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On Fox News last night, Megyn Kelly agreed with her guest James Kallstrom that the FBI needs a larger budget. The horrific attack in Orlando has raised the issue of whether the FBI has sufficient resources to investigate potential terrorists.

I don’t know how large the FBI budget should be. The agency does fill a lot of crucial roles, including tackling never-ending corruption in federal, state, and local governments.

But I do know that the FBI has not been starved; its budget has grown rapidly. The chart, from DownsizingGovernment.org, shows that FBI spending in constant 2016 dollars has more than tripled since 1990, from $2.7 billion to $9.1 billion. 

Congress, in predictable fashion, seems poised to slap a band aid on a problem in the nation’s Selective Service system. The smarter long-term solution would end the practice of draft registration once and for all. 

Changes to the military’s combat rules would open the Selective Service system to new legal challenges on equal protection grounds. The new rules allow women to serve in previously closed ground combat units, a sensible change in policy that reflects the realities of the modern military. But, given this change, it is unfair to require only 18-year-old males to register for the draft. If the rules remain in place – and they should – women should also be required to register.

The Senate version of the National Defense Authorization Act, which passed by a wide margin on Tuesday, includes this change. Hillary Clinton has come out in favor of draft registration for women. Some conservatives are now urging the House and Senate conferees to strip the provision, and, if they don’t, to vote against the entire NDAA. But these objections mostly revolve around the changed combat rules, not the inherent unfairness of requiring only men to register. 

Congress should instead revisit whether we need a Selective Service, not whether both men and women should register for it. As I explained back in February in an online article for the Washington Post:

The entire draft architecture is anachronistic and unnecessary. We’ve operated with an all-volunteer force for decades; no one, regardless of gender, expects that they’ll be drafted; and the wars that we fight don’t depend upon conscription. Future wars aren’t likely to, either.

[…]

[I]t is highly unlikely that we’ll face threats that require troop deployments on a scale that would necessitate another draft. Policymakers in Washington have chosen to fight wars in the Middle East with smaller, more nimble and highly-trained special operators, along with air power, manned and unmanned, in part because the capabilities are available to them, but mostly because these wars do not engage vital U.S. national security interests or threaten our survival.

In the event that a mass-conscripted army was ever again required to defend our country from attack, Congress could immediately pass a law to make that happen. But any notion that today’s Selective Service System is what stands between us and military defeat is absurd. And the push to expand combat roles to women signals that more, rather than fewer, Americans are willing, voluntarily, to do their part to defend this nation. We should take this opportunity to recognize that we can get rid of the draft altogether.

You can read more here.

The Financial Times (FT) published a June 9, 2016, editorial titled, “Coping with a world of too much Chinese steel.”  (Link)  The editorial makes the case correctly that China’s steel overcapacity has spilled onto world markets and is having negative effects on steel makers in the European Union and United States.  It appropriately argues against Western governments nationalizing their steel industries or providing “other indefinite state support.” 

The editorial errs, however, in suggesting that “the best option is a judicious and limited use of trade remedies against subsidized imports.”  Economists have understood for decades that when a nation imposes trade restrictions, it always reduces its own economic welfare.  It is difficult to argue that imposing a policy measure that reduces a nation’s economic welfare is a good thing to do.  The country would have been better off simply by doing nothing.  (“Don’t do something, just stand there!”)

There are two easily understood reasons why imposing trade restrictions won’t help the situation.  The first is that the global overcapacity is so great that market prices for commodity grades of steel are low worldwide.  If imports of hot-rolled steel from China are limited by newly implemented antidumping or countervailing duty (AD/CVD) measures, relatively low-priced hot-rolled coil could easily be imported instead from countries such as South Korea, Brazil, or Turkey.  Curtailing imports from China is likely to provide relatively little relief to domestic steel manufacturers. 

The second reason is that restricting imports in an attempt to benefit steel producers will have the effect of increasing costs of production for manufacturers that use steel as an input.  These downstream users constitute a much larger segment of the economy.  In the United States, for example, data compiled by the Bureau of Economic Analysis (BEA) at the Department of Commerce indicate that economic value added by “primary metal manufacturing,” which includes steel, copper, aluminum, magnesium, etc., amounted to about $60 billion in 2014.  Downstream manufacturers that utilize steel as an input generated value added of $990 billion, more than 16 times larger.  Employment by primary metal manufacturers was 400,000, while downstream manufacturers employed 6.5 million, also 16 times greater.  Use of trade remedies against steel imports amounts to an attempt to benefit the few at the expense of the many.

To elaborate, the United States currently imposes some 150 AD or CVD orders against a large number of steel products from a large number of countries.  These restrictions have had the effect of making U.S. steel prices relatively high, while in the rest of the world they are relatively low.  Still, important portions of the American steel industry have not been sufficiently profitable.  United States Steel Corporation, the country’s largest producer, reported a 2015 loss of $1.5 billion.  So U.S. prices are somewhat high, but not high enough to cure the industry’s commercial problems.

Prices are high enough, though, to do meaningful damage to manufacturers of value-added products that use steel as an input.  Many of those firms have difficulty competing with manufactured goods imported from countries with much lower steel prices.  Carrier, for instance, has been criticized by politicians for its decision to move 2100 air conditioner jobs from Indiana to Mexico.  It seems likely that the many AD/CVD duties against steel – not to mention restrictions on imports of copper tubing and aluminum extrusions – played a role in that decision.  Carrier can escape those policy-imposed costs simply by moving production across the border.

The FT acknowledges that antidumping and countervailing duty (AD/CVD) measures “will increase costs for the numerous companies that use steel as an input,” and explains that the EU trade remedy process includes a “community interest” test that balances the potential benefit of import restrictions to steel producers against the likely damage that would be done to steel users.  The community interest test helps to explain why the EU has many fewer AD/CVD measures in place than does the United States. 

Statutes in the United States contain nothing equivalent to the community interest test.  Instead, the law requires the U.S. International Trade Commission (ITC) to consider only the effects of imports on the domestic industry producing the same product.  So as long as the ITC determines that domestic industry has been injured, it must vote to impose duties no matter how great the costs will be to users.  From experience, I know that this is an economist’s nightmare.  But commissioners are sworn to uphold the law, so have little choice.

Thus, a suggestion by FT that trade remedies offer a reasonable way to counter China’s excesses seems to be much more a political response than one grounded firmly in economic realities. The policy analysis becomes clearer if we begin by recognizing that China’s decisions to export subsidized steel have the effect of transferring a substantial amount of wealth from that country to the importers.  What’s not to like about being on the receiving end of a wealth transfer?  Yes, there are adjustment challenges for firms producing basic grades of steel in importing countries.  Trade Adjustment Assistance (TAA) exists to help address those problems in the United States.  If policymakers conclude that more assistance is needed, they should take care to avoid measures that damage the broader economy.

The better policy approach would be for the European Union and United States to get the attention of Chinese leaders by reframing the debate and delivering this message:

“Thank you for transferring so much wealth from China to Western countries by selling low priced steel.  It’s helping to keep our large manufacturing sectors globally competitive.  Please keep doing it.”

This approach has a decent prospect for encouraging Chinese leaders to deal with the root cause of global overcapacity by downsizing and restructuring their steel industry. 

And, after engaging creatively with the Chinese, U.S. officials should follow up by reforming AD/CVD laws so that import restrictions could be imposed only when economic analysis shows that benefits would outweigh the costs.  It makes no sense to respond to economic harm caused by low steel prices by imposing policies that do even more damage to the U.S. economy.

ReasonTV interviews Cato adjunct scholar Harvey Silverglate on overcriminalization and the threat to free speech at American universities.

When Everything is a Crime: Harvey Silverglate on the Overregulation of Ordinary Life

Almost anything associated with the Cold War appears to be an anachronism these days. New college graduates never saw the hammer and sickle fly over the Kremlin, the deadly wall cut Berlin in half, and defectors leave home in search of that most precious human commodity, liberty.

Even for those of us with a few more years such memories are fading. Still, 1989 remains an extraordinary moment.

The Soviet Union lasted another two years, but it was only a shell of its former totalitarian self. No longer did its citizens have to hope for a trip to the West for an opportunity to leave everything behind.

But that’s not the world in which Viktor Korchnoi grew up. He was born in Leningrad in 1931 and survived the 872-day siege during World War II. He displayed an aptitude for chess, winning the Soviet junior championship in 1947.

Korchnoi was not just a good chess player. In 1975 he lost a close match, essentially the semi-finals, to countryman Anatoly Karpov. Since American Bobby Fischer, who broke the Soviet stranglehold over the championship in 1972, refused to defend his title, Karpov was declared champion, making his match with Korchnoi the de facto title fight.

But he never was a compliant Soviet citizen. Eventually Moscow denied him permission to travel abroad and promoted his great rival and former friend, Karpov.  The regime threatened to kill destroy his future.

When he finally was allowed to play in Europe in 1976 he failed to take the flight home. Although his defection was about career, not politics, he immediately became a non-person at home and a target of Soviet fury overseas.

He was old, in chess terms, when he fled at age 45. Yet he continued to knock on the championship door.

In 1978 he disposed of the other challengers to gain a shot at Karpov. The winner would be the first to six victories. Korchnoi fell behind 5-2. Then he won three of four games, tying the match. Alas, Karpov, the perfect Soviet role model, won the next game, along with the match. Korchnoi again challenged in 1981, but was overwhelmed 6-2.

Although he had escaped, his wife and son languished in the U.S.S.R., denied permission to join him. Indeed, his son was later imprisoned for resisting the draft. Moscow was only too willing to use them as hostages against Korchnoi. (They were finally freed in 1982.)

Korchnoi played in matches leading to the championship for another decade, but never again challenged for the title. He was doomed to be known as the best chess player who never won the championship.

In the 1984 competition the 53-year-old Korchnoi suffered a 32-year-age gap and lost early to Gary Kasparov, another malcontent in the Soviet system. Kasparov, of Azerbaijani and Jewish descent, went on to defeat Karpov. Soon the Soviet Union was tossed on the trash heap of history.

Korchnoi ended up as the oldest active grandmaster playing major tournaments. For years he was by far the oldest grandmaster in the top 100 and still a ferocious competitor. Even after a stroke in 2012 he continued to play.

Korchnoi truly was a chess legend, playing for more than a half century. His 80th birthday was celebrated by Kasparov, now retired and fighting for democracy in Russia. And eulogies were many on his passing.

As I wrote for American Spectator, “thankfully, Korchnoi finished his life in freedom. His childhood was harsh; his career difficult. But he spent almost half of his life in the West, able to taste liberty even before the Soviet Union fell. Viktor Korchnoi is one more reminder of the manifold injustices of totalitarian communism. RIP Viktor.”

For-profit colleges. Accreditors. Endowments. Loan servicers. Debit card companies. Federal policymakers have blamed just about everyone associated with higher education but themselves for the Ivory Tower’s myriad problems. The most recent target just happens to be one specific accreditor: the Accrediting Council for Independent Colleges and Schools (ACICS), which accredits lots of those icky proprietary schools.

Now, ACICS might be as bad as its detractors say. I don’t know because, frankly, I don’t have the time or resources to launch a full and fair investigation into the group. Of course, that is itself a huge problem: Unless you have umpteen free hours on your hands, it is very hard to know whether “bad actors” are really bad, their accusers are jumping to conclusions or are political opportunists, or some combination of those things.

Here is what I do know: Washington gives out big sums of money to people to pay for college without meaningfully determining whether those people are prepared for higher education. That fuels rampant price, credential, and luxury inflation, and seriously mutes incentives for students to think critically about their higher education choices. In other words, “caring and generous” federal policy – policy that lets politicians telegraph how “concerned” they are with education, the poor, and the middle class – is very much at the self-defeating root of all of higher ed’s biggest problems.

So go after ACICS, the openly for-profit schools they accredit, and anyone else you think looks bad (while ignoring crucial context needed to see reality). But don’t expect doing so to fix higher ed. Expect it to just lead to other hunts when these scapegoats are dispatched, and the Ivory Tower getting no better.

Introducing their work, Butterly et al. (2016) write that rising atmospheric CO2 concentrations are projected to increase the productivity of agricultural cropping systems in the future, primarily via enhanced photosynthesis and reduced evapotranspiration when water and nutrients are not limiting. One field crop that is economically important in many semi-arid locations is the common pea plant (Pisum sativum); yet according to Butterly et al., “few studies have examined the effects of elevated CO2 on field pea.” Therefore, in an attempt to rectify this situation, the team of four Australian researchers set out to examine the interactive effects of elevated CO2 and soil nitrate (NO3-) concentration on the growth, nodulation, and nitrogen (N2) fixation of pea plants. Nodules house bacteria that “fix” atmospheric nitrogen into ammonia, which serves as plant food.

The study was conducted in a semi-arid location at the SoilFACE facility of the Department of Economic Development, Jobs, Transport and Resources Plant Breeding Centre in Horsham, Victoria, Australia. There, pea plants were grown for a period of 15 weeks in Vertisol soils containing either 5, 25, 50 or 90 mg NO3--N kg-1 under either ambient (390 ppm) or elevated (550 ppm) carbon dioxide concentrations maintained using free-air CO2 enrichment (SoilFACE). It was the hypothesis of the researchers that “nodule establishment (nodule number), development (nodule mass) and function (nitrogenase activity, N derived from the atmosphere) would be progressively inhibited with increasing NO3- (nitrate) concentration, but these effects would be reduced under elevated CO2 via enhanced N demand due to greater photosynthetic activity and plant biomass accumulation.”

The results of their analysis confirmed the inhibitory effects of soil nitrate concentration on field pea plants growing under ambient CO2. In the elevated CO2 treatment, however, field pea plants had approximately 30 percent more biomass and were not affected by N level (see figure below). What is more, Butterly et al. report that “elevated CO2 alleviated the inhibitory effect of soil NO3- on nodulation and N2 fixation,” which impressive finding they say “is likely to lead to greater total N content of field pea growing under future elevated CO2 environments.” And the end result of these findings, they add, “indicate that field pea may perform well in semiarid agricultural systems under future CO2 concentrations irrespective of soil N status, and subsequent gains in N input via enhanced N2 fixation will be important for maintaining the N fertility of cropping systems.”

Now that is good news worth reporting!

Figure 1. Shoot (Panel A) and root (Panel B) biomass of field pea grown for 15 weeks under either an ambient (aCO2) or elevated (eCO2) carbon dioxide concentration and with 5, 25, 50 or 90 mg NO3--N kg-1 soil.

 

Reference

Butterly, C.R., Armstrong, R., Chen, D. and Tang, C. 2016. Free-air CO2 enrichment (FACE) reduces the inhibitory effect of soil nitrate on N2 fixation of Pisum sativum. Annals of Botany 117: 177-185.

The United States is attempting to use its military to check Chinese military and political assertiveness in East Asia. Yet Beijing has not responded to American freedom of navigation operations in the South China Sea (SCS), increased troop deployments to the region, and deepening political/military relations with former adversaries by changing course. Instead, China has reacted with its own form of military escalation.

In response to Beijing’s intransigence, prominent U.S. policymakers, think tanks, and scholars advocate policies that impose higher costs on Chinese actions. This singular focus on cost imposition is dangerous because it ignores the “benefit” aspect of coercive strategies and places China in a corner. Cost imposition has utility, but it should not be the only leg for U.S. policy to stand on.  

Coercive strategies work by manipulating a target state’s cost/benefit calculation to prevent it from taking certain actions (deterrence) or force it to take certain actions (compellence) to the benefit of the coercing state. Advocates of greater cost imposition in the SCS want to deter aggressive Chinese actions by making the costs of such actions greater than the benefit that would accrue to Beijing. However, the high value that China places on the SCS implies a very high level of cost necessary for deterrence to be successful.

Complicating the task of deterrence further is the fact that China has shown a willingness to escalate its military presence and bellicose rhetoric when confronted. This suggests that any increase in costs inflicted by the United States will be replied to in kind by China. Such a dynamic is ripe for dangerous escalation, which undermines a stated U.S. goal of “peace and stability” in East Asia.

Instead of focusing on cost imposition, U.S. policymakers should devote more effort toward the benefit side of China’s cost/benefit equation. China’s willingness to respond to American displays of military presence in kind shows that Beijing thinks it can gain more from escalating than backing down. It will be difficult to move Beijing away from its territorial ends, but Washington can counteract the ongoing escalation spiral by offering incentives for China to change its means in the SCS.

On the pressing issue of whether or not China will conduct island building in the Scarborough Shoal, the United States could agree to not go through with plans to set up “permanent logistics facilities” at five military bases in the Philippines so long as China does not engage in island building at the shoal. Such an agreement would benefit China by keeping the U.S. military presence in the Philippines at its current level while avoiding the diplomatic costs associated with island building. The United States would benefit from reducing escalation risks in the SCS. Washington could also retain the ability to impose costs on China through its position at Subic Bay, which would not be affected by this agreement. Importantly, the United States could make sure Beijing upholds its end of the bargain via satellite imagery of Scarborough Shoal.

The approach outlined above would likely be difficult to implement for a host of reasons, and it is certainly no silver bullet for solving U.S.-China tensions in the SCS. However, taking a step back from cost imposition will serve U.S. policymakers well in crafting an effective coercive strategy to prevent armed conflict. The most important task for American policymakers is to prevent deterioration in U.S.-China relations to the point that China has more to gain from conflict than cooperation. A “nothing to lose” mentality in Beijing would be a major problem. 

Back in December, Senate Democrats, with President Obama’s backing, attempted to prohibit anyone on the federal government’s terrorism watchlist from purchasing a firearm.

At the time, I criticized the proposal for its lack of process and its inevitable inefficacy at reducing gun crime or terrorism.

Yesterday, Senate Democrats launched a filibuster in order to push for the resurrection of the failed “No-Guns List.”

The substance of their plan has not changed, and my earlier criticism still stands:

How does a person prove they are not a terrorist? It’s virtually impossible. A no-flyer doesn’t receive the evidence against them or a hearing before being placed on the list. They are not allowed to confront their accuser. Even getting the government to acknowledge that a person is on the list may require lengthy and expensive litigation. A person on the no-fly list may not even know they are on the list until they’re refused service at the airport. A person on the broader terror watch list has no means of finding out. The system is devoid of anything resembling due process, a flaw The New York Times condemned as being intolerable in a free and democratic society and over which the American Civil Liberties Union is currently suing the Obama administration. The no-fly listing procedure has already been declared unconstitutional by at least one federal judge.

Including too many people on the list is inevitable. Nobody wants to explain, after a terrorist attack, why the attacker wasn’t in the database. And that overly inclusive quality has manifested itself in absurd ways already. Just a few examples of no-fly denials: the late Democratic Massachusetts Sen. Ted Kennedy, congressman and civil rights hero John Lewis, dozens of people named Robert Johnson, members of the U.S. military and federal air marshals.

The potential for false positives and mistaken identities is not just accepted as collateral damage by these no-gun list proposals; it is the entire point. Anyone who has actually been convicted or is currently charged with terrorism-related crimes is already prohibited from purchasing a firearm under federal law. The people adversely affected by this proposal will inevitably be people against whom the government lacks sufficient evidence to charge.

The fact that a person hasn’t been adjudicated as dangerous doesn’t preclude them from committing violence, of course. But just how much discretion should the president have in abolishing constitutional rights without charge or trial?

What has changed is the political climate in the interim.

The No-Guns List appears to have picked up some powerful allies on the right.   Presumptive Republican presidential nominee Donald Trump has expressed support for the idea, and is apparently lobbying the National Rifle Association to come along with him. 

The GOP and the NRA are generally regarded as the two primary bulwarks against misguided gun control proposals.  Adding their weight to this particular gun control proposal would bolster its legislative prospects immensely.

Even if, as some supporters have urged, the law requires hearings before a watchlisted person can be denied the right to bear arms, important questions remain.  What exactly does the state need to prove in order to take someone’s 2nd Amendment rights away?  What is the burden of proof?  Will judges allow the use of secret evidence, citing state secrecy concerns for refusing to disclose it?  Will the individual be entitled to legal representation?  Can he call and cross-examine witnesses? Can he appeal the ruling? Can he publicly discuss his case?

And those are just the legal concerns.  There are also pragmatic issues. What information does the FBI convey to the gun seller when someone on the list is denied?  Is the gun seller told that he’s got a terror suspect standing in his store?  What if the person actually is an aspiring terrorist under government surveillance?  Doesn’t this process inevitably tip him off? Would finding out that he’s on the government’s radar only encourage an aspiring terrorist to act quicker? Would it compromise legitimate surveillance operations?

The Boston bombers didn’t need guns. Nor did Timothy McVeigh or the 9/11 hijackers.  Giving terror suspects a sure-fire way to figure out whether they’re being surveilled seems like a large price to pay for what may be a non-existent benefit.

Omar Mateen passed background checks.  He passed training requirements. He had access to weapons as a security guard.  He wasn’t even on the terrorism watchlist. Nothing in this proposal, and nothing in any of the other gun control proposals this tragedy has spawned, would have kept firearms out of Omar Mateen’s hands.  The only way his rampage could have been prevented was for someone to kill him first. Unfortunately, laws that deny even sober people the right to carry weapons in establishments that serve alcohol meant that the law-abiding victims were sitting ducks.

Knee jerk reactions to horrible tragedies have proven to be a poor basis for good public policy.  We have institutions like due process precisely for times when emotions threaten to overrun safeguards that are just as important for protecting the innocent as the guilty.

It’s hard to imagine a graver violation of the spirit of the 2nd Amendment than a law allowing the President to declare anyone an enemy of the state without so much as a charge and subsequently bar them from exercising their 2nd Amendment rights.  But Republicans, lured from their stalwart support of gun rights by fears of terrorism, and Democrats, lured from their stalwart support of civil rights by their zeal for gun control, combined with an election cycle that has been defined by appeals to fear may be creating a perfect storm and a severe threat to liberty.

P.S. Two tweets this morning from sitting Congressmen highlight the divide.

Democratic Senator and gun control advocate Joe Manchin doesn’t inspire confidence when he says things like “due process is killing us.”

.@Sen_JoeManchin: Due process is what's killing us right now https://t.co/OTf9LnxHXZ

— Morning Joe (@Morning_Joe) June 16, 2016

Luckily, not everyone in Congress agrees.

Amazing that U.S. senators would filibuster in favor of using secret lists, like some authoritarian regime, to deny rights w/o due process.

— Justin Amash (@justinamash) June 16, 2016

This morning, Senator Joe Manchin (D-WV) was on MSNBC’s Morning Joe discussing police responses to the Orlando shooting. Here’s his key thought:

.@Sen_JoeManchin: Due process is what's killing us right now https://t.co/OTf9LnxHXZ

— Morning Joe (@Morning_Joe) June 16, 2016

With all due respect, due process is the essential basis of America. The Constitution was established to “secure the blessings of liberty”—that’s the whole purpose of our government—and that government can’t deny us our life, liberty, or property without due process of law. If the government wants to deny someone’s liberty, it better have an awfully good reason and it better be ready to defend itself in court immediately—akin to what happens when someone is arrested or involuntarily committed. Otherwise, we’d live in a world where perhaps there’s less crime, but also life isn’t worth living.

Senator Manchin may want to live in a police state, but few of us would want to join him there. Count me out of the time machine to East Germany.

When a class action is settled, class members accept the benefits of the settlement while giving up any legal claims they may otherwise have against the defendant. When the class members’ claims are for money-damages, the rule of civil procedure require that prospective class members must be given the opportunity to opt out of the class to pursue their individual claims independently. This opt-out requirement is a barrier to collusion between defendants and class counsel, who could negotiate a low per-member monetary (or coupon) award in exchange for extinguishing the claims of a large number of people.

An exception to this general rule exists, however, when the claim is not for money but rather for declaratory or injunctive relief—in other words, that the defendant do or stop doing something. In that case, individual class members would have no need to pursue a separate claim for personalized relief. Put simply, in a case seeking an injunction, there’s no possibility that a different attorney would be able to get any one class member more stuff—because there’s no money or other goodies to be gotten anyway.

This commonsense reasoning for the exception to the opt-out requirement breaks down, however, when a case involves both injunctive and monetary relief. Denying an opt-out mechanism in these cases is not only illogical, but depriving class members of their money-damages claims without an opportunity to opt out of the class violates the constitutional rights of absent class members. Specifically, the Fifth Amendment’s Due Process Clause protects class members’ rights to remove themselves from the class, pursue separate claims against the defendant, and be represented by their counsel of choice. The Supreme Court has said that “due process requires at a minimum that an absent plaintiff be provided with an opportunity to remove himself from the class by executing and returning an ‘opt out’ or ‘request for exclusion’ form to the court.” Phillips Petroleum Co. v. Shutts (1985).

While the right to opt out of the class alone is insufficient to prevent self-dealing by—and collusion between—class counsel and defendants, it gives class members the final word on whether a settlement sufficiently compensates them for surrendering their legal claims. Despite all this, the Richmond-based U.S. Court of Appeals for the Fourth Circuit recently upheld a settlement certification without opt-out in a case that originally made claims only for monetary relief, Schulman v. LexisNexis.

The statute under which the class sought relief, the Fair Credit Reporting Act, provides for money-damages remedies only, not for injunctive relief. Nevertheless, the settlement reached by class counsel and defendants would extinguish class members’ money-damages claims while awarding them merely the defendants’ agreement forever to cease harmful actions. Moreover, the court certified the settlement without requiring that class members receive notice and opportunity to opt out precisely because the settlement provides for no monetary relief. If allowed to stand, this precedent will be a wink and a nod to class counsel and defendants everywhere that, if sufficient care is taken in crafting a settlement, they need not worry about the rights and interests of those pesky class members.

Cato has filed an amicus brief urging the Supreme Court to review Schulman and ensure that the due process rights of class members are protected nationwide.

A new report from the Government Accountability Office finds that virtually every one of the 1.2 million employees in their study received a rating at or above “fully successful,” compared to only 0.1 percent who were deemed “unacceptable,” which might be surprising given the scandals that have rocked multiple agencies in recent years and the fact that these employees are people, prone to making mistakes or every day struggles like everyone else. Milton Friedman once asked “where in the world you find these angels who are going to organize society for us?” If these performance ratings are to be believed, they’re already in the federal workforce, which might surprise anyone who has followed the developments at the VA or TSA. The extremely skewed distribution of ratings highlighted in the report highlight the shortcomings of the current evaluation system, which makes it harder to actually address any real problems with the performance of federal employees.

Distribution of Performance Ratings, 2013

 

Source: GAO

Note: Ratings for permanent, non-senior executive service employees.

The authors of the report used data from the Office of Personnel Management to analyze performance ratings for permanent, non-Senior Executive Service employees who received a rating for fiscal year 2014. While there are some exclusions, like the U.S. Postal Service and intelligence agencies, the 24 agencies included “are generally the largest federal agencies and account for more than 98 percent of the federal workforce.” According to the ratings, not only are there virtually no underperforming employees, but many of them go above and beyond the call of duty: 27.4 percent were rated as “exceeds fully successful” and a remarkable 33.1 percent received the highest rating of “outstanding.” While agencies use ratings systems with different numbers of levels, the pattern remains the same: almost every employee rates as “fully successful” or above, with roughly 0.1 percent rating as “unacceptable.”

Things are even rosier when breaking the ratings down by occupational category. The clerical group, which accounts for 4.2 percent of these workers, is the only one of six occupational categories where more than one percent of workers received either an “unacceptable” or “minimally successful” rating. According to the feedback from the ratings systems, coming across a less than stellar federal worker in the administrative, professional, or technical fields is like finding a needle in a haystack. These federal workers are people, fallible like anyone else, so a distribution so heavily skewed towards positive ratings makes the system less credible.

Distribution of Performance Ratings by Occupational Category, 2013

Source: GAO

Note: Ratings for permanent, non-senior executive service employees.

The performance feedback is even more skewed towards stellar when the authors look at workers in higher grades of the General Schedule. Roughly 78 percent of workers in the highest group received one of the top two ratings, compared to 0.4 percent who received anything less than “fully successful.” 

Distribution of Performance Ratings by GS Group, 2013

Source: GAO

Note: Ratings for permanent, non-senior executive service employees.

The authors delve into some of the difficulties in trying to normalize the ratings system from a situation where nearly everyone is a top performer: “[a] cultural shift might be needed among agencies and employees to acknowledge that a rating of ‘fully successful’ is already a high bar and should be valued and regarded and that ‘outstanding’ is a difficult level to achieve.” When more than a third of the covered federal employees, and roughly 46 percent of higher level GS employees received this “outstanding” rating, the system loses much of its value. At this point, the ratings have more in common with the participation trophies found in little league than a meaningful feedback system to address shortcomings and improve performance. In one sense, taxpayers aren’t the only ones done a disservice by this poorly functioning system, as more competent federal workers are indistinguishable from their less able peers, and promotions cease to be based on things related to actual job performance. Having a functional evaluations system is even more important outside of the private sector, where market forces convey valuable information about which methods and employees are successful through profits and losses. As my colleague Chris Edwards has explained, the absence of these market mechanisms one of the reasons for the failures in federal bureaucracy.

As this report notes, the “transparency and credibility of the performance management process is enhanced when meaningful performance distinctions are made.” Given the government’s problems with transparency and credibility in so many other spheres, is it any surprise that the performance evaluation system struggles with the same issues? Until these agencies are able to address this “long-standing challenge,” it seems we’ll just have to take their word for it that virtually every one of these federal employees is above average, and hundreds of thousands are “outstanding.”

 

In Federalist 10, James Madison warned of “a number of citizens, whether amounting to a majority or minority of the whole, who are united and actuated by some common impulse of passion, or of interest, adverse to the rights of other citizens or to the permanent and aggregate interests of the community.” These groups—“factions” in Madison’s terms—come together to seek concentrated benefits from favorable legislation and regulation rather than competing in the marketplace, while spreading the costs throughout society.

While Madison conceded that such interests could not be stopped completely, he acknowledged that certain steps could be taken to mitigate the “effects” of these groups, and the damage that they can do to the public interest. The First Amendment is one such protection. The New York legislature, however, ignored the First Amendment rights of both merchants and consumers when—at the behest of the credit-card lobby—it passed a law restricting how retailers can convey pricing schemes, as well as the public’s right to know about them. 

New York’s no-surcharge law—like those in 10 other states—insulate credit-card companies from consumer knowledge about who is actually causing the higher prices on goods when they use their credit card (“swipe fees”). The law does this not by restricting the merchants’ ability to charge different prices as between cash and credit payments—that’s legal everywhere—but by regulating the communications regarding the different prices.

To put it simply: the law allows merchants to offer “discounts” to cash-paying customers, but makes it a crime to impose economically equivalent “surcharges” on those who use plastic. By mandating how these merchants convey their pricing structure, New York is restricting speech on the basis of its content, which would seem to be an obvious First Amendment violation.

A federal district court agreed—as have two other federal courts, including the U.S. Court of Appeals for the Eleventh Circuit when it struck down a similar Florida law. The district court held that the law “plainly regulates speech”—not conduct—by drawing a line between prohibited “surcharges” and permissible “discounts” based solely on words and labels. The Second Circuit disagreed, however, holding that the law regulates “merely prices,” not speech.

Cato has now filed an amicus brief urging the Supreme Court to take up this important case and rule that collusion between business interests and state government can’t be used to circumvent constitutional rights. Indeed, the Framers sought to protect speech from the type of crony capitalism New York’s no-surcharge law manifests. We also argue that the Court should clarify that the First Amendment covers speech even if it involves commercial matters. When legislatures abridge these protections, judges should apply the highest form of scrutiny to these laws rather than limply deferring to majoritarian will. 

The Supreme Court will decide later this month, or possibly this fall, whether to take up Expressions Hair Design v. Scheniderman.

Thanks to former Cato legal intern Frank Garrison, who’ll be starting as a legal associate later this summer, for help with this brief.

The United States Court of Appeals for the District of Columbia upheld on Tuesday June 14, 2016 so called “net neutrality” rules issues by the Federal Communications Commission in February 2015.  Two previous attempts by the FCC to regulate the internet under different sections of the Telecommunications Act were overturned by the same court in 2010 and 2014 reflecting the traditional policy distinction between heavily regulated traditional telephone landline service and so-called information services involving computers that were not regulated.

The rule issued by the FCC in 2015 reclassified internet services as falling under the same legal regime as traditional telephone service.  Yesterday’s Appeal Court decision accepts that reclassification and the legal authority that goes with it.

Regulation has published four articles in the last two years year criticizing traditional public utility regulation of the internet.  Christopher Yoo from the University of Pennsylvania argues that traditional telephone regulation envisions a monopoly service and government oversight ostensibly intended to limit prices and expand service provision. But the expansion of wireless high-speed Internet has allowed multiple competitive providers to provide service to a large majority of American consumers while restraining capital costs.  “What Hath the FCC Wrought”, by former FCC chief economist Gerald Faulhaber, argues that service quality will suffer to the extent that internet access providers can’t charge more for streams that impose greater costs on the system. Kansas State professor Dennis Weisman argues that internet regulation will likely protect competitors from competition rather than serve consumer interests just like the old telephone regulatory scheme. And Larry Downes from the Georgetown Center for Business and Public Policy argues that the movement to re-regulate telecom is propelled by some firms’ quest for rents under new regulation, and by Federal Communications Commission attempt to regain political power and the benefits that come with it. 

On the fields of Runnymede, 801 years ago today, English nobles and clergy met to wrest from King John many of the rights we Americans now enjoy. There followed, however unevenly, the rule of law.

Thus was the nascent common law reduced to a document, Magna Carta, the world’s oldest, still honored “constitution.” Its lesson, that political power needs to be restrained by the rule of law, is as important to remember today as it was eight centuries ago. 

Click on the links above to see why.

That is the title of a chapter in a new book by Jennifer Grayson, Unlatched: The Evolution of Breastfeeding and the Making of a Controversy. Grayson is a Los Angeles writer, and her book includes endorsements from film stars Anne Hathaway and Alyssa Milano.

Jennifer is a breastfeeding advocate, and she explores the science, history, and cultural practices surrounding breastfeeding. While breastfeeding is now known to be superior for child development than infant formula, apparently too few moms follow through with it for the recommended period of time. Jennifer is a champion of “Breast is Best.”   

Jennifer contacted me when she was writing her book because she had come across my essay criticizing the federal government’s $6 billion Women, Infants, and Children (WIC) program. I found that while WIC administrators are supposed to encourage moms to breastfeed, the program actually incentivizes moms to use formula because WIC provides it to them for free. WIC accounts for half of all infant formula used in the nation. About 90 percent of WIC infants use some formula, and the share of moms on WIC who breastfeed is substantially less than the share of moms not on WIC who breastfeed.

WIC makes no sense. American pediatricians universally recommend breastfeeding, as do government health officials. Yet the U.S. Department of Agriculture (USDA) runs a $6 billion subsidy program that induces mothers to use manufactured baby formula.

Jennifer explores this conundrum in Unlatched. She and I appear to hold different political views, but we come to similar conclusions about the harmful effects of this federal program. WIC administrators across the nation essentially tell millions of new moms, “Breastfeeding is the best for your baby, but here’s a bunch of coupons for free cans of formula.” Jennifer reports that low-income, often immigrant, moms covet formula and perceive it to be valuable because it is expensive on store shelves. Also, the government is handing it out, so they figure that it must be the best thing for their babies.

Jennifer quotes me noting that the perverse aspects of WIC are “akin to how the government tells people to eat healthy, but the eighty-billion-dollar food stamp program subsidizes untold billions in junk food spending.” I hate government hypocrisy.

I also hate the lack of accountability for the harm caused by government programs, as Jennifer found with WIC. No health official in the “most transparent administration in history” would speak to her about her findings: “I contacted the USDA for feedback. No one was available to speak with me.” Ditto with the Centers for Disease Control and the Department of Health and Human Services. Ditto for the California agency that runs the WIC program in that state.

Last word to Jennifer: “The government can promote breastfeeding all it wants, but as long as it continues to hand out free formula, mothers will assume that formula is endorsed by the government.”

For a few years now, the town of Croydon, NH (population 651) has been fighting with the governor and state board of education over their school choice policy. The town isn’t large enough to sustain its own K-12 district school, so it contracts with a neighboring town to educate most of its residents’ children starting in 5th grade. But when its contract was approaching expiration a few years ago, the town decided to give local parents the option of sending their children to private schools as well, and the town would cover tuition up to the amount that it was spending per pupil at the neighboring district school (about $12,000).

That’s when the governor and state education bureaucrats got involved. They objected to the town’s use of tax revenue at non-government schools, though they had difficulty pointing to exactly which law or statute the town was violating. They’re currently embroiled in a lawsuit to sort out whether Croydon has the authority to decide how to spend its local tax dollars, but meanwhile the state legislature passed a bill clarifying that Croydon and similar towns have the authority to enact their own school choice policies. 

Last week, NH Gov. Maggie Hassan vetoed that bill citing two arguments I had already refuted in a Union Leader op-ed earlier in the week. In her veto message, Gov. Hassan wrote:

House Bill 1637 diverts taxpayer money to private and religious schools with no accountability or oversight, a clear violation of the New Hampshire Constitution, which states, ‘… no money raised by taxation shall ever be granted or applied for the use of the schools of institutions of any religious sect or denomination.’ Not only is the bill unconstitutional, it also has no mechanism to ensure a student’s constitutional right to the opportunity to receive an adequate education and would undermine the state’s efforts to ensure a strong and robust public education system for all New Hampshire students.

“Under current New Hampshire law, public schools are required to provide the opportunity for an adequate education, as defined by the Legislature, and are held accountable through laws and rules that require monitoring and review by the Department of Education. Additionally, as required by statute and as a result of Supreme Court decisions requiring a statewide education accountability system, New Hampshire schools are required to participate in the Statewide Educational Improvement and Assessment Program. If House Bill 1637 is enacted, public funds would be used to send students to private schools – which are only approved by the Department of Education for attendance and not curriculum, without the same accountability standards as the public schools – violating the requirements of state law and the state Constitution.

These are red herrings. As I noted in my prebuttal last week:

During the debate over the bill, opponents raised two main objections related to accountability and constitutionality. Neither withstands scrutiny.

One legislator claimed that there are “no safeguards for quality assurance” because private schools are not subject to all the same rules and regulations as district schools. However, this has it exactly backward.

District schools are primarily accountable to school boards and the state department of education, which promise an “adequate education” in principle but don’t always deliver in practice. Private schools are subject to even greater accountability because they’re held directly accountable to parents.

If a private school isn’t working out for a child, the parents can take their child (and their money) somewhere else. Knowing this, private schools have a strong incentive to be responsive to the needs of students and their parents.

Opponents also claim the bill would violate the state constitution’s “Blaine Amendment” provision, which states that “no money raised by taxation shall be granted or applied for the use of the schools or institutions of any religious sect or denomination.”

However, in a 1955 Opinion of the Justices sanctioning the use of publicly funded vouchers at a religiously affiliated nursing school, the New Hampshire Supreme Court held this constitutional provision only forbade the state from supporting “a particular sect or denomination,” but that did not mean “that members of a denomination should be deprived of public benefits because of their beliefs.”

In other words, the state constitution permits students to use public funds at a religious school so long as they could use the funds at a variety of other secular or religious schools. The state constitution demands religious neutrality, not discrimination against religious groups or institutions.

In short, state regulations are no guarantee of quality (nor does their absence imply a lack of quality) and the New Hampshire state constitution does not mandate religious discrimination. If only someone had told the governor…

Since the passing of Muhammad Ali, the establishment has been working in overdrive to convince us that the great boxer was a member of their club. In doing so, the wisdom and wit of Ali has been on display.

Muhammad Ali’s lessons on economics, however, have been absent. Economics? Yes. The lessons were developed in a most edifying book by Donald Sull, The Upside of Turbulence: Seizing Opportunity in an Uncertain World. New York: Harper Collins, 2009 – a book that Mohamed El-Erian recommended to me.

The economic lessons are summarized in “The Boxer Matrix.” A boxer’s fate is determined by a combination of his absorption capacity (read: can he take a punch?) and agility (read: can he avoid a punch?). In the Boxer Matrix, the ideal position to be in is the Northeast quadrant: where Ali and Joe Louis boxed. But, while Ali always had terrific agility, he had to train and think his way to an above average absorption capacity. This capacity was on display in his “Rumble in the Jungle” bout with George Foreman. It was then that Ali’s “rope-a-dope” tactic was executed to perfection.

This brings us to Ali’s message on economics, with particular reference to countries that are heavily dependent on the production of oil. In turbulent times (read: oil price plunges), countries like Saudi Arabia, Venezuela, and Nigeria experience a great deal of pain because their oil-dependent economies aren’t diversified. In short, they lack agility. This is reflected in their position in the lower half of the Boxer Matrix.

Saudi Arabia is able to use its huge stash of foreign reserves (high absorption capacity) to countervail its lack of agility. But, reserves can only go so far. What the Saudis need is more agility. The Vision 2030 project is intended to do just that. Whether the Saudis can endure the “training” required to achieve Vision 2030 is another matter.

As for Venezuela and Nigeria, they are – and are likely to remain – in the loser’s Southwest quadrant: the one that dooms boxers and economies alike.

America’s relationship with Islam is fraught with tension. No one wins if America ends up fighting an endless war with 1.6 billion people worldwide.

Rather, Washington should encourage responsible Islamic voices. One is the Organization of Islamic Cooperation. According the group diplomatic status would give Americans greater opportunity to influence an important forum for Islamic activism.

The OIC was founded in 1969 and is made up of 57 states, most with majority Islamic populations. Past relations have been difficult.

In 1990 the group adopted the Cairo Declaration on Human Rights in Islam which emphasized the role of Sharia Law. At the UN the OIC routinely attacked Israel.

For years the OIC sought UN support to target the so-called “defamation” of religion, which would have threatened religious liberty. The group also struggled with the issue of terrorism.

However, the OIC has filled a more responsible international role of late. Criticism of Israel continues, but the group has become more willing to challenge its own members.

In 2008 the OIC amended its charter to emphasize human rights and liberty. It also established the Independent Permanent Human Rights Commission, an advisory body to monitor human rights within member states.

Perhaps most dramatic, in 2011 the OIC abandoned its campaign on religious defamation and backed a resolution more friendly to religious liberty. Although differences remain over how to define “incitement to violence,” the OIC appears to have moved significantly toward Western standards. Last year’s Fez declaration, adopted at a UN forum backed by the OIC, emphasized the role of religious leaders in countering religious hatred, not government in imposing legislative solutions.

Finally, the group acknowledged the problem of terrorists claiming Islam as a justification for murder and mayhem. Moreover, the OIC-backed Marrakesh Declaration concluded that “It is unconscionable to employ religion for the purpose of aggressing upon the rights of religious minorities in Muslim countries.”

Last year the group’s executive committee developed a program to confront violent extremism and partner with organizations involved in counterterrorism. The OIC plans to review language and messaging, as well as reform education to reduce support for violent extremism.

In 2007 the Bush administration sent an envoy to the OIC. But the Obama administration effectively downgraded America’s representation, withholding ambassador status from the U.S. delegate. Moreover, the group continues to lack diplomatic status, unlike the Organization of American States and even the Vatican.

The Senate Relations Committee currently is moving legislation to grant diplomatic status to the six-member Gulf Cooperation Council, but not the OIC, as recommended by the administration. Yet addressing the OIC allows Washington to address 57 countries around the globe with substantial Muslim populations. Bush’s OIC envoy Sada Cumber complained that “The United States has ignored one of its most capable and effective partners in countering the rise of violence extremism around the world.”

As I wrote in Forbes online: “Obviously, engaging the organization offers no panacea for the West’s problems with Islam. Nevertheless, the OIC offers a useful venue for communicating with scores of Muslim nations. And the group provides engagement opportunities for journalists and NGOs.”

No doubt, the OIC will continue to frustrate the U.S. on many issues. However, the organization also appears open to debate. One American who worked with the OIC argued that in many areas the group is at odds with its members.

Thus, ongoing engagement with OIC staff and representatives of member states—involving them in discussions with American advocates of human rights and religious liberty—could prove useful over time. While this is possible today, diplomatic status would ease OIC administration, encourage enhanced operations, and smooth U.S. relations.

Washington would lose little in granting recognition. Among the benefits is the official oversight that comes with diplomatic status.

The latest terror attack in Orlando reminds us of America’s challenge in confronting Islam. One positive step would be to more effectively engage the OIC.

The most stinging rebuke, as well as the  most public one, I ever received over the course of my academic career, was delivered to me in the pages of The Economic Journal.  It consisted of a  footnote to an article celebrating James Tobin’s contributions to economics.  The footnote offered a paper of mine, also published in the EJ, as a “striking example” of the “comeback” of models relying upon “ad-hoc, backward-looking, mechanical expectation formation models of the early 1960s…in the guise of adaptive learning rules.”

What made my example especially egregious, in my chastiser’s  view, was the fact that, though I referred to “adaptive learning,” my argument was mainly couched in terms of static expectations — an especially naive sort.  To make matters worse, in defending my method, I referred to some other works that seemed to me to supply a rationale for such “naive” thinking in certain contexts.  By so doing, it seems, I was treating “appeal to higher authority (Marx, Keynes, Lucas etc.) [as] an acceptable substitute for empirical evidence or logical argument starting from reasonable primitive assumptions,” thereby supplying “evidence of the immaturity of economics as a science.”  Ouch!

In my defense, my topic was the transition from barter to fiat money, and despite the upbraiding I received I still think it perfectly reasonable to assume that, when some new technology is about to make its appearance, and especially when the first stages of its development are for the most part imperceptible (and money surely qualifies as such a technology), its development is likely to be quite unexpected.  And I didn’t assume static expectations for the heck of it, or because I didn’t realize that doing so was passé.  I assumed them in order to draw attention to their instrumental value and, hence, their possible relevance.  When static expectations or any of their somewhat more sophisticated counterparts, including adaptive learning, were assumed to operate in a monetary search framework, that framework yielded predictions much more consistent with historically-observed patterns of monetary development than it did if expectations were instead assumed to be forward-looking and, in that sense, “rational.”

But my main reason for bringing that whole business up isn’t so that I can defend my poor old article.  It’s to draw attention to the fellow who dressed me down for it.  For that fellow was Willem Buiter who, if you ask me (though admitting it only adds to my chagrin), is one of the best monetary economists around these days, and one whose writings deserve an even wider audience than the considerable one they already command.

As his unsparing (but mercifully brief) assault upon my article illustrates, Buiter doesn’t go in for kid gloves, or for gloves of any sort: spotting what he believes to be a bad argument, he goes after it with bare knuckles, and more often than not lands a knockout punch.  Consider his trenchant critique of the fiscal theory of the price level.  Or have a look at his 2004 Hahn Lecture, in which he puts his dukes up against half-a-dozen “ghosts, eccentricities, mirages, and mythos” of contemporary monetary economics.  No, Sir: this is one monetary economist you don’t want to mess around with.

Buiter is, on the other hand, a monetary economist whose work repays careful reading, and repays it at a decidedly positive real rate of interest.  I was reminded of this recently when, in the course of expanding upon my Congressional Testimony on Interest on Reserves, I came across a 2009 working paper by Buiter that I hadn’t read before.  The question addressed by that paper — What obstacles stand in the way of central banks shrinking their swollen balance sheets and otherwise returning to conventional monetary policy? — makes it even more pertinent today than when it first appeared.  Yet because the paper was published as part of a somewhat obscure volume edited by the European Money and Finance Forum, it hasn’t gotten much attention (Google scholar lists 13 citations, all to the working paper version).  That’s a shame, for the paper is another good example of Buiter’s ability to muster painstaking analysis in the service of blistering rhetoric, with devastating effect.

The gist of Buiter’s argument is that, despite what monetary authorities in the U.S. and elsewhere may claim, “unwinding or reversing unconventional monetary policies,” so as to reduce the relative size of central banks’ balance sheets to pre-crisis levels, “is technically easy.”  The real obstacles to such unwinding are, Buiter insists, political.  They consist, first, of a potential conflict between central bankers and fiscal authorities concerning “the role of seigniorage in closing the government’s solvency gap,” and, second, of the fact that any unwinding procedure “is likely to reveal the true extent of the central bank’s quasi-fiscal activities during the crisis and its aftermath.”

The conflict that constitutes the first of these obstacles arises because “the portfolio reshuffling that is the logical, unavoidable counterpart” to central banks’ large-scale asset sales is likely to “create serious funding problems,” especially for national treasuries.  In particular, to the extent that the sales reduce the central banks net interest income and financial surpluses, they must force associated governments to reduce their own deficits as well.  Unless such a program of deficit reduction is consistent with those treasuries own objectives, unwinding “could be delayed for years.”

The extent of the delay will, of course, depend on central banks’ ability to resist pressure from treasury authorities.  How great is that ability?  Not very, according to Buiter.  In the U.K., a Treasury unhappy with the Bank of England’s aggressive pursuit of normalization might take control of monetary policy by invoking the Reserve Powers clause (section 19) of the 1998 Bank of England Act, allowing it to dictate policy provided that doing so is “required by the public interest and by extreme economic circumstances.”  According to Buiter, its much-vaunted (if mostly mythical) independence notwithstanding, the Fed’s constitution makes it even less immune to pressure from fiscal authorities than the Bank of England.

The second reason governments have for forestalling the unwinding of their central banks’ unconventional policies — their desire to keep a cloak on those banks’ quasi-fiscal activities — is so far as Buiter is concerned all the more reason for the general public to oppose any unnecessary delay:

The large-scale ex-ante and ex-post quasi-fiscal subsidies handed out by the Fed and to a lesser extent by the other leading central banks, and the sheer magnitude of the redistribution of wealth and income among private agents that the central banks have engaged in could (and in my view should) cause a political storm.

That the Fed and other central banks made the crisis an excuse for becoming quasi-fiscal agents in the first place was, in Buiter’s opinion, inexcusable.  Like Bagehot (and Bernanke himself, to judge by the former Fed Chairman’s utterances rather than his actions), Buiter believes that central banks have no business doing anything other than providing liquidity to illiquid but solvent financial institutions, “at a cost covering [their] opportunity cost of non-monetary financing”:

Any action beyond that, such as the recapitalisation of insolvent banks through quasi-fiscal subsidies, ought to be funded by the Treasury.  The central bank should be involved only as an agent of the Treasury — an expert assistant.  It should not put its own conventional or comprehensive balance sheet at risk.

And why shouldn’t a central bank take on quasi-fiscal functions?  Generally speaking, it shouldn’t because doing so can impair its “ability to fulfill its macroeconomic stability mandate,” and also because it may obscure responsibility and accountability “for what are in substance fiscal transfers.”  In the U.S. case, Buiter notes, there is still another reason, and one that ought not to be dismissed lightly.  It is, simply, that the Fed’s quasi-fiscal actions “subvert the Constitution, which clearly states in Section 8, Clause 1, that the power to tax and spend rests with the Congress.”

That the Fed should have gotten away, not only with having allowed itself “to be used as an off-budget and off-balance-sheet special purpose vehicle for the Treasury,” but also (until Bloomberg forced its hand after Buiter’s article appeared) with refusing to divulge the details of its crisis-related fiscal transfers, seems almost incredible to the Dutch-born Buiter, who surrendered his Dutch citizenship in order to become a dual U.S.-U.K. citizen:

It is surprising that a country whose creation folklore attributes considerable significance to the principle of “no taxation without representation” would have condoned without much outcry such a blatant violation of the equally important principle of “no use of public funds without accountability.”  This indeed amounts to a quiet coup by the central bank.

Would that more U.S.-born economists, including those who fell-over each other in their rush to defend the Fed against any prospect of routine GAO “audits,” took the Constitution’s plain language as seriously.

[Cross-posted from Alt-M.org]

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