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

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

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

 

Reference

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The result of this situation truly could be catastrophic.

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

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

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

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

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

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

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

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

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

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

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

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

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

[cross-posted from Overlawyered]

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

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

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

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

… .

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

Read the whole symposium – and the book.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That could take a while.

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

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

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

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

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

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

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

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

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

Here are the best and worst states.

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

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

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

Over at Cato’s Police Misconduct web site, we have selected the worst case for the month of March.  It’s the scandal plagued Sheriff’s Office in Iberia Parish, Louisiana.

Sheriff Louis Ackal and Lt. Col. Gerald Savoy were indicted last month for criminal civil rights violations.  Eight former deputies have already pled guilty to similar charges.  False testimony in court and false allegations in official documents.  Hundreds of criminal cases are now being reopened because they could be tainted by corrupt acts.  The now former deputies admit that they lied in various reports, including search warrant applications.

The scope of this scandal is worth repeating: hundreds of cases will have to be reexamined.

Go here for the full story.

The Association of American Medical Colleges (AAMC) has released projections showing that we may have doctor shortages in coming years. The demand for doctor services is rising in our aging society, but various factors in the health care industry are hampering supply.

But policymakers should remember that high income tax rates inhibit the supply of top earners across all industries. America’s tax system is the most “progressive” or graduated among OECD nations, and that has consequences. If the government penalizes the most productive people, they will work fewer hours, retire earlier, and make other decisions to reduce their labor efforts.

Some politicians on the campaign trail want to raise tax rates on high earners, and they seem to consider them little more than economic leeches. The truth is that most high earners are very industrious people who add crucial skills to the economy. The nation’s 708,000 doctors and surgeons are a case in point.

The Bureau of Labor Statistics (BLS) reports that “physicians practicing primary care received total median annual compensation of $241,273 and physicians practicing in medical specialties received total median annual compensation of $411,852” in 2014.

That high pay makes sense because doctors are highly skilled, face substantial stress, and often work long hours. The BLS notes, “physicians complete at least 4 years of undergraduate school, 4 years of medical school, and, depending on their specialty, 3 to 7 years in internship and residency.” And after all that training, they often “work long, irregular, and overnight hours.”

So how does Congress reward that hard work? It imposes punitive marginal income tax rates on them of up to 40 percent, with state income taxes on top of that. Even lower-earning doctors can be pushed into the highest income tax brackets if their spouses work.

Doctors are exactly the type of workers who have large negative responses to high tax rates because they have substantial flexibility in managing their careers. With high tax rates, fewer people will want to go into this difficult profession, stay in it, and work the long hours—and that ends up hurting all of us who use the nation’s health care system.

Ted Cruz’s campaign has produced a new ad targeting Wisconsin voters in the lead up to that state’s primary election tomorrow. As images switch back and forth between farms and factories, Cruz lists off a number of generic demographics and blue collar occupations that his campaign “is for.” He also complains about international trade.


Here’s the substantive part of the ad:

We will repeal Obamacare, peel back the EPA and all the burdensome regulations that are killing small businesses and manufacturing. 

I’m going to stand up for fair trade and bring our jobs back from China. 

We will see wages going up. 

We’ll see opportunity again.

Senator Cruz doesn’t tell us what he means by “fair trade” or promote a specific trade policy. The term “fair trade” is usually used by politicians as a euphemism for “protectionism.” In the past, Cruz has noted that the value-added tax (VAT) he has proposed is “like a tariff” because it imposes a greater burden on imports. Perhaps this is what he means by “fair trade.”

In any event, some simple facts about trade might be helpful to explain the problems with Cruz’s approach. For example, nearly 60% of imports are materials and capital goods used by American companies. So, Cruz’s “fair trade” is a tax on the very same “small businesses and manufacturing” whose burdens he wants to lift. Oh, and reduced employment in America’s thriving manufacturing sector is not due primarily to trade with China.

The biggest difference between Donald Trump and Ted Cruz on trade is that Trump has been more specific. Trump has singled out specific trade deals he opposes and has promised to tax specific companies specific amounts. Also, Trump’s disdain for trade has been apparent from the beginning of his campaign, while Cruz’s rhetoric and positions have been getting gradually worse in response.

While Trump has been getting lots of attention for his anti-trade rhetoric, it’s worth remembering that other candidates are not offering better policy proposals. They are simply less sensational in how they present the same flawed message.

This morning, the unanimous Supreme Court ruled that Texas was constitutionally justified in drawing state electoral districts based on total population, even if this meant that great disparatives result among districts in numbers of voters. This was the case of Evenwel v. Abbott, in which Cato had filed a brief arguing that the plaintiff-voters’ proposed “citizen of voting age population” (CVAP) metric was a much better one to use when applying the “one-person, one-vote” standard. 

While the eight-justice Court managed to achieve rare unanimity in an election-law case, at least in judgment, it did so only by declining to address the elephant in the voting booth. The Court failed to fill the gaping hole in its voting-rights jurisprudence: the question whether the venerable “one-person, one-vote” principle requires equalizing people or voters (or both) when crafting representational districts.

Still, the ruling leaves open to the states the ability to experiment further with populations considered in drawing district lines both for their own legislatures and federal House seats. Some states already exclude aliens, nonpermanent residents, nonresident military personnel, inmates who were not state residents prior to incarceration, and other non-permanent or non-voting populations.

States like Texas where total-population allocations continue to diverge from eligible-voter allocations—resulting in great disparities of voters between districts—should indeed try to ensure that each vote has the same relative weight, forcing the Supreme Court’s hand in some future case. Regardless of the outcome in that eventual case, however, jurists and political scientists should take heed of Justice Alito’s concurring opinion, which concisely explains why the “federal analogy” to the Constitution’s apportionment of House seats among states is inapposite to the question posed in Evenwel regarding redistricting.

For more background on the case, see my SCOTUSblog essay.

With so much medical research funded by pharmaceutical companies and others with a financial interest in the outcome, it can be hard to avoid conflicts of interest. Years ago, Harvard Medical School revamped its policy on professors reporting potential conflicts of interest after critics, including many students, claimed the old rules were too lax and hid the financial ties many professors had to the manufacturers of the drugs they researched and discussed in class. In an article about a new study published in JAMA on how statins do in fact lead to muscle pain in some patients, the Washington Post gives recognition to Dr. Steven E. Nissen’s approach to minimizing such conflicts.

One can see the potential for conflict in how JAMA describes the role of one of the drugs’ manufacturers:

This study was funded by Amgen Inc.[, which] was involved in the design and conduct of the study, selected the investigators, monitored the trial, and collected and managed the trial data. The sponsor participated in the decision to publish the study and committed to publication of the results prior to unblinding the trial. The sponsor maintained the trial database and transferred a complete copy to the Cleveland Clinic Center for Clinical Research and the sponsor to facilitate independent analyses. The sponsor had the right to comment on the manuscript, but final decisions on content rested with the academic authors.

It’s nice that the the Cleveland Clinic’s researchers had the final say, but one can still see the potential for Amgen to influence the study.

The study’s lead author, Dr. Nissen, voluntarily imposed on himself an additional safeguard. Nissen is chair of the department of cardiovascular medicine at the Cleveland Clinic. According to the Post:

Nissen has worked with many pharmaceutical companies to determine the efficacy of heart therapies but requires the companies to donate any payments to charity so that he receives no compensation or tax breaks, according to a bio accompanying the study.

Nissen’s bio at the Cleveland Clinic’s web site clarifies that this is his personal policy, not one imposed on him by his employer:

As a physician/scientist, Dr. Nissen is often called on by pharmaceutical companies to consult on the development of new therapies for cardiovascular disease. He maintains a long-standing personal policy that requires these companies to donate all related honoraria directly to charity.

There is probably no sure-fire way to eliminate conflicts of interest in medical research. Nissen’s rule could still allow for conflicts if, for example, researchers ask that funders direct their honoraria to a charity in which the researcher has a strong financial or personal stake. Conflicts can arise when government funds medical research, too. The best we can hope for is to minimize the potential for conflicts that impede the growth of medical knowledge.

Kudos to Nissen for taking a confidence-inspiring step in that direction.

When new competition arises, government-protected monopolies often seek further regulation to help suppress the comptetition.

In a refreshing twist, however,

A group of Boston taxi operators sued the city last year alleging they are being treated unfairly, in part because they have to buy expensive medallions to operate, and ride-hailing company drivers do not.

U.S. District Judge Nathanial Gorton on Thursday dismissed many of the taxi companies claims, but allowed claims that their equal protection rights had been violated to move forward, saying ride-hailing services are no different than taxis.

So competition from Uber and Lyft might generate less regulation of the taxi industry, which would benefit everyone except existing medallion owners. Fingers crossed.

From time to time we hear calls for withdrawing today’s lowest and the highest denominations of US currency, the pennyand the $100 bill, from circulation.  In the last year a growing chorus has been calling for prohibition of the $100 bill.

The rhetoric of the anti-high-denomination gang has gotten increasingly shrill.  Erstwhile Bank of England economist Charles Goodhart in September called the European Central Bank and the Swiss National Bank “shameless” for issuing “vastly high-denomination notes,” namely the €500 and SWF 1000, “which are there to finance the drug deals.”  Last month former Treasury Secretary Larry Summers writing in the Washington Post, and citing a working paper by Harvard colleague Peter Sands and student co-authors, extended the indictment to the US $100 bill: it too is used by criminals, so let’s get rid of it.

I have an alternative suggestion for removing $100 bills from the illegal drug trades:  Legalize the trade.  Your local pharmacy doesn’t pay cash to its wholesale suppliers.  My suggestion would reduce the demand for high-denomination currency.  Today’s high-denomination-currency prohibitionists, like today’s drug prohibitionists and yesterday’s alcohol prohibitionists, only think about the supply side.  But does anyone think that banning the $100 bill during Prohibition (when it had a purchasing power more than 11 times today’s, as evaluated using the CPI) and even higher denominations would have put a major dent in the rum-running business, if an army of T-Men couldn’t?[1]

The indictment needn’t stop with facilitation of drug trafficking, of course: opponents add tax evasion, corruption, terrorism, human smuggling, and any number of other activities to the list of crimes whose perpetrators find large-denomination currency convenient.  Sands et al. argue:  “By eliminating high denomination, high value notes we would make life harder” for such criminal enterprises.  No doubt.  But we would also make life harder for everyone else.  The rest of us also find high-denomination notes convenient now and again for completely legal and non-controversial purposes, like buying automobiles and carrying vacation cash compactly.  A serious survey of Eurozone currency use finds that “in Italy, Spain and Austria, … almost one-third of the interviewees always or often use cash for purchases between €200 and €1,000.”

The currency prohibitionists aren’t doing any serious cost-benefit analysis (at least I can’t find any), however.  In a 2014 paper Ken Rogoff enumerates various pros and cons of prohibiting paper currency, but he makes no attempt to attach weights to them.  (He nonetheless hints that he favors moving toward prohibition.)  Goodhart actually assigns a zero value to the cost of lost convenience for non-criminals, asserting that there is “no value whatsoever, except in seigniorage receipts to a number of small Swiss cantons,” from the SNB or ECB issuing the high-denomination notes.  Much less do the prohibitionists consider the effects on personal liberties.  Summers, at least rhetorically, seems to consider the mere suggestion that terrorists use high-denomination currency to be a clinching argument against letting anyone use it:  “The fact that — as Sands points out — in certain circles the 500 euro note is known as the ‘Bin Laden’ confirms the arguments against it.”

In the last few years the prohibitionists have added a second argument: abolishing high-denomination currency would raise the cost of storing currency for everyone.  You might think that raising the costs of a legal activity sounds prima facie like a bad thing, but then you’d be considering the matter from the point of view of ordinary citizens.  The prohibitionists regard it as a good thing because they consider it from the point of view of macroeconomic policy-makers.  If the cost of storing currency is (let’s say) only 0.1% per year[2], then the one-year interest rate can’t go below -0.1%.  It can only be barely negative, in other words.  Why?  At any lower interest rate people will store cash rather than hold one-year bonds, so demand for the bonds vanishes.  Abolish the $100 bill, and the cost of storing a given value in cash (now in the form of $20 bills) increases five-fold: storing bulk cash requires five times as many lockers or safes.  This allows the central bank more leeway to lower rates, in the example to -0.5%.  Thus Goodhart calls the abolition of the €500 note a move that might also prove beneficial by trimming interest rates.”

Both arguments are made by BOE chief economist Andrew Haldane, who in a widely-cited speech takes the arguments to their logical conclusion that society would maximize both (purported) benefits by prohibiting not only high-denomination currency but all currency:

A more radical proposal still would be to remove the ZLB constraint [the Zero Lower Bound on nominal interest rates] entirely by abolishing paper currency.  This, too, has recently had its supporters (for example, Rogoff (2014)).  As well as solving the ZLB problem, it has the added advantage of taxing illicit activities undertaken using paper currency, such as drug-dealing, at source.

Among the prohibitionists, then, one might say that those who want to prohibit only high-denomination notes are the moderates.  The benefit of prohibiting all cash in order to give central banks more leeway to conduct negative interest rate policy, to put it mildly, is very far from having been shown to be worth the cost.

Finally, I note that currency prohibitionists too often regard those who defend high-denomination notes not as intellectually honest but mistaken opponents, but rather as morally suspect characters.  Larry Summers goes out of his way to smear an ECB executive from Luxembourg (who has had the temerity to ask for better evidence before accepting the case for prohibiting high-denomination notes), and by extension to impugn the country’s entire set of policy-makers:

I confess to not being surprised that resistance within the ECB is coming out of Luxembourg, with its long and unsavory tradition of giving comfort to tax evaders, money launderers, and other proponents of bank secrecy and where 20 times as much cash is printed, relative to gross domestic [product], compared to other European countries.

In this one sentence Summers misrepresents several issues.  Luxembourg does protect depositor privacy (aka “bank secrecy”) in general, but not in cases where it would conflict with OECD rules on anti-money-laundering.  Contrary to Summers’ insinuation, banker confidentiality and financial privacy are valuable practices, not per se grounds for suspicion.  Regarding taxation, the former Treasury Secretary Summers, like many current European fiscal authorities from high-tax jurisdictions, blurs the distinction between sheltering illegal activity (“giving comfort to tax evaders”) and allowing legal tax avoidance through competitive tax policies.  Even on its critics’ evidence, Luxembourg’s less onerous tax laws (and specially negotiated tax deals) allow corporations and individuals to legally avoid taxes that they would have to pay if domiciled in other European jurisdiction.  Such competition is naturally not welcomed by authorities from the higher-tax jurisdictions.  As for disproportionate currency issuance (not literally printing) by Luxembourg banks, it should be noted that they also hold a disproportionate volume of bank deposits (about 2.8% of total EU bank deposits, despite the country generating only about 0.36% of GDP).

The case for prohibiting large-denomination currency, to summarize, is largely based on guilt by association or on wishful thinking about the benefits of allowing greater range of action to discretionary monetary policy.  A case based on serious evaluation of costs and benefits has not been made.  Indeed, not even attempted.

Personally, I favor the same policy with regard to large, small, and medium denominations of currency: we can withdraw all the denominations that the Federal Reserve and the Treasury issue so long as we let competing private financial institutions issue dollar-redeemable notes and token coins in any denominations they wish.  Then we will have a market test and not mere hand-waving regarding which denominations are worth having in the eyes of their users.

_________________

[1] According to the Bureau of Engraving and Printing, $500, $1000, $5000, and $10,000 denomination notes were last printed in 1945, and the Federal Reserve began retiring rather than re-issuing those deposited into banks beginning in 1969.  The Bureau also produced $100,000 “Gold Certificates” as part of its 1934 series.  Gold Certificates were, however, used only for transactions between the various Federal Reserve banks.

[2] Back of the envelope time:  educated estimates of the value of the huge cash block that drug kingpin Walter White kept in a rented storage locker in Albuquerque, New Mexico, on the popular TV series Breaking Bad, range from $40 to $80 million.  Let’s take the midpoint of $60 million.  An interior-access climate-controlled storage locker in Albuquerque with “state of the art security” that is large enough to store that block (let’s say 10’x12’) currently runs around $1800 per year.  That makes the storage cost only 0.0033% per year, one-thirtieth of 0.1%. The cost to rent a safety deposit box in a bank is of course much higher per unit volume.

[Cross-posted from Alt-M.org]

Instances of civil forfeiture abuse are common. Indictments against law enforcement are not.

However, this week an Oklahoma grand jury returned an indictment against Wagoner County Sheriff Bob Colbert and one of his deputies stemming from a civil asset forfeiture case.  The indictment charges Sheriff Colbert and Deputy Jeffrey Gragg with extortion and bribery, among other things, stemming from the stop, arrest, and subsequent release of Torrell Wallace and a 17-year old passenger.  

According to the indictment, during a traffic stop of Wallace’s car, Deputy Gragg discovered $10,000 in cash.  When asked about the money, Wallace and his passenger both claimed it belonged to them and were subsequently arrested for “possession of drug proceeds.”

At the jail, the indictment alleges that Sheriff Colbert and Deputy Gragg told the men that they’d be allowed to go free if they signed over the $10,000 to the office’s asset forfeiture fund, which they did.

If this fact pattern sounds familiar, it’s because cases like this are not isolated incidents. The case of Javier Gonzalez sounds eerily familiar. In 2013 Sarah Stillman at The New Yorker documented several similar cases of seemingly extortive forfeiture actions.  Our friends at the Institute for Justice have compiled many more

Because the burden of proof for civil forfeitures is so low, even perfectly benign behaviors can result in seizures. These include carrying too much money, carrying money in an envelope or some other “unorthodox” fashion, or even “traveling to or from a known drug source city,” which seems to include virtually every major city in America.  Such a deficient process for government seizures of cash and property makes abuse inevitable, especially when the seizing agency is permitted to keep most or all of the proceeds for itself.

Sheriff Colbert’s lawyer, however, insists that the real culprit here is the push for forfeiture reform, and was quick to condemn the prosecution as politically motivated:

“We note that there is pending legislation in the Senate hoping to drastically change drug interdiction laws. Their accusations remain politically motivated.”

The “pending legislation” can only be a reference to efforts by State Senator Kyle Loveless to reform Oklahoma’s civil asset forfeiture laws.  Oklahoma has become one of the flashpoints in the national debate over civil forfeiture, and I’ve written previously on the hyperbolic rhetoric that Oklahoma law enforcement is using to shut down reform in the state.

As for the political motivations of reformers, it’s worth noting that support for civil asset forfeiture reform comes from all corners of the political spectrum, from the conservative Heritage Foundation, to the liberal ACLU, to libertarian organizations like the Institute for Justice. The bipartisan coalition in favor of reform has grown so massive that it seems the only factions still opposed to reform are the government agencies that directly profit from the seizures.

Sheriff Colbert’s lawyer also argued that the sheriff was simply following routine procedure:

“The underlying accusation involves a routine drug interdiction (lawful cash seizure of drug funds) by the sheriff’s department. The funds are not missing and are accounted for. The Sheriff’s Office timely deposited every cent of this money in the county’s treasurer account as required by state law. This money was earmarked for fighting drug trafficking to help protect the citizens.

“The basis for this interdiction as reported includes the accusation of deleted records. That accusation cannot be supported at trial. We are looking forward to being released from the gag order such that we can release the counter-evidence exonerating Sheriff Colbert.”

The lawyer’s statement makes no mention of the alleged arrangement to let the men go free in exchange for signing over their money, which seems to be the crux of the indictment. Even that tactic, however, has routinely taken place in other jurisdictions.

But to be fair, it’s understandable that law enforcement officers may sometimes struggle to distinguish civil asset forfeiture from extortion and bribery. Many reform advocates suffer from the same problem.

That is precisely why civil asset forfeiture should be abolished.

For more on civil asset forfeiture and the need for reform, check out our explainer on the topic.

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