Policy Institutes

Reuters has an investigation today of the ways in which the Saudi-led War in Yemen has empowered Al Qaeda in the Arabian Peninsula (AQAP), the group’s local affiliate. While it’s been relatively obvious to observers for some time that AQAP had benefitted from the conflict, the extent of their newfound control and wealth as detailed in the article is fascinating.

Thanks to the seizure of the city of Mukalla, AQAP now controls Yemen’s third largest port, a position that Reuters estimates has allowed them to earn up to $2 million per day in fees and taxes. Extortion of businesses, including around $1.4 million from the state oil company, has also provided an easy revenue source, as has the far less subtle method of simply robbing the city’s banks.

Perhaps of more interest is AQAP’s approach to providing civic services and stability. While it’s untrue that Al Qaeda has never experimented with state-building before, such a strategy has more typically been associated with ISIS. As the Reuters investigation notes,  in Mukalla, Al Qaeda is trying to present themselves as a less cruel and brutal ruler than ISIS, an approach which seems to be working with some Yemeni citizens who fear a return to instability.

So entrenched is the group that it attempted to set up a formal profit-sharing deal with the national government to split oil revenues. It is even managing taxes for the citizens of Mukalla, cancelling payroll taxes and promoting various populist policies. All of this is a remarkable feat for a group which has been the focus of concerted US drone strikes and counterterrorism activities for more than a decade.

But it should not be surprising. The ongoing GCC-backed military campaign has effectively ignored AQAP in its single-minded focus on the Houthi rebels and their allies. There is even evidence that AQAP fighters have fought alongside the Saudi-backed militias.

Meanwhile, the Saudi-led campaign – designed to restore exiled President Hadi and his government – has been bloody and ineffectual. Not only has it created one of the world’s worst humanitarian crises, its forces have stalled south of the capital without meeting their key objectives.

Today’s report really highlights the inherent contradictions in America’s Yemen policy. By backing the Saudi-led campaign, the U.S. is allowing Al Qaeda to accumulate wealth and territory, effectively undermining at least a decade of counterterrorism work inside Yemen. Adding another wrinkle to this is the fact that the Houthi rebels have often fought against AQAP inside Yemen.

While much criticism of the war in Yemen has focused on humanitarian issues, the sheer reactiveness of our Yemen policy and utter lack of any overarching strategy is worrying. Indeed, the effectiveness of some of those past policies, particularly drone strikes, is itself debatable. Studies actually suggest that there are only limited situations in which decapitation strikes are effective.

Yet the gains made by AQAP serve to highlight that any benefit produced by U.S. attacks on AQAP training camps or other counterterrorism work during the last decade is being rapidly undermined by our support for the current war. 

The campaign to attach legal consequences to supposed “climate denial” has now crossed a fateful line. Yesterday:

The Competitive Enterprise Institute (CEI) today denounced a subpoena from Attorney General Claude E. Walker of the U.S. Virgin Islands that attempts to unearth a decade of the organization’s materials and work on climate change policy. This is the latest effort in an intimidation campaign to criminalize speech and research on the climate debate, led by New York Attorney General Eric Schneiderman and former Vice President Al Gore….

The subpoena requests a decade’s worth of communications, emails, statements, drafts, and other documents regarding CEI’s work on climate change and energy policy, including private donor information. It demands that CEI produce these materials from 20 years ago, from 1997-2007, by April 30, 2016.

CEI General Counsel Sam Kazman said the group “will vigorously fight to quash this subpoena. It is an affront to our First Amendment rights of free speech and association.” More coverage of the subpoena at the Washington Times and Daily Caller.

A few observations:

  • If the forces behind this show-us-your-papers subpoena succeed in punishing (or simply inflicting prolonged legal harassment on) a group conducting supposedly wrongful advocacy, there’s every reason to think they will come after other advocacy groups later. That includes yours.
  • This article in the Observer details the current push to expand the probe of climate advocacy, which first enlisted New York AG Eric Schneiderman and then California’s Kamala Harris — into a broader coalition of AGs, with Massachusetts and the Virgin Islands just having signed on. More than a dozen others, such as Maryland Attorney General Brian Frosh, seem to be signaling support but have not formally jumped in. More: Peggy Little, Federalist Society.
  • CEI people, many of whom we count as longtime friends and allies in the pro-liberty policy community, have been active critics of the Schneiderman effort, with Hans Bader, a senior attorney there, highly critical just a week ago.
  • In these working groups of attorneys general, legal efforts are commonly parceled out among the states in a deliberate and strategic way, with particular tasks being assigned to AGs who have comparative advantage in some respect (such as an unusually favorable state law to work with, or superior staff expertise or media access). Why would one of the most politically sensitive tasks of all — opening up a legal attack against CEI, a long-established nonprofit well known in Washington and in libertarian and conservative ideological circles — be assigned to the AG from a tiny and remote jurisdiction? Is it that a subpoena coming from the Virgin Islands is logistically inconvenient to fight in some way, or that local counsel capable of standing up to this AG are scarce on the ground there, or that a politician in the Caribbean is less exposed to political backlash from CEI’s friends and fans than one in a major media center? Or what?
  • I recommend checking out the new Free Speech and Science Project, which intends to fight back against criminalization of advocacy by, among other things, organizing legal defense and seeking to hold officials accountable for misusing the law to attack advocacy.
  • This is happening at a time of multiple, vigorous, sustained legal attacks on what had been accepted freedoms of advocacy and association. As I noted yesterday in a piece in this space, Sen. Elizabeth Warren has just demanded that the Securities and Exchange Commission investigate several large corporations that have criticized her pet plan to impose fiduciary legal duties on retirement advisors, supposedly on the ground that it is a securities law violation for them to be conveying to investors a less alarmed view of the regulations’ effect than they do in making their case to the Labor Department. This is not particularly compelling as securities law, but it’s great as a way to chill speech by publicly held businesses.

[cross-posted, with slight changes, from Overlawyered]

I often find myself described, not as a monetary economist, plain vanilla or otherwise, but as a “free banker,” and (therefore) as someone who wants to “abolish” the Fed.  Yet I’ve also been accused of lacking consistency, and even of being an outright apologist for monetary central planning, because I also have some nice things to say about monetary rules in general, and about nominal spending rules in particular.

So, am I a free banker or not?  The short answer is…well, there isn’t a short answer other than “it’s complicated.”

First of all, I don’t much like being called a “free banker,” or a free banking “advocate.”  Yes, I have a soft spot for free banking; yes, I think that the Scottish and Canadian systems of yore, which approximated most closely, performed a helluva lot better than their modern, centralized counterparts; and yes, I think more people should study those systems, and free banking more generally, so as to better appreciate the extent to which competitive market arrangements are capable of producing stable and efficient systems of money and banking.

Yet these beliefs of mine don’t mean that I’m not interested in reforms that fall short of any sort of some free-banking ideal.  Still less do they mean that I imagine that, were we to simply get rid of the Fed, root and branch, a set of currency-issuing private banks would rush in at once to fill the void. Nor do I suppose for a moment that allowing commercial banks to issue their own notes, and otherwise deregulating them, while leaving the Fed’s current money-creating powers unchanged, would put an end to monetary instability.  Finally, despite having moved from the academy to Cato, I’m more interested in promoting a proper understanding of the economic implications of free banking than I am in leading a crusade of any sort.  (Then again, I’m confident that, if more people understood free banking, we’d have crusaders aplenty for it.)

But there’s a more fundamental reason why partiality to free banking today doesn’t automatically translate into a desire to annihilate central banks.  When banknotes were still redeemable claims to some “outside” money, like gold or silver coin, to favor free banking — that is, to favor having rival banks issue redeemable notes over having a single bank alone do so — was equivalent to being opposed to having a central bank.  In a metallic standard context, freedom of entry into the currency business sufficed to keep any one bank’s actions from provoking a general expansion or contraction, because while a monopoly issuer might count on other banks treating its IOUs as cash reserves, a bank enjoying no monopoly privileges could expect rival issuers to treat its notes like so many checks, to be promptly presented to it for redemption.  Subjecting a formerly privileged bank of issue to competition therefore served, no less than abolishing it altogether might, to deprive the bank of its short-run ability to influence aggregate nominal magnitudes.  Were the bank to be abolished, on the other hand, other banks, perhaps including new entrants, could readily make up for its absence, because the economy’s (metallic) monetary standard would remain intact.

The situation becomes quite different once metallic standards give way to fiat money.  In a fiat system free banking ceases to be a straightforward alternative to, or substitute for, central banking.  That’s so because the monopoly bank of issue is now responsible, not just for issuing paper currency, but for supplying the economy’s standard money.  There is, in other words, no monetary standard apart from that embodied in the central bank’s liabilities.  A “standard” U.S. dollar today is no longer a quantity of silver or of gold; it is a one-dollar Federal Reserve Note, or a one-dollar credit on the Fed’s books.  It follows that, to simply abolish the Fed, in the strict sense of liquidating it (that is, parceling-out its assets to its creditors, and destroying and retiring its paper liabilities),  would be tantamount to abolishing the U.S. dollar itself.  Though it’s still possible, and perhaps even likely, that some sort of new new banking and currency system would arise, that development would have to be accompanied by the prior or concurrent development of a new monetary standard or standards — a potentially fraught proposition.  Some may well be willing to risk such a radical change; but no one could predict its results with any degree of confidence.

In contrast, a free-banking reform that left the Fed’s money-creating powers unchanged, while allowing private firms to issue dollar-denominated paper currency in competition with it, wouldn’t make a big difference, even supposing that the new currency would be so attractive that no one bothered holding Federal Reserve notes at all.  The change wouldn’t be entirely without significance.  For one thing, it would substantially reduce the Fed’s, and therefore the Treasury’s, seignorage revenue, converting it from producers’ to consumers’ surplus.  The reform would also relieve the Fed of the burden of providing for seasonal and cyclical changes in currency demand.  Finally, for reasons I’ve spelled-out in The Theory of Free Banking and elsewhere, the change could make for a more stable relationship between the quantity of base money and the volume of aggregate spending or NGDP.  But so long as paper currency consists either of Federal Reserve dollars themselves or of dollar-denominated private banknotes, a competitive banknote regime alone would not reduce, let alone undermine, the Fed’s general ability to influence nominal magnitudes by buying or selling assets, and perhaps by other means.  Nominal values would be no less dependent than before on the size of the Fed’s balance sheet, holding other determinants of the real demand for reserves (including interest rates on reserves and alternative assets) constant.  It follows that allowing other banks to issue currency would not rule out undesirable central-bank sponsored changes in spending, output, and the rate of inflation.

It follows from this that, so long as an economy relies on fiat money, the quantity of standard money itself, instead of being regulated by private market forces, has to be regulated by some other means.  That must either mean discretionary control by bureaucrats, or control by means of some sort of monetary rule.  The rule might itself replace the fiat standard with a revived commodity standard, by turning purely nominal official monetary liabilities into genuine claims to definite quantities of gold or silver.  But that is only one possibility among many — and an especially difficult one to pull off.  Most rules would instead preserve the standard money’s “fiat” status.  And most would preserve the rumps, if nothing else, of established central banks.  Call it central banking, night-watchman style.

In short, although a century or more ago, free banking and monetary rules were rival ideas for guarding against abuses of discretionary monetary policy, today they are properly seen as complementary schemes, one for improving the performance of the banking system, the other for reforming the base-money regime.  Therefore there’s no reason why one can’t favor, and even crusade for, both.

[Cross-posted from Alt-M.org]

Senator Bernie Sanders wants to dramatically increase the burden of government and he claims that his policies won’t lead to economic misery because nations such as Sweden show that you can be a prosperous country with a big welfare state.

Perhaps, but there are degrees of prosperity. And a large public sector imposes a non-trivial burden on Nordic nations, resulting in living standards that lag U.S. levels according to OECD data.

Moreover, according to research by a Swedish economist, people of Scandinavian descent in America produce and earn much more than their counterparts at home.

That’s not exactly a ringing endorsement of the Nordic Model.

But there actually are some things we can learn from places such as Sweden. And not just things to avoid.

As Johan Norberg explains in this short video (you may have to double-click and watch it on the YouTube site), there are some very good policies in his home country. Indeed, in some ways, his nation is more free market than America.
https://www.youtube.com/watch?v=zhE_68GMJIk

I especially like Johan’s explanation about how Sweden became a rich country before the welfare state was adopted.

And he’s right that Sweden had a smaller government and a lower tax burden than the United States for a long period.

Indeed, there was very little income redistribution until the 1960s.

But once the welfare state was adopted, the Swedes went crazy and dramatically increased tax rates and the burden of government spending. And, as Johan explained, that’s when Sweden’s relative prosperity began to drop.

And big government eventually led to an economic crisis in the early 1990s, which has sobered up Swedish officials and policy in recent decades has been moving in the right direction.

Including significant reductions in the budget and lower tax rates (though the fiscal burden is still far too high).

I particularly like Johan’s advice to copy what works. We should partially privatize our Social Security system (actually, we should be like Australia and have full privatization, but we should at least get the ball rolling). And we should have extensive school choice like Sweden. Moreover, let’s copy the Swedes and get rid of the death tax.

Sweden is actually a very pro-market country, albeit one that is weighed down by a large welfare state and excessive taxation. Interestingly, if you look at the non-fiscal policy variables from Economic Freedom of the World, Sweden actually ranks much higher than the United States (along with many other Nordic nations).

The bottom line is that Sweden actually is somewhat like the United States. There are some very bad policies and some fairly decent policies. America ranks above Sweden in a couple of areas, but lags in other areas. The net result is that we’re both more market-oriented than the average western nation (compare Sweden and Greece, for instance), but both well behind the pace setters for economic liberty, Hong Kong and Singapore.

For more information on this topic, here’s a video from the Center for Freedom and Prosperity that features another Swede explaining what works and doesn’t work in her country.

Economics 101: Learning From Sweden’s Free Market Renaissance

P.S. Denmark is a lot like Sweden. A crushing tax burden and extravagant welfare state, but also hyper-free market policies in other areas (and maybe some fiscal progress if Denmark continues to follow the Golden Rule).

U.S. foreign policy in the Greater Middle East has been a costly and counterproductive train wreck. But the elites who are responsible can’t see what is plainly apparent to the rest of us. Why is this?

Historian Andrew Bacevich has a few ideas. He’ll be at Cato next week to discuss his latest book, America’s War for the Greater Middle East: A Military History, and he previewed the book this past weekend at Politico Magazine.

Bacevich focuses on two key questions, and offers one big answer:

Why has the world’s mightiest military achieved so little even while absorbing very considerable losses and inflicting even greater damage on the subjects of America’s supposed beneficence? Second, why in the face of such unsatisfactory outcomes has the United States refused to chart a different course? In short, why can’t we win? And since we haven’t won, why can’t we get out?

The answer to these questions starts with questioning the premise. The tendency to see the region and Islamic world primarily as a problem that will yield to an American military solution is, in fact, precisely the problem. To an unseemly and ultimately self-destructive degree, we have endorsed the misguided militarization of U.S. foreign policy. As a consequence, we have allowed our country to be pulled into the impossible task of trying to “shape” the region through martial means.

We should dwell in particular on this idea of “shaping” the region, and the rest of the planet, generally.

The concept appears prominently in an early draft of the Pentagon’s Defense Planning Guidance of 1992. “The new international environment has…been shaped by the victory of the United States and its coalition allies over Iraqi aggression.” That was both “the first post-cold-war conflict” and “a defining event in U.S. global leadership,” going forward.

Then-Undersecretary of Defense for Policy Paul Wolfowitz, who helped supervise the drafting of the DPG, believed that the application of U.S. military power would deal with the “sources of regional instability in ways that promote international law, limit international violence, and encourage the spread of democratic government and open economic systems.” 

But Wolfowitz and other leaders of the foreign policy establishment vastly exaggerated the U.S. military’s capacity for shaping the global order. The Middle East has proved particularly resistant to U.S. “shaping.” Instead, the presence of U.S. forces has engendered considerable resistance. This often manifests itself in the form of violence against our military personnel in the region, as with the Khobar Towers bombing in 1996, or the attack on the USS Cole in 2000. But it also comes in the form of acts of terrorism against Americans and U.S. interests, including the attacks on embassies in Kenya and Tanzania in 1998, and, of course, right here at home on 9/11.

Foreign policy elites may have wanted to reshape the Middle East, and then the world, but our responses to the threat of Islamist terrorism emanating from the region have mostly shaped us.

Even Wolfowitz appreciated the danger of terrorist blowback. In making the case for war with Iraq in 2003, he admitted that resentment over the stationing of U.S. forces in Saudi Arabia, had “been Osama bin Laden’s principal recruiting device,” and he predicted that the removal of U.S. troops from the kingdom would have positive effects throughout the region. “Just lifting that burden from the Saudis is itself going to open the door” to a more peaceful Middle East, Wolfowitz told interviewer Sam Tannenhaus in the spring of 2003.

Looking ahead to the post-Hussein period, Wolfowitz implied that the removal of Hussein would enable the United States to withdraw troops from the region. “I can’t imagine anyone here wanting to … be there for another 12 years to continue helping recruit terrorists.”

But that was 13 years ago. And, of course, U.S. troops did stay in Iraq for nearly nine years. Bacevich discusses the shifting rationales with his typical flair. Some foreign policy elites now think that U.S. troops never should have left Iraq, and a few want them to go back in (plus Syria, just for good measure). The interventionists appear just as committed to trying to shape the Middle East as they were before we spent trillions of dollars, suffered and/or caused tens of thousands of deaths, and bequeathed to the people of Iraq, and the wider region, chaos, civil war, and despair.

I discuss Bacevich’s article and book in a recent post at The National Interest blog The Skeptics. And if you’d like to hear more from Prof. Bacevich, be sure to sign up to attend next week’s discussion to be held at Cato on Wednesday, April 13th, at Noon. For more details, and to register, visit here

There are few David versus Goliath matchups in the international system quite like Taiwan versus China. Across virtually every indicator of national power, Taiwan is completely outclassed. In the past, Taiwan relied on a qualitatively superior military and an implicit U.S. security guarantee to maintain its de facto independence, but advances in military technology have enabled Beijing to close the quality gap. Taiwan’s military equipment and doctrine is ill-suited to this new reality. If Taiwan wishes to preserve its de facto independence, it must take a page out of Beijing’s playbook and adopt an anti-access/area denial (A2/AD) strategy.

A2/AD incorporates guided weapons and intelligence/observation systems to prevent enemy military forces from entering a specified area, and, failing that, make it costly for forces to operate within said area. Relatively inexpensive weapons systems that are difficult to defend against, such as long-range anti-ship cruise and ballistic missiles, are a hallmark of A2/AD. American military and political objectives in East Asia require power projection, the moving of air and naval power close to China’s shores. A2/AD is designed to make that difficult.

The same A2/AD concepts and technology that threaten U.S. forces’ freedom of movement can be used by Taiwan to defend against a Chinese invasion. This is just one of several military scenarios that could unfold, but the Taiwanese military should be prepared for the worst. The first phase of a Chinese invasion would be establishing air superiority over the Taiwan Strait and control of the sea around Taiwan. China needs to project power in order to accomplish its objectives. Taiwan can’t defeat China in a stand-up fight, but it can deny the PLA from achieving its objectives with an A2/AD strategy.

Today, Taiwan does not have the necessary military equipment, especially air and naval forces, to conduct an effective A2/AD strategy. Despite having talented pilots, the fighter aircraft of Taiwan’s air force are outclassed by new and numerous Chinese aircraft and missile systems. Earlier this week, the RAND Corporation published a study assessing Taiwan’s air defense options. The study recommends reducing the size of Taiwan’s relatively costly, aging, and increasingly vulnerable fighter fleet to invest a limited military budget toward mobile surface to air (SAM) missile systems. The relatively few surface warships in Taiwan’s navy are similarly vulnerable to Chinese weapons systems. James Holmes of the Naval War College recently recommended that Taiwan’s navy acquire more numerous, fast missile boats armed with anti-ship missiles instead of fewer, larger surface warships that would be relatively easy for the PLA to locate and sink.

Getting Taiwan’s military, people, and politicians to accept an A2/AD strategy will be difficult. Capabilities like surface warships and fighter aircraft are symbols of national strength and pride that are hard to do away with even if they are costly and vulnerable in a fight against China. Taiwan’s president-elect Tsai Ing-wen has promised to increase military spending, which could allow the military to keep these weapons while also increasing their arsenal of weapons suited for A2/AD. In any case, Taiwan’s military should start developing the capabilities and doctrine to use A2/AD against China. This will improve Taiwan’s ability to deter China, and defend itself from invasion should deterrence fail. 

Sen. Elizabeth Warren (D-Mass.), as the business press reports, “is calling on the Securities and Exchange Commission to investigate several critics of the Department of Labor’s fiduciary rule, claiming they misled investors through duplicitous statements.”  It seems several large financial businesses have decried the pending rule as unworkable and seriously harmful to the retirement industry, but have also, in conference calls with investors, said they expected continued growth and profitability even if the rules go through. In a typically aggressive move, Warren cited by name four companies she wanted investigated for these statements, and wrote: “Corporate interests have become accustomed to saying whatever they want about Washington policy debates, with little accountability when their predictions prove to be inaccurate.”

It’s unsettling, to start with – as critics were prompt to note – that a powerful Senator should seek legal consequences for private actors whose “predictions” in Washington policy debates “prove to be inaccurate.” Predictions about effects are the standard way of arguing about public policy – one side predicts, say, that a certain change in policy will cause a slowdown in business or make some good more costly, the other side predicts it won’t, and eventually we find out who was wrong. Pundits, social scientists, and Senators themselves regularly offer predictions that prove wildly inaccurate, yet ordinarily without legal as distinct from reputational consequences.

Let’s assume – okay, let’s pretend – that Warren’s goal here is not to chill the speech of companies that are vocally criticizing one of her own pet policy projects. Let’s imagine that her sole concern is for the well-being of the SEC’s formal constituency, investors. (It’s like pretending that when the Attorney General of New York investigates ExxonMobil for not telling investors that fossil fuel use is destroying the world, it’s really shareholder welfare that’s on his mind.) Would it actually make her happy if the four financial companies dropped the happy talk with Wall Street and said, yes, the Labor rule could mess up our business in important ways that we can’t fully understand or predict? Even if that increased the volume of opposition to the rule by causing shareholders to take alarm? 

Unless readers have long memories, they’re probably not aware that Warren is not inventing a new tactic for trying to chill business speech: she’s reviving an old one.  Way back in 1980, the magazine Regulation – now a Cato publication, then published by our friends at the American Enterprise Institute – ran an opinion editorial on precisely this issue, provocatively titled “Two Lies Are Better Than One.” While the piece was unsigned, its puckish humor and close knowledge of the legalities of the agency rulemaking process suggest that it was written by a close co-thinker (at least) of then-Regulation editor, and later Supreme Court justice, Antonin Scalia.  

The proposal to prohibit “crosstown hypocrisy,” as it was catchily nicknamed, was filed before the SEC back then by none other than Ralph Nader and the Nader-founded group Public Citizen. After noting the proposal’s surface plausibility, and its element of redundancy (since trial lawyers can already sue over material misstatements made to investors, whether or not the SEC acts), the Regulation author goes on to speculate about the unlikelihood of such a principle being applied in other legal contexts: “To take only one of many possible examples: plaintiffs in tort suits might be required to present their courtroom descriptions of their disabling injuries to all prospective employers.” But the author then identifies a weightier problem: the proposal ignores the very nature of the adversary system that defines lawyers’ professional role in agency rulemakings as elsewhere. In the adversary process, it is not only tolerated but expected that lawyers for a party will marshal a case so as to select those bits of evidence and emphasize that combination of hopes and fears that place the sought-after outcome in its most favorable light. It is not, of course, only the business participants in rulemaking debates that put the best or worst face on their cases; lawyers representing consumer, labor, environmentalist, and other advocates all do so too. The piece concludes:

Unless the Nader proposal is changed to include some appropriate remedy for such noncorporate hyperbole, it represents not a radical abandonment of the adversary system but, to the contrary, one of the classic gambits in the book of adversary strategy, to be found under the heading “handicapping one’s opponent.” 

And so with Sen. Warren’s proposal.  

On Tuesday President Obama denounced corporations that cut their taxes by moving their headquarters abroad, and his Treasury Department issued new rules to stop the practice. But rather than helping hard-working Americans, as the president claimed, the new rules against “inversions” will hurt our economy. Higher corporate taxes will mean less corporate investment, which in turn means reduced productivity and lower wage growth for American workers.

Last month, the president hosted the new Canadian Prime Minister, Justin Trudeau, at the White House. Apparently, they hit it off partly because they share the same left-wing politics. But politics are different in different countries, and many leftist leaders abroad don’t have the same level of hostility to corporations that today’s Democratic leaders seem to. Both liberal and conservative leaders in places such as Canada and Europe have supported reduced corporate tax rates in order to boost investment and create job opportunities. That’s why the global average corporate tax rate is now just 24 percent, even as the U.S. federal-state rate remains stuck at 40 percent.

Trudeau released his first budget a couple weeks ago, and it did not tamper with Canada’s 15 percent federal corporate tax rate. Indeed, the budget included the chart below, which indicates pride in Canada’s corporate tax competitiveness. The chart compares federal-state corporate rates—both statutory rates and effective rates, which are the rates that new investments actually face. The U.S. has the highest statutory and effective rates among these major economies. The U.S. effective corporate tax rate is about double the Canadian rate.

In his comments the other day, the president said that we need to revamp our corporate tax system and reduce the rate. He has said that many times before, but there is little evidence that he actually means it.

In an abstract presented at the 26th PACLIM Conference that was published in a recent issue of Quaternary International, Verosub (2015) writes about the challenges of maintaining and utilizing water supplies in California. However, the geologist from the University of California notes that what is often missing from discussions of water security is a consideration of the effects of natural climate variability beyond the historical record. As an example of such variability, Verosub cites the fact that river flow and lake measurements during the 20th century “document the occurrence of several multi-year droughts in the past 100 years while tree ring records show that 20-year and 70-year droughts occurred during the last 300 years.”

On an even longer time scale, the scientist reports that “at least once and probably several times in the last few thousand years, there have been droughts severe enough to drop the level of Lake Tahoe by several tens of meters, which allowed Douglas fir trees to grow to maturity on exposed lake beds.” Furthermore, other data indicate episodes of extreme flooding, such as the water year of 1861-1862 that brought extensive rainfall from Oregon down through southern California.

In consequence of these realities, Verosub concludes that “the paleoclimate history of California suggests that even in the absence of climate change due to anthropogenic greenhouse gases, decadal, multi-decadal, or even century-long droughts are a real possibility in the future for California as is flooding on a greater scale than was seen in the twentieth century.” According to Verosub, if such natural events were to occur today, they would easily “wreck havoc with California’s delicately balanced water delivery system” in the case of drought, and “overwhelm the levee system and destroy California’s ability to transfer water from north to south” in the case of flooding. No doubt, such events would quickly be labeled by climate alarmists and advantage-seeking politicians as “human-caused.” Yet, given the historic periodicity of these events, there would be no way to prove that they weren’t natural. In fact, there mere occurrence would simply confirm that they are natural, recurring over and over again throughout history, human influence notwithstanding. As such, the title of the author’s work provides some good advice for Californians: Don’t worry about climate change; California’s natural climate variability will probably “get us” first.

 

Reference

Verosub, K. 2015. Don’t worry about climate change; California’s natural climate variability will probably “get us” first. Quaternary International 387: 148.

Even when Donald Trump seems to get something right, he’s mostly wrong. At least when it comes to economics.

Many Americans are suffering financially. Yet the problem is not trade: Americans have grown wealthy as a trading nation. In contrast, regulation has done much to harm U.S. competitiveness.

The Obama administration is busy writing new rules to turn America into its vision of a good society, irrespective of the impact on liberty or prosperity. Last year Uncle Sam spent $62 billion to run the rest of our lives.

Observed Patrick McLaughlin and Oliver Sherouse of the Mercatus Center: “Over the last 20 years the regulatory budget has more than doubled in real terms while the number of total restrictions has grown by about 220,000—a 25 percent increase.”

The problem is not only the expense of enforcement. Far greater is the cost of the impact on the economy.

Last year Clyde Wayne Crews of the Competitive Enterprise Institute assessed the impact of regulation in his working paper entitled “Tip of the Costberg.” He figured the total price of regulation to be $1.88 trillion.

However, these figures almost certainly are too low. Crews argued: “Too often, regulatory impacts don’t get measured. But further, the disruption of market processes and the derailment of wealth, safety and health creating processes themselves are for the most part wholly neglected.”

Regulatory costs play out in many ways. One aspect is what an individual or company spends to comply with government dictates. Far harder to measure is what does not occur as a result of arbitrary and expensive rules. What products are not launched, what enterprises are not started, what jobs are not created?

Of course, regulations theoretically are promulgated because they yield net benefits after costs. However, agencies have an incentive to inflate the value of what they are doing. That means exaggerating problems and “social costs,” overstating alleged benefits, and discounting compliance costs.

Overall how much have we lost from excessive, unnecessary regulation? A lot, according to economists John W. Dawson and John J. Seater.

They considered the cumulative impact of losing a couple percent of economic growth year in and year out from 1949 through 2005: “That reduction in the growth rate has led to an accumulated reduction in GDP of about $38.8 trillion as of the end of 2011. That is, GDP at the end of 2011 would have been $53.9 trillion instead of $15.1 trillion if regulation had remained at its 1949 level.”

Increased regulation also contributes to increased inequality. In January McLaughlin and Laura Stanley of Mercatus concluded that such rules “skew income toward politically connected producers and away from individual who lack the resources necessary to navigate the legal and regulatory framework.” 

Finally, there is the issue of lost liberty. Crews released a second study last year entitled “Mapping Washington’s Lawlessness 2016.” It reviewed what he termed “regulatory dark matter.”

The regulatory process is essentially lawless, beyond the normal accountability of a democratic system. As Crews explained: “Congress passes and the president signs a few dozen laws every year. Meanwhile, federal departments and agencies issue well over 3,000 rules and regulations of varying significance. A weekday never passes without new regulation. Beyond those rules, however, we lack a clear grasp on the amount and cost of the thousands of executive branch and federal agency proclamations and issuances, including memos, guidance documents, bulletins, circulars, and announcements with practical regulatory effect.”

Americans are suffering. But closing off the economy is no answer to them.

As I pointed out in American Spectator online: “Policymakers should address federal, state, and local governments which are doing so much to prevent American companies from out-competing foreign operations and rewarding Americans accordingly. These are the bad policies to blame for creating today’s economic problems and imposing widespread financial hardship, thereby fueling the populist Trump bandwagon.”

Donald Trump again is causing international consternation. His remarks about South Korea and Japan developing nuclear weapons set off a minor firestorm.

“It would be catastrophic were the United States to shift its position and indicate that we support somehow the proliferation of nuclear weapons to additional countries,” argued deputy national security adviser Ben Rhodes.

Actually, what would be catastrophic is American involvement in a nuclear war as a result of its defense commitment to another nation, especially one able to defend itself.

Neither country pays enough for its own protection, instead preferring to rely on Washington. The issue of one of them going nuclear “at some point is something that we have to talk about,” he explained.

That’s hardly a radical sentiment. The issue recently was raised by a former presidential candidate in South Korea. After Trump’s remarks Cheong Seong-chang of the Sejong Institute observed: “If we have nuclear weapons, we’ll be in a much better position to deal with North Korea.”

Over the years there has been talk in Japan about pursuing the nuclear option. Former Osaka Mayor Toru Hashimoto said Trump’s sentiments allowed “Japan to change the peace-addled notion that America will protect us.”

Despite the campaign to treat nuclear nonproliferation as sacrosanct, it cannot be decided in isolation. Broadly speaking, it is better if fewer nations have nukes.

Yet in some cases proliferation might be stabilizing. Had Ukraine not given up its nuclear weapons left over from the collapse of the Soviet Union, Russia might not have grabbed Crimea.

Worse, the way Washington won assent of some nuclear-capable powers to abstain is to provide a “nuclear umbrella,” that is, promise to use nukes to defend them if necessary. As a result, the price of nonproliferation in East Asia is America’s willingness to risk Los Angelas to protect Seoul and Tokyo, and maybe Taipei and Canberra too.

Today nonproliferation means only the bad guys get guns. In East Asia China, Russia, and North Korea are the nuclear powers. America is supposed to provide geopolitical balance.

The result of this situation truly could be catastrophic.

So far, America’s defense promises have not created stability. China is acting aggressively toward Japan, Philippines, and Vietnam in particular; Russia has challenged the U.S. in the eastern reaches of Europe and the Middle East. North Korea is worse, constantly breathing fire against its neighbors and the U.S.

Still, policymakers act as if U.S. defense guarantees will never get called. The threat of nuclear retaliation undoubtedly has deterrent value. However, the two great wars of the 20th century started because deterrence failed.

In particular, threats which seem inconsistent with underlying interests have little credibility. Thus, the Chinese have publicly doubted that America would risk nuclear war over Taiwan’s independence.

Moreover, once given, it is hard to back away from security commitments which have lost their original purpose. Which means if deterrence fails America could be at war automatically, without considering the stakes.

Finally, promising to defend other, smaller powers allows them to hold American security hostage. With Washington behind them they are more likely to engage in risky behavior. During the 2000s Taiwan’s independence-minded Chen Shui-bian upset Chinese sensibilities.

Washington’s view that they are covered by the “mutual” defense treaty likely has encouraged Tokyo to refuse to even discuss the status of the Senkaku/Diaoyu Islands with China. Philippines is attempting to enlist the U.S. in its squabble with Beijing over Scarborough Reef.

America’s nuclear umbrella deserves scrutiny and a serious debate. Yet Rhodes dismissed even discussing the idea, contending that “for the past 70 years” the U.S. has opposed nuclear proliferation. But when the world changes, policy also should change. As I pointed out in National Interest: “The greatest risk of catastrophe for this nation would be sleep-walking into an Asian nuclear war.”

I’ve warned for a while about the scheme in Scotland to appoint a state functionary, a so-called Named Person, to look after the interests of every child — not just every child in state care or for whom there are indicia of dangerous neglect or abuse, but every child, period. Now the results are coming in from early rollout of the scheme in some parts of the country. [The Scotsman]

[The professor’s] shock was compounded by the fact that work on this dossier, known as a Family Record, had started without his knowledge. He had only discovered its existence by accident long after the details of his home life had begun to be recorded. Furthermore, it was only after an eight-month battle with his local health board that he managed to obtain a redacted version of the document, which began to be compiled after an acrimonious break-up with his wife which led to a protracted legal row over access to their two children.

Initially pushed through with little opposition, the plan is now causing political grief for the ruling Scottish Nationalist Party of Nicola Sturgeon. Ruth Davidson, leader of the third-place Scottish Conservative Party, has called for rethinking the scheme, and now Scottish Labour Party leader Kezia Dugdale has suggested a halt to its implementation, while still favoring it in principle. The scheme is set to become effective for Scotland as a whole on August 1.

Tragic cases like that of 11-week-old Caleb Ness, the Edinburgh baby killed by his father despite the involvement of social work and health staff, have convinced the Scottish Government that action has to be taken. Indeed, the Named Person approach has the support of many organisations within civic Scotland, including children’s charities and teaching unions, who believe it will help struggling families and prevent tragedies…. In general, health visitors will act as Named Persons for pre-school children, with head teachers taking up the mantle as they get older.

Where not redacted, the 60-page file on the professor’s family had included observations on his children appearing to have diaper rash and runny noses not cleaned for a while, and observed the father “did not appear to take advice on board fully” regarding the thumb-sucking habit of his younger son:

“I find it sinister. I find it very creepy. I find it chilling,” he said. “They just hoover up all of this hearsay and then collate it into huge documents and on to databases. Under the new legislation all sorts of people have access to these databases. All they need is four or five reasons for intervention and they can hoover up information from any database and there is no control over whether this is true or not.”

[cross-posted from Overlawyered]

That’s the title of a new book by Kathleen Brady of Emory Law School. It’s basically a reinterpretation of the role that religion plays in public life and how it’s treated similarly to and differently than secular belief systems under U.S. law – and it’s fascinating.

The Liberty Fund’s Library of Law & Liberty recently had an online symposium about the book, featuring a lead essay by Prof. Brady and responses by Hillsdale history professor D.G. Hart and myself, and a reply by Brady. Here’s a bit of my essay:

Kathleen Brady’s book The Distinctiveness of American Religion in Law: Rethinking Religion Clause Jurisprudence is a fascinating exposition of the changing role that religion plays in a rapidly secularizing society. What’s so special about religion? Why should courts treat it differently from non-religious belief systems? Why do we still mostly speak of religious free exercise and not so much freedom of conscience or other formulations of broader ideological protections? Why, for example, does an institution like the Hosanna-Tabor Evangelical Lutheran Church and School get exempted from employment-discrimination laws but not the Cato Institute (which is just as opposed to government incursions on how it wants to operate)?

The answers are complicated, although impingements on religious liberty increasingly have the same cause as impingements on secular liberty: an overweening state whose regulatory tentacles reach more and more into that part of the public sphere that is non-governmental. The government, especially a federal government liable to be insensitive to state and local contexts, foments clashes of values where none existed previously. At the same time, the culture has shifted in an illiberal way such that certain views and behaviors—which don’t otherwise threaten public order or the state—have to be stamped out with the force of law, rather than tolerated or even celebrated.

… .

Indeed, the reason we’re even “rethinking religion clause jurisprudence,” to quote Brady’s subtitle, is because people’s attitudes toward both religion and government have shifted. The growing enforcement of centralized ideological conformity, as I’ll describe below, is a real innovation in the use of governmental power. The issue isn’t that Congress is taxing, spending, and borrowing more than it ever has—that’s a different problem—but that it’s forcing more mandates into what used to be private decisionmaking. It’s shifting the boundary between the private and public spheres, and the shift tramples individual agency and narrows the choices that people are allowed to make in pursuit of their particular version of the good life.

Read the whole symposium – and the book.

President Obama’s executive actions on immigration are now before the Supreme Court, with a hearing in United States v. Texas scheduled for April 18. As we have at the district court and appellate level, Cato has filed a brief supporting the Texas and the other plaintiff states. Although our immigration system is broken, Congress’s failure to fix it doesn’t give the president the power to institute reforms himself.

Through the Deferred Action for Parents of Americans and Lawful Permanent Residents program (DAPA), the executive branch has given temporary legal status to more than four million illegal migrants, entitling them to work authorizations and other benefits. DAPA amounts to a deliberate effort to bypass Congress and conflicts with five decades of congressional immigration policy. Perhaps most importantly, it violates the separation of powers and is thus unconstitutional.

In what has become routine under this administration, 26 states sued the federal government in response to this executive action. In February 2015, a federal district court blocked DAPA from going into effect, finding that the executive branch did not follow the proper administrative procedures before implementing what is effectively a substantive change in established immigration law. The government appealed this judgment to the U.S. Court of Appeals for the Fifth Circuit, which affirmed the temporary injunction.

When the Supreme Court decided to hear this case, it asked the parties to address four issues: (1) whether at least one state has standing to sue when DAPA will cost the state millions; (2) whether DAPA is subject to the Administrative Procedure Act’s technical procedural requirements for making regulatory changes; (3) whether DAPA violates the law as enacted by Congress in the Immigration and Naturalization Act and related statutes; and (4) whether the president’s actions violate his constitutional duty to “take care that the laws be faithfully executed.”

Cato’s brief, primarily authored by Prof. Josh Blackman and joined by Profs. Randy Barnett and Jeremy Rabkin, addresses the fourth issue, the Take Care Clause of Article II. This clause originated in response to British monarchs’ practice of suspending the law, crossing the line between executive and legislative functions. As the Framers knew well, in the wake of the Glorious Revolution, the English Bill of Rights eliminated “the pretended power of suspending … or the execution of laws by regal authority.” Nevertheless, King George III routinely refused his assent to laws enacted by colonial legislatures, insisting that they contain a provision authorizing the king to suspend their authority. This expansion of executive power yielded the first two grievances in the Declaration of Independence.

Analysis of the text of the Take Care Clause and Supreme Court precedent reveals that the president’s duty to enforce the law entails four distinct but interconnected components: the duty is mandatory and not discretionary; the president must act with care; the president must execute the law, not author new legislation; and the president must make a faithful effort to enforce the content of the laws Congress passes. DAPA amounts to a legislative act and is not a good faith or careful attempt to execute the law.

Cato thus urges the Supreme Court to affirm the judgment of the Fifth Circuit.

Alternatively, the Court should dismiss the writ of certiorari—what the “decision to decide” is called—as improvidently granted, which would leave the injunction of DAPA in place but set no precedent for the future. It’s likely that the next president will either expand or rescind DAPA, either transforming the case into something new for the lower courts to evaluate or mooting it altogether.

For more commentary about our brief, see Randy Barnett and Josh Blackman.

In the latest print edition of National Review, you’ll find my lengthy cover story on international trade policy and its actual effects on the U.S. economy and labor market.  The abbreviated version of my piece (though you certainly should read the whole thing!), is that, while free trade has provided overwhelming benefits for the vast majority of American families, workers and businesses, its inevitable displacement of some workers has revealed serious problems in the U.S. labor market’s ability to reallocate people from older, less productive sectors to new and innovative ones.  This collapse in “labor dynamism” is a relatively new phenomenon and is hurting not only the U.S. economy, but also American voters’ confidence in it – effects that boost, ironically, protectionist candidates like Donald Trump, even though other government policies, and certainly not trade, are likely to blame for the problem. 

Over the last few days, my article has found additional support:

  • First, there have been several new economic reports supporting the benefits of free trade for the U.S. economy.  Two highly respected economic forecasts – from Brandeis’ Peter Petri and Moody’s Analytics – have bolstered my view that Trump’s protectionism would not only fail to solve the current problems in the U.S. labor market, but actually make things much worse.  In particular, these studies each found that withdrawing the United States from the global economy would result in millions of American jobs lost, a full-bore recession (in the United States and in China and Mexico), and an actual increase in the U.S. trade deficit.  I’d also recommend this Eduardo Porter look at NAFTA and the U.S. auto industry, in which he finds that the agreement’s creation of a globally-competitive North American automotive supply chain probably saved U.S. autoworkers’ jobs – jobs that without NAFTA would have disappeared in the face of intense Asian competition.  Finally, for those who, like Trump, erroneously think that the U.S. manufacturing sector has been destroyed by trade, I invite you to check out the latest Global Manufacturing Competitiveness Index, which finds that the second-ranked United States will likely overtake China for the top spot by 2020.
  • Second, my Cato Institute colleagues have gotten in on the fun: Alan Reynolds joins GMU’s Scott Sumner as expressing serious doubts about the new study on China trade and U.S. jobs that’s driving the American punditocracy’s latest bout of protectionist pearl-clutching, while Dan Ikenson warns about blaming trade for all of the real failures of U.S. domestic policy.  Both are worth a look.
  • Finally, commentary from across the pond mirrors my thesis that the real problem in the U.S. labor market isn’t trade but the multiple policy failures that have led to our distressing lack of labor dynamism.  The Economist reiterates the “overwhelming benefits” of trade, while lamenting the U.S. economy’s sorry ability to help American workers cope with the ultimately-beneficial competitive forces unleashed by trade, automation or any other form of “creative destruction.”  Charles Kenny, author of The Upside of Down: Why the Rise of the Rest is Good for the West, says much the same thing in a lengthy interview to the Financial Times.  Kenny’s whole interview is worth reading, but this part really stuck out (emphasis mine):

I think there’s evidence from elsewhere that Chinese imports helped create jobs outside the manufacturing sector, not least by reducing prices and, in particular, reducing prices on goods purchased more by poor people.

So I think there has been an effect on both consumption but also job creation outside of manufacturing, but not in the manufacturing sector. And lots of people in concentrated parts of the country lost their jobs as a response to growing Chinese imports.

The really sad part of the story is what happened next. What happened next was the Federal Government started spending some more money in those parts of the country. On what? On disability payments, on taking people out of the labour force.

This was where most of US Federal money went in response to this challenge. Not on retraining, not on helping people move to where the jobs were, not on creating new innovation, not on any of that, not on building the pie again, but on taking them out of the labour force through disability payments. That’s just chronic. I think it shows a real lack of political leadership.

Data in Kenny’s book, also excerpted in the FT, underscore these problems, and it ends with this mind-blowing statistic: “evidence suggests that about one in four hundred federal dollars helped workers retrain out of [trade-]exposed industries and the other $399 helped them retire or invalid out of those industries and the workforce completely.” 

I highlight many of these misguided policies in my NR article, tracing how each can discourage American workers from saving enough money to weather financial storms or take professional risks; from voluntarily moving from one sector to another; and from getting a new and different job after losing an old one.  As I note therein, a lot more research is needed on this issue, so it’s good to see more attention being drawn to it.  The sooner we abandon Trump’s fake solutions and get to working on the real ones, the better.

Scott Lincicome is an international trade attorney, adjunct scholar at the Cato Institute and visiting lecturer at Duke University. The views expressed are his own and do not necessarily reflect those of his employers.

After a long wait, the Department of Labor has announced it is ready to finalize its fiduciary duty rule as early as this week.  Under this rule, brokers will be considered fiduciaries of their clients, meaning that they will be legally bound to act in their best interests.  The proposed rule has been extremely controversial.  At first blush, it’s difficult to see why.  After all, its proponents argue, don’t you want your broker acting in your best interest?   

But the reality is not so simple.  There is a difference between a broker choosing to act in a client’s best interest and being legally obliged to do so.  And the difference will likely mean that many investors, in particular low- and middle-income investors, will lose out. 

Under existing rules, brokers are bound to a suitability standard.  This means that if they offer you a product it must be suitable for your needs.  If you’re an 80 year old retiree, a fund full of high-risk equities is probably not suitable for you.  But as long as the products are suitable, a broker is free to recommend one fund over another, even if the broker’s reason for making the recommendation is that the recommended fund will provide a better commission, not because it’s a better investment for you.

Since many brokers already put their clients’ interests first, isn’t this just holding everyone to the practices of the best brokers?

No because the rule doesn’t simply change business practices; it changes how the law views brokers.  A fiduciary duty standard is a very high duty of care.  Lawyers, for example, owe a fiduciary duty to their clients, and board members owe a fiduciary duty to their corporations.  There is a well-developed body of law that defines what qualifies as fulfilling a fiduciary duty and most brokers will likely seek out legal counsel for help in understanding what the law means, and how to ensure they are in compliance.  Additionally, holding brokers to a fiduciary duty standard opens the door to litigation.  If the broker deviates from how the law defines adherence to the fiduciary duty standard – or if an unhappy client simply believes that the broker has – the broker now faces the risk of a law suit.

More importantly, the rule will also change the way brokers earn their money.  Most brokers currently made their money through commissions on trades, although they often provide advice and information to their clients as a perk.  To continue using this type of structure under the new rules, brokerage firms would be required to complete and have clients sign new disclosures and paperwork.  Many in the industry have indicated that compliance not be feasible and that they would opt not to continue to use commissions.

Changing this compensation structure is one of the implicit goals of the new rule.  In early 2015, the White House issued a report finding that “conflicted advice” – advice from brokers who were paid through commissions – cost Americans $17 billion in lost retirement savings.  Despite the fact that the analysis supporting this figure has been roundly criticized, it has served as a rallying point for support of the new rule.  What supporters have not addressed, however, is the loss of services the new rule will likely cause, especially for low- and middle-income investors.

While average investors often rely on brokers who work for commissions, wealthy investors often use an investment advisor.  Instead of earning fees for making trades, advisors earn a flat fee, typically a percent of assets under management (one percent is a common rate).  These advisors often qualify as investment advisers under SEC rules and therefore are already held to a fiduciary duty standard.  These advisers face higher compliance costs and litigation risks than brokers, and consequently tend to serve only the wealthy since the fee they earn is worth the cost.  Such a fee structure is unlikely to work for lower net-worth investors, however.  The work involved in managing a portfolio is not much more for a $1 million investment than for a $30,000 investment.  Therefore it is rarely cost-effective for an adviser to take on a client with only $30,000 to invest (which is itself well above average).

Under the new rule, brokers will have no cost-effective way to provide advice to less wealthy investors.  The compliance costs for continuing to use commissions will likely be too expensive, and using a flat fee is inefficient for smaller investments.  Many members of congress from both parties have expressed concern about the impact of the rule on their constituents. 

There is an alternative to broker-provided advice, but many Americans may find it to be a poor substitute.  Many firms have begun using computer algorithms to make investment recommendations.  This algorithms, dubbed “robo-advisors,” use accepted portfolio theory to create appropriate diversification and allocation for investors.  While the investments recommended by the algorithms may not differ from those provided by human brokers, some investors may nonetheless prefer to talk with a real person.  Older Americans in particular may be uncomfortable having a computer make their investment decisions and may prefer the familiarity of speaking with a broker, especially one they may know personally.

None of this is to say that there are not problems with the current system.  Some reports suggest that investors may believe erroneously that anyone who gives them investment advice is already held to a fiduciary duty standard.  The solution, however, is not to implement a new rule that will leave them with reduced access to advice, but simply to provide better information about brokers compensation structures.  The concept of commissions and sales is one that permeates many transactions Americans conduct every day.  From buying a car to buying shoes to choosing a new computer, Americans frequently interact with salespeople, gleaning information from them while retaining proper skepticism given the fact that the salespeople work for commissions.   If any new regulation is needed, a simple disclosure rule, requiring brokers to explain their compensation structure to investors, would go a long way toward solving the problem without reducing average Americans’ options when it comes to receiving needed investment advice.

Yesterday, the governors of California and New York signed legislation to raise their states’ minimum wage over the next few years to $15 an hour throughout California and for much of New York. Similar proposals are percolating in other state and local governments, and Democratic presidential candidate Bernie Sanders has called for a national minimum wage of $15/hour.

Predictably, critics of raising the minimum wage are arguing that the higher wage floor will hurt employment for low-skill workers, the very people the wage floor is intended to help. A worker will be employed only if the value of his output is greater than the cost of employing him—a cost that includes wages, employer payroll taxes (e.g., Social Security, Medicare, unemployment insurance), training and outfitting costs, the new health care mandate and other benefits, etc. According to these opponents, the higher wage floor will reduce employment for low-skill workers and encourage employers to find non-labor ways to accomplish low-skill tasks (e.g., ATM machines, self-serve gas pumps, vending machines, automated phone answering systems).

Wage-increase supporters dismiss this concern, claiming there’s no proof that a higher wage floor hurts employment. A very large body of empirical research indicates otherwise, however, with the negative effects falling mainly on workers below age 24 (which isn’t surprising, as 77% of workers earning the federal minimum wage are below age 24, and they have few demonstrated work skills). Wage-increase supporters can argue the research isn’t unanimous, but given the one-sidedness of the extensive empirical evidence, that argument sounds a bit like climate change denial—if not creation science.

More thoughtful wage-increase supporters have begun offering a different argument: Yes, they concede, raising the minimum wage can hurt low-skill employment. But that harm is a worthwhile tradeoff for better wages for the remaining low-skill work: some workers may lose their jobs or some work hours, but others will get a raise.

This argument is important and interesting—in a Marie Antoinette* sort of way.

Consider this snippet from a recent Washington Post “Wonkblog” post, “The $15 Minimum Wage Sweeping the Nation Might Kill Jobs—And That’s Okay”:

“Why shouldn’t we in fact accept job loss?” asks New School economics and urban policy professor David Howell, who’s about to publish a white paper on the subject. “What’s so bad about getting rid of crappy jobs, forcing employers to upgrade, and having a serious program to compensate anyone who is in the slightest way harmed by that?”

“The problem with having a criterion of ‘no job loss’ is that it guarantees that the minimum wage will always be at a level so low that it won’t come close to achieving [a] living wage standard,” Howell says.

… “It could be that [low-skill workers] spend more time unemployed, but their income is higher overall,” says David Cooper, an economist with the Economic Policy Institute. “If you were to tell me I could work fewer hours, and make as much or more than I could have previously, that would be okay.”

Cooper still thinks there’s a lot more research to be done to understand how higher minimum wages affect the bottom of the labor market. He does think the risk of job loss is worth factoring into the decision of where to set the wage floor. But he also agrees that it’s worth forging into those uncharted waters to see what might await.

This thinking raises two questions: who decides what a “crappy” job is, and who decides what particular tradeoff between less employment and a higher wage floor is “okay”? Howell says the decider is “we,” but it’s unclear who “we” is and what qualifies him/her to make that decision for all workers and employers. Cooper says the decider should be he, but what entitles Cooper to make that decision for everyone?

Howell and (apparently) Cooper think such decisions are justified because they’d ensure that every worker earns a “living wage.” Beyond the obvious problem that “a living wage” is a nonsensical term—a living is provided by income, not rate of income—there likely are plenty of workers who would trade their labor for less than whatever Howell and Cooper stipulate is an acceptable wage: pre-teens who will babysit for Mall money, teenagers who want to buy their first car, college students who want an internship, first-time workers who are willing to “pay their dues” in pursuit of higher ambitions, young workers who have low living costs, people who want to work for some high-minded cause, family members who want to make a little money while helping an entrepreneurial relative, seniors who want some extra cash (and responsibility), and so forth.

Howell and Cooper would reply that such workers should be assisted by social programs to help “anyone who is in the slightest way harmed by” their stipulated wage floor. But student who want opportunity-providing internships, or first-time workers who want to build and demonstrate work skills, or relatives who want to lend a hand in the family business in return for a little money, or seniors who want a little extra cash don’t want a handout and some vocational training—they want a job.

One of the great things about free labor markets is that, because employment is voluntary, each worker can set his own wage floor. That’s why few workers—especially full-time workers—work for the minimum wage: they demand higher compensation, though they each makes his or her own tradeoff between wage demands and employment.

Of course, some workers do work for the minimum wage, and many of them think that wage is lousy. But what’s even lousier is not being able to work for the minimum wage, and not being able to gain the work experience that would help them move on to better-paying jobs. That’s why it’s hard to accept the idea that workers would be better off if they were prohibited from deciding those tradeoffs for themselves, and instead have Cooper or “we” decide it for all of them.

And that’s why this argument sounds an awful lot like “Let them eat cake”: Howell and Cooper believe they–or politicians–should stipulate the minimum that each and every worker should receive for their labor–even if some of those workers would have accepted less, and even if some (and perhaps many) of those workers getting nothing. Though Howell and Cooper undoubtedly are motivated by noble intentions, it’s hard to see how their idea is all that noble.

* In fairness to Marie Antoinette, the “Let them eat cake!” tale is almost certainly apocryphal.

Amid the proliferation of drones many states have passed or considered legislation regulating unmanned aircraft. Yet, if the latest Federal Aviation Administration (FAA) Reauthorization bill is passed as written, states will no longer able to pass drone regulations and the FAA will be the country’s sole drone regulator. Such a proposal is a federal preemption of state authority that won’t allow states to handle issues best addressed at the local level.

Section 2142 (a) of the almost 300-page FAA appropriations bill reads:

FEDERAL PREEMPTION.—No State or political subdivision of a State may enact or enforce any law, regulation, or other provision having the force and effect of law relating to the design, manufacture, testing, licensing, registration, certification, operation, or maintenance of an unmanned aircraft system, including airspace, altitude, flight paths, equipment or technology requirements, purpose of operations, and pilot, operator, and observer qualifications, training, and certification.

The bill does allow for states to deal with issues that arise from drone use that concern “nuisance, voyeurism, harassment, reckless endangerment, wrongful death, personal injury, property damage,” but the text above leaves little doubt about which entity will be overseeing the bulk of drone regulation.

Writing in The Wall Street Journal, Troy Rule, a professor at Arizona State University’s Sandra Day O’Connor College of Law, highlights a number of potential problems associated with Sec. 2142:

many other aspects of civilian drone regulation involve questions that only states and local governments are equipped to address. For example, during what hours of the day should drone-assisted pizza deliveries be permitted in dense urban neighborhoods? Under what conditions should real-estate photographers in a beachfront community be permitted to use drones to capture aerial views of homes being listed for sale? Or how close to a suburban high school’s football stadium should drone flying be allowed on game nights?

Centralized federal agencies are incapable of tailoring drone-use restrictions to fit the unique characteristics and preferences of every local jurisdiction. Given the obvious advantages of involving states and municipalities in the regulation of drones, why is Congress seriously considering statutory language that would effectively prohibit local drone-use restrictions?

Rule is not alone in expressing concerns about Sec. 2142. Perhaps unsurprisingly, the National Conference of State Legislatures and the National Association of State Aviation Officials view the proposed legislation as a needless preemption of state powers:

Section 2142 of The Federal Aviation Administration Reauthorization Act of 2016 (S. 2658) is an overly broad and unjustified pre-emption of state authority. Section 2142 goes well beyond a basic assertion of the FAA’s authority to regulate the safety of the national airspace system. Furthermore, it infringes on traditional state and local powers to protect the basic rights of citizens and address gaps in federal regulations related to unmanned aerial systems (UAS).

As Rule points out in a forthcoming paper on drone regulation, the FAA views itself as the regulator of “every inch of airspace”:

the reality is that Congress has not expressly defined “airspace of the United States” or “navigable airspace.” Therefore, the FAA has conveniently opted to interpret the terms to encompass every inch of airspace above U.S. land, all the way to the ground.

Officials at the FAA have made clear that the agency is the preeminent authority when it comes to regulating airspace. On a FAA website dedicated to “busting myths” about drones the regulator states unambiguously that “The FAA is responsible for the safety of U.S. airspace from the ground up.”

FAA drone regulations are clearly attractive to companies such as Amazon, which one day may use drones for delivery. But despite the appeal of a single nationwide drone regulator there are advantages to the laboratories of democracy regulating drones. Rule highlights that such an approach has worked for land use and cars:

There is no federal land use administration equivalent to the FAA through which citizens in every city in the country must seek real estate development approvals. Nor is there a federal automobile driving administration that manages traffic flows and sets speed limits for every road in all fifty states. The nation’s federalist system wisely allows for state and local officials, which tend to have greater geographic proximity to and information about the probably local impacts these sorts of activities, to be the primary regulators of them. Like land development and automobile driving, civilian drone activity’s impacts can vary greatly by location so it could benefit from such localized governance as well. Entrusting regulatory authority to subnational governments in these areas also creates “laboratories of democracy”, which can be particularly valuable tools for accelerating policy innovation in industries that involve new and rapidly-changing technologies.

For more from Cato on the FAA (including my colleague Chris Edwards’ repeated calls for the agency to be privatized) click here.  

As a fan of the Georgetown University Hoyas, I’ve been pretty pessimistic about the state of college hoops over the last few years. In pursuit of the potentially huge bucks associated with college football, conferences have been realigning and schools without football have been left behind. And while some private universities have come out ahead in these gridiron games, private schools generally can’t compete with public institutions in football. They don’t have the state-subsidized scale needed to gather huge student bodies, nor do they “represent” their states, both of which help fill football stadiums and bring eyeballs to television sets. So I have feared doom for private schools left out of the “Power Five” conferences, especially those in the “new” Big East.

Then Villanova won the NCAA championship. And I had to ask: Has my trepidation and depression been misplaced?

Maybe it has. While the revenue potential of college hoops is significantly smaller than it is for football, the costs are also much lower. There are far fewer players and coaches, the equipment is less costly, and you don’t need nearly as big a band. That means you don’t need as much TV money, or as many posteriors in seats, as you do for football. And if you don’t have football, as some Big East players recently pointed out, hoops is the school’s flagship sport, and the basketball players are the biggest campus stars. That may be a recruiting edge.

Or maybe Villanova’s championship is just long odds that played out, as opposed to a sign the odds are not that bad. Indeed, the Big East overall has struggled a bit in the Tourney since the conference’s reinvention three years ago. It was also lucky that it formed at the same time Fox Sports was putting together a new sports channel – FS1 – and needed programming to fill the hours. Fox offered the Big East a princely (for basketball) sum of about $4.2 million per school per year over a 12 year period. But so far the ratings have been pretty paltry: the first two conference championships had only about 702,000 and 414,000 viewers, respectively, and even though this year’s was on the full Fox network, it only attracted 1.4 million viewers. In contrast, this year’s Big Ten championship game drew 3.2 million eyeballs.

Part of the problem is no doubt that Fox – and especially FS1 – is new to college hoops, and some potential viewers don’t know where to look. But probably a bigger problem is that Big East schools are relatively small, and elicit little if any state pride.

Of course, before anyone starts shedding buckets-o-tears for any college competing in D-1 sports, remember that (1) no one forces schools to participate, and (2) they all benefit, ridiculously, from government “help.” There are no real victims save taxpayers.

That said, what is the outlook for the Big East? Certainly better than I thought it to be a few years ago. But the obstacles still seem sizeable, and I know I won’t be a believer until the Hoyas win at least, um, three more national championships.

That could take a while.

There’s no agreement on the most important variable for state tax competitiveness.

I’m sympathetic to the final option, in part because of my disdain for the income tax. And if an income tax is imposed, I prefer a simple and fair flat tax.

With that in mind, here’s a fascinating infographic I received via email. I don’t know if Reboot Illinois is left wing, right wing, or apolitical, but they did a very good job. I particularly like the map showing zero-income tax states (gray), flat tax states (red), and states with so-called progressive tax schemes (blue).

For what it’s worth, Illinois taxpayers should fight as hard as possible to preserve the state’s flat tax. If the politicians get the power to discriminate among income classes, it will just be a matter of time before all taxpayers are hit by higher rates.

Now let’s shift to the spending side of the fiscal ledger.

Like any good libertarian, I generally focus on the size of government. I compare France with Hong Kong and that tells me that big is bad and small is good.

But regardless of whether a government is large or small, it’s desirable if it spends money efficiently and generates some benefit. I shared, for instance, a fascinating study on “public sector efficiency” from the European Central Bank and was not surprised to see that nations with smaller public sectors got much more bang for the buck (with Singapore easily winning the prize for the most efficient government).

So I was very interested to see that WalletHub put together a report showing each state’s “return on investment” based on how effectively it uses tax monies to achieve desirable outcomes for education, health, safety, economy, and infrastructure, and pollution.

I’m not completely comfortable with the methodology (is it a state government’s fault if the population is more obese and therefore less healthy, for instance, and what about adjusting for demographic factors such as age and race?), but I nonetheless think the study is both useful and interesting.

Here are the best and worst states.

One thing that should stand out is that the best states are dominated by zero-income tax states and flat tax states.

The worst states, by contrast, tend to have punitive tax systems (Alaska is a bit of an outlier because it collects - and squanders - a lot of revenue from oil).

P.S. WalletHub put together some fascinating data on which cities get a good return on investment (i.e., bang for the back) for spending on police and education.

Pages