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For months, we’ve been following the saga of a misguided agency regulation that would have deprived some of the most vulnerable Americans of their basic due process rights. In May of last year, the Obama administration proposed a rule designating everyone who uses a “representative payee” (usually a friend or relative) to aid in filing social security disability forms as “mentally defective.” The practical consequence of such a change is that those deemed “mentally defective” (itself a vague and insulting term from a bygone legal era) will automatically fail their federal background check if they attempt to buy a gun. This presumption of unfitness can only be overcome after a lengthy, years-long bureaucratic process to prove one’s own competency. 

We’ve written extensively on why this rule is prejudicial and unfair. During the rule’s “notice and comment” period, Cato’s Center for Constitutional Studies submitted its first-ever public regulatory comment, objecting to the rule on 10 different grounds. We pointed out that the rule is vastly overbroad, since those filers who use a “representative payee” include anyone the Social Security Agency believes “would be served thereby … regardless of the legal competency or incompetency of the individual.” Moreover, the rule is counterproductive even when applied to those who do suffer from a psychiatric disability, because those people are more likely to be the victims of violent crimes rather than the perpetrators. Finally, we explained that the rule violates constitutional due process; the burden of proof must fall on the government before it can deprive an individual of a constitutional right.

But despite these efforts, the Obama administration forged ahead, finalizing the rule two days before President Trump took office. This seemed to be the final chapter of the story. Now, however, we can report a much happier ending, thanks to a vital law called the Congressional Review Act (CRA).

The CRA was enacted in 1996 to preserve the legislature’s role in American policy-making when agencies try to unilaterally create sweeping national rules. The Act requires that agencies must submit every newly promulgated rule to Congress for review. Once a new rule has both been submitted to Congress and published in the Federal Register, Congress has a period of 60 legislative days—about six months of real time in practice—in which both houses can pass a disapproval resolution by simple majority vote (no Senate filibusters or parliamentary stall tactics are allowed). If such a resolution is passed by both houses and signed by the president, the rule in question is abolished, and no similar rule can be enacted in the future except by statute.

Soon after the “representative payee” rule was finalized, a movement began urging Congress to implement the CRA in overturning it. The arguments were bipartisan; one of us (Blackman) joined with authors from the Autistic Self Advocacy Network and the National Disability Rights Network to explain why the rule was terrible for both gun rights and disability rights. Whatever one’s views are on the gun debate in America, both sides could agree that “individuals with a disability should not be scapegoated to advance gun control.”

This campaign caught on. Many of the arguments that we and others had made to agency regulators—to no avail at the time—were echoed by the people’s elected representatives. House Majority Leader Kevin McCarthy, for example, wrote that the rule “would elevate the Social Security Administration to the position of an illegitimate arbiter of the Second Amendment.”

The disapproval resolution passed both houses and has now been signed by the president, putting an end to the rule once and for all.

Elections have consequences. In this instance, it’s satisfying that one such consequence has been the end of a stigmatizing rule that never should have been proposed in the first place. As this case has demonstrated, the CRA has the potential to be an enormously important tool in the fight against misconceived regulations. The “mentally defective” rule is one of three regulations that have already been revoked using the CRA during the Trump Administration, and 11 more could be on the chopping block soon, with disapproval resolutions having passed in at least one house of Congress.

Even if common-sense arguments for the protection of individual rights fall on deaf ears in the federal bureaucracy, the people’s representatives still retain the ultimate power to create federal policy and vindicate those rights. That is the system the Framers designed, and that is the system the CRA helps preserve. For more on the ambitious project to use the CRA to reverse harmful regulations, see Pacific Legal Foundation’s RedTapeRollback.com.

We thank Cato legal associate Tommy Berry for his help with this blog post.

While the newest federal agency, the Consumer Financial Protection Bureau (CFPB), has been controversial for many reasons, its most troubling feature may simply be its unconstitutional structure.  Its sole director reports to no one but himself, and, under the terms of Dodd-Frank, can be removed by the President only for cause.  And it receives its funding not through Congress, but through the Federal Reserve.  Not even the Fed has the authority to challenge its spending, however.  Instead, the law says the Fed “shall” give the CFPB the funds it requests, up to 12 percent of the Fed’s total operating expenses.  As of 2015, that meant the CFPB could demand up to $443 million in one year.

Last year, a federal appeals court, ruling against the agency, issued a stinging indictment of this structure in PHH v. CFPB.  The CFPB, however, sought a rehearing en banc.  In a typical federal appeals case, a three-judge panel will hear and rule on the matter.  The losing party can request that the entire court – in this case, the 11 active judges of the D.C. Circuit Court of Appeals – to hear and rule on the case again.  The courts rarely grant such requests, except when the matter is one of particular importance.  In this case, the request was granted and the court will hear argument again on May 24, 2017.

Cato has filed an amicus brief in support of PHH.  In it, Cato argues that the CFPB’s unconstitutional structure poses a threat to liberty in two ways.  First, by violating core principles of separation of powers.  Although this principle is often invoked to preserve the powers of the various governmental branches, in fact its purpose is to safeguard individual rights, not any “right” of the government.  Second, by existing unfettered by any accountability to the people, either through direct election or through control by an elected office.  Although any independent agency is constitutionally suspect, most other independent agencies have certain structural protections to ensure some checks on their power.  For example, the Securities and Exchange Commission is headed by a five-member panel.  This panel must include no more than three members from any one political party, and the chair serves in that capacity at the pleasure of the President.  Even though the individual members are removable only for cause, these safeguards assure some restraint. 

The constitutional problems would be reason enough to fear the CFPB, but these problems are not merely academic.  The way Director Cordray has wielded his considerable authority demonstrates just how important these checks are.  In the case of PHH, not only did the company suffer from prosecution by an unconstitutionally structured agency, it suffered clear violations of due process.  After PHH appealed a ruling by one of the CFPB’s in-house judges (for further discussion of the problems with such in-house judges, see our filing in Lucia v. SEC), Director Cordray not only applied a brand-new interpretation of a relevant regulation without first providing notice of the new interpretation, he applied that new understanding retroactively to earlier conduct, and based on this retroactive application, increased 18-fold (yes, eighteen-fold) the penalty already assessed by the in-house judge, resulting in a penalty of $109 million.

This has to stop.  The CFPB has an unconstitutional structure, vests enormous power in one individual, and includes no real checks on this power.  We hope that the D.C. Circuit will uphold the earlier finding that the CFPB exists in clear violation of the constitution and that the people have a right to be free of such tyranny.  

Eleven House Republicans are pushing new legislation to provide a pathway to legal status for young immigrants who entered the United States as children—commonly known as “Dreamers.”* Congressman Carlos Curbelo (R-FL) and ten other Republican members introduced Recognizing America’s Children (RAC) Act today (PDF). The bill will benefit the United States economy and provide certainty for a group of young people who are deserving of a humane approach.

The bill would grant conditional legal permanent status to immigrants who have arrived before the age of 16, have been in the United States since January 1, 2012, have graduated high school, and have either been accepted into college or vocational school, applies to enlist in the military, or works with an existing valid work authorization. The conditional status will be cancelled if they become dependent on government, are dishonorably discharged from the military, or are unemployed for more than a year. The conditional status woudl become permanent after 5 years if they graduate from college or vocational school, are honorably discharged from the military or has served for 3 years, or have been employed for at least 48 months.

As my colleague Ike Brannon has noted, the economic benefits of the Dreamers are enormous. His research for Cato about the DACA program that has allowed many Dreamers to live and work legally in the United States concluded that:

the fiscal cost of immediately deporting the approximately 750,000 people currently in the DACA program would be over $60 billion to the federal government along with a $280 billion reduction in economic growth over the next decade.

I have also written about how the claim that the DACA program for Dreamers attracted children to the border causing the unaccompanied child migrant crisis is inaccurate. The numbers show that the crisis began before DACA was ever announced, and that DACA did not change the upward trend in children coming to the border. DACA, nor this bill, will lead to a more insecure border.

President Trump has repeatedly claimed that he wants to treat the Dreamers humanely, calling them as recently as last month “these incredible kids” and saying he would treat them with “great heart.” So far, he’s kept his word not to end the DACA program, but because he promised to end it, it makes sense for him to seize this opportunity and defend this bill that would provide certainty for these immigrants while keeping his promise to end DACA.

*Post originally said eight House Republicans. Three more have signed onto the legislation. 

The system of checks and balances that the Constitution established is an essential safeguard against government overreach. Yet, the ever growing administrative state often undermines fundamental checks and balances. “Fourth branch” agencies frequently take on legislative, executive, and judicial roles simultaneously. And to make matters worse, administrative officials are much less accountable to the people than their counterparts in the traditional three branches.

One especially alarming example of the breakdown of essential separation of powers within the administrative state is the Securities and Exchange Commission’s use of administrative law judges (ALJs). ALJs adjudicate most of the SEC’s enforcement actions. They have the authority to impose significant civil penalties and can bar respondents from working in the securities industry.

The SEC’s use of ALJs to decide important cases violates the Constitutional principle of an independent judiciary. ALJs are housed within the same agency that initiates the proceedings they adjudicate. While notionally independent, the lack of distance between ALJs and the SEC’s enforcement counsel may serve as a source of bias and conflict of interest. The SEC selects the ALJs that hear cases, even though the Supreme Court has deemed it problematic when “a man chooses the judge in his own cause.”

There is also the risk that ALJs may feel pressure, whether explicit or implicit, to support their employer agency.  The SEC’s win rate is better in cases heard by ALJs than cases brought to federal court.  While there may be some selection bias at play, the optics are not good and, in matters of justice, the appearance of injustice can be harmful in itself.

In addition to these separation of powers and due process issues, ALJs are insulated from public accountability, meaning there is very little any elected official can do to check instances of bias or overreach. Cato recently filed an amicus brief in Lucia v. SEC, a case regarding ALJs’ lack of accountability to the public.

The SEC classifies its ALJs as employees rather than officers. Under the Constitution’s appointments clause, federal government officials are divided into two primary categories, officers and employees. All officers in the executive branch are subject to presidential removal power. The president’s power to remove officers that fail to preform their duties is essential for his ability to faithfully execute the law. Presidential removal power is also necessary in order for officers to be held accountable to the public.

Position holders that exercise significant power and discretion therefore must be labeled officers so that the president can carry out the laws and that officials can be held publically accountable. It is for that reason that jurists going back to the Founding understood that the definition of an officer includes any public official who exercises coercive authority over others. It is also why the Supreme Court defined an officer as an official that “excecis[es] significant authority” in Buckley v. Valeo while describing employees as subordinate “lesser functionaries.”

Given that SEC ALJs issue decisions in high impact cases involving significant dollar sums it is hard to argue that they are “lesser functionaries.” Indeed, the Supreme Court has ruled that the holders of similar positions like tax court special trial judges are officers, not employees. But the SEC insists its ALJs are mere employees. It argues that ALJs are not officers because the SEC Commission can review their decisions. However, this claim ignores the role of ALJs in influencing respondents to settle cases before appeal.

The SEC wants to have its cake and eat it too by trying enforcement cases before judges that are not independent yet still insulated from the public. Defendants should have the right to have their cases heard by federal judges, with all the due process protections that implies. But subjecting ALJs to presidential removal power is an important first step towards restoring accountability.    

In his call to repeal the Affordable Care Act, also known as Obamacare, House Speaker Paul Ryan contended “there are two ways of fixing healthcare…have the government run it, ration it, and put price controls…[or] have a vibrant free market where people…go out in a free market place and buy the health care of their choosing.”

A new survey from the Cato Institute finds that 55% of Americans believe “more free market competition among insurance companies, doctors, and hospitals” offers the “better way” to provide affordable high-quality health insurance to people. In contrast, 39% say that “more government management of insurance companies, doctors, and hospitals,” would better achieve this goal.

Respondents sort themselves along partisan lines. A majority (62%) of Democrats including leaners think that more government management of insurance companies, hospitals, and doctors is the better approach to health care reform. In contrast, majorities of non-partisan independents (57%) and Republicans including leaners (84%) think free market competition offers a better alternative.

The divide between Republicans and Democrats widens as they attain higher levels of education. Fifty percent (50%) of Democrats with high school degrees believe that free market competition would better provide high-quality affordable health care. However, this share drops to 17% among Democrats with college degrees—a 33-point swing. The share of Republicans who believe free markets better deliver high-quality affordable coverage increases from 81% among those with high school degrees to 94% among college graduates. Non-partisan independents’ attitudes don't change much with education.

These results are consistent with the theory that partisans become more likely to learn about and accept partisan cues on health care policy as they gain more political information. Independents, on the other hand, feel less inclined to accept partisan cues regardless of their political knowledge.

This is not the only survey which finds Americans prefer a free market approach to reducing costs in health care.  A Kaiser Family Foundation survey found that 51% of Americans thought free market competition would better reduce prescription drug prices than government regulation (40%).

For decades Americans have debated how to best provide access to high-quality affordable health care. Some argue that health care markets operate differently and thus require more government management to ensure people get the care they need. Others contend that, just like in other sectors, injecting free market forces into health care would incentivize lower costs, increase quality, and expand access.

These results indicate public appetite for taking a new approach to health care reform: injecting free market forces into the system in order to provide access to affordable high-quality health insurance.

Women certainly should be celebrated for their many contributions, and “Day Without a Woman” did a little of that and a lot of advocacy for labor policies yesterday. According to the organizer’s website, the strike was intended to “call out decision-makers” on topics like the minimum wage, the gender pay gap, women’s healthcare, vacation time, and child care.

An impartial observer would likely believe that women’s prospects must be quite depressing, given the missed work, public school closures, and street protests that occurred in some U.S. cities. Luckily, American women’s social welfare and economic prospects are better than many strikers realize.

Take female leadership, for example: it would probably surprise Day Without a Woman strikers that 42% of legislators, senior officials, and managers in America are female. This figure is higher than comparable places like Canada, Western Europe, and Eastern Europe. According to World Bank data, the U.S. is at the top of the pack and has been for at least the last decade.

 

Of course, comparisons to less-developed geographies, like Asia, Africa, and the Middle East are substantially more stark. For example, American women outperform Indian women by around 30 percentage points on this female leadership indicator, despite India taking aggressive actions – like reserving one-third of Village Council head positions for women – since the mid-1990’s. 

It may also surprise strikers that American women are successful on various labor market economic indicators. For example, U.S. women participate in the labor force at levels close to or surpassing other developed countries. The percentage of women in the labor force in the U.S. is about tied with Western Europe, a little over 1 percentage point under that of Eastern Europe, and six percentage points higher than the world average. 

When it comes to personal freedom, American women do especially well. Ian Vasquez and Tanja Porcnik’s 2016 Freedom Index uses OECD information on missing women, equal inheritance regulation, parental-rights, freedom of movement, and female genital mutilation to rank countries across three metrics. On each metric, American women score a 10 of 10, and the report ranks overall welfare of North American women close to the highest in the world. 

Finally, take the so-called gender pay gap: though strikers have been led to believe that women make 78-82% of what men make doing the same work, this simply isn’t true. When researchers compare men and women with the same levels of education, years of experience, job title, age, and geography, the pay gap all but disappears.

So, although men and women in the United States are dealing with different social and cultural pressures, and certainly face unique challenges as a result, the average American working woman should be optimistic. In any event, genuine progress on any issue is only possible when we review all of the available facts. When that happens, the picture that emerges empowers females to do more of the bold things that strikers advocate, not less.

One of Donald Trump’s first actions as president was to sign a presidential memorandum freezing federal government employment. But the order specifically exempts certain federal agencies, including all military personnel and all law enforcement. At the same time that he signed this supposed hiring freeze, he also signed an executive order requiring that the hiring of 5,000 new agents for Customs and Border Protection. This increase would ramp up Border Patrol spending to its highest levels ever and do it at a time when the agency is doing less than it has in decades.

First of all, this increase in agents is being proposed a time when the number of border crossers is at record lows. Since 2010, each border agent apprehended fewer than 2 crossers per month, as the figure below shows. This is less than 1 every other week. This figure includes a large number of “apprehensions” of asylum seekers and unaccompanied children who simply turn themselves over to border agents and who made up 1 in 3 apprehensions last year. Thus, the actual number of border crossers that Border Patrol agents needed to race down was just 14 per agent for the entire year. That means that each agent caught on average someone sneaking into the United States once every 26 days in 2016.

At the same time, Congress continues to throw enormous sums at this agency. Border Patrol has spent an average of $172,000 per agent from 2000 to 2016. This amount has fluctuated between a high of $205,000 in 2006 to a low of $146,000 in 2009. The median has been $176,000, and last year’s total was $183,000. Thus, this hiring surge will likely cost almost $1 billion per year. A leaked Border Patrol memo concludes that the costs of “recruiting, hiring, supporting, and training” the new agents will be $328 million in fiscal year 2017 (which ends in October) and $1.884 billion in fiscal year 2018, meaning that the price tag could be even greater than my projection. The GOP Congress has increased the Border Patrol budget in real terms by only $223 million since 2011.

Figure: Apprehensions Per Border Patrol Agent and Border Patrol Budgets (2016$)                                          

 

Sources: CBP(agents), CBP (apprehensions), CBP (Budgets, PCE-adjusted figures)

Any increase of this magnitude will require special appropriations from Congress, meaning that at most the president’s executive order could speed up the hiring of agents provided by Congress. But even still, Border Patrol has struggled to meet its hiring mandate of 21,380 agents as it is. Since 2012, so many agents are leaving the force that the agency has struggled to keep up. “We are not able to hire as fast as attrition,” CBP Commissioner Gil Kerlikowske told Congress last year. He asked Congress to reduce the mandate by 300.

The Inspector General’s office found last year that Border Patrol and CBP “do not have the staff or comprehensive automated systems needed to hire personnel as efficiently as possible,” finding “significant delays in hiring.” Only 1 in 52 applicants make it through the application process, which makes it difficult to speed up hiring. Last time that Congress pressured the agency to rapidly expand, corners were cut on background checks, and internal corruption reviews were cast aside. About 30 applicants admitted that they were sent by drug cartels.

Border Patrol was still trying in 2015 to cut back on the interview process, and the leaked Border Patrol memo from this month shows the agency is still trying to make it easier to hire people with fewer checks. This is despite the fact that an independent advisory council found just last year that Border Patrol was still “vulnerable to a corruption scandal that could potentially threaten the security of our nation.”

Border security has certainly improved, but when Border Patrol agents are doing as little as they are, Congress should be asking itself whether this agency should receive the funds it is currently getting, not whether it should receive even more. It especially should not consider cutting corners to make hires that the agency cannot guarantee are qualified.

During his campaign President Trump made it clear that his administration would strictly enforce immigration law while also seeking to limit immigration. Trump’s executive orders so far are consistent with his campaign rhetoric, including a revitalization of the controversial 287(g) program, threats to withdraw grants from so-called “Sanctuary Cities,” the construction of a wall on the southern border, a temporary ban on immigration from six Muslim-majority countries, and the hiring of 10,000 more Immigration and Customs Enforcement (ICE) agents. Recent reporting reveals that these agents, tasked with implementing significant parts of Trump’s immigration policy agenda, will have access to an intelligence system that should concern all Americans who value civil liberties.

Earlier this month The Intercept reported on Investigative Case Management (ICM), designed by Palantir Technologies. ICE awarded Palantir a $41 million contract in 2014 to build ICM. ICM is scheduled to be fully operational by September of this year.

Here is The Intercept’s breakdown of how ICM works:

ICM funding documents analyzed by The Intercept make clear that the system is far from a passive administrator of ICE’s case flow. ICM allows ICE agents to access a vast “ecosystem” of data to facilitate immigration officials in both discovering targets and then creating and administering cases against them. The system provides its users access to intelligence platforms maintained by the Drug Enforcement Administration, the Bureau of Alcohol, Tobacco, Firearms and Explosives, the Federal Bureau of Investigation, and an array of other federal and private law enforcement entities. It can provide ICE agents access to information on a subject’s schooling, family relationships, employment information, phone records, immigration history, foreign exchange program status, personal connections, biometric traits, criminal records, and home and work addresses.

In addition to access to federal law enforcement databases, ICM at full implementation will, according to 2014 documents, allow users to have access to a wide range of intelligence systems (see Appendix B). These systems include but are not limited to:

  • Falcon - An ICE analytical system designed by Palantir, which allows ICE’s Homeland Security Investigations (HSI) agents “to track immigrants and crunch data on forms of cross-border criminal activity.”

  • Seized Asset and Case Tracking System (SEACATS) - A Customs and Border Protection (CBP) system that tracks arrests, seizures, and property.

  • Student and Exchange Visitor Information System (SEVIS) -  According to the ICE website, SEVIS “is a web-based system for maintaining information on international nonimmigrant students and exchange visitors in the United States.”

  • The Alien Criminal Response Information Management System (ACRIMe) - “an information system used by U.S. Immigration and Customs Enforcement (ICE) to receive and respond to immigration status inquiries made by other agencies about individuals arrested, subject to background checks, or otherwise encountered by those agencies.”

  • Analytic Framework for Intelligence (AFI) - Palantir played a role in developing this system, which, according to one civil liberty expert, can provide the profiling algorithms necessary for the Trump administration to carry out “extreme vetting.”

The picture below from this document will give you some idea of the data available to ICM users.

Although it’s clear the ICM is used as part of immigration enforcement that doesn’t mean that it can’t affect American citizens. As the screenshot from an ICE funding page below shows, American citizens are part of ICM (the highlighting is mine).

You only need to take a fleeting glance at the history of American domestic surveillance to see how law enforcement priorities change. My colleague Patrick Eddington has put together an excellent timeline of surveillance, covering the last one hundred years or so. At the moment, Islamic terrorism and undocumented immigrants are at the forefront of the Trump administration’s law enforcement priorities. But Patrick’s timeline shows that in the last century socialists, pacifists, labor organizers, anarchists, civil rights leaders, Quakers, the ACLU, Japanese-Americans, folk singers, and others have all been the target of government surveillance.

No one knows what federal law enforcement priorities will be in the next few decades, but when we consider tools like ICM we should be aware of the fact that it and similar systems can and will be used on the next surveillance targets, whether they’re gun owners, progressives, conservatives, pro-life/choice advocates, marijuana users, or the many, many other groups that could upset a future Oval Office occupant.

Federal courts criticized President Trump for initially failing to demonstrate that his executive order suspending immigration from several majority-Muslim countries was based on a real threat to the country. In his revised order, President Trump was careful to include specific evidence to support the idea that refugees and immigrants from these countries pose a threat to the United States and that banning immigration temporarily to review vetting procedures is therefore justified.

Yet the president’s evidence, laid out in a single paragraph in the order, is so exceptionally weak that it exposes his security defense as little more than a fig-leaf to cover his blanket discrimination.

  • The executive order provides no evidence for singling out certain countries.

The executive order states:

Recent history shows that some of those who have entered the United States through our immigration system have proved to be threats to our national security.

This vague language provides no estimate of the level of the threat. The Cato Institute’s recent paper on immigration and terrorism risk does estimate that level: a U.S. resident had a 1 in 3.61 million chance of being killed by a foreign-born terrorist from 1975 to 2015. For comparison, a person had a 1 in 14 thousand chance of being killed in a regular homicide. There is simply no evidence of intolerable terrorism risk from the immigration system generally or from these countries in particular. No person from the six banned countries has killed any U.S. resident in a terrorist attack during those years.

Moreover, two Department of Homeland Security assessments have also rejected the argument that certain countries pose a unique threat to national security. The first stated that “country of citizenship is unlikely to be a reliable indicator of potential terrorist activity” because, of the 82 foreign-born individuals who died in pursuit of or were convicted of any terrorism-related offense, “more than half were native-born United States citizens. Of the foreign-born individuals, they came from 26 different countries.” The second assessment concluded that “most foreign-born, U.S.-based violent extremists likely radicalized several years after their entry,” meaning increased vetting would have no impact.

  • The executive order cites convictions that were not for terrorism offenses.

The executive order states:

Since 2001, hundreds of persons born abroad have been convicted of terrorism-related crimes in the United States.

“Terrorism-related” includes any crime that begins with a terrorism investigation. As my colleague Alex Nowrasteh has described, less than half of the 488 cases of foreign-born people with “terrorism-related” convictions—in a list published by Attorney General Jeff Sessions—were actually convicted of a terrorism offense. Mr. Sessions even included thieves who stole a couple of trucks of cereal. Moreover, only 8 percent of the foreign-born residents with terrorism-related convictions (40 people total) actually planned a terrorist attack inside the United States.

  • The executive order cites a case where the individuals were not planning a domestic attack.

But surely these 40 individuals were so dangerous that it makes sense to shut down our immigration system from these places for a while. The executive order provides two examples to attempt to highlight the danger:

… in January 2013, two Iraqi nationals admitted to the United States as refugees in 2009 were sentenced to 40 years and to life in prison, respectively, for multiple terrorism-related offenses.

My colleague Alex Nowrasteh reviewed this case yesterday—two Iraqi interpreters who attempted to send weapons to Iraq to aid insurgents there. First, they were not planning an attack here, and second, even if they were, this new order specifically exempts those who worked for the U.S. government, so this order would not apply to them. Third, President Obama instituted new vetting procedures that would have caught them anyway. If the goal was to frighten the public, this is about the worst case to cite.

  • The executive order cites a case of a person who entered as a child to justify more vetting.

The executive order also provides this example:

… in October 2014, a native of Somalia who had been brought to the United States as a child refugee and later became a naturalized United States citizen was sentenced to 30 years in prison for attempting to use a weapon of mass destruction as part of a plot to detonate a bomb at a crowded Christmas-tree-lighting ceremony in Portland, Oregon.

As I wrote yesterday, the use of this case about a child who came to the United States as a two-year-old thoroughly undermines the argument that this ban is about vetting. This was a failure of assimilation, not vetting. No review of screening procedures will prevent a similar situation. In any case, the would-be bomber never actually had any real explosives. The threat was so remote that the FBI agents were laughing when they arrested him as he was trying to detonate their fake bomb. The FBI called him a “confused college kid that talks mildly radical jihad out one ear, and drugs, sex, drinking out the other.”

  • The order cites “investigations” as a reason for the ban, even though very few investigations turn into convictions.

The executive order states:

The Attorney General has reported to me that more than 300 persons who entered the United States as refugees are currently the subjects of counterterrorism investigations by the Federal Bureau of Investigation.

As I explained in a post yesterday, 99.7 percent of all FBI terrorism investigations end without a terrorism conviction, and 99.95 percent of all FBI investigations end without a terrorism conviction of a person who was attempting to carry out terrorism against the United States. These statistics predict that only 1 in 300 of these investigations will turn into a terrorism conviction and that it will not involve a domestic terror plot.

In any case, these 300 represent less than 0.1 percent of all refugees admitted since 1975. As the Cato Institute’s recent report found, only 20 refugees have planned, attempted, or carried out a terrorist attack in the United States from 1975 to 2015. Only three killed anyone, and all were before 1980. During those years, the annual risk of death to a U.S. resident by a refugee terrorist in the country is 1 in 3.64 billion. The United States is not being threatened by refugees.

Yesterday, John Bolton had an op-ed in the WSJ criticizing the dispute settlement process used at the World Trade Organization.  He argued that this process “is often criticized for failing to deter violations of the WTO’s substantive trade provisions,” and it also exceeds its mandate “by imposing new obligations on one or more parties, particularly against American interests.”  Somehow, then, in his view, the process is both ineffective AND infringes on sovereignty, an impressive achievement.  My colleague Dan Ikenson systematically dismantles the piece here.

Talking about international dispute procedures in the abstract can be a little hard to follow sometimes, but something happened earlier this week that helps illustrate the value of the WTO dispute process.  This is from a Reuters report on an outbreak of bird flu in Tennessee which has led to some U.S. trading partners imposing import restrictions on U.S. products:

Top U.S. chicken and egg companies ramped up procedures to protect birds from avian flu on Monday, a day after the federal government confirmed the nation’s first case of the virus at a commercial operation in more than a year.

The U.S. Department of Agriculture said on Sunday that a farm in southern Tennessee that is a supplier to Tyson Foods Inc. had been infected with the virus. All 73,500 birds there were killed by the disease, known as avian influenza (AI), or have since been suffocated with foam to prevent its spread.

Already, U.S. trading partners, including South Korea and Japan, have restricted shipments of U.S. poultry because of the infection in Tennessee.

There are more details on the import restrictions here.

While some of Trump’s trade policy staff obsesses over trade deficits or the number of Americans working in manufacturing, the practical side of trade policy these days is often about regulatory trade barriers such as these, which are said to be about food safety but are sometimes just disguised protectionism.  In this case, our trading partners definitely have a reason to be concerned.  But are the actions they take in response based on sound science, or is the disease outbreak being used as an excuse for protectionism?  The restrictions may be justified now, but will they be removed when the threat is gone?  That’s one of the core functions of trade agreements:  Detailed rules and a neutral dispute process to decide whether regulatory measures are legitimate or are disguised protectionism.  In fact, the United States filed a WTO complaint against India in 2012 on these same issues, after India imposed restrictions that were purportedly to address concerns about outbreaks of bird flu.

There will continue to be pushback against the Trump administration’s misguided view of trade deficits and economics more generally.  But there is also the practical question of how this administration will approach day-to-day trade concerns like this one.  In the past, the staff at the U.S. Trade Representative’s Office has shown great skill in using the dispute process at the WTO to address these issues.  Hopefully the Trump administration will let them continue to do their work.

With steel industry lawyers and executives populating key trade policy positions in the Trump administration, we are witnessing the return of an old, rusty narrative that portrays the World Trade Organization as unaccountable global government intent on running roughshod over U.S. sovereignty.  On the Forbes website, today, I explain why that is a protectionist canard.

Here are the opening paragraphs:

John Bolton took to the pages of the Wall Street Journal yesterday to assert America’s interest in abandoning international institutions that threaten U.S. sovereignty. In identifying the World Trade Organization’s Dispute Settlement Body as such an institution, Bolton was reinforcing a central theme of the Trump administration’s recently-minted 2017 Trade Policy Agenda. That document is short on specifics, but makes one thing clear: Under threat of going rogue, the United States will leverage its indispensability to compel changes at the WTO that accommodate a more expansive, less surgical application of domestic trade laws.

“Defending our national sovereignty over trade policy” and “strictly enforcing U.S. trade laws” are, explicitly, the top two priorities on the agenda. Taken together, those priorities suggest the Trump administration will aggressively execute U.S. trade laws with little regard for whether that execution violates internationally-agreed rules established to prevent and discourage abuse of such laws. Agreeing that “all animals are equal,” then adding the famous caveat “but some are more equal than others” is what is meant by “defending our national sovereignty.”

Given the prominence of domestic steel industry representation in the Trump administration, these priorities aren’t surprising. High on the list of talking points of the Washington-swamp-savvy U.S. steel lobby is the assertion that the WTO’s DSB, by finding U.S. antidumping and countervailing duty practices in violation of WTO obligations on numerous occasions over the years, usurps U.S. sovereignty over its own laws. This is a complaint frequently made by Robert Lighthizer, Trump’s USTR-designate, who for decades has represented domestic steel interests in AD/CVD cases before U.S. agencies.

And here are the concluding paragraphs:

The prominence of the claim that U.S. sovereignty is threatened reflects the over-representation of steel interests in the Trump administration. It is intended to add credibility to the implied threat that the United States will ignore DSB rulings with which it disagrees unless and until there are changes made to the WTO texts that render compliant the United States’ non-compliant actions on trade remedies.  But it is irresponsible to risk blowing up the system, especially on behalf of an industry that accounts for less than 0.3 percent of the U.S. economy.

The bottom line is that the WTO dispute settlement system, though not perfect, offers a reasonable formula for balancing the simultaneous imperatives of preserving the rule of international trade law and national sovereignty.

But there are many paragraphs in between that I hope you will find time to read here.

If Republicans succeed in slashing the federal corporate tax rate from 35 percent to 20 percent or less, the tax base will expand as investment increases and tax avoidance falls. There is no need for a legislated expansion in the tax base, as the GOP is proposing with its “border adjustment” scheme. The tax base will broaden automatically over time to offset the government’s revenue loss from the rate cut.

New evidence comes from Britain, which has enacted a series of corporate tax rate cuts. A study by the Centre for Policy Studies includes this chart. It shows the tax rate falling from 35 percent to 20 percent since the late 1980s and corporate tax revenues as a percentage of gross domestic product (GDP) trending upwards. As the rate has fallen, the tax base has grown more than enough to keep money pouring into the Treasury.

Does legislated base broadening explain the increase in U.K. tax revenues? Not for the most recent round of rate cuts. In 2010-11, the government collected £36.2 billion from a 28 percent corporate tax. The government expected its corporate tax package—including a rate cut to 20 percent—to lose £7.9 billion a year by 2015-16 on a static basis. That large expected loss indicated that the package had little legislated base broadening. Study author Daniel Mahoney sent me a table confirming that the package included only modest base-broadening measures that were mainly offset by base-narrowing measures.

The government’s dynamic analysis of the corporate tax package projected a revenue loss of about half of the static amount over the long run. But that analysis was apparently too pessimistic: actual revenues in 2015-16 had risen to £43.9 billion. So in five years, the statutory tax rate fell 29 percent (28 percent to 20 percent) but revenues increased 21 percent (£36.2 billion to £43.9 billion). That is dynamic!

Looking at the longer term, the CPS study says, “In 1982-83 when the rate was 52%, corporation tax receipts yielded revenues equivalent to 2% of GDP. Corporation tax now raises over 2.3% of GDP when the headline rate is at just 20%.” The Brits have scheduled a further rate cut to 17 percent.

Canada’s experience also shows that when you slash the corporate tax rate, substantially more profits appear on corporate returns over time. Canada cut its federal corporate tax rate from 28 percent and higher in the 1980s to just 15 percent today, but it collects about the same amount of corporate tax revenues as a share of GDP now as then.

The British and Canadian experiences show that large corporate tax rate cuts lose governments little if any money. There is no need for risky changes to the corporate tax base, as House Republicans are proposing with border adjustments. That approach would disrupt the economy and invite retaliation from our trading partners for no economic gain.

The CPS study suggests that British industry has responded strongly to tax rate cuts, with rising investment and higher wages for workers. That’s what we want here. So Republicans should put aside their complex base-broadening plan, and just slash the corporate tax rate to the British-Canadian range of 15 to 20 percent.

The CPS study is here.

This past Monday, President Trump released a new executive order shutting down the refugee program for 120 days and banning immigration from six majority-Muslim countries for 90 days. President Trump attempted to justify these changes by stating in part that:

The Attorney General has reported to me that more than 300 persons who entered the United States as refugees are currently the subjects of counterterrorism investigations by the Federal Bureau of Investigation.

The government has refused to provide any additional details about these cases, but an investigation should not be seen as implying guilt. Almost all FBI terrorism investigations do not end with a terrorism conviction. Indeed, the numbers predict that of these 300 refugee investigations, only 1 will turn into a terrorism conviction and that conviction will not be for planning an attack against the United States. This claim about the FBI investigating refugees has turned out to be a groundless smear in the past, and history has shown that refugees have been less likely than others to commit acts of terrorism against the United States. 

These 300 represent less than 0.009 percent of all refugees admitted since 1975. As the Cato Institute’s recent report found, only 20 refugees from 1975 to 2015 have attempted, planned, or carried out a terrorist attack inside the United States. Only 3 carried out a deadly terrorist attack, and all of those were before 1980. During the 40 years from 1975 to 2015, the annual risk of death by a refugee terrorist to a U.S. resident was 1 in 3.64 billion. This makes them about 1,000 times less likely to kill a U.S. resident in a terrorist attack than other foreign-born people.

Unfortunately, this type of baseless fearmongering about FBI investigations into refugees is not new. The FBI told ABC News in 2013 that it was investigating “dozens” of refugees as terrorists. In the 26 months after the FBI made the claim, the agency arrested and convicted 31 individuals for “terrorism-related” offenses. Of these, a majority were U.S.-born citizens. Another 4 convictions were not even for terrorism offenses. In the end, the Bureau only arrested and put away for terrorism offenses 9 foreign-born residents total after it claimed “dozens” of open cases against refugees specifically. None of these individuals were planning attacks inside the United States.

So how often do FBI national security investigations actually turn into convictions?

According to the New York Times in 2016, the Bureau has averaged “7,000 to 10,000 preliminary or full investigations involving international terrorism annually in recent years.” This appears to contrast with Reuters, which reported this week that the 300 refugee investigations were part of 1,000 “counterterrorism investigations” into persons tied to “Islamic State or individuals inspired by the militant group.” Similarly, FBI Director James Comey said in May 2016 that there were “north of a thousand cases” that they were investigating of U.S. residents radicalized by the Islamic State online.

The best explanation that I see for this difference is that the Comey/Reuters number refers to a narrower subset of investigations involving the Islamic State and, more importantly, only reflects a snapshot in time. At any particular moment, there may be 1,000 or so investigations open, but there are between 7,000 and 10,000 investigations for the entire year.

This means that very few FBI investigations end in a terrorism conviction. In the 5 years from 2010 to 2014, the entire United States government averaged just 27 terrorism convictions per year. Taking the middle of the 7,000 to 10,000 range for the number of new FBI investigations (8,500) would mean that only about 0.3 percent of all terrorism investigations end in terrorism convictions.* 

If these individuals are involved with terrorism, it is very unlikely that they are attempting to harm the United States as opposed to supporting terror groups abroad. Less than 5 people per year were convicted of terrorism offenses in which they were targeting the United States in the five years from 2010 to 2014. This appears to be true today as well. Director Comey said in May 2016 that his main concern was people seeking to join the Islamic State overseas. This means that only 0.05 percent of all investigations end in the conviction of a person who was attempting terrorism in the United States.

Based on these percentages, we can predict that only 1 in 300 of these investigations will turn into a terrorism conviction and that it will not involve a domestic terror plot.

The FBI should continue to investigate people who it has reason to believe are involved in terrorism, but it is incorrect to assume that an investigation means that the person is guilty of a crime or even likely to be guilty of a crime. It is even more incorrect to jump to the conclusion that they pose a threat to anyone in the United States. The fact remains that refugees are less likely than others to commit acts of terrorism, and these new investigations do not change that fact.

*In the less likely scenario where the FBI opens only 1,000 terrorism investigations annually, 2.7 percent would end in terrorism convictions and 0.5 percent would end with convictions for an offense targeting the U.S. These numbers would predict that of these 300 refugees, only 8 will be convicted of a terrorism offense. Of these, only 1 will have planned an attack targeting people inside the United States.

From Kenneth Boulding, A Reconstruction of Economics (NY, Science Editions 1962) pp. 481-82:

“Economic ethics has been seriously distorted by static and short-run criteria of value. ‘Justice’ has been thought of too much in terms of division of a fixed pie than in terms of encouraging the baking of more pies… .The importance of this problem rests on a matter of simple arithmetic: that if redistribution toward any group causes a fall in the rate of growth of national income, no matter how slight, there will be some date beyond which the absolute income of the favored group will be less than it would have been if the redistribution had not taken place.”

Peter Navarro, director of the newly-established White House National Trade Council, gave a speech last week to the National Association for Business Economics, which he condensed into an opinion piece for the Wall Street Journal. The analytical errors and the fallacies portrayed as facts in that op-ed are so numerous that it is bewildering how a person with a Ph.D. in economics from Harvard University—and a potentially devastating amount of influence within the White House—could so fundamentally misunderstand basic tenets of introductory economics.

Almost every paragraph in the op-ed includes an error of fact or interpretation.  I’ll focus on a few, deferring to others’ noble efforts (Phil Levy, Don Boudreaux, Linette Lopez) at wading through the rest of Navarro’s confused and misinformed diatribe.

Consider Navarro’s portrayal of the national income identity as an economic growth formula.  He claims:

The economic argument that trade deficits matter begins with the observation that growth in real GDP depends on only four factors: consumption, government spending, business investment and net exports (the difference between exports and imports).

The sentence betrays a deep and troubling misunderstanding of the factors of economic growth. Real GDP growth (growth in the total value produced in the economy) depends on increases in the factors of production and increases in the productive use of those factors, which trade and specialization facilitate. What Navarro refers to as the drivers of growth are actually the channels that account for the disposition of our output – what we do with our output.

The national income identify is expressed as: Y=C + I + G + X – M.  It tells us that our national output is either consumed by households (C); consumed by business as investment (I); consumed by government as public expenditures (G); or exported (X). Those are the only four channels that can account for the disposition of national output.  We either consume our output as households, businesses and government or we export it.

Imports (M) are not a channel through which national output is disposed.  We don’t import our output. But M appears in the identity and is subtracted because we consume – as C, I, and G – both domestically produced and imported goods and services.  If we didn’t subtract M in the national income identity, we would overstate GDP by the value of our imports.

But Navarro believes – or wants the public to believe – that the national income identity is an economic growth formula or function, where Y (GDP) is the dependent variable, C,I,G, X, and M are the independent variables, and the minus sign in front of M means that imports are inversely related to (or detract from) GDP.  That’s wrong and a Harvard Ph.D. economist should know that.

Reducing a trade deficit through tough, smart negotiations is a way to increase net exports—and boost the rate of economic growth.

The evidence is overwhelming – month after month, quarter after quarter, year after year – that the trade deficit and GDP rise and fall together. The largest annual decline in the trade deficit ever recorded was between 2008 and 2009, during the trough of the Great Recession. The largest annual increase in the trade deficit occurred between 1999 and 2000, when the economy grew by 4.7 percent – the strongest annual economic growth in the past 33 years.

When the economy grows, households, businesses, and government tend to spend more, and they spend more on both domestic and imported goods and services.  When the economy contracts, there is less spending on both domestic and imported goods and services.  For the past 42 straight years, the United States has registered trade deficits.  In 40 or those 42 years, annual changes in the value of imports and the value of GDP moved in the same direction.

Navarro either believes, or would have the public believe, that imports detract from GDP and that our national security requires all of the gears of U.S. trade policy be put to the service of eliminating our trade deficit. This is a fool’s errand and a Harvard Ph.D. economists should know that.

Suppose America successfully negotiates a bilateral trade deal this year with Mexico in which Mexico agrees to buy more products from the U.S. that it now purchases from the rest of the world. This would show up in government data as an increase in U.S. exports, a lower trade deficit, and an increase in the growth of America’s GDP.

First, note the implication that Navarro expects U.S. trade agreements to include commitments by our trade partners to meet certain outcomes – “…Mexico agrees to buy more products from the U.S.”  This kind of managed trade is unprecedented and utterly defies the purpose and spirit of trade liberalization.  Trade agreements are intended to reduce barriers to competition, not to preempt competition by anointing the winners at the outset.  But, okay, the administration believes it has a mandate to blow things up on the trade front.

But, here’s another problem with Navarro’s scenario.  If Mexico agrees to buy from the United States some of what it now purchases from other countries (Navarro’s key to decreasing the bilateral trade deficit with Mexico), then won’t those other countries have fewer dollars with which to purchase U.S. exports?  Wouldn’t that, all else equal, increase bilateral trade deficits or reduce bilateral surpluses the United States has with those other countries?  Yes and yes.  What Navarro is suggesting is a game of trade policy whack-a-mole. Bilateral trade accounting is utterly meaningless, and a Harvard Ph.D. economist should know that.

Now, what about the investment term in the GDP equation? When U.S. companies offshore their production because of America’s high taxes or burdensome regulations, that shows up in government data as reduced nonresidential fixed investment—and a growth rate lower than it would be otherwise.

Intentionally or not, Navarro is presenting only part of the picture in this example.  If a U.S. company completely shutters operations in the United States and moves those operations offshore, then the expenditures of that business that registered this year in the investment term of the national income identity will not register next year.  Granted.  But Navarro’s example is unrepresentative of the true nature of offshoring, outsourcing, or – as it is called by the Bureau of Economic Analysis – outward foreign direct investment.

First, while shuttering a factory in Indiana and moving the operation rafter-by-rafter, bolt-by-bolt down to Mexico to produce and export back to the United States is the common portrayal and popular perception of outsourcing, such examples are highly unrepresentative of the nature and purpose of outsourcing.  Even though such examples capture the public’s attention, they are the exception and not the rule. 

At the enterprise level, outsourcing and domestic production are not substitutes.  They are complements.  The BEA data reveal that when U.S. multinational corporations invest more in foreign operations (production, assembly, R&D, hospitality service provision, etc.), they invest more in the parent operations at home.  My research shows positive correlations between a U.S. parent companies’ and its foreign affiliates’ capital expenditures (i.e., when a U.S. MNC spends more/less on capital investment in its foreign affiliates, it spends more/less on capital investment in its parent operations), value-added, R&D expenditures, compensation, employment, and compensation per employee. 

The data suggest that when companies shift particular operations abroad, resources are freed up to invest in other company operations stateside.  When U.S. multinationals expand their operations abroad, greater demand is placed on headquarters and other complementary operations in the United States, which results in new domestic investments as well.

Meanwhile, Navarro’s example precludes discussion of the opposite of outsourcing – insourcing.  The trade deficits Navarro so desperately wants to curtail are the sources of massive amounts of inward foreign direct investment.  When we run trade deficits, foreign companies have more resources to invest in U.S. operations, which increase the value of the investment component of the national income identity.  In 2016, the stock of foreigners’ (mostly Western Europeans, Canadians, and Japanese) investments in U.S. manufacturing was valued at $1.2 trillion – more than twice the amount of FDI in Chinese manufacturing.  And foreign companies operating in the United States directly employed over 6.4 million American workers.

When writing about the effects of trade and investment on GDP, it is inadequate and misleading to focus on one part of one side of the ledger. A Harvard Ph.D. economist should know that.

Justice Clarence Thomas yesterday signalled that the abusive practice of civil asset forfeiture is ripe for expanded constitutional scrutiny.

The case is Lisa Olivia Leonard v. Texas.  James Leonard (the petitioner’s son) was stopped by police for a traffic infraction in 2013 “along a known drug corridor.”  Police searched Mr. Leonard’s vehicle and discovered a safe containing $201,100 and the bill of sale for a home. Arguing that the money was either proceeds from a drug sale or going to be used in such a sale, the state initiated forfeiture proceedings and took the money.  The safe actually belonged to James’ mother Lisa, who brought suit to protect her property from the government seizure.

The Supreme Court denied certiorari for procedural reasons, but Justice Thomas had some harsh words for civil forfeiture anyway, and suggested that it’s time for the Supreme Court to take another look at the practice:

Civil proceedings often lack certain procedural protections that accompany criminal proceedings, such as the right to a jury trial and a heightened standard of proof.

Partially as a result of this distinct legal regime, civil forfeiture has in recent decades become widespread and highly profitable. And because the law enforcement entity responsible for seizing the property often keeps it, these entities have strong incentives to pursue forfeiture.

This system - where police can seize property with limited judicial oversight and retain it for their own use - has led to egregious and well-chronicled abuses…

Justice Thomas also noted the disparate impact these types of abuses have on the poorest and most vulnerable communities:

These forfeiture operations frequently target the poor and other groups least able to defend their interests in forfeiture proceedings.  Perversely, these same groups are often the most burdened by forfeiture. They are more likely to use cash than alternative forms of payment, like credit cards, which may be less susceptible to forfeiture. And they are more likely to suffer in their daily lives while they litigate for the return of a critical item of property, such as a car or a home.

The opinion goes on to explain that while the court has historically upheld the constitutionality of civil forfeiture, the modern practice of forfeiture has strayed far from its narrow historical use and purpose:

I am skeptical that this historical practice is capable of sustaining, as a constitutional matter, the contours of modern practice, for two reasons.

First, historical forfeiture laws were narrower in most respects than modern ones. Most obviously, they were limited to a few specific subject matters, such as customs and piracy. Proceeding in rem in those cases was often justified by necessity, because the party responsible for the crime was frequently located overseas and thus beyond the personal jurisdiction of the United States courts. These laws were also narrower with respect to the type of property they encompassed. For example, they typically covered only the instrumentalities of the crime (such as the vessel used to transport the goods), not the derivative proceeds of the crime (such as property purchased with money from the sale of the illegal goods).

Second, it is unclear whether courts historically permitted forfeiture actions to proceed civilly in all respects. Some of this Court’s early cases suggested that forfeiture actions were in the nature of criminal proceedings…

Lastly, while agreeing with the Court’s refusal to hear the case for procedural reasons, Justice Thomas nonetheless expressed his interest in taking another look at civil forfeiture:

Whether this Court’s treatment of the broad modern forfeiture practice can be justified by the narrow historical one is certainly worthy of consideration in greater detail.

In his opinion, Justice Thomas refers to the Institute for Justice’s Policing for Profit survey of forfeiture laws around the country, and also to Sarah Stillman’s expose Taken, documenting several instances of forfeiture abuse. Both of those sources are worth reading for a better idea of just how bad the incentives of civil forfeiture are and the abuses that have resulted.  

It’s heartening to have a Supreme Court Justice so squarely acknowledge and raise questions about a predatory government practice that has proceeded unchecked for so long.

One of the most common questions I receive when I talk about civil asset forfeiture is “why does the Supreme Court allow this?” My answer has always been “because these laws predate the country and the court has never seen fit to re-examine them.”  

This opinion is a clear signal that at least one member of the Supreme Court is ready to take a fresh and skeptical look.

Given the administration’s plans are still as clear as mud, yesterday’s Cato event on infrastructure was necessarily wide-ranging. Panelists welcomed Trump’s desire to harness more private sector involvement, but there are many different forms policy to support this could take, from removing regulatory and user pricing barriers, right through to the distortionary tax credits proposed by his advisors Wilbur Ross and Peter Navarro.

One possibility is greater use of public-private partnerships. These entail agreements between government and a private contractor for the building, financing or operation of infrastructure with the aim of passing on substantial risk to the private sector. They can take different forms, from simply transferring management responsibilities to a private sector firm, right through to integrated contracts that incorporate the design, build, maintenance and operation of the infrastructure (for example, toll roads.)

In terms of results, types of PPPs are not created equal. As Randal O’Toole noted, “demand risk PPPs,” where a private company builds and then runs, say, a toll road for a set period of time, allow the expansion of capacity with incentives for the private firm to control long-term costs (including considering future maintenance needs) whilst alleviating taxpayers of the usage risk. Yes, there are still political risks that governments will renege on agreements, but when there are obvious cash streams from the investment linked to usage, beneficial investment can be forthcoming. Chris Edwards has previously pointed out the success of the Capital Beltway project in Virginia, for example.

Other types of infrastructure, not least provision of loss-making modes or those with no user fees, are more difficult. In these cases, public-private partnership contracts have and can be designed such that private investors build, operate and maintain an asset with a stream of tax revenue payments from the government instead.

Sadly this “availability payment” model, as Randal calls it, where the private contractor gets paid irrespective of usage, is less likely to curb costs. In fact, the UK made extensive use of this type of agreement in the building of hospitals and schools through the 2000s, and the results have been disappointing.

Success in road schemes and a number of privately-owned prisons in the early 1990s (with a much higher proportion delivered on time and on budget than through traditional procurement) led to a huge expansion of PPPs. By 2003/04 they accounted for 39 percent of capital spending by UK government departments, and there were over 500 in operation by 2008, including in the building of schools, hospitals and public transport (especially rail). Britain led the world in their use.

This expansion of PPPs though is now associated with high lifetime costs for taxpayers, not least arising from badly negotiated bundled contracts with private contractors. Many hospitals face huge deficits. Any benefits arising from the privatization of risk and on-time and on-budget delivery of projects was eclipsed by higher borrowing costs coupled with the costs of consultants and lawyers in drawing up the contracts. Furthermore, the opacity of the liabilities for taxpayers has proved very unpopular, with significant attempts to renegotiate contracts.

What went wrong? First and foremost, the government was often a poor client. As Jesse Norman MP wrote for the Centre for Policy Studies:

These were generally huge one-off projects agglomerating very different skills, services and expertise, from construction to IT to facilities management. They were laden with social, bureaucratic and political prestige, creating external interference and a demand for expensive “signature” buildings with unknown future costs. Often the clients were dominated by producer interests, overspecified the projects, changed the specification en route, lacked the necessary commercial or negotiation skills to manage the procurement, were naïve about using external professional advice, and did not adequately understand the risks involved, the likely future costs or the relevant financing models.

In other words, many of the failures of traditional government infrastructure projects merely arose at the contract negotiation stage. Another problem was inability to assess risk, something noted by Bent Flyvberg in his exceptional book Megaprojects and risk. That lots of the infrastructure built was regarded as “essential” or politically contentious meant that in reality taxpayers still faced most of the risk.

Several major projects in the UK saw the government step in, for example, after the private sector company was unable to fulfil the contract after mispricing (more details here).  Contracts were often overly inflexible too and the whole process dogged by political interference, even at the development stage. The main reason for the use of this type of arrangement was that the New Labour government wanted to see huge upfront investments without the capital expenditure being on the public balance sheet.

When trying to generate up to a $1 trillion of new investments here, it might be convenient for the Trump administration to play the same trick. Indeed, it could help fulfil the promise that taxpayers won’t fund new projects directly. But what really matters is lifetime costs, and whilst these types of PPPs can work in some scenarios, the UK model suggests caution about widespread roll-out or using them as a substitute for areas ripe for genuine privatization.

Of course, in policy we should not allow the perfect to be the enemy of the good. The failures of other traditional procurement methods are well-known, and in other countries such as Canada and Australia the record of PPPs seems more positive. At best though, the UK experience shows they are no panacea. If the public sector is bad at delivering infrastructure, it can be bad at contracting for it too.

During the presidential campaign, Donald Trump promised legislation that “fully repeals ObamaCare.” Monday night, the Republican leadership of the House of Representatives released legislation it claims would repeal and replace ObamaCare. Tuesday afternoon, Vice President Mike Pence will travel to Capitol Hill to pressure members of Congress to support the bill. On Wednesday, two House Committees will begin to mark-up the legislation. House and Senate leaders are hoping for quick consideration and a signing ceremony, maybe by May, so they can move on to other things, like tax reform and confirming Supreme Court nominee Judge Neil Gorsuch.

Everyone needs to take a step back. This bill is a train wreck waiting to happen.

The House leadership bill isn’t even a repeal bill. Not by a long shot. It would repeal far less of ObamaCare than the bill Republicans sent to President Obama one year ago. The ObamaCare regulations it retains are already causing insurance markets to collapse. It would allow that collapse to continue, and even accelerate the collapse. Republicans would then own whatever damage ObamaCare causes, such as when the law leaves seriously ill patients with no coverage at all. Congress would have to revisit ObamaCare again and again to address problems they failed to fix the first time around. ObamaCare would consume the rest of Congress’ and President Trump’s agenda. Delaying or dooming other priorities like tax reform, infrastructure spending, and Gorsuch. The fallout could dog Republicans all the way into 2018 and 2020, when it could lead to a Democratic wave election like the one we saw in 2008. Only then, Democrats won’t have ObamaCare on their mind but single-payer.

First, let’s look at how the main features of this bill fall short of repeal.

Medicaid Expansion

ObamaCare expanded Medicaid to able-bodied adults below 138 percent of the federal poverty level. The federal government covers a much larger share of the cost of covering Medicaid-expansion enrollees than enrollees in the “old” Medicaid program—currently 95 percent, bottoming out at 90 percent in 2020. So far, 31 states have chosen to implement the Medicaid expansion; 19 have declined.

The House leadership’s bill would not even start to repeal ObamaCare’s Medicaid expansion until 2020, more than two and a half years from now, and even then would repeal it only one enrollee at a time. In 2020, states could no longer enroll new able-bodied adults into the Medicaid expansion. Yet the federal government would continue to pay for each and every continuously covered able-bodied adult who enrolled in the expansion before then. And it would do so at the enhanced ObamaCare matching rate, in perpetuity, until an enrollee leaves the program. If the House leadership has its way, we may be decades away from full repeal of the Medicaid expansion.

For the two-plus years between enactment and 2020, the House leadership bill would continue to allow states both to opt into the expansion and to go on an enrollment binge, for which the federal government could be paying for decades. It is likely that the number of states participating, and the number of people enrolled in the Medicaid expansion will be higher after “repeal” than before.

Which means the Medicaid expansion may never disappear at all. By 2020, the constituency for preserving the Medicaid expansion would be much larger than it is now. More states, more voters, and more special interests will resist repealing the expansion than do today. As I discuss below, Congress will likely be more Democratic than it is today.

When eventually we see a Congressional Budget Office score of the bill (House leadership has numbers, but they’re not sharing them), it may show a reduction in federal spending on the Medicaid expansion after 2020. I would not bet on that happening.

Medicaid Reform

Currently, Congress matches states’ spending on their Medicaid programs. When a state spends $1 on its program, Congress contributes between $1 and $3. This creates a pay-for-dependence incentive. It encourages states to expand both enrollment and benefits far beyond what they would if states bore the full marginal cost.

The House leadership bill would reform the Medicaid program by converting it to a system of “per capita block grants.” It would give each state a fixed amount of money per enrollee, with the amount varying by the type of enrollee (aged, blind, disabled, children, non-expansion adults, and expansion adults).

A per-capita block grant would therefore resemble ObamaCare’s Medicaid expansion. States would get additional federal dollars for each additional person they enroll in their programs. But states would face the full marginal cost of providing new or existing benefits to enrollees. Just as ObamaCare’s Medicaid expansion creates incentives for states to expand their programs to able-bodied adults, while reducing access to care for the aged, blind, disabled, children, and pregnant women, the House leadership bill would create (or preserve) an incentive to expand enrollment to less vulnerable populations while cutting benefits for more vulnerable populations.

Private-Insurance Overhaul

Economists describe the basic architecture of ObamaCare’s overhaul of private health insurance as a three-legged stool. The three legs of the stool are (1) “community rating” price controls that force insurers to charge healthy and sick people of a given age the same premium, and only allow premiums to vary from older to younger enrollees by a ratio of 3 to one, (2) an individual mandate that penalizes taxpayers who do not purchase a government-designed health plan, and (3) subsidies to help low-income people purchase that compulsory, overpriced health insurance. The House leadership plan retains all three legs of the stool, as well as many other ObamaCare provisions designed to mitigate the damage done by the community-rating price controls.

The first thing the House leadership’s bill does is expand ObamaCare by appropriating funds for the law’s so-called “cost-sharing” subsidies, something no previous Congress has ever done.

The House leadership bill retains the very ObamaCare regulations that are threatening to destroy health insurance markets and leave millions with no coverage at all. ObamaCare’s community-rating price controls literally penalize insurers who offer quality coverage to patients with expensive conditions, creating a race to the bottom in insurance quality. Even worse, they have sparked a death spiral that has caused insurers to flee ObamaCare’s Exchanges nationwide, including driving all insurance companies from the market in 16 counties in eastern Tennessee. As of next year, 43,000 Tennesseans in those counties could have no way to obtain coverage. Nearly 3 million Exchange enrollees are just one more carrier exit from the same fate.

The leadership bill would modify ObamaCare’s community-rating price controls by expanding the age-rating bands (from 3:1 to 5:1) and allowing insurers to charge enrollees who wait until they are sick to purchase coverage an extra 30 percent (but only for one year). Even with these changes, however, premiums would remain high, ObamaCare would continue to make it easier for people to wait until they are sick to purchase coverage, and the law would continue to penalize high-quality coverage for the sick. In fact, the House leadership’s decision to leave ObamaCare’s community-rating price controls in place while relaxing its “essential health benefits” requirements would cause coverage for sick to deteriorate even faster than ObamaCare does.

It is because the House leadership would retain the community-rating price controls that they also end up retaining many other features of the law. Observers have started to notice that successive iterations of the bill look increasingly like ObamaCare.

For example, the House leadership bill retains and modifies another leg from the three-legged stool: ObamaCare’s advanceable, refundable, and means-tested tax credits for health insurance. Though they sound like tax cuts, ObamaCare’s tax credits are actually 94 percent government outlays and only 6 percent tax reduction. The House leadership’s tax credits are likely to be similarly lopsided.

House leaders are retaining all that government spending—again, we don’t yet know how much ObamaCare spending the bill retains—largely because retaining community rating drives premiums unnecessarily high. Ironically, due to congressional budget rules, the fact that there are tax credits in the bill makes it impossible for Republicans to repeal ObamaCare’s community-rating price controls and other regulations. The CBO reportedly has projected that if the bill repealed those regulations, the price of insurance would fall so much that many more people would take advantage of the tax credits, and the bill would run afoul of budget rules by increasing federal deficits. Republicans evidently cannot repeal ObamaCare’s regulations if they hold on to health-insurance tax credits.

The tax credits could create a very thorny problem for both House and Senate Republicans. The House leadership bill prohibits the use of its tax credits for health plans that cover abortion. Due to an arcane Senate rule, Democrats likely can and will strip any such restrictions from the bill before final passage. This means that if the House bill ever makes its way to President Trump’s desk, it could subsidize abortion even more than ObamaCare does.

To the extent the bill’s modified tax credits are tax reduction, however, they are the functional equivalent of ObamaCare’s individual mandate. The flip side of tax credits that are available solely to those who purchase health insurance is that those who do not purchase insurance must pay more to the IRS than those who do. Just like a mandate. And since the effective penalty is just an increase in the taxpayer’s income-tax liability, tax credits for health insurance are actually more coercive than ObamaCare’s individual mandate, because the IRS has many more tools it can use to collect the penalty.

Conservatives deny any similarities between an individual mandate and a tax credit for health insurance. But consider the following. ObamaCare’s individual mandate penalty for single adults is $695 or 2.5 percent of income, whichever is greater. Suppose that instead, Congress had simply enacted a tax with those features, and then come back and provided an equivalent tax credit for anyone who purchases health insurance. The end result would be identical to ObamaCare’s individual mandate. But which would it be, a tax credit or a mandate?

Like ObamaCare’s tax credits, the House leadership’s tax credits would involve burdensome projection and verification of the taxpayer’s income (taxpayers above a certain threshold are ineligible for credits) as well as whether the taxpayer has an offer of qualified health insurance from an employer (taxpayers with an offer of coverage from an employer are ineligible).

Finally, the House leadership creates a new program of matching grants to states to fund things like Exchange subsidies, insurer bailouts, high-risk pools, and perhaps a “public option,” even after Republicans spent years railing against many of these things. If states don’t use the money, the federal Centers for Medicare & Medicaid Services can use the funds for insurer bailouts. The funding formula for this new grant program appears to reward high-cost states.

Taxes

The House bill zeroes out the individual and employer mandates and outright repeals all manner of ObamaCare taxes, including: the tax on over-the-counter medications; the additional 10-percent tax on non-medical HSA withdrawals; the limits on health flexible spending arrangement contributions; the medical device tax; the tax on poor and/or sick patients (the AGI threshold for the medical-expenses deduction reverts from 10 percent to 7.5 percent); the “Medicare” “payroll” tax; the net-investment tax; the tanning tax; the tax on insurance-executive compensation; the health-insurance tax; and the pharmaceutical-manufacturers tax.

In a pretty crass budget gimmick, the bill retains the “Cadillac tax” on high-cost health plans but delays its onset until 2025.

Swallowing the Republicans’ Agenda

Republicans don’t seem to have any concept of the quagmire they are about to enter with this bill.

ObamaCare’s Exchanges are already on the brink of collapse. Since this bill does not repeal the community-rating price controls, repeals the individual mandate, shifts the benefits from ObamaCare’s tax credits up the income scale, and tasks states with devising new bailout schemes of uncertain timing and efficacy, the threat of death spirals will remain. Even where the individual market does not collapse, the coverage will get increasingly worse for the sick. If the tax credits (read: subsidies) for low-income Americans are less than under ObamaCare, many more low-income patients will lose coverage. Premiums will continue to rise. Republicans will take the blame for all of it, because they will have failed to repeal ObamaCare, or learn its lessons, when they had the chance.

The leadership bill therefore creates the potential, if not the certainty, of a series of crises that Congress will need address, and that will crowd out other GOP priorities, in late 2017 before the 2018 plan year begins, and again leading up to the 2018 elections. If Congress gets health reform wrong on its first try, health reform could consume most of President Trump’s first term. Pressure from Democrats, the media, and constituents could prevent Republicans from moving on to tax reform, infrastructure spending, or even Supreme Court nominees.

Partial Repeal Is the Road to Single Payer

Flubbing ObamaCare would at once united and embolden Democrats while dividing the GOP base, driving the former to the polls in 2018 and 2020 while causing the latter to stay home. If ObamaCare is not doing well, and Republicans take the blame, it will create the potential for the sort of wave election Democrats experienced in 2008, when they captured not just the House and the presidency, but a filibuster-proof, 60-vote supermajority in the Senate. If that happens, and ObamaCare is not doing well, Democrats will be less interested in rescuing ObamaCare than repealing and replacing it themselves—with a single-payer system.

ObamaCare opponents often muse that supporters designed the law to fail because it would give them the excuse to enact a single-payer system. Republicans have a choice. They can either prevent that future from unfolding, or they can help it along.

Conclusion

Widespread voter dissatisfaction with ObamaCare produced Republican gains in 2010 and 2014, and a GOP sweep in 2016. President Trump and congressional Republicans pledged full repeal of the law, and to replace it with free-market reforms. The parts of the country that stood the most to gain from ObamaCare swung the most to President Trump. That looks suspiciously like a mandate. The good kind.

Source: The Economist

If Republicans care about covering people with expensive medical conditions, they should stick to that promise. Making health care better, more affordable, and more secure requires first repealing all of ObamaCare’s regulations, mandates, subsidies, and taxes. Next, Congress should block-grant the Medicaid program, giving each state a fixed sum of money that does not change from year to year, combined with full flexibility to target those funds to the truly needy. (If states want to cover less-needy populations, like able-bodied adults, they can pay 100 percent of the marginal cost of that coverage.)

Finally, and crucially, Congress needs to enact reforms that make health care more affordable, rather than just subsidize unaffordable care. To make health insurance more affordable, Congress should free consumers and employers to purchase health insurance licensed by states other than their own. To drive down health care prices, Congress should expand existing tax-free health savings accounts into “large” HSAs. Large HSAs would be a larger effective tax cut than the Reagan and Bush tax cuts combined, adding $13,000 to the wages of a typical worker with family coverage. Large HSAs would drive down prices by making consumers cost-conscious at every margin, and would reduce the problem of preexisting conditions by freeing consumers to buy portable coverage that stays with them between jobs. Sen. Jeff Flake (R-AZ) and Rep. Dave Brat (R-VA) have introduced legislation to create Large HSAs.

The House Republican leadership bill does not replace ObamaCare. It merely applies a new coat of paint to a building that Republicans themselves have already condemned. Since the most important asset health reformers have is unified Republican opposition to ObamaCare, at least in theory, it would set the cause of affordable health care back a decade or more if Republicans end up coalescing around this bill and putting a Republican imprimatur on ObamaCare’s core features. If this is the choice, it would be better if Congress simply did nothing.

But this can’t be the only choice. Right?

President Trump signed a new executive order temporarily banning all immigration from several majority-Muslim countries. The entire point of the new order is to place his ban on more secure legal footing, but in several respects, the new order actually undermines the defenses that he has given over the past month.

“Delaying implementation puts our country in peril!”

After a judge temporarily blocked enforcement of the original order for a few days to get a hearing to listen to further arguments on both sides, President Trump tweeted:

Just cannot believe a judge would put our country in such peril. If something happens blame him and court system. People pouring in. Bad!

In other words, the delay threatened U.S. security. Yet this new executive order does not become effective for more than a week. Does the president’s delayed rollout also “put our country in peril”? The president’s legal team will have a more difficult time arguing that another judicial delay will cause “irreparable harm” to the U.S. this time.

“Current vetting is totally inadequate!”

President Trump in his speech to Congress said:

It is not compassionate, but reckless, to allow uncontrolled entry from places where proper vetting cannot occur. …That is why my administration has been working on improved vetting procedures.

In other words, these nationalities must be completely banned because the current vetting is worthless. Yet this new order allows people who currently have a valid visa to come. If the vetting process is so inadequate, then exempting current visa holders makes no sense. They are still a threat even if they have gone through the process. 

“This is about better vetting, not banning people.”

The president in his original executive order stated:

To ensure that adequate standards are established to prevent infiltration by foreign terrorists or criminals… I hereby suspend entry into the United States… of such persons for 90 days.

Thus, the whole point of this “temporary” ban is to give the administration 90 days to review the vetting. It’s not about keeping people out. If that’s so, then why does the new executive order restart the clock to 90 days? 37 days have passed since the order was enacted. Why would the time when the prior order was suspended not count against the 90-day review? It seems obvious that it’s because the review was a fraud, and the real goal is about banning people. It was unable to accomplish its goal due to the judge’s order, so the new order restarts.

The new order also cites the case of a Somali who was brought over when he was a child who then became a terrorist as a reason for the ban. Yet that is not a failure of vetting that is a failure of assimilation. Using this example would imply that this ban is not about vetting and that the president has no plans to keep it temporary.

“President Obama came up with the list!”

President Trump stated:

The seven countries named in the Executive Order are the same countries previously identified by the Obama administration as sources of terror.

This assertion was based on the fact that the list of seven countries was drawn from a law that Congress passed in 2015 that required Iraqis, Iranians, Syrians, Sudanese, and any other nationality that the president decided to have a valid visa before entering the United States. President Obama added Libyans and Somalis to this list. Here’s the problem: President Trump took Iraq off the list, which means that now he can no longer claim that his list is the same as President Obama’s or is based on a congressional statute. It’s now his list and his alone.

President Trump’s updated executive order used the Bowling Green terrorists as a justification for his policy changes even though they weren’t planning a domestic terrorist attack. His order states that “in January 2013, two Iraqi nationals admitted to the United States as refugees in 2009 were sentenced to 40 years and to life in prison, respectively, for multiple terrorism-related offenses.” Those two Iraqi nationals were Mohanad Shareef Hammadi and Waad Ramadan Alwan and they were each convicted of multiple terrorism offenses—but they were not convicted or even charged with attempting to carry out a terror attack on U.S. soil despite some erroneous media reports to the contrary. 

Hammadi and Alwan were arrested in an FBI sting operation. Hammadi pled guilty to a 12-count indictment on multiple charges of providing material support to foreign terrorists, material support for a designated terrorist organization, exporting a missile system that could destroy aircraft, and fraudulently procuring a U.S. passport. Alwan pled guilty to a 23-count indictment that included engaging in terrorism against Americans overseas, teaching someone how to make a bomb, providing material support to foreign terrorists, material support for a designated terrorist organization, and exporting a missile system that could destroy aircraft. The FBI rendered all of the weapons inert before allowing Hammadi and Alwan to handle them so nobody was ever in any real danger.

Alwan did show a confidential informant how to build bombs but, according to the Department of Justice, those lessons were provided “with the intent that they be used to train others in the construction and use of such IEDs for the purpose of killing U.S. nationals overseas, including officers and employees of the United States.” The press release that announces Hammadi’s guilty plea doesn’t mention any support for domestic terrorist attacks. Additional court documents show neither Alwan nor Hammadi was charged or convicted of planning a domestic terror attack.

Upon their indictment, David J. Hale, U.S. Attorney for the Western District of Kentucky said, “Whether they seek shelter in a major metropolitan area or in a smaller city in Kentucky, those who would attempt to harm or kill Americans abroad will face a determined and prepared law enforcement effort dedicated to the investigations and prosecutions necessary to bring them to justice.”

Upon their sentencing in 2013, Assistant Attorney General Monaco said, “These two former Iraqi insurgents participated in terrorist activities overseas and attempted to continue providing material support to terrorists while they lived here in the United States. With today’s sentences, both men are being held accountable.” 

Neither of those statements by U.S. attorneys, the numerous press releases I linked to above, nor the court documents show that Alwan or Hammadi was convicted or charged with planning a domestic terrorist attack. The sting operation was designed to show the two terrorists shipping weapons and money abroad to support insurgent operations against American forces in Iraq, not against Americans on U.S. soil. Alwan and Hammadi thought they were providing material and money for insurgents to kill Americans abroad—a serious crime but not one targeting Americans on U.S. soil. The overarching purpose of Trump’s new executive order is to protect the “nation from terrorist activities by foreign nationals admitted to the United States.” The convictions of Alwan and Hammadi do not support the supposed overarching purpose of Trump’s executive order.  

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