Cato Op-Eds

Individual Liberty, Free Markets, and Peace
Subscribe to Cato Op-Eds feed

Based on the title of this column, you may think I’m going to write about oppressive IRS behavior or punitive tax policy.

Those are good guesses, but today’s “brutal tax beating” is about what happens when a left-leaning journalist writes a sophomoric column about tax policy and then gets corrected by an expert from the Tax Foundation.

The topic is the tax treatment of executive compensation, which is somewhat of a mess because part of Bill Clinton’s 1993 tax hike was a provision to bar companies from deducting executive compensation above $1 million when compiling their tax returns (which meant, for all intents and purposes, an additional back-door 35-percent tax penalty on salaries paid to CEO types). But to minimize the damaging impact of this discriminatory penalty, particularly on start-up firms, this extra tax didn’t apply to performance-based compensation such as stock options.

In a good and simple tax system, which taxes income only one time (including business income), the entire provision would be repealed.

But when Alvin Chang, a graphics reporter from Vox, wrote a column on this topic, he made the remarkable claim that somehow taxpayers are subsidizing big banks because the aforementioned penalty does not apply to performance-based compensation.

…the government doesn’t tax performance-based pay for…any…top bank executive in America. Unlike regular salaries — where the government takes out taxes to pay for Medicare, Social Security, and all other sorts of things — US tax code lets banks deduct the big bonuses they give to their executives. … The solution most Americans want is to either heavily tax CEO pay over a certain amount, or to set a strict cap on how much CEOs can make, relative to their workers. As long as this loophole is open, though, it makes sense for banks to continue paying executives these huge sums. ..for now, taxpayers are still ponying up to help make wealthy bankers even wealthier, because the US tax code encourages it.

Since Mr. Chang is a graphics reporter, you won’t be surprised that he included several images to augment his argument.

Here’s one making the case that companies should pay a 35 percent tax on performance-based pay for CEO types. Keep in mind, as you peruse this image, that recipients of performance-based pay have to declare that income on their 1040s and pay 39.6 percent individual income tax.

And here’s Chang’s look at how much money the IRS could have collected from big banks in recent years if the anti-CEO tax penalty was extended to performance-based pay.

When I look at these images, my gut reaction is to be offended that Chang equates “taxpayers” with the federal government.

So I would change the caption of the first image so it ended, “…this pile would be diverted from shareholders to politicians.”

And the caption in the second image would read, “This is the amount it saved taxpayers.”

But Chang’s argument is also flawed for much deeper reasons. Scott Greenberg of the Tax Foundation debunks his entire column. Not just debunks. Eviscerates. Destroys.

Here are some of the highlights.

…the article contains several factual errors and misleading claims about how CEOs are taxed in America. The article begins by making an incorrect claim: that the federal government does not tax performance-based CEO pay… This is simply untrue. Under the U.S. tax code, households are generally required to pay individual income taxes on the value of the stock options and bonuses that they receive…up to 39.6% on the performance-based pay… The article continues with another false assertion…it claims that CEO performance-based pay is not subject to the same Social Security and Medicare payroll taxes as “regular salaries.” In fact, all employee compensation, including CEO pay, is subject to Medicare payroll taxes, and high-income individuals actually pay a higher Medicare payroll tax rate than most other employees. …it claims that U.S. businesses are allowed to deduct CEO pay but are not allowed to deduct “regular salaries.” This is patently incorrect. Under the U.S. tax code, businesses are allowed to deduct virtually all compensation to employees. In fact, the only major exception to this rule is that businesses are only allowed to deduct $1 million in non-performance-based salaries to CEOs. This means that the U.S. tax code gives the same, if not worse, treatment to CEO compensation as “regular salaries.”

Scott also addresses the silly assertion that deductions for CEO compensation are some sort of subsidy.

You probably wouldn’t claim that taxpayers are subsidizing the restaurant worker’s salary, because the deduction for employee compensation is a regular, structural feature of the tax code. In general, businesses in the U.S. are taxed on their revenues minus their expenses, and the salary paid to the worker is a business expense like any other. The same argument applies for CEO compensation. When a business pays a CEO $155 million, it has increased its expenses and decreased its profits. The normal logic of U.S. tax law dictates that the business be allowed to deduct the CEO’s compensation from its taxable income. Then, the CEO is required to pay individual income taxes on the compensation.

The bottom line, as Scott points out, is that Bill Clinton’s provision means that CEO pay is penalized rather than subsidized.

…wages and salaries of CEOs are penalized relative to the wages and salaries of regular employees, while performance-based compensation is taxed in the same manner as regular wages and salaries. In sum, it is simply wrong to say that the federal tax code subsidizes CEO pay.

Game, set, and match. Mr. Chang should stick to graphics rather than tax policy.

And policy makers should resist tax policies based on envy and resentment since the net result is a tax code that is needless complex and pointlessly destructive.

One final moral to the story: If there’s ever a tax fight between Vox and the Tax Foundation, always bet on the latter.

A preliminary draft paper on transparency that Cass Sunstein posted last month inspired Vox’s Matthew Yglesias to editorialize “Against Transparency” this week. Both are ruminations that shouldn’t be dealt with too formally, and in that spirit I’ll say that my personal hierarchy of needs doesn’t entirely overlap with Yglesias’.

In defense of selective government opacity, he says: “We need to let public officials talk to each other — and to their professional contacts outside the government — in ways that are both honest and technologically modern.”

Speak for yourself, buddy! The status quo in government management may need that, but that status quo is no need of mine.

A pithy, persuasive response to Yglesias came from the AP’s Ted Bridis, who pointed out via Twitter the value of recorded telephone calls for unearthing official malfeasance. Recordings reveal, for example, that in 2014 U.S. government officials agreed to restrict more than 37 square miles of airspace surrounding Ferguson, Missouri, in response to local officials’ desire to keep news helicopters from viewing the protests there. Technological change might counsel putting more of public officials’ communications “on the record,” not less.

It’s wise of Sunstein to share his piece in draft—in its “pre-decisional” phase, if you will—because his attempt to categorize information about government decision-making as “inputs” and “outputs” loses its intuitiveness as you go along. Data collected by the government is an output, but when it’s used for deciding how to regulate, it’s an input, etc. These distinctions would be hard to internalize and administer, certainly at the scale of a U.S. federal government, and would collapse when administered by government officials on their own behalf.

I think it’s right that there are some categories of work done in government executive offices and agencies that should be left as the business of the parties themselves. But I’m more attracted to reversing the presumption of automatic publication only in the narrow instances when national security, the privacy of private individuals as such, and the need for candid communication with high executive officials requires it. (That’s hardly a perfect standard. This blog post is a rumination.)

Few would make the connection, but Dave Weigel supplies what’s really missing from the discussion. In “Why You Should Stop Blaming the Candidates if you Don’t Know ‘What They Stand For’,” he says: “I’m sorry, but this one falls on the voters. It is generally as easy to learn where the candidates stand on all but the most obscure issues as it is to find, say, a recipe for low-calorie overnight oats.”

The “outputs” are there, but the public is failing to use them. The problem is the public. If voters aren’t using even published and publicized campaign information, why would they do any good with governance inputs? Especially in light of the interests of regulators, with whom Sunstein and Yglesias quite strongly sympathize, transparency isn’t all that special. Let’s just tap the brakes in this one area, giving regulators more room for private deliberations.

Massive public dissatifaction with the status quo tells us there must be something wrong with that argument.

The glib, libertarian answer is that you could shrink the size and scope of government, particularly the U.S. federal government, and grow the public’s relative capacity to oversee it. And while I think that’s true, there’s a more subtle approach that may appeal to an Yglesias or a Sunstein. That’s to recognize that the public today has diminished capacity for government oversight, having lived for many decades without transparency as to the inputs or outputs of government.

In my paper, Publication Practices for Transparent Government, I wrote of the social capital that must grow up once governments begin publishing information well.

[T]ransparency is not an automatic or instant result of following these good practices, and it is not just the form and formats of data. It turns on the capacity of the society to interact with the data and make use of it. American society will take some time to make use of more transparent data once better practices are in place. There are already thriving communities of researchers, journalists, and software developers using unofficial repositories of government data. If they can do good work with incomplete and imperfect data, they will do even better work with rich, complete data issued promptly by authoritative sources. When fully transparent data comes online, though, researchers will have to learn about these data sources and begin using  them. Government transparency and advocacy websites will have to do the same. Government entities themselves will discover new ways to coordinate and organize based on good data-publication practices. Reporters will learn new sources and new habits.

Put aside mere “inputs.” The government today doesn’t publish good data that reflects its deliberations, management, and results. Take one of the most important areas: the law itself. The bills in Congress are published in unnecessarily opaque fashion (our efforts with the Deepbills project notwithstanding). Federal statutory law in the form of the U.S. Code only recently began to see publication in a basic computer-usable fashion. Regulations are available in XML, but regulatory processes have only been superficially updated, essentially by combining existing processes on a single web site. And sub-regulatory law—guidance documents, advisories, and such—those are a transparency travesty if not a systematic, widely accepted Due Process violation.

Authoritative data that indicates what the organizational units of the federal government are—a machine readable government organization chart—does not exist, even after the Obama Administration’s promise last fall to produce one in “months.” And implementation of the DATA Act, while proceeding, may yet run into enough roadblocks to fail at giving the public a consistent, reliable account of federal spending.

The transparency movement is a reform movement based on a vision of modern government. Sunstein’s and Yglesias’ modest arguments against transparency don’t appear to recognize the government’s long, systematic exclusion of the public from its processes or the resulting atrophy of Americans’ civic muscles. Thus, they too easily conclude that giving transparency to internal matters, or “inputs,” is not necessary because it’s not useful.

Transparency is a legacy issue for President Obama, who campaigned in 2008 on promises of true reform. Time has not run out for the president’s pro-transparency reform.

Among industrialized countries, the United States has the highest official corporate tax rate and one of the highest effective tax rates. To take advantage of lower taxes in other countries, some U.S. firms elect to sell themselves to smaller foreign firms, a process called “inversion.”

For shareholders of those firms, the tax consequences of inversions are complicated. Some are harmed by the move while others benefit. Individual shareholders, who own shares in taxable accounts, are taxed on the increased value of their shares. This can result in different tax outcomes from inversions for shareholders who have held the stock for a long time prior to the inversion and short-term shareholders (including corporate officers exercising company stock options).

In the summer issue of Regulation, I described a new research paper that investigates 73 inversions that occurred from 1983 to 2014. For those investors who had owned stock for three years, half of the inversions resulted in a negative return. So if many long-term shareholders lose money on inversions, why do they occur?

The answer appears to be that corporate executives gain from inversions even if shareholders lose. The return earned by CEOs of inverted companies is different than the return of average shareholders if the CEOs have stock options. Inversion does not result in capital gain taxation of exercised options.  Thus inversions can be more rewarding for CEOs than long-term investors. The paper’s authors show that the higher the option compensation of a CEO, the greater the likelihood of an inversion.

Put simply, the CEO has incentives that are not well-aligned with long-term shareholders. That likely means that current proposals to combat inversions by raising taxes on inverting firms will not have the intended effect; though shareholders would be further harmed by the tax penalties, the CEOs would still have incentives to invert.

The authors of the research paper had a recent op-ed in the New York Times about their work. They call for lower corporate tax rates and an end to the rules that were intended to reduce inversions but have only hurt long-term shareholders.

Export-Import Bank supporters are back at it again. According to a document from the Office of Management and Budget, the administration is reportedly asking lawmakers to include a provision restoring the agency’s full lending authority as part of the continuing resolution that needs to be passed in order to keep the government functioning after September 30th. It was just a few weeks before his election in 2008 that Obama said it had “become little more than a fund for corporate welfare,” and cited it as an example of why he wasn’t someone “who believes we can or should defend every government program just because it’s there.” What a difference eight years can make.

Opponents of cheered last year when Congress let the bank’s charter lapse, only for it to be reauthorized months later when a provision was attached to the highway bill in December to reauthorize the agency through September 2019.

The agency, which provides financing and loan guarantees for U.S. export transactions, has since been limited in the scope of its lending authority, as the Senate has declined to approve the administration’s nominee to its board of directors. With three of five board seats vacant, quorum rules prevent the bank from approving any transactions over $10 million until the vacancy is filled.

This latest request from the administration is the culmination of a concerted effort on both sides of the aisle to restore full authority to the agency, without which it cannot approve the larger deals that would benefit the bigger companies that receive so much of the bank’s support. This is hardly a partisan affair, as earlier this year Republican Rep. Charlie Dent introduced an amendment to the State and Foreign Operations Appropriations Bill that would achieve the same objective.

The agency’s supporters suggest that companies are moving some operations abroad for lack of support from the Export-Import Bank, leading to lost jobs. These claims should be viewed with a lot of skepticism, as the agencies support primarily introduces distortions that shift jobs to the industries and firms it subsidizes.  Most of the beneficiaries are major corporations that already have access to capital, almost two-thirds of the bank’s financing benefits just 10 large corporations.

According to analysis from Veronique de Rugy, the Export-Import bank supports only a miniscule share of exporters or small business: 0.42 percent of exporters and 0.28 percent of small businesses from FY2009-2014. The vast majority of these companies are operate and compete just fine without the Export-Import bank. In fact, these firms not directly supported by the bank are placed at a competitive disadvantage by its interventions.

Despite the bipartisan support from policymakers, voters are less sure about the need for an Export-Import Bank. In a Morning Consult poll from last year, 36 percent said that the statement the agency is a “government handout that benefits only a handful of major American corporations” was closer to their opinion than that it “supports U.S. jobs.”

In that same poll, 73 percent of registered voters responded that they had not heard much or anything at all about Export-Import Bank, which may be part of the reason that firms who receive the concentrated benefits of its support are consistently able to overcome opposition from some policymakers, and public support that is tepid at most.

The Export-Import Bank is just one aspect of corporate welfare within federal government policies, and one that does not currently place an outsize fiscal burden on taxpayers, but it still distorts business decisions and gets the government into the role of influencing which firms will be winners and losers from policy. Each year, the federal government spends more than $100 billion on various forms of corporate welfare. Given the stubborn persistency of the Export-Import Bank and the broader problem of concentrated benefits and diffuse costs, this state of affairs will unfortunately continue for years to come.

Princeton economist Uwe Reinhardt supports ObamaCare. He also thinks the law’s health-insurance Exchanges are doomed. An exodus of insurers—lots of Exchanges are down to one carrier; Pinal County, Arizona is down to zero carriers—has taken supporters and the media by surprise. It shouldn’t. Similar laws and even ObamaCare itself have caused multiple insurance markets to collapse.

Reinhardt jokes ObamaCare’s Exchanges look like they were designed by “a bunch of Princeton undergrads.” Those Exchanges are now experiencing “a mild version” of “the death spiral that actuaries worry about.” The extreme version has happened before. “We’ve had two actual death spirals: in New Jersey and in New York,” Reinhardt explains. “New Jersey passed a law that had community rating but no mandate, so that market shrank quickly and premiums were off the wall. You look at New York and the same thing happened; they had premiums above $6,000 per month. The death spiral killed those markets.” Community rating is a system of government price controls that supposedly prohibit insurers from discriminating against people with preexisting conditions.

And it’s not just New York and New Jersey where ObamaCare-like laws have caused health insurance markets to collapse. It also happened in Kentucky, New Hampshire, and Washington State.

In fact, the death spiral Reinhardt sees in the Exchanges would itself be the fourth death spiral ObamaCare itself has caused:

  1. Before they even took effect, ObamaCare’s preexisting conditions provisions began driving insurers out of the market for child-only health insurance. Insurers ultimately exited that market in 39 states, causing the markets in 17 states to collapse.
  2. ObamaCare’s long-term care insurance program – the CLASS Act – failed to launch when the administration could not make it financially sustainable. President Obama and Congress repealed it.
  3. Exchanges effectively collapsed in every U.S. territory, again prior to launch.
  4. Now, a nationwide exodus of insurers has left one third of counties, one in six residents and seven states with only one carrier. In Pinal County, Arizona, every insurer has exited the Exchange. The exodus goes beyond greedy, for-profit insurers. It includes more than a dozen government-chartered nonprofit “co-op” plans.

Each of these crashes shares the same root cause: ObamaCare’s preexisting-conditions provisions create adverse selection. (Adverse selection is when sick people enroll in a plan and healthy people don’t.) To put it more plainly, ObamaCare required insurers to cover so many people with preexisting conditions that they ultimately could not cover anyone.

In the child-only market and the CLASS Act, the preexisting conditions provisions took effect with no mandate to purchase insurance, or premium subsidies, or anything to mitigate the resulting adverse selection.

In the territories, the preexisting conditions provisions were to take effect with no mandate and relatively weak premium subsidies. “These regulations had screwed up territorial insurance markets so badly that health insurance plans bolted; it’s currently impossible to purchase an individual market insurance plan in the Northern Marinas Islands,” wrote Vox’s Sarah Kliff. It got so bad, the Obama administration reinterpreted the law to say its preexisting conditions provisions and other costly regulations don’t apply in the territories.

In Pinal County, ObamaCare had everything. It had the pre-existing conditions provisions.  It had a mandate. It had premium subsidies. Thanks to the Supreme Court, it even had subsidies and a mandate that the ACA doesn’t authorize (because Arizona didn’t establish its own Exchange). The Exchange still collapsed.

ObamaCare’s authors knew they were playing with fire, but thought their handiwork could contain it. If it can’t, even more Exchanges will collapse, leaving people who had relatively secure coverage before ObamaCare with no coverage at all.

But hey, we’ll always have Massachusetts.

The state of Oregon recently began a pilot program with 1,000 drivers, which charges those drivers a fee based on the miles they drive, rather than a gas tax. Several states are looking closely at Oregon’s experiment. This could mark the beginning of a major change to a much better way to finance our roads.

The states care about Oregon’s experiment because the gas tax is a lousy user fee that doesn’t come close to capturing the true cost a driver imposes on the state when he drives, whether via the wear and tear his vehicle causes to the highway, the congestion his presence on the road exacerbates, or the pollution his car emits. An optimal user fee would attempt to capture each one of those and charge a fee based on where a person drives, how much he drives, the amount of congestion on the roads he is on, and his car’s emissions. Oregon’s simple experiment captures none of that—it consists solely of a 1.5 cent per mile charge, coupled with a fuel tax credit—but with today’s technology a more advanced system could easily be implemented.

The advantage of having a sophisticated user fee for drivers is that it could dramatically lessen congestion on a road: if you charge a high fee when roads get crowded, people will postpone trips, carpool, work at home, or take mass transit. Since the majority of auto pollution comes from cars stalled in traffic, the reduction in smog would be significant. Such a user fee would also help states reduce how much infrastructure they have to build by smoothing out demand.

The complaint against such schemes is that they have the potential to invade privacy—a valid concern, but one that can be addressed with adequate regulation, and an open source software system that can be examined by anyone to determine if it is sufficiently secure.

Illinois’s legislature considered such an approach until popular outcry led to rapid backpedaling by leaders in the state legislature, spurred in part by downstate outrage. That the poorer and more rural residents there reflexively objected to Illinois’s mileage-based user fee plan is a pity, because they stand to be the biggest winners from such a change. Switching to a smart per-mile fee for Illinois drivers would push more of the cost of the state’s roads onto wealthier drivers in suburban Chicago, while at the same time reducing the amount that would need to be spent on infrastructure for them. People who don’t live upstate and thus rarely find themselves in traffic jams would see their fees go down. In short, replacing the gas tax with a smart per-mile fee would represent a very progressive change to the system, whether in Oregon, Illinois, or any other state.

California took a small step in this direction when it changed auto insurance rules to base rates on miles driven. The politicians survived that step. As long as gas prices remain low, it is a propitious time to aggressively expand efforts to charge people something akin to the true public and private cost of their driving.

The federal government could help the cause by making it easier to toll on federal roads, and congressmen could help by not demagoguing such plans when they arise, as is their wont. My former congressman Ray LaHood committed a political gaffe early in his tenure as secretary of transportation, when he inadvertently told the truth and said per-mile charging was the most logical system that existed, and that we should do what we can to move towards implementing it. President Obama quickly renounced the sentiment and promised that such a thing would never happen on his watch.

Obama’s watch is now almost over. It’s time we embraced a transportation funding system that would more closely resemble an actual market, and deliver markedly better results for drivers and the environment. It would be asking too much for either presidential candidate to embrace such a reform, but the next commander-in-chief could help nudge states in the right direction simply by directing the Department of Transportation to be more helpful in experiments like Oregon’s. The idea of smart, per-mile charging is so intuitively appealing that I suspect most DOT workers are already inclined in that direction. A White House that’s not worried about short-term blowback could allow them to do a lot more than at present to make per-mile fees, instead of gas taxes, a reality.

According to opinion polls, Americans think that the federal government is too large and powerful. Most people do not trust the federal government to handle problems. Only one-third of people think that the government gives competent service, and the public’s “customer satisfaction” with federal services is lower than for virtually all private services. I discussed these sad realities in this study. reports today on a new customer satisfaction study:

Despite a major push by the Obama administration in recent years, the federal government “still fails at customer experience,” according to Forrester Research’s Customer Experience Index.

The federal government finished dead last among 21 major industries, and had five of the eight worst scores of the 319 brands, leading Forrester to note that government has a “near monopoly on the worst experiences.”

Notably, ranked last among all brands …, the departments of Education and Veterans Affairs, the Transportation Security Administration, the Internal Revenue Service, Medicaid and the Small Business Administration rated in the bottom 6 percent of all brands.

This was not a small-sample poll. Forrester’s Index was based on perceptions from surveys of 122,500 adult customers.

“For me, the most compelling point is that federal agencies are clustered near the bottom of the index,” Rick Parrish, senior analyst at Forrester, told Nextgov. “So many agencies that have been working hard haven’t shown improvement. You see a lot of action, a lot of arm-waving and noise, but not a lot of progress.” Even the worst brands in the worst industries—TV and internet service providers, and some airlines—generally outperformed federal agencies.

An irony of Big Government is that even as Congress has created hundreds of new programs to supposedly help people, and dishes out more than $2 trillion a year in subsidies, the public has not grown fonder of the government. Instead, people have become more alienated from it, and more disgusted by its poor performance.

For more on government failure, see here.

The outcome was certain the moment federal and state regulators spilled blood in the water and swarmed ITT Technical Institutes, but today it became official: ITT is going out of business. No proven guilt, just accused to death. But we’ve been over all that.

What is worth pointing out now are the alternatives to ITT. I’ve recently seen a couple of stories from Ohio about community colleges offering to take in students stranded by ITT’s demise, and thought it might be worth doing a little comparison between Ohio ITT branches—I mean, former branches—and these would-be rescuers.

Here is some broad info from the federal College Scorecard on Ohio ITT branches, and it is certainly not great: Annual after-aid costs ranging from $21,212 to $24,258, graduation rates from “not available” to 52 percent, and salary after attending of $38,400, which appears to be listed for most ITT campuses nationwide.

How about those community colleges?

I couldn’t find Butler Tech or Great Oaks on the Scorecard, but Cuyahoga Community College has an annual after-aid student cost of $5,832—enabled by upfront taxpayer subsidies—but only a 6 percent graduation rate and an annual salary after attending of $27,600. Cincinnati State Technical and Community College has an annual cost of $7,021, a graduation rate of 22 percent, and a salary of $29,700. The community colleges are cheaper than ITT, but their outcomes appear appreciably worse.

The Scorecard, importantly, is a seriously flawed tool, but it comes from the very federal government that has targeted ITT, and it gives the kind of first-blush data that have readily been employed to attack the for-profit sector. What I looked at is also, of course, anecdotal. But what it suggests is that the alternatives to ITT, at least in Ohio, are probably no better than ITT was, and may well be worse. Which supports what you’ve read here many times, and which broader evidence upholds: For-profit colleges are not distinctly terrible. It is the whole, federally distorted system that is a wreck.

Americans have lately been debating the tradeoffs we face as the global poor rise. Their gains have been enormous and unprecedented. And yet the American working class has struggled to better itself even as conditions have improved for most others:

Image source.

Percentiles 80-95 contain many from the relatively rich countries’ lower-income classes; there are a lot of Americans in there. Other factors may be at work, but let’s say for the sake of argument that the gains by the global poor have on balance harmed at least some of them.

So why is this happening? Is it part of some other nation’s malicious plan? Is it China, perhaps? Or India? Or did we inadvertently do it to ourselves, through bad trade agreements or “soft” foreign policy?

It’s natural to want to make the story about us, or our actions, or a villain who threatens us. Those sorts of explanations are politically useful; they suggest that the right leader can get us out of the mess we’re in.

But maybe the correct explanation isn’t about us at all. One way to see this is to ask a slightly different question: Why is the Great Global Enrichment happening right now? Why didn’t it happen in the 1960s? It happened in the 1960s in Japan, after all. It presumably could have happened elsewhere too. So why not?

The left-hand side of the graph contains few Americans or Europeans. It’s mostly made up of people from India, China, and Africa. In the 1960s, India was undergoing a slow-motion economic suicide, nationalizing major industries under Jawaharlal Nehru and Indira Gandhi, and pursuing economic autarky in the false belief that that’s just what industrializing nations need to do. China’s economic suicide was much more dramatic, with the Great Leap Forward bringing ecological disaster, mass starvation, and tens of millions of deaths. Over in Africa, a colonial-era infrastructure geared toward extraction found ready use in the hands of socialist and nationalist state agents, who expropriated foreign and domestic investments to enrich only themselves, while scaring away most future investments for a generation.

Things are different today. Since the 1990s, India has steadily pursued economic liberalization, and as a result, its economic growth has accelerated. China is no more than nominally Maoist anymore, and while its human rights record remains lamentable, at least the central government isn’t micromanaging the economy with Lysenkoist pseudoscience. In Africa, expropriation and nationalization of assets are at historical lows, making it safer than ever to invest in Africa, no matter where you come from.

So… maybe the story is not about us. It’s also not about an enemy who threatens us. It’s about the rest of the world not shooting itself in the foot anymore. It’s about other societies increasingly adopting economic liberalism, which happens to be very good at lifting people out of poverty.

In the process, the rest of the world is exposing many Americans to market discipline, which, yes, is going to hurt. But the only way to stop this process is to re-impose repressive economic regimes on billions of people. That’s a step that’s equal parts unwanted, unrealistic, and unethical, and the transformation at hand is just too big to be much affected by anything else that we might do.

Both sides of our political spectrum have purely venal reasons to want the story to remain about us. The left doesn’t want to admit that economic liberalism beats command-and-control socialism when it comes to mass enrichment. The right has lately embraced economic populism as a check on a purportedly hostile world – a worldview that positively requires one or more villains. But maybe we don’t live in a hostile world. Maybe we live in an increasingly excellent world, one that we created inadvertently, through the power of good examples. If so, that’s not a change that we should want to undo. Let them have their freedom, let the curse of poverty be lifted, and let the competition continue.

Over at Cato’s Police Misconduct site, we have selected the worst case for the month of August. It’s the Baltimore Police Department (BPD). 

Although the misconduct has been festering for many years, our selection is based upon the investigative findings of the Department of Justice, which were published in a report last month.

Here are a few of those findings:

  • The BPD engages in a pattern or practice of making unconstitutional stops, searches, and arrests;
  • The BPD engages in a pattern or practice of using excessive force;
  • The BPD engages in a pattern or practice of retaliating against people engaging in constitutionally-protected speech;
  • The BPD has allowed violations of policy to go unaddressed even when they are widespread or involve serious misconduct;
  • The BPD has failed to take action against offenders known to engage in repeated misconduct.

Because the problems run deep, it would be a mistake to focus all of our attention on the police department itself. The political establishment of Baltimore knew there were problems, but failed to address them. It remains to be seen whether the reform rhetoric we have been hearing will be followed by real action.


No, I don’t mean sections 8 and 10 of the Constitution’s first article — though goodness knows a case can be made (and has been made recently, and most eloquently, by CMFA Adjunct Scholar Dick Timberlake), that it hasn’t adhered to the letter of that law, either. I’m referring to the law authorizing the Fed to pay interest on depository institutions’ reserve balances, or IOR, for short.

You see, according to Title II of the 2006 “Financial Services Regulatory Relief Act” — that law that originally granted the Fed authority, commencing October 1, 2011, to begin paying IOR — the Fed is allowed to pay interest, not at any old rate it chooses, but “at a rate or rates not to exceed the general level of short-term interest rates.”

As the name of the 2006 Act suggests, its purpose was to relieve financial institutions of unnecessary regulatory burdens. The fact that depository institutions’ reserve balances at the Fed, including minimum balances they were required to hold, bore no interest, had long been regarded as one such unnecessary burden. So long as reserve balances paid no interest, reserve requirements amounted to a distortionary tax on bank deposits subject to them. In the words of then Fed Governor Donald Kohn, who testified in favor of IOR back in 2004, the payment of interest on reserves, and on required reserves especially, would result in improvements in efficiency that “should eventually be passed through to bank borrowers and depositors.”

Since the original intent of IOR was to remove an implicit tax on deposits, and not to have the Fed subsidize those deposits, it’s easy to understand the law’s insistence that the Fed pay IOR only at “a rate or rates not to exceed the general level of short-term interest rates.” It also easy to see why most economists, including the Fed’s own experts, treat the federal funds rate as an appropriate proxy for the opportunity cost of reserve holding, and hence as one of the short-term rates that the rate of interest on bank reserves ought “not to exceed.” Indeed, because overnight lending involves some risk and transactions costs, while banks would earn IOR effortlessly and without bearing any risk, the IOR rate should logically be strictly below, rather than below or equal to, the federal funds rate.

Fast forward to 2008. Among its other provisions, the “Emergency Economic Stabilization Act” passed on October 3rd of that year “accelerated” the Fed’s authority to pay interest on bank reserves, making that authority effective as of the new law’s passage, instead of as of October 1 of 2011. Significantly, the 2008 measure did not otherwise alter the language of the original legislation. The rush to implement IOR was, nevertheless, based on motives quite different from those that informed the 2006 Act. As then-Chairman Ben Bernanke explained, in  an October 7th, 2008 speech he gave at the annual meeting of the National Association for Business Economics, in the wake of  Lehman’s failure, the extent of the Fed’s emergency lending

had begun to run ahead of our ability to absorb excess reserves* held by the banking system, leading the effective funds rate, on many days, to fall below the target set by the Federal Open Market Committee. This problem has largely been addressed by a provision of the legislation the Congress passed last week, which gives the Federal Reserve the authority to pay interest on balances that depository institutions hold in their accounts at the Federal Reserve Banks. The Federal Reserve announced yesterday that it will pay interest on required reserve balances at 10 basis points below the target federal funds rate, and pay interest on excess reserves, initially at 75 basis points below the target. Paying interest on reserves should allow us to better control the federal funds rate, as banks are unlikely to lend overnight balances at a rate lower than they can receive from the Fed; thus, the payment of interest on reserves should set a floor for the funds rate over the day (my emphasis).

Thus, although the Fed was now chiefly concerned, not with relieving banks of an implicit tax, but with reinforcing its ability to hit its federal funds target, its plan was to do so in a manner that nevertheless complied with the letter, if not the spirit, of the 2006 law, by having IOR serve as a new, non-zero lower bound to the federal funds rate.

Alas, things didn’t work out quite as Bernanke and other Fed officials intended. Instead, the “floor” they’d laid out so carefully turned out to be rotten, chiefly owing to the fact, although they keep balances with the Fed, Fannie and Freddie and other GSEs aren’t eligible for IOR.Consequently, their involvement created an arbitrage opportunity that Fed officials hadn’t anticipated, with banks borrowing funds from GSEs overnight at rates sufficiently below the IOR rate to turn the banks a tidy (if modest) profit.

The crux of the matter is that the effective federal funds rate — that is, the rate that was actually being paid for overnight funds — quickly ended up falling below the IOR “floor” and, therefore, below the  Fed’s target rate. In fact, as the red plot in the figure below shows, since December 2008, when the Fed set the IOR rate for both required and excess reserves at 25 basis points, the rate has always exceeded the effective federal funds rate, besting it on occasion by as much as 19 basis points.

Faced by this reality, the Fed made the best of a bad job by declaring (1) that instead of setting a fed funds rate target it would henceforth set a target “range;” and (2) that the rate of IOR was to define, not the lower bound (or “floor”) of the new target range, but the upper bound.

Man, I bet the Board of Governors makes some mean lemonade!

But while the Fed may have succeeded in saving face, it doesn’t follow that it managed to do so while still obeying the law. For converting the IOR rate from a floor to a ceiling meant setting it above rather than at or below “the general level of short-term interest rates,” taking that “general level” to be appropriately represented by the effective federal funds rate. Nor does letting the three-month T-bill rate proxy the “general level” of (risk-free) short term rates — a reasonable alternative — get the Fed out of hot water, since that rate (the green plot in the figure) has generally been even lower than the effective federal funds rate:

The situation hasn’t gone unnoticed by Congress. Bill Huizenga (R-Michigan), Chairman of the Financial Services Committee’s Subcommittee on Monetary Policy and Trade, drew attention to the matter following  Janet Yellen’s June 22, 2016, Humphrey-Hawkins Testimony:

HUIZENGA: Thank you, Mr. Chairman, and back here, Chair Yellen.

So, in response to the financial crisis, the Emergency Economic Stabilization Act accelerated its authority that had been granted to start paying interest on reserves from 2011 back to October 1 of 2008. And according to the New York District Bank, the Fed expected to set interest on reserves well below the Fed’s target policy rate, that is, the federal funds rate. Had the Fed created such a, quote, “rate floor,” it would have complied with the letter of the law.

Section 201 of the Financial Services Regulatory Relief Act of 2006 explicitly states that interest on reserves can, quote, “not exceed the general level of short-term interest rates.” However, as we learned in last month’s Monetary Policy and Trade Subcommittee hearing, interest on reserves is above the Fed funds rate.

This above-market rate not only appears to have gone outside the bounds of the authorizing statute, it may also be discouraging a more free flow of credit in an economy that can and should be flourishing. …

As if taking this as his cue, Jeb Hensarling (R-Texas), Chairman of the House Financial Services Committee, and one those responsible for introducing the 2006 legislation, grilled Yellen remorselessly on the subject:

HENSARLING: And as I think you know, Section 201 of the Financial Services Regulatory Relief Act says that payments on reserves, quote, “cannot exceed the general level of short-term interest rates.” Today, you are paying 50 basis points on interest on excess reserves. The fed funds rate yesterday, I believe, is 38 basis points. Is that correct?

YELLEN: Probably correct.

HENSARLING: So, you’re paying about — back to the (inaudible) calculation — a 35 percent premium on excess reserves. You’re paying a premium to some of the largest banks in America, is that correct?

YELLEN: Well, I consider a 12 basis point difference to be really quite small and in line with the general level of interest rates.

HENSARLING: OK. So, you believe you have the legal authority to do this, otherwise you wouldn’t do it, is that correct?

YELLEN: Well, I do believe we have the legal authority to do it…

HENSARLING: Madam Chair, would it be legal…

YELLEN: Our (ph)…

HENSARLING: Would it be legal for you to pay a 50 percent premium? You’re paying a 35 percent premium today. Would it be legal to pay 100 percent premium?

YELLEN: I believe it’s a small difference. And interest on excess reserves did not succeed as expected in setting a firm floor…

HENSARLING: And would it be legal…

YELLEN: … on the (inaudible) short-term interest rates…

HENSARLING: Would it be legal under the statute — would it be legal under the statute for you to pay twice the Fed’s fund rate as a premium on interest on reserves?

YELLEN: Well, I believe that the way we are setting it is legal and consistent with the act.

HENSARLING: No, I know. But that’s not my question.

YELLEN: It is — it is…

HENSARLING: What is the legal limit? What is the legal limit on which you can pay? What does the phrase exceed the general level of short-term interest mean? You’re saying that 12 basis points does not trigger the statute. At what point is the statute triggered?

YELLEN: It depends on exactly what short-term interest rate you’re looking at. There are a whole variety of different rates and…

HENSARLING: OK. Do you have an opinion on whether…

YELLEN: … whatever…

HENSARLING: … or not it would be legal to pay 100 percent premium?

YELLEN: Whatever level we set, the interest on reserves…

HENSARLING: Madam Chair, please, it’s a simple question.

YELLEN: … at, it funds (ph) going to trade below that level.

HENSARLING: Madam Chair, please, it’s a simple question.

YELLEN: It funds going to — to trade below that level.

HENSARLING: Madam Chair, please. It’s a simple question. Would it be legal under the statute to pay a 100 percent premium? If you don’t know the answer to the question, you don’t know the answer to the question.

YELLEN: Well, my interpretation is that it is legal.

HENSARLING: It would be legal to pay twice the market rate? That would not exceed the general level of short-term interest?

YELLEN: There is likely to be for quite some time a small number of basis points gap…


YELLEN: … between interest on reserves and the Fed funds rate, and that is something that…

HENSARLING: I would simply advise discussing that with the legal counsel, because I think that, frankly, it (inaudible) common sense.

I’m going to go out on a limb and guess that Hensarling’s last “inaudible” word was “defies.”

Whatever the word was, it sure seems to me that, no matter how one slices it, an IOR rate “a small number of basis points” above the fed funds rate is one that “exceeds” that rate. But I’m not a Federal Reserve lawyer, so what do I know? Still, I wish someone deeply committed to making sure that financial institutions don’t get away with any hanky-panky (the CFPB, perhaps?) would go ahead and sue the Fed, so that Representative Hensarling and I can find out once and for all just what “not to exceed” really means.


*That is, it’s ability to “sterilize” its emergency loans by disposing of Treasury securities.

[Cross-posted from]

The Center for American Progress Action Fund (CAPAF) has sounded the alarm: Donald Trump’s proposal to eliminate the U.S. Department of Education (ED) would be pure loss because a lot of people use federal education money. Lost jobs, lost college access, lost learning. Which makes sense if you assume that the federal government miracles money into existence, people can’t adjust to changing circumstances, and federal control can only help.

Of course, the federal government does not just will money into existence. It does spend far more than it has, but sooner or later someone is going to have to pay for that. And money arriving through taxation comes from people who may have used it for other, more productive things. Taxpayers may have spent it on new businesses, or housing, or food, or lots of other things that would have potentially grown the economy and created new jobs. Or heck, just made them happier. So there are costs—maybe big ones—that CAPAF ignored: opportunity costs.

Then there are costs to dealing with ED demands. Yes, as CAPAF points out, the department has a relatively small workforce—about 4,300 full-time equivalent employees—but that is in part because ED makes states do a lot of the administrative heavy lifting, forcing them to hire a lot of bureaucrats. There is also a sizeable compliance cost that goes with federal programs. The latest available numbers I could find were from a 1998 report—pretty old—but that precedes the No Child Left Behind Act, which greatly expanded federal management. That report suggested that for every dollar sent to Washington only 85 cents made it back to local districts, and noted that there were nearly three times as many state employees being funded by federal money as ED employees.

How would ED be eliminated? While it is unclear how Trump would do it—details do not seem to be his thing—he would likely phase the department out, not just kill it all at once. Of course, he could just move the programs elsewhere in the federal bureaucracy. But assuming that by killing ED he means to kill the programs, he would probably phase them out, leaving states, districts, colleges, and students time to adjust. And if he were to couple phasing out the programs with, say, proportionate tax relief, or even just block grants to states, that money could still be used for education! It would not necessarily mean any lost teacher jobs, student aid, or anything else. It could just mean that instead of losing 15 cents in bureaucratic processing for each dollar, taxpayers could keep the whole buck!

Would trimming what we spend necessarily even be bad educationally? Signs pretty clearly point to “no.” As the graph below shows, as well as this report on SAT scores, large spending increases haven’t come close to producing commensurate improvements in achievement, at least as measured by standardized tests for high school kids. Those scores have essentially sat still. Same for staffing: In roughly the same period as is covered in the graph, public schools went from about 14 students per staff member, to just 8 students, approaching a doubling of employees per child. Even the high-school graduation rate “all-time highs” that sound so nice aren’t: CAPAF cited a report based on only four years of data, and longer-term data show in 1969–70—close to when the feds first got heavily involved in education—the average freshman graduation rate for public schools was 78.7 percent. As of 2012–13—the latest data on the chart—it was 81.9 percent. Hardly a huge increase, and possibly one inflated by “credit recovery” and other dubious practices. Oh, and the feds coerced states to adopt a single curriculum standard—the Common Core—only to see tremendous backlash after the public finally became aware of what had been foisted on them. At the very least, great political acrimony and stomach-churning educational turbulence have been the result.

The evidence—more of which can be found here—suggests that in K–12 education, federal involvement may well be a loss, not a gain.

How about higher ed? Federal student aid, it is becoming increasingly certain, has largely translated into skyrocketing prices, major non-completion, credential inflation, and big student debt. Hardly the pure affordability effect that is all CAPAF discusses. You can get more in-depth on higher education here.

There is one other thing that ought to be mentioned, though it may seem passé: Washington has no constitutional authority to meddle in education outside of DC itself, federal installations, and prohibiting state and local discrimination in education provision. Yet the vast majority of what ED does goes far beyond those things. Ignoring the Constitution comes with costs all of its own, which CAPAF—and everyone else—may learn very quickly if there is a President Trump and he, among other things, unilaterally tries to change federal education policy. You know, like President Obama.

CAPAF portrays the U.S. Department of Education as all gain, and it’s possible ending all pain. But there is a whole other side to federal education meddling: costs. And they are big.

Kratom is a plant that, according to users, relieves pain, reduces anxiety, and aids withdrawal from opioids like heroin.

The Drug Enforcement Administration, however, believes kratom is dangerous and has no valid medical use. So the DEA is placing kratom in Schedule I of the Controlled Substances Act, which effectively bans legal use of the drug.

The DEA’s decision prompted one user to send me this email:

I’ve read many of your posts online, and remembered you today as I heard some news that, I fear, is going to change my life for the worse. I’m sure you are aware that very soon kratom is going to be banned nationwide.

Full disclosure: I do depend on kratom for anxiety and (very) occassional pain from back spasms. About five years ago kratom gave me my life back after finally weening myself from prescription pain medication. I take it every day, and I’ve never had to increase the amount. This amazes me.

I am a successful high school teacher, husband, and father. I have a master’s degree in education and I work hard to take care of my family. I have refused, and will continue to refuse, to become a ward of the pharmaceutical industry. Which I suppose, in the eyes of the DEA, now makes me a felon.

I am writing to ask you if you have any advice at all for how to fight this. I am writing writing writing … senators and health officials … posting on forums, donating money. This all feels quite futile.

So I guess I’m also, not so subtly, asking you if you believe there is any way you could help. You are an expert in this field. Your voice would be heard much more clearly than a high school teacher in Southwest Ohio. What you might say I do not know. But I do know there are thousands of people right now who are frightened and angry, and my gut tells me this ban could cause many to suffer. But of course I am also being selfish.

I replied that I did not have an obvious way to help, but that I would blog again about kratom. The sender in turn said:

Thank you so much for your reply. You may absolutely quote me, but I would appreciate if you did not use my name. Small-town malice is a reality around here.

I would like to link a short video that was posted online today by a Veteran who is upset about the DEA not allowing public comment on this matter. His story is heartbreaking. It made me feel a bit guilty about my whining.

My personal story aside, I just think it’s an overreach. The data they cite in their intent letter is incorrect (nearly all the deaths blamed on kratom have been shown to have resulted from users having multiple drugs in their systems – mainly tramadol, according to what I’ve read). And the very substance they wish to ban is so obviously helping thousands of people stop abusing heroin and all the so-called maintenance drugs prescribed to addicts. Evidently, the month after Alabama banned kratom, herion overdoses doubled. I think we may see this on a national scale come October.

Most of the information I’m finding is all anecdotal, of course. But Schedule 1 means kratom will never get properly researched. I’m no conspiracy theorist, but it all seems a bit fishy.

That was a rant. Sorry. It’s been a rough couple of days. Here is the video link, and thank you so much. Even if you can’t write the blog, you have been very kind.

And finally:  

One more link then I will get a life and leave you alone:

Two U.S. patents, the most recent one funded by the government, clearly stating the medical benefits of kratom. So the DEA is being a bit disingenuous.



One individual’s experience is not proof that kratom’s benefits outweigh its negatives; kratom may have significant risks for some users.

But in a free society, individuals, not the DEA, get to make that decision.

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

This week, all eyes have been on Hurricane, now-Tropical-Storm, Hermine.

Since the Hermine coverage has been non-stop and ubiquitous, instead of highlighting anything in particular on the intertubes, we thought we’d give you our specific take on the events of this (and next) week. Here goes.

We’re about to take the national Rorschach test that accompanies headline storms, as the leftovers from Hurricane Hermine are going to spin away for a week off the mid-Atlantic coast, generating humongous seas and climate change blathering.

Dealing with the former won’t be better informed by the latter—an uneccessary and largely unjustified interloper/distraction.

The storm will be the result of an unhappy marriage between a hurricane or tropical storm remnant and a garden variety upper-atmospheric low pressure system. For reasons having everything to do with bad luck, the jet stream is going to be “blocked” in place for nearly a week, so that anything that would normally be steered from west to east is just going to sit. And sit.

The waters off the mid-Atlantic coast are near their seasonal maximum, and they’re also several degrees above normal. (Note—in the northeastern Atlantic, they’re several degrees below average.) That’s going to provide a tad more energy to the storm as it stalls out, but that’s not going to last long. A huge donut of 50-70mph winds sitting in the same place will mix out the surface warmth pronto, and what will be the main event will be more like a strong winter northeaster that gets stuck in one place, like the Ash Wednesday storm of 1962, which caused a huge amount of coastal damage from Cape Cod to South Carolina

If that repeated now, owing to the tremendous coastal development since then, it would easily be among the most expensive storm in our history. Fortunately (at least as of this writing) it looks like the persistent strong winds are going to be coming from the north, resulting in only modest (two to four foot) storm surges.

This is hardly the first time that a decaying hurricane has been enmeshed with a stagnant upper air storm. In fact, the resemblance between Hermine and 1972’s Hurricane Agnes is astounding.

Both came ashore rated as 80mph storms on the Florida panhandle. Neither actually generated an observed hurricane-force sustained wind on land. Both then burbled northeastward, to emerge off the Outer Banks and briefly resurrected as tropical cyclones. Both then were captured by a stagnant jet stream.

Both produced tremendous amounts of rain, with one slight difference. The Agnes remnant did it over an extensive area of the northeastern U.S., killing 122 people. Sixteen of these were in Washington, as normally torpid Rock Creek rose to the rooftops of cars on the adjacent Parkway in a matter of a few minutes. The U.S. Office of Emergency Management calls it “the most massive flooding in the history of the eastern United States.”

Agnes did this while spinning a loop over land. The Hermine remnant is forecast to spin three, but out over the water, all the while chunking out tremendous amounts of rain. We can only hope this is true, because all that’s going to cause is a week of impressive winds and gigantic waves. If this happens onshore (or very near-shore)…we don’t even want to think about it.

With regard to that Rorschach test, it should be duly noted that both the Ash Wednesday storm and Hurricane Agnes occurred during a time of global cooling. You don’t need global warming, and, because the Hermine remnant is going to mix away any unusually warm water very quickly. The real culprit will be the dumb luck of a weak hurricane intercepting a stalled jet stream.

Dilma Rousseff was never as popular as the president who anointed her as his successor. Despite her intelligence and diligence in numerous official posts, she lacked his warm personality and flair for campaigning. But she ran a very professional presidential campaign, with lots of celebrity supporters, and the vigorous support of her predecessor, and she won the election and became Brazil’s first female president. In office she pursued policies of easy money, subsidized energy, and infrastructure construction, which initially boosted her popularity. As is so often the case, though, those populist programs eventually brought inflation and a slide into economic contraction. Simultaneously, allegations of corruption and cronyism hurt her reputation. Impeachment proceedings were brought against her, focused on her mismanagement of the federal budget, particularly employing budgetary tricks to conceal yawning deficits. ”Experts say Ms. Rousseff’s administration effectively borrowed some $11 billion from state banks, an amount equal to almost 1 percent of the economy, to fund popular social programs that have been a hallmark of the Workers Party’s 13 years in power.” Some said that such fiscal mismanagement and dishonesty were common in presidential administrations and should not result in impeachment. But the Senate convicted her and removed her from office, making her bland vice president the new president.

Thank goodness nothing like that could happen in our own country.

As Venezuelan socialism descends into tyranny, hunger, and chaos, a milestone came in July when a government ministry announced Resolution No. 9855, under whose provisions, quoting CNBC, “workers can be forcefully moved from their jobs to work in farm fields or elsewhere in the agricultural sector for periods of 60 days.” Amnesty International says the decree “effectively amounts to forced labor.” Strongman Nicolas Maduro has likewise imposed harsh legal penalties on businesses that close down their operations.

It all echoes the Directive 10-289 (all workers “shall henceforth be attached to their jobs and shall not leave nor be dismissed nor change employment,” with businesses similarly bound) from Ayn Rand’s novel Atlas Shrugged. Readers may assume that Rand based her fictionalized directive on the track record of the sorts of dictatorships that outlaw political opposition. But in fact elements of forced labor have cropped up in socialist experiments even in nations with strong track records of constitutional government and civil liberties, such as postwar Britain.

In 1947, two years after war’s end, the Labour government led by Prime Minister Clement Attlee decided to extend a wartime emergency measure by means of what was called the Control of Engagements Order, intended, as one sympathetic account put it, to correct the “failure of labour to go where it is most needed.” To quote a contemporary account, the order, applying with scattered exceptions to all men 18 to 50 and all women 18 to 40 not mothers, “compels employees seeking workers and workers seeking employment to use employment exchanges. Unemployed persons who, after having been offered a choice of jobs, refuse to accept essential work, will be given 14 days to think it over. If they still refuse, they are liable to be directed.”

Britain was of course a democratic nation and the Control of Engagements Order promptly became a topic of hot controversy, with critics of the Labour government arguing that it exemplified the prediction of Friedrich Hayek, in The Road To Serfdom (1944), that socialist control of the economy would lead by logical steps to a severe constriction of personal freedom. Whether or not because of the outcry, the measure was short-lived, and repealed within a couple of years. As of June 1949 only 95 persons had been subjected to explicit orders of coercion under the order. Some, like Milton Friedman in Capitalism and Freedom, have concluded that the quick demise of the order demonstrated that in a nation with a tradition of liberty like Britain, even a committed socialist government would not be willing to pursue the notion of “centralized allocation of individuals to occupations” to the point of “trampling rough-shod on treasured private rights.”

A young Conservative Party politician at the time, however, pointed out in an exchange with a Labour incumbent that the harshness of the order in practice must not be underestimated: 

The small number of cases in which compulsion has had to be applied is often acclaimed by the Socialists. The figures considered alone are misleading. It must not be forgotten that they relate only to the formal directions which the Ministry issues as a last resort. The majority of people, when threatened with direction, “go quietly;” but it is the existence of these powers which causes them to go. Such persons are in fact, though not in law, directed, and they are far more numerous than the hardy spirits who hold out until compelled to give in.

And further:

Less than 72 hours before I spoke to the Young Conservatives, my attention was drawn to a case of a person who was negotiating direct with another employer for a better job. He was informed that such action was prohibited under the Order, that he would require to secure his release from his present employment and apply through a labour exchange. There was then no guarantee that the exchange would send him to the job he wanted, but they might direct him to another. He considered the risk of not getting the post too great, and is still in his present work.

While it may be argued that that person was not legally prevented from taking the new job (though he may have been had he chosen to have gone through with it), the fact remains that owing to the existence of the Control of Engagement Order and the wide powers of direction held by the Minister of Labour, he is now one rung lower on the ladder than he would otherwise have been. This is only one instance. I could cite others of a similar nature.

That brisk account came from the pen of Conservative candidate Margaret Roberts, better known by her later married name of Margaret Thatcher.

From here in the United States of America, many of whose finest political thinkers have been associated with the principle of the freedom of labor, Happy Labor Day.

MIAMI, FL - NOVEMBER 02: Martha Lucia (L) sits with Rudy Figueroa, an insurance agent from Sunshine Life and Health Advisors, as she picks an insurance plan available in the third year of the Affordable Care Act at a store setup in the Mall of the Americas on November 2, 2015 in Miami, Florida. Open Enrollment began yesterday for people to sign up for a 2016 insurance plan through the Affordable Care Act. (Photo by Joe Raedle/Getty Images)

In opeds at Time and National Review Online, I discuss how ObamaCare’s health-insurance Exchange has collapsed in Pinal County, Arizona, throwing some 10,000 residents out of their ObamaCare plans. Charles Gaba of and Cynthia Cox of the Kaiser Family Foundation asked me to explain a claim I make in the NRO piece:

Obamacare will still penalize those residents if they don’t buy coverage — even if the amount they must pay increases tenfold or more.

Before I explain, let me first apologize on behalf of the Affordable Care Act’s authors for the complicated mess that follows.

ObamaCare’s individual mandate penalizes taxpayers who fail to purchase health insurance. But there are so many exemptions that of the 33 million or so people who lacked insurance in 2014, the IRS levied the penalty against only 6.6 million tax filers (which actually represents a larger number, maybe 17 million people).

For example, the Affordable Care Act exempts “individuals who cannot afford coverage” from the penalty. You qualify for this exemption if your “required contribution” exceeds roughly 8.13 percent of your household income. For individuals who don’t have access to a suitable employer plan, the “required contribution” is equal to “the annual premium for the lowest cost bronze plan available in the individual market through the Exchange in the State in the rating area in which the individual resides,” minus “the amount of the credit allowable under section 36B for the taxable year (determined as if the individual was covered by a qualified health plan offered through the Exchange for the entire taxable year).” In other words, if you would have to pay more than 8.13 percent of your income for an ObamaCare plan, even after accounting for premium subsidies, then coverage is unaffordable for you and ObamaCare doesn’t penalize you for not buying coverage.

You would think this exemption would somehow apply to the 10,000 residents of Pinal County, for whom coverage will become dramatically more expensive when the Exchange collapses. If those folks are like Exchange enrollees in the rest of the country, the vast majority of them (85 percent or so) receive premium subsidies. When their Exchange coverage disappears next year, so will those subsidies. If they wish to purchase coverage off the Exchange, they will face, for the first time, the actual cost of ObamaCare coverage. Given that the amount Pinal County residents will have to pay for ObamaCare coverage could rise by several multiples, from a fraction of the premium to the full premium, given that the lowest-income enrollees will see the largest increases, given that the large year-to-year rate increases occurring nationwide will only add to the suffering, you would think the ACA’s unaffordability exemption would somehow cover those 10,000 Pinal County residents. But you would be wrong.

Remember, the ACA penalizes people if they fail to purchase insurance, unless they qualify for an exemption. The unaffordability exemption applies only if “the annual premium for the lowest cost bronze plan available in the individual market through the Exchange” in Pinal County, minus “the amount of the credit allowable under section 36B,” whether the individual enrolls in Exchange coverage or not, exceeds 8.13 percent of the individual’s household income.

You can’t do that calculation in Pinal County. The premium for the lowest-cost bronze plan in Pinal County is not $0.00. It’s not even a number. It’s the empty set. The “credit allowable under section 36B” is likewise the empty set. Section 36B “allow[s] as a credit…an amount equal to the premium assistance credit amount for the taxpayer.” To calculate the premium-assistance credit amount, you need to know either the premium for the health plan the taxpayer “enrolled in through an Exchange established by the State under [section] 1311,” or the premium for the “the second lowest cost silver plan” available to the taxpayer “through the same Exchange.” It would be awesome if all those premiums were $0.00. (Free health care!) But it’s not. Instead, no such premiums exist. Since there are no such premiums, there is no “required contribution.” Since there is no “required contribution,” there is no unaffordability exemption in Pinal County. Without an Exchange, there is no unaffordability exemption from the individual mandate.

Following the collapse of the Exchange, the ACA strips 10,000 Pinal County residents of their health coverage, strips them of any subsidies they had been receiving, and penalizes them if they fail to purchase coverage that everybody knows ObamaCare has made unaffordable for them. The ACA also denies the unaffordability exemption to any uninsured residents who had qualified or would have qualified for it. The ACA exempted them from penalties when coverage was somewhat unaffordable, yet penalizes them when coverage becomes very unaffordable.

But let’s suppose we had a government that didn’t care what the law says, and was determined to make the unaffordability exemption work for residents of Pinal County and any other county or state where the Exchange collapses. The government could pretend the lowest-cost-bronze-Exchange-plan premium actually is $0.00. But then the required contribution would be zero or negative, which is less than 8.13 percent of household income. So no exemption. Ooh, I know! The government could pretend the ACA allows them to use non-Exchange-bronze-plan premiums for the first part of the “required contribution” calculation. But then they would have to argue simultaneously that the ACA does not allow them to use non-Exchange-silver-plan premiums for the second part of the calculation. To put it differently, the government would have to argue the ACA allows them to pretend that non-existent Exchange plans exist but does not allow them to pretend that non-existent tax credits exist. I’m guessing that would be awkward.

It may be a blessing that we won’t have to watch ACA ObamaCare supporters put themselves through such contortions (again). The ACA gives the Secretary of Health and Human Services carte blanche to exempt anyone she pleases from the mandate penalty. All she has to do is claim they have “suffered a hardship [trying] to obtain coverage under a qualified health plan.” The people of Pinal County would certainly seem to qualify. To date, the Secretary has issued a raft of these “hardship” exemptions, none of which seem to apply to enrollees for whom coverage became unaffordable because their Exchange just plain collapsed. Since the Secretary hasn’t created such a hardship exemption yet, what I’m describing is here the law.

And even though it seems inevitable that the Obama administration will create such an exemption, the fact that they will have to take that affirmative step to protect ObamaCare’s intended beneficiaries from the law is significant. It will certainly be the most awkward the Obama administration has had to issue. It will be an admission that ObamaCare threw thousands of Pinal residents out of their pre-ObamaCare plans, stripped them of their guaranteed-renewability protections, turned their covered illnesses into pre-existing conditions, threw them out of their health plans again, left them with no affordable health-insurance options, and left many of them far worse off than they would have been if the president had never signed the ACA or had heeded Congress’ calls for repeal. Issuing hardship exemptions for Pinal County will be an admission that ObamaCare is inherently unstable, and that a similar fate could soon befall other Exchange enrollees. It will be an admission that the ACA’s architects suffered from a certain lack of foresight.

And it can’t come soon enough.

In his speech last night, Donald Trump stated that “immigration as a share of national population is set to break all historical records” and promised to restore a “historical norm.” It is the underlying premise behind his entire speech. His “deportation task force,” E-Verify, and all the rest is all about enforcing a lower rate of immigration and ending “an open border to the world.”  “We take anybody,” he said later. “Come on in, anybody.” He couldn’t be more wrong.

The United States has accepted roughly one million immigrants per year as permanent residents. As a share of the population, this number contributes 0.32 percent of the population. The historical average is 0.45 percent—nowhere close to extreme. As you can see, the immigration norm that we abandoned in the 1920s was much higher than the levels that we are seeing today. 

Figure 1: Historical Immigration Rate (Legal Permanent Residents as a Share of U.S. Population)

Source: Department of Homeland Security

Another way to view the rate of immigration is to look at the net increase in the total foreign-born population—which includes unauthorized immigrants—as a share of the overall population. The Census Bureau’s records on the foreign-born population only go back to 1850, but the annual rate of increase in recent years is also well within historical norms. The aberration was the 1930s to 1960s when the foreign-born population shrank in size. The United States is returning to its historical average of 0.21 percent. The rate in 2014 was 0.22 percent.

Figure 2: Annual Increase in the Total Foreign-Born Population as a Share of Total Population (Decadal Averages)

Source: Census Bureau

It is true that the immigrant share of population already in the United States has grown to its highest level in a century, but that is not the result of more immigrants entering the United States, but mainly of fewer Americans being born. A lower population growth rate for native-born Americans accounts for nearly two-thirds of the increase in the foreign-born share since 1965.  It’s just not true that historically abnormal immigration into the country is the primary cause of the higher immigrant share of the population.

The idea that the United States “takes anybody” flies in the face of the long waits that many legal immigrants face right now. As I’ve detailed before, there are millions of legal immigrants waiting for the chance to get a green card to live and work permanently in the United States, and they will not receive those visas under current law for decades. I can only imagine the looks on the faces of Indian immigrants who face century-long wait times for green cards when Trump claimed that America simply says “just come on in” to anyone who wants to immigrate here.

Perhaps Trump is making a comparison, arguing that America has an open door compared to other countries. If so, he’s also wildly off base. Again, as a share of the population, immigration to the United States is in the back of the pack compared to other developed countries (OECD). 

Figure 3: Immigration as a Percent of Population, 2013

Source: OECD

No matter how you look at it, the United States has low immigration flows for a country of its size and wealth. If Donald Trump wants America to return to its historical average, he would need to increase legal immigration. That would be a good thing for the country.

Trump’s speech last night in Phoenix confirmed that his supposed softening on immigration turned out to be wishful thinking.  After last night, nobody can claim that Trump’s position on immigration is too soft.  Trump reiterated his position paper on immigration that called for a large-scale increase in immigration enforcement along the border and in the interior of the United States through the building of a Great Wall, a tripling of ICE agents, the creation of another deportation force, and mandating the unworkable E-Verify program.  He also reiterated his support for slashing illegal immigration.

His listed deportation priorities included visa overstays who account for about 42 percent of all illegal immigrants and an increasing proportion of the total.  When combined with his call to revoke DACA, remove all violent and property criminals (wise policy to address a small problem that is already law), and for full enforcement of all immigration laws that means virtually all illegal immigrants will be deported under his plan.  

To remove any doubt of this, he also said that “no one will be immune or exempt from enforcement.”  Trump interprets enforcement as meaning, “Anyone who has entered the United States illegally is subject to deportation.  That is what it means to have laws and to have a country. Otherwise, we don’t have a country.” 

Trump’s proposed restrictions on LEGAL immigration could slash the number of green cards issued by up to 62.9 percent.  If you don’t believe me and Trump’s own position paper doesn’t convince you, just look at how happy Roy Beck of NumbersUSA is by Trump’s call for cutting legal immigration:



Dog Whistles to Restrictionists

Trump’s speech included numerous dog whistles to appeal to anti-immigration populists.  He cited the Center for Immigration Studies, an immigration-restrictionist think tank well known among Trump’s anti-immigration base.  Trump said there could be 30 million illegal immigrants in the United States, a wildly exaggerated number which was lifted from page 72 of Ann Coulter’s anti-immigration rant Adios America.  If there were really 30 million illegal immigrants in the United States, their already low crime rates would be even more minuscule relative to their proportion of their population. Trump mentioned Eisenhower’s immigration enforcement actions that are frequently and incorrectly cited by restrictionists.  He called for a “physical” border wall, which is popular among Know-Nothings who are skeptical of electronic border enforcement.  He also said he’d break the cycle of illegal immigration and amnesty which is a common point in restrictionist circles.  At its most lenient, Trump’s speech is an endorsement of the anti-immigration establishment’s position on the topic and therefore not a softening.     

Shoring up the Base – In August

The most remarkable part of Trump’s speech was not that he doubled down on his immigration views but that he felt he had to do so in late August.  This is usually when candidates are busy appealing to moderates rather than doubling down on minority positions.  His haphazard mention of the Second Amendment, repealing Obamacare, global warming, and other conservative issues in addition to his rejection of amnesty show just how desperate he is to shore up his support from reluctant conservatives.  If Trump loses in November, and all signs are pointing to that, this speech shows that nobody can reasonably claim that it was because he was “too soft” on immigration.  His probable November loss will be rightly blamed on his anti-immigration position.  

The Brazilian Senate impeached President Dilma Rousseff yesterday, bringing an end to the era of Worker Party rule, which began there in 2003.

Rousseff and her supporters have disingenuously denounced the impeachment, calling it a coup d’état. But it is likely that her removal from office will strengthen the country’s institutions and lead to an improvement in the policies that have led Brazil into its worst recession since the 1930s and that Latin Americans in recent years considered a model to emulate because it was seen to combine economic stability and enlightened social policies.

Let’s first of all dismiss the idea that Rousseff’s impeachment amounts to a coup. Whether we favored the political trial or not, it was conducted under the rule of law, and to assume otherwise weakens the legitimacy of the Congress and Brazilian democracy. As my colleague Juan Carlos Hidalgo has pointed out, the Constitution clearly delineates how and in which circumstances an impeachment should be carried out, and the Supreme Court has endorsed the legitimacy of this particular case. The fact that eight out of eleven members of the court were appointed by Rousseff and her Worker Party (PT) predecessor, Lula da Silva, undermines the credibility of coup claims.

The last time a Brazilian president was impeached was in 1992 and, as analysts Diogo Costa and Magno Karl observe, it was hailed as a “Victory of Democracy,” and ended up improving the country’s policies. (And it’s not that the PT does not believe in impeachments; the party attempted to impeach the three democratically elected presidents who preceded Lula.)

This trial may also have a positive impact. It will likely reduce to some degree the crony capitalism that was the essence of the Lula and Rousseff administrations. Alex Cuadros, who will speak at a Cato book forum on September 13, describes these policies well in his new book Brazillionaires. The PT’s policies have consisted of strengthening ties between the political and economic elite and were inspired by the idea of investing in strategic industries, generating high economic growth, and funding social welfare programs such as “Bolsa Familia.” Thus, the state granted easy credit to large companies and prominent businessmen. Subsidies from public banks increased from 0.4 percent of GDP in 2007 to 9.7 percent in 2013.

In practice, the unhealthy relationship that has long existed between Brazil’s politically and economically powerful deepened—one in which businessmen, with the aid of state credits, were financially supporting important politicians who also backed these business leaders. State subsidies were so important that by 2014 public banks had a market share larger than private banks, and participated in more than 700 large Brazilian firms.

These policies were not sustainable –and were even less so when the commodity boom came to an end—and led to an increase in government debt. According to Cuadros, what Rousseff “spent in one year on interest payments—money transferred to banks and wealthy families—exceeded twelve years of spending on the Bolsa Familia welfare program.” The Brazilian economy continues to shrink, which has led to cuts in social programs.

The PT’s economic model also encouraged large-scale corruption. The most prominent cases are “Mensalão,” in which legislators were bribed in exchange for votes; and “Lava Jato,” where billions of dollars in illegal transfers from the state-owned Petrobras oil company benefited leading businessmen and politicians.

The most surprising aspect of these corruption cases is that they have resulted in the arrest and conviction of numerous powerful people from the world of politics and business—a rather unusual outcome in Latin America. As I wrote about here, this is due to institutional and legal changes, such as allowing the use of some forms of plea bargaining, and the appointment over the course of many years of prosecutors, judges and police officers based on merit. Rousseff’s impeachment should also strengthen Brazil’s institutions, since the process increases the president’s and Congress’s accountability.

The new president, Michel Temer, seems to have control of the Congress in a way that Rousseff did not, and plans to carry out reforms to control public spending and open the economy to some degree.  We should not expect radical reforms, but rather policies that are somewhat better.