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The public relations and legal battle between the Federal Bureau of Investigation and Apple over the company’s use of encryption has put the focus on executive branch surveillance in a way not seen since Edward Snowden’s revelations almost three years ago. However, as the historical record demonstrates, the FBI’s domestic spying on the American public dates almost from the Bureau’s creation in July 1908. In the years that followed the FBI’s birth, other federal agencies–some civilian, some military–initiated their own warrantless domestic surveillance operations. Throughout this period, Congress was more frequently aiding and abetting this surveillance and repression, rather than preventing it or reining it in.

As the showdown between Apple and the FBI illustrates, what has changed is the technology used to accomplish the surveillance–technology that now gives federal law enforcement and intelligence agencies the ability to surreptitiously access the computers, smartphones, and even home appliances of tens of millions of Americans.

Today, the Cato Institute is launching a timeline that chronicles the history and implications of these developments: American Big Brother: A Century of Political Surveillance and Repression.

Too often, federal domestic surveillance of citizens was a prelude to government actions aimed at subverting civil society organizations opposed to American involvement in foreign wars, aiding conscientious objectors, advancing civil rights and political autonomy for people of color, the creation of labor unions, and even surveillance of candidates running for or holding office–including members of Congress and presidential contenders.  

As political scientist Robert Justin Goldstein noted in his 1978 book, Political Repression in Modern America: 1870-1976, “American social scientists have not seriously considered political repression as one important factor which helps explain the narrowness of the American political spectrum…” Put differently, through the use of surveillance, agent provocateur’s, and outright violence, federal officials often decided what political views were or were not permissible to hold and practice in the American political system.

Indeed, the theme that emerges clearly from the timeline’s episodes is that in many of these cases, federal surveillance and political repression were directed most forcefully at individuals and organizations that challenged the prevailing political paradigm on the issue at hand. Occasionally, the domestic surveillance was aimed squarely at the political opponents of the president then occupying the White House (FDR ordering surveillance against isolationists, LBJ ordering Goldwater’s campaign plane bugged). In other cases, simply the perception by federal officials that an individual or group might be a “threat to national security” (think Japanese-Americans in World War II or Arab/Muslim-Americans today) was enough to trigger an unwarranted federal attack on the target’s constitutional rights.

The individuals and organizations subjected to these tactics often found themselves either politically crushed or so badly damaged as to be rendered politically marginalized and ineffective. The personal and professional costs of these federal attacks on the constitutional rights of these citizens were usually life-long, and belated apologies by federal officials decades removed from the actions of their predecessors did little if anything to actually right the original wrong, much less preclude a repeat of such surveillance and repression against others.

Indeed, just three years after the passage of the Foreign Intelligence Surveillance act in 1978, then-President Ronald Reagan promulgated an executive order than one recent State Department whistleblower alleged has been used to conduct warrantless surveillance of the overseas communications of Americans in the post-9/11 era. Whether the practice goes back farther is an issue that should be, but currently is not, the subject of a Congressional inquiry–just as all government surveillance activities initiated since the Church Committee should be investigated. 

The timeline endeavors to provide a wide range of examples of federal misconduct in this area. It will be updated regularly on the basis of archival research and new revelations of current federal domestic surveillance and political repression of Americans–citizens whose only “crime” was or is to challenge governmental policies they oppose but that are carried out in their name.

As soon as the terrorist bombings took place in Brussels, President Obama’s many critics demanded that he immediately terminate his state visit to Cuba and abandon the rest of his trip to Latin America.  Instead, Senator John Kasich, Senator Ted Cruz, and other GOP luminaries insisted, the president should return immediately to Washington and go into crisis mode with his national security team. President Obama firmly refused to do so. Instead, he continued his trip as scheduled.  That afternoon, he attended a baseball game with Cuban President Raul Castro and then completed the Cuba leg of his journey with a joint statement and press conference before leaving for Argentina.

In terms of substance, it was the right course of action.  Too many members of America’s political elite, as well as the news media, hype the terrorist threat to absurd levels. Pundits and politicians even have a tendency to compare the severity of the threat posed by such groups as ISIS and Al Qaeda to the dire menace to global peace and American security posed by the likes of Nazi Germany and the Soviet Union, and they warn that we are on the brink of World War III or perhaps are fully engaged already in that conflict. It is a nonsensical comparison. ISIS and similar nonstate actors do not even come close to constituting such an existential threat. 

Instead, radical Islamic terrorism poses a limited threat roughly akin to that presented by radical anarchists in the second half of the nineteenth century. To allow ISIS to disrupt an important presidential visit to Latin America, a crucial and often neglected region in U.S. diplomacy, would have accorded the terrorist group an importance it does not deserve.  The news media makes a similar error when it gives every terrorist incident seemingly endless coverage for days or weeks.  President Obama sent ISIS a clear message that he would not play into their hands in that fashion this time.

However, the president’s handling of the optics surrounding his decision was extraordinarily clumsy.  It would have been one thing to have been in unspecified “meetings” or “discussions” with U.S. or Cuban officials.  Additional meetings with key members of the new U.S. embassy staff in Havana could certainly have been arranged at the last minute.  But attending a baseball game in his shirt sleeves with Castro, relaxing and enjoying the Cuban sunshine, while the bodies of the victims in Brussels were still cooling, presented a horrible image.  It was simultaneously frivolous and insensitive. 

And, unfortunately, that is the image that most people both in the United States and abroad will remember about President Obama’s initial reaction to the events in Brussels. Naturally, his critics pounced and portrayed the action as another manifestation of a feckless foreign policy. The reality is that it was the correct substantive response, but one that was ineptly executed.

In the wake of the terrorist attacks in Brussels this week, presidential candidate and senator Ted Cruz called for increased law enforcement activity in American Muslim communities:

 We must empower law enforcement to patrol and secure Muslim neighborhoods before they become radicalized.

Pressed to clarify his remarks, Sen. Cruz called for the resurrection and nationalization of a now-defunct NYPD surveillance program directed at the Muslim community in and around New York City.  He argued that the “successful” program was shut down due to an excess of political correctness, leaving New Yorkers more vulnerable to the threat of terrorism.

The problem: even ignoring political correctness, the NYPD program was a failure by any reasonable standard.

In the aftermath of 9/11, the NYPD established a surveillance-based Demographics Unit.  The goal of this unit was to “map” certain (almost entirely Muslim) communities in and around New York City, placing them under expansive police surveillance in order to sniff out would-be terrorists before they could launch attacks.   

To achieve this mandate, the police infiltrated mosques, set up surveillance cameras around Muslim-owned businesses and residences, went undercover to monitor everyday conversations, and even infiltrated student groups at schools as far away as Yale and the University of Pennsylvania in order to monitor what students talked about, who they spoke to, and how often they prayed. 

The end result of years of Demographic Unit surveillance on American Muslims was… nothing. 

No convictions, no prosecutions, and, according to Assistant Chief Thomas Galati, not even a single legitimate lead

That’s not to say there were never any terrorist threats in New York during this time period, only that the expansive “patrolling and securing” of Muslim neighborhoods failed to produce any actionable intelligence about them.  A 2013 New York Magazine article contains an illustrative example: 

In September 2009, the National Security Agency intercepted an e-mail from a taxi driver named Najibullah Zazi to an e-mail address linked to one of Al Qaeda’s most senior leaders. The message contained the line “the marriage is ready.”

Marriage and wedding were among Al Qaeda’s favorite code words for attacks, referring to the day that a suicide bomber met his brides, the maidens of the hereafter.

Trying to ascertain the scope of the plot, the NYPD searched the files of the Demographics Unit. Even though the rakers had canvassed Zazi’s neighborhood daily, and had even visited the travel agent where he bought his tickets between New York and Colorado, there was not a single piece of useful information. “There was nothing,” said [NYPD Lt. Hector] Berdecia. 

In 2011, the Associated Press began publishing an in-depth exposé on the program, which spawned calls for reform and a wave of litigation against the city. By the time Bill de Blasio took office as mayor in 2014, the program had largely wound down, and the unit was eventually disbanded entirely.

There is little evidence that program made New Yorkers any safer. What the program undoubtedly did is cost millions of tax dollars and thousands of law enforcement man-hours that could have been spent investigating actual criminal behavior. 

Sen. Cruz’s campaign also claimed that the end of the program made it more difficult for the NYPD to work with the Muslim community: 

In New York City, Mayor de Blasio succumbed to unfounded criticisms and eliminated the efforts of law enforcement to work with Muslim communities to stop radical Islamic terrorism. 

According to the NYPD itself and advocates within the New York Muslim community, the opposite is true. The NYPD program understandably alienated the local Muslim community and generated immense distrust between Muslim Americans and law enforcement.

While there is scant evidence that the NYPD program generated much in the way of actionable intelligence, it did generate civil rights and constitutional litigation against New York City.  Several suits have been settled, with costs ranging in the millions of dollars.

Meanwhile, another suit in New Jersey remains on the docket. Last October, the Third Circuit Court of Appeals issued a strongly worded opinion reinstating a lawsuit against the NYPD surveillance program, invoking several of the darkest civil liberties violations in our history to explain why the suit should proceed:

No matter how tempting it might be to do otherwise, we must apply the same rigorous standards even where national security is at stake. We have learned from experience that it is often where the asserted interest appears most compelling that we must be most vigilant in protecting constitutional rights. “[H]istory teaches that grave threats to liberty often come in times of urgency, when constitutional rights seem too extravagant to endure.”

[…]

Today it is acknowledged, for instance, that the F.D.R. Administration and military authorities infringed the constitutional rights of Japanese-Americans during World War II by placing them under curfew and removing them from their West Coast homes and into internment camps. Yet when these citizens pleaded with the courts to uphold their constitutional rights, we passively accepted the Government’s representations that the use of such classifications was necessary to the national interest. […] In doing so, we failed to recognize that the discriminatory treatment of approximately 120,000 persons of Japanese ancestry was fueled not by military necessity but unfounded fears.

[…]

What occurs here in one guise is not new. We have been down similar roads before. Jewish-Americans during the Red Scare, African-Americans during the Civil Rights Movement, and Japanese-Americans during World War II are examples that readily spring to mind. We are left to wonder why we cannot see with foresight what we see so clearly with hindsight – that “[l]oyalty is a matter of the heart and mind[,] not race, creed or color.” 

Recycling failed, constitutionally-dubious policies is not a solution to terrorism, nor is singling out a largely law-abiding minority community for even more invasive government surveillance than it already endures.  Police are already empowered to investigate criminal activity, and to patrol any neighborhood they like. But the power to select entire neighborhoods or communities for intense police surveillance based solely on the ethnicity or religion is a power the police don’t need and shouldn’t have. 

For its part, the NYPD now seems to agree

Six years ago today, President Barack Obama gave the Affordable Care Act his signature. There is no sense in marking the ACA’s anniversary, however, because the ACA is no longer the law.

Realizing the law he signed was unconstitutional and unworkable. President Obama and the Supreme Court have since made a series of dramatic revisions that effectively replaced the ACA with something we now call “ObamaCare.”

ObamaCare–not the ACA–is the law under which Americans now live.

  • Under ObamaCare, the Supreme Court used Congress’ taxing power–a power Congress declined to use under the ACA–to force Americans to purchase government-approved health-insurance plans.
  • Under ObamaCare, the Supreme Court severed the connection between the (ineffective) Medicaid expansion Congress enacted and the rest of the Medicaid program–a bifurcation Congress never contemplated, much less intended.
  • Under ObamaCare, the president imposed and the Supreme Court green-lighted taxes on nearly 100 million Americans whom Congress clearly exempted.
  • ObamaCare gives members of Congress a special exemption from the ACA. (It’s good to be the king.)
  • Under ObamaCare, the president can tax and subsidize whom he pleases. Even if Congress didn’t provide the funding. Even if Congress says he can’t.

The ACA, in effect, is dead. ObamaCare is the law governing Americans’ health care–even if we don’t know what that law is from one day to the next. The ACA had legitimacy. No legislature ever approved ObamaCare. It has no legitimacy.

Unfortunately, ObamaCare doesn’t work much better than the ACA. ObamaCare is still causing Americans to lose their health plans. As one voter pointedly reminded Hillary Clinton, ObamaCare is still driving premiums higher. It is still causing their coverage to erode.

If you want to celebrate something on March 23, celebrate the anniversary of the last time Democrats put the legislative process and political legitimacy ahead of their ideological goal of universal coverage

Today’s argument in Zubik v. Burwell was very different than what we saw two years ago on Hobby Lobby. The focus was almost entirely on whether the “accommodation” offered to religious nonprofits constitutes a substantial burden on those employers’ religious free exercise. Indeed, much of the argument involved a dispute over how exactly the “accommodation” works and whom it burdens – not simply whether adequate alternatives were available.

But getting past these technicalities of instance regulations, the result looks to be the same as what we saw regarding for-profit corporations: the progressive justices are in lockstep for the government, the conservatives support the religious-liberty claimants, and Justice Kennedy is in the middle but almost certainly leaning towards the conservatives. Of course, after Justice Scalia’s passing, that suggests that the vote will be 4-4 – meaning an affirmance of conflicting lower-court rulings and a Schroedinger’s mandate that lives on in some of the country but not the rest.

The Court could avoid this untenable result – as well as the messy casuistry and the culture-war battle – by following the administrative-law line suggested by Cato in our amicus brief. We argued that the Department of Health & Human Services simply lacked the authority to create law in this sensitive area. As Josh Blackman and I write in the current issue of The Weekly Standard:

Conveniently, there’s an alternate argument, based on the Hobby Lobby and King rulings, that could command a majority opinion: The agencies lack both the expertise and power to exempt some religious groups while forcing others—deemed “less” religious—to be complicit in what they consider sin. By rejecting this bureaucratic assertion of executive authority, Zubik can thus be resolved without further politically fraught haggling over RFRA.

In other words, if Congress had imposed this regime, that would’ve been one thing, but we cannot assume that the Congress that passed Obamacare – including especially the pro-life Democrats whose votes were essential – delegated such awesome power to administrative agencies without saying so explicitly.

Alas, the Court didn’t seem at all interested in that nifty solution, and so, rather than releasing that impossible tie, what we’re likely to see is a setting of Zubik for reargument at a time when the Court gets its ninth justice. That means we’ll be doing this all again next year, when it really will be deja vu all over again.

Yesterday at the Washington Post, which I saw just this morning, Radley Balko found two stories that make the blood boil. His headline says it all: “A dead cop, a dead suspect, a wounded cop and a terrified, hospitalized grandmother.” He’s writing, of course, about the war on drugs.

Early Sunday morning, it seems, just after midnight, two Howard County, Indiana, sheriff’s officers tried to serve a warrant in a trailer park in Russiaville, Indiana, by forcibly entering the home. The result? Read the headline again. And what was the alleged crime? Possession of a syringe. That’s right.

So a deputy is dead, a suspect is dead, and a third deputy was seriously wounded because a guy failed to appear in court after he was arrested for possessing a syringeThe Indianapolis Star reports that the suspect had prior arrests for drug possession. Not distribution. Just possession.

Meanwhile, in Chicago, Balko continues, an 82-year-old great-grandmother, Elizabeth Harrison, was given the scare of her life last Friday when cops, guns drawn, broke down her door and ordered her to put up her hands. They had the wrong house, she later told reporters from her hospital bed. “They wanted me to produce this young man that they were looking for. And they would not take no for an answer that I didn’t know him.”

As Balko notes, this case has a bizarre twist (in part, quoting the original story):

The man police were looking for walked up to the officers as they were explaining to Harrison’s family how they can fill out paperwork to file a claim to get her door fixed …

Linda Channel, Harrison’s daughter who lives on the same block as her and rushed over following the raid, said the “target” told cops they had the wrong house …

“You all came to the wrong house. I live at 126, and this is 136,” Channel told ABC, quoting the man.

In the end, the police didn’t even arrest him, due to lack of evidence. Harrison is lucky she’s still alive. She isn’t the first innocent grandmother to be wrongly raided. Or the second. Or the third.

She also wouldn’t have been the first grandmother to be killed in a mistaken drug raid. Or the second. Or the third. Or the fourth.

Read the whole piece here. This insane war on drugs has got to end. 

Republican frontrunner Donald Trump claims he is going to build a wall along the border and get Mexico to pay for it.  This has been laughed off as infeasible, perhaps even a little nutty.  Yet perhaps we should have held back our disdain a little longer.  In 1954, President Eisenhower prompted the Mexican government to deploy troops along the border to stop Mexicans from entering the United States.  While Mexico didn’t build a wall, they attempted to stem the tide of Mexicans emigrating to the United States and their government paid for it.  This might sound great to immigration restrictionists until they realize how Eisenhower did it.    

After months of failed negotiations between the two countries over the terms of the Bracero guest worker visa, the U.S. departments managing the visa issued a press release on January 15, 1954 stating that migrants who entered would be immediately awarded a labor contract and a job.  Outraged by this attempt to cut them out of the negotiations, the Mexican government deployed 5,000 soldiers along the border to threaten, detain, and deter migrants who tried to enter the United States.

Deborah Cohen sums up the resulting chaos:

When the United States actually pulled back the gate and opened the border on January 22, chaos ensued.  Hundreds of hopeful migrants rushed past the barrier, aided by the extended arms of United States Border Patrol agents, even as Mexican soldiers charged the men, trying to prevent them from crossing.  Soldiers grabbed their countrymen, often by the shirt, and yanked them back as they were pulled towards the other side by United States border guards.  [Mexican] Troops pelted men with fists, guns, water, and clubs in a vain attempt to contain this rush of bodies [emphasis added].

Mexicans who avoided their own military and made it across the border found helpful Border Patrol and INS officers who guided them to labor recruiters who gladly transported them to farms for legal work in the United States. 

Negotiations to renew the Bracero program broke down for two main reasons.  The first is that the Mexican government sought a monopoly on the export of labor.  Article 123 of the Mexican Constitution of 1917 controlled the hiring of Mexican citizens abroad.  Cloaked in nationalistic justifications, it was a scheme that created a Mexican government labor monopoly to skim off rents.  To empower Article 123, historian Ernesto Galarza describes a Mexican immigration law passed in 1932 that “authorized the confiscation of vehicles uses to transport persons to the border for the purposes of facilitating their illegal entry into the United States.”  Galarza means “illegal entry” under Mexican law, not U.S. law.  Simply put, the Mexican government wanted higher rents and the U.S. government was reluctant to grant them.          

The second reason negotiations broke down is that Eisenhower wanted the Mexican government to contribute to migration control by patrolling their side of the border.  The Bracero program had existed since 1942 as a bilateral labor agreement between the two countries but unlawful Mexican immigration persisted.  The Mexican government’s failure to control illegal Mexican emigration and never ending American demand for workers lulled them into a position of salutary neglect so that by the early 1950s almost 2 million Mexican unauthorized immigrants were working in the United States.  Eisenhower wanted that stopped and thought the Mexicans could help.  The Americans eventually solved it themselves

The negotiations broke down in 1953 and 1954, prompting the Eisenhower administration’s January 1954 announcement that any Mexican who showed up would be granted a work visa.  Mexico quickly acceded to American demands and soon Bracero workers were flowing freely back and forth across the border again - to the economic benefit of everybody involved. 

Eisenhower’s opening of the border with Mexico in January 1954 was only possible because of the Bracero guest worker visa program that tied the two government’s together.  If a future President Trump negotiated a large scale guest worker visa program that allowed many temporary Mexican guest workers in annually and legalized most of the unauthorized immigrants in the United States, he could gain the diplomatic leverage to prompt Mexico to build a wall – or at least deploy some troops in a fancy show.

A legalization and the creation of a large scale guest worker visa program would make such a wall even more irrelevant than it would currently be (unlawful immigration from Mexico has essentially stopped) but at least we’d have a more functional immigration system. 

This post was written with the help of Andy Yuan

In a third-act twist worthy of M. Night Shyamalan, the FBI has announced that it has just discovered a method, provided by an unnamed “third party,” of breaking into deceased San Bernardino shooting suspect Syed Farook’s iPhone without help from Apple.  As a result, the hearing at which Apple and DOJ lawyers were scheduled to square off today has been postponed for at least two weeks while the Bureau tests out this “new” approach, potentially rendering the legal battle with Cupertino moot.

The scare quotes in the previous sentence are there to signal my skepticism that there is a genuinely novel in play here—which matters because the FBI has been consistently representing to the courts that Apple’s assistance, and an order to compel that assistance, was “necessary” to access the data—which is to say, that the FBI had no viable alternative methods to decrypt the contents of the phone.  Yet from the beginning of the public debate over this case, the technical experts I’ve consulted with have consistently pointed to two distinct approaches the Bureau might employ that wouldn’t require Apple to write or authenticate a line of code. 

First, there are potential methods of extracting the phone’s UID—a secret master encryption key physically embedded in the processors of iOS devices.  With that key, which is designed to be difficult to read and unknown even to Apple, the FBI  could crack the encryption protecting the iPhone data in a matter of minutes.  Though cumbersome, time-consuming, and expensive, these methods would almost certainly still be cheaper than a protracted legal battle with a deep-pocketed tech titan—though they would also inherently carry some risk of destroying the key information, rendering the iPhone data permanently inaccessible.

The second and more plausible method was described in some detail weeks ago by ACLU technology fellow Daniel Kahn Gillmor, and even referenced by Rep. Darrell Issa at recent hearing with FBI director James Comey. Read Gillmor’s post for the details, but in essence it involves removing the phone’s “effaceable storage” to make a backup copy of the key material that is erased to render the phone’s data permanently inaccessible after too many incorrect passcode guesses. When FBI hits their guess limit, they “re-flash” the backed-up data to the phone and get another round of guesses.  Security researcher Jonathan Zdziarski’s argues cogently that this is the most probable option. 

If that’s the case, the bureau ought to have some explaining to do, because this alternative surely should not have been unknown to FBI’s forensic experts.  It would imply that the government either chose to obscure the real range of options from the courts, or more charitably, did not make a very serious effort to explore alternatives before pleading “necessity.”   A high profile terrorist attack, after all, must have seemed like an ideal test case for the proposition that technology companies can be compelled, under existing law, to hack their own security on the government’s behalf—which might have sapped enthusiasm at Main Justice for abandoning it in favor of an attack that would give them this data, but be unlikely to work on newer model phones.  Of course, that cost-benefit calculus might look different once it became clear that this would be a long legal slog with Silicon Valley more generally lining up to back Apple—not a quick and easy PR win for the government. No doubt the FBI will plead reluctance to disclose too much about their “sources and methods” of accessing data on the phone, but they should at least be pressured to confirm, generally, whether they’re using a general approach they ought to have known about well before this past weekend.  If so, that ought to affect the credibility their representations of necessity are afforded by future courts in similar cases.

And, of course, there will be no shortage of similar such cases: There are a dozen underway already,  and hundreds more locked iPhones in the hands of various law enforcement agencies.  Since the method outlined above will (probably) not work on newer iPhones, the underlying legal questions raised by this case will still need to be resolved—though perhaps by courts that have learned to regard FBI’s technical affidavits with bit more skepticism.

 

While most U.S. allies seem happy to continue their free-riding ways, Japan is exhibiting a different sort of behavior. The long-time U.S. ally is taking steps to shoulder a greater share of the burden for its own defense and regional stability. Last year, the Japanese Diet reformed its national security laws allowing the country to play a more active role in East Asia. The reforms prompted many observers to declare an end to Japan’s post-World War II pacifism.

Jennifer Lind, author of a recent Cato Policy Analysis, disagrees:

Such pronouncements are misguided; these reforms are only the most recent recalibration of Japan’s postwar grand strategy…[Japan] prefers to “buck-pass” to the United States, but—at times of growing threat and uncertainty about the U.S. commitment—Tokyo has built greater military capabilities and accepted more roles within the alliance. The recent security reforms represent continuity, rather than change…

Lind, who is an associate professor at Dartmouth College, goes on to argue that Japan’s new posture may not be permanent. She explains, “Japan does less when it can; more when it must.” The new security posture is motivated by two factors: the military threat posed by China and uncertainty about the U.S. commitment to Japan. Tokyo could return to free riding if either the threat from China is reduced or the United States shores up its commitment.

Yet, while many welcome Tokyo’s reform efforts, others fear that a more assertive Japan will only increase tensions in the region. But what are the implications for U.S. security of a more assertive Japan? And does Japan’s acceptance of more responsibility suggest that other U.S. allies would act accordingly if Washington were to step back?

Please join Jennifer Lind, myself, and two distinguished panelists as we discuss these and other important questions. The event will be held at noon on March 29, 2016 at the Cato Institute. You can register here.

Just four days after Salah Abdeslam, the mastermind of last fall’s Paris attacks, was finally captured, the Islamic State (ISIS) has claimed responsibility for this morning’s terrorist attacks in Brussels. The attacks, which have killed more than 30 and wounded almost 200, provide another chilling reminder of how dangerous the world can be.

As Brussels tends its wounds, the simple question looms: How should Europe and the United States respond?

In and around official Washington, the script is becoming sadly predictable. Immediately following the news, administration officials assert their resolve and commitment to combatting terrorism: “Attacks like these only deepen shared resolve to defeat terrorism around the world

Close on their heels, administration critics line up to fear monger, launch cheap insults at Obama for not paying enough attention the terrorism, and to talk tough about striking back at ISIS. All the Republican candidates criticized Obama for staying in Cuba. Donald Trump took the opportunity to point out that he has long been in favor of closing up the border while Ted Cruz called on the president to recognize that “Radical Islam is at war with us” and for “empowering law enforcement to patrol and secure Muslim neighborhoods before they become radicalized.”

Finally, both Europe and the United States are likely to ratchet up the war on the ground against ISIS. To date this approach has born decidedly mixed fruit. On the one hand ISIS has certainly lost significant ground over the past year. On the other hand, very little of that success can be traced directly to U.S. or French military efforts.

Rather than go through the motions focused on short-term political gains, both Europe and the United States should pursue a long-term strategy. That strategy might take many forms but at heart a sound long-term approach needs three fundamental components.

First, a long-term strategy requires an enduring commitment to openness and tolerance. Both Europe and the United States benefit tremendously from immigration, both economically and socially, and from a vigorous marketplace of ideas sustained by diverse religious, racial, and ethnic populations. The costs of closing borders, polarizing society along ethnic and religious lines, and limiting civil liberties will far outweigh whatever benefits they might bring in the short run.

Second, a long-term strategy must emphasize a law enforcement approach to combatting terrorism rather than a military one. The notion that Europe and the United States can fight a “war” against terrorism is ridiculous. Terrorism is a tactic, not a disease or an organization. No amount of military adventurism will eliminate the ability of violent individuals to cause pain. Nor will destroying the Islamic State (ISIS) be enough to ensure some kind of victory. The root causes of violence in France, Belgium, and San Bernardino stem from the sweeping unhappiness and anger within the Arab and Muslim worlds. Until those issues are settled Europe’s and America’s entanglement in Middle East affairs will continue to spawn terrorist attacks in the West. This is why destroying Al Qaeda didn’t solve the problem but instead just produced the next incarnation of the threat. Simply put, killing more terrorists will not produce long-term security in Europe and the United States.

The third component is to pull back from the region.  Our over-involvement in the Middle East has not only engendered anger among many Muslims in the region; it has also worked directly against our own security in other ways. ISIS, let us not forget, is an outgrowth of the Sunni insurgency that rose up to fight U.S. forces in our war of choice in Iraq (2003-2011). They are an unintended, albeit not unforeseeable, consequence of that wrong-headed war. More bombs and boots now may have similarly counterproductive results down the line. In addition, our deep engagement in the region has resulted in a pernicious, long-standing relationship with Saudi Arabia, which is the foremost exporter of the radical Wahabist ideology that drives al-Qaeda, ISIS, and other anti-American terrorist groups.

The strategic importance of the Middle East has been greatly exaggerated. And pulling back from the region, although it would not necessarily yield positive results in the immediate term, is likely to have hugely beneficial long-term effects as far as securing us from the minor but real threat of terrorism.

Recently a friend of mine sent me a picture of a diagram she saw at her son’s pre-school, created around Presidents’ Day. It shows what the students (3 year-olds) would do if they were president.

I’ve often heard it said that libertarianism is much like what we teach kindergartners: keep your promises, don’t take other people’s stuff, and keep your hands to yourself. But clearly these toddlers are getting other, more maximalist messages about presidential power, because the list of things they would do reads like…well, like the promises made during campaign speeches: “Give you ice-cream!”, “I will make it rain” (clearly on the opposite end of the ideological spectrum from Benjamin, who would “Stop the rain!”) and the refreshingly candid “Give myself lots of presents.” Even the teachers, who one would hope to have a firmer grasp of the constitutional limits on executive power, get in on the act: Miss Wendy promises “Rainbows everywhere” and Miss Kelly “Pizza lunch every day!”.

On a positive note, young Yarden has the right idea: he/she would simply “Go home”. Sounds like a libertarian in the making. Yarden for President, 2066!

Update: David Boaz had a similar take on “Our Magical President” back in 2001.

According to Gary Gorton and Ellis W. Tallman, in their  recently released NBER Working Paper, some were.

For several decades prior to the Fed’s establishment, Gorton and Tallman note, “private bank clearinghouses provided lending facilities and assisted member banks when they needed help.”  The pattern of such assistance, they say, reflected a privately-adopted TBTF policy that “was a reasonable response to the vulnerability of short-term debt to runs that could threaten large banks and thereby the entire banking system.”

These clearinghouse bailouts appear, furthermore, to have succeeded in averting more serious crises.  Since, according to Gorton and Tallman’s understanding, “[t]he logic of modern bailouts is the same” as that adopted by 19th-century clearinghouses, they conclude that TBTF remains a reasonable policy today, and not, as many suppose, an invitation to excessive bank risk taking.

But there’s a flaw in Gorton and Tallman’s reasoning, and I’m afraid it’s a lulu.  The flaw consists of their failure to understand what “Too Big to Fail” means.  That meaning has been clear from the time  Congressman Stewart McKinney first popularized the notion during a hearing concerning the Continental Illinois bailout.  “Mr. Chairman,” McKinney said, “Let us not bandy words.  We have a new kind of bank.  It’s called too big to fail.  TBTF, and it’s a wonderful bank.”

In case it isn’t obvious, Congressman McKinney was being sarcastic.  What was “wonderful,” in the sense of “amazing,” was the fact that Continental would remain a going concern despite it’s having been rendered insolvent by bad loans it had made or purchased.  The point is that, if TBTF means anything, it means that certain financial institutions are exceptions to Walter Bagehot’s “classical” rule according to which last-resort loans and other kinds of emergency aid should be confined to solvent financial firms.  It is precisely because TBTF can mean putting insolvent firms on government life-support that critics of the policy see it as a source of moral hazard.

All of this appears, somehow, to have escaped Gorton and Tallman’s attention.  For otherwise they could not have failed to note the crucial difference  between “the logic of modern bailouts” and that underlying the private pre-Fed bailouts that their paper describes.  For while clearinghouses did occasionally rescue “big” banks, they never rescued insolvent ones.  Instead, as is clear from the evidence that Gorton and Tallman themselves muster, clearinghouses went to great lengths to assure themselves of a bank’s solvency before they’d lend it a nickel.  “If a bank possesses good assets and is merely temporarily embarrassed,” a 1901 source cited in the paper explains, “it is good policy of the [clearinghouse] association to prevent [its] failure.”  That’s not too big to fail.  It’s too sound to fail.

And while it’s true that, according to the same source, clearinghouses were especially concerned to prevent “important” members from failing, because such failures try “the weak points of all the banks,” such banks still had to have plenty of  “good assets” to qualify for help.  During the Panic of 1884, for example, the failure of the Metropolitan National Bank might have had disastrous consequences for its many correspondents.  Yet the New York Clearing House agreed to offer it support in the form of clearinghouse loan certificates only after its examiners determined that the Metropolitan “had sufficient assets in good condition” to warrant that support.  In short, “Bigness” (or “interconnectedness”) may have been a necessary condition for clearinghouse support.  But it was never a sufficient condition.

In a TBTF regime, in contrast, “bigness,” or “interconnectedness,” can suffice.  Hence Continental Illinois.  Hence other bailouts of larger, insolvent financial firms since them, including the Fed’s rescues of Citigroup and AIG during the recent crisis.  As Tom Humphrey points out,

the Fed ignored the classical advice never to accommodate unsound borrowers when it helped bail out insolvent Citigroup and AIG.  Judging each firm too big and interconnected to fail, the Fed argued that it “had no choice” but to aid in their rescue since each formed the hub of a vast network of counterparty credit interrelationships vital to the financial markets, such that the failure of either firm would allegedly have brought collapse of the entire financial system.  Fed policymakers overlooked the fact that Bagehot already had treated this argument, and had shown that interconnectedness of debtor-creditor relationships and the associated danger of systemic failure constituted no good reason to bail out insolvent firms.

The difference between the “logic” of the private-market financial firm rescues of the pre-Fed era, in which the rescuers themselves had “skin in the game,” and today’s taxpayer-supported rescues, is a difference of no small importance.  It is why we worry about TBTF these days, while no one worried about it back then.

I hope I won’t be misunderstood as intending to suggest that there’s no merit in Gorton and Tallman’s research, because that isn’t my intention at all.  In fact I consider their inquiry into clearinghouse rescues of the pre-Fed era quite valuable.  The problem isn’t the research itself, but the fact that Gorton and Tallman draw the wrong lesson from it.  The lesson isn’t that TBTF is a dandy doctrine, and that those looking for the causes of financial-system fragility today should look elsewhere.  It’s that private, 19th-century financial actors appeared to have managed last-resort lending more responsibly than their modern, government-appointed counterparts.

[Cross-posted from Alt-M.org]

Tom Friedman had an op-ed last week in which he argued that if Donald Trump – who has been complaining that the U.S. government negotiates bad trade deals – were negotiating the Trans Pacific Partnership (TPP), he would negotiate pretty much the same deal that President Obama negotiated. But I think that Friedman misunderstands how Trump and some other businessmen, especially various high profile investors, think about trade. And the reason I mention investors is that’s who Trump seems to have in mind as trade negotiators:

I take a guy like Carl Icahn, you take Henry Kravis, you take so many of the guys that I know, and you say, “You know what? I’d like you to watch over the deals that are being made with China because we’re getting killed on trade.”

Believe me, we will be so good. You should get a guy like Carl on, very smart, great negotiator. We will be so good.

Now, I don’t know exactly what  Carl Icahn thinks about trade policy, trade deficits, etc. I looked around the internet a bit, but did not see anything.  (As for Henry Kravis, he signed this letter in support of Trade Promotion Authority and the negotiation of the TPP, although that was before the final TPP text was made public).  But I do know what another famous investor, Warren Buffett, thinks.  In the past, he has argued for a program that manages exports and imports to keep them roughly in balance. Here’s what he proposed a while back:

… My remedy may sound gimmicky, and in truth it is a tariff called by another name. But this is a tariff that retains most free-market virtues, neither protecting specific industries nor punishing specific countries nor encouraging trade wars. This plan would increase our exports and might well lead to increased overall world trade. And it would balance our books without there being a significant decline in the value of the dollar, which I believe is otherwise almost certain to occur.

We would achieve this balance by issuing what I will call Import Certificates (ICs) to all U.S. exporters in an amount equal to the dollar value of their exports. Each exporter would, in turn, sell the ICs to parties—either exporters abroad or importers here—wanting to get goods into the U.S. To import $1 million of goods, for example, an importer would need ICs that were the byproduct of $1 million of exports. The inevitable result: trade balance. 

Warren Buffett is a great investor, but with regard to trade policy, he is in over his head. The idea of balanced trade completely misunderstands how trade works. A trade deficit is not like a budget deficit, where you borrow money from someone and have to pay it back. If the U.S. has a trade deficit with Mexico, for example, it just means that Americans are buying more from Mexicans than Mexicans are buying from Americans; it does not mean that Americans now owe Mexicans the deficit money. There are a variety of ways these things work themselves out, but the main one is that the money gets reinvested in America, which most people would agree is good for America. Thus, a trade deficit is not something that needs to be fixed with some sort of government intervention.

So, I think Friedman is wrong that Trump would have negotiated the TPP just like Obama would. My best guess is that Trump, like Buffett, wants trade deals that lead to trade balance. In effect, he wants guaranteed import and export outcomes, rather than deals that reduce protectionist tariffs (which is what trade agreements are mainly about). From a business perspective, an outcome-based approach to negotiations may make sense, but it is total nonsense in terms of trade policy. You could, in theory, make an outcome-based deal where U.S. companies sells $1 billion of goods and services to Mexicans, and Mexican companies sell $1 billion of goods and services to Amercians. But that does not remotely resemble free trade, and it’s not what we want out of a trade agreement. Unfortunately, it’s how Trump and a few business folks who don’t understand economic policy appear to view the world of trade. 

Dan Baum has a lengthy article in the latest Harper’s titled, “Legalize It All: How to Win the War on Drugs.” 

Here is an excerpt:

Experiments in alternatives to harsh prohibition are already under way both in this country and abroad. Twenty-three states, as well as the District of Columbia, allow medical marijuana, and four — Colorado, Washington, Oregon, and Alaska — along with D.C., have legalized pot altogether. Several more states, including Arizona, California, Maine, Massachusetts, and Nevada, will likely vote in November whether to follow suit. Portugal has decriminalized not only marijuana but cocaine and heroin, as well as all other drugs. In Vermont, heroin addicts can avoid jail by committing to state-funded treatment. Canada began a pilot program in Vancouver in 2014 to allow doctors to prescribe pharmaceutical-quality heroin to addicts, Switzerland has a similar program, and the Home Affairs Committee of Britain’s House of Commons has recommended that the United Kingdom do likewise. Last July, Chile began a legislative process to legalize both medicinal and recreational marijuana use and allow households to grow as many as six plants.

Check it out–it’s a very good piece on recent developments.

For related Cato work, go here, here, and here.

This morning the Supreme Court declined to take up a lawsuit by the states of Nebraska and Oklahoma challenging Colorado’s Amendment 64 measure that legalized the sale and use of marijuana. Not just medical marijuana, but recreational use as well.

We detailed the arguments involved in the case last year:

The Nebraska/Oklahoma argument: because the federal government, through the Controlled Substances Act, has banned marijuana, states are not allowed to contradict that ban by creating a regulatory framework for legalization.  Further, Colorado’s official regulation of recreational marijuana imposes a nuisance burden on surrounding states due to an alleged increase in drug trafficking.  While Nebraska and Oklahoma disclaim any intent to force Colorado to “re-criminalize” marijuana, the suit argues that Colorado’s official efforts to regulate the legal marijuana industry bring the state into conflict with federal and international drug laws.

Colorado’s response: there is no conflict.  Federal marijuana prohibition is still in effect, and the decision not to prioritize enforcement in states that legalize marijuana came from the federal government, not Colorado.  If Nebraska and Oklahoma object to the manner in which the federal government is discharging its law enforcement duties in Colorado, they should be suing the federal government.  Colorado’s regulation of the marijuana industry is within its prerogatives under the CSA. As to the nuisance claim, Colorado argues that mere policy differences between states that don’t directly injure the sovereignty of other states are not actionable nuisances.

The legal basis for the lawsuit has been questionable from the beginning, with legal commentators both challenging its merits and pointing out the irony in two of America’s “reddest” states taking a legal posture that overruns state sovereignty in favor of federal power.

And, of course, if prohibition states are concerned with the costs, they could always legalize and regulate marijuana themselves and spare their justice systems the immense costs of prohibition.  

Today’s result is not surprising, especially after the Obama Administration urged the court to decline the case, and the outcome fits with our analysis of the case’s prospects in 2014:

Will the Supreme Court accept this case for review? That’s impossible to predict. However, the constitutional argument being advanced by Nebraska and Oklahoma is weak and so would likely fail. Just because the federal government enacts a law against marijuana, it does not follow that all the states have to enact laws against marijuana. And just because the federal police (FBI and DEA) have grown accustomed to having state and local police conduct marijuana raids and arrests, it does not follow that the local authorities can’t stop doing that. So long as the local police are not arresting or threatening to arrest federal agents for trying to enforce the federal law, there is no “conflict.” Thus, the Supremacy Clause does not come into play.

Today’s action at the Supreme Court amounts to a big boost to the marijuana legalization movement, which continues to gather strength and momentum.

For those interested in a deep dive into the legal issues, check out the Cato Policy Analysis by Robert A. Mikos, On the Limits of Federal Supremacy: When States Relax (or Abandon) Marijuana Bans.

The right to swing my fist ends where the other man’s nose begins.

The saying, it turns out, has some of its pedigree in Prohibition, during which the right to serve drinks was said to interfere with the rights of the family. But misapplication to “group rights” aside, it’s a phrase that captures our system of rights well. You are (or should be) free to do whatever you wish, so long as you don’t injure others in their rights.

You can see society hammering out the dividing line between rights in a case that produced a jury verdict last Friday: Hulk Hogan vs. Gawker. The provocative website published a mid-2000 video of the former wrestler and TV personality having sex with a friend’s wife. Hogan sued and won a verdict of $115 million, which Gawker will appeal.

The argument on Hulk’s side is that public exposure of a person’s intimate moments and bodily functions violates a right to privacy. The free speech argument is that a person has a right to broadcast and discuss anything he or she pleases.

These are both important rights. The privacy right is a little younger, having developed since about 1890. The free speech right pre-existed its 1791 acknowledgement in the Bill of Rights, so speech has a stronger heritage. But the dividing line will never be decided once and for all. Common practices and common mores will set and reset the line between these rights through accretion and erosion, the way a winding river divides a plain. That way of producing rules is very special: common law courts deciding in real cases what serves justice best.

The major alternative is to have legislatures episodically decide the rules that apply. When Congress and state legislatures change the rules, the change is often dramatic and avulsive. I contrasted the two systems in the recent Cato Policy Report.

Common law is inductive. Building on experience in case after real-world case, common-law courts accrete knowledge about the rule-set that best serves society. Because rule development occurs with reference to real life cases, it takes advantage of local knowledge about the precise disputes that occur. This allows better approximation of what the truly just rules will be for most cases.

Legislation and regulation more often produce rank re-ordering of rights and liabilities because legislation is deductive. At a single point in time, based on all the knowledge it has drawn together at that moment, a legislature establishes the rule-set that it believes to make the most sense. This is often what it perceives as pleasing the most—or the most important—constituencies. That imperative to please constituencies means that the information legislatures codify often comes from well-organized interests with substantial resources. Special- interest pleading is a hallmark of legislation and regulation.

There’s some risk of that special-interest pleading in the anti-“revenge porn” statutes that several states have adopted, relevant to the Hogan/Gawker case. Time will tell whether they are well-crafted reflections of society’s values or not. The Video Privacy Protection Act has all the flavor of special-interest legislation. Congress passed that bill quickly in 1988 after it learned that news outlets might investigate the potentially naughty VHS rentals of prominent public figures—including Supreme Court nominees and senators. In 2012, Netflix succeeded in convincing Congress to allow people to share rental information on social networking sites after obtaining customers’ permission—a lobbying effort that would have been entirely unnecessary in a common law context.

There is no sound argument that common law is perfect. Excessive punitive damages awards and class-action shenanigans are just two areas where common law processes could be improved. But common law is arguably more fixable than legislation and regulation, in which the interests of lawmakers are a permanent source of distortion on justice.

Our common law inheritance from England is no archaic relic. It’s even something for Hulkamaniacs to be aware of. Lovers of liberty and justice should remember and prefer the common law.

News reports about President Obama’s visit to Cuba are regularly referring to his meeting with “Cuban President Raul Castro.” But Castro is not a president in the same sense that President Obama is. He’s not even a president in the dictionary sense. The Oxford English Dictionary defines “president” as “the elected head of a republican state.” Raul Castro was not elected, and Cuba is not a republic. Castro is a military dictator. That may not be a polite thing to say, but journalists are supposed to tell the truth, not worry about the feelings of the powerful. Indeed, according to the distinguished journalists Bill Kovach and Tom Rosenstiel, in their book The Elements of Journalism, written under the auspices of the Nieman Foundation, journalism’s first obligation is to tell the truth. The truth is that Raul Castro is, as Fidel Castro was, a dictator who rules with the support of the military.

Even the Wall Street Journal refers to “Cuban President Raul Castro.” I particularly regret this, because back in 2006 I called them out for their double standard on dictators, in a letter they published. They had written in an obituary note:

Gen. Alfredo Stroessner, the military strongman who ruled Paraguay from 1954 until 1989. Among 20th century Latin American leaders, only Cuban President Fidel Castro has served longer.

Why, I asked, 

do you describe Gen. Alfredo Stroessner as a “military strongman” and Fidel Castro as “Cuban president” (“A Flair for Flavor,” Aug. 19)? Both came to power through bullets, not ballots, and ruled with an iron hand. Mr. Stroessner actually held elections every five years, sometimes with opposition candidates, though of course there was no doubt of the outcome. Mr. Castro dispensed with even the pretense of elections. Both ruled with the support of the army. In Cuba’s case, the armed forces were headed by Mr. Castro’s brother. So why does the Journal not give Stroessner his formal title of “president,” and why does it not describe Castro accurately as a “military strongman?”

One could make the same point about Chile’s Augusto Pinochet. He was formally the president, but newspapers generally referred to him as a military dictator. Pinochet ruled with an iron hand for 17 years. After 15 years he held a referendum on his rule. When he lost, he held elections and stepped down from power. That’s more than the Castro brothers have done after 57 years. 

Pinocchio Quattro!” is Washington Post “Fact Checker” Glenn Kessler’s response to Donald Trump, for his claims about trade, currency manipulation and manufacturing. No doubt the 4-pinocchio distinction is well-earned. Actually, without issuing a score, my analysis in Forbes today reaches similar conclusions.

Reading Kessler’s explanation and justification for the award, I was pleasantly surprised by how well he characterized and conveyed the salient, underlying trade issues. Non-trade experts and non-trade-beat reporters often miss the nuance and get things wrong. Nonetheless, for the purpose of even greater precision, I’m going to reiterate, clarify, amplify, and slightly modify some of the points Kessler makes. (Thanks for being a prop, Glenn.

FC1:

Globalization has changed the face of the world economy, for good or bad. In an interconnected world, it’s no longer a zero sum game in which jobs are either parked in the United States or overseas.

There is no doubt that economic interdependence – best observed as transnational investment and cross-border supply chains – has increased considerably in response to trade liberalization, political liberalization, revolutions in communications and transportation, as well as other developments, such as China opening to the world. As I characterized it in this 2009 paper about the virtues of growing economic interdependence, “the factory floor has broken through its walls and now spans borders and oceans.”  One relatively unheralded consequence of this trend is that protectionism is costlier than ever.  And that’s a great thing.  It helps explain why the world avoided descending into an abyss of “tit for tat” protectionism during and after the Great Recession, and why it’s unlikely to do so in the future. This paper, which goes into greater detail about why protectionism would be eschewed, was a bit heterodox at the time.” v:shapes=”Picture_x0020_2”>

But let me slightly modify Kessler’s explanation.  It’s not interconnectedness that makes trade “no longer a zero sum game.” Trade is never a zero sum game. If trade were a zero sum game, it would never happen.  Two people trade because each expects to gain from the exchange. If I shine your shoes for $5, it’s because you value shiny shoes more than you value $5 and I value $5 more than the time, materials, and effort I expended.

FC2:

First of all, a trade deficit means that people in one country are buying more goods from another country than people in the second country are buying from the first country. Trump frequently suggests the United States is “losing money” when there is a trade deficit, but that reflects a fundamental misunderstanding. Americans want to buy these products from overseas, either because of quality or price. If Trump sparked a trade war and tariffs were increased on Chinese goods, then it would raise the cost of those products to Americans. Perhaps that would reduce the purchases of those goods, and thus reduce the trade deficit, but that would not mean the United States would “gain” money that had been lost.

A noxious fallacy that perpetuates confusion and fuels antipathy toward trade and trade agreements is that trade is a competition played between national teams where the objective is to obtain a trade surplus.  Under this “Us versus Them” portrayal, exports are Team America’s points; imports are the foreign team’s points; the trade account is the scoreboard; and, since the scoreboard shows a deficit, the United States is losing at trade.

But trade is not a team sport. Trade is conducted by billions of individuals, each seeking to obtain value by exchanging some of their specialized output (monetized in the form of salaries or wages) for some of the specialized output of others. The purpose of trade policy is not to secure a trade surplus, but to facilitate this process of specialization and exchange and, ultimately, to produce economic growth. 

The United States has registered trade deficits for 41 consecutive years. Over those 41 years, increases in the size of the deficit have correlated with increases in GDP and decreases in the size of the deficit have correlated with decreases in GDP. Achieving a trade surplus is not the objective of trade policy. Nor is a trade deficit evidence of its failure. If there is compelling evidence to support the theory that trade deficits are bad for the United States, it has not been presented in the context of the U.S. trade policy debate. Certainly there is much rhetoric and opining about the deleterious effects of the trade deficit on the economy, but where is the support? After 41 straight years of annual trade deficits, surely economists like Rob Atkinson, Jared Bernstein, Dean Baker, Peter Morici, and other trade skeptics can identify – if not quantify – the damage done.

The objective of trade policy is economic growth. That’s why we trade – to create value. The data strongly suggest that economic growth and trade deficits increase and decrease contemporaneously. Looked at another way, if the goal of trade policy is to achieve a trade surplus, then by extension the goal of trade policy is slower economic growth, even contraction.

FC3:

Trump did manage to name specific countries with which the United States has trade deficits, but he’s wrong when he says the United States has a deficit with “everybody.” There’s barely a trade deficit with the United Kingdom, according to the International Trade Commission, and the United States has a trade surplus with Hong Kong ($30 billion), Netherlands ($24 billion), United Arab Emirates ($21 billion), Belgium ($15 billion), Australia ($14 billion), Singapore ($10 billion) and Brazil ($4 billion), among others.

Of course, the Fact Checker was merely checking Trump’s claims, but I’d say: Waste of time? Bilateral trade accounts are meaningless. They’re meaning because of the observations made with respect to Point 1, above.

In a globalized economy of cross-border investment and transnational production sharing, where nearly two-thirds of the value of global trade flows are intermediate goods, bilateral trade accounting is simply meaningless. A $300 import from China adds $300 to the aggregate value of imports from China, regardless of whether the Chinese material, labor, and overhead (the Chinese value-added) accounts for all or just a fraction of that $300 cost. It adds $300 to the U.S. bilateral trade deficit with China even if $250 of the $300 cost is attributable to the value of components made in the United States with U.S. labor and overhead. This is not merely theoretical. Nearly 50 percent of the value of all U.S. imports from China is the value of components from other countries. When it comes to electronics, such as computers and smart phones, the foreign value content can account for as much as 95 percent of the cost, yet the product’s entire cost is chalked up as an import from China. This should give pause to those who attach meaning to bilateral trade accounting.  

FC4:

Trade can lead to job losses — as well as job gains. A domestic widget-maker might lose market share, and cut staff, if lower-cost imports undercut prices. But exports also generate jobs, which is why U.S. presidents generally have sought to lower tariffs.

Granted, this is true.  But the implication that imports necessarily cost jobs is misleading, and untrue. For starters, according to the Bureau of Economic Analysis, about 60 percent of the value of U.S. imports consists of intermediate goods and capital equipment – the purchases of producers, not consumers.  This continues on the theme of interconnectedness and globalization.  What this means is that 60 percent of the value of U.S. imports are complementary goods, not substitutes.  And this is just one example of how imports support U.S. jobs. 

FC5:

When speaking about the impact of trade deals, Trump (as in a USA Today opinion article) often cites research from groups, such as the Economic Policy Institute, about supposed job losses from trade agreements. Interestingly, Bernie Sanders (Vt.), a candidate for the Democratic presidential nomination, often cites the same data — such as a claim that 800,000 jobs were lost because of the North American Free Trade Agreement.

The job-loss figures often rely on simplistic formulas that are disputed by other economists. It is often difficult to separate out the impact of trade agreements on jobs, compared to other, broader economic trends. (Readers should also be wary of claims of job gains from trade deals, as we noted in this column on the Trans Pacific Partnership.)

I couldn’t agree more – on both sides.  The pro-trade and anti-trade jobs numbers aren’t at all reliable.  But EPI should be held out for special scorn.

FC6:

The manufacturing sector has declined as a source of jobs in the United States, but again Trump would be fighting against economic shifts long in the making. American manufacturing has becomes incredibly productive, so fewer workers are needed to make the same number of goods.

“In real terms, U.S. factories produced more output (looking at straight output or value added) last year than ever before in history,” said Dan Ikenson, director of trade policy studies at the Cato Institute. “Year after year (with the exception of during recessions), the sector breaks new records with respect to output, revenues, exports, imports, return on investment.” 

I elaborate further in today’s Forbes piece.

FC7:

Similarly, Trump’s complaints about currency manipulation are woefully out of date. Fred Bergsten, senior fellow at the Peterson Institute, calls himself “a big hawk” on currency manipulation but says Trump is “way out of whack.”

China has not manipulated its currency for at least two years and in recent months has been selling dollars and running down its reserves in an effort to keep the currency from weakening during an economic slowdown. Japan has not sought to lower its currency for at least a decade, with the exception of an intervention in March 2011 — a move that was supported by other leading economic powers because the yen had appreciated sharply in the wake of the devastating tsunami and earthquake.

The currency issue is a red herring, and now it is irrelevant, as China is attempting to prop up the value of its currency, as sentiment on the Chinese economy has soured.  This piece goes into a good bit of detail about the long-running debate and what to do about the issue.

FC8:

In fact, there is evidence that some manufacturing jobs are already coming back to the United States, through a process known as “reshoring,” because Chinese wages are no longer as competitive. General Electric in 2012 brought back nearly 4,000 jobs from China and Mexico, for instance. Marriott International said in March it would manufacture in the United States all of its towels for its hotels.

Many factors, not just wages, affect investment location decisions. The idea that investment chases low wages and lax environmental standards couldn’t be further from the truth.  This paper explains.

FC9:

Trump’s claims on trade, currency manipulation and manufacturing are either wrong or no longer valid. If he became president, he (and his supporters) would have a rude shock that the problems he complains about are overstated or no longer exist — and solutions such as raising tariffs might backfire. Taken together, his vision is a whopper.

Agreed!

You Ought to Have a Look is a feature from the Center for the Study of Science posted by Patrick J. Michaels and Paul C. (“Chip”) Knappenberger.  While this section will feature all of the areas of interest that we are emphasizing, the prominence of the climate issue is driving a tremendous amount of web traffic.  Here we post a few of the best in recent days, along with our color commentary.

Welcome to this issue of You Ought to Have a Look, our round-up of under-appreciated and overlooked articles from around the web.  Here’s a trio from this week.

First up is an article in the American Spectator (online) by the Center for the Study of Science’s newest addition, adjunct scholar and University of Virginia Law Professor Jason Johnston. Jason takes a look at why decarbonizing the US economy is a bad idea, paying particular attention to Germany’s burdensome system of green subsidies that are leading to much higher energy prices and perhaps even future subsidies for fossil fuel-powered power generation. Jason’s bottom line:

Whether one is considering carbon taxes or renewable energy subsidies, the impact of such a policy is almost surely to increase prices for the basic energy and transportation necessities of life, harming especially the poor and middle class. If, as in Germany, renewables subsidies require subsidies for coal-burning power plants, and if, as economics predicts, expectations of a permanent and rising carbon tax generate increases in present day CO2 emissions, then where will be the environmental benefits to justify the enormous burden put on poor and middle class households? It would seem that the case for carbon taxes and renewables subsidies is not so simple after all.

“It would seem that the case for carbon taxes and renewables subsidies is not so simple after all.” You can say that again (we just did!).  Jason’s whole analysis is worth digging in to.

Next up is an extended piece by Nico Stehr, Karl-Mannheim Chair of Cultural Studies at Germany’s Zeppelin University, that appears in the Winter 2016 issue of Issues in Science and Technology titled “Exceptional Circumstances: Does Climate Change Trump Democracy?” His answer is a resounding “No!”—but one that he thinks is in danger of becoming a minority opinion, at least among climate enthusiasts.

Stehr sets the stage with:

Climate scientists, social scientists concerned with climate change, and the media refer to a future of “exceptional circumstances.” However, the same groups also assert that no one is listening to their diagnosis of potential incomparable dangers. An elite of climate scientists believes they are reading the evidence that others fail to acknowledge and know truths that others lack the courage to fully confront. In light of the extraordinary dangers to human civilization posed by climate change, democracy quickly becomes in their eyes an inconvenient form of governing.

He then sets about drawing and quartering this preposterous notion. Here’s an excerpt:

[T]he idea that science and scientific leadership offer some sort of alternative to democracy has, to put it mildly, major weaknesses. To begin with, scientific knowledge does not and cannot dictate what to do…

The pessimistic assessment of the ability of democratic governance to cope with and control exceptional circumstances seems to bring with it an optimistic assessment of the potential of large-scale social planning. Yet all evidence suggests that the capacity not only of governments, but societies, to plan their future is rather limited, perhaps non-existent. The problem is not one of democracy, but of the complexity of social change. From this perspective, the claims that the key uncertainties about the behavior of the natural climate processes have been eliminated does nothing whatsoever to address the uncertainties associated with the social and political processes for taking effective action. Consensus on the evidence of natural science, it is argued, should motivate a consensus on political action. The uncertainties of social, political, and economic events, the difficulty of anticipating the future, are treated as minor obstacles that can be managed by the experts. But contemporary societies show no evidence that these uncertainties are even comprehensible, let alone manageable.

Stehr closes strongly:

Now is the time to commit to democratic complexification that fosters creativity and experimentation in the pursuit of multiple desired goals. For those who think that there can be only one global pathway to addressing climate change, the erosion of democracy might seem to be “convenient.” History, of both recent decades and centuries, tells us that suppression of social complexity undermines the capacity of societies to solve problems. Friedrich Hayek points out a paradoxical development: As science advances, it tends to strengthen the observation shared by many scientists that we should “aim at more deliberate and comprehensive control of all human activities.” Hayek pessimistically adds, “It is for this reason that those intoxicated by the advance of knowledge so often become the enemies of freedom.”

His entire piece is a must-read.

And finally, on a lighter note, a reminder that weather is not climate…except when it’s bad (to hear it told by the “mainstream” press/science consortium).

Anthony Watts’ dedicates his Friday Funny this week to the over-the-top media attention piled upon the announcement that February’s global average temperatures were record-setting, record-shattering, “beyond record hot,” “astronomical,” “jaw-dropping.”  Anthony opines “I’ve come to think that climate alarmists are little more than garden variety hypochondriacs. Almost anything weather or climate related seems to scare them.”

We pushed back on this ourselves a bit this week, explaining that without the strong El Niño, (a potent form of natural variability), February’s temperatures wouldn’t have been so warm as to draw out such (feigned) astonishment. And even with the strong El Niño event, February temperatures were hardly newsworthy when set against the backdrop of climate model expectations. We noted that had global warming been going as predicted (i.e., warming at the rate projected by climate models), February’s temperatures wouldn’t be that remarkable. The fact that they seemed to be is an indication that climate change is progressing at a rate much more sluggishly than expected.  We anticipate that a pokey rate of warming may resume, once this El Niño event has run its course and temperatures drop back to near pre-event conditions, or we could go back into a “pause,” perhaps at a higher base level that the recent one.  

Of course, then, as Anthony points out, folks will be singing different tune:

In a couple of months, El Niño and the temperature spike will be gone and then we won’t see crazy pronunciations like this. Instead, we’ll see a shift in dialog that this cooling is just “weather, not climate.”

Twelve of the 23 Obamacare health cooperatives (CO-OPs) have shut down already. 627,000 people were enrolled in CO-OPs that ceased operations, and the federal government had disbursed more than $1.2 billion to these CO-OPs, and it might be difficult to ever recover any of these taxpayer funds. A GAO report released this week reveals that the CO-OP losses could be far from over.

4 of the 11 CO-OPs still operating in 2016 have not yet reached the benchmark of 25,000 enrollees, which CMS officials say is the minimum needed for a CO-OP to have financial solvency. More than 69,000 people were enrolled in these plans as of January 2016, and the federal government has already disbursed $265 million of the $407.8 million in loans awarded to them. The people enrolled in these plans and millions of dollars in government outlays are both at risk in the coming year. The map below, based on a figure from the report, shows how level of attrition so far, with the addition of highlighting the states where the CO-OPs have failed to reach the enrollment benchmark.

 

CO-OPs in the States, 2016

The Centers for Medicare and Medicaid Services (CMS) has determined that eight of the remaining CO-OPs face issues that are of “elevated” urgency and severity, for issues including “failing to comply with state laws and experiencing high enrollment and significant losses.” CMS has placed them under enhanced oversight and corrective action plans, but these measures are in no way an indication that these CO-OPs can be salvaged. Half of the eighteen plans under the enhanced oversight and correction plans as of last November have since ceased operations.

That’s not all: Politico Pulse obtained a letter Superintendent of the Maine Bureau of Insurance Eric Cioppa sent to CMS this week revealing that the CO-OP in that state could be on the verge of insolvency. This is striking because Maine’s CO-OP was the only one in the country to report positive income in 2014, and thought to be one of the few success stories. After enrollment gains have made the plan the largest writer of individual insurance in the state, it reported a net loss of $74 million for last year. The insurance bureau now “wants to place the co-op in receivership and cancel a random selection of the co-op’s plans in order to reduce its costs.” CMS decided to oppose Cioppa’s proposal, so as of now, it will not allow him to begin deleveraging the CO-OP by removing people from the insurance rolls, and it is hard to see a path forward for the trouble plan.

Obamacare’s CO-OPs were a misguided idea from their inception, and they were criticized by everyone from Cato scholars to ardent supporters of Obamacare when they were initially being discussed. These CO-OPs had no infrastructure, no meaningful way to controls costs, and were in real danger of not being able to attain sufficient enrollment numbers to become financially viable. Their inclusion in Obamacare is another triumph of politics and intentions over rational analysis. Hundreds of thousands of people have already had to pay the price for this choice, and thousands more could join them in the increasingly likely scenario that more CO-OPs fail.

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