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This week I hosted a debate between two federal appellate judges on the question, “Does the American Criminal Justice System Need an Overhaul?”  Judge Alex Kozinski says it does; Judge Jay Harvey Wilkinson says it does not.  Watch it here and decide for yourself.

By way of background, Kozinski authored a much discussed article titled, “Criminal Law 2.0.”  One problem he identifies (among many others), is that federal prosecutors too often shirk their legal and ethical obligations.  The Department of Justice tried ignoring his criticism, but is now responding.  Here is a snippet from an article in the National Law Journal (November 16 – sorry, pay wall for this one).

Justice Department Rebuts Judge Kozinski’s Criticism of Prosecutors

In a rare public war of words, top officials at the U.S. Department of Justice are pushing back against recent criticism about prosecutors’ ethics from Judge Alex Kozinski of the U.S. Court of Appeals for the Ninth Circuit.

The thrust of the DOJ argument is the familiar, “Trust us – we’ll do the right thing.”  Kozinski rightly insists upon a “trust, but verify” posture as it relates to government promises.

Related items here & here.


More than two hundred people gathered at the Cato Institute last Thursday for our 33rd Annual Monetary Conference.  Over the course of three addresses and four panel discussions, a distinguished cast of speakers — including St. Louis Fed president James Bullard, Richmond Fed president Jeffrey Lacker, and Stanford economist John Taylor — covered topics ranging from the rights and wrongs of monetary rules, to the ins and outs of the Fed’s long-awaited “exit strategy” from quantitative easing and near-zero interest rates.  If you didn’t make the event, here’s a synopsis.

Opening Keynote

Bullard kicked things off with the keynote address, noting that while he favors policy normalization — that is, a return to the kind of monetary policy (and Fed balance sheet) that prevailed between 1984 and 2007 — there is a risk that we’ll get stuck at “Permazero” if the economy fails to take off, or suffers new negative shocks.  He speculated that inflation would stay persistently below target in such a scenario, while monetary policy would lose its power to stimulate or stabilize.  Long-run growth would continue to be driven by real factors, but asset prices could become very volatile.  Bullard stressed that this was just one possible interpretation, and that it didn’t change his view that the Fed should begin raising rates and shrinking its balance sheet.  Nevertheless, he said, we should be prepared for the possibility that things do not go according to plan.

Panel 1: What Monetary Policy Can and Can’t Do

The day’s first panel, moderated by Wall Street Journal chief economics correspondent Jon Hilsenrath, focused on what monetary policy can and cannot do.  There was a broad consensus among the panelists — the Richmond Fed’s Jeffrey Lacker, the Bank of Mexico’s Manuel Sanchez, and George Tavlas of the Bank of Greece — that monetary policy should focus on price stability, while steering clear of objectives it is less suited to, like boosting growth, guaranteeing financial stability, or pricking asset bubbles.  Within that discussion, Tavlas made the case for monetary rules over “constrained discretion,” suggesting that Milton Friedman might be sympathetic to the Taylor rule if he were around today.

Panel 2: Inflation, Deflation, and Monetary Rules

Monetary rules were the focus of the next panel, which featured John Taylor (he of the eponymous rule), former Philadelphia Fed president Charles Plosser, the Mercatus Center’s Scott Sumner, and our very own George Selgin.  Although all four panelists favored a shift towards rule-based monetary policy, each took a different approach.

Plosser noted that the Fed already runs five different monetary rules through its model of the economy when preparing for Federal Open Market Committee meetings.  So why not release the results of that analysis, and use it to explain how policy decisions are made?  Sumner advocated a similarly incremental approach, suggesting the Fed could be “nudged” towards his favored paradigm — NGDP targeting — with requirements that it clearly define the “stance of monetary policy” in its communications, regularly review its past policy decisions, and set “guardrails” for the maximum permissible fluctuations in aggregate demand.  Selgin drew a distinction between rules and “pseudo-rules,” arguing that the former must be strictly enforced, hard to “innocently” break, and possible to stick to during a crisis.  Taylor, meanwhile, argued that capricious monetary policy was promoting massive capital flows between emerging and developed economies, stoking exchange rate volatility, and giving rise to widespread capital controls and currency manipulation.  Rule-based monetary policy, he suggested, is a necessary complement to open capital markets and floating exchange rates — and legislation in the U.S. would set a great example for the rest of the world.

Luncheon Address

Claudio Borio, the head of the monetary and economic department at the Bank for International Settlements (BIS), delivered the conference’s luncheon address, arguing that we need to reassess “three pillars” of received monetary policy wisdom — first, that the natural rate of interest is best defined in terms of output and inflation; second, that money is neutral; and third, that deflation is always and everywhere a disaster.  Borio rejected all three premises.  He preferred to think of the “natural rate” as one which is consistent with good, sustainable macroeconomic performance.  According to this view, financial imbalances (such as asset price bubbles) are the key signifier of disequilibrium.  Borio also questioned the idea of monetary neutrality, arguing that credit-induced resource misallocation is central to an accurate understanding of the economic cycle.  This means that easy money can’t always solve our problems; you need structural and balance sheet reform after a crisis.  Finally, on deflation, Borio highlighted BIS research suggesting that there is only a weak association between deflation and economic contraction.  What link there is derives largely from the Great Depression and is more aptly attributed, in that case, to a collapse in asset prices.  In reality, said Borio, garden-variety falls in the prices of goods and services do not always portend doom — and shouldn’t always spur offsetting policy actions.

Panel 3: Monetary Policy and the Knowledge Problem

The monetary conference’s third panel discussion focused on Hayek’s knowledge problem in the context of monetary policy.  Cato senior fellow Gerald O’Driscoll suggested that the knowledge problem explains why rule-based monetary policy is superior to central bank discretion — we don’t know enough to design an optimal monetary policy, so we’re better off using rules to create a monetary order and anchor expectations.  The American Enterprise Institute’s Alex Pollock took a similar approach, asking, “Does the Federal Reserve Know What It’s Doing?”  His answer was a resounding “no” — but it’s not their fault, said Pollock; it’s fundamental uncertainty, not incompetence, that dooms the Fed to recurring failure.  Speaking last, David Malpass of Encima Global LLC added his voice to calls for monetary policy normalization, arguing that the Fed’s zero-interest rate policy is actually weighing down economic growth.

Panel 4: The Fed’s Exit Strategy vs. Fundamental Reform

The prospect of monetary policy normalization provided the backdrop to the day’s final panel discussion: “The Fed’s Exit Strategy vs. Fundamental Reform.”  Alt-M contributor and George Mason University economics professor Larry White tackled the first half of that title.  He argued that quantitative easing (QE) wasn’t really a monetary policy at all: by deciding to pay interest on bank reserves held at the Fed, policymakers effectively “sterilized” QE, which meant it barely affected the broad-money (M2) aggregates.  What sterilized QE did do, however, was to preferentially allocate credit towards housing over other uses.  In this context, an “exit strategy” worthy of the name must put an end to this discretionary credit allocation — but, alas, there’s little indication that the Fed has any intention of doing that.  Jerry Jordan, former president of the Cleveland Fed, was similarly gloomy about the prospects for a meaningful exit strategy, arguing that monetary policy has lost its potency now that banks are no longer reserve-constrained, and questioning the Fed’s ability to normalize policy even if it wants to.  Kevin Dowd, an adjunct scholar at Cato’s Center for Monetary and Financial Alternatives, brought the session to a close by outlining a bold agenda for fundamental monetary and financial reform, eschewing incremental steps in favor of a re-commoditized dollar, an entirely new bank capital regime, radically reformed bank governance, and a thoroughgoing roll-back of government intervention in the United States’ monetary and financial system.

Closing Address

The closing address of the 33rd Annual Monetary Conference was delivered by Rep. Bill Huizenga (R-Mich.), who chairs the House Financial Services Subcommittee on Monetary Policy and Trade.  His remarks focused on the draft legislation he unveiled earlier this year, which would require the Fed to adopt an explicit policy rule, and grant greater auditing power to the Government Accountability Office, among other reforms.

If you missed the conference, video footage of all the sessions is available here, on Cato’s website.  The papers submitted to the conference will also be published in next year’s Spring/Summer issue of the Cato Journal.

Overcriminalization is not a myth. Labyrinthine regulations often produce absurd outcomes, including prison sentences for individuals who do everything in their power, including consulting multiple attorneys, to comply with the law before acting.

A recent op-ed in The Washington Times illustrates the point, using a recent Medicaid fraud case that is currently in front of a federal appeals court:

Here’s a quiz: Which of the following is a federal crime: (a) A hamster dealer needlessly tilting a hamster’s cage while in transit; (b) subliminally advertising wine; or (c) selling a fresh steak with paprika on it?

Give up? The answer: all of the above.

Right now, there are approximately 4,500 federal criminal statutes and 300,000 administrative regulations that can be punished with imprisonment — and the list keeps growing. This is an invitation for our government to over-prosecute. Too often, federal prosecutors are accepting that invitation and rejecting more measured and effective administrative and civil remedies.


In a case that was recently argued before a federal appeals court, executives at WellCare, a managed health care company in Florida, were prosecuted based on their reasonable interpretation of a Florida statute. Federal prosecutors, however, disagreed with the company’s interpretation, even though Florida never issued any regulations contradicting the executives’ reading of the law.

The legal framework WellCare operated in was complex. In a nutshell, Florida’s Medicaid program required managed care companies to report expenses they paid for providing behavioral health care — like mental health services. If the company did not spend at least 80 percent of the premiums they received, they had to return some of the premium dollars to the state. The executives at WellCare read Florida’s requirements as allowing them to classify as expenses the money that WellCare paid to its subsidiary that actually provided all the services.

Florida never clarified the law to say whether this was allowed or not, so WellCare did what businesses do — it consulted a lawyer. And WellCare’s lawyers — both in-house and independent outside counsel — said that the way they were reading the law was reasonable. Other companies providing these services under Florida’s Medicaid program read the law in a similar way. Admittedly, WellCare’s interpretation made the company more money, but, of course, making money is what a corporation ought to do.

Federal prosecutors disagreed and brought criminal charges against its executives. The prosecutors argued that WellCare lied when it sent in expense forms reflecting its reading of the law. At trial, even the government’s witnesses agreed that WellCare’s interpretation of the law made sense. And because this complicated question of how to read a technical Florida health care law was improperly left to the jury instead of the judge, the executives were convicted after a month of stalled deliberations. The company’s reasonable interpretation of a complex law — which was vetted by lawyers — was no sanctuary from a conviction for the company’s executives.

The executives were sentenced to prison up to three years. Yet another company that used the same accounting method was only sued for breach of contract and didn’t even have to pay back any money to Florida.

A federal appeals court has a chance to correct this and uphold a firmly established principle of criminal law: Where a citizen reasonably interprets complex regulatory law, a judge — not a jury — should throw out the case.

Whether prosecutors accuse you of violating Honduran lobster-packing laws even when the Honduran courts insist you didn’t, or prosecute you for assuming that a gun license from one state would be valid in a neighboring state, far too many non-dangerous people end up in prison simply because their reasonable interpretation of the law differs with that of the government.

Thanksgiving is almost upon us and time has come for that most sacred of American traditions: bemoaning the rising cost of living. Per this Bloomberg headline on Thursday, “Thanksgiving Meal Costs Most Ever as Bird Flu Hits Turkeys.”

Well, that’s complete and utter nonsense. 

The headline grabbing data comes from the American Farm Bureau Federation, which faithfully records the cost of 12 items (e.g., turkey, pumpkin pie mix, sweet potatoes, etc.) that go into a preparation of a Thanksgiving meal for 10 people.

On the face of it, the nominal cost has risen by $0.70 from $49.41 in 2014 to $50.11 in 2015. Using a BLS calculator, I have inflated $49.41 in 2014 dollars to $49.64 in 2015 dollars. So, the real increase amounts to mere $0.47.

Now let us see what happens when we adjust the nominal cost of Thanksgiving dinners by the rise in nominal wages.

In October 2014, FRED tells us, the average hourly wage of production and nonsupervisory employees in the private sector (i.e., blue collar workers) was $20.72. In October 2015, it was $21.18.

That means that in 2014, an average worker had to work 2 hours 23 minutes and 5 seconds to procure all the items needed to buy a Thanksgiving dinner for 10 people. In 2015, s/he had to work 2 hours 21 minutes and 57 seconds to do the same. So, in terms of actual work, the price of a Thanksgiving dinner has decreased by 1 minute and 8 seconds between 2014 and 2015.

That may seem like small beans, but consider what happened to the cost of a Thanksgiving dinner since 1986, which was the first year in which the AFBF collected the pertinent data. In 1986, Thanksgiving dinner cost $28.74. In October 1986, an average worker made $8.96 an hour. That means that s/he had to work 3 hours 12 minutes and 27 seconds, or 50 minutes and 30 seconds longer than worker today.

So, enjoy your Thanksgiving dinner and rejoice in knowing that you have worked almost an hour less to earn it than would have been the case in 1986.   

I have proposed that America adopt a Canadian-British innovation to encourage greater household savings. Canada’s Tax Free Savings Accounts (TFSAs) and Britain’s Individual Savings Accounts (ISAs) are revolutionizing savings for moderate- and middle-income families in those countries.

Now Americans may get a chance to save in a similar tax-friendly vehicle. Senator Jeff Flake (R-AZ) and Representative David Brat (R-VA) are introducing companion Senate-House bills to create Universal Savings Accounts (USAs). The accounts are like supercharged Roth IRAs.

Here are some of the features of the Flake-Brat USAs:

  • Americans could save without the restrictions, confusion, and penalties associated with other savings accounts.
  • Anyone 18 years of age or older could open a USA, contribute up to $5,500 after-tax a year, and use the tax-free withdrawals for any purpose at any time.
  • Funds would be invested in bonds and equities, and grow tax-free.
  • USA accounts would allow individuals to decide what to use their savings for and when, without Congress micromanaging their choices, as they do with other accounts.

Flake and Brat cite data showing that only 53 percent of adults could currently cover an emergency expense of $400 without selling an asset or borrowing, and most Americans do not have the recommended three to six months of income in their current savings accounts.

As Ernest Christian and I have noted, USAs would help solve these sorts of problems for many Americans by giving them a savings account that maximized liquidity and flexibility, while zeroing out taxes that eat away at returns. Flake and Brat are right that their USA accounts would encourage more savings by Americans at all income levels.

House Speaker Paul Ryan is known to admire these sorts of accounts, and numerous Republican presidential candidates have pro-savings features in their tax plans. So if the next president is a Republican, we should have a good chance at making these pro-family, pro-growth savings accounts a reality.

In the mid-1960s, being an air hostess was considered to be a glamorous job. Back then, however, air stewardesses were paid less than half of what they make today. They also had to endure much longer flights, since 1960s airplanes carried relatively little fuel and had to stop for refueling. That also meant that flight attendants had to serve more meals and, consequently, worked harder during the flight. Most importantly, the likelihood of dying on the job declined substantially. In 1965, there were 1,142 airplane fatalities per 250 million passengers carried worldwide. Only 761 people died out of over 3 billion people who flew in 2014.

In 2010, Burma’s military junta–misnamed the State Peace and Development Council–began a controlled move toward limited democracy. The process was highly imperfect and there has been backsliding of late.

Nevertheless, national elections were held last week.

Nobel Laureate Aung San Suu Kyi’s National League for Democracy annihilated the regime’s Union Solidarity Development Party, winning 78 percent of the seats. Voters rejected many top military and USDP leaders.

The losers were surprised that the people gave them so little credit for the end of dictatorial rule. “All of our calculations were wrong,” said one. Yet this happened before.

After ruthlessly suppressing pro-democracy demonstrations, the military regime sought to improve its image with an election in 1990. The NLD similarly won about 80 percent of the legislative seats. The embarrassed junta promptly voided the results, suppressed protests, and kept Suu Kyi under house arrest for most of the last quarter century.

No one expects a similar response this time, however. The military made a far more calculated move toward democracy, writing the constitution to guarantee its influence. Moreover, after inviting in the West, the military could not easily return to isolation, the almost certain result of any electoral repudiation.

However, is the military prepared to allow reform to move forward?

Suu Kyi and the NLD face extraordinary challenges, made more difficult by people’s high expectations. People across Burma voted for The Lady, but she has never held office or participated in the give and take of politics.

She faces what remains an authoritarian state. Human Rights Watch recently warned that “the reform process has stalled.”

Much must be done. Civil and political freedoms must be further expanded. All members of parliament should be elected. Judges must be made independent and fair criminal procedures need to be established.

Moreover, power must be fully vested in civilians. Today, the Ministries of Defense, Border Affairs, and Home Affairs are formally under military control, while the army has seeded its personnel throughout the nominally civilian bureaucracy and judiciary.

Fundamental economic reform also is necessary. The Economic Freedom of the World index places Burma at a dismal 146 of 157 nations. Little progress has been made toward a market economy. The new government must make Burma attractive to domestic entrepreneurs and foreign investors alike.

Conflict continues among a number of ethnic groups. Peace requires allowing substantial self-government, creating trust after decades of military atrocities, and reintegrating ethnic and religious minorities in Burmese institutions.

Riots and massacres have continued in Rakhine State targeting the Muslim Rohingya, encouraged by radical Buddhist nationalists. The national government must protect vulnerable groups from organized violence.

Standing in the way of real change is the military-drafted constitution, which bars Suu Kyi from the presidency and requires a 75 percent vote in parliament to amend the constitution, while guaranteeing 25 percent of the seats to the military. Forging a relationship with the army while edging it aside will require extraordinary sensitivity.

Suu Kyi also must overcome her own limitations. Although a heroic figure who has suffered much for the cause of democracy, she has failed to delegate and develop a broad leadership within the NLD.

And her plan for governing sounds anything but inclusive: “The president will be told exactly what he can do. I make all the decisions, because I am the leader of the winning party.”

It has been more than a half century since the people of Burma have been able to rule themselves. They face tough questions of media freedom, political reform, economic liberalization, ethnic conflict, military accountability, and more.

As I argued on Forbes online: “For too long the Burmese people could only look to the future and hope for change. Today they have a chance to enjoy the opportunities that the rest of us take for granted. Hopefully now, after decades of conflict, the future finally has arrived for Burma.”

At the Washington Post online, Ilya Somin claimed that the Paris attacks gave “the Obama administration an opportunity to legalize its previously unconstitutional war against ISIS.” He continues, though invoking Article 5 may not appeal to the Obama administration it “is nonetheless the only sound legal justification for continuing the war against ISIS, unless and until the president gets a new authorization from Congress.”

International legal scholar Julian Ku disagreed, noting “Article 9 of the North Atlantic Treaty states that ‘[t]his Treaty shall be ratified and its provisions carried out by the Parties in accordance with their respective constitutional processes.’ (emphasis added).”

In response to Ku, Somin wrote: “in the event of an enemy attack on the US itself, the president has the legal authority to use force of his own volition, without additional congressional authorization.” And Article 5 “gives him the same authority to use force as he would have in the event of an attack on the United States itself.” Indeed, Somin enthused that “Empowering the president to assist an ally under attack without having to seek congressional authorization…makes the US commitment to defend its European allies more credible and certain.”

I am struck by Somin’s enthusiasm for allowing Barack Obama to circumvent the Congress’s war-making authority, and take the United States to war in Syria on account of attacks in France.

This is the same Barack Obama, mind you, who a number of scholars have criticized for exceeding his Constitutional authority. It seems particularly odd, given the importance that the Founders invested in the principle of legislative supremacy over the executive with respect to the war powers – Madison famously said that it was the most important passage of the entire document – that anyone, but especially advocates of limited, constitutional government, would be quick to make an exception in this case.

Will these advocates of greater executive power be now similarly inclined to allow the president to usurp a number of the other legislative powers enumerated in the Constitution? Should Obama be allowed to levy taxes and fees? Or initiate massive new domestic spending programs, independent of the Congress? Say, to implement a health care plan?

That is doubtful. What we are seeing, instead, is a manifestation of the fear-driven politics of the post-9/11 era, which has created a worrisome double-standard: presidents supposedly have nearly unlimited authority to send Americans abroad to be killed or maimed, but they are severely constrained when acting here at home. This attitude is perhaps best exemplified by Bush-era lawyer John Yoo’s claim that, in light of the supposedly uniquely dangerous threats confronting us today, “we should not…adopt a warmaking process that contains a built-in presumption against the use of force abroad.”

Actually, we should. The supposed dangers are precisely that: we do not live in a uniquely dangerous world. Americans today, in particular, enjoy a measure of safety that our ancestors would envy, and that our contemporaries do envy. Given this state of affairs, we should be extremely reluctant to intervene in others’ disputes when our vital interests are not directly threatened. And we should never forget that efforts to create a strong executive abroad will inevitably lead to a strong one at home.

The United States should maintain military power capable of deterring attacks against the United States, and fighting and winning wars when deterrence fails. That military will also be large enough to assist other nations in need, but the authority to deploy forces in that way should never be pre-delegated to circumvent the Congress – and, by extension, the people – of the United States.

Chinese President Xi Jinping and Taiwanese President Ma Ying-jeou recently met in Singapore. Never before has Beijing treated the island’s government as an equal. It was a small step for peace, but the circle remains to be squared.

China insists that Taiwan is a wayward province, while the vast majority of Taiwanese feel no allegiance to the People’s Republic of China. If, as expected, Taiwan’s opposition presidential candidate Tsai Ing-wen wins in January, relations between the two states are likely to shift into reverse.

The island of Formosa, or Taiwan, separated from the mainland when the Kuomintang government relocated to Taipei following the triumph of the Chinese Communist Party. Taipei continues to promote a separate identity.

The PRC insists that the island should return to Beijing. China’s growing power has encouraged its leaders to press Taiwan to accept some form of “one country, two systems.”

The PRC has hoped that closer economic and cultural ties would move the two countries closer to union. Yet Taiwan is steadily moving away from the PRC. More than 80 percent of Taiwanese back independence—if it would not trigger Chinese military action.

Now the KMT is likely to lose the presidency and possibly the legislature. The opposition is unlikely to enter into serious negotiations leading to reunification.

Which leaves the PRC’s Taiwan strategy in ruins. This likely explains President Xi’s decision to meet with President Ma. The former presumably hoped the meeting would encourage Taiwanese to vote for the KMT in order to further reduce cross-strait tensions.

What happens next remains up to the PRC. It has much at stake in maintaining a peaceful and stable order in East Asia. Nevertheless, nationalism runs deep and Taiwan is seen as part of China by most Chinese.

Moreover, Taipei is a security concern for Beijing, especially if allied with America. This concern may grow as the United States increasingly confronts Beijing over its territorial claims elsewhere in the region.

Washington traditionally has responded to cross-strait relations with “strategic ambiguity,” refusing to spell out its commitment to Taipei. But this is a dangerous gamble.

In the past, Taipei assumed Washington was committed to its security and Beijing assumed that the United States wouldn’t risk war over a distant, peripheral interest. The result could be an unnecessary, inadvertent crisis in which American officials must choose between abandoning Taiwan and fighting China.

Now, during a period of quiet, the United States should reconsider its policy toward Taiwan. As I point out in National Interest: “The island is a worthy friend, but Washington cannot justify risking Los Angeles for Taipei, as one Chinese general bluntly warned. Beijing might be willing to make the risky wager but it would be irresponsible for Washington to raise the stakes.”

Instead, it is worth considering creative bargains which might ensure Taiwan’s independence while satisfying Chinese interests. For instance, Washington should warn Taipei that the United States will not go to war on the former’s behalf. Taiwan should invest in a military sufficient to force China to pay a high price for any attempt at coercion.

The United States should warn the PRC that engaging in coercion against the island would impose a high economic price on Beijing and reduce China’s chances of taking on a greater regional and global leadership role. Washington also should encourage its Asian and European allies to communicate a similar message: while no one wants war with the PRC, no one could ignore an attack on Taiwan.

Washington could propose a Taiwanese neutrality declaration along with an American promise to forswear any military commitment to or bases on the island. In return, Beijing would reduce its threatening missile deployments and forswear military action against Taiwan. The United States could follow reduced tensions by shrinking its force presence elsewhere in the region.

There is no easy way to square the Taiwan circle, but the Ma-Xi meeting has created a better atmosphere, however limited, in which to explore a broader agreement including America that could encourage longer-term peace and stability. 

With Puerto Rico’s continuing fiscal strains, some commentators have suggested that one avenue to give Puerto Rico breathing room would be the purchase of Puerto Rican municipal debt as part of Open Market Operations by the Federal Reserve.  The most prominent proponent of this plan is Rensselaer Tech Economics Professor Arturo Estrella.  His proposal can be found here.  The governance of Open Market Operations, which is the buying and selling of securities by the Federal Reserve System, is found in Section 14 of the Federal Reserve Act.

A threshold question is: does the debt of Puerto Rico qualify as allowable investments?  There are essentially three categories of allowable purchases under Section 14:  state/local government debt in the continental United States, foreign government (or agency) debt;  and U.S. Treasury or agency debt.  Professor Estrella spends considerable effort arguing that Puerto Rico is within the definition of “continental” United States and hence qualifies.  Unfortunately, his efforts are in vain as the Federal Reserve Act in Section 1 defines the “continental United States” to mean “the States of the United States and the District of Columbia” which obviously excludes territories like Puerto Rico.

How does Professor Estrella attempt to overcome the very clear language of the Federal Reserve Act?  He argues that “the preponderance of regulatory language in Federal Reserve regulations shows that Puerto Rico is treated in the same way as a state…”  The good professor offers plenty of examples, such as the Truth in Lending Act, carried out by the Fed’s Regulation Z.  What he fails to mention is that the cited regulations are not carried out pursuant to the Federal Reserve Act.  For instance, the Truth in Lending Act actually defines Puerto Rico as a state, which explains why Regulation Z as implemented does so.  Congress regularly chooses different definitions of the same words for different statutes, and it does so intentionally.  That, however, does not allow an agency to pick and choose.  The definitions contained in a statute govern the regulations promulgated under that statute only.

Estrella also argues that since the Fed treats Puerto Rico as part of the New York Federal Reserve District, then it must be a state since Section 2 of the Federal Reserve Act established a procedure of allocating states to reserve bank districts.  The essence of Estrella’s argument is that since the Fed treats Puerto Rico as a state in some contexts, then it must be classified as a state for purposes of Section 14.  Such a view implies that an agency, like the Fed, can simply rewrite statutes at its whim.  Such a view is, of course, incorrect.  Only Congress can write statutes and while agencies can “fill in the blanks,” they cannot rewrite clear statutory language.

Interestingly enough, Professor Estrella also argues that Puerto Rico might qualify as a “foreign government,” since the International Banking Act of 1978 defines, for its purposes, Puerto Rican banks as “foreign banks,” although it does not include Puerto Rico under its definition of “foreign country.”  One can debate the contradictory nature of the definitions of the 1978 Act, but they clearly do not apply to Section 14 of the Federal Reserve Act.  Lastly, I believe it is obvious–and I do not know of anyone who has argued the contrary–that Puerto Rico is not part of the federal government or one of its agencies.

In summary, any plain reading of the Federal Reserve Act, along with the traditional practices of statutory interpretation, would conclude that the Federal Reserve cannot purchase Puerto Rican government debt as part of open market operations.

Even if the Fed were allowed to do so, would buying debt fix Puerto Rico’s problems?

Let us assume, for the sake of argument, that Puerto Rico qualifies as part of the continental United States.  Section 14(2) limits any municipal purchases to maturities of less than six months at the time of purchase.  While I have not been able to find a distribution of maturities for Puerto Rican debt, reports appear to indicate much longer maturities.  Perhaps longer debt could be swapped out for six month, but such might leave Puerto Rico even more vulnerable as it would have to come to market far more often.  Just as Bear Stearn’s reliance on overnight debt was part of its undoing, shortening the maturity of Puerto Rico would likely make a bad situation worse.

Perhaps most binding of all is that Section 14 is dependent upon “anticipation of the collection of taxes or in anticipation of the receipt of assured revenues…”  In plain English, that means that lending is limited to debt that the Fed has determined there is revenue forthcoming.  As Puerto Rico’s governor stated that the debt “could not be paid,” it is hard to see how the Fed could stay within the clear language and intent of Section 14 while purchasing Puerto Rico’s debt.

Let me be clear: I do not have answers to Puerto Rico’s debt crisis.  What I do know, however, is that having the Federal Reserve purchase Puerto Rico’s debt as part of open market operations is not legal.  And if it was, it would likely be unworkable.

[Cross-posted from]

Of the 859,629 refugees admitted from 2001 onwards, only three have been convicted of planning terrorist attacks on targets outside of the United States and none was successfully carried out.  That is one terrorism-planning conviction for a refugee for every 286,543 of them who have been admitted.  To put that in perspective, about 1 in every 22,541 Americans committed murder in 2014.  The terrorist threat from Syrian refugees in the United States is hyperbolically over-exaggerated and we have very little to fear from them because the refugee vetting system is so thorough.  

The brutal terrorist attack in France last Friday reignited a debate over accepting refugees from Syria and the Middle East.  A Syrian who applied for asylum could have been one of the attackers although his passport was a forgery.  (As of this writing, all identified attackers have been French or Belgian nationals.) Governors and presidential candidates have voiced opposition to accepting any Syrian refugees while several bills in Congress could effectively end the program.

There are many differences between Europe’s vetting of asylum seekers from Syria and how the United States screens refugees.  The geographic distance between the United States and Syria allows our government to better vet those seeking to come here while large numbers of Syrians who want to go to Europe show up at their borders and are less carefully vetted.  A lax security situation there does not imply a lax security situation here.  

The Differences between Refugees and Asylum Seekers

Much of the confusion over the security threat posed by refugees is over the term “refugee” itself.  It’s not yet clear how any foreign attackers in Paris entered Europe, but one or more may have entered disguised as asylum-seekers. 

In the United States, asylum seekers show up at U.S. borders and ask to stay must show they have a well-founded fear of persecution due to their race, religion, nationality, membership in a particular social group, or their political opinion if they return to their country of origin.  There is an application and investigation process, and the government often detains the asylum-seeker during that process. But the investigation and vetting of the asylum seeker often take place while he is allowed inside of the United States.  Many of the Syrians and others who have entered Europe are asylum seekers who are vetted through similar less stringent security screens.

Refugees are processed from a great distance away and are more thoroughly vetted than asylum-seekers as a result.  In the United States, a refugee is somebody who is identified by the United Nations High Commissioner for Refugees (UNHCR) in a refugee camp.  UNHCR does the first round of security checks on the refugee according to international treaties that the United States is a party to and refers some of those who pass the initial checks to the U.S. Refugee Admissions Program (USRAP).  The referrals are then interviewed by a U.S. Citizenship and Immigration Services (USCIS) officer abroad.  The refugee must be outside of the United States, be of special humanitarian concern to the government, demonstrate persecution or fear of persecution due to race, religion, nationality, political opinion, or membership in a particular social group, not firmly resettled in another country, and is admissible to the United States.    

Because the refugee is abroad while the U.S. government checks their background, potential terrorist links, and their claims to refugee status, the vetting is a lot more thorough and can take up to two years for non-Syrians.  For Syrians, the vetting can take about three years because of the heightened concerns over security. 

Asylum seekers, on the other hand, face rigorous checks, but they are conducted while the asylum seeker is inside of the United States and not always while he is in a detention center.  Syrians fleeing violence who come to the United States will be refugees, whereas many getting into Europe are asylum seekers.  This crucial distinction shows that the United States is in a far better security situation vis-à-vis Europe on any potential terrorist threat from Syrians.

The distinction between asylum seekers and refugees is usually lost when discussing the security threat from refugees.  The father of Boston Marathon bombers Tamerlan and Dzokhar Tsarnaev was granted asylum status, which conferred derivative asylum status on the children.  None of the Tsarnaevs were ever refugees. 

Both Tamerlan and Dzokhar were children when they were admitted through their parent’s asylum claims.  They did not adopt a radical interpretation of Islam or start plotting a terrorist attack until years after coming here.  Their case does not reveal flaws in the refugee vetting process. There were some other terrorist attacks in the early 1990s from applicants for asylum status, but none of them were actual refugees. 

Security Screenings for Refugees

Deputy State Department Spokesman Mark Toner called the security checks for refugees, “the most stringent security process for anyone entering the United States.” Coming here as a refugee requires numerous security and background checks that are more intense and invasive than for other migrants or visitors – which is partly why refugees have not successfully carried out terrorist attacks on U.S. soil (three have been convicted of attempting to carry out attacks abroad, and there was one borderline case from a refugee who entered in 1997).

The first step for a refugee is to arrive and register in a UNHCR refugee camp outside of Syria.  The UNHCR then refers those who pass the first stage of vetting to the U.S. government refugee process (as described above).  The National Counterterrorism Center, the Terrorist Screening Center, the Department of Defense, the FBI, Department of Homeland Security, and the State Department use biometrics and biographical information gleaned through several interviews of the refugee and third-party persons who know him or could know him to make sure applicants really are who they claim to be, to evaluate their security risk, and to investigate whether they are suspected of criminal activity or terrorism.  Numerous medical checks are also performed.  During this entire screening process, which takes about three years for Syrians, the refugee has to wait in the camp. If there is any evidence that the refugee is a security threat, he or she is not allowed to come to the United States.

Refugee security screenings go beyond weeding out actual terrorists but also seek to those who provided material support to them.  This material support standard is very elastic and weeds out many otherwise deserving refugees.  Human Rights First claims that under current interpretations of the material support standard, Syrians would be turned away under all of these circumstances:

  • A family who, while their residential neighborhood was being bombed by government forces, sheltered a wounded opposition fighter in their home;
  • A boy who, after his father was killed, was recruited by opposition forces and, after serving with them for a time, left the conflict to join his mother and younger siblings in a neighboring country;
  • The owner of a food stand in a neighborhood under opposition control from whom opposition fighters bought falafel sandwiches.

A refugee from Burundi was detained by DHS for 20 months for materially supporting a terrorist group because rebels beat him up, stole $4 from him, and took his lunch (it’s unclear from the story, but might have been an asylum seeker).  Many good candidates for resettlement in the United States are turned down for these silly reasons.

How Many Refugees Make It Here?  How Many Are Syrians?

The UNHCR annually refers less than one percent of all refugees for resettlement.  In 2014, they referred a mere 103,890 to all resettlement nations.  That year, the United States accepted 69,933 refugees or about 0.5 percent of the total number of all refugees in the world, but over 67 percent of all those referred by UNHCR. 

In 2015, the United States has accepted only 1682 Syrian refugees, or 0.042 percent of the 4,045,650 registered Syrian refugees.  Only one out of every 2,405 Syrian refugees in a camp was resettled in the United States in 2015. 

Evaluating the Risk

Few ISIS soldiers or other terrorists are going to spend at least three years in a refugee camp for a 0.042 percent chance of entering the United States when almost any other option to do so is easier, cheaper, quicker.

If the United States still takes in 10,000 Syrian refugees in 2016, and the number of refugees rises to 4.5 million, a mere 0.22 percent of them–one out of every 450–will be resettled in the United States.  That number is still so small and the process so well monitored that potential terrorists are unlikely to see the refugee system as a viable way to enter the United States. 

Foreign- born terrorists tend to enter on student visas, tourist visas, business visas, have asylum applications pending, or are lawful permanent residents – all nonimmigrant or immigrant categories face fewer security and background screenings than refugees do. 

Of the 859,629 refugees who have entered the United States since 2001, three have been convicted for planning a terrorist attack abroad and exactly zero attacks domestically – that’s one conviction for every 286,543 refugees admitted.  Focusing on the 735,920 refugees from Africa, Asia, the Middle East, and South Asia, that’s one conviction for every 245,307 refugees admitted.  Just to hammer the point home, these are convictions for planning terrorist attacks abroad, not for carrying out actual terrorist attacks in the United States or anywhere else.

In 2015, 53 percent of the Syrians admitted were men while only 41.5 percent of those men were between the ages of 14 and 40.  Of all the Syrian refugees in that year, only 22.3 percent of them were men between the ages of 14 and 40.  Terrorism-related convictions are almost always of men so any risk-assessment should note the small number of men in the applicable age ranges.   

Let’s assume, for the same of argument, that individual Syrian refugees are three times as likely to attempt terrorism in the United States than non-Syrian refugees because they are super-radicalized and very good at hiding it while waiting for years in refugee camps for their chance to strike.  Assuming this fantasy is true, the United States can expect to convict a single Syrian refugee for attempting a terrorist attack for every 95,514 of them allowed in as refugees.  There are many more convictions for attempted terrorism than successful terrorist attacks.  Without even attempting to estimate the damage caused by such hypothetical terrorist attacks, it’s clear that the present political panic and calls for a moratorium on refugee admissions from Syria are totally unwarranted.

This situation may be different in Europe where 681,713 Syrian asylum seekers have sought refuge since the beginning of their civil war in 2011.  So far, one of them may have participated in the Paris terrorist attack, and that is far from clear.      

John Mueller and Mark G. Stewart have been critical of counterterrorism agencies that “simply identify a source of harm and try to do something about it, rather than systematically thinking about the likely magnitude of harm caused by a successful terrorist attack, the probability of that attack occurring, and the amount of risk reduction that can be expected from counterterrorism efforts.”  These criticisms could easily apply to the U.S. refugee vetting process.  To my knowledge, there has been no systematic evaluation of the costs and benefits of this refugee vetting process.  The marginal costs of outlays and security procedures may exceed the marginal benefits, but that means we have even less to fear from those refugees admitted even if the price we pay for that safety is irrationally high.

There is also a risk of not letting in more Syrian refugees that policymakers should consider.  Syrians could languish in refugee camps for years or decades to come unless the Turkish government suddenly becomes more classically liberal and hands out millions of work permits.  There is one clear lesson from the limited academic literature on this issue: Allowing the current UNHCR refugee camp situation to grow and fester for years can only produce more radicalization and terrorism.  A more expansive refugee policy with adequate security checks that resettles large numbers in safe countries can drain the swamp of potential future terrorists and decrease that risk.

Where the Refugees are Settling in the United States

The pace of Syrian refugee admissions is scheduled to pick up in 2016 unless Congress prevents it.  In October 2015, the government took in 187 Syrian refugees and settled them in several states (Figures 1 and 2). 

Figure 1

Syrian Refugees Resettled in October 2015 by State


Source: U.S. Refugee Processing Center

Figure 2

Other Refugees Resettled in States with Syrians October 2015


Source: U.S. Refugee Processing Center

In October 2015, Syrians were approximately 3.6 percent of all refugees admitted and many states didn’t even receive any (Figure 3).

Figure 3

Syrian and Other Refugees by State


Source: U.S. Refugee Processing Center

From the beginning of the Syrian civil war in 2011 through the first month of the 2016 fiscal year, a mere 0.63 percent of all refugee admitted to the United States were Syrians or about 2070 out of 329,856 (Figure 4).

Figure 4

Syrian and Other Refugees Admitted Since 2011


Sources: U.S. Department of State and U.S. Refugee Processing Center


The security threat posed by refugees in the United States is insignificant.  Halting America’s processing of refugees due to a terrorist attack in another country that may have had one asylum-seeker as a co-plotter would be an extremely expensive overreaction to very minor threat. Resettling refugees who pass a thorough security check would likely decrease the recruiting pool for future terrorists and decrease the long run risk.

The current refugee vetting system is multilayered, dynamic, and extremely effective.  ISIS fighters or terrorists who are intent on attacking U.S. soil have myriad other options for doing so that are all cheaper, easier, and more likely to succeed than sneaking in through the heavily guarded refugee gate.  The low level of current risk does not justify the government slamming that gate shut.

When something as horrific as last Friday’s Paris attacks unfolds on the news, it’s hard not to feel that the world is a very dangerous place. It’s hard to remember that what makes acts of terror, such as the one in Paris last week, so shocking and newsworthy is that violence is becoming rarer. In fact, the vast majority of human interactions are peaceful.  

Esteemed journalist and advisory board member Matt Ridley put it well when he said, “violence makes the news precisely because it is so rare; routine kindness does not make the news precisely because it is so common.” Harvard University’s Steven Pinker, who is also one of our board members, observed

We never see a reporter saying to the camera, “Here we are, live from a country where a war has not broken out”—or a city that has not been bombed, or a school that has not been shot up. […] The only sound way to appraise the state of the world is to count.

And if we judge how violent the world is by counting, instead of by how gruesome the headlines are, we find something heartening. International wars have almost disappeared. Homicides are becoming rarer. In the United States, violence against women is decreasing, and so is child abuse. 

Almost everywhere, we see a trend away from violence. Progress, sadly, is neither linear nor inevitable. Setbacks do occur. Terrorism is one of the few areas where violence is becoming worse, although it remains rare. For example, you are much more likely to die of a disease, in an accident, or from an ordinary homicide. 

To meet the challenge posed by terrorism the rest of the world may need to think outside the box. Even one violent death is too many. Still, we must not lose sight of the fact that though some violent fanatics may stand athwart the trend towards greater peace and tolerance, violence is slowly retreating.

It’s a familiar libertarian insight that regulation often holds government itself to lower standards than it does private actors. Pension funds for public employees are mostly immune from the federal solvency and funding requirements that apply to their private counterparts; Federal Trade Commission rules against false advertising by profit-seeking companies do not restrain false advertising by government actors on the same topics; the FTC can fine companies massively for data breaches even as the federal government itself suffers gigantic losses of sensitive data to foreign actors with few career consequences for many of those who had dozed; anticompetitive practices per se illegal under antitrust law become legal when states do them, and so forth and so on.

Now David Konisky of Indiana University and Manuel Teodoro of Texas A&M, in a study published by the American Journal of Political Science entitled “When Governments Regulate Governments,” have pulled together some data:

Our empirical subjects are public and private entities’ compliance with the U.S. Clean Air Act and Safe Drinking Water Act. We find that, compared with private firms, governments violate these laws significantly more frequently and are less likely to be penalized for violations.

More from an Indiana press release via Tyler Cowen:

For the study, Konisky and Teodoro examined records from 2000 to 2011 for power plants and hospitals regulated under the Clean Air Act and from 2010 to 2013 for water utilities regulated under the Safe Drinking Water Act. The study included over 3,000 power plants, over 1,000 hospitals and over 4,200 water utilities — some privately owned and others owned by public agencies.

* For power plants and hospitals, public facilities were on average 9 percent more likely to be out of compliance with Clean Air Act regulations and 20 percent more likely to have committed high-priority violations.

* For water utilities, public facilities had on average 14 percent more Safe Drinking Water Act health violations and were 29 percent more likely to commit monitoring violations.

* Public power plants and hospitals that violated the Clean Air Act were 1 percent less likely than private-sector violators to receive a punitive sanction and 20 percent less likely to be fined.

*Public water utilities that violated Safe Drinking Water Act standards were 3 percent less likely than investor-owned utilities to receive formal enforcement actions.

[After speculating that public operators may find it harder to raise funds promptly for needed facilities improvements:] Public entities also face lower costs for violating the regulations, the authors argue. There is evidence from other studies that they are able to delay or avoid paying fines when penalties are assessed. And officials with regulatory agencies may be sympathetic to violations by public entities, because they understand the difficulty of securing resources in the public sector.

Application of the principle to state-owned industry outside the United States can be left as an exercise for the reader.

As we evaluate the TPP in the coming months, there will be a lot of talk about the “regulatory”/”governance” parts.  These aspects can be very difficult to evaluate.  Here’s an illustration of why the assessment is so hard.

Over at the Volokh Conspiracy blog, Stewart Baker had a recent post in which he worried that a particular TPP provision would prevent the NSA/FBI etc. from demanding encryption keys from private companies.  Now, I have a different view of what constitutes good public policy, so if the TPP prevented this, I wouldn’t be worried.  But does the TPP actually do this?

The provision in question is in the Technical Barriers to Trade chapter, in Annex 8-B, Section A, paras. 3-4 (pp. 22-23 of the linked document).  At first glance, it does seem as though it says what Mr. Baker thinks it says, as it provides that with respect to a product that uses cryptography and is designed for commercial applications, no TPP Party may require the transfer of a private key or something similar.  (Go to the link for the full legalese; also, note that the provision has other functions as well).

But, before we draw a final conclusion, we need to keep in mind the exceptions set out in another chapter

One particularly broad exception is for “security.”  Article 29.2(b) says:  “Nothing in this Agreement shall be construed to: … preclude a Party from applying measures that it considers necessary for the fulfilment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.”  The word “considers,” in the trade law context, usually means a provision is “self-judging,” indicating that the government has a lot of leeway to do whatever it wants.  So, at least in theory, if the government demanding a private key invokes “security,” it can pretty much do whatever it wants.

So how do we find out what the TPP provisions actually mean?  What do they require from governments in terms of demanding encryption keys?

The answer is, we don’t know yet.  As with constitutions, trade agreements get elaborated through litigation.  At some point, a TPP Party may have concerns with the behavior of another Party on these issues, and bring a complaint, at which time a dispute panel will have to apply these provisions to the facts of the case.  Until then, there will be some uncertainty as to what exactly all of this means.

One final point is that the U.S. Trade Representative has provided summaries of the TPP provisions, and on this issue, here’s what it says:  ”TPP Parties will be prohibited from disclosure of proprietary information in order to comply with technical regulations or conformity assessment procedures, a requirement that some governments could use to expropriate proprietary information and disseminate it to competitors.”  So they only mention a completely different purpose for this provision, not the private key part.  For those interested in the meaning of the TPP, whether members of Congress or ordinary citizens, it’s worth asking the administration for some additional insight as to what the full impact of these provisions will be.

BEIJING—Mao Zedong, China’s “Great Helmsman,” died four decades ago. Only after his murderous reign finally ended could his nation move forward. The old dictator and his cronies wouldn’t recognize China’s capital today. Beijing has become a sprawling metropolis with night clubs and fast food restaurants. Shanghai’s transformation is equally dramatic. Always more international and commercial than Beijing, it has become a world financial center.   There’s a lot more to the People’s Republic of China, including a vast rural territory which remains poor, with average incomes well below urban PRC. But extreme poverty has given way to a genuine, if modest, prosperity.   As China has advanced on the global stage, there’s been discussion of the “Beijing consensus” or China Model. Who needs free markets and democracy if managed capitalism and autocracy can deliver sustained, even faster, economic growth? Dictators around the world want to convince themselves–and more importantly, their subjects–that oppression pays.   Yet the China Model is looking a bit frayed. China has slowing growth, a property bubble, ghost cities, inefficient state enterprises, a stock market crash, badly skewed demographics, overextended banks stuffed with political loans, and unbelievable official statistics.

 And corruption continues, by some estimates costing as much as three percent of GDP. The government’s crackdown, though widely welcomed, has not resulted in more efficient administration. Instead, one American diplomat told me that it is more difficult now to get any decision since virtually every official, especially at the local level, is a potential target. Beijing has put foreign companies in its gunsights. This makes Western firms even more nervous over investments which often have not paid off as expected.    Economic problems mean political problems. In fact, the regime has been cracking down on domestic dissent and foreign influence.   Although an authoritarian state where public criticism—through traditional or social media—is punished, China is remarkably open in other ways. Dissent is widely expressed, especially by students, who I’ve been addressing for years. In front of classmates, they have denounced Internet controls, lauded American democracy, asked about Tiananmen Square, and worried that Xi Jinping was becoming another Mao Zedong. But wimpy liberals they are not. They are patriots with a nationalist bent. Taiwan is Chinese, they tell me. So are disputed territories in nearby waters.   It’s an interesting tension that I found common during my recent trip to China. A successful businessman educated in America forthrightly declared that democracy might not be best for the world’s most populous state. He offered little praise for the Communist Party, but he obviously didn’t want to be ruled by a peasant majority either.   Particularly interesting is the question whether growing repression will impede Chinese growth. Beijing recognizes it faces a challenging future: for instance, it has just dropped its destructive one-child policy. Other repressive policies inevitably hinder commercial development, especially in today’s Internet/information-dominated economy.   Equally significant, the attempt to tighten central party control may generate widespread political instability. A reported 100,000 party members are under investigation. Having taken on the “tigers,” such as past security chief Zhou Yongkang, Xi Jinping has upset the post-Mao policy of not targeting previous leaders. There is wide disagreement over whether Xi is secure on the mountaintop or standing on a precipice.   China is fascinating, even exciting. In many ways it has the feel of a free country: arrive with your visa and you can visit where you want, meet who you want, travel how you want, and say what you want. Yet the PRC imposes a glass ceiling on liberty. Break it and you suffer a huge penalty.   But as I pointed out for the Foundation for Economic Education: “ultimately the country as well as the people may pay. China has come far. It has even further to go, however. Where it ends up is likely to depend on whether the government comes to trust its people and becomes accountable to them. If not, the 21st Century is unlikely to end up as the Chinese Century.”

Many U.S. policymakers see China as the answer to North Korean proliferation. If Beijing would just tell the North’s Kim Jong-un to behave, East Asia’s biggest problem would disappear.   Of course, it’s not that simple. To be sure, the People’s Republic of China has influence in Pyongyang, but the latter always has jealously guarded its independence.   Still, the current regime does not appear to be as stable as its predecessors. Powerful Chinese pressure, if backed by economic sanctions, might encourage now incipient opposition.   The China-North Korea relationship goes back to the Korean War. Although, Beijing no longer hides its dissatisfaction with the North, the PRC is not yet willing to abandon its sole ally.   Its reluctance is understandable. Violent conflict within the DPRK, mass refugee flows across the Yalu, loss of Chinese investments, and a united Korea hosting U.S. troops all are possibilities no PRC government desires. China’s interest is almost purely negative, avoiding what the Democratic People’s Republic of Korea could become. " title="<--break-->"> Yet China also recognizes that the status quo is not just uncomfortable, but untenable. In fact, President Xi Jinping has met six times with South Korean President Park Geun-hye, but not once with Kim. Chinese academics and analysts, as well as advocates on social media, routinely criticize the DPRK.   The North’s hallmarks are proliferation, brutal repression, instability, and war threats. Pyongyang recently declared that it was strengthening its nuclear arsenal. Both Washington and Beijing would benefit from a “new” north of some sort, whether independent or reunited with the South. Which suggests the possibility of a modus vivendi between the U.S. and China.   However, a deal will require the PRC to take the lead. Unfortunately, U.S. officials are inclined to lecture Beijing about what the latter should do. China must tell Washington that cooperation is possible, but that Beijing requires guarantees before taking tougher action against the North.   The big issues would be process and endpoint. China should indicate its willingness to go along with the U.S. to change the North’s behavior, and government, if necessary—if the PRC is protected from the consequences.   Only Beijing could decide on the necessary conditions, but several obvious issues include financial support for refugees, acquiescence to Chinese military intervention post regime collapse, guarantees for existing economic deals, U.S. troop withdrawal from a united Korea.   South Korea also would have to be brought into any discussions, but the ROK’s warming relationship with Beijing suggests that Seoul would be receptive to a deal. Unlike the U.S., the South does not attempt to dictate relations in Northeast Asia.   Washington should respond positively to any Chinese overture, since North Korea has become one of America’s no-win problems. Despite presidents having insisted for at least two decades that Pyongyang cannot be allowed to become a nuclear state, it has done so.   Despite having no great strategic interests post-Cold War in the Korean peninsula, the U.S. maintains an expensive garrison in the South and remains a constant rhetorical target of a bizarre, unstable hereditary communist regime in the North. Despite urging China to deal with the problem, Beijing has shown no interest in taking the DPRK out of America’s hands.   But it would be worth much to the U.S. if the PRC did so. As I point out for China-US Focus: “The U.S. could drop North Korea from its enemies list, turn South Korea’s defense over to the South Koreans, reduce overall military commitments and spending, ease tensions with Beijing, and improve East Asian security without pervasive American military involvement. Washington could even avoid the stigma of being a supplicant if Beijing proposed talks.”   North Korea is a challenge for both the U.S. and China. Cooperation between the two offers the best hope for maintaining peace on the Korean peninsula. Beijing should propose talks. Then the world’s two greatest powers would have an opportunity to cooperate to solve their common problem.

Aside from one necessary clarification (see far below), it would be difficult to improve on what the New York Times, the Boston Globe, and the enrollees they interview have to say about ObamaCare.

First, from yesterday’s New York Times article, “Many Say High Deductibles Make Their Health Law Insurance All but Useless”: 

But for many consumers, the sticker shock is coming not on the front end, when they purchase the plans, but on the back end when they get sick: sky-high deductibles that are leaving some newly insured feeling nearly as vulnerable as they were before they had coverage.

“The deductible, $3,000 a year, makes it impossible to actually go to the doctor,” said David R. Reines, 60, of Jefferson Township, N.J., a former hardware salesman with chronic knee pain. “We have insurance, but can’t afford to use it.”…

“We could not afford the deductible,” said Kevin Fanning, 59, who lives in North Texas, near Wichita Falls. “Basically I was paying for insurance I could not afford to use.”

He dropped his policy…

“Our deductible is so high, we practically pay for all of our medical expenses out of pocket,” said Wendy Kaplan, 50, of Evanston, Ill. “So our policy is really there for emergencies only, and basic wellness appointments.”

Her family of four pays premiums of $1,200 a month for coverage with an annual deductible of $12,700…

Alexis C. Phillips, 29, of Houston, is the kind of consumer federal officials would like to enroll this fall. But after reviewing the available plans, she said, she concluded: “The deductibles are ridiculously high. I will never be able to go over the deductible unless something catastrophic happened to me. I’m better off not purchasing that insurance and saving the money in case something bad happens.”

“While my premiums are affordable, the out-of-pocket expenses required to meet the deductible are not,” said [Karin] Rosner, who makes about $30,000 a year…

“When they said affordable, I thought they really meant affordable,” [Anne Cornwell of Chattanooga, Tenn.,] said.

And from today’s Boston Globe article, “High-Deductible Health Plans Make Affordable Care Act ‘Unaffordable,’ Critics Say”:

“We can’t afford the Affordable Care Act, quite honestly,” said Cassaundra Anderson, whose family canvassed for Obama in their neighborhood, a Republican stronghold outside Cincinnati. “The intention is great, but there is so much wrong. . . . I’m mad.”…

The Andersons’ experience echoes that of hundreds of thousands of newly insured Americans facing sticker shock over out-of-pocket costs…

“This will be an issue at least one more time in the 2016 election. It could absolutely still hurt Democrats,” said Robert Blendon, a professor of health policy and political analysis at the Harvard School of Public Health. “Polls about the Affordable Care Act have a considerable amount of middle-income people who say either the program has done nothing for them or actually hurt them.”…

“Unfortunately, what we are headed toward now is universal crappy health insurance,” said Dr. Budd Shenkin, a California pediatrician…“It’s just not a good deal for people,” he said.

“We’re in the process of looking at going without insurance,” [Cassaundra Anderson] said, calculating that the family will be better off financially just paying the $2,000 tax penalty for not abiding by the law’s mandate. “What am I even paying these insurance people for? Why should we reenroll?”…

“I cannot get anything with this insurance. Nothing,” said [Laura] Torres, who avoids seeking treatment for her thyroid condition and high blood pressure because of cost. “I just pay my monthly payments, try to take care of myself, go to work, and hope something serious doesn’t happen to me.”…

Amete Kahsay, 53, works as a temporary warehouse packer in Columbus. The Affordable Care marketplace is her only option for health insurance. She and her husband, an airport shuttle driver, pay $275 a month for a “bronze” plan with a $13,200 deductible.

Shortly after they signed up for insurance last year, her husband rushed her to the emergency room when she experienced dizziness. The visit, which included a CT scan of her brain, cost $1,700. She paid the charge from her savings, then returned to her native Ethiopia, where care is cheaper, to consult a neurologist and seek follow-up care.

“I support Obamacare. Without it, I wouldn’t have any type of insurance. But I’m not sure it’s worth the money,” said Kahsay, a US citizen who is registered as an independent voter. “Now, unless I get very, very sick, like only if it’s life-threatening, I won’t go to the doctor. I just lay down and take a rest.”

The necessary clarification is that these people are not complaining about high-deductibles in a market system. In a market system, consumers who choose high deductibles save money on their premiums and therefore have more resources to help them pay their out-of-pocket expenses. ObamaCare, on the other hand, manages to pair high deductibles with higher premiums, stripping many people of this benefit of high-deductible plans and leaving them unable to pay their medical bills. 

With two Republican presidential candidates embracing a value-added tax (VAT), it is worth looking back at the original federal debate over that bad policy idea.

Richard Nixon appears to have been the first U.S. leader to push for a VAT, which is not surprising given that he was perhaps the most statist GOP president of the 20th century. With a three-percent VAT in mind, Nixon called for new federal financing of local schools in his 1972 State of the Union address.   

A 1972 Congressional Quarterly article examined Nixon’s VAT. (The first link when you Google “richard nixon vat congressional quarterly”). The article reveals that the administration looked fondly on a VAT because of its large revenue-raising potential—both for funding schools and for funding a general expansion of the welfare state:

Two major reasons were apparent for the Nixon administration’s consideration of a value added tax. The first was the condition of federal finances.

The budget for fiscal year 1973, which the President sent to Congress Jan. 24, included a five-year forecast showing that in fiscal 1977 the only surplus funds foreseeable would result from a proposed increase in Social Security taxes. Projected costs of existing and proposed programs were expected to absorb all revenues from existing taxes and other sources. This meant that no new programs could be inaugurated without new taxes to finance them or reduction of existing programs to release funds. Though initially pledged for education, revenues from an expanding value added tax might provide future funding for other programs.

The second reason was the situation in public schools and school districts.

Tax expert Alan Schenk notes that Nixon had been plotting to impose a VAT from soon after he came into office in 1969. But imposing a new and powerful tax as a spigot to fund local government was an awful idea that would have undermined federalism and dangerously centralized fiscal power in the nation.

Thankfully, the Nixon proposal went nowhere in Congress, the ACIR came out against it, and it was dropped. America’s economy dodged a bullet. If Nixon had been successful, the rate would probably have soared over time from an initial 3 percent to maybe 20 percent today—just as rates in Europe have risen—and that would have fueled growth in new and expanded entitlement programs.  

The congressional testimony highlighted in the CQ article indicates that most experts leaned against a VAT, but the ideological split was interesting. Some conservatives liked the VAT because it was “efficient,” while liberals generally disliked it because it was “regressive.”

Libertarians had a different view. The Nixon administration’s VAT proposal received a sharp rebuke from economist Murray Rothbard in a 1972 Human Events article. Some of Rothbard’s economic reasoning is dubious, but his main thrust regarding tax transparency is on target. He argued:

It is now easy to see the enthusiasm of the federal government and its economic advisers for the new scheme for a VAT. It allows the government to extract many more funds from the public — to bring about higher prices, lower production, and lower incomes — and yet totally escape the blame, which can easily be loaded on business, unions, or the consumer as the particular administration sees fit.

The VAT is, in short, a looming gigantic swindle upon the American public, and it is therefore vitally important that it not pass. For if it does, the encroaching menace of Big Government will get another, and prolonged, lease on life.

Occupational licensing is supposed to protect consumers against people who would practice a trade without the proper qualifications. In the first Supreme Court case on the question, Dent v. West Virginia (1883), the Court held that government may require people to be trained and educated before taking up the medical profession, because “such regulations” help “secure” the public “against the consequences of ignorance and incapacity as well as of deception and fraud.” But, the Court warned, if states impose licensing requirements that are not aimed at protecting “the general welfare of [the] people,” those restrictions “can operate to deprive one of his right to pursue a lawful vocation.”

But Dent was decided before the advent of “rational-basis scrutiny,” the rule under which courts today typically ignore violations of the right to earn a living. Under today’s law, state governments are given extremely broad power to limit economic freedom in whatever way lawmakers or unelected bureaucrats think best. That raises a crucial question—one on which the federal Courts of Appeals are now divided: may government restrict economic freedom, not to protect the public, but solely to protect the private benefits of a preferred group of people? Does such “mere protectionism” qualify as a “legitimate state interest” under the lenient “rational basis” rule?

Today, PLF and the Cato Institute have asked the Supreme Court to answer that question in a case involving teeth-whiteners: people who help clean teeth by shining a special kind of light on them. Officials in Connecticut ordered a group of teeth-whiteners to cease operations because they were not licensed dentists. Represented by our allies at IJ, a teeth-whitening company called Sensational Smiles sued, arguing that forcing them to spend the money and time needed to get a dentist’s license was irrational—they don’t offer dental services, after all. In this case, the licensing requirement was not being used to protect the public. Instead, it was a form of “mere protectionism” that barred competition against established dentists.

Federal courts are divided over whether such “mere protectionism” is constitutional under the rational basis test. The Fifth, Sixth, and Ninth Circuits in recent years—and the Third, Fourth, and Eighth Circuits in past decades—have all held that however lenient the rational basis test may be, it still requires that the government act in the interests of the public, rather than the private interests of the politically powerful. These holdings were consistent with Supreme Court precedent that held that licensing laws must be “must have a rational connection with [a person’s] fitness or capacity to practice” the trade—rather than being acts of spite or mere preference.

But in 2003, the Tenth Circuit ruled that the government can use its licensing powers for “mere protectionism”—to forbid people from engaging in a business solely as a favor to those the legislature prefers. And in the New Jersey case, the Second Circuit agreed. It ruled against the teeth-whiteners, holding that lawmakers can bar entrepreneurs from a business out of a “simple preference for [other people] over [them].” In other words, the legislature need not even pretend that its restrictions on economic opportunity—or other rights subject to the “rational basis” test—benefit the public. It can simply pick winners and losers however it wants, without constitutional limitation.

That holding contradicts eight centuries of Anglo-American common law, which has held since the days of Magna Carta that however broad the government’s power may be, it has one basic limitation: it must use its powers to serve the general public, not the private interests of the rulers or their cronies. That’s not a very strong limitation—there’s a lot the government can still do that benefits the politically powerful—but it must at least aim at the public benefit, not the private benefit. Even in its most pro-government cases, such as the 2005 eminent domain case, Kelo v. New London, the Supreme Court has held that government must use act in the public interest: “the City would no doubt be forbidden from taking [Kelo’s] land for the purpose of conferring a private benefit on a particular private party,” the Court said there.

The Second Circuit rejected this principle. “Much of what states do is to favor certain groups over others,” the judges declared. “We call this politics.” But as the Supreme Court observed in 1943, “[t]he very purpose of a Bill of Rights was to withdraw certain subjects from the vicissitudes of political controversy, to place them beyond the reach of majorities…as legal principles…. One’s right to life, liberty, and property, to free speech, a free press, freedom of worship and assembly, and other fundamental rights may not be submitted to vote; they depend on the outcome of no elections.” (Note the reference to “property,” to which the rational basis test applies.)

Of course, the people who will suffer most from the rubber-stamp approach that the Second Circuit took are those who lack the political influence to get the government to do its bidding. These people—including members of minority groups, and unknown entrepreneurs just starting out—must look to the courts to protect their rights, instead. By withdrawing judicial protection for the constitutional rights, the Second Circuit essentially throws them to the mercies of the very legislatures that took their rights away. As Prof. Robert McCloskey put it, the idea that these people can protect themselves through the political process is “a polite fiction,” because “the scattered individuals who are denied access to an occupation by State-enforced barriers are about as impotent a minority as can be imagined.”

Here’s hoping the Supreme Court steps in to protect their rights.

[Cross-posted at PLF’s blog.]

The Open Government Partnership is an “international platform for domestic reformers committed to making their governments more open, accountable, and responsive to citizens.” Shortly after the OGP’s creation, in my November 2012 study, “Grading the Government’s Data Publication Practices,” I gave the OGP unenthusiastic praise. It appeared to substitute meetings about open government with actual forward motion on the government transparency that President Obama promised in his first presidential race.

But an important commitment emerged late last month from the “Third Open Government National Action Plan for the United States of America.” The plan includes “a wide range of actions the Administration will take over coming months to strengthen, deepen, and expand upon” U.S. open government efforts. Among them (at the bottom of page 10) is the commitment  to develop a machine-readable government organization chart. 

The lack of a machine-readable government organization chart has been an emphasis of mine in writings and speeches since at least 2012. The Washington Examiner’s Mark Tapscott cited my quest for one in a favorite article calling me a “digital Diogenes.”

Having access to data that represents the organizational units of government is essential to effective computer-aided oversight and effective internal management. Presently, there is no authoritative list of what entities make up the federal government, much less one that could be used by computers. Differing versions of what the government is appear in different PDF documents scattered around Washington, D.C.’s bureaucracies. Opacity in the organization of government is nothing if not a barrier to outsiders that preserves the power of insiders—at a huge cost in efficiency.

The promise to produce a useful organization chart is not self-delivering, of course, and there are ways that this commitment could go off the rails. But the phrasing of the commitment suggests understanding of what a well-published digital organization chart is.

The General Services Administration and National Archives Office of the Federal Register will “capture agencies’ organizational directories as machine-readable raw data in a consistent format across the U.S. Federal government.” That suggests to me that the relationships among agencies, bureaus, and program offices (to use one nomenclature) will be represented in a consistent manner government-wide. Each sub-unit of government must have a unique identifier that embeds its relationship to its parent, like the identifiers in this document published by the National Institute of Standards and Technology in 2008. We’re not talking about a flat digital phone book.

It is not clear whether this commitment is a commitment of the Obama Administration to make this the authoritative organization chart. Obviously, an org chart that doesn’t accurately represent and guide the government’s own actions is not much of an org chart. But if the White House (i.e. OMB) and other important actors such as the Treasury Department (which cuts the checks) rely on and use this machine-readable government organization chart, then we will really have something. That will raise the pressure on Congress to make its processes more transparent by referring to agencies and their sub-units in legislative documents using the same identifiers.

I’ll report here on the success or failure of the project. The national action plan does not give a definitive timeline or deadline, but it does speak of action on its commitments in terms of “months.”