chris Zanunu loves to tout the fact that his state does well. Some credit to him, of course, but lawmakers are the people who set the rules for the state. But how cognizant are lawmakers of the...
Freedom in the 50 States report. Yeah, we get a lot of interest, particularly from legislators and legislative staffs in the different states. And obviously, governors pay attention. We've seen people like Chris Anunu. We've seen people like Governor Noem in South Dakota have referenced this. For the last edition, we had quite a vociferous response by the governor of New York, suggesting that indeed they are so free. It kind of harkened back to the Isaiah Berlin positive versus negative freedoms, which so many of us classical liberals, libertarians, conservatives, you know, are more.
skeptical of. But, you know, I think that the fact that he responded, you know, kind of so negatively towards the study last time was, I think, showed that they do care. They pay attention. They don't like to see themselves being ranked low. And sometimes, you know, especially within regions, states want to know, well, how can we do what our neighbor is doing? Because I think they feel that pinch more. I mean, you know, you live in Kentucky. I have friends that, you know, have worked in Kentucky but lived in Tennessee. Why? Because there's a freedom advantage that Tennessee has.
And that's something that I think they definitely pay attention to, especially when it means that you're seeing declining population numbers, which means declining tax revenues, especially when businesses are moving out. And you hear about the worry in New York of... The potential kind of a downward spiral where the tax base erodes, but public services still are expensive and need to be supported, at least according to the politicians. And that creates a real potential for a death spiral. And again, that can be overrated when it comes to a state like New York City, which seems to constantly reinvent itself. But it is a real danger, particularly for downtowns. And even though Washington, D.C., for example, is not ranked in the 50 states, because obviously it's not a state, you even see that when it comes to competition between Virginia, Maryland and Washington, D.C., where there's a real worry about Washington being hollowed out because of its mix of both problems.
in protecting people's freedom from crime, but also taxes and so forth. So let's get to the boring part, which for listeners, I suppose, but not for me. And that is the methodology here. Jason, you said that you weigh various components of freedom based on the dollar value impact that it has on individuals living within a state. How do you get at that?
Yeah, so we look at the research there that's available, and sometimes these estimates are more precise than at other times. But what we're really trying to do is we're looking at the people whose freedom is at stake. Let's say it's marijuana laws, for example. So there, because we separately measure incarceration and arrest rates for drugs, we're not counting the cost of going to prison or being arrested in our marijuana policy index. But what we are looking at is foregone consumer surplus and producer surplus when you prohibit possession or sale of marijuana.
And so we go out in the literature, we try to figure out what researchers have found in terms of what the consumer surplus really is and what the impacts of state-level legalization are on sales, consumption, production, things like that. And we use that to derive a dollar terms figure. So there's definitely a little bit of art to it. Some of these numbers are a little bit more guesstimates and some are more true, precise estimates that we're a lot more confident in. Something like taxes, it's really easy to measure in dollar terms, right? You get a dollar number of what taxes are paid.
But that's what we do to try to be as objective and scientific as possible in putting all these 150 plus policies together into a single index. And on the methodology, there are some policies because they relate to basic constitutional rights that do get a slight bump for that reason. Because if it's been ensconced in a state constitution or it has been ruled as being a constitutional right by a court, then that suggests something intrinsically important about that freedom. And so we do give it a bump in those cases. And in terms of when the data ends.
There's always a lag. Whenever I talk to Ian Vasquez about the Human Freedom Index, he will always be careful to tell me, look, the data lags, meaning we have to end measurement at some point in the past in order that things don't get crazy. And we are making sure that we are measuring across all countries, or in this case, all states, with a common set of data. Yeah, so there's not that great a lag for us. There is a lag. But we're fortunate enough, and it takes a lot of work given the number of variables that you have to look at, but we are up to date as of end of the year 2022. So as of January 1st, 2023, we're up to date. And then in the state profiles that are part of the book, we actually, especially when it comes to those policies that are, you know, having a lot of kind of national or regional energy behind them, we make sure to try to capture that in the state profiles, even if it's past our specific data cutoff.
because we want to give a picture in those state profiles of what's happening. So for example, with educational reform, there's been a lot of movement on school choice. And so we tried to capture the states that have had changes in 2023. So again, trying our best to make sure that the picture that our readers get is as up to date as possible. But of course, there's going to be some lag because we're measuring about 230 different variables and we're measuring them since the last edition. And so, you know, two different years. And then you multiply that by 50 states. That's a lot of coding.
So we do our best to be up to date. But it's also the fact that some of the data, there's a lag in it coming out from some of the official sources, like in terms of the fiscal policy data. But again, I think you could be comfortable if you're reading this, that you're getting as up to date as possible. And like Jason said, that we're being as objective and scientific as possible. And that's something that has changed in the course of us.
doing this index. This is the seventh edition now. When we did the first edition, we did a more back of the envelope estimation of what we thought the proper weighting was. And we were pretty satisfied with that. And I think it stood up pretty well. But we've refined that since to go to this more objective approach. And we're pretty satisfied that this is the best way forward. And it turns out that it's a roughly one-third, one-third, one-third split in terms of fiscal regulatory and personal freedom in terms of how they play out. It's not exactly that because, of course, nothing ever rounds to a perfect number like that.
But again, with 230 different variables, with it being up to date, with our objective way we measure things and weight them, I think people can be pretty confident that the results aren't being driven by one thing that we may weight more than something else. I mean, a good example is in our first several editions, we weighted gambling freedom lower than it is now. And part of that is because we've learned that Americans love gambling more than we thought they did. And so it just matters more to their freedom if it's taken away or if there's restrictions on it. I want to talk about trends a little bit in states that have fallen.
or states that have improved markedly since you began doing this, what are they? Yeah, so all of our top five states in the index have increased a lot, especially since 2010, in just an absolute terms, not just in terms of how they rank. So, you know, you can see that states like Arizona and Wisconsin and West Virginia have had some big increases in freedom since 2010. And in some cases, that seems to coincide with some changes that happened in the state legislature. And these states also had some room to grow. And West Virginia is still below average on our freedom index, but it has increased a lot. It used to be near the very bottom. And then states that are toward the bottom, a lot of them are kind of in stasis or even declining. Hawaii is the state that's fallen the most in terms of freedom over the last decade or so. So, you know, you're getting a little bit more divergence among states where the top states, the difference between the top state and the worst state is just growing over time.
And some states like New Hampshire, which is our number one state for freedom overall, it has actually continued to grow in absolute terms, not just in relative terms. And so the legislature and the governor there can be pretty proud of the fact that they haven't rested on their laurels when it comes to advancing human freedom in that state. In fact, New Hampshire has the highest level of freedom that we've seen in absolute terms since the index started and since the data started that we have, which starts in 2000. If you don't mind, because I'm sure people are very interested and may be driving their cars at this very moment and can't pull it up. top five, bottom five. And if you can tell us what some of those states have in common. Yeah. So again, drum roll, please. Right. New Hampshire is the freest state in the United States, followed very closely by Florida. In fact, those two states have done really well in many of the last editions.
In the fifth edition, Florida was number one, but New Hampshire edged it out in the sixth edition and has remained number one. But after Florida, it's South Dakota, Nevada, and Arizona. So that's the top five. In terms of the bottom five, you have Oregon at 46, followed by New Jersey, California, Hawaii, and New York as number 50. And New York has always been the least free state in America throughout our time series, throughout all of the indices. In fact, it's been so much worse than even 49. But Hawaii is edging closer in relative terms because it's just performed so poorly over the last decade or so.
And, you know, I think that it's hard to imagine New York getting much better because of the fact that you have special interest groups and a kind of progressive ideology that those two things together make for a pretty hellish brew. But, you know, who knows how Hawaii will evolve. And I think one of the things that's most in common, again, is that you have you do have these bootlegger and Baptist coalitions, right? You have strong progressive ideologies. And so in some ways, the people in these states, they're getting what they want and they're getting it pretty hard. But also.
you have coalitions that benefit from these things. So in a state like Oregon, Oregon, if I'm remembering correctly, has pretty high spirits taxes, unlike a state like Kentucky, where you are. And you can imagine why that might be and why the obverse might be true for Kentucky, right? The same thing when it comes to some of the challenges with housing is that you have very high kind of, if you will, kind of status quo bias in favor of people who want to maintain the high housing prices, because more housing is potentially a threat to what many consider to be. a very important asset that they own. And some people consider housing investment, although that's not a very good economic way of thinking. That is true that it is considered to be investment by so many Americans. So there's a lot of these coalitions between self-interest and ideology. One of the things when it comes to the free states is that states like New Hampshire have always talked about a freedom advantage. States like Florida have really used that as a way to, that some of their state leaders have used it as a way to make themselves...
you know, more popular on a national stage, right? There's something different about Florida and we're the ones driving change. You know, Jeb Bush drove changes to education policy. Rick Scott drove changes in, I think a lot of times in fiscal policy areas where they did a lot better. And obviously Governor DeSantis has tried to use change as a lever for national prominence. So that might be a case where there's actually, maybe it's not, it's an unintended consequences of the desire for political fame. And that's a good thing. Like we would like to, our freedom index may be a good way for people to try to take credit for something that, you know, look, we don't care.
where political credit goes to as long as they push their states in a more freedom direction. Yeah, I would say that the top states have less in common with each other than the bottom states do. So the bottom states all have this pattern of being deep blue and having low levels of economic freedom that outweigh, in some cases, a decent personal freedom score. So Oregon, for instance, is always a decent on personal freedom, but the economics are just weighing it down. And then at the top end, you get states like New Hampshire and Arizona that are good on both economic and personal freedom. Then you also get a state like Florida that's decent on personal freedom and really good on economic freedom, or South Dakota, which is, you know...
poor on personal freedom, but so good on economic freedom that they managed to get to the top five. Or Nevada, which is pretty good on economic freedom, but our number one state on personal freedom. So they're all different from each other in various ways, but they have different roots to the top. Although I will give the caveat that even a place like South Dakota, it does a lot better than some of its more redder peers. I mean, it's still a top 25 state on personal freedom. And that does give it an advantage relative to other states that are doing pretty well economically. And that's always been one of the cases for a state like Arizona, which is number two on personal freedom, or a state like New Hampshire, which has been number four. And even a state that's pretty red, like Montana and Missouri, those are states that are doing well on personal freedom.
There is a myth of the fact that red states are economically free, but personally unfree, because there are lots of red states that actually do pretty well on personal freedom. The argument about the other myth is still true. There are states that are blue, that are bad economically or less free economically and more free personally. But there are still states that do quite poor across the board when it comes to personal freedom. So if you think about New York is only number 30 on personal freedom. A state like New Jersey is only 35th. Hawaii is 39th.
So these are states that just don't do very well and defy the myth of kind of the blue state also having its virtues and vices. It's a lot of vice. All right. The website, if you'd like to dig into the detail, and I'll say the website is great if you want to dig into the more granular detail of this, freedominthe50states.org. It is a project of the Cato Institute. The authors are Will Ruger and Jason Sorens. Well, thanks for having us. And I think it's been a great product and something that's been useful for so many of our readers. And we thank them for giving us feedback and for inviting us to come out and talk to their legislatures or talk to their civic groups.
So I ask you, are you surprised that we're having to sit here in 2023, and especially in the United States, and... defend or reassert the case for open trade and globalization and for the WTO, especially in regards to its effect on the global poor and on the environment? Are you surprised that we're here doing this? Scott, I'll give you The Economist 200.
Response. Yes, on the one hand, I'm surprised, and no, on the other, I'm not. So what is the yes part? And this is the part of reasserting. It's surprising. Yes, of course, the United States was at the making. And we go back, when I think of the WTO, I always think of it together with the GATT. And so that's a 75-year history of having created a system that has largely delivered, and which, in a sense, I term a global public good. I know it's not the best use of it, but I see it that way. That has been husbanded over time, has largely delivered. So yes, the fact we now have to reassert, I like that word, what it has.
delivered, in the place that created it, can be surprising. And let's remember some of the things, as you yourself said in some of your work, the globalization, reminding people it lifted over a billion people out of poverty, that rich countries benefited. You know, you look at World Bank data, I think they looked at between 1995 to 2011 or those years, and saw that globalization. and the trading system have managed to make rich countries to increase income by GDP by 50% over that period of time. And so that's rich countries. Of course, for poor countries and emerging markets, 150% from a lower base. So it's not, and the Peterson Institute work also shows that the US has benefited from the international trading system since the Second World War by up to about $2.3 trillion. So, you know, there are so many studies that have been done that have demonstrated.
how the trading system has helped not only poor countries, but rich countries. So it's reasserting and reminding people of that, that I think is the surprise that we have to say yes. But is there a no part? I'm not surprised because the globalization has also had its discontents. And people should remember Joe Stiglitz's work.
way back, which was a bestseller. At that time, you know, there were many who didn't really listen, but it's true. There have been sites of globalization that have not worked for everybody. There were poor people in rich countries who were left behind, and there were poor countries who were left out of the system. So the issue is, does that then mean you throw out globalization? No. It means that we look and ask the question, how do we take care of those who have been marginalized within the system? But trade, as you said,
You need someone to blame and to knock. Even where technology is the culprit for taking away jobs, trade is often blamed. And that's where the problem lies. For sure. Although acronyms, WTO, NAFTA, those are complicated and scary sometimes.
For all the talk against globalization, though, one of the things that we've written in our project, and one of the things that your organization has documented so well over the last few years, is that global trade and value chains have remained pretty darn durable, given a global pandemic, all the political rhetoric, and the other things. And of course, the details are changing, as they always do. Some policies, certainly here in the United States, have regressed on the margins. But still, this whole death of globalization thing has been, I think, wildly oversold. Is there a point at which, in your view, the political rhetoric, the marginal policy changes really start to steamroll and have a more significant impact on the trade reality? Or maybe is that already happening? We're just not seeing it yet because of the data. And then finally, related to that, in your view, and you covered this a bit, what are the costs? I mean, if this really does start to be a big-time retreat, what are the costs that we'll face for the developed world, but also, of course, for the developing world?
Well, yeah, thank you. You know, the work we've done shows that trade has been pretty resilient. If you look at the figures for global trade, it's at an all-time high of about $31 trillion, $30.5 trillion, $25 trillion in goods trade, the rest in services. So it's at an all-time high. And if you look at numbers of trade between the U.S. and China, for instance, or China and EU, they're also at all-time highs. For 2022, that's the latest. We have full figures. You know, the U.S. Commerce Department released $691 or so billion of trade between U.S. and China. But the EU is even more.
is slightly over $900 billion worth of trade. So right now in aggregate, the data we have doesn't quite substantiate the loud noise you hear. But does that mean that they are not issues? They are. We see emerging fragmentation in trade. And that's why we sounded a warning almost starting a year ago that we're beginning to see signs of fragmentation. And that could be very costly to the world, including and especially so to developing countries and emerging markets. So some of the work we did just trying to see, suppose the world fragments into two trading blocks.
What does it mean? And we did some simulations, you know, using UN voting patterns to simulate the two trading blocks. And we found that, you know, the world would lose about 5% of GDP in the longer term. That's a lot. That's like the economy of losing Japan's economy to the world. And for emerging markets and developing countries, the numbers would be in the double digits, like 11% to 12%. So they would lose the most from fragmentation of world trade into blocks. So we were sounding the warning that this would be very costly to the world if we were to do it. And then you would really be signing a kind of sentence on emerging markets and developing countries who have for a long time been told that open markets, trading systems, no protectionism.
That's the way to go. And just as they are trying to integrate into world trade, and then you're turning... You're back on them. So that's why there's also a north-south divide that is emerging as southern countries begin to question what is happening with global trade. So the signs of fragmentation we're seeing, of course, that are emerging, you look at, even though you have these high numbers, if you go behind the numbers, you can see that in certain sectors, trade between China and the U.S. is already on the decline, of course, in the technology sectors, in semiconductors, in certain areas. And so that is emerging. We also see in another simulation that
Trade between like-minded countries seems to be growing faster than between non-like-minded. If you simulate two blocks of like-minded and non-like-minded, just to simplify it. So those are some warning signs that we're beginning to see that we need to pay attention to. Now, you know, can I just say something? Does that mean that we shouldn't look?
at some of the vulnerability of supply chains that have emerged. We have to admit that during the pandemic, we saw vulnerability in supply chains. But what is the diagnosis? People blame trade and supply chains. But if you look at the issue, you see that the issue is really over-concentration of the production of certain products in certain geographies.
and in certain sectors. And that does not build resilience. So I do agree with those who say that let's look at certain sectors that are very important to the world and see how we deal with deconcentrating supply chains so that the world can be more resilient. That is the problem we really face. Semiconductors, 90% or more manufactured in one geography or one part of the world. Is that resilience? No. There's some argument.
that we should look at that. Pharmaceuticals. You saw during the pandemic how, let's say, a continent like Africa imports 99% of vaccines and 90% of pharmaceuticals. Should that be that we're at the back of the queue when all this happens? No. Maybe we need to deconcentrate some of these pharmaceutical supply chains. So I think there's an argument for building resilience. This is why I'll end on this note on this. We are arguing for a new reimagining of globalization.
So we are not saying that people who have problems are completely wrong. There are issues to look at. Let's reimagine globalization to deconcentrate some of these supply chains, to build more resilience by looking at how we relocate the supply chains, by putting them in countries and in regions of rich countries that were at the margins of the global supply chains before. There are poorer countries that have a good environment for business. I'm not advocating just going anywhere. It's not just China plus one, which is Vietnam or Indonesia or India. It could be China plus Morocco.
It could be China plus Bangladesh, China plus Brazil, China plus Senegal, China plus South Africa, you name it, China plus Nigeria. I'm sure if I forget my own country, they will attack me and say, so we're just saying where there's a good business environment, you can try to build resilience. And that is what we're advocating by saying re-globalization. Within the US, you can look at those regions where there has been a hit. where people have been losing jobs. And I want to use this to say that, by the way, there are 50 million jobs turnover in the U.S. each year. The Peterson Institute work has also shown that only 0.6% of this is attributable to trade. Technology is in play, but of course, it's easy to blame trade. Nevertheless, we're arguing if you want to relocate supply chains, look at those regions where people have been left behind. We're not against that because this will help us build a new kind of globalization. Dr. Ngozi Okanjo-Nwela is the Director General of the World Trade Organization. Scott Lincecum is Vice President for General Economics at the Cato Institute.
In the case for shareholder capitalism, author David McLean explains how embracing shareholder capitalism doesn't negate the significance of other institutions. Rather, it allows businesses to excel in providing the goods, services, and jobs that make society better off. He spoke at the Cato Institute in December. So the case for shareholder capitalism, at least the one that I make in the book, the case for it is that it's good for non-shareholders. So the case for shareholder capitalism, the one I'm making, it's not that shareholders deserve things and they're great and we need to give them all this stuff. It's actually good for non-shareholders. That if you live in a world where firms are trying to maximize shareholder value, that that's good for everyone else, even if you'll never be a shareholder. And many seem to think, so a business creates wealth for its shareholders by generating profits. And many seem to think that a profit somehow reflects a shareholder's gain at the expense of the other stakeholders, like the customers, the suppliers, and the employees. And I think that's a real misunderstanding. So the best way to think about shareholders and the other stakeholders is that they're trading partners. They're not competitors. They're engaging in mutually beneficial trading. And what I mean by that, so we can think, so a customer,
will only buy the firm's product if it benefits the customer. So if I go to Starbucks, I buy a $3 cup of coffee, it must be that the value I placed on the coffee is more than $3, or I wouldn't have bought the coffee. And at the same time, Starbucks, the cost of the coffee was less than $3 for it, so it got to make a profit. It made a profit. So we engage in a mutually beneficial trade. And if you think of your economic life, all the things that you buy, all the goods and services, all those transactions are like that. You enter them because it benefits you, and at the same time, the other side benefits. And the same is true for employees. An employee only sells a firm their labor if it benefits the employee. In fact, where an employee choose to work, they must be getting better than what any other firm or institution would offer them, or they would work somewhere else.
And then suppliers, that's kind of silly. Sorry about that. Suppliers only sell their firms their goods and services if it benefits the supplier. So when a supplier sells a firm its goods and services, the supplier makes a profit from that. So no one's forced to do anything here. Each party only trades if it benefits it. And profits reflect the shareholders' gains from all that type of trading. If there's no profit, then in the end, the trading wasn't mutually beneficial. The stakeholders benefit, but not the shareholders. So I think the best way to think of a profit is it's actually just a leftover.
that the business owners get to keep after they made all the other stakeholders better off. So the shareholders are actually eating last in shareholder capitalism, even though the goal of the firm is to create shareholder value. So when we say that, when we say the goal of the firm is to create shareholder value, implicit in this is the fact that the firms must serve all the other stakeholders first. Otherwise, there is no shareholder value. So when a corporate manager goes to work and they're trying to maximize shareholder value, they're not really thinking about their shareholders. They're thinking about all the other stakeholders. And then can they enter mutually beneficial transactions with each of those parties? And it's important to point out that this is easier said than done. Most new businesses fail to make profits and are gone within five years.
Another thing that comes up with shareholder value that I think it's important to point out, shareholder value is inherently a long-term concept. So many of the critics of shareholder capitalism claim that it encourages short-termism, especially in publicly traded firms, and that somehow the shareholders, they really want short-term profits at the expense of investments that might create value in the long run. And so the ultimate goal in shareholder capitalism is we want to maximize shareholder value. So what exactly is shareholder value? It's the value of the business minus any debt. So what's the value of the business? Well, the value of a business, if we say it technically, is just the present value of all its future cash flows, and cash flows are different by profits.
So if we own a business, if you're a business owner, we think, OK, we can make a profit this year, the next year, five years after that, 10 years after that, 20 years after that, forever off into the future. And the present value of all those cash flows generated by those profits is the value of the business to track off any debt. And that's shareholder value. So if a business owner wants to sell her business, shareholder value is what a fair selling price would be. And a good estimate of what the stock price should be in a publicly traded corporation is shareholder value divided by shares outstanding. In practice, so if you value a firm, short-term profits are usually only a very small part of shareholder value.
Long-term profits are far more important. So a good example of this, if we look at IPOs over the last 20 years, so these are firms that first came public, the majority are tech and biotech firms, and the majority of those were losing money. But they could still come public and be worth hundreds of millions or even billions of dollars. If we look at biotech firms, 95% have negative profits. The majority had no sales, but they could still raise all this capital. A selling example is Moderna. Moderna came public actually before the COVID pandemic. Moderna was losing when it came public hundreds of millions of dollars, and it never sold anything, but it was worth $7 billion at shareholder value.
And so why is that? It's because shareholders look to the future. They look ahead when they value a business. And so shareholder value, it's a long-term concept. So how does a corporate manager maximize shareholder value? Well, of course, shareholder value is the value of the business minus any debt. So we want to maximize the value of the business. And the way you do that is you make investments where the future profits succeed the cost. So you play a long game. You don't play a short game. And firms regularly make investments that lower their current profits but increase shareholder value. So one example we could look at is Pfizer. Pfizer invested $14 billion in R&D in 2022.
If Pfizer hadn't done that, it would have higher profits and maybe more cash on hand to pay dividends things. But that $14 billion likely made their shareholders right at that point in time richer, not poorer. Because everyone knows that Pfizer, when we invested the $14 billion, that's going to produce drugs in the future. And those future profits are going to be greater than the $14 billion. And that's why Pfizer can both invest and have lower current profits but become a more valuable business.
So how do things look at the economy level if all firms are engaging in shareholder capitalism? So the overarching problem of any economy is how do we allocate scarce resources that have alternative uses? So what goods and services should we make and what quantities? And what things should we not make? And just as importantly, what do we not make? And profits give us the answer. So profits reflect what a consumer is willing to pay for a good or service less the cost. So if a firm makes a profit, it means it took resources that society places a low value on and created goods and services that society places a high value on. So when a firm makes a profit, the economy grows and society is better off.
So when firms are governed by profit-seeking, all of the society has a de facto rule that says only use a scarce resource if you can create something that's of greater value. If you can't do that, leave the resource there and let somebody else use it for a better purpose. So profits are a really good way to measure whether a firm creates value for society. As a thought experiment, imagine if every firm strived for losses instead of profits. So a loss is I take something of high value and I create something of low value. So take something that society places a high value on, make something that society places a low value on. When you do that, actually the economy shrinks and society gets poorer. If all firms did that for a long enough period of time, we'd all be back to living in poverty. So the profit motive is an important one.
David McLean is author of The Case for Shareholder Capitalism. The Republican Party is engaged in a more vigorous debate over foreign policy than it has been in many years. What, if anything, does history tell us about where the right and the GOP are headed on foreign policy? At the Cato Institute last month, Victoria Coates and the Heritage Foundation joined Brandon Buck, a PhD candidate at George Mason University, for a lively discussion moderated by Cato's Justin Logan. This is a sort of a conversation that I've been having in different iterations really from 2007 on. And I think what we've seen between the conclusion of the second Bush term and what we're going into here in 2024 has been a really radical shift in the way national security is.
policy is designed and executed. And we've had kind of a remarkable series of different almost screenshots within that period of time. We've got the Obama two terms and the record that came out of that. We have the Trump term. We got, again, a very distinctive record. And then we are now getting a full picture of what the Biden administration foreign policy has brought on the world. And I think, Brandon, we'll go into the historical roots of all of this, but there really has been a shift from that much more traditional hawkish.
uh republican foreign policy to what i would refer to as a conservative national security policy and the way i've conceived of this in my brain because i'm visual is that you know we're not hawks we're not doves we're owls uh that i would reject that paradigm that you have to either be a interventionist or an isolationist i don't think that's applicable to the united states in the second quarter of the 21st century we have to be able to do better than just default to one of those two positions And it really clarified for me in the 2016 Republican primary when you had candidates such as Jeb Bush, obviously very closely associated with his brother's foreign policy. And then you could range to Rand Paul, who obviously was the most formal libertarian. And then Marco Rubio was in that mix as well. Nobody bought either of those polls in the primary. I think Marco won the Minnesota caucuses. And the two candidates who came in first and second, Trump and Cruz, obviously I'm partial, worked for both of them. So I suppose you could say actually I'm not partial. But they had fundamentally the same approach.
to international affairs, which is, for Trump, summed up in America First, that you start with the basic interests of the United States and you build your approach from there. And we can get into the relative successes or failures of that approach, but it's one that was persuasive to the primary voters and then to the general electorate. So I think that's in many ways where the head of the American people are. So we can get into various specifics there, but that's kind of where I see things at the moment. That's great. Brandon, give us a little bit of the gloss on history here, how you're connecting the GOP to the GOP of previous eras.
So I think it's important to note that history shows that the meaning of a conservative foreign policy is not preordained, and it could take many forms that might seem strange to us in the present. And I think if you look to the old right, sometimes called the Tafties, as led by Robert A. Taft of Ohio, they were strident anti-communists, but they were also nationalists, and they rejected much of the liberal internationalism that came with the early prosecution of the Cold War. And as such, they advocated for a model for the Cold War that looked much more like Fortress America from the interwar period. And I think it's important to note that their framework, the way that they saw America in the world, stemmed heavily from a revisionist view of the World Wars, particularly for World War II and especially for the manner in which the war ended. But more importantly, they saw the failings of American foreign policy of their time as a product of American action and not inaction. And that ran completely counter to what was then the emerging liberal consensus that came out of World War II, that it was the absence of American power on the global stage that led to the rise of fascism and therefore the Second World War.
But, you know, their views became verboten by the mid-50s. But nevertheless, they carried them forward. And I think that way of viewing the world from a conservative lens was largely lost to us because first they lost the political battle, but more importantly, they lost a narrative battle in the mid-50s and then going through into the 60s. And so I think if you look at that history, the modern rights cynicism and its various flavors towards foreign policy has deeper roots than are commonly appreciated. And I think, you know, modern Asia firsters or more strident non-interventionists.
Especially if you look at the grassroots, they both use a vernacular to describe American foreign policy that looks more like the mid-30s and say the early 1960s. Like if you look at the base, they're using the phrase, you know, the military-industrial complex, which while it was coined by Eisenhower, it was really kept alive by the new left in the 60s and 70s. And so the Orbiton window has widened to a place that it hasn't been in decades. So if we juxtapose, you know, the history of the old right with the present, you know, it suggests that conservative opinions on foreign policy are far more elastic than they're sort of commonly. understood. I also think history shows a conservative foreign policy in America emerged from domestic political processes. It was not strictly informed by a reaction to events overseas, nor inherently in global and its ambitions. And of course, going through some of the history, the old right was first constrained by the primary defeat of Robert Taft and later his death by cancer in July of 53. And then the remnants of the old right were eventually ground down via attrition throughout the 60s. And so again, when you expose that history, I think it shows that the prominence of intervention and strains of conservatism, be it the old guard, unilateralism, or Reaganism, or neoconservatism, are more.
aberrant than normative. So again, the generational turnover that we're seeing is not at all uncommon. That being said, I also think history shows that the modern Republican Party is probably going to remain chaotic without a unifying figure. Modest claims. Modest claims. Well, I'm a historian. I want to guard my claims. I don't want to peer over the horizon too much. I mean, without a unifying figure like a Dwight D. Eisenhower and without a unifying narrative of recent foreign policy success like World War II served in the previous era. And also without a foreign threat, and I use the square quotes, that can get the party elite and the base together like communism was during the Cold War or terrorism was during the Cold War on terror.
And I don't think that the autocracies versus democracies framework coming out of the White House is going to work, especially after 20 years of war and $34 trillion in debt. But those are some of the similarities, but I think the differences are important to highlight unless we try to make a model of the past to predict the future. The old right had a regional basis of support at a time in which American politics was highly sectional. And even though they had ideas that were hearkening back to the founding of the country, they had institutions that were built up to oppose American imperialism that started first with the Spanish-American War and then reached its height during the wake of the Great War. And so they had a breadth of voter support, but more importantly, they had a depth of institutional cover, both in business and in media, but more importantly, in Congress. So they had a confluence of interests that saw in a sort of American foreign policy as detrimental to their economic interests, but also to their vision of what America's role in the world should be. But the president, I mean, perhaps you correct me if I'm wrong here, but like for me, like the patterns of dissent are more, they're more decentralized than anyone's world. You know, they're even more rural than the old right was. And they're dispersed throughout the country and they're aligned against social class. And there's not like an elite that can lead these ideas into politics.
And similarly, the institutions aren't quite there. I know there's been a lot of change since 2016, but they certainly aren't as robust as they were during the first half of the 20th century. And also, they have a much heavier lift, right? I mean, they're trying to either eradicate or redirect a massive national security and foreign policy apparatus, whereas the old right was simply trying to slow one down. And I also think that there are social issues which are tangential to foreign policy, which can serve as an impediment to either their success or forming coalitions with their counterparts on the left, particularly issues like immigration and trade. And there's also a general difference in how they view sovereignty over versus libertarians or certainly people on the left. So whatever comes next, we'll certainly have echoes of the past that will very much be a product of its own time.
Victoria Coates is a vice president at the Heritage Foundation. Brandon Buck is a PhD candidate at George Mason University. Argentinian President Javier Malay has given the world a taste of his vision for growing wealth and prosperity. At the World Economic Forum, he laid out a warning to the West that state control and socialism are paths to poverty. For the Cato Daily Podcast, I spoke with Cato's Daniel Raisbeck about why the speech made such a powerful impact and how the Malay agenda for Argentina is bearing so far. The World Economic Forum events, correct me if I'm wrong, this is just my impression, a lot of global technocrats.
get together and talk to each other about problems that the world is facing. Right. Technocrats, but also business leaders. But it's usually not the up and coming startups that are there, rather very established businesses. And a lot of politicians will come give nice speeches and nod to the concerns of the participants in World Economic Forum events. And but usually it's not particularly newsworthy. It's all stuff that you would hear normally. So when Javier Malay comes to the World Economic Forum and gives a speech.
You know, rooted in first principles about where wealth comes from, about the people that we should look to for solutions to so many of the world's problems. He was offering, as he put it, a warning to the world about abandoning economic liberty. Right. And I think what you just mentioned is probably one of the most important things about the speech is that it was a warning to the West. He said it verbatim. And this is from a recently elected Latin American leader. And of course, he only won as an outsider in Argentina. But here he comes as an outsider, as a Latin American president, speaking directly to the West, which I think is something that doesn't happen very frequently because to the extent that Latin American leaders make any headlines, it's usually with this victim mentality and with the theory that Latin America is poor because other countries are rich.
or that other countries became rich at the expense of Latin America and the underdeveloped world. And Millet came here with the opposite of that mentality. He came with a mentality that the wealth creators are actually heroes. The businessmen and the entrepreneurs are heroes. And the warning was towards the states and the bureaucrats and regulations and printing money and not allowing the market to flow freely, saying very clearly that this is what impedes more wealth from being created. And also a defense of capitalism, which you barely hear nowadays, and saying very clearly that it's the capitalist system, the free market system that has lifted so many millions of people out of poverty. And as you mentioned, usually at the World Economic Forum, what they talk about, it's just very basically trendy things like ESG or climate change.
And Millet came with a masterclass in libertarian and free market thoughts. So in that sense, I think it was, to a certain extent, revolutionary. And it's especially interesting to hear... a speech like this coming from an outsider in a country that 100 years ago was on par with the United States in terms of per capita wealth. And Argentina has suffered, as you well know, this slow, steady decline over decades. And so Millet has a pretty clear case study to point to about what happens when you abandon principles of free markets, free exchange.
Yes, that is absolutely right, Caleb. And Millet even spoke about Argentina's experience in saying that he had the moral authority to speak about the virtues of capitalism and free markets precisely because Argentina abandoned them about 100 years ago, first with nationalism and then with Perrinism. And that is what has caused Argentina's very precipitous decline. Whereas when they embraced the principles of free markets of the 1853 constitution, and he mentioned 1860, which was around the time they started to come into place, that's when Argentina enjoyed this tremendous period of economic growth. which, as you said, put it on a par with the very richest countries in the world. And that is what his agenda is. But I think the important point here is that he was saying things, he's been saying a lot of these things in Argentina and in Latin America for years now. But it's the place where he said it. This is not a place, the World Economic Forum in Davos is not a place where you usually hear these very thoughtful.
a very thoughtful case in favor of free markets. It's usually the opposite. It's usually a case in favor of interventionism and letting technocrats control more aspects of citizens' lives. And another interesting part of Millet's speech is that he updated, he warned about the dangers of socialism, but he also updated the definition of socialism. And according to Millet, you should also think about things like money printing and the debt, out-of-control debt spending and regulations as ways in which the state can control citizens' lives. And I think it's a very timely warning far beyond Argentina.
You know, I want to get to some of the details there, and I could talk about this speech for a long time. I feel like it got too brief recognition when it was delivered. But what was the general reaction? This is a strident presentation before a group of people who aren't used to sort of being dressed down by someone from a country that has been on the wane for so long, being lectured about essentially the principles that give rise to wealth creation on the earth. Well, that's a great question. And I suppose it depends on who you ask, because I suppose a lot of the people at the event, the world leaders, the technocrats,
the businessmen who are enthralled to ESG, they did not enjoy the speech at all. But I think especially on the internet, and I think a lot of people watched it even live or soon after it happened because it was being dubbed. And then there was that wonderful direct translation into English through AI. And so I think a lot of people now beyond Latin America, beyond the Spanish speaking world, which is the truly amazing thing, are learning about free market principles, the first principles, thanks to Millet and thanks to Millet's speech. And I think we haven't seen this thanks to a...
to a president or a head of state in many years. And that's why I think it's remarkable. And another thing that he said that I assume the DevOps crowd didn't really like was his repeated attack on the myths of market failures and saying, you are all concerned about fixing the market here and fixing the market there. We're supposed to fail. But really, when you have a so-called market failure, it's usually a failure of the state and it's usually a failure of state intervention if you look at it in the correct way. And I think for this particular venue, again, this is something...
absolutely radical and revolutionary, which is why I think also that a lot of people on the internet very much liked it. He talked about money printing as an apparatus of state control, which you mentioned. And that's certainly true. It is an apparatus by which the state can effectively steal wealth from people who hold those particular assets. But there remains a big if in the Millais presidency, which is if he can't get dollarization, a lot of his program is sort of...
doomed, isn't it? Yes. Well, this is something that we've been writing about here at Cato. And you shouldn't forget that the main proposal of Millet's candidacy when he started rising in the polls was to dollarize the economy and close the central bank because Argentina at the time had 130% inflation. Now you have inflation well over 200%, which is why also Millet really understands what he's talking about when he's mentioning the dangers of money printing. But one critique that we've had in the first month or month and a half around of his presidency is that
There is no sign that he is about to dollarize the economy and the economy minister or the finance minister that he ended up naming is not a fan of dollarization. And they're certainly not implementing dollarization at this point. And we fear that that is a mistake. And we think they should proceed with dollarization first and foremost. And you can take care of the fiscal problems as you dollarize, which, of course, are in the end the main problem because of chronic fiscal deficits being monetized. That's the reason why you have inflation in the first place.
But if you look at the experience of other countries, you really have to solve the monetary problem first, which you do through dollarization. If you don't do that, we fear that you put all these other great measures that Millet has put in place, for instance, ending rent controls and price controls, you put that all at risk if you don't solve the monetary problem as soon as possible. In many ways, U.S. residents are less free to make their own health care decisions than residents of other countries. Government controls a larger share of health spending in the United States than in Canada, the United Kingdom, and most other advanced nations. State and federal governments subsidize low-quality medical care, penalize high-quality care, and block innovations that would otherwise reduce prices. Recovery, a new policy guide from the Cato Institute, shows that making health care as universal as possible requires ending all barriers governments place in the way of better, more affordable, and more serious health care. You can get your copy of Cato.org. That will do it for this edition of Cato Audio. I'm Caleb Brown.
Talk to you again next month.