Policy Institutes

This morning, a car bomb exploded outside a mosque in Saudi Arabia, the second such attack in a week. The attacks, which have killed at least 25 people, were aimed at the minority Saudi Shi’a community. In doing so, ISIS is expertly capitalizing on Saudi Arabia’s internal sectarian divide, which is worsened not only by domestic repression, but by the propaganda supporting Saudi Arabia’s activist foreign policy in Syria, Yemen and elsewhere. Saudi rulers should remember that sectarianism, though convenient for political purposes, also carries substantial risk.

In an interview shortly before the recent Camp David summit, President Obama committed the faux-pas of pointing out the internal problems faced by many of the GCC states. He noted that these states contain “populations that, in some cases, are alienated, youth that are underemployed, an ideology that is destructive and nihilistic, and in some cases, just a belief that there are no legitimate political outlets for grievances… The biggest threats that they face may not be coming from Iran invading. It’s going to be from dissatisfaction inside their own countries.”

He’s not wrong. Saudi Arabia is well-known as one of the world’s most repressive states, with little political representation and no rights for women or minorities. Further, oil prices remain low, and while the Saudi state has massive cash reserves, the rise of shale oil has diminished its role as the world’s main oil producer. Saudi Arabia also has a growing youth population, with 51% of the population under the age of twenty five.

This is itself less concerning than the inability of the oil-dependent Saudi state to provide stable employment opportunities; the unemployment rate for those between fifteen and twenty-five years of age is at least 30%. It is no wonder that many of the unemployed youth of Saudi Arabia are attracted by movements like ISIS. Indeed, by some estimates, more than 2,500 of the foreign fighters in Syria come from Saudi Arabia. The newest iteration of this threat is seen in attacks like those of the last week, as young men susceptible to ISIS avoid travel to Syria, and instead carry out attacks inside Saudi borders.

Yet the ISIS attacks also highlight the pernicious influence of state-supported sectarianism. The bombers astutely aimed the bombings not at Sunnis, but at the state’s minority Shi’a population. While targeting Sunnis would likely have increased resolve among Saudi citizens, targeting Shi’a mosques instead served to cast worshippers as heretics, highlighting domestic sectarian tensions.

The attacks remind Saudi Shi’ites that their own government uses sectarian messaging on state TV, and has close ties to clerics which rail against Shi’a heretics. Shi’ites in Saudi Arabia don’t even enjoy the same minimal political rights that their Sunni compatriots do, and the state has repeatedly cracked down on calls for increased representation.

These tensions are being further inflamed by the war in Yemen, which is being presented by Saudi state TV as a crusade against Houthi Shi’ites. The same applies to the state’s newly activist foreign policy, which is portrayed broadly as a challenge to Iranian and Shi’a interests across the region. The high civilian death toll in Yemen – as many as 2,000 people – and the reticence of the Saudi government to seek a political settlement with the Houthis also contributes.

In short, the ISIS attacks targeted a potential cause of instability within the Saudi state, requiring Saudi rulers to strike a delicate balancing act. They must show support for the attacked communities, while avoiding upsetting the hardline Sunni clerics which support the royal family. Balancing these factors while continuing to use sectarian language to justify the state’s wars in Yemen and elsewhere may prove impossible.

As the Arab Spring illustrated, even states which appear relatively stable can suffer from instability and chaos. It also showed that once the Pandora’s Box of sectarianism has been opened, it is extremely difficult to shut. As ISIS attacks within Saudi Arabia seek to increase tensions between Sunni and Shi’a populations, this is a lesson Saudi Arabia’s rulers would be wise to bear in mind.  

I’ve argued that the centralization of government spending in Washington over the past century has severely undermined good governance. Citizens get worse outcomes when funding and decisionmaking for education, infrastructure, and other things are made by the central government rather than state and local governments and the private sector. The problem is the same in the European Union, as a new article in Bloomberg on the funding of Polish airports illustrates:

Local authorities are spending some 205 million zloty ($58 million), including more than $44 million in EU subsidies, to build runways and a new terminal that could accommodate more than 1 million passengers a year. The Olsztyn Mazury Airport is scheduled to open next January, but traffic and revenue forecasts developed by the project’s backers are “very far from reality,” says Jacek Krawczyk, a former chairman of LOT Polish airlines who advises the EU on aviation policy through its European Economic and Social Committee.

Szymany adds to a burgeoning supply of costly new airports across Poland. Since 2007, the EU has spent more than €600 million ($666 million) to build or renovate a dozen Polish airports.

… Mostly, though, Poland’s new airports have been a financial bust. A report in December by the European Court of Auditors found that EU-subsidized airport projects in Poland, as well as others in Estonia, Greece, Italy, and Spain, had “produced poor value for money.” Traffic at most airports fell far short of projections, and there was little evidence of broader economic benefits, such as job creation, the report found.  

With respect to U.S. infrastructure, there is ongoing pressure to increase federal investment, despite decades of experience on the inefficiency of it. Politicians and lobby groups constantly complain that America does not spend enough on infrastructure. But they rarely discuss how to ensure efficiency in spending, or cite any advantages of federal spending over state, local, and private spending.

I’ve discussed the many downsides to federal aid for infrastructure and other local activities here and here. But I was alerted to an additional argument against aid from this Regulation article by William Fischel and this book by James Bennett. Federal aid encourages local governments to expropriate private property, often for dubious purposes.

The article and book discuss the expropriation of Detroit homes for the benefit of General Motors in the 1980s. The “Poletown” project would not have happened without $200 million in federal and state loans and grants to the city. So Fischel makes the point that (abusive) government uses of eminent domain—such as the Kelo case in New London, Connecticut—are encouraged by the flow of federal and state funds to cities. That is, money for “economic development” and the like.

State and local governments would make better decisions if they were responsible for their own funding of programs and projects. The annual flow of more than $600 billion in federal aid to state and local governments should be phased out over time and eliminated.

Discontent at a land-use control process perceived as “condescending and obnoxious” helped fuel a surprise voter revolt in affluent Chevy Chase, Md., just across the D.C. border in Montgomery County, reports Bill Turque at the Washington Post. Aside from intensive review of requests to expand a deck or convert a screened-in porch to year-round space, there are the many tree battles:

[Insurgents] cite the regulations surrounding tree removal as especially onerous. Property owners seeking to cut down any tree 24 inches or larger in circumference must have a permit approved by the town arborist and town manager attesting that the tree is dead, dying or hazardous.

If turned down, residents can appeal to a Tree Ordinance Board, which applies a series of nine criteria to its decision, including the overall effect on the town’s tree canopy, the “uniqueness” or “desirability” of the tree in question and the applicant’s willingness to plant replacement trees.

MorePhilip K. Howard with ideas for fixing environmental permitting. [cross-posted from Overlawyered and Free State Notes]

With debate about NSA spying continuing in the Senate, it’s worth looking at some of the historical and modern precedents for protecting our communications and communications data. A few highlights:

  • The earliest precedent for protection of communications in the United States is the treatment of mail. The founders used postal mail to communicate their revolutionary ideas and even to plan their insurrection against the tyranny of King George, so they prioritized protecting the privacy of the mail. In the Act of Feb. 20, 1792, passed a few short years after ratification of the Constitution, the U.S. Congress enshrined protections for mail in the law, creating heavy fines for opening or delaying mail.
  • The Supreme Court confirmed the existence of constitutional protection for postal communications in Ex Parte Jackson. In that 1877 case, the Court described the Fourth Amendment’s guarantees in very interesting and clear language: “Letters and sealed packages … are as fully guarded from examination and inspection, except as to their outward form and weight, as if they were retained by the parties forwarding them in their own domiciles.” Though we place mail in the hands of government agents, the Fourth Amendment protects it like it’s inside our homes.
  • The year Ex Parte Jackson case was decided, both Western Union and the Bell Company began providing voice telephone service. The Supreme Court addressed constitutional protection for phone calls some decades later in 1928. The Olmstead case was wrongly decided, we now know. It found that telephone communications weren’t protected by the Constitution. So the dissents are where to look for precedential language. Justice Brandeis’s famous dissent spoke of the “right to be let alone,” but Justice Butler provided thinking and language that should have more lasting value: “The contracts between telephone companies and users contemplate the private use of the facilities employed in the service,” he wrote. “The communications belong to the parties between whom they pass.” The communications belong to the parties. That’s a fasacinating and important way to think about our communications, as property that we own.

When the Court reversed Olmstead in 1967’s Katz decision, it unfortunately and inadvertently produced a Fourth Amendment doctrine basing constitutional protection on “reasonable expectations of privacy.” People do reasonably expect privacy in their communications, but “reasonable expectations” doctrine is not well equipped for administering the Fourth Amendment. We saw that in Smith v. Maryland, the 1979 case in which the Court used no research or even consideration of the opposing view in finding that people have no expectation of privacy in data about their phone calls. Happily, the Court has eschewed “reasonable expectation” doctrine in many recent cases.

When the Second Circuit Court of Appeals ruled that the NSA spying program is illegal a few weeks ago, it treated data as property. When we reduce our thoughts and records to digital form and send them over the Internet, we’re doing the same thing the founders did when they wrote letters and put them in the mail. Those communications are still ours, and they should be protected in transit as if they are in the home. America’s private telecommunications system is not like the U.S. mail, of course. We’re not handing our calls over to the government like we hand our letters to the U.S. Postal Service. Our calls and Internet communications should be more protected than the mail because we are using service providers that are obligated by contract and regulation to protect our privacy.

The communications data the NSA is accessing belongs to the parties between whom it passes. It is not the government’s to take—not without a particularized warrant based on the requisite level of suspicion. There’s good precedent for that.

Back in March, I shared a remarkable study from the International Monetary Fund which explained that spending caps are the only truly effective way to achieve good fiscal policy.

And earlier this month, I discussed another good IMF study that showed how deficit and debt rules in Europe have been a failure.

In hopes of teaching American lawmakers about this international evidence, the Cato Institute put together a forum on Capitol Hill to highlight the specific reforms that have been successful.

I moderated the panel and began by pointing out that there are many examples of nations that have enjoyed good results thanks to multi-year periods of spending restraint.

I even pointed out that we actually had an unintentional - but very successful - spending freeze in Washington between 2009 and 2014.

But the problem, I suggested, is that it is very difficult to convince politicians to sustain good policy on a long-run basis. The gains of good policy (such as what was achieved in the 1990s) can quickly be erased by a spending binge (such as what happened during the Bush years).

Unless, of course, there’s some sort of constraint on the desire to spend money. And the panelists discussed the three most successful examples of reforms that constrain the growth of government.

We started with a presentation by Daniel Freihofer from the Swiss Embassy. He talked about Switzerland’s “Debt Brake,” which actually is a spending cap.

It’s remarkable how well Switzerland has performed while most other European nations have suffered downward spirals of more spending-more taxes-more debt. Here’s a chart I put together on what’s happened to spending in Switzerland ever since 85 percent of voters imposed the Debt Brake early last decade.

By the way, Herr Freihofer said during the Q&A session that support for the Debt Brake is now probably about 95 percent, so Swiss voters obviously understand that the policy has been very successful.

Our second speaker was Clement Leung, Hong Kong’s Commissioner to the United States. He talked about Article 107 and other rules from Hong Kong’s Basic Law (their constitution) that limit the temptation to over-tax and over-spend.

And if you want to see some of the positive results of these rules in Hong Kong, here’s some of what Commissioner Leung presented.

By the way, the burden of government spending in Hong Kong averages about 18 percent of economic output. That’s the most impressive result. And Commissioner Leung explained that there’s a commitment to keep the burden of spending below 20 percent of GDP.

The final panelist was Jonathan Williams from the American Legislative Exchange Council, and he talked about Colorado’s Taxpayer Bill of Rights, popularly known as TABOR.

Jonathan talked about how the pro-spending lobbies keep attacking TABOR, and he mentioned that they narrowly succeeded in getting a five-year suspension of the law back in 2005. But Colorado voters generally understand they have a good policy.

The most recent attempt to enable more spending came in the form an increase in the state’s flat tax back in 2013 and voters rejected it by a stunning 66-34 margin (almost as impressive as the recent vote against tax hikes in Michigan) even though Jonathan said advocates outspent opponents by a 289-1 margin.

Here’s a slide from his presentation showing what happened during other attempts to enable more spending.

By the way, Jonathan also mentioned that Colorado’s voters are about to get a TABOR-mandated tax cut because taxes on marijuana are pushing revenues above the limit. Talk about a win-win situation!

To wrap up, one of the big lessons from all the presentations is that governments generally get in trouble because they can’t resist over-spending when the economy is doing well and generating lots of tax revenue.

I fully agree, and I’ve previously explained this is why Alberta got in fiscal trouble, and also why California suffers a boom-bust budgetary cycle.

The way you solve this problem is not with a balanced budget requirement (which often serves as the justification for tax hikes), but some sort of spending limitation rule.

The skepticism was evident in conservative talk-show host Laura Ingraham’s voice when she referred to the working relationship between President Obama and Senate Majority Leader McConnell as a “burgeoning bromance.” Her sentiment is shared by a number of Republicans in Congress, who are unhappy that Senate and House leadership is working with the president to secure Trade Promotion Authority.

Perhaps it’s no longer axiomatic that trade divides Democrats and unites Republicans.  According to Politico, “about 40 to 45 of the 245 Republicans in Congress are hard ‘nos’ on [TPA]” with many asking: Why would Republicans want to give this president, who has aggrandized his authority and disregarded congressional prerogatives, any more power?  Well, they shouldn’t.  However, TPA would not give the president any power to make mischief.

Trade Promotion Authority is neither a congressional capitulation nor an executive power grab.  It is a compact between the branches, which effectively deputizes the president to negotiate trade agreements on behalf of Congress, which meet parameters and fulfill objectives spelled out by Congress, which are put to votes in both chambers of Congress. 

If the concluded trade agreement meets Congress’s parameters and fulfills its objectives, legislation to implement the agreement is considered without amendments on an expedited timetable by an up-or-down vote.  If the agreement fails to meet Congress’s parameters or fulfill its objectives, it can be taken off the so-called fast-track through a resolution of disapproval.  And, ultimately, members and senators can always vote “no” if they don’t like the deal.  

For members who see trade liberalization as a way to expand economic freedom and generate economic growth, rejecting trade promotion authority would be a mistake.  Without TPA, the Trans-Pacific Partnership agreement simply cannot be completed.  Negotiating partners would be unwilling to put their best and final offers on the table without the assurances – provided under TPA – that the agreement wouldn’t be picked apart and altered by Congress. 

The TPP will include provisions that reduce trade barriers and offer some of the economic opportunities that went missing over the past six years.  But it will also include some provisions that are protectionist or otherwise impede liberalization.  The TPP is managed trade, not free trade.  So without making the perfect the enemy of the good, each member of Congress should review the agreement and decide whether it is liberalizing on net, liberalizing enough, or whether it exceeds whatever benchmarks each deems appropriate.

Without TPA, there won’t be a TPP to assess.  If TPA is passed, the TPP can conclude and Congress, the public, and Cato’s trade analysts will have ample opportunity to scrutinize its details and make informed judgments about the desirability of TPP.  Concerns about granting the president more power are misplaced. The only mischief the president can make under this arrangement is mischief that earns the endorsement of majorities in both chambers.

George Selgin has recently focused on the failure of Federal Reserve policy to finance a normal recovery. The Fed has greatly expanded its balance sheet and created a large quantity of excess reserves, which, for a variety of reasons, commercial banks have not mobilized into credit creation. Instead, banks seem content to earn the 25 basis points of interest the Fed now pays on reserves.

This anomalous behavior shows up in the M1 money multiplier, which is at record lows – less than half its value before the financial crisis. The Fed is creating reserves, but commercial banks are not creating as much bank money as has been historically true. Compounding this is the fact that the velocity of M1 – the rapidity with which each dollar is spent annually – has hit a 40-year low. Consequently, the Fed’s efforts to produce monetary stimulus have failed.

(A similar story can be told for other money supply measures. Data and charts can be found at FRED, the online data center at the Federal Reserve Bank of St. Louis.)

I do not think economists fully understand all of the factors contributing to this policy failure. But Selgin has surely identified one relevant factor, the payment of interest on reserves. On the margin, it creates a disincentive for commercial banks to create money and credit in a normal fashion. There are also fiscal reasons for ending the payments, as they reduce the payments the Fed makes to the Treasury. As it is, the payment of interest on reserves constitutes a fiscal transfer from taxpayers to commercial banks. In a normal world, I would endorse his call to end the interest paid on reserves.

We do not live in a normal world. The Fed has replaced liquid, short-term assets on its balance sheet with illiquid, long-term assets. Normally, to raise the Fed Funds rate, the Fed would sell Treasury bills. It has none to sell. Analysts and pundits speculate on when the Fed will raise interest rates. They should be asking how the Fed will raise interest rates.

Stanford’s John Taylor thinks the Fed will need to increase the interest rate paid on reserves to accomplish that goal. Markets through arbitrage would then increase the interest rates banks pay each other to borrow reserves. I suspect he is correct, with two caveats. First, there is no longer much of a market for federal funds. Banks aren’t lending each other reserves. Second, there are other possible mechanisms for raising short-term interest rates like the tri-party, reverse repo facility at the New York Fed. This, and other facilities, are untested as a means to implement a policy change. Their use would put monetary policy in unchartered waters.

To sum up, monetary policy has failed to simulate economic activity. It has failed even to finance a normal economic recovery. In pursuing a failed stimulus policy, the Fed has tied its policy hands going forward. At some point, interest rates will need to rise. The Fed will need to rely on novel means to accomplish a turn in policy. Paying higher interest rates on bank reserves may be one method. It is an unpleasant reality. It is only one consequence of the Fed’s experiment with extraordinary monetary policy.

Last December the federal Department of Justice concluded an investigation of the Cleveland Police Department.  That investigation found a pattern of excessive force in violation of the Constitution.  On Monday, Cleveland Mayor Frank Jackson agreed to a legal settlement with the feds to overhaul his police department’s policies and practices regarding the use of force and how it handles complaints and monitors the actions of its officers.  This is just the most recent police department to be scrutinized.  Following the riot in Baltimore, Attorney General Loretta Lynch announced that the Dept of Justice would be launching a pattern and practice investigation of that police department as well.  Local policymakers in Baltimore, Cleveland, and elsewhere, have let serious problems fester in their police departments and addressing those deficiencies is long overdue.  At the same time, we should also remember that policymakers are also doing a generally poor job on a broader range of issues, including the schools.  As it happens, our friends at Reason did a short film a while back titled “Saving Cleveland.”  The film covers several important issues and what needs to be done.

Reason Saves Cleveland With Drew Carey

Last week, Cato hosted an event on Capitol Hill, Lessons from Baltimore, which covers additional issues not in the Reason film.  Policing, body cameras, and social welfare spending.  That event can be viewed here.

As more journalists and commentators discuss the Trans-Pacific Partnership, we’ve seen very conflicting descriptions of the agreement.  For some, the TPP isn’t about trade at all but about giving power to corporations and ending U.S. sovereignty, or about containing China and building U.S. influence in Asia.  When commentators do focus on the potential economic impact of the agreement, they either describe the TPP as a very big deal or as a very small one.  It all depends on your perspective.

My colleague Simon Lester has written about problems in how GDP gains from the TPP have been estimated.  I’d like to take issue with a different figure commonly cited to bolster the idea of the TPP’s hugeness—that the 12 countries involved account for almost 40% of global GDP.  This number is correct but highly misleading as a gauge of the TPP’s economic significance.

For one thing about 22.5% of global GDP comes from the United States.  So, one could claim accurately that the U.S.–Jordan Free Trade Agreement covers almost a quarter of the global economy.  Also, most of the remainder comes from Canada and Mexico, with whom the United States already has a free trade agreement.  In fact, the United States has free trade agreements with all but five countries in the TPP negotiations.

The only large economy country in the TPP that the United States doesn’t already have a free trade agreement with is Japan.  So, if you’re going to measure the “size” of the TPP, it would be best understood as a U.S.–Japan free trade agreement.  That’s a pretty big deal, actually, but it’s not two-fifths of the world.

Talking about trade agreements in terms of their size also obscures what trade agreements actually do.  Contrary to the rhetoric we hear from the White House, trade agreements benefit the United States because they lower artificial trade barriers, not because “we” get to write “the rules” instead of China.

But those claiming that the TPP is really small are missing something too.  Paul Krugman, for example, points out that U.S. tariffs are already really low, so the TPP won’t make much of a difference.  This argument misses the fact that while U.S. tariffs are low on average, a number of tariffs remain very high in order to protect domestic industries from competition.  Moreover, many of the high tariffs are on basic consumer goods like clothes and shoes.  These are essentially regressive consumption taxes, and their negative impact goes beyond a simple dollar amount. 

That’s why the inclusion of Vietnam in the TPP is so significant.  Tariff-free trade in labor-intensive manufactured goods from Vietnam could have great benefits for Vietnamese workers (and potential workers) and American consumers.  But U.S. negotiators may reduce those benefits by securing long tariff phaseouts or complex rules of origin at the behest of politically powerful domestic industries.

What all this means for the TPP is that its economic value hinges on how extensively, deeply, quickly, and uniformly it reduces existing trade barriers, something we won’t know until the negotiations are completed.

A piece in the New York Times today suggests that rich people are more likely than poor people to support free trade:

The Trans-Pacific Partnership trade deal making its way through Congress is the latest step in a decades-long trend toward liberalizing trade — a somewhat mysterious development given that many Americans are skeptical of freer trade.

But Americans with higher incomes are not so skeptical. They — along with businesses and interest groups that tend to be affiliated with them — are much more likely to support trade liberalization. Trade is thus one of the best examples of how public policy in the United States is often much more responsive to the preferences of the wealthy than to those of the general public.

Skepticism toward free trade among lower-income Americans is often substantial. Data from a 2013 CBS/New York Times poll show that 58 percent of Americans making less than $30,000 per year preferred to limit imports to protect United States industries and jobs, while only 36 percent preferred the wider selection and lower prices of imported goods available under free trade. But the balance of opinion reversed for those making over $100,000. Among that higher-income group, 53 percent favored free trade versus 44 percent who wanted to limit imports.

Similarly, a Pew Research Center survey released on Wednesday found that a plurality of Americans making under $30,000 per year say that their family’s finances have been hurt by free trade agreements (44 percent) rather than helped (38 percent). By contrast, those making more than $100,000 per year overwhelmingly believe free trade has been beneficial — 52 percent said trade agreements have helped their family’s finances versus only 29 percent who said they have hurt.

I am sometimes skeptical of polls on these issues, mainly due to badly phrased questions.  But regardless, I would be interested to see if the answers were affected by information on who actually pays the most in tariff revenue (as a percentage of their income), which, it turns out, is poor people:

Should a movie star’s maid pay higher sales taxes than her famous boss?

The truth is, she often does. She just doesn’t know it.

Low-income moms buying polyester shirts, plastic purses, and cheap canvas sneakers are unwittingly taxed five, ten, and sometimes even 30 times higher than movie stars shopping for silks, cashmeres, and snakeskin on Rodeo Drive. This is the hidden scandal of the American tariff system—a small and almost forgotten tax, which likely costs low-income families nearly $2 billion a year.

Because the tariff system raises most of its money from cheaper shoes and clothes, its tilt against the poor is especially steep—much steeper than that of any other federal tax. Each year, single-parent families spend about $13 billion buying clothes, shoes, and other home goods. Tariffs drive up the cost of these goods by about 15 percent, adding about $1.6 billion to the total bill.

So, the next time they conduct one of these polls on how people of different income levels feel about free trade, maybe give them these details first and then see how they answer.

Expanded maternity and child care benefits are expected to be a pillar of Hillary Clinton’s presidential campaign. These policies seek to make it easier for women to balance the challenges of being a working mother. While they may well be well-intentioned, but they backfire. The New York Times highlighted the downside.

First, the article focused on maternal leave policies in Spain:

Spain passed a law in 1999 giving workers with children younger than 7 the right to ask for reduced hours without fear of being laid off. Those who took advantage of it were nearly all women.

Over the next decade, companies were 6 percent less likely to hire women of childbearing age compared with men, 37 percent less likely to promote them and 45 percent more likely to dismiss them, according to a study led by Daniel Fernández-Kranz, an economist at IE Business School in Madrid. The probability of women of childbearing age not being employed climbed 20 percent. Another result: Women were more likely to be in less stable, short-term contract jobs, which are not required to provide such benefits.

The results in Chile were similar:

The child-care law in Chile, the most recent version of which went into effect in 2009, was intended to increase the percentage of women who work, which is below 50 percent, among the lowest rates in Latin America. It requires that companies with 20 or more female workers provide and pay for child care for women with children under 2, in a location nearby where the women can go to feed them.

It eases the transition back to work and helps children’s development, said María F. Prada, an economist at the Inter-American Development Bank and lead author of a new study on the effects of the law. But it has also led to a decline in women’s starting salaries of between 9 percent and 20 percent. Researchers compared pay at the same companies before and after they were big enough to be forced to comply with the law. (Another approach by companies, especially smaller ones, has been simply not to comply with the law.)

A broader analysis of 22 countries found that women were more likely to work when these types of policies are in place, but their jobs more likely to be “dead-end” positions and less likely to be managerial posts.

Even the Family Medical Leave Act, which provides up to 12 weeks of unpaid medical leave here in the United States, has hurt female job prospects. Women are slightly more likely to stay employed, but receive fewer promotions because of the law, according to research cited by the New York Times.

Balancing the challenges of working while raising children is difficult, but having the government force employers to provide additional maternal and childcare benefit is the wrong approach. Such policies harm job prospects for women and make the work-life balance even tougher to achieve.

The Atlanta Journal-Constitution reports that district school bureaucrats are “proceeding with an ambitious plan to offer a wider range of education options.”

Superintendent Robert Avossa is leaving the 96,000-student district for the larger Palm Beach County system in Florida. Ken Zeff, who takes over as interim superintendent next week, shares Avossa’s view that parents want and deserve choices.

An array of choices may lessen the exodus of by parents who want a non-traditional setting for their children. More than 15 percent of Fulton families opted for private schools this school year.

While Fulton has increased its number of district-approved charter schools, the AJC reports more than 1,600 families are on charter school wait lists for next fall, largely in south Fulton where school performance is not as high as north Fulton. 

(North Fulton is one of the state’s most affluent areas and boasts some of the highest achieving high schools in Georgia. Its schools are a major draw for new families moving to the metro region.)

Not every student learns in the same way so Fulton is expanding school design options.

“This is not an attempt to dismantle traditional public schools,” said Zeff in an AJC news story by Fulton Schools reporter Rose French. “Traditional-model schools are performing great for a lot of kids. But some parents want and some students would do better in a different environment.”

In other words, when parents chose schools other than their child’s assigned district school–perhaps using Georgia’s tax-credit scholarships–the government school system responded by being more responsive to parental demands. 

This is not an isolated phenomenon. Out of 23 empirical studies of the impact of school choice policies on district school performance, 22 found a statistically significant positive impact. Recently, the prestigious peer-reviewed American Economic Journal published the results of a study by David Figlio of Northwestern University and Cassandra Hart of the University of California-Davis on the impact of a school choice program in Florida on district schools. The study found that the academic performance of students at public schools improved as a result of increased competition:

We find greater score improvements in the wake of the program introduction for students attending schools that faced more competitive private school markets prior to the policy announcement, especially those that faced the greatest financial incentives to retain students. These effects suggest modest benefits for public school students from increased competition.

As I’ve noted previously, district schools often operate as monopolies, particularly those serving low-income populations with no other financially viable options. And sadly, a monopolist has little incentive to respond to the needs of its captive audience. Thankfully, the evidence suggests that when those families are empowered to “vote with their feet,” the district schools become more responsive to their needs.

Good ideas in Congress rarely have a chance. Rep. Fred Upton (R-Mich.) is sponsoring legislation to speed drug approvals, but his initial plan was largely gutted before he introduced it last month.

Drug discovery is an uncertain process. Companies consider between 5,000 and 10,000 substances for every one that ends up in the pharmacy. Of those, only one-fifth actually makes money—and must pay for everything.

As a result, the average per drug cost exceeds $1 billion, most often thought to be between $1.2 and $1.5 billion. Some estimates run more.

Naturally, the Food and Drug Administration insists that its expensive regulations are worth it. Unfortunately, while the agency undoubtedly prevents some bad pharmaceuticals from getting to market, it delays or blocks far more good products.

The average delay in winning approval of a new drug rose from seven months in 1962, when the FDA’s power was dramatically increased, to 30 months in 1967. Approval time now is estimated to run as much as 20 years.

Economist Sam Peltzman found no evidence that changing the law reduced the introduction of ineffective or unsafe pharmaceuticals. After all, companies don’t make money selling medicines that don’t work. And putting out something dangerous is a fiscal disaster. Observed Peltzman:  the “penalties imposed by the marketplace on sellers of ineffective drugs prior to 1962 seem to have been enough of a deterrent to have left little room for improvement by a regulatory agency.”

Alas, the FDA increases the cost of all medicines, delays the introduction of most pharmaceuticals, and prevents some from reaching the market. That means patients suffer and even die needlessly.

Congress has applied a few bandages over the years. One was to create a process of user fees through the Prescription Drug User Fee Act. The measure was estimated to save as much as $30 billion and as many as 310,000 life years.

A special procedure for “Accelerated Approval” of drugs aimed at life-threatening conditions also was created. Unfortunately, noted Nature Biotechnology, few medicines qualified and “in recent years, FDA has been ratcheting up the requirements.”

The Wall Street Journal reported that some desperate patients today who are “frustrated by the slow pace of clinical drug trials or unable to qualify, are trying to brew their own version of an experimental compound at home and testing it on themselves.” Overall, far more people die from no drugs than from bad drugs.

The deadliest pre-1962 episode involved Elixir Sulfanilamide and killed 107 people. Around 3500 users died from Isoproterenol, an asthmatic inhaler. Vioxx was blamed for a similar number of deaths, though the claim was disputed. Most of the more recent incidents would not have been prevented from a stricter approval process. 

The death toll from agency delays of medicines like beta-blockers is much greater. Analyst Dale Gieringer figured that the benefits of FDA regulation “could reasonably be put at some 5,000 casualties per decade or 10,000 per decade for worst-case scenarios.  In comparison … the cost of FDA delay can be estimated at anywhere from 21,000 to 120,000 lives per decade.”

Fundamental reform is necessary. The FDA should be limited to assessing safety. Further, the agency should be stripped of approval monopoly. As a start, drugs okayed by other industrialized states should be available in America.

As I argue in the Freeman, “Patients and their health care providers also could look to private certification organizations, which today are involved in everything from building codes to electrical products to kosher food. Medical organizations already maintain pharmaceutical databases and set standards for drug treatments. They could move into testing and assessment.” 

No doubt, some people would make mistakes. But they do so today. With more options, more people’s needs would be better met.

Instead of arguing over regulatory minutiae Congress should address who decides who gets treated how. Today it is Uncle Sam. Tomorrow it should be all of us.

                                                  

The U.S. Fish and Wildlife Service, exercising power purportedly delegated to it pursuant to Congress’s power to regulate interstate commerce, has classified the ubiquitous Utah prairie dog, which has no commercial value and has never dug holes in any lands beyond southwestern Utah, as “threatened” under the Endangered Species Act (ESA), thereby prohibiting the “take” of said prairie dogs—which essentially means doing anything that disturbs the little rodents’ habitat. If the varmints invade their property, human residents cannot build homes, start or operate certain businesses, or, in the case of Cedar City, protect playgrounds, an airport, and a local cemetery from their burrowing and barking.

Joining as People for the Ethical Treatment of Property Owners (PETPO), and represented by the Pacific Legal Foundation, residents filed suit, claiming that the “take” rule for the noncommercial, intrastate Utah prairie dog exceeds Congress’s power to regulate interstate commerce. Congress has the power to regulate “commerce among the states,” not species. PETPO’s suit argues that the ESA cannot reach activities that are intrastate and noncommercial—activities, for example, like filling holes in your lawn or otherwise developing land where prairie dogs might live. The federal district court agreed and therefore struck down the “take” regulation. The case is now before the Tenth Circuit Court of Appeals.

Joined by constitutional law professors Jonathan H. Adler, James L. Huffman, and Josh Blackman, Cato has filed a brief supporting the landowners. We argue, consistent with prior Supreme Court precedent, that the Constitution’s Commerce Clause affords Congress the power to regulate only items, channels, or instrumentalities of interstate commerce. If Congress wants to regulate activities that “substantially affect” interstate commerce, that power rests in the Necessary and Proper Clause, which gives Congress the means to regulate interstate commerce—provided those means are both necessary and proper. But the prohibited activities do not substantially affect interstate commerce. Moreover, the “take” rule is not necessary for regulating interstate commerce; Congress can regulate that commerce without prohibiting these residents from using their property. Nor is the rule proper since the power to regulate uses of property that do not affect interstate commerce belongs to the states. For those several reasons the “take” rule as applied to the Utah prairie dog exceeds the powers the Founders and the Founding generation delegated to Congress.

Across my desk this morning: James Bennett’s new book, Corporate Welfare: Crony Capitalism That Enriches the Rich.

Bennett is a highly regarded George Mason professor of economics and a prolific author of public policy books. His new book opens with a discussion of corporate welfare in the Early Republic, and then provides four case studies on more recent issues. The case studies are the Supersonic Transport (SST) project of the 1960s, state and local economic development subsidies, the use of eminent domain in Detroit to benefit General Motors, and the Export-Import Bank.

The last item is timely given the current battle over Ex-Im between the fiscal reform and business-subsidy wings of the Republican Party. It is an important battle because a win for reform on Ex-Im might generate momentum to wean American businesses off of other types of subsidies. I also think that ending Ex-Im would make recipient businesses more competitive and efficient in the long run. Subsidies produce industrial weakness, not strength.

Here’s what I said about Corporate Welfare on the book’s dust jacket:

Professor Bennett begins his excellent new book about corporate welfare with Alexander Hamilton’s misguided schemes. Fortunately, those schemes were mainly blocked in the early Republic by the Jeffersonian party. The problem today—as Bennett skillfully documents—is that business subsidies are a bipartisan disease, chronic at all levels of government. Few politicians stand up for the taxpayer, despite citizen opposition to hand-outs from across the political spectrum. Hopefully, Bennett’s stomach-turning stories will convince more people of the evils of crony capitalism.

The Asian order is under strain as the People’s Republic of China has become an economic colossus with growing military might and diplomatic influence. The PRC is asserting territorial claims once considered impractical or worthless. Brunei, Japan, Malaysia, Philippines, and Vietnam all stand opposed to these claims. 

Washington is not a claimant, but has sparred with the PRC over the U.S. Navy’s legal right to engage in intelligence gathering in Chinese waters. More important, America has a formal military alliance with Japan which, the president declared, covers disputed territories. Washington’s military relationship with Manila is looser, but Philippine officials are seeking a similar territorial guarantee.

The Obama administration has escalated U.S. involvement by sending American aircraft over islands reclaimed by China and discussing joint patrols with the Japanese.

Most of the islands are intrinsically worthless and provide little security value. Maritime rights are affected but, in peacetime, the difference wouldn’t matter so much. In wartime, everything would depend on the capabilities of the contending navies.

The economic benefits from control are real but still relatively small compared to the economies of most of the claimants. For most of the countries, national ego is the primary issue.

What should the United States do? American interests are few and of middling importance. Washington primarily seeks to uphold global norms, in this case, navigational freedom and peaceful conflict resolution.

It is widely assumed that America’s involvement would deter China from starting a war. However, any attempts to coerce the PRC over its perceived interests would add conflict to the U.S./China relationship.

As I point out on National Interest online: “China likely would respond by matching American air and naval maneuvers, accelerating military outlays, and challenging U.S. interests elsewhere. Americans should reflect on how they would respond if Beijing acted like the U.S.”

Maintaining the overly large and expensive military presence necessary for Washington to project power sustainable over the long-term. It costs far more to build carriers than to sink them. Americans are unlikely to heed a clarion call for sacrifice to ensure that the Senkakus stay Japanese.

Instead of goading China, the administration should withdraw from East Asia’s territorial miasma. First, Washington should acknowledge that East Asian hegemony it not essential for America’s security.

Second, Washington should make clear through action, as well as rhetoric, that it takes no position regarding competing territorial claims. While the United States should assert freedom of navigation—and insist that there is no valid legal justification for turning 80 percent of the South China Sea into Chinese territorial waters—Beijing has not threatened that basic freedom.

Third, the administration should remove contested territories from security guarantees. America’s interest is in Japan’s and the Philippines’ independence, not their control over worthless rock piles. It is especially foolish to threaten a nuclear-armed state over territories to which the latter might be entitled.

Fourth, the administration should allow events to take their natural course. China’s neighbors are growing increasingly hostile to Beijing’s aggressiveness. Japan is spending more and rethinking historic strictures on its military, smaller nations are arming–some of which are working with Tokyo–and everyone is encouraging India to play a larger regional role.

Fifth, U.S. officials should more effectively make the case for negotiation. Washington should press its friends to offer creative solutions to the region’s many disputes, such as setting aside or sharing island sovereignty.

Finally, Washington should highlight the advantages of peace for all concerned, especially China. The future should not be risked for stakes of such limited value.

What should the United States do about East Asia’s territorial disputes? In most of East Asia’s territorial controversies, America’s interests are peripheral and Washington should play a minor role. America’s most important interest today is keeping the peace.

On Friday night of Memorial Day weekend, the U.S. Senate passed the Bipartisan Congressional Trade Priorities and Accountability Act, better known as Trade Promotion Authority (TPA), by a vote of 62-38.  In light of what appeared to be formidable opposition pressing difficult demands that could have seriously prolonged the Senate TPA debate or derailed the Trans-Pacific Partnership (TPP) negotiations altogether, passage of the bill in relatively short order is a credit to the commitment of Majority Leader McConnell, Finance Committee Chairman Orrin Hatch, and Finance Committee Ranking Member Ron Wyden to getting it done.  But proponents of the trade agenda still have a long road ahead.

When Congress reconvenes next week, debate and consideration of a similar TPA bill will be one of the first orders of business in the House of Representatives.  Getting to 218 votes will test the persuasive powers of Ways and Means Chairman Paul Ryan, Speaker John Boehner, and President Obama, who will need to woo Democratic support without losing Republican support in the process. The goal is to pass TPA in a form that is sufficiently similar to the Senate version to avoid the need to reconcile different versions in conference, which would necessitate a second vote in the House. 

Meanwhile, with trade negotiators seeing some progress on TPA, the TPP talks appear to have begun to move into the “end-game” phase.  Although it is uncertain how long this phase of the negotiation might last – because it remains unclear how many issues are outstanding, how much distance there is between the parties, and whether unexpected demands requiring alterations to previously settled parts of the agreement will be made – it is now evident that the soonest Congress could vote to implement the TPP is early 2016, with the distinct and growing possibility that the matter will fall to a lame duck Congress and president or, even, to the next president and the 115th Congress.

Stay tuned for an analysis that fleshes out some of the issues likely to affect the direction and outcome of the trade agenda, including some possible hurdles and other twists and turns in the road.

George Pataki, the governor of New York from 1995 to 2006, is expected to announce the launch of his presidential campaign tomorrow. Pataki joins an already crowded Republican field and is expected to highlight his record as governor to win support. A review of Pataki’s record presents a question: which Pataki will be running for the presidency?

Pataki’s first several years in office showed promise, from a small-government perspective. He proclaimed that his administration was “overthrowing all the unworkable liberal abstractions of the past and replacing them with a revolution of conservative ideas.” His actions matched his claims. His first two budgets included a number of spending cuts. New York general fund spending decreased five percent in his first year.  He eliminated 12,000 of the state’s 200,000 government jobs. In total, spending was cut by $2 billion. Pataki coupled his spending cuts with tax cuts. He cut the personal income tax by 25 percent

His actions during those two years earned him an “A” on Cato’s Fiscal Policy Report Card on America’s Governors in 1996. The authors of the report said that Pataki “had far and away the most impressive fiscal record in his first two years” among the 20 new governors covered in the report.

Pataki seems to have lost his zeal for fiscal restraint after his first two years. He supported a 55 cent increase to the cigarette tax and followed it with another 39 cent increase in the tax. He pushed for a $1.5 billion bond issue for infrastructure. General fund spending increased by seven percent from fiscal year 1998 to fiscal year 1999. It continued to grow after that. It grew five percent from fiscal year 2004 to 2005, nine percent from fiscal year 2005 to 2006, and an astounding 10.6 percent from fiscal year 2006 to 2007. 

During his tenure as governor, fiscal years 1997 to 2007, New York general fund spending increased 67 percent, according to data from the National Association of State Budget Officers. That was almost double New York’s population growth and inflation during those years.

In his final appearance in the Cato report card in 2006, the authors summarized Pataki’s time in office. “George Pataki started out as a tax-cutting, small-government governor. He ended up as a big spender seemingly hell-bent on overturning anything good he had done in his first term.” His grade fell from an “A” in his first two years in office to a “D” for his final term

Pataki’s tenure as governor can be divided into two distinct periods. His first two years in office embodied fiscal restraint. Pataki cut taxes and spending and downsized the state’s workforce. He quickly lost steam tackling the monster New York budget. Pataki increased taxes by $3 billion in his last term. Under Pataki’s leadership, state general fund spending increased by 67 percent. His campaign will hopefully answer the question of which Pataki is running for president.

Over at the Huffington Post, Ryan J. Reilly reports that St. Louis was one of the cities to receive MacArthur Foundation grants to improve the relationship between the police and the public. When discussing the award, the police chief made some frank admissions about the double standard that infects policing in the greater St. Louis area:

In an interview ahead of the announcement, St. Louis County Police Chief Jon Belmar called the reform effort a “positive that came out of a tragedy.”

[…]

Belmar… said it is simply unrealistic for law enforcement to be able to enforce the hundreds of thousands of outstanding warrants in the county, many of them in connection with missed court dates for minor violations of municipal codes.

“I’m looking at cities that have 50,000, 39,000, 30,000 outstanding warrants today. You’re never going to catch up to that,” Belmar said. “You might have a city like Pine Lawn, which is 360 acres, that has 30,000 outstanding warrants. How can that be? The math doesn’t work.”

Belmar acknowledged that the protests in Ferguson have given a voice to populations that had been overlooked in the past.

“If you went to a very affluent area in St. Louis County, how long do you think a program would last where speed cameras were put up on arterial roads coming into subdivisions, and people were given letters saying they were going to be arrested? It would last about five hours,” Belmar said.

As Judge Janice Rogers Brown recently wrote in a concurrence in the U.S. Court of Appeals for the D.C. Circuit, such double standards are not limited to St. Louis. Describing roving patrols for guns that are standard practice in Southeast D.C.—an area of predominantly poor and minority neighborhoods—she wrote:

As a thought experiment, try to imagine this scene in Georgetown. Would residents of that neighborhood maintain there was no pressure to comply, if the District’s police officers patrolled Prospect Street in tactical gear, questioning each person they encountered about whether they were carrying an illegal firearm? Nothing about the Gun Recovery Unit’s modus operandi is designed to convey a message that compliance is not required. While viewing such an encounter as consensual is roughly equivalent to finding the latest Sasquatch sighting credible, I submit to the prevailing orthodoxy, but I continue to reject its counterintuitive premise.

Georgetown is an affluent, predominantly white area that is home to many D.C. elites and features high-end shopping and dining. It is indeed difficult to imagine SWAT teams shaking down tourists and well-to-do residents for very long.

Because many neighborhoods around the United States continue to be segregated along both economic and racial lines, this policing double standard has the effect—whether intended or not—of alienating poor minorities and undermining police legitimacy in those communities. Extracting money from the impoverished and using dubiously constitutional tactics in specific areas is the wrong way to treat the people who live there.

When I first came to Washington back in the 1980s, there was near-universal support and enthusiasm for a balanced budget amendment among advocates of limited government.

The support is still there, I’m guessing, but the enthusiasm is not nearly as intense.

There are three reasons for this drop.

  1. Political reality - There is zero chance that a balanced budget amendment would get the necessary two-thirds vote in both the House and Senate. And if that happened, by some miracle, it’s highly unlikely that it would get the necessary support for ratification in three-fourths of state legislatures.
  2. Unfavorable evidence from the states - According to the National Conference of State Legislatures, every state other than Vermont has some sort of balanced budget requirement. Yet those rules don’t prevent states like California, Illinois, Connecticut, and New York from adopting bad fiscal policy.
  3. Favorable evidence for the alternative approach of spending restraint - While balanced budget rules don’t seem to work very well, policies that explicitly restrain spending work very well. The data from Switzerland, Hong Kong, and Colorado is particularly persuasive.

Advocates of a balanced budget amendment have some good responses to these points. They explain that it’s right to push good policy, regardless of the political situation. Since I’m a strong advocate for a flat tax even though it isn’t likely to happen, I can’t argue with this logic.

Regarding the last two points, advocates explain that older versions of a balanced budget requirement simply required a supermajority for more debt, but newer versions also include a supermajority requirement to raise taxes. This means - at least indirectly - that the amendment actually is a vehicle for spending restraint.

This doesn’t solve the political challenge, but it’s why advocates of limited government need to be completely unified in favor of tax-limitation language in a balanced budget amendment. And they may want to consider being more explicit that the real goal is to restrain spending so that government grows slower than the productive sector of the economy.

Interestingly, even the International Monetary Fund (which is normally a source of bad analysis) understands that spending limits work better than rules that focus on deficits and debt.

Here are some of the findings from a new IMF study that looks at the dismal performance of the European Union’s Stability and Growth Pact. The SGP supposedly limited deficits to 3 percent of GDP and debt to 60 percent of GDP, but the requirement failed largely because politicians couldn’t resist the temptation to spend more in years when revenue grew rapidly.

An analysis of stability programs during 1999–2007 suggests that actual expenditure growth in euro area countries often exceeded the planned pace, in particular when there were unanticipated revenue increases. Countries were simply unable to save the extra revenues and build up fiscal buffers. …This reveals an important asymmetry: governments were often unable to preserve revenue windfalls and faced difficulties in restraining their expenditure in response to revenue shortfalls when consolidation was needed. …The 3 percent of GDP nominal deficit ceiling did not prevent countries from spending their revenue windfalls in the mid-2000s. … Under the SGP, noncompliance has been the rule rather than the exception. …The drawbacks of the nominal deficit ceiling are particularly apparent when the economy is booming, as it is compatible with very large structural deficits.

The good news is that the SGP has been modified and now (at least theoretically) requires spending restraint.

The initial Pact only included three supranational rules… As of 2014, fiscal aggregates are tied by an intricate set of constraints…government spending (net of new revenue measures) is constrained to grow in line with trend GDP. …the expenditure growth ceiling may seem the most appealing. This indicator is tractable (directly constraining the budget), easy to communicate to the public, and conceptually sound… Based on simulations, Debrun and others (2008) show that an expenditure growth rule with a debt feedback ensures a better convergence towards the debt objective, while allowing greater flexibility in response to shocks. IMF (2012) demonstrates the good performance of the expenditure growth ceiling

This modified system presumably will lead to better (or less worse) policy in the future, though it’s unclear whether various nations will abide by the new EU rules.

One problem is that the overall system of fiscal rules has become rather complicated, as illustrated by this image from the IMF study.

Which brings us back to the third point above. If the goal is to restrain spending (and it should be), then why set up a complicated system that first and foremost is focused on red ink?

That’s why the Swiss Debt Brake is the right model for how to get spending under control. And this video explains why the objective should be spending restraint rather than deficit reduction.

And for those who fixate on red ink, it’s worth noting that if you deal with the underlying disease of too much government, you quickly solve the symptom of deficits.

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