Before he launched his presidential campaign, Jeb Bush released his emails from his eight years as governor. Now he’s released a 700-page book of selected emails. According to Amazon’s search function, I’m not in the book. But I did have a brief exchange with Governor Bush in 2003. As a libertarian, I wasn’t convinced by his argument. But I was impressed that the governor personally answered an email that I didn’t even send to him but rather to a member of his press staff. Governor Bush announced the creation of the Governor’s Task Force on the Obesity Epidemic, with such goals as:
- Recommend ways to promote the recognition of overweight and obesity as a major public health problem in Florida that also has serious implications for Florida’s economic prosperity;
- Review data and other research to determine the number of Florida’s children who are overweight or at risk of becoming overweight;
- Identify the contributing factors to the increasing burden of overweight and obesity in Florida;
- Recommend ways to help Floridians balance healthy eating with regular physical activity to achieve and maintain a healthy or healthier body weight;
- Identify and research evidenced-based strategies to promote lifelong physical activity and lifelong healthful nutrition, and to assist those who are already overweight or obese to maintain healthy lifestyles;
- Identify effective and culturally appropriate interventions to prevent and treat overweight and obesity;
When the announcement of this task force reached my inbox, courtesy of the governor’s office press list, I had this exchange (read from the bottom):
From: Jeb Bush [mailto:jeb [at] jeb.org]
Sent: Thursday, October 16, 2003 8:05 PM
To: David Boaz
Cc: jill.bratina [at] myflorida.com
Subject: FW: Executive Order Number 03-196
David, the reason for this is that obesity creates huge costs to government. If you believe in limited government, you should support initiatives that reduce it. I know you believe that it is not the role of government to deal with these demands, which I respect, but until you win the day, we need to respond to the challenge.
From: David Boaz [mailto:dboaz [at] cato.org]
Sent: Wednesday, October 15, 2003 10:30 AM
To: DiPietre, Jacob
Subject: RE: Executive Order Number 03-196
Why is what I eat any of the government’s business? This is the very definition of big government.
From: DiPietre, Jacob [mailto:Jacob.DiPietre [at] MyFlorida.com]
Sent: Wednesday, October 15, 2003 10:21 AM
To: ALL OF EOG, OPB & SDD
Subject: Executive Order Number 03-196
DATE: October 15, 2003
TO: Capital Press Corps
FROM: Jill Bratina, Governor’s Communications Director
RE: Executive Order Number 03-196
Please find attached an Executive Order creating the Governor’s Task Force on the Obesity Epidemic.
As I said, I wasn’t persuaded. I’ve written that obesity is not in fact a public health problem. It may be a widespread health problem, but you can’t catch obesity from doorknobs or molecules in the air. And the idea that our personal choices impose costs on government, through semi-socialized medicine and similar programs, has no good stopping point. If obesity is the government’s business, then so are smoking, salt intake, motorcycle riding, insufficient sleep, cooking all the nutrients out of vegetables, and an endless stream of potentially sub-optimal decisions. (I was going to include drinking whole milk, but … well, you know.)
I’m glad to note that last month Jeb Bush said that a federally developed anti-obesity video game, “Mommio,” was a waste of “scarce resources.” Maybe he’s coming around.
The overwhelming conclusion of the best research on school choice is that students who receive scholarships to attend the school of their choice perform as well or better on achievement tests on average and are more likely to graduate high school and go to college. The positive effects are particularly found among low-income and minority populations that are presently the most choice deprived.
The only way opponents of school choice get around this inconvenient truth is by ignoring it, which they do with great persistence. They are frequently aided in their willful ignorance by dubious “reports” that claim to evaluate the evidence while inexplicably leaving out numerous gold standard studies by researchers at top universities. The latest such “report” comes from the Center for Public Education, which Professor James Shuls of the University of Missouri-St. Louis methodically exposed over at the Show-Me Institute’s blog:Recently, the Center for Public Education, an arm of the National School Boards Association, released a report on the merits of school choice. The paper claims to summarize “what the research says.” Interestingly, the report fails to include almost every analysis that has found benefits to private school choice programs.
When Anna Egalite, an assistant professor of educational leadership, policy, and human development at North Carolina State University, conducted a systematic review of the competitive effects of private school choice programs, she found 21 studies. She concluded that the results “unanimously find positive impacts on student achievement. Such overwhelming evidence supports the development of market-based schooling policies as a means to increase student achievement in traditional public schools.” Interestingly, the Center for Public Education did not cite any of these studies.
Similarly, there have been 12 random-assignment studies of voucher programs. These are considered the “gold-standard” in social science research because they are the best at determining causality. Eleven of the 12 studies have found positive effects from voucher programs. The Center for Public Education review only cites one of these studies.
The report cites plenty of useful statistics from the National Center for Education Statistics and other sources, but does not even attempt to cite the plethora of useful research on school choice programs.
Nevertheless, the report does get at least one thing right—private school choice tends to boost graduation rates. This was highlighted in the evaluation of the Washington D.C. Opportunity Scholarship program, which showed a 21 percentage point increase in the graduation rate for voucher users.
Not surprisingly, given that they neglect to cite any of the ample evidence showing that school choice succeeds, the Center’s conclusion is that “In general, we find that school choices work for some students sometimes, are worse for some students sometimes, and are usually no better or worse than traditional public schools.”
The Center for Public Education does not explain what criteria it used to determine which studies to include in its supposed review of the research on school choice. Hopefully they will respond to Prof. Shuls’ critique by issuing a revised report that is more transparent and thorough–but don’t hold your breath.
By nearly a 2 to 1 margin, Ohio’s Issue 3 has failed. It may be just as well. Jacob Sullum writes at Reason:
[I]t’s not clear whether the rejection of Issue 3 reflects general resistance to legalization or opposition to the initiative’s most controversial feature: a cannabis cultivation cartel that would have limited commercial production to 10 sites controlled by the initiative’s financial backers. The ballot description highlighted that aspect of the initiative, saying Issue 3 “grants a monopoly for the commercial production and sale of marijuana for recreational and medicinal purposes” and would “endow exclusive rights for commercial marijuana growth, cultivation, and extraction to self-designated landowners who own ten predetermined parcels of land.”
Establishing a permanent commercial pot cartel has no clear public policy rationale. It appears rather to have been an instance of shameless self-dealing by individuals who hoped to extract rents based on the public’s anxiety about change. Even – and I don’t say this lightly – even a state monopoly on commercial sales might have been better, in that the rents would have gone to a public purpose, rather than to some well-connected speculators, who ought not to profit from a law written specifically to favor them. Indeed, such laws are not properly called laws at all; they are privileges – private laws, rather than public ones, and as such they come under grave suspicion.
The problem, then, is not corporatization. Love it or hate it, we’re neck deep in corporatization already. Few would object to it now, I would think, particularly given that Issue 3’s backers did (grudgingly) relent and allow personal cultivation. The trouble is not corporatization; it’s when only a self-selected handful of corporations even get a chance to enter the market, and when all others are excluded by law forever, presumably by means of the same awful Drug War apparatus we’ve always known.
What should a legal marijuana market look like? It’s a little early to tell. Colorado’s experiment is still developing, and its market may not yet be mature. What’s called for is flexibility in business design, as well as rapid response by state governments to any genuine problems that might arise. (Will they? Maybe!) We don’t really know what consumers are going to want yet, including whether that may vary regionally or over time, and what negative externalities their choices might or might not produce. Establishing a cartel would have been exactly the wrong move.
In a recent The Hill piece on the REAL ID debate in New Hampshire, I wrote about the complaint against federal legislators who cease representing their states in Washington, D.C., and start representing Washington, D.C., in their states.
That seems to be happening in New Mexico, where four of five members of the congressional delegation are at best standing by worrying about a Department of Homeland Security attack on their state. At worst, they are lobbying the state legislature to cede authority over driver licensing to the federal government.
The DHS is pushing New Mexico toward compliance with REAL ID, the national ID law, by saying that it will not offer another extension of the deadline for compliance. The statutory deadline passed seven years ago and no state is in compliance. No state will be in 2016. The national ID law is as unworkable as it is weak as a security tool.
But U.S. Senators Tom Udall (D) and Martin Heinrich (D), and Representatives Ben Ray Luján (D) and Michelle Lujan Grisham (D) had this to say in a joint statement:
Our offices remain in close contact with DHS and it is clear from our conversations that the state legislature and the governor must take action to ensure New Mexicans can continue to access federal facilities and airports in the months to come.
It’s not the New Mexico delegation calling the shots in Washington, D.C. It’s Ted Sobel of the Department of Homeland Security’s Office of State-Issued Identification Support. According to Government Technology, he confirmed Friday that New Mexico’s practice of issuing licenses to qualified drivers without reference to their immigration status is the reason why DHS has mounted this attack on New Mexico.
That’s a good state policy, though, treating driver’s licenses simply as a license to drive. And it’s the policy New Mexico has chosen. I can imagine New Mexicans being nonplussed to learn that their congressional delegation is “in close contact” with the federal bureaucrats attacking their state’s policies and authority.
A Santa Fe New Mexican editorial calling for state compliance is too conciliatory and wrong in its conclusion, but it says of REAL ID, “It likely won’t increase security but does add to the bureaucratic hurdles citizens and state governments face. Another solution to New Mexico’s problem would be for Congress to repeal the law.”
Another solution indeed. Perhaps the paper should urge the congressional delegation to defend the interests of New Mexico and New Mexicans by defunding and repealing the national ID law.
Presidential candidates Ted Cruz and Rand Paul have proposed value-added taxes (VATs) as part of their tax reform plans.
I critique these taxes in National Review today, arguing that they could become engines of big government growth.
Cruz and Paul are champions of small government, and so their embrace of VATs is unfortunate, and also potentially dangerous.
Dangerous because VATs are probably the only way that liberals would be able to fund the huge projected growth in unreformed entitlement programs in coming years.
In a worse-case scenario under the current tax system, liberals would succeed in hiking income taxes, but they wouldn’t be able to seize much more money because the income tax base is so mobile in today’s global economy. The corporate income tax, for example, is a complex and damaging tax, but it is not capable of raising the government any more revenue than it already does.
But in a worst-case scenario under a Cruz or Paul VAT, the government would be able to confiscate far more money as the VAT rate were jacked up over time. It is no coincidence that Western European governments—with their VATs—collect substantially higher revenues as a share of GDP than we do.
In a best-case scenario, reformers like Cruz and Paul will lead the charge to cut entitlements and enact a simpler, lower, pro-growth tax code. But we have to consider how liberals will work to hijack new tax structures and try to drive us in the opposite direction.
Cruz and Paul are heroes for their battles against the GOP establishment on overspending and other issues. But I fear their tax plans would not move us in the small-government direction they want to go in over the long run.
Back in 2002, Stephen Ware wrote a policy analysis for Cato entitled “Arbitration Under Assault: Trial Lawyers Lead the Charge.” That assault – endorsed by the New York Times in a two-part series that is getting some attention – depends crucially on both an attack on freedom of contract and a refusal to take seriously what consumers vote for with their marketplace choices.
As has come to be widely acknowledged in recent years, most class action litigation over consumer financial claims goes on for the benefit of lawyers. It produces scanty benefits for customers but does drive up the costs of providing common services, which is passed along in the form of higher fees and rates. Given a chance, as a result, almost every company will seek to draft “fine print” substituting low-cost, relatively fast arbitration for forms of litigation whose transactional cost greatly exceeds the value to customers of eventual relief given. Even where there is strong competition in a market (among affluent credit card users, for example), it is exceedingly rare for consumers to switch accounts because one provider shunts claims into arbitration while another invites class action litigation.
What does this signify about consumer preferences? Consumers willingly switch all the time from one airline loyalty card to another in quest of better miles-and-points rewards, baggage allowances, pre-boarding policies, and so forth – but not to avoid arbitration policies. Why not? To the experts the Times prefers to speak to – and as the U.S. Chamber of Commerce points out, every single judge and law professor the Times spoke to was hostile to arbitration, which is hardly true of the universe of all distinguished law professors and judges – it must be inattention or false consciousness; consumers don’t realize that they’ve giving up terribly valuable rights. The other possibility is that consumers rationally place little before-the-fact value on a future benefit that is expensive to provide and mostly pays off for the lawyers who – as Daniel Fisher points out – mostly manage to stay in the background of the Times piece.
I’ve got more on the story at Overlawyered this morning, where I’ve been covering the Litigation Lobby’s war on arbitration since I launched the site in 1999. Other Cato legal scholars have agreed with a Supreme Court majority (but not with the Times) that the role of the government is ordinarily to enforce, not substitute its judgment for, clearly worded private contracts generating terms announced and known to the parties. And I’ll give the last word for the moment to blogger Coyote, writing about a recent California anti-arbitration bill so extreme that even liberal Gov. Jerry Brown saw fit to veto it: “Here is how you should think about this proposed law: Attorneys are the taxi cartels, and arbitration is Uber. And the incumbents want their competitor banned.”
The Arizona Republic and the Associated Press (AP) used Cato’s recent work to highlight the failure of E-Verify to turn off the jobs magnet that attracts unauthorized immigrants to the United States. Arizona has a shaky record on immigration enforcement, despite its laws and reputation to the contrary. Maricopa County Attorney’s Office has had zero E-Verify related cases since 2010 and the state Attorney General’s office has failed to update a list of E-Verify compliant businesses since at least 2012 – a requirement under state law.
Other states’ recent experiences also point to problems with E-Verify.
In Ohio, an unauthorized worker at a dairy company was charged on October 20th with identity fraud, after having been discovered to be using the Social Security number of a (legal) Arizona resident. The fraud only came to light after the Arizonan discovered that his Social Security number was being used in Ohio. The fraud was not discovered by the routine E-Verify check that the unauthorized Ohio worker underwent in 2013. E-Verify confirmed the worker, who was utilizing the stolen SSN and fraudulently obtained documents based off of said number, as work-authorized and legal. The use of a valid number and fraudulent (but on the surface valid) documents by migrants is a problem with E-Verify that we’ve highlighted in the past.
California passed legislation to prevent employer misuse of E-Verify. Their law effectively duplicates federal restrictions on re-verification of employees, bars selective verification (targeting certain applicants over others), punishes use of E-Verify as an interview screening tool, and imposes a $10,000 fine for misuse. The intent of the new law is positive but it will be impossible to enforce.
Finally, a controversial immigration bill has become law in North Carolina (I wrote about this in May). The new law lowers the threshold for mandated E-Verify to businesses with five or more employees, limits the types of identification that migrants can present (effectively banning use of Mexican consular identification cards), and prevents local and county governments from adopting so-called “sanctuary city” policies.
E-Verify imposes an economic cost on American workers and employers, does little to halt unlawful immigration because it fails to turn off the “jobs magnet,” and is an expansionary threat to American liberties. During the housing collapse and Great Recession, Arizona enacted the Legal Arizona Workers Act (LAWA), which mandated E-Verify for all new hires in the states. In its early days, E-Verify had a reputation of effectiveness that, combined with the crashing economy, resulted in a large exodus of unlawful immigrants from Arizona. After the economic recovery and E-Verify’s flaws were made clear, subsequent states like Alabama, Mississippi, and South Carolina have had far less success in using E-Verify to decrease the numbers of unauthorized immigrants in their states. E-Verify’s bark was worse than its bite.
This post was written with the help of Scott Platton
As the prominence of tariffs in the transatlantic relationship has receded and transnational supply chains and investment have proliferated, regulatory barriers to transatlantic trade have become more evident. Reducing duplicative regulations that increase production and compliance costs without providing any meaningful social benefits is a chief aim of the Transatlantic Trade and Investment Partnership negotiations. Indeed, most of the economic gains from the TTIP are expected to come from this exercise.
But that is easier said than done. According to University of California-Irvine law school professor Gregory Shaffer, “regulatory barriers to trade can be more pernicious and more difficult to reduce than tariff barriers because they often reflect certain cultural values and preferences, and there are often more interests vested in the status quo.” In his Cato Online Forum essay, submitted in conjunction with last month’s TTIP conference, Shaffer describes five different approaches to regulatory coherence/harmonization (with pros and cons) that could be undertaken by U.S. and EU negotiators.
Depsite vastly different approaches to regulation on opposite sides of the Atlantic, Shaffer points to examples of successful cooperation in recent years as evidence that the TTIP’s regulatory coherence discussions could bear fruit. But he doesn’t bet the house on that outcome. Instead, he writes:
We should nonetheless be cautious in our optimism given the serious impediments to achieving regulatory coherence. Removing regulatory barriers to trade and investment while continuing to reflect local preferences and retain democratic accountability is, and always has been, a challenging undertaking.
On Sunday, the Associated Press released the results of a year-long investigation into sexual misconduct by police officers across the country. They found that about 1,000 officers were decertified for some type of sexual misconduct—consensual sex on duty, sexual assault, coercion, child molestation/pornography, statutory rape, inter alia—over a six year period. The Morning Call listed the general rules governing misconduct and decertification—where applicable—in each state.
The AP story reported that the 1,000 number is “unquestionably an undercount” of offenders because of the scattershot nature of police misconduct reporting, prosecution, and internal administrative discipline across states and departments. Indeed, such is the nature of tracking any kind of police misconduct.
At the National Police Misconduct Reporting Project (NPMRP), we track all kinds of police misconduct from sexual misconduct to domestic violence to DUI and drug related corruption. Looking at the preliminary data through October 30, NPMRP has tracked at least 130 news reports of sexual misconduct* by American law enforcement personnel in 2015. Almost all were criminal in nature. Many cases had multiple victims and happened over a period of years, supporting the AP claim that many cases go unreported.
*This number was compiled by searching the @NPMRP Twitter feed using the terms “rape,”“sex,” “sexual,” “pornography,” “solicitation,” and “molestation.” Other cases of stalking, harassment, and other charges that may be sexual in nature would not necessarily be counted in these searches.
The government of China has launched its 13th five-year plan (known as 13.5), sticking with the form if not the substance of Stalinism. But in our modern and networked world, China wants the world to understand its planning process, so it released this catchy video in American English:What’s China gonna do? Better check this music video
The video explains how comprehensive the planning process is:
Every five years in China, man
They make a new development plan!
The time has come for number 13.
The shi san wu, that’s what it means!
There’s government ministers and think tank minds
And party leadership contributing finds.
First there’s research, views collected,
Then discussion and views projected.
Reports get written and passed around
As the plan goes down from high to low,
The government’s experience continues to grow.
They have to work hard and deliberate
Because a billion lives are all at stake!
It must be smart: note the picture of Einstein along with Chinese leaders such as Mao Zedong (around 0:50).
Of course, this “planning process” doesn’t work. In the best of circumstances, it’s no match for a billion producers and consumers making decisions every day about what actions are likely to better their own condition. It’s characterized by bureaucracy, backward-looking decisions, and cronyism. In less-than-ideal circumstances, when the planners are armed with total power and inspired by an ideological belief that they can actually direct the activities of millions of people, as in China from 1949 to 1979, the results are disastrous: poverty, starvation, and even cannibalism. Fortunately, after 1979, the planners led by Deng Xiaoping began to dismantle the system of collective farming and to allow Chinese farmers to make many of their own decisions, and growth took off. Plans work better when they allow individuals to plan.
I wrote about planning in The Libertarian Mind:
It is the absence of market prices that makes socialism unworkable, as Ludwig von Mises pointed out in the 1920s. Socialists have often considered the question of production an engineering question: Just do some calculations to figure out what would be most efficient. It’s true that an engineer can answer a specific question about the production process, such as, What’s the most efficient way to use tin to make a 10-ounce soup can, that is, what shape of can would contain 10 ounces with the smallest surface area? But the economic question—the efficient use of all relevant resources—can’t be answered by the engineer. Should the can be made of aluminum, or of platinum? Everyone knows that a platinum soup can would be ridiculous, but we know it because the price system tells us so. An engineer would tell you that silver wire would conduct electricity better than copper. Why do we use copper? Because it delivers the best results for the cost. That’s an economic problem, not an engineering problem.
Without prices, how would the socialist planner know what to produce? He could take a poll and find that people want bread, meat, shoes, refrigerators, televisions. But how much bread and how many shoes? And what resources should be used to make which goods? “Enough,” one might answer. But, beyond absolute subsistence, how much bread is enough? At what point would people prefer a new pair of shoes to more food? If there’s a limited amount of steel available, how much of it should be used for cars and how much for ovens? What about new goods, which consumers don’t yet know they’d like? And most important, what combination of resources is the least expensive way to produce each good? The problem is impossible to solve in a theoretical model; without the information conveyed by prices, planners are “planning” blind.
In practice, Soviet factory managers had to establish markets illegally among themselves. They were not allowed to use money prices, so marvelously complex systems of indirect exchange—or barter—emerged. Soviet economists identified at least eighty different media of exchange, from vodka to ball bearings to motor oil to tractor tires. The closest analogy to such a clumsy market that Americans have ever encountered was probably the bargaining skill of Radar O’Reilly on the television show M*A*S*H. Radar was also operating in a centrally planned economy—the U.S. Army—and his unit had no money with which to purchase supplies, so he would get on the phone, call other M*A*S*H units, and arrange elaborate trades of surgical gloves for C rations for penicillin for bourbon, each unit trading something it had been overallocated for what it had been underallocated. Imagine running an entire economy like that.
Despite the total failure of total planning, I wrote,
the Holy Grail of planning dies hard among intellectuals. What is President Obama’s health care plan but a central plan for one-seventh of the American economy? [And see also his promise of “strategic decisions about strategic industries.”] President Bill Clinton had offered an even more breathtaking view of the ability and obligation of government to plan the economy:
We ought to say right now, we ought to have a national inventory of the capacity of every… manufacturing plant in the United States: every airplane plant, every small business subcontractor, everybody working in defense.
We ought to know what the inventory is, what the skills of the work force are and match it against the kind of things we have to produce in the next 20 years and then we have to decide how to get from here to there. From what we have to what we need to do.
After the election, a White House aide named Ira Magaziner fleshed out this sweeping vision: Defense conversion would require a twenty-year plan developed by government committees, “a detailed organizational plan… to lay out how, in specific, a proposal like this could be implemented.” Five-year plans, you see, had failed in the Soviet Union; maybe a twenty-year plan would be sufficient to the task.
China’s catchy jingle can’t obscure the fact that central economic planning is a misguided holdover from the era of centralized industries and centralized governments. It’s increasingly backward in a dynamic world of instant communication, global markets, and unprecedented access to information.
Last week I attended a talk and panel discussion at Brookings, in which Roger Lowenstein discussed his new book on the Fed’s origins. I have much to say about that book, and I eventually plan to say some of it here. But for the moment my concern is with another book, this one concerning, not the Fed’s origins, but its recent conduct. I mean Ben Bernanke’s The Courage to Act.
So why bring up the Brookings event? Because, in the course of that Federal Reserve love-fest, someone made a passing reference to those crazy people who actually want to limit the Fed’s emergency lending powers. Having seen the Fed save the economy from oblivion, such people, one of the panelists observed (I believe it was former Fed Vice Chairman Donald Kohn), are determined to make sure it can never save it again! At this, the audience chuckled approvingly.
Well, mostly it did. My own reaction was more like a bad attack of acid reflux. Is it really possible, I asked myself (as I struggled to keep my gorge from rising), that nobody here takes the moral hazard problem seriously? Do they really suppose that Senators Warren and Vitter and others seeking to limit the Fed’s bailout capacity are doing so because they like financial meltdowns and couldn’t care less if the U.S. economy went to hell in a hand-basket?
To his credit, Ben Bernanke does understand the problem of moral hazard. Moreover, he claims, in his long but very readable memoir, to have struggled with it repeatedly over the course of the financial crises. “I knew,” he writes at one point, “that financial disruptions” could
send the economy into a tailspin. At the same time, I was mindful of the dangers of moral hazard — the risk that rescuing investors and financial institutions from the consequences of their bad decisions could encourage more bad decisions in the future (p. 147).
Faced with this dilemma, what’s a responsible central banker to do? The classic answer — and one that Bernanke has long endorsed — is what he calls “Bagehot’s dictum,” after Walter Bagehot, the Victorian polymath (and opponent of central banking) who set it forth in Lombard Street. According to Bernanke’s own summary of that dictum, central bankers faced with a crisis should “lend freely at a high interest rate, against good collateral” (p. 45).
Did Bernanke’s Fed follow Bagehot’s advice? To answer, it helps to first consider Bagehot’s own elaboration of his rules:
First. That these loans should only be made at a very high rate of interest. This will operate as a heavy fine on unreasonable timidity, and will prevent the greatest number of applications by persons who do not require it. The rate should be raised early in the panic, so that the fine may be paid early; that no one may borrow out of idle precaution without paying well for it; that the Banking reserve may be protected as far as possible.
Secondly. That at this rate these advances should be made on all good banking securities, and as largely as the public ask for them. The reason is plain. The object is to stay alarm, and nothing therefore should be done to cause alarm. But the way to cause alarm is to refuse some one who has good security to offer… No advances indeed need be made by which the Bank will ultimately lose. The amount of bad business in commercial countries is an infinitesimally small fraction of the whole business… The great majority, the majority to be protected, are the ‘sound’ people, the people who have good security to offer. If it is known that the Bank of England is freely advancing on what in ordinary times is reckoned a good security — on what is then commonly pledged and easily convertible — the alarm of the solvent merchants and bankers will be stayed. But if securities, really good and usually convertible, are refused by the Bank, the alarm will not abate, the other loans made will fail in obtaining their end, and the panic will become worse and worse.
Plainly, Bagehot’s reasons for insisting on good collateral (“good banking securities”) are, first, to protect the central bank itself against losses, and, second, to make sure that only “sound” institutions benefit from the central bank’s protection.
The Fed’s first, extraordinary use of its last-resort lending power during the subprime crisis consisted of its decision, on March 15, 2008, to assist JPMorgan’s purchase of Bear Stearns by arranging for the purchase, through Maiden Lane, a limited liability company formed for the purpose, of $30 billion worth of Bear’s mortgage-related securities. Although Bernanke claims that those securities were “judged by the rating agencies to be investment-grade” (that is, rated BBB- or higher) (p. 219), their value when the Fed acquired them was anything but certain, which is why JPMorgan was determined to limit its exposure to losses on them to $1 billion — its share of the Maiden Lane purchase.
Moreover, thanks to Bloomberg’s having forced the Fed to disclose the contents of all three Maiden Lane portfolios, we now know that, by April 3, 2008, when Bernanke made the same “investment grade” claim in testifying before the Senate Banking Committee, some Maiden Lane securities had already been downgraded to below investment grade. Furthermore we know that Maiden Lane I’s portfolio was chock-full of toxic securities. Reacting to these disclosures, Ohio Senator Sherrod Brown, a member of the Senate Banking Committee, opined that “Either the Fed did not understand the distressed state of some of the assets that it was purchasing from banks and is only now discovering their true value, or it understood that it was buying weak assets and attempted to obscure that fact.”
That Bernanke should repeat the “investment grade” claim in his book, after the true nature of the Fed’s purchases has been disclosed, seems pretty surprising. So, for that matter, does his admission — offered in defense of the Fed’s subsequent decision to let Lehman go under — that the Fed “had no legal authority to overpay for bad assets.” If the Fed really lacked such authority, then its purchase of Bear’s assets wasn’t legal. If it did have permission to overpay, then the reason Bernanke gives for the Fed’s having let Lehman Brothers fail — a reason he only started referring to when questioned by the Financial Crisis Inquiry Commission (FCIC), almost two years after the rescue — is phony.
If saying that the the Fed’s Bear bailout was secured by “investment grade” collateral is a stretch, calling the assets in question “sound banking securities” or “commonly pledged” ones requires an impossible leap: even the Fed itself commonly accepts only AAA-rated CDOs and MBSs as collateral for its discount-window loans.
Yet perhaps the biggest problem with the Bear loan was, oddly enough, the fact that its providers did not consistently maintain that Bear was being rescued only because it had plenty of good collateral. Instead, in explaining the Bear rescue to the JEC, Bernanke argued that Bear had to be saved because its sudden failure “could have severely shaken confidence.” Tim Geithner made similar claims; and Hank Paulson, in justifying the rescue to the FCIC, actually scoffed at the suggestion that Bear might have been solvent at the time. “We were told Thursday night,” Paulson testified, “that Bear was going to file for bankruptcy Friday morning if we didn’t act. So how does a solvent company file for bankruptcy?” How indeed. In short, far from insisting that they were rescuing Bear because, though illiquid, it was fundamentally sound, those concerned made it clear that they were rescuing it because it was Too Big (or Too Systematically Important) to Fail.
Peruse the pages of Lombard Street all you like. You will find no equivalent to the contemporary notion that some firms are Too Big (or Systemically Important) to Fail. Nor will you discover any other exception to the rule that emergency lending ought to be confined to “sound institutions.” Suppose one recklessly-managed, gigantic firm to be in danger of going under, and of ruining 1000 sound firms in the process, unless the central bank intervenes. Lombard Street offers grounds for having the central bank lend generously to the sound 1000, but none at all for having it lend to the unsound one, however gigantic it may be.
Why not lend to unsound firms, or at least to gigantic (or Systematically Important) ones? Because, if you do, every gigantic firm will come to expect similar aid, and so will be inclined to take risks it would not take otherwise. (Notice how this isn’t the case if lending is confined to “sound” firms.) Of course the moral hazard problem had been present before the Bear rescue. But until then it was mainly confined to commercial banks, which had so far been the only recipients of the Fed’s largesse. Although the 13(3) loophole had been present since the 1930s, the Fed hadn’t dared to make much use of it even then, and made none at all for decades afterwards.
The Bear rescue convinced surviving investment banks that they’d suddenly been moved from beyond the school-ground fence to the head of the Systematically-Important class. As Michael Lewis put it not long after Bear was saved:
Investment banks now have even less pressure on them than they did before to control their risks. There’s a new feeling in the Wall Street air: The big firms are now too big to fail. Already we may have seen some of the pleasant effects of this financial order: the continued survival of Lehman. What happened to Bear Stearns might well already have happened to Lehman. Any firm that uses $1 of its capital to finance $31 of risky bets is at the mercy of public opinion… Throw its viability into doubt and the people who lent them the other $30 want their money back as soon as they can get it — unless they know that, if it comes to that, the Fed will make them whole. The viability of Lehman Brothers has been thrown into serious doubt, and yet Lehman Brothers lives, a tribute to the Fed’s new policy.
Lewis wrote in June 2008. And he was far from being alone in his sentiments. (See also Joe Nocera’s exit interview of Sheila Bair.) Lehman filed for bankruptcy in September 2008. These facts must be kept in mind in assessing Bernanke’s own assessment of the Fed’s action:
Some would say in hindsight that the moral hazard created by rescuing Bear reduced the urgency of firms like Lehman to raise capital or find buyers. … But in hindsight, I remain comfortable with our intervention. … Our intervention with Bear gave the financial system and the economy a nearly six-month respite, at a relatively modest cost (pp. 224-5; my emphasis).
What Bernanke calls “a six-month respite” is what some others might be inclined to call a six-month period during which failing firms, instead of either looking for more capital wherever they could get it, including from prospective purchasers, or planning for bankruptcy, could become more deeply insolvent.
Bernanke goes on to say that Lehman did, after all, raise some capital that summer, and that it ultimately suffered runs that proved that at last some of its creditors worried that it would not be rescued (ibid.). But these facts prove no more than that the market put the probability of a Fed rescue at something less than 100 percent. In fact they don’t even prove that much, for as Bernanke observes elsewhere (p. 252), Lehman, besides refusing to consider selling itself, acquired more capital only after being heavily pressured by both the Fed and the Treasury to do so; and Lehman first confronted a broad-based run on September 12, when it finally became evident that the Fed might not rescue it after all (p. 258). Moreover it’s clear from the Fed’s internal email communications, as disclosed by the FCIC, that the decision to not rescue Lehman was a last-minute one, and one that came as a surprise even to employees at the New York Fed, who reported in favor of a bailout.
Besides allowing an insolvent firm to go on placing risky bets with other people’s money, the expectation of Fed support makes both troubled firms themselves and their prospective buyers unwilling to clinch a deal until the pot has been sweetened. Had Bear been allowed to fail, or had Bernanke and company somehow been able to persuade larger investment banks that despite the Bear bailout their still greater Systematic Importance was no guarantee of Fed support, Lehman might have felt compelled to grab one of the lifelines thrown to it by CITIC securities and the Korean Development Bank, instead of waiting for the USS Fed to toss it a thicker one. Whether any of Lehman’s prospective, later purchasers were also holding out for such a deal isn’t clear, although Bernanke acknowledges that at one point both Bank of America and Barclay’s, having found Bear’s losses to be much bigger than had previously been assumed, “were looking for the government [i.e., the Fed] to put up $40-$50 billion in new capital” (p. 263), and that he worried at the time that the firms might be “overstating the numbers as a ploy to obtain a better deal.”
In the case of AIG’s rescue, it’s even harder to avoid seeing a moral-hazard-inspired game of chicken being played out between the lines of Bernanke’s account. “Every time we heard from the company and its potential private-sector rescuers,” Bernanke writes, “the amount of cash it needed [from the Fed] seemed to grow” (p. 275). When two firms finally made offers, AIG’s board “rejected them as inadequate,” and then made sure its representatives let Fed Board members know that “it would need Fed assistance to survive” (p. 276). A day later AIG executives “were hoping for a Federal Reserve loan collateralized by a grab bag of assets ranging from its airplane-leasing division to ski resorts” (p. 127). Would those executives have entertained such hopes if Bear hadn’t been rescued, or if the Fed had been prohibited by statute from rescuing potentially insolvent firms, or ones lacking “good banking securities” in the strict sense of the term?
The $85 billion loan that the Fed ended up making to AIG was in any case even less justifiable on Bagehotian grounds than its loan to Bear had been. As Bernanke acknowledges, the collateral for the AIG loan consisted, not of any sort of securities but of “the going concern value of specific businesses,” the value of AIG’s marketable securities having been “not nearly sufficient to collateralize…the loan it needed” (p. 281). Even granting Bernanke’s claim that such collateral met the Fed’s own legal requirements — a claim that is one of many reasons for entertaining serious doubts concerning Bernanke’s insistence that the Fed could not legally have rescued Lehman Brothers — it certainly couldn’t be said to consist of “good bank securities.” On the contrary, it was so bad that when the Fed was forced to disclose its Maiden Lane holdings, those of Maiden Lane II and III, which held AIG’s troubled assets, were worth 44 and 39 cents on the dollar, respectively.
Although the Fed’s defenders, Bernanke among them, are quick to note that all three Maiden Lane portfolios eventually recovered, so that the Fed (or rather taxpayers) bore no losses, the fact that they did doesn’t at all suffice to square the rescues in question with Bagehot’s well-considered advice. That advice simply doesn’t allow central banks to place risky bets on troubled firms. Bagehot never says that it’s OK for a central bank to set his advice aside provided that its gambles end up paying off.* The Fed’s apologists also fail to consider that, while the Fed itself may have come out of the deals it made smelling like roses, the same cannot be said for several of the private firms that took part in them.
And what about the moral hazard consequences of the AIG bailout? Time will tell, but at very least the bailout set the dangerous precedent of having the SIFI (“Systemically Important Financial Institution”) stamp applied to non-financial firms. And although Bernanke assures his readers that the bailout’s “tough” terms were such as would not “reward failure or…provide other companies with an incentive to take the types of risks that had brought AIG to the brink” (p. xiii), he fails to point out that the terms, though “tough” on AIG’s shareholders, let its creditors, including Goldman Sachs, go Scot-free, instead of insisting that they accept haircuts. The trouble is that, unless creditors bear some part of the risk of failure, they will chase after high non-risk-adjusted returns, even if that means depriving safer firms of credit.
The plain truth is that, despite his professed devotion to Bagehot, Ben Bernanke was never able to heed the principles laid down by that great authority on last-resort lending.** Nor is it hard to see why. When confronted by a failing SIFI, it generally takes more courage for a central banker to refuse aid than to grant it. After all, if the SIFI survives, the central banker can claim credit, whereas if it doesn’t he can at least claim to have “acted.” On the other hand, if the SIFI is left to fail, the costs are obvious and immediate, whereas the benefits are largely invisible and remote. Bad as it was, the drubbing Bernanke took for bailing out Bear and AIG was nothing compared to the horsewhipping he received, even from some people whose opinions he had reason to care about, after he let Lehman fold. The usual public choice logic applies. In any event, no one knows how to calculate the net present value of present and future financial losses. And who, in the midst of a crisis, would pay attention if someone managed to do it?
And that is why it makes little sense, after all, to blame Ben Bernanke for the Fed’s irresponsible bailouts. Apart from allowing Lehman Brothers to fail, he only did what just about any central banker would have done under the same circumstances. For among that tribe, the courage to act is one thing; the courage to refuse to rescue large, potentially insolvent firms is quite another. And that is why we need laws that make such rescues impossible.
*Bernanke himself appears to confuse loans paid in full with loans made to solvent institutions when he observes that “Nearly all discount window loans [are] to sound institutions with good collateral. Since its founding a century ago, the Fed has never lost a penny on a discount window loan” (p.149). Apparently he is unaware of, or has forgotten about, the House Banking Committee’s study of Fed discount window lending during the late 1980s and Anna Schwartz’s St. Louis Fed article on the same subject.
**The conclusions appears to hold, not just for the Fed’s more notorious rescues during the crisis, but also for its lending through the Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF), both of which lent on toxic and systematically overvalued collateral.
In the 15 months since the president unilaterally launched our latest war in the Middle East, he’s repeatedly pledged that he wouldn’t put U.S. “boots on the ground” in Syria. As he told congressional leaders on September 3, 2014, “the military plan that has been developed” is limited, and doesn’t require ground forces.
Alas, if you liked that plan, you can’t keep it. Earlier today, the Obama administration announced the deployment of U.S. Special Forces to Northern Syria to assist Kurdish troops in the fight against ISIS. U.S. forces will number “fewer than 50,” in an “advise and assist” capacity; they “do not have a combat mission,” according to White House press secretary Josh Earnest. Granted, when “advise and assist” missions look like this, it can be hard for us civilians to tell the difference.
Asked about the legal authorization for the deployment, Earnest insisted: “Congress in 2001 did give the executive branch the authority to take this action. There’s no debating that.”
It’s true that there hasn’t been anything resembling a genuine congressional debate over America’s war against ISIS. But the administration’s legal claim is eminently debatable. It’s based on the 2001 authorization for the use of military force, or AUMF, the Congress passed three days after 9/11, targeting those who “planned, authorized, [or] committed” the attacks (Al Qaeda) and those who “aided” or “harbored” them (the Taliban).
In 2013, Obama administration officials told the Washington Post that they were “increasingly concerned the law is being stretched to its legal breaking point.” That was before they’d stretched it still further, 15 months later, to justify war against ISIS, a group that’s been denounced and excommunicated by Al Qaeda and is engaged in open warfare with them. Headlines like “ISIS Beheads Leader of Al Qaeda Offshoot Nusra Front,” or “Petraeus: Use Al Qaeda Fighters to Beat ISIS” might give you cause to wonder–or even debate!–whether this is the same enemy Congress authorized President Bush to wage war against, back before Steve Jobs unveiled the first iPod.
In the Obama theory of constitutional war powers, Congress gets a vote, but it’s one Congress, one vote, one time. This is not how constitutional democracies are supposed to go to war. But it’s how we’ve drifted into a war that the Army chief of staff has said will last “10 to 20 years.” Sooner or later, we’ll have cause to regret the normalization of perpetual presidential war, but any congressional debate we get will occur only after the damage has already been done.
Hands On Originals, a t-shirt printing company in Kentucky, refused to print t-shirts promoting a gay-pride event, the Lexington Pride Festival. Its owners weren’t objecting to any customers’ sexual orientation; instead, they objected only to the ideological message conveyed by the shirts.
The Gay and Lesbian Services Organization nevertheless filed a complaint with the Lexington-Fayette Urban County Human Rights Commission under an antidiscrimination ordinance that bans public accommodations from discriminating against individuals based on sexual orientation. The Commission ruled against Hands On Originals, but the state district court reversed on free speech and free exercise grounds.
The case is now before the Kentucky Court of Appeals, where Cato filed an amicus brief, drafted by Prof. Eugene Volokh and UCLA’s First Amendment clinic. Our brief urges the court to uphold the right of printers to choose which speech they will help disseminate and which they won’t.
In Wooley v. Maynard (1977)—the “Live Free or Die” license-plate case—the Supreme Court held that people may not be required to display speech with which they disagree because the First Amendment protects the “individual freedom of mind.” Wooley’s logic applies equally to Hands On Originals’ right not to print messages with which they disagree, which is an even greater imposition than having to passively carry the state motto on your car’s tag.
Thanks to Prof. Volokh and his student, Ashley Phillips, for their work on the brief, and on this blogpost.
The European Union (EU) and its member states have had a difficult time dealing with the politics of genetically modified organisms (GMOs). Despite the fact that the European Food Safety Authority (EFSA) has determined numerous GMO products to be safe, only one currently is allowed to be planted. MON 810 corn (maize) resists insects, such as the European corn borer. Although this type of corn is widely grown around the world, it is planted on only 1.5 percent of the land area devoted to corn production in the EU. The main reason is a decision by the EU to allow individual member states to forbid the planting of crops that have been enhanced through genetic engineering. Member states now banning the planting of GMOs include Austria, France, Germany, Greece, Hungary, Italy, Luxembourg, and Poland.
Regardless of the EU’s reluctance to allow GMO crops to be grown, importation of GMO soybeans and soybean meal has been a commercial necessity. In 2014 the EU consumed the protein equivalent of 36 million metric tons of soybeans for livestock feeding. Roughly 97 percent of those soybeans were imported. The three largest soybean producing and exporting countries – the United States, Brazil, and Argentina – each devote more than 90 percent of their plantings to GM varieties. It simply isn’t possible to buy enough non-GMO soybeans in today’s world to meet the protein needs of the EU livestock sector.
Apparently it also isn’t possible for the European Commission to achieve agreement among member countries to authorize new GMOs for importation as human food or livestock feed. Since the regulations for considering GMO applications went into effect in 2003, a qualified majority of member states has never agreed to approve a new food or feed product. When the outcome among member states is “no opinion,” the decision on whether to allow a product containing GMOs to be imported reverts to the Commission. Perhaps with some reluctance, the Commission has approved the importation of around 50 genetically modified products.
Not pleased to be in a situation in which opponents of GMOs criticize it every time a new application gets approved, the European Commission proposed in April 2015 to pass the buck and allow individual member countries to ban the importation of GMO foods and feed ingredients that they don’t like. The EU Parliament, a popularly elected legislative body, voted on Oct. 28 to reject the proposal by a convincing 577-75 margin. Among the reasons for disapproval are that it would fracture the EU internal market, violate World Trade Organization rules, and impose huge costs on livestock producers.
It is gratifying to see legislators acting in support of sound science, economic integration, and the rules-based global trading system. It would be nice to think that the Parliament’s strong rejection of the proposal would mean the end of it. Not so fast, though. The Commission still is hoping for an affirmative decision by the European Council, which includes the heads of state of EU member countries. If the Council decides to approve it, the measure would go back to the Parliament to be considered once again.
Even though this particular proposal does not seem likely to be adopted, the question of how best to regulate GMOs in the EU is far from settled. In the United States, there has been a general consensus that approved GMOs should be allowed to be marketed, but debate continues on whether they should carry special labeling. The political process in the EU still is wrestling with the basic question of whether the government should prevent people from purchasing products that are recognized as safe, but are opposed by some members of society. A libertarian approach would be to ensure that people are free to exercise their rights to buy – or to refrain from buying – whatever they wish. The EU still has some distance to go to achieve that degree of individual liberty and consumer choice.
Perhaps in anticipation of Halloween, two components of corporate welfare have been doing their best impression of a Hollywood monster that refuses to die.
The Export-Import Bank (Ex-Im) seems poised to come back from the grave, and promises have already been made to reverse the minor cuts to the crop insurance subsidy program agreed to in this week’s budget deal. These cases give some insight into just how difficult it is to actually get rid of corporate welfare.
Cato has long criticized both corporate welfare and crony capitalism, which benefit the few, the powerful, and the politically connected at the expense of everyone else. These policies introduce distortions into the market and limit competition, all at taxpayer expense. Despite their many harmful effects, the nature of these programs, with concentrated benefits and dispersed costs makes it hard to root out corporate welfare from the budget. The groups and companies that benefit are highly motivated to make sure they continue, while ordinary people who all bear a smaller share of the cost are more focused on other things like the practical concerns of providing for their families. This can explain part of why it’s so hard to end any of the many programs that make up the web of corporate welfare.
Ex-Im provides financing and loan guarantees for foreign customers of certain U.S. companies. While proponents argue that Ex-Im is critical to exports and helps American businesses, the vast majority of these benefits flow to a handful of major corporations, and roughly 98 percent of U.S. exports do not get any kind of Ex-Im assistance at all. As Cato’s Dan Ikenson has shown, these subsidies also harm “competing U.S. firms in the same industry, who do not get Ex-Im backing, and U.S. firms in downstream industries, whose foreign competition is now benefiting from reduced capital costs courtesy of U.S. government subsidies.” Given these inefficiencies and distortions, opponents of Ex-Im cheered when the bank’s charter lapsed this summer, but unfortunately that was not the last chapter in this saga. Earlier this week, the House, in a discouraging instance of bipartisanship, voted to reopen Ex-Im by a 331-118 margin. While it still has to get past the Senate, a similar bill passed that chamber earlier this year, and the measure will likely be included in the coming highway bill. So after a prolonged battle to shut down this one small component of corporate welfare, the hard-fought victory for Ex-Im opponents will probably be short-lived.
Tucked into this week’s very disappointing budget deal was one minor positive aspect: modest cost savings from making changes to the subsidized crop insurance program. In this program, farmers can purchase insurance from approved private insurance companies, and the federal government reimburses these insurance companies for administrative and operating costs in addition to reinsuring their losses. The tweak in the budget deal wouldn’t even achieve savings by increasing the insurance premiums paid by farmers, but by merely lowering the rate of return for the insurance companies from 14.5 percent of premiums to 8.9 percent. It’s worth noting that the Congressional Budget Office estimated that this change would save about $3 billion through 2025, and that these savings would not really start to materialize until 2019. Perhaps unsurprisingly, Roll Call reports that “[f]arm-state lawmakers have been assured by leaders that a provision in the bipartisan budget deal that would trim the federal crop insurance subsidy program will be replaced down the road.” This modest change was years away from even taking effect and the savings were extremely modest over a decade, but there have already been promises to reverse them, citing the potential for “dramatic” consequences.
Sources: Author’s calculations using Office of Management and Budget, “Public Budget Database, Outlays,” https://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/outlays.xls and Office of Management and Budget, “The Appendix, Budget of the United States Government, Fiscal Year 2016,” https://www.whitehouse.gov/omb/budget/Appendix; Tad DeHaven, “Corporate Welfare in the Federal Budget,” Cato Institute Policy Analysis No. 703, July 25, 2012; Stephen Slivinski, “The Corporate Welfare State: How the Federal Government Subsidizes U.S. Businesses,” Cato Institute Policy Analysis No. 592, May 14, 2007.
The developments with Ex-Im and crop insurance subsidies are just the two most recent examples of why corporate welfare keeps coming back like a Hollywood monster, costing taxpayers and introducing economic distortions, year after year. Even so, opponents of corporate welfare need to continue to expose the flaws, costs and harmful effects of these programs, otherwise they will always be with us.
The Trans-Pacific Partnership negotiations have just concluded and the parties are about to begin a very long process of ratification and implementation. Once all of that is complete, the TPP will be ready and willing to accept new members. There’s a pretty long list of countries ready to join.
The president called the TPP America’s chance to “write the rules” instead of China. That’s an unfortunately confrontational way to sell international commercial cooperation. Certainly, the TPP is an effort to circumvent gridlocked negotiations at the World Trade Organization and establish new norms while lowering trade barriers. It’s not clear yet whether the proliferation and growth of megaregional agreements like the TPP will help or hinder the broader and more valuable goal of global trade liberalization.
In practice, having America “write the rules” mostly means (1) lower tariffs; (2) more rules on things like intellectual property, state-owned enterprises, and labor and environment protection; and (3) less pressure to eliminate America’s own protectionist policies like outrageous farm subsidies, shipping restrictions, and abusive antidumping laws.
But if the TPP is going to be a vehicle for exercising American influence over global economic governance, it will surely need to expand beyond its current 12 members.
Since the negotiations concluded a few weeks ago, half a dozen governments in the region have expressed or reiterated their interest in joining the TPP. These include Indonesia, South Korea, Colombia, Thailand, the Philippines, and Taiwan. The fact that so many countries are eager to join an agreement they haven’t seen and had no role in drafting says a lot about the politics of international trade.
Once the TPP text is released, we will have a better idea of what these countries will be required to do to gain entry to the agreement. Will they need unanimous approval from existing members? Will they be required to accept additional obligations beyond the current text? Will Congress and other legislatures have to ratify each accession? The answers to these questions could have a big impact on the future of the global trading system.
In the trade policy world, everyone is eagerly awaiting the release of the full text of the Trans Pacific Partnership (TPP) agreement, but trade news sources say this is still several weeks away. My colleague Bill Watson has done a nice job with the one chapter, on intellectual property, that is available in mostly final form through a leak, but for the rest of the text, it is hard to say too much at this point.
But if we can’t talk much about substance yet, what we can talk about is the politics of the TPP: What are its chances in Congress? The Obama administration has taken a somewhat creative approach to assembling a coalition from across the political spectrum in support of the TPP.
They have tried to appeal to free market conservatives by talking about how the TPP would involve “18,000 tax cuts,” in the form of lower tariffs on U.S. exports.
They have tried to bring in liberal support by calling it the “most progressive trade agreement in history.”
And some people have portrayed the TPP as having a security component, in order to bring security hawks on board.
But here’s a key question related to the first two: Can they bring in supporters without creating new opponents? For example, with regard to the TPP’s “progressive” nature, the administration says the TPP would do the following on labor protections: “Require laws on acceptable conditions of work related to minimum wages, hours of work, and occupational safety and health.” Focusing on the first one, what exactly would the TPP require with a minimum wage? If it requires that all TPP countries have a minimum wage – either set at a particular level, or just having one at all – some Republicans in Congress might object.
With trade agreements these days addressing so many aspects of social policy, assembling a package of provisions that Congress will support is a challenge. Putting aside the substance, which we will get to once the text is released, the politics of the TPP are going to be very interesting.
In the Republican debate last night, former Gov. Mike Huckabee of Arkansas criticized calls for Social Security reform, saying “people paid their money. They expect to have it,” and that the country needs to honor its promises to seniors. There are problems with this line of argument: the Social Security payroll taxes a person pays are not tied to the benefits they receive in a legal sense, and the ‘promises’ made by Social Security are, and always have been, subject to change.
Congress has had the authority to alter Social Security since its inception. Section 1104 of The Social Security Act of 1935 explicitly says: “The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress.”
Not only does Congress have the right to make changes, it has done so multiple times in the past. Sometimes these changes are smaller things, like a technical correction to the indexation formula, but there were also larger reforms that were part of attempts to address the programs solvency issues.
The Supreme Court revisited the issue of Social Security’s promises in Flemming v. Nestor, in which Nestor, who had paid into Social Security for 19 years and begun to receive benefits, was then deported for previous ties to the Communist Party. Nestor tried to appeal the termination of his benefits, citing his previous contributions, but the Supreme Court upheld it, saying:
To engraft upon the Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to ever changing conditions which it demands… It is apparent that the non-contractual interest of an employee covered by the [Social Security] Act cannot be soundly analogized to that of the holder of an annuity, whose right to benefits is bottomed on his contractual premium payments.
The other aspect Huckabee touches on is the link between the taxes paid in and the benefits a person ultimately receives, implying that a worker’s contributions are kept in some kind of silo to be paid out to them at a later date. As another Supreme Court case found, this is not true.
In Helvering v. Davis (1937)the Court held that Social Security was not a contributory insurance program in the sense that “[t]he proceeds of both the employee and employer taxes are to be paid into the Treasury like any other internal revenue generally, and are not earmarked in any way.” Despite how Huckabee and his fellow defenders of the status quo describe the program, the payroll tax payments a person pays into Social Security have no direct link to the benefits that they receive in a legal sense: they are subject to future changes made by Congress and dependent on the program having sufficient revenue.
Huckabee doesn’t need to familiarize himself with these decades-old Supreme Court cases or the Social Security Act to be able to understand the problems with his invocation of the program’s ‘promises’. Anyone, including Huckabee, can see this for themselves in the Social Security Statement that the Social Security Administration periodically sends to workers:
Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time.
The ‘promises’ with Social Security always came with an asterisk, and beneficiaries are not entitled to a certain amount because they have contributed payroll taxes. In the past the law has been altered to change the deal facing beneficiaries, and there will undoubtedly have to be more changes in the future if Social Security is to remain viable. If we maintain the status quo and do nothing, benefits will have to cut by 23 percent across the board when the combined trust fund is exhausted in 2034. There can be disagreements about the best way to reform Social Security, but when it is facing trillions in unfunded obligations and the certainty of drastic cuts in the future absent reform, doing nothing is not a feasible option.