Policy Institutes

I am not a lawyer, and I’m certainly not an expert on California law, but yesterday’s state appeals court ruling in the much-discussed Vergara v. California teacher tenure case seems plausible. While Golden State statutes make it very hard to remove bad teachers, and may lead to the worst teachers being disproportionately assigned to schools serving low-income kids, district administrators could curb that if they really, really wanted to. It would just require very expensive, convoluted dismissal procedures be followed for each unsatisfactory educator. So technically, the law may not violate California’s constitution. But to defend it, in reality, is to defend a system heavily slanted against low-income students.

Vergara has spawned similar cases in other states, and I would guess there is a good chance similar rulings will come down the pike in those places. But there is probably also a good chance of tenure laws being overturned. It doesn’t strike me that, from a legal perspective, either side has a clearly superior case. But again, I am not a lawyer.

What this once again screams is that public policy needs to move away from an education system in which parents are dependent on politicians or courts to protect their children. They need money to be attached to kids and to have the ability to take their children out of schools they do not like and put them into other institutions. And there should be no blanket state seniority or teacher evaluation rules. Educators should be free to get together and set up schools with whatever policies they want, and whether or not those schools survive or those policies are maintained should depend on their ability to attract enough paying customers with the services they produce.

We need to stop making parents and children wards of the state, and instead give them real power.

“We don’t win anymore!” Republican presidential candidate Donald Trump tells us. One of the main reasons, according to Trump, is due to free trade agreements. At a rally in North Carolina he declared: “All this free trade, you know what, it is free trade for them, not for us. We’re losing our shirts.” Trump has proposed imposing various taxes on foreign imports to the US because he believes this will help facilitate bringing back jobs to the US (my colleague Daniel Ikenson has written about this here and here).

Trump’s talk of unfair trade and his proposals to punish importers has resonated with many Americans. In fact, a recent CBS/New York Times survey finds that 61% of Americans agree that “trade restrictions are necessary to protect domestic industries” whereas 29% say free trade should be allowed even if domestic industries are hurt by competition abroad. 

Yet, Americans may not be willing to foot the bill of goods’ higher prices that will result from Trump’s proposed trade restrictions. A recent AP/GfK poll finds that 67% of Americans would rather buy cheaper products made in another country rather than pay more for the same product made in the United States. Thirty percent (30%) say they’d rather pay more to buy American made products. That being said, 71% report that they’d like to buy American made items, but that they are often too costly or difficult to find. Furthermore, only 9% say they hold firm to only buying American made goods even if they cost more.

These poll results give some insight into Americans’ revealed preferences, or their actual consumer behavior. While in theory Americans like the idea of buying items made closer to home by their fellow citizens, ultimately their pocketbook may prove more relevant to their behavior.

When it comes to free trade agreements impact on American jobs and wages, Americans are divided but tend not to be concerned. Fifty-four percent (54%) do not believe that free trade agreements decrease wages for American workers while 43% think these agreements do harm wages. Similarly 51% do not think that free trade agreements cost American jobs, while 46% think they do.

Overall, Americans are quite divided over the general benefits of free trade with a third who believe free trade agreements are good for the economy, 37% who say they don’t make a difference, and about a quarter who think these agreements harm the economy.

Japan is a developed nation that allows little immigration, thus winning occasionalpraise from American immigration restrictionists. If the reason for copying Japan’s immigration policy of almost no immigrants is that it will improve the labor markets, conditions there do not provide evidence for that claim, at least on the surface. 

Japan’s immigrant population is minuscule compared to the United States, as a percent of either country’s population (Figure 1).

Figure 1: Immigrant Stock as Percentage of Population

Source: World Bank.

Although there is little immigration to Japan, real average monthly cash earnings have declined slightly since 1995 (Figure 2). During the same time period, U.S. wages have actually grown, albeit not as fast as many want (Figure 3). If those graphs were unlabeled, my hunch is that most immigration restrictionists would assume the better graph is Japan. Japan’s sluggish wage growth in a low-immigration environment doesn’t match the restrictionist fairytale while American wage growth contradicts it.

Figure 2: Japanese Real Average Monthly Cash Earnings, (2010 Thousand Yen)

Source: Statistics Japan: Statistics Bureau, Ministry of Internal Affairs and CommunicationsWorld Bank Data.

Figure 3: U.S. Real Average Wages, Annual, (2010 dollars)

Source: United States Census and World Bank.

An immigration restrictionist might counter that more Japanese are employed due to a paucity of immigration, thus outweighing (or explaining) the sluggish wage growth. That response doesn’t fit either as labor force participation rates (LFPR) for the entire adult population in Japan has been lower than in the United States for as long as World Bank data is available (Figure 4). Japan’s population is older than the United States which likely explains much of their lower LFPR.

Figure 4: Labor Force Participation Rates (% of total population ages 15+)

Source: The World Bank, http://beta.data.worldbank.org/

However, according to a different ILO estimate of LFPR for those aged 15-64, Japanese workers are more likely to be in the workforce since 2009 but less likely prior to then (Figure 5). 

Figure 5: Labor Force Participation Rate, Modeled ILO Estimate (% of total population ages 15-64)

Source: The World Bank, http://beta.data.worldbank.org/

Prime Minister Shinzo Abe is turning his attention to reforming Japan’s lackluster labor market that is widely blamed for holding back the country’s economic recovery. Immigration reform could be a portion of that reform package. Some Japanese politicians are less satisfied with their immigration restrictions than they used to be. Japanese public opinion toward immigration has softened recently, especially when viewed in an economic context. Regardless of potentially shifting Japanese public opinion, Japan’s labor market experience does not help immigration restrictionists make their case in the United States.      

 

Quick note:

Due to difficulty in finding Japanese data I had to rely on average wage rates and use the CPI as an inflation benchmark.    

 

In the April 13, New York Times an article discusses developments in the civil proceeding between an owner of shares in Fannie Mae and Freddie Mac and the federal government over the latter’s decision in August 2012 to revise the terms of its conservatorship of Fannie Mae and Freddie Mac.  The original agreement stated that the U.S. Treasury would receive a 10 percent dividend on its 189.5 billion dollar injection of capital.  The revised terms gave all positive cash flows from Fannie and Freddie to the Treasury leaving little for the firms’ shareholders.  Granting a request from the government, materials produced under discovery in the case have been under seal.  Responding to a request by the New York Times the judge in the case has released two depositions.  In one the former chief financial officer of Fannie Mae said that she told Treasury officials before their 2012 decision that Fannie Mae would soon earn profits again and that she believes her briefing played a role in the government’s decision to alter the terms governing the conservatorship. 

For some background on this issue you should read my Working Papers column in the Fall 2014 issue of Regulation in which I discuss two papers relevant to the issue.  In “Stealing Fannie and Freddie,” Yale Law School professorJonathan Macey argues that the decision by the Treasury to take all of the profits now earned by Fannie and Freddie erodes the rule of law and violates shareholder rights.

In “The Fannie and Freddie Bailouts Through the Corporate Lens,” Adam Badawi, professor of law at Washington University, and Anthony Casey, assistant professor of law at the University of Chicago argue that in the third quarter of 2012, when the federal government changed the financial arrangements to take all future positive cash flows, the value of shareholder equity in Freddie alone was negative $68 billion.  That is, for the shareholders to earn anything, Freddie would first have to earn $68 billion, which was more than Freddie had earned in the 19 years prior to its financial difficulties (1988–2006). But if Freddie lost only $4 billion more (which is the amount of losses per week in 2008–2009), the senior preferred Treasury shares would be worthless.  The data for Fannie were even worse: it would have to earn $114 billion before common shareholders would earn anything, which is more than it had earned in the 27 years prior to the financial crisis.  The authors argue that when equity’s real value is negative, the directors’ duty to maximize the value of the firm is the practical equivalent of a duty to creditors and not shareholders.  The authors argue that the government’s actions are consistent with what we would expect from a private creditor and do not violate shareholder rights.

I think both papers may be relevant.  As my colleague Mark Calabria has argued the Treasury may have violated the spirit if not the letter of the law.  And in a commentary written at the time he argued creditors were advantaged rather than taxpayers.

But similar to the decision in the AIG case in which a judge ruled that the federal government exceeded its authority in its takeover of AIG but that the government owed no damages to shareholders, the damages to Fannie and Freddie shareholders also may be zero because at the time the firms had negative net worth and would continue to have negative net worth for the foreseeable future.

In the April 13, New York Times an article discusses developments in the civil proceeding between an owner of shares in Fannie Mae and Freddie Mac and the federal government over the latter’s decision in August 2012 to revise the terms of its conservatorship of Fannie Mae and Freddie Mac.  The original agreement stated that the U.S. Treasury would receive a 10 percent dividend on its 189.5 billion dollar injection of capital.  The revised terms gave all positive cash flows from Fannie and Freddie to the Treasury leaving little for the firms’ shareholders.  Granting a request from the government, materials produced under discovery in the case have been under seal.  Responding to a request by the New York Times the judge in the case has released two depositions.  In one the former chief financial officer of Fannie Mae said that she told Treasury officials before their 2012 decision that Fannie Mae would soon earn profits again and that she believes her briefing played a role in the government’s decision to alter the terms governing the conservatorship. 

For some background on this issue you should read my Working Papers column in the Fall 2014 issue of Regulation in which I discuss two papers relevant to the issue.  In “Stealing Fannie and Freddie,” Yale Law School professorJonathan Macey argues that the decision by the Treasury to take all of the profits now earned by Fannie and Freddie erodes the rule of law and violates shareholder rights.

In “The Fannie and Freddie Bailouts Through the Corporate Lens,”Adam Badawi, professor of law at Washington University, and Anthony Casey, assistant professor of law at the University of Chicago argue that in the third quarter of 2012, when the federal government changed the financial arrangements to take all future positive cash flows, the value of shareholder equity in Freddie alone was negative $68 billion.  That is, for the shareholders to earn anything, Freddie would first have to earn $68 billion, which was more than Freddie had earned in the 19 years prior to its financial difficulties (1988–2006).  But if Freddie lost only $4 billion more (which is the amount of losses per week in 2008–2009), the senior preferred Treasury shares would be worthless. The data for Fannie were even worse: it would have to earn $114 billion before common shareholders would earn anything, which is more than it had earned in the 27 years prior to the financial crisis.  The authors argue that when equity’s real value is negative, the directors’ duty to maximize the value of the firm is the practical equivalent of a duty to creditors and not shareholders.  The authors argue that the government’s actions are consistent with what we would expect from a private creditor and do not violate shareholder rights.

I think both papers may be relevant.  As my colleague Mark Calabria has argued the Treasury may have violated the spirit if not the letter of the law.  And in a commentary written at the time he argued creditors were advantaged rather than taxpayers.

But similar to the decision in the AIG case in which a judge ruled that the federal government exceeded its authority in its takeover of AIG but that the government owed no damages to shareholders, the damages to Fannie and Freddie shareholders also may be zero because at the time the firms had negative net worth and would continue to have negative net worth for the foreseeable future.

A number of House Republicans have testified to the Ways and Means Committee about their ideas for overhauling the tax code. Rep. Roger Williams testified about his plan this week. And Reps. Michael Burgess, Devin Nunes, and Robert Woodall presented their plans a couple weeks ago.

Here are a few notes:

Michael Burgess Flat Tax. Rep. Burgess testified in favor of a classic Hall-Rabushka flat tax, which is the plan that has been supported by Steve Forbes and Dick Armey. The tax is named after economists Robert Hall and Alvin Rabushka, who is an adjunct scholar at Cato.

The Burgess plan would have a 19 percent rate (dropping to 17 percent), a large standard deduction ($32,000 for a married couple), and large child deductions ($7,000 per child). My preference would be for a lower rate with a smaller standard deduction, but the Burgess plan is generally excellent.

The flat tax would vastly simplify the tax code. Individuals would be able to file their tax return on a postcard because the plan would abolish nearly all deductions, exemptions, and credits, and individuals would be generally only taxed on their labor income. All capital income would be taxed at the business level at the same 19 or 17 percent rate.

Business taxation would have a simplified cash-flow structure, and companies would immediately write-off capital investment. Complex income tax concepts such as depreciation, amortization, and capital gains would be abolished.

The Burgess tax would eliminate the current tax code bias against savings and investment, which is a key weakness of income taxation. With an economically neutral base and a low rate, the Burgess flat tax would be very pro-growth.

Devin Nunes Business Tax. The Nunes proposal is essentially the business part of the Hall-Rabushka flat tax, but with a 25 percent rate. This is a cash-flow tax, meaning that accrual accounting and noncash concepts such as depreciation would be scrapped. Business investment would be expensed.

Rep. Nunes may have been inspired to pursue his proposal by my 2003 Cato study on replacing the corporate income tax with a business cash-flow tax. Alan Viard at AEI has also written about the idea.

Politicians love to rail against corporate tax avoidance. But the way to actually solve the problem would be to slash the tax rate and replace the current business tax base—which relies on the imprecise concept of “income”—with the easy-to-measure base of net cash-flow, as under the Nunes plan. The current system has so many “loopholes” partly because Congress is taxing the wrong base.

The Nunes plan would be territorial, meaning that the earnings of foreign subsidiaries would not be taxed by both foreign governments and the U.S. government. The plan would encourage multinational corporations to locate their headquarters and their factories here in America, and that would be a boon to U.S. workers. 

Robert Woodall FairTax. Rep. Robert Woodall proposes replacing federal income and payroll taxes with a national retail sales tax called the FairTax. I appreciate the radical spirit of this proposal, and if it were enacted, it would simplify taxation and boost economic growth. However, there are risks to this sort of reform.

One risk is that Congress enacts a national retail sales tax and the income tax is either not repealed or it comes back down the road. The last thing we need is for the overgrown government to have multiple huge tax bases. The Woodall bill would repeal the 16th Amendment, but I don’t think that would be sufficient protection to prevent resumption of income taxation. After all, Congress enacted the corporate income before the 16th Amendment was adopted by claiming that it was an “excise” tax, and today this “excise” tax is the most damaging part of the income tax. Presumably, a liberal Congress could decide that it wanted to impose a similar “excise” tax on America’s more than 20 million small businesses.

Another concern about the FairTax is the plan’s rebate mechanism that would provide families a check each month to offset part of the sales tax burden. That would be a large and redistributive entitlement program, and it would surely become larger and more complex over time as politicians expanded and manipulated it.

All that said, kudos to the sponsors and cosponsors of these bills for their support of a dramatic tax overhaul. Let’s hope that their support can be translated into major tax reform moving through Congress next year.  

For more on the flat tax, national sales tax, and other reforms, see here.

Tacoma, Washington’s News Tribune has editorialized about the REAL ID Act in a way that will be unfamiliar to followers of the national ID law and its implementation. The state has been “dawdling,” it says, by not moving forward on the national ID. The Department of Homeland Security (DHS) has been “patient to a fault” and “dispensed grace” to the 28 states (NT’s number) that have escaped federal punishment. Next we’ll be told that the federal government is efficient and responsive.

If you’re just tuning in, last fall DHS began a major, concerted effort to bring state governments in line with the provisions of the REAL ID Act, a federal law designed to create a national ID system. Washington State has resisted this federal power-grab up over the last decade, but Senator Curtis King (R) recently introduced legislation that would bring Washington into compliance. This threatens Washingtonians privacy and liberty.

Passed in 2005, the REAL ID Act is a federal law designed to coerce states into adopting uniform standards for driver’s licenses and non-driver IDs. Compliance would also require the Washington State Department of Licensing to share drivers’ personal data and documents with departments of motor vehicles across the country through a nationwide data sharing system. If fully implemented, REAL ID would create a de facto national ID card administered by states for DHS. The back-end database system the law requires would expose data about drivers and copies of basic documents, such as birth certificates and Social Security cards, to hacking risks and access by corrupt DMV employees anywhere in the country.

Congress passed REAL ID Act without a hearings and no up-or-down vote in the Senate. Indeed, it was tacked onto a “must pass” military spending bill. Proponents frequently tout REAL ID as having been in a recommendation of the 9/11 Commission. In fact, the REAL ID Act repealed federal legislation that had been passed based on the Commission’s recommendations. It also canceled a negotiated rulemaking process, which was bringing together state and federal officials, privacy groups, and civil libertarians in an effort to shape ID policy. Instead, the REAL ID Act ordered one-size fits all federal regulations with no input from outside groups, much less states.

As the costs to state budgets and Americans’ privacy became clear, many states rejected REAL ID compliance, passing resolutions against the law or outright banning themselves from complying. Washington was one of the strong states. It banned itself from complying with REAL ID in April 2007.

Seeking to break down state resistance, DHS has been issuing threats that it will soon begin refusing drivers’ license and IDs from non-compliant states at Transportation Security Administration checkpoints. But DHS can only threaten; it has never made good on the threat and it never will. That is because DHS itself would take all the blame if it started refusing Americans their right to travel. Multiple DHS-invented “deadlines” have come and gone since the original deadline set by the law in 2008. In January, DHS backed off from a claim made last fall that it would start refusing many states’ licenses in 2016. The latest DHS-invented deadline is in 2018.

When Congress passed REAL ID in 2005, the claim was that it would be a tool in the fight against terrorism. Neither the DHS nor any advocate for a national ID has articulated how it would provide cost-effective security. The true result of the federal government’s national ID program would be greater tracking and control of law-abiding Americans, not terrorists. And data about law-abiding Americans would be exposed to the far more common threats of hacking and identity fraud. These are reasons why Washington resisted REAL ID when the federal Department of Homeland Security first tried to take over the Washington State Department of Licensing.

Another reason for resistance is the certainty that Washington, D.C., will move the goalposts after Washington State moves toward compliance. DHS bureaucrats will be able to change Washington State’s driver licensing policies, require the state to spend funds on the Department of Licensing as the federal bureaucracy wishes.

Washingtonians stood at the forefront of the anti-REAL ID movement when the law first appeared. They should continue to do so, and continue to fight against DHS and its allies in Olympia. There is no security benefit from implementing REAL ID. It simply transfers power from states like Washington to a growing federal government. Senator King should not want to be the official who goes down in hisotry as having pressed a national ID into the hands of Washingtonians.

New Balance announced this week that it will intensify its lobbying efforts against the Trans-Pacific Partnership after the Department of Defense refused to accept the company’s bid to become the exclusive supplier of shoes for new military recruits.  The news has gotten attention because it hints at how the Obama administration may be bribing companies to support the TPP.  That’s an interesting angle, but the incident also highlights New Balance’s long history of rent-seeking and how they intentionally adopt inefficient business practices to curry favor with the government. 

Unlike its global competitors, New Balance assembles shoes in the United States.  They have a handful of factories in New England that employ about 1400 people.  Only about 25% of New Balance shoes sold in America are assembled in its U.S. factories (the rest are imported), and its Made-in-America shoes are manufactured from approximately 70% domestic material. 

Because New Balance is less dependent on trade than its competitors, it benefits from U.S. tariffs on shoes.  Those tariffs range from 8% to 60%, with the higher rates reserved for cheaper shoes.  The tariffs directly cost American consumers and businesses over $2 billion per year. 

Even though New Balance imports most of the shoes it sells, it has lobbied aggressively to maintain those tariffs—likely because the tariffs impose a relatively greater strain on its competitors.  The TPP would eliminate tariffs on shoes from Vietnam, where Nike employs over 350,000 people.

But New Balance’s business model doesn’t depend only on taxing American consumers for doing business with their competitors.  They also want to leverage their American manufacturing as a way to get preferences in government procurement.  That includes using a 75-year-old law to force the Pentagon to buy only New Balance shoes for new recruits.

Under the 1941 Berry Amendment, the Department of Defense may only purchase certain products if they are “wholly of US origin.”  New Balance’s American shoes, remember, are only 70% American, so the Pentagon has been able to provide running shoes for new recruits free of the Berry Amendment’s sourcing restrictions.

A few years ago New Balance decided to try making a 100% American shoe in hopes that the military would then be forced by law to buy only that shoe for all new recruits.  According to the Boston Globe, New Balance “bought a contraption that makes midsoles — a key missing link in its domestic supply chain — and installed the machine, which is the size of a school bus, at its Brighton plant about two years ago in anticipation of the military work.”

However, New Balance’s efforts to use protectionist laws and its leverage in Congress haven’t made the Pentagon actually want to buy its shoes.  Military officials were able to avoid New Balance’s trap by relying on a practical exception to the Berry Amendment that applies when U.S made products “cannot be acquired as and when needed in a satisfactory quality and sufficient quantity at U.S. market prices.”   The Boston Globe reports:

The problem, according to the Department of Defense, is that none of the three New Balance shoes offered for consideration met the agency’s cost requirements and one didn’t meet durability standards.

New Balance’s vice president of public affairs says the problem is President Obama and excessive bureaucracy: 

We were assured this would be a top-down approach at the Department of Defense if we agreed to either support or remain neutral on TPP. [But] the chances of the Department of Defense buying shoes that are made in the USA are slim to none while Obama is president.

They’ve put up roadblock after roadblock. Our shoes are ready to go. It’s a bureaucracy run amok.

So, to recap, New Balance went and made their operations even less efficient in an attempt to get access to sweet government money, but the government agency they wanted to force into buying their product resisted.  Now that that avenue seems to have dried up, they are going to stop playing nice on the TPP, redoubling their efforts to prevent the elimination of regressive shoe tariffs. 

It’s all an excellent example of how companies that rely on government-granted privileges, in this case through protectionist tariffs, learn to make rent-seeking a key part of their business model.

The FT published a piece this week suggesting that it’s actually perfectly legal for the Puerto Rican government–which is on the brink of insolvency–to change its constitution and repudiate its guarantee to general obligation bondholders, in a rhetorical sleight-of-hand that makes me convinced that Jacques Derrida has won the war for the hearts and minds of America’s youth.

The article’s proposal is at once banal and unserious, and much of it they credit to their students, presumably because they recognize this: the first is that while the Puerto Rican constitution may guarantee the payment to the general obligation bondholders with the full faith and credit of the government, that doesn’t mean that the commonwealth’s government couldn’t just change the constitution and eliminate this pesky promise. Legality achieved! Laws change all the time–even constitutions–they aver, and debtors shouldn’t be surprised if that happens in a way that just happens to hurt them financially.  

Another way for the commonwealth to get around the constitutional promises, they suggest, is to make use of provision 3105 of Puerto Rico’s civil code, which “recognises that creditors sometimes have a duty not to enforce debt in ways that prejudice other creditors.”

The other creditors in this instance are the retirees and state employees of Puerto Rico, who may see their wages or pension benefits frozen as a part of the island’s financial reforms. Doing such a thing is, in their perspective, always and everywhere a disaster, and setting aside the law is justifiable because of the harm that would be done if other government spending were ever forced to be cut in order to pay the island’s debt.

But every budget requires a government to decide how to split its revenue between debtors, capital projects, workers, and pensioners, and that inevitably means that the government must spend less in the short run than it would presumably like on police and teachers in order to satisfy its lenders. By this interpretation of provision 3105 Puerto Rico has the right to void its contract with its debtors at any time, even if it’s solvent. It would also mean that no one would have lent to them had they known it would be interpreted this way.

It is a fundamentally unserious idea.

The problem facing Puerto Rico is an age-old one that many governments throughout the world have faced: Puerto Rico can’t pay its debt and it has few options, but it doesn’t want its debtors or the federal government to constrain it in any way while it tries to negotiate a fresh start. Despite the fact that the U.S. Treasury wants to help them in their insouciance, this isn’t the way these negotiations work, and if they ever want to return to capital markets the commonwealth will have to either make some politically difficult decisions to reduce the size and scope of the government or else let someone do it for them. 

Drawing on a new World Bank study, Washington Post columnist Charles Lane today notes “a vast reduction in poverty and income inequality worldwide over the past quarter-century” – despite what you might think if you listen to Pope Francis, Bernie Sanders, and other voices prominent in the media.

Specifically, the world’s Gini coefficient — the most commonly used measure of income distribution — has fallen from 0.69 in 1988 to 0.63 in 2011. (A higher Gini coefficient connotes greater inequality, up to a maximum of 1.0.)

That may seem modest until you consider that the estimate’s author, former World Bank economist Branko Milanovic, thinks we may be witnessing the first period of declining global inequality since the Industrial Revolution.

Note that this hopeful figure applies to the world’s population as though every individual lived in one big country. When Milanovic assessed the distribution of income between nations, adjusted for population, the improvement was even more striking: a decline in the Gini coefficient from 0.60 in 1988 to 0.48 in 2014.

The global middle class expanded, as real income went up between 70 percent and 80 percent for those around the world who were already earning at or near the global median, including some 200 million Chinese, 90 million Indians and 30 million people each in Indonesia, Egypt and Brazil.

Those in the bottom third of the global income distribution registered real income gains between 40 percent and 70 percent, Milanovic reports. The share of the world’s population living on $1.25 or less per day — what the World Bank defines as “absolute poverty” — fell from 44 percent to 23 percent.

So maybe this is a result of all the agitation on behalf of a more moral or planned economy? No, says Lane, citing Milanovic:

Did this historic progress, with its overwhelmingly beneficial consequences for millions of the world’s humblest inhabitants, occur because everyone finally adopted “democratic socialism”? Was it due to a conscious, organized effort to construct a “moral economy” as per Vatican standards?

To the contrary: The big story after 1988 is the collapse of communism and the spread of market institutions, albeit imperfect ones, to India, China and Latin America. This was a process mightily abetted by freer flows of international trade and private capital, which were, in turn, promoted by a bipartisan succession of U.S. presidents and Congresses.

The extension of capitalism fueled economic growth, which Milanovic correctly calls “the most powerful tool for reducing global poverty and inequality.”

This is the good news about the world today. Indeed, it’s the most important news about our world. We hear so much about poverty, inequality, gaps, resource depletion, and the like, it’s a wonder any NPR listeners can bear to get out of bed in the morning. But as the economic historian Deirdre McCloskey says, this is the “Great Fact,” the most important fact about our world today – the enormous and unprecedented growth in living standards that began in the western world around 1700. She calls it “a factor of sixteen”: we moderns consume at least 16 times the food, clothing, housing, and education that our ancestors did in London in the 18th century. And this vast increase in wealth that began in northwestern Europe, mostly Britain and the Netherlands, has now spread to most of Europe, the United States, Japan, and increasingly to the rest of the world.

Bernie Sanders is leaving tonight for the Vatican, where he’ll speak at a conference of the Pontifical Academy of Social Sciences on changes in politics, economics, and culture over the past 25 years. Other speakers will include the leftist presidents of Ecuador and Bolivia. The Vatican would do better to invite Branko Milanovic and Deirdre McCloskey, who have a much better understanding of the real changes in our world than do Sanders, Rafael Correa, and Evo Morales.

Economic growth has not eliminated all poverty, and it will never solve all the problems of the human heart. But understanding the enormous increase in world standards of living over the past three centuries and the past 25 years should be a starting point for any discussion of further progress. Neither the Vatican nor the American media do a good job of informing us about the Great Fact.

The just completed visit of Secretary of Defense Ashton Carter to India has generated considerable speculation.  That is especially true in China, where opinion leaders noted not only was this was Carter’s second trip to India during his relatively short tenure as Pentagon chief, but that he cancelled a previously scheduled trip to Beijing so that he could make this latest journey.  That move, they feared, suggested a rather unsubtle tilt against China in favor of one of its potential geostrategic competitors.

The agreement that came from Carter’s visit will do nothing to reassure the Chinese.  Carter and his Indian counterpart, Defense Minister Manohar Parrikar, pledged to increase logistical cooperation in the military arena, especially maritime cooperation.  Although that agreement is still a considerable distance away from constituting a full-fledged military alliance between the two nations, it continues a trend that has emerged over the past decade of ever deepening strategic ties.  And mutual concerns about China’s ambitions appear to be the driving force in the bilateral relationship.

At a minimum, the United States appears to be trying to put in place the building blocks of a containment policy directed against China, if U.S. leaders later decide that such a full-blown policy has become necessary.  On this same trip, Carter made a stop in the Philippines to reassure that country of strong U.S. backing in its South China Sea territorial dispute with China. Apparently previous statements by the Secretary of State and President Obama himself, combined with a buildup of U.S. troops in the island nation were not sufficient evidence of resolve.

And Carter’s sojourn in India must be seen in the larger context of Washington’s efforts to strengthen its long-standing alliances with South Korea and Japan and to forge cooperative military ties with such former adversaries as Vietnam.  Along with Japan, though, India would be the biggest prize as a strategic ally.

Despite the wishes of some Sinophobes in Washington, we are likely to see a more measured response from India.  Delhi has much to lose and little to gain by becoming a cat’s paw ally of the United States against China.  That is especially true if Washington is not willing to sever its close ties with India’s arch-enemy, Pakistan.  Yet as long as U.S. leaders insist on waging a “war on terror” with a major Central Asia/South Asia component, centered in Afghanistan, they will not cut Washington’s supposed Pakistani ally loose.  And as long as that is the case, Indian leaders and the Indian public will view professions of U.S. loyalty to their country’s vital interests with justifiable skepticism.

Moreover, shrewd Indian policymakers may conclude that the best position for their country is one of constructive neutrality in the growing tensions between the United States and China.  Whatever side India would take, it would anger one of those great powers, lose potential benefits, and increase its risk level.  Only if China truly adopted a policy of rogue expansionism is that sober calculation likely to change.  In the meantime, Ash Carter and other American suitors may press their courtship of India, but they are likely to come away disappointed.

People who fly a lot will invariably have a bad experience at the airport, sooner or later. Delays, cancellations, huge lines, and overbooked flights can wear on people, and sometimes individuals take their frustrations out on an airline employee. And, once in a while, the person goes too far and crosses the line into assaulting that employee.

In no airport in America is assaulting an airline employee legal under state law. The laws against simple assault—that is, unwanted physical contact, often without injury—apply just as much at the terminal gate as they do at your local bar or walking down the street. But, as with seemingly every bad thing that happens, someone wants to make a federal case out of it. Literally.

Senator Maria Cantwell (D-WA) introduced an amendment to a bill before the Senate to make the simple assault of an airline employee punishable up to ten years in federal prison. This is a problem for a bunch of reasons, but here are two that stick out.

First, the crime lacks what criminal justice folks call a “nexus” to a federal interest. That is, unlike disrupting a flight while on board a plane—which is regulated by federal law and the Federal Aviation Administration—or interfering with a federal government employee—such as a TSA agent or air marshal—there is no particular reason a simple assault of a private business employee triggers federal involvement. If a ticket agent is spat upon or touched without consent by a would-be traveler, that agent has every right to call the local (or airport) police and file charges if he chooses. For these reasons, the law is duplicative and unnecessary.

Second, the possibility of ten years in prison is too much for contact without injury. The statute that would be amended included an enhanced penalty to protect TSA employees who are charged with keeping America’s skies safe from would-be terrorists. One could argue—indeed, I would—that the original statute includes a penalty too stiff relative to the crime. Most simple assault statutes in the federal code include sentence maximums between six months and one year. It’s hard to understand how an angry person grabbing the arm of a ticket agent walking away from them potentially carries ten times the maximum sentence if that person had instead shoved a member of Congress. (see 18 U.S.C. § 351 (e))

A skeptic might say that, in practice, no one will get ten years for petty actions. Perhaps that’s true, but then why should we make such a sentence possible in the first place?

No one should shove a member of Congress or assault an airline employee, period. Simple assault is a crime already, as well it should be. But as the conversation about mass incarceration and sentencing propriety continues on Capitol Hill, legislators should internalize the lessons learned from years of disproportionate sentencing and overcriminalization.

The federal criminal law should be limited to those crimes that properly fall under federal jurisdiction, demonstrate a particular need that is not being met by local authorities, and, when needed, provide sentences proportionate to the severity of the given crime.  This proposed amendment failed all of these aims.

 

The House Ways and Means Committee is holding hearings on tax reform in advance of major restructuring next year should a Republican win the White House.

Today, Rep. Roger Williams presents his plan to the committee. The congressman’s Jumpstart America legislation is a good plan, but I would make it better in these ways:

  • Individual Income Tax Rates. Williams would reduce the current seven tax rates (10, 15, 25, 28, 33, 35, and 39.6 percent) to four (10, 15, 20, and 30). I would go to two rates (10 and 25), as envisioned in a previous Paul Ryan tax plan.
  • Individual Savings. Williams would cut the top tax rates on dividends and capital gains from 23.8 to 15 percent. That’s great, but I would add Universal Savings Accounts to any tax overhaul, as I’ve proposed and Sen. Flake and Rep. Brat have introduced.
  • Corporate Income Tax Rates. Williams would cut the federal corporate rate from 35 to 20 percent. I would slash it further to Donald Trump’s proposed 15 percent.
  • Corporate Foreign Earnings. Williams would reduce taxes on repatriated foreign earnings. I would scrap worldwide taxation of corporations and go to a territorial system, allowing tax-free repatriation.
  • Estate Tax. Williams would eliminate the estate or death tax. I agree.
  • Depreciation. Williams would scrap the business depreciation system and go to expensing, or immediate write-off, of capital investments. I agree.
  • Payroll Taxes. Williams would cut the federal payroll tax rate by 2 percentage points. Instead, I would allow workers to redirect 6 percentage points of the tax into private Social Security accounts, while cutting traditional benefits. To workers, that would feel like a large tax cut because they would gain ownership of their retirement contributions, which currently disappear from their paychecks into a government black hole.

The current tax code is a mess, and it should be overhauled. We should transition to a low-rate flat tax, and the Williams plan and my improvements would be good first steps.

So kudos to Rep. Williams for putting a specific pro-growth plan on the table. Other members of Congress should follow suit to aid the Ways and Means Committee in drafting legislation.

Americans For Tax Reform provides a useful summary of Williams’ plan. I provide an overview of tax reform options here.

Well, isn’t this a shame:

Brad Fitch, president and CEO of the Congressional Management Foundation, told Bloomberg BNA Feb. 16 that House “Democratic chiefs of staff are freaking out” about finding room in their budget for overtime wages.

It’s not clear whether the Obama administration’s forthcoming edict on overtime will apply to legislative staffers, but House Democratic leadership decided it would be prudent for their members to at least gesture toward the spirit of the controversial rule by preparing for compliance. [BNA Daily Labor Report] Now “the rule is creating administrative headaches” and more:

“We don’t have a set-hour kind of situation here; some kids work 12, 14, 16 hours a day, weekends, and I feel terrible that I cannot afford to give raises to the staff,” Rep. Alcee Hastings (D-Fla.) told Bloomberg BNA Feb. 11.

With $320,000 slashed from members’ representational allowances (MRAs) over the past four years, “I don’t see how we could pay overtime” for the “17 or 18 people that each of us is allowed to have—that’s problematic for me,” added Hastings, a senior member of the House Rules Committee.

Some members fear that an overtime mandate will result in having to send staffers home at 5 p.m., leaving phones unanswered and impairing constituent service. “Most members are of the sentiment that it’s impractical to be paying overtime,” said former Virginia Democratic Rep. Jim Moran, now a lobbyist, who suggests that members choose to close one of their district offices or reduce constituent correspondence to adjust to a smaller staff number.

If only there were some way for the U.S. Congress to influence federal labor law!

[cross-posted, slightly adapted, from Overlawyered]

Climate alarmists seem to be working overtime these days to persuade the public to support legislation to combat dangerous climate change, which they claim will occur unless CO2 emissions are drastically reduced. And after nearly two decades of over-predicting global warming (there has been little to no global warming since the late 1990s), they are getting awfully desperate in their attempts to convince the public that there is an imminent climate catastrophe on the horizon.

The rhetoric-of-choice is good old-fashioned fear mongering. The latest example is a New York Times article by Michelle Innis entitled “Climate-Related Death of Coral Around World Alarms Scientists.” In a nutshell it’s a lot one-sided reporting in making the case that unless climate change is stopped (i.e., fossil fuel use is reduced rapidly), highly important underwater coral ecosystems will be consigned an awful death due to coral bleaching. There’s a substantial literature on coral resilience that somehow was ignored. Surely an oversight!

Coral bleaching is one of the most frequently cited negative consequences projected to result from CO2-induced global warming. It is a characterized by a loss of color in certain reef-building corals that occurs when algal symbionts, or zooxanthellae, living within the host corals are subjected to various stresses (usually higher than normal ocean temperatures) and expelled, resulting in a loss of photosynthetic pigments from the coral colony. If the stress is mild, or short in duration, the affected corals often recover and regain their normal complement of zooxanthellae. However, if the stress is prolonged, or extreme, the corals eventually die, being deprived of their primary food source.

In her article, Innis reports that corals bleached at many locations this year as a result of warmer ocean temperatures associated with El Niño, so therefore if something isn’t done to stop global warming (note to the author: that is impossible), these incredible underwater species will go extinct. 

As noted above, there’s a substantial literature showing that corals are pretty resilient. Consider the recently published work of Guest et al. (2016), who reported on the status of a coral community on a highly disturbed reef site south of mainland Singapore before, during and after a major warming event that occurred throughout the Indian Ocean and Southeast Asia in 2010, leaving in its wake many severely bleached coral reefs. And in so doing, they discovered the following intriguing facts.

First of all, the 13 scientists note that approximately two thirds of the coral colonies bleached; but that “post-bleaching recovery was quite rapid and, importantly, that coral taxa that are usually highly susceptible were relatively unaffected.” Secondly, they note that “there was no significant change in coral taxonomic community structure” as a result of the bleaching. Third on their list of discoveries was the fact that “several factors may have contributed to the overall high resistance of corals at this site, including Symbiodinium affiliation, turbidity and heterotrophy.”

Taken together, all of these observations led the thirteen researchers to ultimately conclude that “turbid shallow reef communities may be remarkably resilient to acute thermal stress.” And they conclude that their results (1) “suggest an under-appreciated resilience in disturbed impacted reef systems” and that (2) “corals that have been classified as losers in the face of climate change may have a greater capacity for adaptation and/or acclimatization than previously supposed.”

The findings of Guest et al. are not unique and many other researchers have reached similar conclusions (see dozens of references in the chapter on Aquatic Life in Idso et al., 2014). As one other example, Guzman and Cortes (2007) studied coral reefs of the eastern Pacific Ocean, which “suffered unprecedented mass mortality at a regional scale as a consequence of the anomalous sea warming during the 1982–1983 El Niño.” At Cocos Island (5°32’N, 87°04’W), in particular, they found in a survey of three representative reefs, which they conducted in 1987, that remaining live coral cover was only 3 percent of what it had been prior to the occurrence of the great El Niño four years earlier (Guzman and Cortes, 1992). Based on this finding and the similar observations of other scientists at other reefs, they predicted “the recovery of the reefs’ framework would take centuries, and recovery of live coral cover, decades.” In 2002, therefore, nearly 20 years after the disastrous coral-killing warming, they returned to see just how prescient they might have been after their initial assessment of the El Niño’s damage, quantifying “the live coral cover and species composition of five reefs, including the three previously assessed in 1987.”

With respect to the subject of thermal tolerance, the most interesting aspect of their study was the occurrence of a second major El Niño between the two assessment periods. In fact, Guzman and Cortes state “the 1997–1998 warming event around Cocos Island was more intense than all previous El Niño events,” noting that temperature anomalies “above 2°C lasted 4 months in 1997–1998 compared to 1 month in 1982–83.” Nevertheless, they report “the coral communities suffered a lower and more selective mortality in 1997–1998, as was also observed in other areas of the eastern Pacific (Glynn et al., 2001; Cortes and Jimenez, 2003; Zapata and Vargas-Angel, 2003),” which is indicative of some type of thermal adaptation following the 1982–83 El Niño.

Corals are much more resilient to the stress of bleaching than many people have supposed, and that is an inconvenient truth for the coralline alarmists.

 

References

Cortes, J. and Jimenez, C. 2003. Corals and coral reefs of the Pacific of Costa Rica: history, research and status. In: Cortes, J. (Ed.) Latin American Coral Reefs. Elsevier, Amsterdam, The Netherlands, pp. 361–385.

Glynn, P.W., Mate, J.L., Baker, A.C. and Calderon, M.O. 2001. Coral bleaching and mortality in Panama and Ecuador during the 1997–1998 El Niño-Southern Oscillation event: Spatial/temporal patterns and comparisons with the 1982–1983 event. Bulletin of Marine Science 69: 79–109.

Guest, J.R., Low, J., Tun, K., Wilson, B., Ng, C., Raingeard, D., Ulstrup, K.E., Tanzil, J.T.I., Todd, P.A., Toh, T.C., McDougald, D., Chou, L.M. and Steinberg, P.D. 2016. Coral community response to bleaching on a highly disturbed Reef. Scientific Reports 6:20717, DOI: 10.1038/srep20717.

On April 6th, the Wall Street Journal published an editorial that merits careful examination: “Jack Lew’s Political Economy”. The Journal correctly points out that the Obama administration’s meddling with regulations and red tape is killing U.S. investment and jobs. The most recent example being the Treasury’s new rules on so-called tax inversions, which burried a merger between Pfizer, Inc. and Allergan PLC.

As the Journal concluded: “This politicization has spread across most of the economy during the Obama years, as regulators rewrite longstanding interpretations of longstanding laws in order to achieve the policy goals they can’t or won’t negotiate with Congress. Telecoms, consumer finance, for-profit education, carbon energy, auto lending, auto-fuel economy, truck emissions, home mortgages, health care and so much more.”

“Capital investment in this recovery has been disappointingly low, and one major reason is political intrusion into every corner of business decision-making. To adapt Mr. Read [Pfizer CEO Ian Read], the only rule is that the rules are whatever the Obama Administration wants them to be. The results have been slow growth, small wage gains, and a growing sense that there is no legal restraint on the political class.”

Washington’s destructive policies have been dubbed “regime uncertainty” in a strand of innovative analyses pioneered by Robert Higgs of the Independent Institute. Regime uncertainty relates to the likelihood that an investor’s private property – namely, the flows of income and services it yields – will be attenuated by government action. As regime uncertainty is elevated, private investment is notched down from where it would have been. This can result in a business-cycle bust and even economic stagnation. I recommend Higgs’ most recent book for evidence on the negative effects of regime uncertainty: Robert Higgs. Taking a Stand: Reflections on Life Liberty, and the Economy. Oakland, CA: The Independent Institute, 2015.

This past weekend, The Economist uploaded and shared a short video to its Facebook page called, “The year of the 1 percent.” The video shows a graph superimposed over the Earth seen from space, while a voice narrates, “2016 is set to be a more unequal world than ever before. For the first time, the richest 1 percent of the population will enjoy a greater share of global wealth than the other 99 percent.” The video has been viewed more than one hundred thousand times.

The Economist’s graph reminded me of another graph, which also shows two lines that eventually cross but tells a very different story. Despite population growth, there are fewer people living in extreme poverty today than ever before:How can both graphs be accurate? Poverty can decline even as inequality rises, as long as the total amount of wealth in the world is growing. To ignore this is to fall prey to the “fixed pie fallacy.” Throughout most of human history, global wealth hardly changed. But thanks to trade and industrialization, wealth has skyrocketed since the 1900s and continues to climb. At the same time, technological advances have also increased human wellbeing in ways not captured by looking at GDP alone. Because the pie is growing, focusing solely on inequality, like The Economist’s video did, makes little sense. Most of us would rather have a relatively small slice of a gigantic pie than the biggest slice of a microscopic pie. In other words, most of us would rather be wealthier in absolute terms, regardless of our relative position. This is why many of us, if given the choice, would choose to be an ordinary person today instead of a member of the upper crust a century ago or a 17th century king

The territorial dispute between China and multiple Southeast Asian countries in the South China Sea (SCS) is the most pressing geopolitical issue in U.S.-China relations. The United States has responded to Chinese island building by increasing its military presence around the SCS and coordinating with friendly countries. However, criticism of the Obama administration’s approach, grounded on the presumption that U.S. efforts to date have been inadequate, calls to mind a set of lyrics from the anti-Vietnam War anthem “Fortunate Son” by Creedence Clearwater Revival:

And when you ask them, ‘How much should we give?’
They only answer More! More! More!”

It is difficult to determine what exactly “more” means given the already high level of U.S. activity in the SCS since the USS Lassen conducted a freedom of navigation operation (FONOP) in late October 2015. Since then, the U.S. Navy has conducted another FONOP in addition to other patrols involving aircraft carrier strike groups. Additionally, Philippine-U.S. military cooperation has reached its highest point since American forces were ejected from the country in 1991. Notable examples of cooperation are the recently finalized agreement for the U.S. military to set up “permanent logistics facilities” at five Filipino air bases, and tens of millions of dollars in military aid to improve the Philippines’ maritime patrol and surveillance capabilities.

Many pundits and experts have responded to this increased American presence and engagement by demanding “more”. A recent article by AEI’s Edward Linczer recommends increasing America’s foreign military financing to friendly SCS countries, and Senator John McCain called for “more than symbolic gestures” in the event that China declares an air defense identification zone in the region. The overwhelming consensus among American SCS watchers is that the United States is not doing enough to stand up to China, which is giving China tacit permission to act aggressively. By doing “more” China will eventually be forced to back down.

Asking for “more” in the SCS is not a long-term solution. Beijing has been willing and able to respond in kind to greater American shows of force or resolve. The “do more” advocates argue that the United States just hasn’t hit China’s breaking point yet, but, given the importance of the SCS for China and the relatively low level of military hardware it has placed in the region thus far, such a breaking point, if it exists, will be difficult to reach. Additionally, if “doing more” triggers an assertive response by China, then regional allies and partners will likely feel more threatened and demand even greater American shows of commitment. This creates a dangerous spiral of increasing threat perceptions and additional armaments in the SCS.

America’s short-term fixation on signaling and posturing in the SCS ignores questions about our long-term goals. Is the United States willing to risk armed conflict with China for the sake of interests that are more pressing to Vietnam and the Philippines? Does “doing more” carry downsides that will make America’s long-term position in the SCS more difficult to maintain? These are the kinds of strategic questions that need to be seriously debated; without such a debate, calls for “more” amount to tactics in search of strategy.

When there is a trade negotiation going on, people often try to bring various other policies into the mix. One way they do this is to argue that if another country wants to trade with the U.S., they should have to change some of the policies we don’t like. One recent example comes from the so-called Panama Papers. This is from the Washington Post: 

The Panama Papers’ detailed revelations of a massive international tax-haven scheme have snowballed this week into a fierce debate among Democrats over President Obama’s trade policies with the tiny Central American nation and again laid bare sharp divisions within the party over such agreements.

Trade critics lambasted the administration as failing to heed their prior warnings and win sufficient financial reforms from Panama before signing a landmark free-trade deal in 2011, missing a chance to disrupt the elaborate financial arrangements disclosed in a massive leak of private data last weekend.

“The Panama Papers just show once again how entirely cynical and meaningless are American presidents’ and corporate boosters’ lavish promises of economic benefits and policy reforms from trade agreements,” said Lori Wallach, director of Public Citizen’s Global Trade Watch. The Panama free-trade deal’s “investor protections and official U.S. stamp of approval made it safer to send dirty money to Panama,” she said.

… 

… Wallach, the consumer advocate, said the Obama administration did not push hard enough. The financial-transparency treaty, she said, “requires someone in the U.S. to know what to ask for. It’s not like in Canada, where a financial transaction is automatically reported.”

She said that the trade talks were “a potential opportunity, and if Panama really wanted that opportunity, the administration should have said, ‘These are the things you must do if you really want it and your government is interested enough to change some of this.’ But they didn’t even ask those things.”

There’s a general problem with this kind of criticism. There are many ways U.S. domestic policies might differ from those of other countries, and going down the road of using our leverage to change other countries’ policies is dangerous. We already use trade agreements to influence other countries’ intellectual property, labor and environmental policies. If we keep going in this direction, you could imagine governments taking aim at a wide range of additional domestic policies. (As an extreme example, trade could be used as leverage to encourage pro-choice abortion policies; or it could be used to encourage pro-life policies).  And you could also imagine other governments with large economies doing something similar. The EU already does this to some extent. If it sees others doing so, China might decide to join in.

All in all, this approach to trade policy creates a mess for trade negotiations and trade liberalization, distracting everyone from their main purpose, and causing conflict rather than promoting economic integration.

As it happens, in the context of the Panama Papers, there is also a more specific criticism: It turns out that the critics may be wrong on the facts. The Washington Post editorial board explains:

Data culled from the documents by the International Consortium of Investigative Journalists, and presented in several charts on the group’s website, show that the Panama-based law firm Mossack Fonseca, which specialized in setting up offshore accounts and shell companies for wealthy people, has been steadily reducing its activity in Panama for about a decade. As it happens, the decline began about the time the Bush administration and Panama began discussing a free-trade pact — and accelerated after the deal took effect during Mr. Obama’s first term.

Specifically, the number of offshore incorporations fell from 4,741 in 2005 to 835 in 2015. Most important, as of last year Mossack Fonseca appeared to have nearly completely ceased incorporating the least transparent form of company — known as “bearer shares” — which often don’t need to register an owner’s name.

This should provide an effective rebuke to the critics here. On the other hand, it is problematic if it suggests this type of trade leverage can accomplish domestic policy change abroad, as it might encourage more such efforts. Much better to let trade agreements focus on free trade, and leave discussions of other issues to a separate forum.

Today, the Library of Law and Liberty is carrying my review of Dale Russakoff’s book, The Prize: Who’s in Charge of America’s Schools?, which explored the impact of Mark Zuckerberg’s $100 million gift to Newark’s district school system. Years later, it had little to show for it. At times The Prize reads like a comedy of errors, but given what was at stake, it was really a tragedy. But it didn’t have to be.

Zuckerberg’s gift was matched by other philanthropists and foundations, but even $200 million wasn’t enough to bring the “transformational” changes that reformers desired. The bureaucracy was just too good at impeding reform and sucking up resources:

The new labor agreement was also pricier than initially anticipated: it consumed nearly half of the $200 million of the philanthropic package. The teachers’ contract itself cost $50 million, including $31 million in back pay to cover the raises that teachers hadn’t received over the previous two years.

The union boss, Joe Del Grosso, made the back pay a condition for even holding the negotiations. “We had an opportunity to get Zuckerberg’s money,” Del Grosso later explained, “Otherwise, it would go to the charter schools. I decided I shouldn’t feed and clothe the enemy.” The contract also included merit bonuses and financial incentives for teachers to switch to a universal pay scale.

On top of that, [Newark Superintendent Cami] Anderson asked for $20 million in “buyout” funds to incentivize low-performing teachers, principals, and support staff to leave; $8.5 million in tuition support for teachers to earn graduate degrees relevant to their subject area; and $15 million for a new contract with the principals’ union (which didn’t actually happen during Anderson’s term because the principals refused to negotiate).

The high cost of the agreement meant eliminating plans to invest in community organizing, early-childhood programs, and vocational programs for Newark’s thousands of recent dropouts, which had been one of [Newark Mayor Cory] Booker’s priorities.

Then, too, the teachers’ contract contained fine print that raised its cost even higher. Teachers received 15 paid sick days and three paid personal days (in a less than year-round job, that is, a school year of 180 days), meaning that the district had to pay for both regular and substitute teachers for up to one out of every 10 school days—a particularly large expense given that at least 560 teachers earned more than $92,000 a year. The seniority pay bumps also remained in place, so the district couldn’t afford the performance incentives that they had wanted to give promising young teachers to persuade them to stay.

The great expense was deemed necessary to get greater flexibility and accountability, but it was never clear how permanent those features would be. Asked if the union would continue the accountability reforms after the contract expired in three years, Del Grosso replied: “Let’s pray there’s another Zuckerberg.”

Four years after Zuckerberg’s announcement on the Oprah Winfrey Show, the reforms had not lived up to expectations. The 2014 state test results showed that proficiency in both math and English had declined in every tested grade since 2011. Moreover, the ACT college admission test, which all high school juniors had taken, revealed that only 2 to 5 percent of non-magnet school students in the district were ready for college. Anderson resigned the following year. By then, Booker had already moved on to the U.S. Senate, and his successor, Democratic Mayor Ras Baraka, was elected largely because of his opposition to the Booker/Anderson reforms. Soon after, [New Jersey Governor Chris] Christie turned his attention to his (ultimately failed) presidential bid.

If anything, Newark’s education reform debacle is further evidence of the wisdom of Professor Jay P. Greene’s advice: Build New, Don’t Reform Old

With the New York primary just days away, a policy fight has erupted on the left regarding the 1994 Clinton Crime Bill.  I have a piece today over at Newsweek on the subject.  Here’s an excerpt:

The Crime Bill maddens today’s BLM activists because it earmarked $7.9 billion in grants to the states for the building of prisons. To be eligible for the funds, states had to meet certain conditions. The idea was to encourage the states to embrace the stricter policies found in the federal system, which had abolished parole and limited good time credits for prisoners, which allow well behaved inmates to earn an earlier release date.

Many states were eager to do just that. During the 1990s, America was building a new prison every week, on average. And as soon as those facilities opened up, they were soon operating beyond their original design capacity.

Many of the prisoners were young minority men, nonviolent drug offenders who were serving mandatory minimum sentences….

Hillary has tried to sound like a reformer, saying, “We need a true national debate about how to reduce our prison population while keeping our communities safe.”  

Such throwaway lines are not nearly enough for BLM activists. For them (and others too), support for the 1994 Crime Bill is the political equivalent of Hillary’s vote to support the Iraq war: It was a key indicator of policy judgment—and the Clintons failed the test.

I also point out that Cato’s 1995 Handbook for Congress called for repealing the Clinton Crime Bill precisely because it would lock up thousands and thousands of people who do not belong there.  We urged policymakers to call off the drug war and to reserve prison space for violent offenders.  Alas, Congress turned away from our policy advice. 

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