Policy Institutes

The 2016 G20 summit in Hangzhou is fast approaching and, similar to the pre-summit meetings hosted by China throughout the year, the focus will be the state of the global economy. Still contending with sluggish global economic growth, the summit’s theme of “Towards an Innovative, Invigorated, Interconnected and Inclusive World Economy” is especially timely. Under the umbrella of global economic growth, cultivating opportunities for trade and investment will become a major priority for G20 states, and three global powers—the United States, China, and Russia—are each developing their own multinational trade route projects. These major trade projects could serve as opportunities for cross-country cooperation and growth, but they could also become sources for future conflict.

China’s management of domestic markets, currency, and commitment to structural reforms was a cause for global concern at the first meeting of G20 Finance and Central Bank Governors in February. At next week’s summit, China’s President Xi Jinping will undoubtedly point out China’s efforts towards realizing supply-side structural reforms in the face of China’s “new normal” of slower economic growth. As part of these reforms aimed at rebalancing China’s economy, Beijing plans to cut industrial overcapacity, tackle overhanging debt, reform state-owned enterprises, and seek out new consumer markets. On the last point, Beijing is championing its New Silk Road Initiative (also known as “One Belt, One Road”), a major state project focused on opening up new markets. To accomplish this, Beijing is building vast trade networks spanning several countries and continents, by land and by sea. However, many countries are wary. The project, billed as purely an economic one, may evolve to include a political and/or military dimension as well.

Similarly, Russia is looking to build new economic opportunities and trade links in the face of continued western economic sanctions and an ongoing bearish global hydrocarbons market. Its project, the Eurasian Economic Union (EEU), is based on its precursor organization, the Eurasian Customs Union. Since coming into force on January 1, 2015, the EEU has managed to increase trade amongst its members, which at present include Russia, Kazakhstan, Belarus, Armenia, and Kyrgyzstan. However, this intra-regional economic union has been slow to deliver significant economic advantages for its member states and, in fact, may be having the reverse effect on their economies: due to their close economic links to Russia, they too have inadvertently been suffering fallout from Russia’s economic troubles. Anders Åslund of the Atlantic Council argues that the EEU is actually isolating the economies of its member states and blocking out more beneficial economic relationships, particularly with the EU. Even the initial proponent of the EEU, Kazakhstan’s President Nursultan Nazarbayev, has himself appealed to EEU state leaders for closer integration with both the EU and China’s New Silk Road project.

Finally, the relatively unknown U.S. New Silk Road Initiative is seeking to bring about economic integration and growth by encouraging trade links between South Asian and Central Asian states, and especially with Afghanistan. As the United States aims to drawdown its military presence in Afghanistan, the New Silk Road project could portend a shift to economic concerns. By helping Afghanistan to establish an economic foothold through regional trade, the United States hopes to foster greater stability. On the other hand, getting Afghanistan to stand on its own feet economically could prove difficult in a country rife with internal issues. Also, opening up trade links with Afghanistan as part of the U.S. New Silk Road Initiative could mean that Afghanistan’s various domestic and drug trade problems may spill across borders, having the reverse effect of what was intended, by increasing regional instability instead of calming it. 

Though the potential for cooperation exists, and conflict is not inevitable, how these three major projects espoused by three global powers will interlock will be debated well beyond the conclusion of the upcoming G20 summit and into the future. All three of these trade and investment projects overlap in Central Asia. Moscow’s reaction to these two powers’ further involvement in Central Asia—its traditional region of dominance—will likely not be favorable. Moscow, though, has been in talks with Beijing to include it in the EEU through a Eurasian Partnership Agreement, but how the dynamics of such a partnership would actually play out is yet to be ascertained. For its part, experts in China have expressed that there is room for the United States to cooperate in China’s New Silk Road project. The United States itself is keen to find projects on which to cooperate with Beijing, as part of its own U.S. New Silk Road Initiative. At the same time, however, China feels that the United States, and the west in general, are trying to encircle and exclude a rising China, pointing to the Trans-Pacific Partnership agreement (TPP), the row over the South China Sea, western governments questioning Chinese investments in infrastructure projects, and the U.S.’s planned THAAD anti-missile defense system in South Korea. Therefore, as global leaders gather and discuss how to achieve sustainable growth as part of an “interconnected and inclusive world economy”, the realities on the ground point to several possible areas of contention.

Last week’s 20th anniversary of welfare reform event put income-based poverty measures on trial and drew skeptics from many circles. Michael Tanner stated that you would be hard-pressed to find “anyone on the left or right to defend the current [income-based] measure,” Robert Rector compared the current poverty measure to wearing glasses with cracked lenses, and Scott Winship presented research indicating income-based measurements distort U.S. poverty estimates.

Criticisms of the poverty metric during the event were only a microcosm of objections that have been occurring for some time.

Specifically, academics have taken issue with the failure of income-based poverty measures to accurately capture the realities of poverty. Measuring poverty incorrectly can have deleterious results, because it leads to misunderstanding the problem itself and, by extension, the solution.

So, what’s wrong with using income to measure poverty?

It turns out a lot, because income does not provide an accurate picture of economic well-being. It does not, for instance, provide information about an individual’s access to welfare benefits or access to formal or informal insurance. Income also can’t say anything about an individual’s accumulation of wealth or access to credit. Practically speaking, the income measurement often ignores dollars earned under-the-table on the so-called “gray market.” Importantly, for poor individuals, the resources that income overlooks are often substantially larger than income itself.

For a more concrete illustration of the issue, just imagine your average graduate student. This student likely has very low income. If he is lucky, perhaps he works part-time for a modest wage as a course assistant. As an older student, he may even have a wife who stays at home with a couple of young kids. Though he has substantial academic and personal financial obligations, his financial outlook is not as bleak as income alone indicates: he likely has considerable access to informal insurance (a phone-call to parents or in-laws will help in a pinch), access to credit (sizable student loans), and even a bit of savings remaining from a former professional life. Perhaps he qualifies for an academic scholarship or living stipend.

Even after considering this individual’s meager income and weighty family obligations, we would likely agree that he and his family have a bright future ahead. His day-to-day living situation suggests he knows that he does: he never worries about going hungry, there is no eminent danger of eviction, and his family generally lives life with many of the trimmings of a middle-class lifestyle.

Now consider your average high-school dropout, bereft of credentials or a resume replete with stable professional experience. She works part-time stocking inventory at an agricultural processing plant, but this work is seasonal and variable. At night she has part-time work cleaning office buildings across town. When she’s away from home she leaves her two young kids with a boyfriend who is out of work, but she constantly worries about losing her apartment and paying for groceries. 

For all of their differences, these two individuals have the same income levels, yet they have wildly disparate prospects and financial security. They even have the same size household, which means that they are subject to an identical federal poverty line – $24,300 for a family of four. As such, either may qualify for various income-tested welfare benefits.

Individuals in these two very different categories are treated exactly the same way by current poverty measures.

This example highlights just one of several issues associated with using income to measure poverty. Income has been used to measure poverty for decades because it is simple. However, in an increasingly complex world, it has become an increasingly meaningless measure. As we look to a future of more effective welfare policy, it is essential we improve on it. 

You Ought to Have a Look is a feature from the Center for the Study of Science posted by Patrick J. Michaels and Paul C. (“Chip”) Knappenberger. While this section will feature all of the areas of interest that we are emphasizing, the prominence of the climate issue is driving a tremendous amount of web traffic. Here we post a few of the best in recent days, along with our color commentary.

It looks like a new investigation into the use of ethanol as a substitute for gasoline found pretty much what most people have known all along—it’s just a bad idea.

Car mechanics know it. Drivers know it. Food analysts know it. Land conservationists know it. The last bastion of holdouts (aside from Midwestern corn farmers and their Congressional representatives) were the climate change do-gooders, claiming that all of the above sacrifices were small prices to pay for the benefit to the climate that ethanol was producing.  After all, they argued, burning ethanol produces fewer carbon dioxide emissions on net than burning “fossil” fuels because the carbon liberated in the process (for more on liberated carbon check out Andy Revkin’s contribution) was being recycled at a quicker rate than the geologic times scales necessary to produce oil.

While this may be technically true, it turns out that the rate of ethanol carbon recycling was being oversold by its supporters. At least this is the conclusion of a new paper authored by John DeCicco of the University of Michigan Energy Institute and colleagues. According to the paper’s press release:

A new study from University of Michigan researchers challenges the widely held assumption that biofuels such as ethanol and biodiesel are inherently carbon neutral.

Contrary to popular belief, the heat-trapping carbon dioxide gas emitted when biofuels are burned is not fully balanced by the CO2 uptake that occurs as the plants grow, according to a study by research professor John DeCicco and co-authors at the U-M Energy Institute.

The study, based on U.S. Department of Agriculture crop-production data, shows that during the period when U.S. biofuel production rapidly ramped up, the increased carbon dioxide uptake by the crops was only enough to offset 37 percent of the CO2 emissions due to biofuel combustion.

The researchers conclude that rising biofuel use has been associated with a net increase—rather than a net decrease, as many have claimed—in the carbon dioxide emissions that cause global warming. The findings were published online Aug. 25 in the journal Climatic Change.

Interestingly, the U.S. Environmental Protection Agency has recently been called to task for not investigating the supposed climate impact of the Congressionally mandated ethanol standards—a report that the EPA was required to produce by law. The EPA’s response: “we ran out of money and Congress didn’t pay attention to us last time we tried to issue a report.” But, they said they’d get right on it—and have a report ready by 2024.

We have a better idea: skip the report and just drop the standards.

Next up is one of the few really good pieces on the Louisiana floods (aside from those generated by our last YOTHAL, e.g., at the Daily Caller and Washington Times).

Louisiana State University’s Craig Colton explains how “suburban sprawl” and poor preparation played a large role in worsening the damage of the recent flooding disaster in the state. He notes that the region has a long history of flooding (pointing to historical accounts back to the 18th century) and provides several examples of very high rainfall amounts there in recent decades (and we’ll add that there are many more examples going back decades further such as a tropical depression in 1962 that put down 23 inches in the vicinity and 1979’s Tropical Strom Claudette which dropped more than 42 inches in nearby eastern Texas). 

Coastal Louisiana is perhaps the most climatologically primed (non-mountainous) spot for heavy rainfall events in the lower 48. As such, urban/suburban development there should proceed accordingly—which apparently isn’t what is happening, according to Colton. While some steps to develop flood plans and reduce risk were drawn up after flooding in 1983, Colton reports that:

However, these efforts have not been sustained. Suburban sprawl has spilled onto floodplains and placed residents at risk.

For example, the relatively new incorporated community of Central in East Baton Rouge Parish reports that 75 percent of its territory is in the 100-year floodplain. According to initial news reports, up to 90 percent of the town’s houses sustained damage in this month’s floods.

Check out Colton’s entire informative article to find out more about why the region’s flooding disaster is rooted in (poor) local decisionmaking and why you don’t need to invoke climate change to understand that this was a disaster in the making. It’s not that a warming climate shouldn’t be expected to generally increase rainfall totals, but laying the blame for the specific heavy rains and the resultant flooding in Louisiana (or anywhere else for that matter) on human-caused climate change is neither instructive nor scientifically defensible.

And finally, we’d be remiss if we didn’t have a little fun with the flip-flop Libertarian presidential candidate Gary Johnson pulled last week on his support of a carbon tax.

Last Sunday (August 21), in an interview with the Juneau Empire, Johnson indicated that he was in favor of a carbon “fee” to address climate change. And on Monday, followed that up with what seemed to be support for a full-blown carbon tax, telling CNBC’s John Harwood:

“I do think that climate change is occurring, that it is man-caused. One of the proposals that I think is a very libertarian proposal, and I’m just open to this, is taxing carbon emission that may have the result of being self-regulating.”

We immediately suggested to Gov. Johnson (via Twitter), that even in theory, a carbon tax wasn’t such a good idea, and pointed to our Cato Working Paper (soon to be Policy Analysis) on the topic:

By last Thursday, Johnson had apparently reconsidered, telling a campaign rally in Concord, New Hampshire (as reported over at Reason.com):

If any of you heard me say I support a carbon tax…Look, I haven’t raised a penny of taxes in my politicial career and neither has Bill [Weld]. We were looking at—I was looking at—what I heard was a carbon fee which from a free-market standpoint would actually address the issue and cost less. I have determined that, you know what, it’s a great theory but I don’t think it can work, and I’ve worked my way through that.

We’re glad that Gov. Johnson has seen the data on the ground and come to see the light—let’s hope he sticks to it.

The Obama administration is debating a declaration of no first use of nuclear weapons. Some Asia specialists fear the resulting impact on North Korea. But dealing with Pyongyang is a reason for Washington to encourage its ally South Korea to go nuclear.

Washington has possessed nuclear weapons for more than 70 years. No one doubts that the United States would use nukes in its own defense.

However, since then, Washington has extended a so-called “nuclear umbrella” over many of its non-nuclear allies. For instance, the United States long has threatened to use nuclear weapons in its NATO allies’ defense, though the precise circumstances under which the United States would act were not clear.

Northeast Asia is the region where nuclear threats seem greatest. Japan and South Korea are thought to be snuggled beneath America’s nuclear umbrella, which has discouraged both from acquiring their own weapons.

The “umbrella” obviously is defensive, that is, to protect American allies against the first use of nukes. However, Washington also could—and, it appears, would, if necessary, whatever that might mean—use nuclear weapons first to stop a conventional attack. Russia and China aren’t likely to attack the Republic of Korea or Japan. More plausible is a North Korean invasion of the ROK.

Extended nuclear deterrence always has been risky for the United States. It means being willing to fight a nuclear war on behalf of others. Americans would risk Washington, D.C. and Los Angeles to, say, defend Berlin and Tokyo.

At least bilateral deterrence among great powers tends to be reasonably stable. Dealing with North Korea is potentially more dangerous. 

Yet the DPRK eventually may gain the ability to strike the U.S. by developing long-range missiles as well as nuclear weapons. The North isn’t likely to attack first, but it still could lay waste to a major American city–which would be a bad deal indeed.

Yet advocates of extended deterrence are criticizing proposals for an American pledge of no first use of nuclear weapons.

The problem is fundamental: It is one thing for Washington to use nuclear weapons, including preemptively, to protect America. It is quite different to do so for allies.

As I point out in National Interest: “Alliances are a means, not an end, that is, a mechanism to help defend the U.S. A North Korean attack on the ROK would be awful, a humanitarian tragedy. But American security would not be directly threatened. Certainly there is no threat warranting the risk of nuclear retaliation on the U.S.”

Of course, those being defended have configured their security policy and force structure in response. But future policy should not be held captive to the past.

Washington’s chief responsibility should be America’s security. Backers of the status quo act like there is no alternative to leaving the ROK (and Japan, which faces a real, though less direct, threat from the DPRK) vulnerable to attack.

However, Seoul is well able to deter and defeat the North. The ROK possesses around 40 times the GDP and twice the population of North Korea, as well as a vast technological lead and an extensive international support network. Japan, which long possessed the world’s second largest economy, also could do far more.

The South is capable of developing nuclear weapons. Indeed, polls show public support for such an option today. Opposition to nuclear weapons is stronger in Japan, but an ROK weapon would put enormous pressure on Tokyo to conform.

Obviously, there are plenty of good reasons to oppose proliferation, even among friends. However, the current system is entangling Washington in the middle of other nations’ potential conflicts. The result is to make America less secure.

Dealing with nuclear weapons is never easy. Washington’s best alternative may be to withdraw from Northeast Asia’s nuclear imbroglio. Then America’s allies could engage in containment and deterrence, just as America did for them for so many years.

When the federal district court in D.C. ordered a seizure of Alonzo Marlow’s cell service location information (CSLI) held by his cell provider, it held that the federal government didn’t need a warrant to obtain CSLI data from a person’s phone provider. The Stored Communications Act of 1986 (SCA) governs the searching of such data, and under § 2703(d) of that act, federal investigators need not demonstrate probable cause in order to search—but merely to show “specific and articulable facts” that there is criminal wrongdoing. Thus, the Fourth Amendment requirement that “no warrants shall issue, but upon probable cause” is effectively removed.

Cato has filed an amicus brief with the U.S. Court of Appeals for the D.C. Circuit, supporting the appeal of Marlow and his co-defendants. For purposes of the Fourth Amendment, cell phone data is a “paper” or “effect” in which there is a right of the people to be secure. The Supreme Court made clear in Riley v. California (2014) that giving police carte blanche to search a phone incident to an arrest would “in effect give police officers unbridled discretion to rummage at will among a person’s private effects.”

Indeed, Marlow specifically protected his cell data from prying eyes through his user agreement; Sprint was contractually obligated to maintain his privacy unless some valid lawful process required production. Because the government took Marlow’s data without his consent, there was a seizure of “effects” under the Fourth Amendment. But the district court did not issue a warrant for this seizure, instead simply acceding to the government’s § 2703(d) request.

The government claims that the SCA created the lawful process that satisfies the contractual exemption, so Marlow is out of luck. But in order for that process to be valid, it needs to comport with the Fourth Amendment.

When there is a property right to exclude others—which in this case was contractually created—the Fourth Amendment requires a probable-cause warrant, a higher standard than “specific and articulable facts.” Thus the SCA court order process itself is constitutionally infirm. The aim of the courts in interpreting the Fourth Amendment is to “assur[e] preservation of that degree of privacy against government that existed when the Fourth Amendment was adopted.” Kyllo v. United States (2001).

Allowing the warrantless search of CSLI violates privacy as much as rummaging through a person’s physical papers did in 1776. To handle the challenges of the digital age, Fourth Amendment jurisprudence requires robust protection of cellular data contents as “effects.”

We urge the D.C. Circuit to reverse the ruling below in United States v. Benbow and make clear that property interests in data privacy are protected under the Fourth Amendment.

In her speech yesterday at the Federal Reserve’s annual conference in Jackson Hole, Wyoming, Fed Chair Janet Yellen stated that “the case for an increase in the federal funds rate has strengthened in recent months.” She based that view on “the continued solid performance in the labor market” and “our outlook for economic output and inflation.”

As documented by Jon Hilsenrath in yesterday’s Wall Street Journal,the Fed has consistently overestimated economic growth since 2004. The Fed’s economic model is wrong and there is no reason to believe it will suddenly produce reliable predictions. The model also does poorly in predicting inflation, though it does not show such a bias one way or another. Continuing to rely on the Fed’s flawed model to determine policy would be foolish.

Characterizing the labor market as “solid” is misleading in the extreme. Much of the decline in the unemployment rate to which Yellen directs our attention has been due to the decline in the civilian labor market participation rate. If people give up on the labor market, they are not counted as unemployed. Far from being a sign of strength, a fall in the unemployment rate for that reason is arguably a sign of weakness in labor markets. Since the unemployment rate is no longer a reliable indicator of labor market conditions, it should be dropped as a policy gauge.

For these and other reasons, I stand by my post of August 9th that the Fed will not be able to raise rates. My only hedge on that prediction is that Yellen is putting the Fed’s credibility on the line with her continued predictions of raising interest rates. Loss of face is a poor justification for raising interest rates, but the human factor cannot be dismissed in policy making.

I have a love-hate relationship with corporations.

On the plus side, I admire corporations that efficiently and effectively compete by producing valuable goods and services for consumers, and I aggressively defend those firms from politicians who want to impose harmful and destructive forms of taxes, regulation, and intervention.

On the minus side, I am disgusted by corporations that get in bed with politicians to push policies that undermine competition and free markets, and I strongly oppose all forms of cronyism and coercion that give big firms unearned and undeserved wealth.

With this in mind, let’s look at two controversies from the field of corporate taxation, both involving the European Commission (the EC is the Brussels-based bureaucracy that is akin to an executive branch for the European Union).

First, there’s a big fight going on between the U.S. Treasury Department and the EC. As reported by Bloomberg, it’s a battle over whether European governments should be able to impose higher tax burdens on American-domiciled multinationals.

The U.S. is stepping up its effort to convince the European Commission to refrain from hitting Apple Inc. and other companies with demands for possibly billions of euros… In a white paper released Wednesday, the Treasury Department in Washington said the Brussels-based commission is taking on the role of a “supra-national tax authority” that has the scope to threaten global tax reform deals. …The commission has initiated investigations into tax rulings that Apple, Starbucks Corp., Amazon.com Inc. and Fiat Chrysler Automobiles NV. received in separate EU nations. U.S. Treasury Secretary Jacob J. Lew has written previously that the investigations appear “to be targeting U.S. companies disproportionately.” The commission’s spokesman said Wednesday that EU law “applies to all companies operating in Europe – there is no bias against U.S. companies.”

As you can imagine, I have a number of thoughts about this spat.

  • First, don’t give the Obama Administration too much credit for being on the right side of the issue. The Treasury Department is motivated in large part by a concern that higher taxes imposed by European governments would mean less ability to collect tax by the U.S. government.
  • Second, complaints by the US about a “supra-national tax authority” are extremely hypocritical since the Obama White House has signed the Protocol to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which effectively would create a nascent World Tax Organization (the pact is thankfully being blocked by Senator Rand Paul).
  • Third, hypocrisy by the US doesn’t change the fact that the European Commission bureaucrats are in the wrong because their argument is based on the upside-down notion that low tax burdens are a form of “state aid.”
  • Fourth, Europeans are in the wrong because the various national governments should simply adjust their “transfer pricing” rules if they think multinational companies are playing games to under-state profits in high-tax nations and over-state profits in low-tax nations.
  • Fifth, the Europeans are in the wrong because low corporate tax rates are the best way to curtail unproductive forms of tax avoidance.
  • Sixth, some European nations are in the wrong if they don’t allow domestic companies to enjoy the low tax rates imposed on multinational firms.

Since we’re on the topic of corporate tax rates and the European Commission, let’s shift from Brussels to Geneva and see an example of good tax policy in action. Here are some excerpts from a Bloomberg report about how a Swiss canton is responding in the right way to an attack by the EC.

When the European Union pressured Switzerland to scrap tax breaks for foreign companies, Geneva had most to lose. Now, the canton that’s home to almost 1,000 multinationals is set to use tax to burnish its appeal. Geneva will on Aug. 30 propose cutting its corporate tax rate to 13.49 percent from 24.2 percent…the new regime will improve the Swiss city’s competitive position, according to Credit Suisse Group AG. “I could see Geneva going up very high in the ranks,” said Thierry Boitelle, a lawyer at Bonnard Lawson in the city. …A rate of about 13 percent would see Geneva jump 13 places to become the third-most attractive of Switzerland’s 26 cantons.

This puts a big smile on my face.

Geneva is basically doing the same thing Ireland did many years ago when it also was attacked by Brussels for having a very low tax rate on multinational firms while taxing domestic firms at a higher rate.

The Irish responded to the assault by implementing a very low rate for all businesses, regardless of whether they were local firms or global firms. And the Irish economy benefited immensely.

Now it’s happening again, which must be very irritating for the bureaucrats in Brussels since the attack on Geneva (just like the attack on Ireland) was designed to force tax rates higher rather than lower.

As a consequence, in one fell swoop, Geneva will now be one of the most competitive cantons in Switzerland.

Here’s another reason I’m smiling.

The Geneva reform will put even more pressure on the tax-loving French.

France, which borders the canton to the south, east and west, has a tax rate of 33.33 percent… Within Europe, Geneva’s rate would only exceed a number of smaller economies such as Ireland’s 12.5 percent and Montenegro, which has the region’s lowest rate of 9 percent. That will mean Geneva competes with Ireland, the Netherlands and the U.K. as a low-tax jurisdiction.

Though the lower tax rate in Geneva is not a sure thing.

We’ll have to see if local politicians follow through on this announcement. And there also may be a challenge from left-wing voters, something made possible by Switzerland’s model of direct democracy.

Opposition to the new rate from left-leaning political parties will probably trigger a referendum as it would only require 500 signatures.

Though I suspect the “sensible Swiss” of Geneva will vote the right way, at least if the results from an adjoining canton are any indication.

In a March plebiscite in the neighboring canton of Vaud, 87.1 percent of voters backed cutting the corporate tax rate to 13.79 percent from 21.65 percent.

So I fully expect voters in Geneva will make a similarly wise choice, especially since they are smart enough to realize that high tax rates won’t collect much money if the geese with the golden eggs fly away.

Failure to agree on a competitive tax rate in Geneva could result in an exodus of multinationals, cutting cantonal revenues by an even greater margin, said Denis Berdoz, a partner at Baker & McKenzie in Geneva, who specializes in tax and corporate law. “They don’t really have a choice,” said Berdoz. “If the companies leave, the loss could be much higher.”

In other words, the Laffer Curve exists.

Now let’s understand why the development in Geneva is a good thing (and why the EC effort to impose higher taxes on US-based multinational is a bad thing).

Simply stated, high corporate tax burdens are bad for workers and the overall economy.

In a recent column for the Wall Street Journal, Kevin Hassett and Aparna Mathur of the American Enterprise Institute consider the benefits of a less punitive corporate tax system.

They start with the theoretical case.

If the next president has a plan to increase wages that is based on well-documented and widely accepted empirical evidence, he should have little trouble finding bipartisan support. …Fortunately, such a plan exists. …both parties should unite and demand a cut in corporate tax rates. The economic theory behind this proposition is uncontroversial. More productive workers earn higher wages. Workers become more productive when they acquire better skills or have better tools. Lower corporate rates create the right incentives for firms to give workers better tools.

Then they unload a wealth of empirical evidence.

What proof is there that lower corporate rates equal higher wages? Quite a lot. In 2006 we co-wrote the first empirical study on the direct link between corporate taxes and manufacturing wages. …Our empirical analysis, which used data we gathered on international tax rates and manufacturing wages in 72 countries over 22 years, confirmed that the corporate tax is for the most part paid by workers. …There has since been a profusion of research that confirms that workers suffer when corporate tax rates are higher. In a 2007 paper Federal Reserve economist Alison Felix used data from the Luxembourg Income Study, which tracks individual incomes across 30 countries, to show that a 10% increase in corporate tax rates reduces wages by about 7%. In a 2009 paper Ms. Felix found similar patterns across the U.S., where states with higher corporate tax rates have significantly lower wages. …Harvard University economists Mihir Desai, Fritz Foley and Michigan’s James R. Hines have studied data from American multinational firms, finding that their foreign affiliates tend to pay significantly higher wages in countries with lower corporate tax rates. A study by Nadja Dwenger, Pia Rattenhuber and Viktor Steiner found similar patterns across German regions… Canadian economists Kenneth McKenzie and Ergete Ferede. They found that wages in Canadian provinces drop by more than a dollar when corporate tax revenue is increased by a dollar.

So what’s the moral of the story?

It’s very simple.

…higher wages are relatively easy to stimulate for a nation. One need only cut corporate tax rates. Left and right leaning countries have done this over the past two decades, including Japan, Canada and Germany. Yet in the U.S. we continue to undermine wage growth with the highest corporate tax rate in the developed world.

The Tax Foundation echoes this analysis, noting that even the Paris-based OECD has acknowledged that corporate taxes are especially destructive on a per-dollar-raised basis.

In a landmark 2008 study Tax and Economic Growth, economists at the Organization for Economic Cooperation and Development (OECD) determined that the corporate income tax is the most harmful tax for economic growth. …The study also found that statutory corporate tax rates have a negative effect on firms that are in the “process of catching up with the productivity performance of the best practice firms.” This suggests that “lowering statutory corporate tax rates can lead to particularly large productivity gains in firms that are dynamic and profitable, i.e. those that can make the largest contribution to GDP growth.”

Sadly, there’s often a gap between the analysis of the professional economists at the OECD and the work of the left-leaning policy-making divisions of that international bureaucracy.

The OECD has been a long-time advocate of schemes to curtail tax competition and in recent years even has concocted a “base erosion and profit shifting” initiative designed to boost the tax burden on businesses.

In a study for the Institute for Research in Economic and Fiscal Issues (also based, coincidentally, in Paris), Pierre Bessard and Fabio Cappelletti analyze the harmful impact of corporate taxation and the unhelpful role of the OECD.

…the latest years have been marked by an abundance of proposals to reform national tax codes to patch these alleged “loopholes”. Among them, the Base Erosion and Profit Shifting package (BEPS) of the Organization for Economic Cooperation and Development (OECD) is the most alarming one because of its global ambition. …The OECD thereby assumes, without any substantiation, that the corporate income tax is both just and an efficient way for governments to collect revenue.

Pierre and Fabio point out that the OECD’s campaign to impose heavier taxes on business is actually just a back-door way of imposing a higher burden on individuals.

…the whole value created by corporations is sooner or later transferred to various individuals, may it be as dividends (for owners and shareholders), interest payments (for lenders), wages (for employees) and payments for the provided goods and services (for suppliers). Second, corporations as such do not pay taxes. …at the end of the day the burden of any tax levied on them has to be carried by an individual.

This doesn’t necessarily mean there shouldn’t be a corporate tax (in nations that decide to tax income). After all, it is administratively simpler to tax a company than to track down potentially thousands - or even hundreds of thousands - of shareholders.

But it’s rather important to consider the structure of the corporate tax system. Is it a simple system that taxes economic activity only one time based on cash flow? Or does it have various warts, such as double taxation and deprecation, that effectively result in much higher tax rates on productive behavior?

Most nations unfortunately go with the latter approach (with place such as Estonia and Hong Kong being admirable exceptions). And that’s why, as Pierre and Fabio explain, the corporate income tax is especially harmful.

…the general consensus is that the cost per dollar of raising revenue through the corporate income tax is much higher than the cost per dollar of raising revenue through the personal income tax… This is due to the corporate income tax generating additional distortions. … Calls by the OECD and other bodies to standardize corporate tax rules and increase tax revenue in high-tax countries in effect would equate to calls for higher prices for consumers, lower wages for workers and lower returns for pension funds. Corporate taxes also depress available capital for investment and therefore productivity and wage growth, holding back purchasing power. In addition, the deadweight losses arising from corporate income taxation are particularly high. They include lobbying for preferential rates and treatments, diverting attention and resources from production and wealth creation, and distorting decisions in corporate financing and the choice of organizational form.

From my perspective, the key takeaway is that income taxes are always bad for prosperity, but the real question is whether they somewhat harmful or very harmful. So let’s close with some very depressing news about how America’s system ranks in that regard.

The Tax Foundation has just produced a very helpful map showing corporate tax rates around the world. All you need to know about the American system is that dark green is very bad (i.e., a corporate tax rate that is way above the average) and dark blue is very good.

And to make matters worse, America’s high tax rate is just part of the problem. A German think tank produced a study that looked at other major features of business taxation and concluded that the United States ranked #94 out of 100 nations.

It would be bad to have a high rate with a Hong Kong-designed corporate tax structure. But we have something far worse, a high rate with what could be considered a French-design

In the wake of the devastating floods in Louisiana, many people have been stranded in places that are difficult to access, some needing rescue and others running dangerously low on basic supplies. 

The federal response has gotten mixed reviews so far, but some residents in Louisiana saw the real need for help and decided to step up and do what they could for their friends and neighbors.

“All of a sudden before the feds could react, we got thousands of boats in the water, with locals helping each other,” said Kevin Dietz.

The “Cajun Navy” as it has been called, consists of dozens of people with boats and coordinators who work together to deliver supplies or rescue people from flooded areas. 

These volunteers are not just some disorganized rag-tag group, many of them might know how to navigate their neighborhoods better than the government officials, and they are utilizing new technologies to share their GPS locations with each other and organize their communications onto dedicated channels.

State Senator Jonathan Perry is now in the middle of a maelstrom after a report came out that he was working on a proposal that could require these would-be rescuers to undergo training or get a permit in order to help.

To be fair to Senator Perry, he contends that he is trying to figure out a way to remove the layers of red tape that prohibit volunteers from helping with the rescue efforts, as under current law it is illegal for them to  cross the barriers set up by law enforcement and many of them are prevented from doing so.

In the current framework these volunteers are being turned away and prevented from doing what they can at the same time that people are stranded and waiting for help.

This dynamic is not unique to situations like the flooding in Louisiana. Dozens of cities have passed bans making it illegal for private citizens and charities to feed the homeless, which leads to situations like this 90-year-old man and two being charged in Florida for violating the ban. Occupational licensing makes it much more difficult for medical professionals to volunteer their medical and dental services at free clinics through organizations like Remote Area Medical.

There is a rich history in America of people coming together to help others: one report from Giving USA claimed 2015 was “America’s most-generous year ever” when it comes to donating money to charities, and almost 63 million Americans volunteered their time in some capacity, although the volunteer rate has declined in recent years. These private efforts have enormous capacity to help solve problems if they are not deterred by burdensome red tape.

As one member of the Cajun Navy put it, “How can you regulate people helping people, that doesn’t make sense to me.”

Unfortunately, it’s all too common for government regulations to erect barriers and layers of red tape that make it harder for people to help.

I’m delighted to join the many people spreading the news today that the University of Chicago, my graduate alma mater, is bucking the trend at colleges and universities across the country by refusing to pander to the delicate but demanding “snowflakes” and “crybullies” who’ve tyrannized American campuses over the past few years. As the Daily Beast reports, Dean of Students John Ellison told the incoming class of 2020 “something they wouldn’t hear on most other liberal-arts campuses: ‘We do not support so called “trigger warnings”… and we do not condone the creation of intellectual “safe spaces.”’” At Chicago, students are expected to live “the life of the mind.”

Just yesterday Nick Rosenkranz posted in this space about the efforts he and colleagues over at Heterodox Academy are taking to encourage greater ideological diversity in academia. On both of these closely connected issues I’ve spoken at some length and in detail—it’s not a pretty picture out there. But this silliness could not go on forever—not at these prices. Let’s hope that these are signs of changes in the offing.

Would you like a break from the presidential campaign and be interested in catching a movie?  The pickings are pretty slim–unless you can’t get enough of the Obamas.  Here’s a tip: Check out the new documentary film, Incarcerating US, which is coming to theaters next month. 

Sneak preview:

Incarcerating US: Teaser

For more information about the film, go here.

For related Cato work, go here here, and here.

This is a follow-up to my post yesterday about Muslim American assimilation that focuses on religious differences between Muslims in the United States, between them and their co-religionists in their countries of origin, and their differences with other Americans.    

There are many different sects of Islam and most are represented in the United States.  Sunni Islam is the largest followed by Shia Islam at roughly 89 percent and 11 percent, respectively, which is similar to the global division.  African American membership in the Nation of Islam adds another wrinkle.  There are further sub-sects such as the Sufi, Druze, Ahmadiyya, Alevism, and others that disagree on virtually everything from doctrine to modes of practice.  In addition to those differences, there are five main schools of Islamic jurisprudence (four Sunni and one Shia) that reveal further differences to say nothing of how local cultures have altered practice and doctrine.  Islam is not a monolithic and uniform religion.  It is highly fractured and lacks a central religious authority. 

Based on a 100 point index pooling the responses from religious questions in the World Values Survey, Muslim immigrants in the West had a religiosity of 76 compared to 83 in their countries of origin and 60 in their destination societies.  According to Gallup, 80 percent of Muslim Americans say that religion plays a key role in life, which is more than the 65 percent of the general population but still less than the 85 percent reported by Mormons who agree with that statement.  Those figures are slightly lower for younger Muslim and non-Muslim respondents aged 18 to 29.  Pew also found that religion is about as important to U.S. Muslims as it is to Christians while both valued it more than the general population. 

Gallup and Pew found that compared to Muslims in Islamic countries, U.S. Muslims are the least likely to say religion is important to them.  Gallup found that Muslim weekly attendance at religious services in the United States is only just above that of the general population, 41 percent to 34 percent, and is 22 percentage points below Mormon attendance.  Among Muslims who said that “religion is important,” only 49 percent attend religious services once a week – lower than the U.S. general population and all other religious groups except Judaism.  For respondents aged 18 to 29, 41 percent of Muslims attend mosque at least once a week, the same percentage as Protestants, 27 points behind Mormons, and 14 points ahead of the general population.  Pew found that weekly attendance for Muslims and Christians was about the same and both were higher than the general population. 

According to Doug Massey and Monic Higgins, 68 percent of Muslim immigrants never attend religious services compared to 62 percent of all American Christians who say they attend religious services once or twice a month.  Chapter 7 of a National Academy of Science report on immigration assimilation analyzed New Immigrant Survey data and found a significant drop off in new immigrant Mosque attendance that likely rebounds over time.  

A 2011 poll by Pew found that 35 percent of Americans Muslims think their religion is the only true faith while 37 percent think there is only one true way to practice it.  For American Christians, the percentages are 30 and 28, respectively.  Pew also found that 56 percent of U.S. Muslims believe that many religions can lead to eternal life compared to 65 percent of all Americans and 64 percent of Christians.  Only 47 percent of African American Muslims said that many religions could lead to eternal life, a percentage lower than in any other demographic group.  The median finding in other countries is that only 18 percent of Muslims believe that many religions can lead to heaven.  The same poll found that 63 percent of U.S. Muslims and 64 percent of U.S. Christians do not say there is any tension in being devout and living in a modern society.  The global median for Muslims on this question was 54 percent.   

A 2016 poll by the Institute for Social Policy and Understanding (ISPU) found that 45 percent of Muslim Americans favor a role for their religion in law.  In the same poll, 50 percent of Protestants said their religion should play a role in the law.  ISPU also finds that those Muslims with strong religious identities are also more likely to strongly identify as Americans, a finding similar across the religious groups surveyed.  A 2011 survey found that only 1 percent of American Muslim believed in the extreme Salafi approach to making Islamic decisions, down from 6 percent in 2005.  A majority of Mosque-goers, 55 percent, are also more likely to disagree with the statement that “all the different religions are equally good ways of helping a person find ultimate truth,” compared to 31 percent of attendees at other U.S. congregations. 

Related to religious belief, African American Muslims who are mostly converts or the descendants of recent converts and also disproportionately affiliated with the Nation of Islam, are more than twice as likely to think that America is immoral than immigrant and second-generation Muslims.  According to Gallup, Muslims are also less likely to strongly identify as American compared to other religious groups but they are also less likely to strongly identify with their own religion than Protestants and Mormons.  Only a small minority of Muslim Americans respondents in one study reported any conflict between being Muslim and American.  In another study, women who were more religious were also more involved in civil society and politics but that was also correlated decreased cultural and psychological integration into U.S. society.        

Educated, prosperous, and urbanized Muslim immigrants are less religious.  The concentration of Muslim immigrants among their fellow co-religionists and co-ethnics is positively associated with religious participation across a range of countries.  Endogamy also boosts religious participation.  In this regard, the greater diversity among American Muslims by ethnicity, race, and country of origin works against religious participation by limiting the scope of ethnic concentration and endogamy.  Shia Muslims, who are about 11 percent (page 23) of all U.S. Muslims, are especially fractionalized

How America Has Altered Islam

The lack of a state religion in the United States combined with a lively free-market in faith and high levels of belief have prompted Muslims to adapt.  They have had to create religious institutions from the ground up without U.S. government support, meaning that they end up copying the way that American churches are organized, staffed, funded, and operated. 

The different Western social, religious, and institutional landscape means that religious Muslims have to make a greater effort to actually practice.  Religion and religious institutions have often helped American immigrants assimilate.  That being said, conversion to other religions is uncommon among Muslims in the United States – 65 percent of those who do convert to another faith become unaffiliated while the rest choose another religion.  There is also some evidence that moving to the United States makes immigrants more observant but they tend to practice differently than in their home countries by, for instance, adopting a congregational style of mosque participation that is less ethnically divided.

Religion has also become more important as a source of identity for Muslim Americans in the second generation that often accompanied with a rejection of their parent’s ethnicity.  That’s partly a search for authentic or pure Islam untainted by culture, a notion present among some Muslim immigrants themselves.  A stronger religious identification can also push many marginal believers out of Islam, leading them to identify as non-religious.  This doesn’t appear to be at odds with broader integration.  Sociologists David Voas and Fenella Fleischmann sum up this section of their review by writing that: “[T]here is little evidence that religious socialization, current religiosity, or desire to maintain inherited traditions reduce the interest in adopting the mainstream culture.”

Conclusion

American Muslims have very different religious opinions and practices compared to their fellow co-religionists in Muslim-majority nations.  The difference in Muslim opinion between countries could be explained by the fact that those who choose to emigrate could have different opinions, America might change them, or both.  Interestingly, African-American converts to Islam, whether to the Nation of Islam or not, have the most negative about America and American culture.  That should improve our relative view of Muslim immigrants and their assimilation.  Muslim Americans have religious opinions that tend to differ from those of other Americans but the gulf is not too wide.     

When people want to join together to spend money in an election campaign, federal law requires them to form a “political action committee” or PAC. Most PACs are allowed to donate up to $5,000 to any candidate in an election. If a PAC has been registered for less than six months, however, this maximum donation is inexplicably lowered to $2,700 per candidate.

Since the 1974 case of Buckley v. Valeo, the Supreme Court has consistently held that limitations on campaign contributions “implicate fundamental First Amendment interests.” And only two years ago, in McCutcheon v. FEC, the Court reiterated that such limits could only be justified if they reduce quid pro quo corruption (or its appearance). By that standard, the $2,700 limit on new PACs is clearly unconstitutional: If a $5,000 donation from a seven-month-old PAC does not run the risk of corruption, it’s hard to see how a $2,701 donation from a five-month-old PAC does. Making just this argument, a new PAC – the colorfully titled Stop Reckless Economic Instability Caused by Democrats (Stop REID) – sued the Federal Election Commission.

There was just one problem: Although this plaintiff PAC was less than six months old when the case was filed, it was more than six months old when the district court ruled. For that reason, the U.S. Court of Appeals for the Fourth Circuit held that it could not rule on the constitutionality of the $2,700 limit because the question had become “moot”; the limit no longer applied to the particular PAC that had brought the case.

Reconciling mootness doctrine with the realities of our lengthy judicial process is not a new problem. Courts have long recognized that some laws would be impossible to challenge under the normally strict rules of mootness, because the harm caused by the law happens faster than it takes a case to wend its way through the legal system. That’s why courts developed the sensible “capable of repetition, yet evading review” exception to mootness: If a law is likely to repeatedly affect people, but always for short periods at a time, then courts will decide the merits of a challenge to that law no matter how long the litigation takes.

Every court in the country agrees with this principle, but where the circuits have split is on a more particular question: does the harm have to be capable of repetition to the same plaintiff in order to waive mootness, or need it only be capable of repetition to the public as a whole? The approach of several prior Supreme Court cases, as well as the explicit precedent of four circuit courts, has been not to impose the “same plaintiff” requirement in election-law cases. But four other circuits, including now the Fourth Circuit, have continued to impose the “same plaintiff” rule in such cases. Given that split, Cato has filed a brief urging the Supreme Court to take this case and declare definitively that the “same plaintiff” requirement makes no sense in the election-law context.

The facts of this case show how electoral regulations can be specifically designed to affect each individual entity only once, while still having an enormous cumulative effect on the electoral process as a whole. Under the Fourth Circuit’s approach, even a statute that blatantly violated the First Amendment, such as a complete ban on all spending by PACs that are less than six months old, could never be struck down. Indeed, so long as Congress always designed its one-time waiting periods to be just shorter than the length of a typical lawsuit, it could effectively do whatever it wanted.

The Supreme Court should step in now before we move closer to that absurd result. A constitutional right hardly does much good if courts aren’t able to enforce it.

General David Petraeus and Brookings Fellow Michael O’Hanlon recently took to the Wall Street Journal to assure the American people that, despite sequestration, there is no military readiness crisis. A few days later, Thomas Donnelly and Roger Zakheim published a rebuttal in the National Review claiming that the challenges of too few personnel and aging, overextended equipment induced a “wasting disease.” They alleged that the size of the defense budget was a misleading statistic without context.

So, here’s some context. After a rapid demobilization following World War II, the United States slowly rebuilt its forces to balance against the Soviet Union. Spending remained far above pre-World War II levels for the remainder of the decades-long conflict, and ever since. The Pentagon budget averaged $462 billion from 1948–1990 (in FY2017 dollars), with notable spikes for the Korean War, Vietnam War, and the Reagan build up in the 1980’s (See Figure 1). With the end of the Cold War, we see a fairly steep decline in military spending during the H.W. Bush and Clinton years. In the aftermath of the 9/11 terrorist attacks, the reductions of the 90s gave way to much larger Pentagon budgets, as the George W. Bush administration embarked on the wars in Afghanistan and Iraq. Defense spending during the early years of the Obama administration remained above $750 billion as the president ramped up the war in Afghanistan while working to end the war in Iraq. In constant, 2017 dollars, annual Pentagon spending during Bush 43’s eight years in office averaged $612 billion; under Obama, the average is $675 billion (See Figure 2).

One side-note regarding the grouping by presidential administration: Taken alone, the picture can be misleading, in that Reagan inherited Carter’s final budget, Clinton inherited H.W. Bush’s, etc. And, besides, Congress, not any single president, makes the final decision on what the government spends. It is also true, however, that Congress has typically deferred to presidential preferences, particularly when it comes to military spending. Had Clinton wanted more, he likely would have gotten it (and did, starting in 1999); Obama, meanwhile, could have requested less (and, eventually, did). Those variations within four- or eight-year terms get lost in a graph that lumps all the years together in one fat bar for each president.

With respect to whether current spending levels are far too low, far too high, or somewhere in between, the Budget Control Act (BCA) of 2011 and its threat of sequestration tried to rein in spending on both defense and non-defense discretionary spending, but has been only partly successful. Congress has found ways around the defense caps, in part by funneling extra money to the base budget through the Overseas Contingency Operations (OCO) account, which is exempted under the BCA. And, under the BCA caps revised late last year, estimated military spending would average at least $551 billion from 2017 to 2021 (.pdf, see page 15) – and likely more than that if Congress doesn’t kick its OCO addiction. That’s 28 percent higher than in 2000, and 19 percent higher than the Cold War average.

In short, if there is a readiness gap, it’s not due to lack of funding. The BCA, by itself, has not resulted in significant cuts in military spending. In inflation-adjusted dollars, we spend more today than during the average Cold War year, and more than we spent at the start of the War on Terror. It would appear that we are mostly getting less “bang for our buck” than during previous generations.

Defense acquisition and compensation reform would help the Department of Defense to better channel scarce resources to its priorities. Similarly, the Pentagon has repeatedly requested the authority to close unneeded military bases, which a short-sighted Congress refuses to allow. But such common-sense reforms, that are supported by a broad bipartisan coalition of defense budget experts (including O’Hanlon, Donnelly and Zakheim), would not be enough to close the means/ends gap.

We also need to revisit the military’s requirements, which are a function of the nation’s overly ambitious grand strategy. We should shift away from primacy, which expects the U.S. military to meet all dangers, in all places, at all times, and instead pursue a strategy that expects other countries to address urgent threats to their security before they become threats to their region, or the globe. Restraining U.S. policymakers’ impulse to use the U.S. military might induce greater self-reliance on the part of U.S. allies, but, as important, it would reduce the likelihood that the United States will become involved in foreign conflicts that sap our strength and undermine our values. 

 

Graphs prepared by Caroline Dorminey and James Knupp

Source: FY2017 Green Book, includes OCO funding

 

This November’s election could be a decisive turning point in the struggle to end U.S. marijuana prohibition. ​It’s been a long time coming.

As recently as the 90s, every major political faction was squarely in favor of prohibition. Only drug-addled hippies and libertarians thought otherwise. With just a few honorable exceptions, every significant public intellectual supported prohibition too. We libertarians walked a lonely road, patiently pointing out prohibition’s high costs and doubtful benefits. In some ways we’re still alone, because we certainly wouldn’t stop with marijuana. But let’s consider what progress we’ve made.

In November’s election, five states – Arizona, California, Maine, Massachusetts, and Nevada – may each legalize recreational marijuana for adults. State-level opinion polling is notoriously unreliable, but so far it’s favorable in Maine and Nevada​, and overwhelmingly favorable in California. It’s unfavorable in Arizona and Massachusetts, though the Massachusetts poll only asked a generic marijuana legalization question and did not reference the specific initiative. If recent history is any guide, things look good for this November: Of the seven legalization initiatives offered to voters since 2012, five have passed, in Alaska, Colorado, Oregon, Washington, and Washington DC.

Things look especially good in California, which is poised to be a nationwide gamechanger. ​​California’s Proposition 64 is up by almost a 2:1 margin​, and​ the Los Angeles Times predict​s​ passage as well. If ​Prop 64​ does pass, the statewide implementation of a generous recreational pot regime – in the nation’s most populous state – is sure to have some significant economic and regulatory effects.​ It could hardly do otherwise.​

Some nationwide economic effects of legalization have already been seen. Marijuana prices nationwide have flattened or declined as new large-scale suppliers have come online. Seasonal price fluctuations seem to be disappearing as growers increasingly work in the open. And still-illegal Mexican growers have had to abandon marijuana because they can’t compete with the domestic ​free market, small as it​ still​ is.

And again, California is no ordinary state; already it produces more marijuana than Mexico – and by one estimate it​s medical marijuana regime​ grows nearly half the total legal U.S. production. And​ that’s ​before the near-certain growth of the industry in a recreational regime.

All this suggests that when California goes fully legal, the federal ​government ​will ​have to react somehow. ​The DEA has​ been reluctant to reschedule cannabis so far, but already many activists are dismissing the DEA’s Schedule I classification as irrelevant. Rob Kampia of the Marijuana Policy Project writes:

State and federal laws are simply two coexistent systems. But 99 percent of all marijuana arrests are made under state and local laws, not federal law. There simply aren’t enough DEA agents and other federal enforcers to wage an inclusive war on marijuana users, and the federal government cannot require states to enforce federal law on behalf of the federal government…

So we don’t really care whether marijuana is in Schedule I or II. In fact, my organization and other advocates of marijuana legalization don’t desire rescheduling, but rather the removal of federal penalties for marijuana and, furthermore, an explicit recognition that states should be able to determine their own policies without federal interference.

As more and more states legalize, that Schedule I classification looks more and more ridiculous.​ Soon the federal government may have to decide whether to follow the states – and the will of the people – or whether to crack down on legalization. But as time goes on, cracking down looks more and more illegitimate, and inaction looks more and more like a joke. Something’s got to give.

America collects allies like Americans collect Facebook friends. As a result, Washington defends more than a score of prosperous European states, several leading Asian nations, and a gaggle of Middle Eastern regimes.

Yet most of the countries on the Pentagon dole appear to be perpetually unhappy, constantly demanding reassurance of Washington’s love. Their sense of entitlement exceeds that of the typical trust fund baby.

As a result, the U.S. is expected to protect virtually every prosperous, populous, industrialized nation. But that’s just a start. Washington also must coddle and otherwise placate the same countries.

Once great powers, they now believe it to be America’s duty to handle their defense. Alas, U.S. officials are only too willing to enable this counterproductive behavior.

Except for Donald Trump.

There is much to say about his candidacy, most of it bad. Nevertheless, he’s right not to be interested in reassuring allies.

Which has horrified the gaggle of well-to-do nations on America’s defense dole. For instance, the New York Times reported “an undercurrent of quiet desperation” among European officials. They went to Hillary Clinton’s campaign begging for, yes, reassurance!

As for Washington’s major Asian defense dependents, Bloomberg explained that they found Trump’s views “baffling.” The South Korean newspaper JoongAng Daily proclaimed itself to be “dumbfounded.”

Alas, both Republicans and Democrats rushed to promise well-heeled allies that they shouldn’t lose any sleep over Trump’s message, that nothing will change. Indeed, the Times reported European leaders visiting the Democratic convention, where they found the message “soothing.”

Washington officials have lost sight of why America should participate in an alliance. Alliances should be a means to an end.

Their purpose is to increase American security. They aren’t particularly useful where there’s no significant threat to the U.S., Washington can easily deter any adversary on its own, and/or America’s friends are capable of protecting their own interests. Which is the case for most U.S. allies today.

Russia’s Vladimir Putin is a nasty fellow, but has demonstrated no interest in challenging America militarily. And while Moscow deploys a capable armed forces, it would lose in a contest with the U.S.

Moreover, the Russian republic, like the old empire, is primarily focused on border security and respect, not conquering non-Russian peoples. Anyway, Europe has a larger economy and population than America, and far larger than Russia. Europe has chosen to remain seemingly helpless.

The Democratic People’s Republic of Korea is an unpleasant actor, but is interested in America only because America, in the form of 28,500 military personnel, is next door in the South. Yet South Korea enjoys a vast economic and technological lead, overwhelming international and diplomatic advantage, and sizeable population edge over the North. Seoul long ago should have graduated from America’s defense dole.

China, like Russia, is a regional power unlikely to seek war with America, which enjoys a large military lead. Japan, which long possessed the world’s second largest economy, could have done much more to advance its and its region’s defense for years. Even today Tokyo is well able to deter any Chinese threat to the former’s existence.

No Middle Eastern state directly threatens the U.S. America’s friends are dominant: Israel is a regional superpower, Saudi Arabia vastly outspends Iran on the military, and Turkey’s armed forces, despite the aftermath of the coup attempt, outrange those of all of its neighbors, aside from Russia, which has no cause for conflict.

As I point out in American Conservative: “Why is the U.S. providing all of these nations security commitments, military equipment, and promises to go to war? And reassuring governments desperately afraid that they might have to do more for their own defense? Instead, Washington should insist that its friends take over responsibility for their own security.”

It’s impossible to predict what Donald Trump would do as president. However, he might be willing to put muscle behind bluster and kick nations off of the U.S. defense dole.

Under Dodd-Frank, the new Financial Stability Oversight Council (FSOC) has the authority to designate companies as “systemically important financial institutions” or “SIFIs.” By identifying and branding these companies as systemically important, we’ve been told, the government will end “too big to fail.” Dodd-Frank’s supporters claim bailouts like the one we saw in 2008 are a thing of the past, in part because of the heightened oversight of SIFIs. Except FSOC hasn’t fully thought through the whole SIFI designation concept. In March, a court found that FSOC’s designation of insurance giant MetLife failed to consider the impact the designation would have on MetLife and the U.S. financial system as a whole and therefore was “arbitrary and capricious,” that is, unlawful.

FSOC was created by Dodd-Frank and, as an agency of the federal government, it exists to “further some public interest or policy which [Congress] has embodied in law.” This interest, Dodd-Frank tells us, is to “promote the financial stability of the United States…to end too big to fail, [and] to protect the American taxpayer by ending bailouts[.]” Whether FSOC  is capable of any of these things and whether the legislation that created it will ultimately promote anything like stability is not the point (although our vote on these questions is “no”). The point is that, in exercising this delegated authority, FSOC must always act to forward the goal of promoting the financial stability of the United States.

It is surprising, then, that in determining whether MetLife should be designated as a SIFI, FSOC not only failed but flat out refused to consider whether the cost of compliance with this increased burden might actually weaken the company. If FSOC designates a company as a SIFI it means that FSOC has determined that “material financial distress” at the company “could pose a threat to the financial stability of the United States.” That is, that anything that weakens it would undermine the express goal of Dodd-Frank. It seems clear that FSOC should at least ask the question: would complying with these new rules make the company stronger or weaker?

And yet FSOC claimed that this question, which goes to the very heart of its authorizing statute, is not one it has to ask. Following its loss in the district court, FSOC appealed the case to the D.C. Circuit Court. On Monday, Cato filed an amicus brief arguing that it was unreasonable for FSOC to fail to consider whether its action in designating MetLife as a SIFI promoted or instead frustrated the goal of Dodd-Frank in promoting financial stability in the U.S. Cato also argued that, far from reducing the risk of bailout, designating MetLife as a SIFI could in fact increase the likelihood of taxpayer-funded rescue.

Ultimately the question is whether an agency must grapple with the possible negative effects of its actions, or whether it may simply wave these costs away, saying “that’s not our concern.” We hope the court decides that federal agencies, like everyone else, must consider the costs of their actions.

[Cross-posted from Alt-M.org]

Yesterday the 10th annual Education Next survey of American opinion on K-12 education came out, and right away Jason Bedrick deftly distilled the school choice findings. I want to quickly discuss two other, ripped-from-the-headlines subjects: opinion on the Common Core national curriculum standards, and agency fees charged to teachers who don’t want to join a union.

As perhaps reflected in the latest version of the Elementary and Secondary Education Act—the recently enacted Every Student Succeeds Act (ESSA)—many Americans across the ideological spectrum are none too pleased with the Common Core, which the ESSA goes so far as to mention by name as off limits to further federal coercion. According to the survey, federal politicians read the tea leaves correctly when they took off against the Core. Despite the survey using a wording likely to bias respondents in favor of the Core—saying it will be used “to hold schools accountable for their performance”—the general public was evenly split: 42 percent supportive and 42 percent against. Even more telling has been the Core’s trajectory since first being addressed in the 2012 survey. The trend data do not include people who were neutral on the Core, but among those who offered opinions for or against, support plummeted from 90 percent to just 50 percent.

That said, the survey’s overall message is not entirely hopeful if you aren’t fond of centralized standards and testing. Among other things, 55 percent of the general public supports generic, identical state standards in reading and math used “to hold public schools accountable for their performance.” Of course, that wording makes it impossible to know if respondents are mainly reacting to uniform standards, accountability, or both, but the uniformity inclination does not bode well for fans of local control of public schools. Then again, the public opinion trajectory is similar to what we saw when the Common Core was mentioned by name: support dropped from 92 percent of people who offered an opinion in 2012, to 66 percent today.

When it comes to public opinion, the Common Core is a sinking ship. But it’s not yet on the ocean floor.

The other results that jumped out at me, especially given the unfortunate demise of the Friedrichs Supreme Court case and ongoing, brazen union politicking, were on  “agency fees,” funds that teachers in many states have to supply unions even if they do not wish to be members, supposedly to cover their “fair share” of contract negotiations. Only 35 percent of the general public supported such compelled fees, versus 44 percent who opposed them. Even more telling, among all the subgroups of respondents the pollsters broke out, only one—Democrats—expressed greater support than opposition. And among the subgroups were teachers themselves, who opposed agency fees 47 percent to 43 percent!

Hopefully what this reflects is a lot of Americans perceiving the fundamental injustice of forcing people to associate with a union, and of requiring them to pay for speech that is inherently political.

There’s a lot more worth exploring in the survey, so check it all out! And if you are going to be in Washington, DC, on September 16—or you have a computer such as, say, the one you are using right now—you can watch me discuss the poll with several other, much smarter folks, including the pollsters themselves. Should be fun!

The 1996 Welfare Reform Act (PRWORA) made it more difficult for non-citizens to access means-tested welfare benefits.  However, that law also allowed states to use their own funds to extend means-tested welfare benefits to non-citizens and some took advantage of this.  After 1996, the only sure-fire way for a non-citizen to get welfare benefits was to naturalize and become a citizen. 

Twelve states did not change non-citizen eligibility for four large welfare programs (TANF, SNAP Medicaid, and SSI) in response to PRWORA while the other 39 states and the District of Columbia became more restrictive.  If non-citizens responded to welfare reform by naturalizing in order to gain access to benefits then there would be a larger increase in naturalizations in states with more restrictive post-PRWORA policies.  The evidence bears this out for immigrants based on country of origin.  The state by state evidence is more mixed. 

I then compared the increased percent in the number of naturalizations per state from the 1993-1995 period (first period) to the 1997-1999 period (second period).  Unfortunately, the 1996 data is unusable because some of it is unavailable and computer problems delayed naturalizations for that year, causing a 100 percent drop off in some states that had nothing to do with welfare reform.    

The combined number of naturalizations in the twelve states with unchanged rules for non-citizen eligibility increased by 54.5 percent from the first to the second period.  Naturalizations especially increased in California but there were other factors there contributing to the surge.  Excluding California, naturalizations only increased by 13.6 percent in the remaining 11 states with unchanged non-citizen welfare eligibility rules.  The total number of naturalizations increased by 32 percent between the two periods in the 39 states that adopted more restrictive welfare eligibility laws.        

About 44 percent of all nationwide naturalizations occurred in the states with unchanged welfare rules in the first period and 48 percent in the second period.   The percentage of all nationwide naturalizations in states with rules that got more restrictive dropped from 55.6 to 51.7 percent from the first to the second period.  The national share of naturalizations increased the most in states that did not adopt more restrictive welfare rules while the proportion of all naturalizations in states with more restrictive rules actually dropped between the periods, the opposite of what we’d expect if immigrants naturalized to get around welfare reform.      

Furthermore, the share of the population that was naturalized in the 12 unchanged states went from 3 percent to 3.7 percent from 1994 to 1999 (the 1993 data was absent from CPS).  For the states that restricted non-citizen welfare access, the percentage of the population that was naturalized climbed from 1.8 percent to 2.3 percent.  The change was larger, proportionally, in the restricted states – but not by much.  Numerous other potential explanatory variables are not included here so this is not the whole story.    

Welfare reform likely prompted a rise in naturalizations but the effect is probably small compared to other factors.  

Republican Governor Charlie Baker recently signed statewide regulations for ride-hailing platforms like Lyft and Uber and this package has the ignominy of including “a subsidy that appears to be the first of its kind in the United States,” as Reuters calls it. This comes in the form of a new 5-cent per trip tax on ride-haling companies that will be funneled to the traditional taxi company. This is part of the total 20-cent per trip fee with the rest of the revenues being split between local governments and the state transportation fund.

There are approximately 2.5 million rides per month in Massachusetts just through Uber and Lyft, with more coming through other, smaller ride-hailing companies.  This means that the 5-cent tax and subsidy will transfer at least $1.5 million to traditional taxi companies each year, and likely much more as the total number of ride-hailing trips continues to rise in the coming years.

As it is written now the “taxi tax,” as Brittany Hunter has dubbed it, is scheduled to be collected through 2021 and the entire 20 cent surcharge will be in effect through 2026. Now that traditional taxi competitors have gotten a taste of being subsidized by their more successful competitors, it seems unlikely they would let a fruitful source of new ‘revenue’ expire without a fight.

While the regulation promises “riders and drivers will not see the fee because the law bars companies from charging them” there is no way the ride-hailing companies will passively absorb all of these additional costs. Instead, the most likely scenario is that they will indeed find a way pass on these costs and the most likely channels are higher prices for consumers or lower compensation for drivers.

Some details about how the new slush fund will be spent are still in the works, and MassDevelopment, the “economic development and finance agency” well-versed in disbursing subsidies to business will be in charge of how those funds are allocated. The law directs the money to help traditional taxies adopt “new technologies and advanced service, safety and operational capabilities” while the manager of Boston area’s Independent Taxi Operator’s Association has suggested it could go towards improving a smartphone app they have begun to use. So most of the ideas for the use of this new subsidy from the new  ride-hailing companies is to try to make traditional taxi companies adopt some of their practices. Adopting some of the innovative practices that have enabled ride-hailing companies to become successful might be something that traditional taxis should explore, but why is it something their competitors have to subsidize?

Efforts like this to force new entrants to subsidize the entrenched incumbents they directly compete with are misguided and counterproductive. They encourage both groups to focus their efforts on trying to influence regulation instead of innovating or improving their products.

Instead, the main way the traditional taxi companies in Massachusetts are innovating is trying to find new ways to make their new competitors subsidize them.

If only the last known VHS manufacturer had held out for just a little longer, they could have lobbied for a surcharge on streaming services like Netflix and Hulu that would subsidize their operations.

Instead of looking to impose the old framework of regulations on these new business models or force new companies to subsidize their traditional competitors, policymakers could look to reform those burdensome regulations that impose costs on consumers and drivers alike.  

Since 1975 – for 41 straight years – the United States has registered annual trade deficits with the rest of the world.  That means that year after year, Americans spend more on foreign-produced goods and services than foreigners spend on U.S.-produced goods and services or, put simply, the dollar value of U.S. imports exceeds the dollar value of U.S. exports.

For almost as long, some economists have been arguing that trade deficits are unsustainable – they sap economic growth, bleed jobs, and saddle our descendants with debt.  Perhaps if one looks at the trade deficit (or the slightly broader current account deficit) in isolation, these concerns might seem to have merit.  But looking at the U.S. trade or current account deficits without considering the capital account surplus is a meaningless, misleading exercise.

Yesterday, I published this piece at Forbes online, explaining why the trade deficit is not only not a problem, but that the associated capital surplus (the excess of inward investment over outward investment), which includes high-quality foreign direct investment, bestows huge advantages on the U.S. economy.  In that piece, I ask trade deficit hawks (or scolds, as I call them) to furnish their best, fact-based, comprehensive arguments – to finally step up to the plate and explain why it is that the trade deficit is a problem to solve.  

It would be of immense public policy value if we were to be able to catalogue and compare the arguments of both sides (and those who may be in the middle).  After all, one of the reasons that trade is so maligned is that the public has been lead to believe that the trade account is a scoreboard, with the deficit indicating that Team America is losing – and it’s losing on account of poorly negotiated trade deals and foreign cheating.  Helping the public reach that conclusion (rather than find the truth) may be the goal of some noisy contributors, but I suspect there are plenty of trade deficit hawks with purer motives, if not convincing arguments.

We intend to host a public debate on this question later this year, so it would be good to have some compelling, fact-based arguments that the trade deficit is a problem to solve.  (Feel free to forward by email or social media.) Below is a short list of some of Cato’s expositions of the arguments that the trade deficit is not a problem to solve:

And here’s Milton Friedman talking to Kansans about the subject: Milton Friedman on Trade Balance and Tariffs

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