Policy Institutes

President-elect Donald Trump says that he will cut wasteful spending and “drain the swamp” in Washington. The first thing he should target is business subsidies in the federal budget. Such “corporate welfare” spending attracts corruption like garbage dumps attract rats.

A Cato study estimated that there is $100 billion of corporate welfare in the budget. That spending harms the economy, but the incoming administration should be aware that such spending also spawns damaging scandals. That pattern goes all the way back to the 19th century. Federal subsidies for the first transcontinental railroad led to the Credit Mobilier scandal of the 1870s, which involved dozens of members of Congress.

More recently, corporate welfare has spawned these scandals: 

  • HUD Subsidies under Reagan. President Ronald Reagan’s Department of Housing and Urban Development overflowed with corruption in the 1980s under Secretary Sam Pierce. Pierce routinely dished out grants, loans, and other subsidies to friends, business associates, and Republican Party contributors.
  • Commerce Subsidies under Clinton. President Bill Clinton’s Commerce Secretary, Ron Brown, used business subsidies as a fund-raising tool for the Democratic Party in the 1990s. Corporate executives who played the game were given access to export promotion trips and federal export loans. In his investigations, U.S. District Judge Royce Lamberth determined that Commerce officials concealed and destroyed documents relating to the trade mission scandal, and he compared officials to “con artists.”
  • Enron Subsidies under Clinton and Bush. Enron Corporation lobbied federal officials to expand export subsidy programs, and it received billions of dollars in aid for its risky foreign schemes. During the Clinton and Bush administrations, high-level officials went to great lengths to aid Enron on an Indian power plant deal. Federal aid induced Enron to make misguided foreign investments, and the resulting losses helped cause the company’s implosion.
  • Green Subsidies under Obama. The Washington Post found that “Obama’s green-technology program was infused with politics at every level.” The $535 million loan guarantee for the failed Solyndra is a prime example. The Department of Energy approved the loan after pressure from the White House. A main Solyndra investor was a billionaire Obama fundraiser. The New York Times found that Solyndra “spent nearly $1.8 million on Washington lobbyists, employing six firms with ties to members of Congress and officials of the Obama White House.”

American businesses have a right to lobby the federal government. But Congress throws fuel onto the corruption fire by funding business subsidy programs. The Trump administration should work to eliminate corporate welfare, including green subsidies, export subsidies, and housing subsidies. Corporate welfare undermines honest governance, and one message of the election is that Americans are sick and tired of the resulting scandals. 

Ben Carson was nominated secretary of the Housing and Urban Development Department (HUD) on Monday and his appointment will be debated endlessly over the coming months, with critics quickly honing in on his lack of housing policy and government experience. No matter, though; the naysayers need not stop him from doing an excellent job as HUD’s top administrator. The job can be done well if the following ideas remain front and center.

High-cost housing is a product of government regulation

Carson would be wise to remind everyone that cities do have control over sky-high housing prices: in fact, if cities relax zoning and land use regulations and simplify developer approval processes they can decrease the cost of housing across the board, no exceptions. Zoning regulations are the real culprit in places like Manhattan, where research demonstrates that regulations price the poor, the young, and the unestablished out of high opportunity areas. Local regulation also hampers innovation in the housing market, just look at the sad demise of low-cost micro-housing in Seattle.

HUD is not the nation’s urban planner

We can be quite certain that Carson will move away from the social-engineering-of-cities model advanced under HUD Secretary Julian Castro. Specifically, Carson should dig his heels in on the Affirmatively Furthering Fair Housing rule promulgated last year, a rule that allows HUD to oversee where people live locally based on their race. Fortunately, Carson has voiced opposition to the rule, and President-Elect Trump agrees, so it seems that Carson may have the support that he needs to remind the agency that not every local municipality’s land use and zoning regulations are under HUD’s jurisdiction.

Cities are unique, so housing solutions should be, too

Carson should keep in mind that what works in one city is not likely to work in all of the other ones. Past HUD Secretaries, like Shaun Donovan, made the mistake of thinking about HUD policy as urban policy, and operated under the belief that the lessons of his native – and hyper-urban – New York City could be applied everywhere. A better idea is to remember that the diverse United States includes small towns, rural America, and suburbs where a cookie-cutter approach won’t be successful. HUD policies should reflect a high degree of latitude for cities so that local governments can sort out their problems on their own.

Social justice doesn’t mean preferential treatment

Likewise, Carson should eliminate small area fair market rents, a social engineering tack used to push low-income individuals to locate in wealthy neighborhoods. Housing policy should remain neutral toward where people decide to live. From a political angle, Carson would do well to remember that small area fair market rents are exactly the type of policy that treat low income individuals preferentially as compared with lower-middle income individuals, and therefore, the kind of policy that Trump voters resent most.

HUD money is taxpayer money

Speaking of which, Carson must remember that HUD money is simply taxpayer money. This isn’t difficult to understand in the abstract, but the practical implications for HUD policy are more challenging to grasp. Carson should work to eliminate rules that require local communities to comply with federal checkboxes in order to obtain agency block grants. Citizens are entitled to sharing the benefits of their own tax money, independent of whether state administrators fill out the forms on time.

HUD does not know better than individuals and private businesses

Although apparently tempting for both democrat and republican administrations, Carson should eschew policies that prioritize homeownership over renting, and vice-versa. Each of Clinton, Bush, and Obama administrations have promoted their personal housing predilections, in spite of the fact that history indicates that government does not know better than individuals what sort of homes they should live in, and housing policy should be neutral rather than preferential in that regard. Consider the housing market fallout of the financial crisis – a result of government policies that promoted the irrational belief that everyone should be a homeowner – a cautionary tale.

Housing technocrat or not, with these ideas in mind, Carson will be well on his way to success.

Angelo A. Paparelli contributed to this post. 

This week last year, Donald Trump proposed prohibiting all Muslim immigration to the United States. He altered the proposal this year to specify “suspending immigration from nations tied to Islamic terror.” He told CNN that this was actually intended as an expansion of the Muslim ban. Last week, he said, “People are pouring in from regions of the Middle East,” but that he would “stop that dead, cold flat.” He has also made clear that this would be one of the actions that he takes as president during his first day in office. This promise implies that he has the power to do so under current law, but that is not the case. It is illegal to discriminate against immigrants based on their national origin.  

Even while delegating to the president broad powers to exclude immigrants, Congress also expressly forbade banning immigrants based on their race or national origin. President Trump will almost certainly run into legal difficulties if he attempts to carry out his promise.

Text of the law bans discrimination based on national origin

At first blush, it would seem that the president can ban people based on their nationality or country of residence. The Supreme Court has granted Congress extensive leeway under the plenary power doctrine to limit immigration based on criteria—such as race or national origin—that would be considered unconstitutional in other contexts, and proponents of Trump’s plan claim that Congress authorized such bans by pointing to a provision of section 212(f) of the Immigration and Nationality Act (INA), the law that controls most U.S. immigration policies:

Whenever the President finds that the entry of any aliens or of any class of aliens into the United States would be detrimental to the interests of the United States, he may by proclamation, and for such period as he shall deem necessary, suspend the entry of all aliens or any class of aliens as immigrants or nonimmigrants, or impose on the entry of aliens any restrictions he may deem to be appropriate.

This seems to hand unequivocal authority to the executive branch to determine who it may admit to the United States. However, another section of the law clearly bans discrimination against certain classes. Section 202(a)(1)(A) of the INA states that except in cases specified by Congress in section 101(a)(27):

…no person shall receive any preference or priority or be discriminated against in the issuance of an immigrant visa because of the person’s race, sex, nationality, place of birth, or place of residence.

While section 212 grants the president a general power to exclude certain immigrants, section 202 limits this power. Note that this section does not prevent discrimination based on religious affiliation, political belief, or ideology, but Trump’s new policy would run afoul of at least one if not all three of those last three restrictions—nationality, place of birth, or place of residence—depending on how it was applied. “Place” of birth is actually a broader restriction than nationality, meaning that even if Trump’s ban applied to subnational or regional levels, it would still be illegal.

Section 202 does not protect all types of people who wish to come here from discrimination based on national origin. It is limited only to immigrants or so-called green card holders. Legally, immigrants are foreigners who enter on visas granting legal permanent residency in the United States as well as noncitizens whom the U.S. Citizenship and Immigration Services has adjusted their status to that of a permanent resident. The most common types of immigrants are immediate relatives of U.S. citizens—parents, spouses, and their minor children—who have no numerical limit. Other types include employees sponsored by U.S. businesses, adult children of U.S. citizens, their siblings, and immediate relatives of legal permanent residents. Refugees and asylees who have already entered the United States and held status for a year are eligible for immigrant visas, making discrimination against them at that stage also illegal.

Refugees outside of the United States, however, could still be excluded based on nationality before they enter as they do not enter on an immigrant visa. Obviously all nonimmigrants—guest workers, tourists, and other temporary visitors—could conceivably be subject to this discriminatory policy. It could also apply to those who are claiming asylum in the United States, but at the same time, the law prohibits deporting people who face a likelihood of persecution in their home country, which could leave such people in limbo.

Finally, because section 202 applies only to the issuance of the visa, it would not necessarily bar other types of discrimination, such as reporting or registration requirements. This type of discrimination was also upheld in a federal circuit court case involving Iranian nonimmigrant students in the United States who were required in 1979 to report to an immigration service office for interview and registration.

Section 202 also does not prohibit discrimination based on religious affiliation, but recently Trump has been adamant that his proposed ban would apply to countries rather than religions. “I’m looking now at territory. People were so upset when I used the word Muslim,” he told NBC. “I’m okay with that because I’m talking about territory instead of Muslim.” If he maintains this position, he will clearly be in violation of the law.

Trump’s plan is a more extreme overreach than anything President Obama tried

Proponents of the Trump plan could argue that section 202 does not directly state that its restriction applies to section 212. But reading section 202 as having no impact on section 212 would mean that section 202 was intended as no restriction at all—something that the president could waive at any time for any reason. By contrast, section 212 would not be rendered pointless if section 202 limits its authority. The president could still bar certain classes of aliens from the United States. He just could not do so based on race, gender, nationality, or place of birth or residence. This interpretation makes sense of both laws in a way in which both serve a purpose.

Any other reading would grant the president power to use his general section 212 authority even in situations in which Congress has said he cannot use it. In other words, it would write section 202 out of the law. To be sure, there is an interesting parallel here between the Trump plan and President Obama’s attempted executive action on immigration, which was criticized—including by the Cato Institute and by candidate Trump—as executive overreach.

President Obama proposed using his general authority in section 274A(g), which recognizes his authority to issue employment authorization to whomever he wants, to grant work permits to unauthorized aliens with U.S. citizen children.  Since it was first enacted in 1986, Congress had enacted provisions limiting the use of or requiring the use of executive power to authorize employment of certain individuals, but none of these provisions applied specifically to the class of noncitizens to whom he wanted to grant employment authorization. President Obama argued that he could use his general authority to issue work permits to anyone so long as the law did not specifically prohibit him from doing so.

Donald Trump’s plan by contrast is a much more extreme overreach. He would be forced to argue that not only could he use his general authority to ban immigrants in any way that he chooses, he could do so even in situations in which the law specifically prohibits him from doing so. This power grab is so much more far-reaching than President Obama’s that virtually any court will likely view it with great skepticism.

It is out of the question to claim that section 202 prohibits discrimination only in the issuance of the physical visa document that allows foreigners to request admission as an immigrant. Sections 201, 202, and 203 of the INA, which are entirely devoted to limiting the number of visas for immigrants, are discussing actual persons who can come and live permanently as a result of receiving a visa, not just about limiting the issuance of the physical documents allowing people to travel to a port of entry and request entry. If it were only referencing visa documents, the president could grant immigrant status to an uncapped number of people without issuing visas to them—which is clearly unjustified.

Legislative history supports a ban on discriminating by national origin

The historical background for the enactment of section 202 supports the interpretation that it was intended to bar all national origin discrimination against immigrants. During the late 19th and early 20th centuries, Congress passed several laws barring the immigration of immigrants based on where they were born or resided. In 1882, it banned “the coming of Chinese laborers to this country.” In 1917, it “excluded from admission” all “persons who are natives… of any country… on the Continent of Asia” from India and eastward—the so-called Asiatic Bar Zone—and in 1924, it implemented the national origins quota system, which skewed the quotas to the benefit of immigrants from Western Europe.

In 1952, Congress debated repealing this prejudicial system, but ultimately refused to do so. Instead, it passed a bill that contained only minor revisions. It was in this law that Congress introduced the section 212 authority to ban immigrants based on nationality. President Truman vetoed the bill, inveighing against it as a violation of the “great political doctrine of the Declaration Independence.” He specifically objected to “powers so sweeping” that they could be used to exclude or deport aliens based on such vague and potentially discriminatory grounds such as “public interest” (powers first included in a bill in 1950 that he had also vetoed). Congress overrode the veto and the legislation became the Immigration and Nationality Act of 1952.

All of this history is important because section 202 was enacted as part of the Immigration Act of 1965, which was intended as a repudiation of the discriminatory system of 1952. The very first paragraph in section 202 (quoted above) banned any attempt to resurrect the old prejudicial system. The rest of section 202 details the new per-country limits, which provide that each country receives an equal share of the annual limits. Senator Ted Kennedy, the congressional architect of the 1965 law, said that it was intended to “eliminate the national-origins system, which was conceived in a period of bigotry and reaffirmed in the McCarthy era.” In other words, the law was intended to repudiate the 1952 act and all that came before it. The Judiciary Committee Report on the bill stated in its first line: “The principal purpose of the bill, as amended, is to repeal the national origin quota provisions of the Immigration and Nationality Act.”

President Lyndon Johnson summed up the law best in his signing statement:

This bill says simply that from this day forth those wishing to immigrate to America shall be admitted on the basis of their skills and their close relationship to those already here. … The fairness of this standard is so self-evident that we may well wonder that it has not always been applied. Yet the fact is that for over four decades the immigration policy of the United States has been twisted and has been distorted by the harsh injustice of the national origins quota system.

Under that system the ability of new immigrants to come to America depended upon the country of their birth. Only 3 countries were allowed to supply 70 percent of all the immigrants. Families were kept apart because a husband or a wife or a child had been born in the wrong place. Men of needed skill and talent were denied entrance because they came from southern or eastern Europe or from one of the developing continents. This system violated the basic principle of American democracy—the principle that values and rewards each man on the basis of his merit as a man. Today, with my signature, this system is abolished.

In other words, the explicit intent of the 1965 law was to “abolish” the very kind of discrimination that Donald Trump is proposing to create by executive fiat. On section 202 in particular, Senator James Easterland, an opponent of the bill, commented:

the President said: ‘The principal reform called for is the elimination of the national origins quota system.’ … In an attempt to carry out the request of the President, we find that section 2 of the bill has amended section 202 of the Immigration and Nationality Act to provide as follows: (a) No person shall receive any preference or priority or be discriminated against in the issuance of an immigrant visa because of his race, sex, nationality, place of birth, or place of residence…

The goals could not have been clearer to anyone—opponent or proponent—and there is simply no way to slip national origin discrimination back into the 1965 act with section 212 of the 1952 act. Senator Bobby Kennedy stated forcefully on the floor of the Senate that he believed that the law would “eliminate from the statute books a form of discrimination totally alien to the spirit of the Constitution.” In the congressional debate over the bill, senators constantly argued that the bill would end, as Senator Jacob Javitas put it, “the basic discrimination” of the 1952 act. To claim that in 1965 Congress did not in fact eliminate the discrimination of the 1952 act but instead continued to allow it under section 212 of that very act flies in the face of not only the explicit text of the law, but pages upon pages of the congressional record.

Court precedent backs a ban on national origin discrimination

The D.C. circuit court of appeals has also found that the president cannot discriminate against immigrants based on nationality. The case involved whether certain asylum seekers could apply for immigrant visas at U.S. consulates outside of their country of origin. The Department of State created new rules making it more difficult to do so only for Vietnamese asylum seekers in Hong Kong, and the asylum seekers sued. The government did not even attempt to argue that section 212 would allow discrimination, but rather that they had changed the rules for reasons unrelated to nationality.

In Legal Assistance for Vietnamese Asylum Seekers v. Department of State, the D.C. circuit granted standing to a U.S. citizen who was attempting to sponsor his Vietnamese spouse in Hong Kong. The court found that discrimination had taken place under section 202. It stated that the policy drew “an explicit distinction between Vietnamese nationals and nationals of other countries.” It wrote:

Where Congress has unambiguously expressed its intent, we need go no further. Here, Congress has unambiguously directed that no nationality-based discrimination shall occur. There is no room for the Service’s interpretation proffered by the Department.

The court stated that the government’s “proffered statutory interpretation, leaving it fully possessed of all its constitutional power to make nationality-based distinctions, would render section 202(a) a virtual nullity.” The court also disregarded the administration’s argument that “it retains discretion under § 1152(a)(1) to discriminate on the basis of nationality so long as its policies are rationally related to U.S. foreign policy interests.” It stated:

Congress could hardly have chosen more explicit language. While we need not decide in the case before us whether the State Department could never justify an exception under the provision, such a justification, if possible at all, must be most compelling—perhaps a national emergency. We cannot rewrite a statutory provision which by its own terms provides no exceptions or qualifications simply on a preferred “rational basis.”…

The court also rejected the idea that the policy was not based on nationality because the administration was doing the same thing to Laotians detained in Thailand. The court also cited this passage from Haitian Refugee Center v. Civiletti, a district court case from Florida in 1980,that concluded:

In 1965, Congress abandoned the national quota system of immigration and added a provision prohibiting discrimination in the granting of visas on the basis of “race, sex, nationality, place of birth, or place of residence.” This provision manifested Congressional recognition that the maturing attitudes of our nation made discrimination on these bases improper.

Congress responded to the decision in the Vietnamese case by amending section 202 to state that the limit on discrimination should not apply to “procedures for the processing of immigrant visa applications or the locations where such applications will be processed.” When the Supreme Court remanded the case in light of this change, the appeals court reversed its earlier decision in 1997. Nonetheless, the amendment clearly shows that Congress did want this anti-discrimination provision to have some effect or it would have just deleted it entirely.

Past presidential actions do not support the legality of Trump’s policy

Proponents of the Trump plan can also point to specific cases in which presidents have used the authority in section 212 to ban certain classes of foreigners. But in almost all of the cases, these actions barred individuals based on their actions rather than their nationality. President George W. Bush, for example, barred the entry of participants in the Mugabe government in Zimbabwe, but not all Zimbabweans. President Obama has exercised the authority under section 212 several times, but has never imposed a ban against an entire nationality.  As a typical example, he prohibited the entry of anyone under a United Nations travel ban in 2011.

No president has ever banned all immigrants from a certain country without any exceptions, as Trump is proposing, and in only a couple of instances out of dozens have presidents exercised the authority in section 212 against a particular nationality at all.

In 1980, President Carter suspended issuances of visas to all Iranian citizens. From the text of his proclamation, it is unclear whether this applied to only nonimmigrant (temporary) visas—which would have been legal—or also to immigrant visas, but news reports imply that it applied only to temporary visitors. A Washington Post report from 1980 discussed the ban applying only to “students, tourists and businessmen”—the main categories of nonimmigrants—and multiple articles from the New York Times framed the issue as only impacting “foreign visitors.” Moreover, government statistics show that thousands of Iranians continued to receive immigrant visas in 1980.

Either way, President Carter only took this action because Iranian rebels seized control of the U.S. embassy and began using the U.S. visa machine to print fraudulent visas, making it impossible to determine who had a bona fide visa. It is also unclear if the ban applied to Iranian nationals whose visas were not issued in Iran. For these reasons, the Carter case is a poor parallel for Trump’s blanket ban.

In 1986, President Reagan suspended entry of all Cubans—immigrants and nonimmigrants—but this bar had a major exception for those who were immediate relatives of U.S. citizens, which is the main category of legal immigration. Cubans are also unlike other immigrants because Cuban immigration is partially governed under the Cuban Adjustment Act of 1966, which does in fact preference the issuance of visas to Cubans by granting visas to almost all Cubans who have been in the United States for a year. In any case, neither president’s actions were challenged in the courts, so their legality remains untested.

The breadth of the Trump plan is unprecedented

These past actions are particularly unconvincing when considering the breadth of the Trump plan. According to Trump, the immigration ban would apply to an entire region of the world. He has even refused to rule out banning immigration from France because “they have totally been” compromised by terrorism. CNN has estimated that a ban broad enough to include France would comprise at least 40 countries, but even the least broad restriction against immigration from countries with “terrorist safe havens” would eliminate all immigration from a dozen nations.

President Obama’s attempted executive actions on immigration were partially struck down in part due to their breadth. The courts conceded the president’s power to authorize immigrants to work and to suspend deportations, but not when it amounted to a wholesale abandonment of the law. This point is even much clearer in this case.

For almost a decade, Congress debated creating an immigration system free from discrimination by nationality, country of birth, or country of residence. President-elect Trump, however, now proposes to discriminate unlawfully against certain foreign nationals on the basis of the same protected grounds without any legislation from Congress.

An important part of Donald Trump’s health care agenda is his pledge to let consumers and employers avoid unwanted regulatory costs by purchasing insurance licensed by states other than their own, a change that would make health insurance both more affordable and more secure. The Congressional Budget Office has estimated that allowing employers to avoid these unwanted regulatory costs would reduce premiums an average of 13 percent. That’s a nice contrast to what Bill Clinton calls ObamaCare’s “crazy system where…people [who] are out there busting it, sometimes 60 hours a week, wind up with their premiums doubled and their coverage cut in half.”

A reporter recently wrote to me: “I’ve talked to many people – health policy experts, regulators, industry leaders – and none of them think it is a good idea. They worry that the policy would promote a race to the bottom, with insurers consolidating in states with the most lenient regulations. They say state regulators would lose their power to protect consumers. They argue that healthy people may save money by selecting cheaper plans, but sick people would end up paying more and/or have trouble accessing care.” Below is my response.

—–

What you have stumbled across is a grand conspiracy against consumers by industry, regulators, and left-wing ideologues.

The big, incumbent insurers like banning out-of-state purchases, because that protects them from competition.

Providers and patient groups like government mandates that force consumers to buy coverage for their products (mental health coverage, contraceptives coverage, acupuncture coverage, etc.). The freedom to purchase insurance licensed by other states would allow consumers to avoid those unwanted costs.

State insurance regulators like banning out-of-state purchases, because they are in the business of providing consumer protections, and the ban gives them a monopoly. Little wonder they produce what monopolies always produce: a high-cost, low-quality product.

The ideologues want to impose Gruber-style hidden taxes on consumers. The freedom to purchase insurance licensed by other states would allow consumers to avoid those hidden taxes.

It would be embarrassing if these groups said any of this explicitly, so they describe the prospect of losing their privilege as a “race to the bottom.”

Nonsense. There would be no race to the bottom. It would be a race to what consumers want: affordable, secure health coverage.

If letting people purchase insurance licensed by other states would lead to a vastly different health-insurance market than we have right now, it merely illustrates how far astray these groups have led us from the sort of health insurance consumers want.

I wrote a rather favorable column a few days ago about a new study from economists at the Organization for Economic Cooperation and Development. Their research showed how larger levels of government spending are associated with weaker economic performance, and the results were worth sharing even though the study’s methodology almost certainly led to numbers that understated the case against big government.

Regardless, saying anything positive about research from the OECD was an unusual experience since I’m normally writing critical articles about the statist agenda of the international bureaucracy’s political appointees.

That being said, I feel on more familiar ground today since I’m going to write something negative about the antics of the Paris-based bureaucracy.

The OECD just published Revenue Statistics in Asian Countries, which covers Indonesia, Singapore, Malaysia, South Korea, Japan, and the Philippines for the 1990-2014 period. Much of the data is useful and interesting, but some of the analysis is utterly bizarre and preposterous, starting with the completely unsubstantiated assertion that there’s a need for more tax revenue in the region.

…the need to mobilise government revenue in developing countries to fund public goods and services is increasing. …In the Philippines and Indonesia, the governments are endeavoring to strengthen their tax revenues and have established tax-to-GDP targets. The Philippines aims to increase their tax-to-GDP ratio to 17% (excluding Social Security contributions) by 2016…and Indonesia aims to reach the same level by 2019.

Needless to say, there’s not even an iota of evidence in the report to justify the assertion that there’s a need for more tax revenue. Not a shred of data to suggest that higher taxes would lead to more economic development or more public goods. The OECD simply makes a claim and offers no backup or support.

But here’s the most amazing part. The OECD report argues that a nation isn’t developed unless taxes consume at least 25 percent of GDP.

These targets will contribute to increasing financial capacity toward the minimum tax-to-GDP ratio of 25% deemed essential to become a developed country.

This is a jaw-dropping assertion in part because most of the world’s rich nations became prosperous back in the 1800s and early 1900s when government spending consumed only about 10 percent of economic output.

And not only were taxes a concomitantly minor burden during that period, but many nations didn’t have any income taxes at all.

At this point, you may be thinking the OECD bureaucrats are merely guilty of not knowing history.

That certainly would be a charitable explanation of their gross oversight/mistake.

But there’s something else in the study that makes this benign interpretation implausible. The study explicitly notes that Singapore is a super-prosperous developed nation with a very low tax burden - way below the supposed minimum requirement identified by the OECD.

Singapore has the highest GDP per-capita of the six countries and one of the lowest tax-to-GDP ratios. …The low tax-to-GDP ratio is explained by lower income tax rates (particularly on corporate income) and VAT rates, compared to other Asian countries. …The tax-to-GDP ratio in Singapore is lower in 2014 relative to 2000, driven by the decrease of individual income tax rates and corporate income tax rates.

Here’s a chart from the report showing that taxes consume less than 14 percent of economic output in Singapore.

Needless to say, there’s nothing in the report to square the circle and justify the claim about the supposed link between higher taxes and economic development. Nothing to explain why Singapore manages to be so rich with such a small burden of government. It’s as if the bureaucrats hoped that nobody would notice that numbers in the study undermined their ideologically driven claim that tax burdens should climb in Asia.

Indeed, I wonder if Hong Kong was omitted from the study simply because that would have further undermined the OECD’s preposterous assertion that higher taxes are a route to economic development.

P.S. Having low taxes and a modest burden of government certainly is part of what can make a nation rich and successful, but the real goal should be to have a good mix of free markets and small government. Singapore does that, ranking #2 in Economic Freedom of the World.

Other Asian nations, by contrast, may have modest fiscal burdens, but the potential economic benefit is undermined by statist policies in areas such as trade, regulation, monetary policy, and property rights. This certainly helps to explain why countries such as Indonesia (#79), Malaysia (#62), and the Philippines (#80) have much lower scores for overall economic liberty.

P.P.S. I’m not sure why the OECD would produce such sloppy research. If they simply wanted to create a false narrative, why didn’t the bureaucrats omit Singapore and simply hope nobody knew the numbers from that country (or the historical numbers for North America and Western Europe)? My suspicion is that the senior political types at the OECD wanted to produce a study that would be helpful for certain politicians  in the region (i.e., allow them to justify higher tax burdens) and they figured a lot of people would only pay attention to the press release.

P.P.P.S. The OECD certainly has a track record of dishonest research.

The Cato Institute has released Policing in America—an extensive national public opinion report that explores Americans’ attitudes toward the police based on an original Cato Institute/YouGov national survey of 2,000 Americans. Here are ten key facts about Americans’ attitudes toward the police. 

  1. There are stark racial and partisan divides in favorability toward policebut not group is anti-cop: 68% of white Americans have a favorable view of the police, only 40% of African Americans and 59% of Hispanic Americans also have a favorable view. Republicans (81%) are 22 points more favorable toward the police than independents (59%) and Democrats (59%). Although some groups have less positive views of the police, findings weaken the ascertain that these groups are “anti-cop.” For instance 9 in 10 white, black, and Hispanic Americans oppose cutting police forces and 6 in 10 worry the police have very dangerous jobs. [1]
  2. 54% say police using military equipment goes too far, while 46% say it’s necessary for law enforcement purposes. Majorities of whites (53%), Hispanics (51%), and blacks (58%) oppose police using military weapons and armored vehicles. Most Republicans (65%) believe police need to use military weapons, while 60% of both Democrats and independents believe police using such equipment goes too far.
  3. 84% of Americans oppose civil asset forfeiture. Americans oppose police seizing “a person’s money or property that is suspected to have been involved in a drug crime before the person is convicted.” When police departments seize people’s property, 76% say the local department should not keep the assets. Instead Americans think seized assets should go either to the state general fund (48%) or a state-level law enforcement fund (28%). A quarter (24%) say police departments should keep the property they seize.
  4. 79% support outside law enforcement agencies conducting investigations of police misconductwhile 21% prefer police departments handle such investigations internally. Strong majorities of Republicans (76%), independents (77%), and Democrats (83%) all agree that outside agencies should conduct such investigations.
  5. 89% of Americans support police body cameras and majorities are willing to raise taxes pay for them (51%) and let police look at the footage before making official statements (52%). Body cameras aren’t a zero-sum proposition: 74% think body cameras protect both officers and citizens equally.
  6. Only 30% say police should prioritize enforcing drug laws.  Instead, Americans want police to prioritize investigating violent crime (78%), protecting people from becoming crime victims (64%), and investigating property crime (58%). Americans across partisan and demographic groups share these top three priorities for law enforcement.
  7. Nearly half (49%) of Americans say “most” police officers think they are “above the law.” African Americans (61%), Hispanics (61%), and Democrats (61%) are considerably more likely than whites (46%) and Republicans (36%) to say that most police officers think they are above the law. Instead, a majority of whites (54%) and Republicans (64%) say police don’t think they’re above the law.
  8. 65% of Americans think police officers “commonly” racially profile Americans and 63% oppose itMajorities of whites (62%), Hispanics (62%), and blacks (77%) oppose police stopping “motorists and pedestrians of certain racial or ethnic backgrounds because the officer believes that these groups are more likely than others to commit certain types of crimes.” Republicans stand out with a slim majority (51%) in favor of racial profiling and 49% opposed. Black Republicans, however, disagree, with 65% who oppose racial profiling and 35% who support it.[2]
  9. 61% say there is a “war on police” in America. Sixty-five percent (65%) of Americans worry that police officers have “very dangerous jobs,” and 58% feel officers too often must deal with recalcitrant citizens who don’t show enough respect. Although Republicans and Democrats both believe police have dangerous jobs, Republicans are more than 30 points more likely than Democrats to believe there is a “war on police” today (82% vs. 49%) and that Americans show insufficient respect to officers (77% vs. 45%). 
  10. African Americans are nearly twice as likely as whites to report a police officer swearing at them. About a quarter of African Americans (26%) and Hispanics (22%) report police using abusive language or profanity with them compared to 15% of whites. Nearly 4 in 10 African Americans (39%) and 27% of Hispanics report knowing someone physically mistreated by police, compared to 18% of whites.
  11. 60% say it’s more important to protect the innocent than punish the guilty. When asked which would be worse, 60% say it would be worse to imprison 20,000 innocent people, while 40% say it would be worse to have 20,000 guilty people who are free. Majorities of Republicans (55%), independents (60%), and Democrats (64%) all agree it’s worse to imprison innocent people. However, Donald Trump’s early core supporters stand out with a majority (52%) who say it’s actually worse to not punish the guilty. Other Republican voters disagree. For instance 65% of Ted Cruz’s early primary supporters say it’s worse to imprison the innocent.[3] 

Click here to read an overview of the report or here for the full report.

The Cato Institute/YouGov national survey of 2000 adults was conducted June 6-22, 2016 using a sample drawn from YouGov’s online panel, which is designed to be representative of the US population. YouGov uses a method called sample matching, and restrictions are put in place to ensure that only the people selected and contacted by YouGov are allowed to participate. The margin of sampling error for all respondents is +/-3.19 percentage points. The full report (.pdf) can be found here, toplines (.pdf) results can be found here, full methodological details can be found here.

 

[1] To be sure, advocates of shrinking police departments are not necessarily “anti-cop” either; however, it’s difficult to argue a person is if they do not want to cut the police force.

[2] Data for support of racial profiling by race/ethnicity and partisanship come from the combined June 2016 and November 2015 national surveys (N=4000), which offer greater precision and smaller margins of error for subgroups. (Unweighted: Black Republicans=45.)

[3] Results are from the November 2015 Cato Institute/YouGov National Survey, conducted November 19 to 24, 2015.

Whenever I write about Hispanic immigration to the United States, I am greeted with some variation of the “they’re all socialists” line. These commenters typically point to the fact that a majority of Hispanics vote for Democrats. Yet as Alex Nowrasteh has written, the Republican Party’s antagonism toward Hispanics plays an important role in that outcome. The reality is that Hispanics disproportionately backed the libertarian presidential candidate this election and, as I have described before, are America’s most libertarian major ethnic group on a variety of specific issues. Now, thanks to Donald Trump’s recent actions, we have more evidence for this fact.

The Economist magazine teamed up with the survey outfit YouGov to ask Americans how they felt about trade, tariffs, subsidies, and free markets following President-elect Trump’s recent decision to intervene to prevent Carrier from relocating production to Mexico. Support for the deal should be a telling indicator of a person’s views on capitalism, as it clearly shows contempt for the market system and free trade. As Vice President-elect Mike Pence told The New York Times, he supported the deal because “the free market has been sorting it out and America’s been losing.”

The first question in the poll on the issue asked respondents whether they agreed with Pence’s statement, but did not reveal its origin to avoid allowing partisanship to impact the responses. Figure 1 provides the breakdown of the responses by ethnicity. As it shows, Hispanics were the least likely to agree with Pence’s statement—a full twenty percentage points less likely. In case you think that this result might still be pure partisanship, barely half of Hispanics had even heard anything about the Carrier deal, let alone the Pence remark.

Figure 1: Share agreeing with the statement that “the free market has been sorting [the economy] out and America’s been losing.”

Source: Economist–YouGov

While this certainly implies that Hispanics are also the least likely to agree that the free market has been leading to a worsening economy, perhaps it could be argued that Pence’s statement is unclear. I disagree with that. I think it would be obvious to respondents that they are supposed to connect the free market with a poor economy. Fortunately, the survey asked other questions that support the idea that Hispanics correctly interpreted Pence’s comment as being anti-free market.

The survey followed up by asking respondents whether they supported “special tax breaks to companies in order to keep jobs in those communities.” Hispanics were the least likely to support such tax breaks. Only 1 in 3 Hispanics considered such tax breaks legitimate. Again, as Figure 2 shows, this is 19 percentage points less than whites.

Figure 2: Share supporting “special tax breaks to companies in order to keep jobs in those communities”

Source: Economist–YouGov

Finally, the survey asked whether the respondents favored “stiff tariffs or other taxes on U.S. companies that relocate jobs from the U.S. to foreign countries.” On this question, the difference in opinion is the most dramatic. Only 37 percent of Hispanics want to punish companies for these business decisions. This is an astounding 26 percentage points less than whites, who overwhelmingly favored government interference.

Figure 3: Share supporting stiff tariffs or other taxes on U.S. companies that relocate jobs from the U.S. to foreign countries

Source: Economist–YouGov

This result corresponds with Hispanics’ strongly pro-free trade sentiments, as expressed in polls by the Pew Research Center. It appears that their views on free trade will hold under both the Democrat and Republican administrations. On the Carrier deal itself, Hispanics who knew about the deal were overwhelmingly not supportive, but a plurality had no opinion as they had not heard enough about it.

These three questions address a broad understanding of the government’s role in the economy. The first focuses on a general sentiment about the current market economy in the United States, the second on corporate welfare and government intervention, and the last on punitive taxation, free trade, and government intervention. Overall, they show that Hispanics are not “socialists”—indeed, on these questions, they are much less supportive of a planned economy than white Americans.

Donald Trump’s campaign has certainly galvanized feelings of nationalism and patriotism.  John Fonte and John O’Sullivan even wrote that Trump’s election victory represent a “return of American nationalism.”  It’s no coincidence then that he spoke about immigration as much as he did.  There is a common belief that immigrants and their descendants are less patriotic than other Americans. Yet rarely do proponents of this idea bring facts to the table to support their claims. 

A prominent academic paper by Jack Citrin and others challenges the idea that Hispanic Americans are less patriotic.  On the opposite side, responses from a Harris Interactive Survey purport to show less patriotism among immigrants.  Fortunately, the General Social Survey asks many questions about patriotism in 2004 and 2014.  The questions generally show that immigrants and Hispanics have patriotic feelings virtually identical to those of other Americans.

The first question is:  “How much do you agree or disagree with the following statement:  Generally speaking, America is a better country than most other countries.”  The responses show a remarkable consistency across the four groups of all immigrants, all natives, all Hispanics, and all non-Hispanics (Figure 1).  The last two combine those who are foreign-born and native-born.   Those four groups all have almost exactly the same opinion on whether America is better than most other countries.

Figure 1: America Is a Better Country than Most Other Countries

 

Source: General Social Survey.

The second question is: “How much do you agree or disagree that strong patriotic feelings in America are needed for America to remain united?”  This question judges whether immigrants and Americans even care about patriotism anymore, a concern for those concerned about patriotic assimilation.  The responses between immigrants and natives do vary in this question (Figure 2).  Virtually all of the difference is between whether they “strongly agree” or just “agree” (Figure 3).  Immigrants and Hispanics are about as likely to “strongly disagree” or “disagree” with the statement.   

Figure 2: Patriotic Feelings Are Needed for America to Remain United

 

Source: General Social Survey.

Figure 3: Patriotic Feelings Are Needed for America to Remain United, Simplified

 

Source: General Social Survey.

The third question is, “How much do you agree or disagree that strong patriotic feelings in America strengthen America’s place in the world?”  This is a natural follow-up question that seeks to understand how the respondents view the utility of patriotism.  The responses show that immigrants and Hispanics are less likely to “strongly agree” but more likely to “agree” with the statement compared to natives and non-Hispanics (Figure 4).  The difference disappears entirely when the responses are shrunk to just “agree,” “neither,” or “disagree” (Figure 5).   

Figure 4: Strong Patriotic Feelings Strengthen America’s Place in the World

 

Source: General Social Survey.

Figure 5: Strong Patriotic Feelings Strengthen America’s Place in the World, Simplified

 

Source: General Social Survey.

The last two questions concern the potential downsides of patriotism.  If immigrants or Hispanics are more likely to see the costs of patriotism then they might be less willing to be patriotic either now or in the future.  The next question asks whether the respondents agree that patriotism leads to intolerance amongst Americans.  The responses are virtually identical among all of the groups surveyed (Figure 6).  Immigrants and Hispanics see about as much of a downside to patriotism as natives and non-Hispanics do. 

Figure 6: Patriotism Leads to Intolerance

 

Source: General Social Survey.

The last question is the most personal.  It asks whether respondents agree that patriotism leads to negative feelings about immigrants.  Immigrants and Hispanics either do not connect opinions that are anti-Hispanics or anti-immigration to patriotism, do not believe such a connection actually exists, or they do not care as they appear to have the exact same opinions as the rest of Americans on that issue (Figure 7).

Figure 7: Patriotism Leads to Negative Feelings about Immigrants

 

Source: General Social Survey.

The number of Hispanic respondents is small in every question so their responses should be taken with a grain of salt.  Furthermore, controls for age, education level, and geography would help to create a complete picture of patriotic feelings but the number of respondents in this portion of the General Social Survey limits that type of analysis.  Based on the data here, immigrants and Hispanics look about as patriotic as other Americans.   

On Sunday Anderson Cooper at CBS “60 Minutes” covered one of our favorite topics: the way lawyers and clients sue retail businesses by the dozens or hundreds over defects in ADA accessibility compliance and then cash in the complaints for quick settlements. Actually entering the business is not always necessary: it can be enough to drive around the parking lot spotting technical violations, in what is known as a “drive-by lawsuit.”

South Florida store owner Mike Zayed says before the complaint arrived “no disabled customer had ever complained about the ramp, the sign, or the parking space.” Zayed “doesn’t think the person who sued him was a real customer because the man claimed he encountered barriers inside the store that didn’t exist.” And now we’re beginning to see “Google lawsuits” in which the complainant consults online aerial maps to discover, for example, which motel owners haven’t yet installed the pool lifts that federal law recently made obligatory. The same attorney using the same client sued more than 60 defendants in 60 days over lack of pool lifts. “At last count, that attorney has sued nearly 600 businesses in just the last two years, many for not having pool lifts.” [Dec. 4 segment and script; full show here (segment begins 32:47).

[adapted from Overlawyered]

Over at Cato’s Police Misconduct web site, we have selected the worst case for the month of November: The Albuquerque Police Department, (APD) which is now under investigation, once again, for misconduct.

Here’s the background.  A few years ago, after numerous complaints from community leaders, the Department of Justice (DOJ) launched an investigation of the APD.  In April 2014, the DOJ announced its finding that there was indeed a pattern of excessive force by officers with the APD.  Police officials promised to change and improve.

Shortly thereafter, an APD officer shot and killed 19 year old Mary Hawkes.  It looks like Hawkes stole a car and the police were trying to catch her.  The police said she was a threat and so deadly force was necessary.  Hawkes’ family sued the city for excessive force.  Prior to trial, lawyers asked to see any police body camera footage from the incident.

Now we come to the latest news reports of APD misconduct.  Reynaldo Chavez was an employee of the City of Albuquerque and his job was handling records requests.  Chavez says he was aware that the police department had a peculiar policy regarding police body camera footage.  When the footage helped the police, it was released to the public.  When the footage hurt the police, such as showing excessive force, the footage was altered or destroyed.  In other words, the APD had a policy of tampering with evidence, which is a crime.

Chavez reportedly turned over incriminating body camera footage to the lawyers representing the Hawkes family.  Chavez then lost his job and he is now fighting to get his job back because he says he was punished for doing what he was legally supposed to do.

The APD has denied any wrongdoing, but the state attorney general has seen enough to launch yet another investigation into APD practices.

Last week and this morning the results of two major international exams came out: the Trends in International Mathematics and Science Study (TIMSS) and the Program in International Student Assessment (PISA), respectively. Together, they offer a mixed bag of overall mediocre news for the United States.

On TIMSS—an exam that tends to use “traditional” questions such as directly multiplying two numbers—American students saw 4th grade math scores dip a bit between 2011 and 2015, 8th grade math scores rise a statistically significant amount, and 4th and 8th grade science scores rise slightly. We also placed pretty high compared to other countries, though we finished behind Kazakhstan on all tests. On the whole, that’s decent news (Kazakhstan notwithstanding).

PISA would probably be best characterized the opposite way: bad news. Scores on the exam—which is more focused on solving “real world” problems, akin to multi-step word problems, and is only for 15-year-olds—were all down.  Science, math, and reading, as you can see below, all dropped. And our placement among other participating countries? Well below average for advanced countries in math, slightly above in science and reading.

Taking PISA and TIMSS together, the news isn’t great, especially considering that we spend more on K-12 education than almost any other country in the world.

That said, these scores only tell us so much, and it is impossible to definitively place blame or credit for them on any particular policy: school choice, Common Core, bilingual education, etc. It will be interesting to see, though, how groups like the Collaborative for Student Success will handle PISA. The Collaborative recently argued that adopting “high standards”—read: the Common Core—is clearly working because state test scores have gone up in many Core states. But it is quite possible that scores in Core states have risen largely because those states have adjusted to the Core, not because students are better educated. The target may have moved to the left, or even down, but scores will lag until sights are adjusted. Tests like PISA can serve as something of a check against using one exam to proclaim policy success.

Speaking of poorly grounded proclamations, the darling of progressive educators, Finland, continues to sink after its heady days atop the rankings about a decade ago. Its PISA science, math, and reading scores have all dropped since the early-to-mid 2000s. Meanwhile, the Finns ranked below the U.S. in 4th grade math on the most recent TIMSS, but above us in 4th grade science.

How about another country with somewhat mythical status: China. In the last two PISA iterations only students in elite Shanghai participated, and they scored very well. Alas, many commentators spoke as if atypical Shanghai represented all of China. This time around three other provinces participated, and scores plummeted.

What does all this tell us? First, that nothing clearly dramatic has happened in American education over the last few years, at least as reflected in scores on two international tests. That makes it especially hard to declare any particular policy proven good or bad, though the temptation to seize on test scores and make sweeping declarations is powerful. The scores also furnish a highly cautionary tale about picking the top-placing, country du jour—looking at you now, Kazakhstan!—and obsessing over what it has done and how we can do the same thing. It may not be so magical after all.

These tests tell us something. But what it is—and is not—can be tough to figure out. All we can say with some certainty is that the latest international exams, taken together, suggest mediocre American performance, especially for the money we spend.

President-elect Donald Trump has claimed victory in his effort to preserve employment for Carrier workers in Indiana.  Assisted by $7 million in tax incentives provided by the State of Indiana, Mr. Trump persuaded the company not to move 800 furnace manufacturing jobs to Monterrey, Mexico.  This works out to a taxpayer-funded subsidy of $8750 per job. 

Another 1300 Carrier jobs still will move to Mexico between now and 2019.  Published reports have indicated that the company anticipated cost savings of some $65 million per year from moving all 2100 positions to Monterrey.  So Carrier is taking at least a partial step toward maintaining its global competiveness, while at least partially appeasing the incoming president.

I wrote an op-ed in Forbes on August 22, 2016, in which I argued that Carrier no doubt had quite good business reasons for planning the move to Mexico.  Carrier’s February 2016 announcement of the decision said that it was due to “ongoing cost and pricing pressures driven, in part, by new regulatory requirements.”  

Carrier has been manufacturing products in Monterrey for some years.  The company certainly has a clear understanding of why moving production of some air conditioning units makes business sense.  It would not be wise for them to explain their reasoning in public because such proprietary knowledge would be of great interest to their competitors. 

Some commentators have opined that the decision was driven largely by lower labor costs.  Carrier’s expenses for employee salary and benefits average about $34 per hour in Indiana, while those costs in Mexico are only around $6 per hour.  It’s possible the move was prompted primarily by labor cost savings, although my analysis of data compiled by The Conference Board suggests otherwise.  The value generated by an hour worked in the United States has risen by 40 percent over the past 22 years of NAFTA.  In Mexico, the gain has been only 10.5 percent.  Productivity has grown faster in the United States, so the incentive to shift production to Mexico today ought to be weaker than it was 10 or 20 years ago.  (Note:  Those figures apply to the productivity of all workers.  If it was possible to analyze just the manufacturing sector, perhaps the findings would change.)

There is little doubt that Carrier could escape some other costs by moving away from the United States.  As I wrote in August:

 

What other factors could have inspired Carrier’s move?  U.S. businesses frequently are critical of what they see as burdensome regulations imposed by government.  Those range from policies dealing with energy and the environment, to rules pertaining to labor relations and taxation.  One often overlooked issue is the burden placed on manufacturing firms by antidumping and countervailing duty (AD/CVD) measures.  AD/CVD duties are imposed to provide protection for U.S. companies that face import competition.  Many industries that seek AD/CVD protection are in the business of making basic products that are used as inputs by downstream manufacturers.  The simple reality of the marketplace is that protected firms tend to receive higher prices.  Those higher prices translate directly into higher costs for value-added manufacturers that use the protected product as an input. 

Steel provides a great example. The United States has imposed roughly 150 AD/CVD orders to limit imports of steel from numerous countries.  The extra duties help steel mills to compete, but they also reduce the competitiveness of steel-consuming firms that must pay those extra costs.  AD/CVD measures cause a few steel producers to be winners, while a whole lot of other firms end up as losers. 

Since steel is required to make air conditioners, there is little doubt that Carrier is one of the losers from AD/CVD policies.  Perhaps more important than steel, AD/CVD measures also apply to imports of copper tubing and aluminum extrusions, both of which are used to accomplish the essential heat-exchange function.  Carrier can avoid those policy-imposed costs simply by moving to Mexico.

It may be helpful to look at steel trade remedies in a broader perspective.  Downstream manufacturers that use steel as an input are a much larger factor in the U.S. economy than are steel producers.  Department of Commerce statistics indicate that “primary metal manufacturing,” which includes steel, copper, aluminum, magnesium, etc., added about $60 billion of value to the economy in 2014.  Downstream manufacturers that utilize steel as an input generate value added of $990 billion, more than 16 times larger.  Employment by primary metal manufacturers was 400,000, while downstream manufacturers employed 6.5 million, also 16 times greater.  (Employment by U.S. steel mills is somewhere around 100,000.)

Steel import restrictions have made the United States a high-priced island in an ocean of low-priced steel.  U.S. prices are high enough to give imported manufactured goods an advantage when competing in the U.S. market against domestic firms.  How many of the 6.5 million workers employed by value-added manufacturers are vulnerable to import competition from foreign companies that have access to world-price steel?  It’s not clear.  What is clear is that if only 2 percent of those workers (130,000 people) lose their jobs, more people would be unemployed due to steel import duties than are now employed in the entire U.S. steel mill workforce.

Will the new administration be interested in reforming AD/CVD laws so that an action intended to help one industry does not inadvertently damage another?  If so, it should pursue legislation that would balance the potential help provided by such measures against the potential harm they might do.  Trade remedy measures should be prevented from going into place whenever quantitative analysis shows that they would have an overall negative effect on the U.S. economy.  Although this approach makes great sense, it may not be welcomed by members of the incoming administration’s transition team, some of whom have connections to the steel industry.

One unfortunate aspect of the president-elect’s foray into Carrier’s business decisions is that he missed the opportunity to focus the public’s attention on the need to improve the U.S. business climate.  Government policies play important roles in determining whether firms can remain competitive.  Non-competitive companies aren’t able to thrive, grow, or hire more workers.  The incoming administration would do well to focus on reforming poorly conceived U.S. laws and regulations that make it unnecessarily difficult to conduct business in this country.

The Washington Post has a blockbuster story today documenting vast overhead costs in the Department of Defense (DoD). Experts often lambast the DoD’s excessive bureaucracy, and I have charted the growth in the number of civilian DoD workers.

But the Post reveals remarkable new measures of the department’s bloat, based on a leaked study it obtained:

The Pentagon has buried an internal study that exposed $125 billion in administrative waste in its business operations amid fears Congress would use the findings as an excuse to slash the defense budget, according to interviews and confidential memos obtained by The Washington Post.

Pentagon leaders had requested the study to help make their enormous back-office bureaucracy more efficient and reinvest any savings in combat power. But after the project documented far more wasteful spending than expected, senior defense officials moved swiftly to kill it by discrediting and suppressing the results.

The study was produced last year by the Defense Business Board, a federal advisory panel of corporate executives, and consultants from McKinsey and Company. Based on reams of personnel and cost data, their report revealed for the first time that the Pentagon was spending almost a quarter of its $580 billion budget on overhead and core business operations such as accounting, human resources, logistics and property management.

The data showed that the Defense Department was paying a staggering number of people — 1,014,000 contractors, civilians and uniformed personnel — to fill back-office jobs far from the front lines. That workforce supports 1.3 million troops on active duty, the fewest since 1940.

The DoD’s effort to bury the study is appalling, but Pentagon waste is a complex problem. You can’t just chop $125 billion worth of “back office” jobs overnight. However, it is also true that the 1,014,000 such jobs—in logistics, procurement, and other activities—are the exact types of functions that have become vastly more efficient in the private sector.

One of the core problems in the DoD and other federal departments is the excessive layering that has accumulated over time. American businesses have become much leaner in recent decades, with flatter management structures. But the federal workforce has become top-heavy with excessive layers of management, and the DoD is no exception.

Former Defense Secretary Robert Gates complained that the Pentagon is a “gargantuan, labyrinthine bureaucracy” with 30 layers of staff under the secretary. And John Lehman explained: “With so many layers and offices needed to concur on every decision, it now takes an average of 22½ years from the start of a weapons program to first deployment, instead of the four years it took to deploy the Minuteman ICBM and Polaris submarine missile system in the Cold War era.”

The Post says that the DoD’s “cost-cutting study could find a receptive audience with President-elect Donald Trump.” The real estate developer may be particularly struck by the size of one overhead activity: 192,000 workers just to handle the department’s “real property management.”

For more on the root causes of federal bureaucratic inefficiency, see this essay.    

In 2014, the Pentagon commissioned a study to identify wasteful practices and improve efficiency, but when the researchers found too much waste – approximately $125 billion worth – the officials who asked for the report tried to bury the findings. As reported in the Washinton Post, Pentagon officials worried that “Congress would use the findings as an excuse to slash the defense budget.”

The Pentagon imposed secrecy restrictions on the data making up the study, which ensured no one could replicate the findings. A 77-page summary report that had been made public was removed from a Pentagon website.

Particularly telling are a series of comments by Deputy Defense Secretary Robert O. Work, the Pentagon’s second-highest-ranking official, and Frank Kendall III, the Pentagon’s chief weapons-buyer. 

“At first,” the Post explains: 

Work publicly touted the efficiency drive as a top priority and boasted about his idea to recruit corporate experts to lead the way.

After the board finished its analysis, however, Work changed his position. In an interview with The Post, he did not dispute the board’s findings about the size or scope of the bureaucracy. But he dismissed the $125 billion savings proposal as “unrealistic” and said the business executives had failed to grasp basic obstacles to restructuring the public sector.

Kendall, meanwhile, wasn’t buying what the researchers were selling almost from the very beginning. He “challenged the board’s data and strenuously objected to the conclusion that his offices were overstaffed.”

Mostly, however, he worried about what it would mean for extracting more money from Congress for military spending.

Kendall knew that lawmakers might view the study as credible. Alarmed, he said, he went to Work and warned that the findings could “be used as a weapon” against the Pentagon.

“If the impression that’s created is that we’ve got a bunch of money lying around and we’re being lazy and we’re not doing anything to save money, then it’s harder to justify getting budgets that we need,” Kendall said.

President-elect Donald Trump largely bought into the notion that the U.S. military has been gutted by the supposedly devastating effects of the bipartisan Budget Control Act. This is a myth, as my colleague Benjamin Friedman explained at a Capitol Hill briefing last month. The U.S. military remains eminently capable of defending the United States and U.S. vital interests. The greatest threat to American security is U.S. officials’ collective inability to prioritize, and their tendency to be drawn into others’ disputes.

Still, Mr. Trump has pledged to rebuild the military, and dismissed critics who scoffed at his claim that he could find the money that he needs without raising taxes or cutting other popular domestic programs. The key, he said, was  “eliminating government waste and budget gimmicks.”

He should thank the Pentagon for helping to identify some of that waste, and the Washington Post’s Craig Whitlock and Bob Woodward for making the findings public. Actually extracting the savings, including by getting Congress to stop treating the Pentagon as a particularly inefficient jobs program, is likely to prove tougher.

 

In a new report for the Heritage Foundation, Michael Sargent summarizes what we need on infrastructure from the incoming Trump administration. I agree with all of Michael’s points, which I paraphrase here:

Ignore rhetoric about crumbling highways and falling-down bridges. America’s infrastructure needs improvements, but the scare stories are off-base.

  • Reduce government red tape to speed investment.
  • Repeal harmful labor rules, which raise the costs of infrastructure construction.
  • Embrace privatization.
  • Approve energy projects blocked by the Obama administration.
  • Repeal the net neutrality regulations on the Internet.
  • Limit regulations on emerging technologies.
  • Cut the federal highway gas tax, end spending on urban transit, and reduce the federal role in highways.
  • Privatize air traffic control, eliminate subsidies for airports, and remove barriers for the states to restructure airports as self-funded businesses.
  • Do not pass a federal infrastructure spending stimulus.
  • Do not use repatriated corporate earnings for a government stimulus. If such revenues arise from corporate tax reform, use them to reduce the corporate tax rate.
  • Do not create new tax loopholes or subsidies for infrastructure.
  • Do not create a federal infrastructure bank. That would lead to more bureaucracy, subsidies, and central control.

I would add to Michael’s points that I share concerns expressed by Trump and others that America should have world-class infrastructure. But the way to get it is not through subsidies, regulations, and centralization. Instead, the incoming administration should focus on market-based reforms to privatize facilities, reduce subsidies and regulations, and increase competition.

For more information on infrastructure reforms, see here, here, here, and here.

According to Wall Street Journal writer Laura Saunders, future Treasury Secretary Mnuchin must be wrong because Tax Policy Center experts say so. Actually, Mr. Mnuchin may be partly right, but the experts are almost entirely wrong.

“Steven Mnuchin, the likely next Treasury secretary, this week said rich U.S. taxpayers won’t get “an absolute tax cut” under President-elect Donald Trump,” writes Ms. Saunders; “But that is not what Mr. Trump says in his taxation plan. In fact, under his approach the wealthy would receive an average tax cut of about $215,000 per household, experts say.” 

“What Mr. Trump says” is not at all the same as what some “experts say.” Expert or not, Tax Policy Center (TPC) estimates of who pays what under different tax rates are distressingly capricious.

Mr. Mnuchin appeared to be talking only about individual income taxes. That is why he suggested that lower marginal tax rates for high earners “will be offset by less deductions.” So long as we focus only on non-business taxes (including high salaries and dividends), Mr. Mnuchin was probably right. Indeed, according to Ms. Saunders’ experts, the lost revenue from lower tax rates over 10 years totals $1.49 trillion plus $145 billion from eliminating the 3.8% Obamacare surtax.  Yet those individual tax cuts are more than offset by $2.6 trillion in added revenue from Trump’s cap on itemized deductions and the loss of personal exemptions. More than doubling the standard deduction loses considerable revenue, but not from high-income taxpayers.

Ms. Saunders mentions only the loss of itemized deductions—not exemptions—and concludes “these limits don’t fully offset the effects of income- and estate-tax cuts for high earners proposed by Mr. Trump, according to experts.” 

Repealing the estate tax loses very little revenue, but it is arbitrary for the TPC to assign that lost revenue to people with high incomes because the estate tax is borne by heirs and charities—not dead people.

With estate tax repeal included, only 22% of the Trump tax cut goes to households (including investors) according to the TPC, with 44% of Trump tax cuts going to corporate earnings (and the rest to unincorporated business). 

In the estimates Ms. Saunders presents as facts, her experts claim to estimate how the corporate income tax is distributed among households, even though they know they have no proof of the actual incidence of the corporate tax. If the corporate tax reduces capital formation, for example, then the relative scarcity of capital would raise pretax returns to capitalists while reducing productivity and real wages.  

Those squeamish about watching sausage being made should not look closely at how distribution estimates are concocted.  

A suspicious hint (from the Wall Street Journal graph) is that the Top 1% are defined as those earning more than $699,000 in 2017. By contrast, the Top 1% in the famed Piketty and Saez estimates started at $442,900 in 2015. The $699,000 figure is 24% larger than TPCs estimate of Adjusted Gross Income needed in 2017 to be among the Top 1%. That huge difference is because the TPC has lately opted to compare taxes with a big stew called Expanded Cash Income (ECI)

The main reason TPC estimates of “Expanded” Top 1% income are 24% larger than AGI is that the TPC assumes that 60% of the corporate tax is borne by owners of capital. Before 2012 they assumed 100% was borne by capital. It’s all quite hypothetical and arbitrary:

“We define ECI to be adjusted gross income (AGI) plus: above-the-line adjustments (e.g., IRA deductions, student loan interest, self-employed health insurance deduction, etc.), employer paid health insurance and other nontaxable fringe benefits, employee and employer contributions to tax deferred retirement savings plans, tax-exempt interest, nontaxable Social Security benefits, nontaxable pension and retirement income, accruals within defined benefit pension plans, inside buildup within defined contribution retirement accounts, cash and cash-like (e.g., SNAP) transfer income, employer’s share of payroll taxes, and imputed corporate income tax liability” [emphasis added].

It takes a lot of “imputation” (heroic guesswork) to assemble this plump sausage. Nobody has credible data on the ever-changing “inside buildup” within private IRA and 401(k) plans, or how all that unseen wealth is distributed among constantly changing annual income groups.  

Nobody knows how to “impute corporate income tax liability” and the related corporate income to income groups either.

Since TPC claims 60% or 100% of the corporate tax is born by domestic (not foreign) owners of capital, this assumption invites them to add most corporate profits to the pretax incomes of the Top 1%. To do that, TPC (and CBO) examine shares of capital income reported on income tax forms to infer that most capital must be owned by the Top 1%. Emmanuel Saez and Gabriel Zucman made a similar mistake when basing wealth estimates on individual income tax returns.

The trouble is that most middle-income Americans keep trillions of dollars in tax-free retirement accounts, which means taxable investment income reported on their tax returns tell us absolutely nothing about what assets they own. As Tax Foundation economist Alan Cole noted, “Much capital income—especially capital income in tax-free middle-class retirement accounts—goes uncounted in income data, heavily distorting the measurement and making people appear poorer than they are. Thomas Piketty’s income inequality data leaves out $19 trillion of pension assets, which are yet to be attributed to any individual.” 

Another big problem is that the expensing of business investment and deep cuts in business tax rates are sure to have huge dynamic effects on investment and economic growth, yet “by convention, TPC distributes only the static impacts of tax changes.” An OECD study finds “lowering statutory corporate tax rates can lead to particularly large productivity gains in firms that are dynamic and profitable, i.e. those that can make the largest contribution to GDP growth.” It makes no sense to talk about who benefits from lower tax rates without including workers who benefit from “large productivity gains.”

Even the static distribution is another arbitrary guess. “Although firms pay the corporate income tax, the economic incidence of the tax falls on individuals. TPC’s tax model therefore distributes the burden of the tax to individuals. The incidence of the corporate tax, however, is an unsettled theoretical issue. The tax could be borne by the owners of corporate stock, or passed on in part to labor in the form of lower real wages, to consumers in the form of higher prices, or to the owners of some or all capital in the form of lower real rates of return.”  

The TPC static estimate of the Trump tax cut is twice as large for corporations as it is for individuals, yet their allocation of the corporate tax is (1) completely static “by convention,” and (2) completely erroneous in using shares of taxable capital income as a proxy for wealth, and (3) completely arbitrary in assuming corporate taxes are mostly born by capital. For such reasons, the TPC distribution estimates cannot be credibly cited to “prove” Trump or House Republican tax plans are too generous to those who pay the most taxes or too stingy to those who pay the least. 

The truth is these “experts” simply do not know who will benefit most from a low corporate rate. What they do know, or should, is that a low corporate tax cut will greatly improve the growth of jobs and real wages for many ordinary Americans. Unfortunately, their static methodology stubbornly refuses to take that into account.

 

 

 

 

 

 

 

 

Last week I wrote about the unintended consequences of the proposed DC family leave benefit, which is to be financed by a payroll tax on all employers in the District. 

My objections were that the tax increases the cost of operating in the District and that this will likely push some businesses contemplating opening in DC to Maryland or Virginia instead. The other objection I had was that it specified a benefit to be provided that not all companies may want to provide. In an ideal world companies would pay wages to workers and then allow workers to get their own insurance, pensions, transportation, food, and the like on their own and not have these things provided by their workplace. Today, the tax breaks afforded most fringe benefits behoove companies to give many of these things to their workers in lieu of wages, and that’s not efficient. 

I received a surprising amount of feedback from my article, most of which was positive—a first for me—and some readers suggested that I missed a couple issues relevant to the benefit. The first is that while tying the tax to payroll may make sense as far as this benefit is concerned, it also tends to make it more difficult for people to understand the true cost involved. 

A tax that’s .62% of payroll may not seem like a lot, but for a restaurant that has $1 million of revenue that translates to a tax of $2,100 a year, assuming that payroll is one-third of total revenue. For businesses other than restaurants, where payroll typically equals two-thirds of revenue, double that number. That amounts to 2.2% instead of 4.4% of profits, on top of the 8.95% DC corporate profits tax on revenue over $1 million. If they expand the tax to cover medical leave as well—which is on the table—that would add another thousand dollars or so to a restaurant’s cost of doing business. In fact, a better way to see this is as a 50% increase on the tax on business profits, except that this doesn’t vary much with the business cycle.

The other point a restaurant owner suggested to me is that their workers are typically young and part-time, and often have another job. In short, they see this as a benefit few of their twenty-something employees would claim, yet they still would be paying for it. Fortune 500 companies may find the tax easy to swallow, but not so for businesses like my local kebab house that are on the verge of hanging on. This tax, combined with a sharply higher minimum wage and other government mandates—such as the city’s inexplicable refusal to charge for-profit food trucks to use city-owned property for their business, increasing restaurants’ competition further—are hurting their bottom lines, and life is getting more precarious for businesses on the margins. 

Businesses that want to offer this benefit can already do so. A new company called Freya Solutions allows them to purchase insurance to cover such a benefit for their employees, and the company has the ability to tweak the replacement rate and the length of the benefit so as to maximize the bang for the buck the business gets from the service in terms of employee recruitment and retention. 

David Brunari wrote today in the Washington Business Journal that this tax will generate $420 million a year—or about how much the corporate income tax currently raises for the District. He also noted that a majority of the benefit would go to people who live outside of Washington DC.

Governments interfere too much in compensation decisions as it is. Mandating an entirely new benefit exacerbates an already-difficult problem for employers in the District

Over the course of the presidential campaign, and even more intensely after the election, Donald Trump has made it very clear that he does not like it when U.S. companies invest abroad rather than here at home (except for his companies, of course). His response has been a mixture of pushing state government tax incentives to keep them at home and general haranguing of the companies (as he did with Carrier), as well as threats of tariffs to convince companies not to leave (this sounds like one of those statements that should be taken “seriously but not literally,” but we’ll see).

With regard to the general policy issues here, my colleague Dan Ikenson has been taking on misguided concerns about outsourcing for a while now.

In terms of the legality of a company-specific tariff, we would need to see a specific proposal—is this going to be done via statute? by Presidential proclamation?—but there would certainly be some serious domestic and international legal hurdles if Trump actually tries to pursue this. I’m not sure what Trump’s economic policies will do for the economy as a whole, but the field of international trade law will be booming.

But there’s also a flip side to the issue of foreign investment that I want to raise here: What does Trump think about foreign companies who want to invest in the United States? This question may seem like a no-brainer: Who would object to new investment? But in recent years, the Obama administration has looked skeptically at some of the investment coming from China, on purported national security grounds. Here’s the latest, from the Wall Street Journal:

President Barack Obama on Friday took the rare step of forbidding a foreign company from buying a firm with U.S. assets, telling a Chinese investment fund that it cannot complete a deal for German technology company Aixtron SE.

Mr. Obama’s move, only his second outright ban on a foreign acquisition, shows the increasing suspicion the U.S. harbors toward Chinese acquisitions of certain U.S. firms, even before the arrival of President-elect Donald Trump, who made criticism of Beijing a cornerstone of his campaign.

In a statement released on Friday, the Treasury Department said Mr. Obama had issued an order barring Fujian Grand Chip Investment Fund LP, part-owned by the Chinese government, from buying Aixtron. The ban follows a recommendation from the Committee on Foreign Investment in the U.S., or CFIUS, which confidentially reviews foreign acquisitions solely on national-security grounds.

U.S. officials have also intervened in Chinese deals involving real estate near strategic military installations. In 2012, Mr. Obama barred Chinese-owned Ralls Corp. from purchasing wind farms in Oregon near a sensitive military facility, the only other recent example of a president forbidding a deal before Friday.

What are Trump’s views on Chinese foreign investment in the U.S.? The WSJ article notes:  

During the 2016 primary season Mr. Trump appeared to criticize a Chinese bid for a small U.S. stock exchange, but his transition team hasn’t publicly spelled out its attitude toward foreign investment.

Still, Mr. Trump, who has extensive foreign investments himself, has indicated he would use all available levers against harmful trade practices from China and other countries. CFIUS under Mr. Trump could also expand the definition of national security to include food security and oppose deals from countries that don’t allow comparable U.S. investments, according to a memo obtained by CNN.

In the background of this issue is a bilateral investment treaty that has been under negotiation between the United States and China for many years, and that until recently some people were suggesting could be completed this year. The basic idea is that, through this treaty, China would promise to open up its market to foreign investment in currently closed sectors, and also that there would be an international dispute mechanism under which foreign investors could sue the host country government if certain rights were violated.

Trade agreements have gotten all the attention recently, both what does Trump think of investment treaties? They have been part of U.S. international economic policy since the late 1970s/early 1980s (traditionally, investment obligations were part of standalone treaties, but now they are often included as chapters in free trade agreements), but it is easy to imagine that Trump would oppose them. He may not want to make it easier for U.S. companies (again, other than his) to invest abroad, and he would not want Chinese companies suing the U.S. government in an international court. Will Trump therefore put an end to investment treaties and investment chapters of trade agreements?

Beyond these international investment rules, what does Trump think of Chinese investment in the US more generally? Will he use national security as a justification for rejecting it, as the Obama administration has done? 

As with all things Trump, there’s a lot we don’t know, and we will have to wait and see. But hopefully he will be less hostile to foreign investment in the U.S. than he has been to U.S. investment abroad.

You Ought to Have a Look is a regular feature from the Center for the Study of Science. While this section will feature all of the areas of interest that we are emphasizing, the prominence of the climate issue is driving a tremendous amount of web traffic. Here we post a few of the best in recent days, along with our color commentary.

While “climate fretting” has become a pastime for some—even more so now with President-elect Trump’s plans to disassemble much of President Obama’s “I’ve Got a Pen and I’ve Got a Phone”-based Climate Action Plan—climate reality tells a much different story.

For example, a new analysis by Manhattan Institute’s (and YOTHAL favorite) Oren Cass looks into the comparative costs of climate changevs. climate action. His report, “Climate Costs in Context” is concise and to-the-point, and finds that while climate change will impart an economic cost, it is manageable and small in comparison to the price of actively trying to mitigate it. Here’s Oren’s abstract:

There is a consensus among climate scientists that human activity is contributing to climate change. However, claims that rising temperatures pose an existential threat to the human race or modern civilization are not well supported by climate science or economics; to the contrary, they are every bit as far from the mainstream as claims that climate change is not occurring or that it will be beneficial. Analyses consistently show that the costs of climate change are real but manageable. For instance, the prosperity that the world might achieve in 2100 without climate change may instead be delayed until 2102. [emphasis added]

In other words, the economic impacts of climate change aren’t something worth fretting over.

Next up is a contribution (at Judith Curry’s blog, Climate Etc.) from Nic Lewis showing more evidence that the temperature response in most climate models is too sensitive to changes in atmospheric carbon dioxide concentrations. Nic reviews a new paper that suggests the paltry increase in global average temperature in recent decades may continue for another decade or more from forces of natural variability alone, and then adds his own analysis showing that an alternative view supported by the paper is that the transitive climate sensitivity (TCS; how much the global average surface temperature rises at the time of a doubling of the atmospheric carbon dioxide concentration) is rather low. Instead of the climate model average TCS of around 1.8°C, Nic finds observational support for a TCS of about 1.35°C. From this information, he concludes:

Based on these estimates, the average TCR [transient climate response] of [current climate] models likely exceeds that in the real world by about 30%…the future warming projected by [these] models is on average 65% or more above that projected by simple but physically-consistent models with a TCR of ~1.35 K.

Rather than fret about high-end climate change scenarios, folks ought embrace lukewarming as the way of the future.

And finally this week, Ron Bailey produces a dose of reality in his latest article for Reason.comEnergy Poverty Is Much Worse for the Poor Than Climate Change.” In his piece, Ron reviews a recent report, “Energy for Human Development” from The Breakthrough Institute that argues for prioritizing energy access over climate concerns. According to Ron:

[T]he Breakthrough writers call for prioritizing energy development for productive, large-scale economic enterprises. Copious and reliable energy will accelerate the creation and spread of higher-productivity factories and businesses, which then will generate the opportunities for a better life; that, in turn, will draw poor subsistence farmers into cities. They further note that energy access and electricity access are not the same thing. In fact, in 2012 electricity accounted for only about 18 percent of the energy consumed globally. “Efforts to address energy poverty must address needs for transportation fuels and infrastructure, and for fertilizer and mechanization of agriculture,” they argue.

But what about climate change? Current renewable sources of energy are not technologically capable of lifting hundreds of millions of people out of energy poverty. Consequently, the Breakthrough writers see “no practical path to universal access to modern levels of energy consumption” that keeps the projected increase in global average temperature below the Paris Agreement on climate change goal of 2 degrees Celsius above the pre-industrial level. This implies that atmospheric concentrations of carbon dioxide will exceed 450 parts per million.

Ron continues:

They correctly point out that forcing poor people to forego economic development in order to prevent climate change is a “morally dubious proposition.” They additionally observe that the wealth and technology produced by economic growth increases resilience to climatic extremes and other natural disasters. When bad weather encounters poverty, disaster ensues.

The overarching conclusion from all of the above is one that we have championed since the start—what’s really worth fretting about is climate policy (not climate change). To this end, the Trump Administration ought to ease such fretting.

As the Venezuelan bolivar collapses, the hype about Venezuela’s alleged hyperinflation becomes more intense. Most of the commentary is literally fantastic, suggesting that the authors are unfamiliar with the subject of hyperinflation and the arithmetic of inflation.

For example, DolarToday.com – which publishes reliable black-market exchange rate data, as well as the Johns Hopkins-Cato Institute annual inflation estimates – claims that the bolivar has depreciated by over 100 percent this month. This is wrong because DolarToday’s arithmetic is wrong. DolarToday’s mistake represents a common error. It fails to transform the bolivar-U.S. dollar exchange rate into dollars and cents. At the start of the month, the VEF/USD black market rate was 1,501.17, and as of November 29th, it was 3,744.52. The correct arithmetic to calculate the deprecation of the bolivar between those two dates is ((1/3,744.52) - (1/1,501.17)) / (1/1,501.17) = 59.9 percent  depreciation. 

The accompanying charts illustrate the correct arithmetic and the linkage between black market exchange rates and annual inflation rates. For Venezuela’s inflation to hit the International Monetary Fund’s (IMF) 720 percent inflation forecast for 2016, the bolivar would need to depreciate by 44 percent from today’s rate of 3,744 to 6,735 VEF/USD. Furthermore, for Venezuela to hit hyperinflation, which is an annual inflation rate of 12,875 percent, the bolivar would need to collapse by 97 percent from today’s rate to 106,565 VEF/USD. 

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