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Today was a busy day for financial regulatory policy. In the morning, the Department of the Treasury released its long-awaited report on nonbank financials, fintech, and innovation. A few hours later, the Office of the Comptroller of the Currency announced that it will start taking applications for a special purpose charter for “fintech companies engaged in the business of banking.”

Over the eighteen months since President Trump signed an executive order outlining the core principles for financial regulation under his watch, the fintech sector has been gripped by policy uncertainty and the looming threat of regulation by enforcement. Today’s events bring much-needed clarity on the Trump administration’s outlook for financial innovation, and the likely way forward.

At 222 pages, the Treasury report is a mammoth document. However, in grappling with the chief ailments of the U.S. financial regulatory framework, the report starts a discussion that will hopefully lead to major revision of existing rules and regulatory approaches.

Three problems afflict the current edifice of the financial regulatory system. Firstly, it was largely designed at a time when most of the technologies that are changing financial services provision did not exist. Secondly, there is a great deal of fragmentation, both horizontal—with rulemaking, supervisory, and enforcement power dispersed across many federal agencies—and vertical—with competences distributed between states and the federal government. Thirdly, it is by design a precautionary system, focused on protecting consumers at all costs, often at the expense of beneficial innovation.

Comprehensively addressing these three problem areas will take more than a sympathetic attitude from the executive. However, the report helpfully points the way forward in seven areas.

1. Clarity about how financial providers talk to consumers

The rules governing communications between financial providers and their customers stem from the Fair Debt Collection Practices Act (FDCPA) and the Telephone Consumer Protection Act (TCPA), passed respectively in 1977 and 1991. Unsurprisingly, both laws fail to take account of the increasing reliance on text and email communication via smartphones—and the Federal Communications Commission has given a wide interpretation to statutory provisions, constraining providers’ ability to reach their customers using new media. The Treasury report finds that the reach of current regulations is overly broad, an assessment vindicated by recent court rulings. It recommends changes to the FDCPA and TCPA to make it easier for consumers to revoke consent to be contacted. It also calls for greater clarity about the ways in which providers can reach consumers and the information they can disclose over email and voicemail services.

2. Data access and use by fintech firms

More people are making use of technology platforms for budgeting, saving, investment, and debt management. Enabling fintech applications to gain access to one’s financial data can improve consumer welfare by making it easier and cheaper to refinance loans, manage bank accounts, and learn about suitable new financial products. But banks and other established financial firms are reluctant to give access to customer data to third parties—partly because it is a competitive threat but also because it can compromise the confidentiality of those data, for which banks could be found liable. The Treasury report calls for increased efforts to improve data aggregation. It favors private-sector action and standardization of applications to make data-sharing easier and more secure but doesn’t rule out federal standards.

3. Credit scoring

One of the key ways that financial innovation is improving consumer welfare is by helping to model risk and predict default in more accurate ways. This lowers the cost of credit and expands access to marginal borrowers. For instance, a recent Federal Reserve paper finds fintech credit scoring to lead to better default estimates and lower interest spreads than FICO scores. The Treasury recognizes the value of alternative data use for better credit scoring, but it is wary of potential discrimination. Growing empirical evidence, on the other hand, suggests that better outcomes can be achieved without undermining equal treatment laws.

4. Harmonizing or federalizing money transmitter and nonbank lender licensing

As Brian Knight from the Mercatus Center has discussed at length, a key weakness of existing financial regulation is its fragmentation across states. The Treasury is aware of the onerous licensing and compliance costs that such fragmentation imposes on providers, and its report encourages voluntary harmonization by states, via passporting rules. If states cannot achieve the requisite degree of equivalence, the Treasury advocates federal action. Given New York’s fierce opposition to any perceived dilution of its financial rules, it looks like federal preemption will come sooner or later. Federalization would foreclose healthy regulatory competition, but in light of the operating costs imposed by fragmentation, the trade-off may redound to the benefit of consumers.

5. Codifying valid-when-made for banks and nonbank lenders

Legal precedent for two hundred years has established that, if a loan extended by a national bank did not violate usury laws at the time or location of its issue, then it is valid at a subsequent time and location within the United States. More recent judicial decisions have expanded the application of this doctrine to nonbanks, but a recent case involving defaulted credit card debt questioned the principle, throwing interstate marketplace lending into disarray. The Treasury rightly calls on Congress to codify the valid-when-made doctrine. In fact, the House already passed a bill that does exactly that.

6. Rescind the BCFP’s payday rule

Nobody likes high-cost short-term credit, but the accumulated evidence—contrary to popular wisdom—shows that payday loans serve many customers much of the time—especially those with urgent need for funds and no access to alternatives. Despite this evidence, the Bureau of Consumer Financial Protection (BCFP) under its previous director sought to apply new rules on payday lenders that would have required them to verify the borrower’s ability repay. These checks would be inappropriate precisely because payday loans are a last-resort emergency product, meaning that some non-negligible proportion of borrowers will indeed end up not paying them back. That makes payday loans costly to extend, but it does not mean they do not help the typical borrower. The Treasury recommends that this draconian BCFP rule be rescinded. Instead, the emphasis should be on removing regulation to encourage a broader spectrum of lower-cost small-dollar products provided by banks and nonbanks alike.

7. Adopt regulatory sandboxes as a spur to innovation

Existing rules aiming to protect consumers may not pose a threat to established institutions, but they do raise barriers to entry for challenger firms, reducing competition. A pragmatic way to maintain existing protections—even though the case to do so is often dubious—while encouraging innovation is to allow for regulatory sandboxes: in which new firms can begin operations under regulatory supervision, but without being subject to the full corpus of regulation. Leading financial jurisdictions such as Britain and Singapore have implemented sandbox programs. The Treasury report calls for similar policies from U.S. regulators, and, if needed, congressional action to facilitate innovation and preempt state barriers. While the sandbox approach eschews the broader question of whether existing rules are appropriate, it almost surely will improve the environment for innovators.

The above is not a comprehensive discussion of the report, but a summary of its key proposals. The tenor of the Treasury’s recommendations is laudable and many of the specific reforms much-needed. However, perhaps the thorniest of issues goes unmentioned, namely, whether the sheer number of regulators and regulatory restrictions placed on financial services firms is making the financial services industry less dynamic and innovative than it could be. That is the question underlying present efforts, however modest, at regulatory relief for banks, nonbank lenders and new players such as cryptocurrency issuers and exchanges.

The tone of the Treasury’s report suggests an answer, but it remains to be seen whether executive and legislative action will measure up to the challenge.

[Cross-posted from Alt-M.org.]

Since the 2016 election Facebook has faced several problems, some related to the election, some not. In 2016 Russian agents bought ads on Facebook and posted messages related to the election. Facebook has been blamed for not preventing the Russians from doing this. Many people may believe the Russian efforts led to Donald Trump’s election. That view remains unproven and highly implausible.

Beset by other problems, Facebook seeks to avoid a replay of 2016 after the 2018 elections. Yesterday Facebook tried to take the offensive by removing 32 false pages and profiles from its platform; the pages had 16,000 to 18,000 followers, all connected to an upcoming event “No Unite the Right 2 – DC”.  

Facebook stated the pages engaged in “coordinated inauthentic behavior [which] is not allowed on Facebook because we don’t want people or organizations creating networks of accounts to mislead others about who they are, or what they’re doing.” Facebook does not allow anonymity on its platform at least in the United States. They appear to be enforcing their community standards.

Most people might not worry too much about what Facebook did. The speech at issue was said to be divisive disinformation supported by a traditional adversary of the United States. Who worries about the speech of hostile foreigners? Still a reasonable person might be concerned for other reasons.

The source of the Facebook pages, not the company’s policies, seemed of most interest in Washington. Sen. Mark Warner said that “the Kremlin” had exploited Facebook “to sow division and spread disinformation.” Warner’s confidence seems unwarranted. The Washington Post reported that Facebook “couldn’t tie the activity to Russia.” Facebook’s chief security officer called the Russian link “interesting but not determinant.” The company did say “the profiles shared a pattern of behavior with the [2016] Russian disinformation campaign.”

The takedown also affected some Americans. Ars Technica said the event on the removed page “attracted a lot of organic support, including the recruitment of legitimate Page admins to join and advertise the effort.” Perhaps Russian operatives have no protections for their speech. But the Americans affected by the takedown do or at least would have had such protections if the government had ordered Facebook to take down the page in question.

But the source of the speech was not the only problem. As noted earlier, Sen. Warner thought two kinds of speech deserved suppression: divisive speech and disinformation. But, as a member of Congress, he cannot act on that belief. Courts almost always prevent public officials from discriminating against speech based on its content. For example, the First Amendment protects “abusive invective” related to “race, color, creed, religion or gender.” The Supreme Court has also said false statements are not an exception to the First Amendment.

In contrast, Facebook can remove speech from their private forum. The First Amendment does not govern their actions. But Facebook’s freedom in this regard might one day threaten everyone else’s.

Here’s how. Facebook might have removed the page for purely business reasons. Or they have acted more or less as agents of the federal government. The New York Times reported that Sen. Warner “has exerted intense pressure on the social media companies.” His colleague Sen. Diane Feinstein told social media companies last year “You’ve created these platforms, and now they are being misused, and you have to be the ones to do something about it. Or we will.” Free speech would fare poorly if social media were both free of constitutional constraints and effectively under the thumb of public officials.

Facebook officials may see business reasons to resist Russian efforts on their platform, a goal served by enforcing existing rules. At the same time Facebook wishes to be seen by Congress as responsive to congressional bullying. But being too responsive would only encourage more threats later, and in general, giving elected officials even partial control over your business is not a good idea. So Facebook is both careful about Russian influence and responsive to congressional concerns, a good citizen rather than an enthusiastic conscript in defense of the nation.

Facebook’s efforts may yet keep Congress at a safe distance. But members of Congress may be learning they can get they want from the tech companies. In the future federal officials free of constitutional constraints may indirectly but effectively decide the meaning of “divisive speech” and “disinformation” on Facebook and elsewhere. Their definitions would be unlikely to affect only the speech of America’s adversaries.

This is getting old. I find myself correcting false claims regarding the scientific evidence on private school choice all too often. For example, using only one correlational study that did not detect any statistically significant effects, Valerie Strauss recently concluded that “private schools aren’t better at educating kids than public schools” in the Washington Post. As I have pointed out many times before, the preponderance of the causal evidence indicates that school voucher programs in the U.S. improve student test scores and more important outcomes such as high school graduation, college enrollment, and tolerance of others.

But science shouldn’t determine whether families are allowed to pick the schools they want for their kids.

Just imagine if we used the scientific evidence to decide whether people should be residentially assigned to their nearest government grocery store. What if we randomly assigned thousands of families to government-run grocery stores and found that, on average, those families consumed fewer calories than the families with the freedom to shop for groceries on their own? Such an empirical finding certainly wouldn’t mean that the government should compel all individual families to accept the grocery basket deemed ideal by the experts. After all, a crude metric such as caloric intake can only tell us so much about how well an individual’s nutritional needs are being met. And, of course, some people may simply value eating appetizing foods more than the benefits of having a lower BMI. It would be a disgraceful limitation of freedom to compel people to consume—and pay for—a basket of groceries they did not want.

Yet this is precisely the type argument often used against freedom in education—that parents are somehow unfit to choose schools for their own kids.

But it’s worse than that with education because most of the random-assignment evaluations find that students are better off when their parents are allowed to choose their schools. And even though the most rigorous scientific evidence available says families should have school choice, less than one percent of the school-aged population in the U.S. uses a private school choice program.

But why shouldn’t society use science to force other people to do the “right” things?

Of course, science can tell us a lot about the world around us. And random assignment (the “gold standard” of scientific research) is the best thing we have available to determine how certain treatments (or policies) affect groups of people. However, even the best methodology has important flaws that do not allow researchers to give central planners enough information to make good decisions for individual families.

For example, since the internal validity of experimental design relies on something called the law of large numbers, the methodology only allows researchers to determine the average effects of policies for large groups of people. In other words, even the best scientific methodology that exists cannot determine the effect of policies on specific individuals. And then there is the external validity problem—even if a school choice program is found to have large positive (or negative) effects on one group of students, on average, it is unlikely that the effects will be exactly the same for the other cohorts of students or in different settings. Similarly, the effectiveness of school choice programs—and the supply of private schools—can change over time.

And education technocrats frequently use faulty measures of success—standardized test scores—because it is extremely difficult for researchers to get their hands on more important long-term outcomes such as earnings, crime, and character skills. The main problem is that effects on math and reading test scores often do not predict effects on more important long-term outcomes. For instance, a recent American Enterprise Institute review of the evidence found that 61 percent of school choice programs’ effects on math test scores—and 50 percent of effects on reading test scores—did not predict effects on high school graduation. And at least 11 other studies have found divergences between private schools’ effects on test scores and their effects on more important long-term outcomes. For example, a peer-reviewed evaluation found that private school vouchers in Ohio had no effect on test scores but increased students’ charitable donations by 23 percent. In other words, focusing too much on standardized test scores could compromise the character skills necessary for true lifelong success.

And that’s just the tip of the iceberg. Many evaluations do not use random assignment—and the problems only get much worse when weaker empirical methods are used. Put simply, central planners face a severe knowledge problem with education today—just as central planners faced severe knowledge problems with five-year plans in the Soviet Union.

The fact is that families have more information about what their individual children need than education bureaucrats and scientists sitting in offices—hundreds of miles away. Families are also more interested in their own children’s lifelong success than anyone else.

The strongest scientific evidence we have on the subject suggests that private school choice works. But that really shouldn’t even matter. Just as people have the right to pick their own groceries, people should have the right to pick the schools that they believe will work best for their own kids. And just as government officials cannot force families to eat at particular restaurants, government officials shouldn’t be able to force families to send their kids to failing government schools.

Late yesterday, U.S. District Court Judge Robert Lasnik issued a temporary restraining order (TRO) blocking the release of design files for 3D-printed guns. The order comes in response to a lawsuit filed by a number of state attorneys general who claim that the Trump administration acted unlawfully in reaching a settlement in a lawsuit brought by Defense Distributed, a company that produces digital blueprints for 3D-printed guns, and the Second Amendment Foundation. Judge Lasnik found that states were likely to suffer irreparable harm—the standard for a TRO—if the digital blueprints became distributable via a website, and he felt that the situation was such an emergency that the order was issued within a day of when the suit was filed.

This is a deeply silly order. People have been making guns out of various objects for centuries. Watch this video of someone making a shotgun out of two pieces of commonly available tubing.

Zip guns like those have been used for centuries. They’re easy to make and easy to learn how to make. And, as long as you follow certain guidelines (such as not making a machine gun), such guns are perfectly legal to make. As the ATF website says: “No, a license is not required to make a firearm solely for personal use.”

Moreover, distributing plans for zip guns is a form of speech protected by the First Amendment, as it should be. Here’s a website telling you how to make one, and here’s a YouTube video telling you how to make one in less than two minutes. Judge Lasnik’s TRO is the equivalent of shutting down those websites and videos because telling people how to make zip guns creates an “irreparable harm.”

3D-printed guns are little better than those zip guns. The Libertor is a one-shot pistol that, if it works, fires a low-powered bullet with an effective range of maybe 20 feet. More often, it might just explode in your hand. As one commentator writes,

The Liberator’s bullet emerges going very slowly and wobbling or tumbling due to lack of spin. It might go almost anywhere, though not very far, and is unlikely to do much damage to anything it manages to hit. It’s a bit better than holding up a cartridge in a pair of pliers and banging the cap with a centrepunch or similar, but not much.

The Songbird is another design that works slightly better, but still wouldn’t be your first choice for doing anything except demonstrating to your friends that you built a gun that doesn’t blow up in your hand.

These guns are little better than a musket or a muzzle-loading flintlock pistol, which anyone can purchase without a background check. Yes, that’s right, criminals all over the country can purchase something like this replica English Civil War cavalry pistol and wreak havoc. Sure, they’ll need to get some black powder, some wadding, and some musket balls, but those are widely available, especially in the internet age. Or, if they want more than one shot, they can purchase this 1860 model Colt revolver replica, also without a background check, which would certainly be good enough to rob a store. So why aren’t people constantly robbing stores with the guns of Jesse James or Captain Jack Sparrow? Because it would be stupid and more expensive than purchasing this professionally manufactured Hi-Point 916 for $149.00. And if someone is prohibited from purchasing a gun from a licensed dealer, perhaps because they’re a convicted felon, they can acquire a gun in the myriad ways criminals acquire guns. No street-level gun dealer is waiting for the TRO to be lifted so he can start flooding the streets with in-demand single-shot plastic pistols. The concept is too silly to contemplate.

The idea that allowing websites to distribute digital blueprints for 3D-printed guns creates “irreparable harm” to the states is as silly as saying allowing people to distribute plans for zip guns does “irreparable harm.” The fear created by the phrase “3D-printed guns” should not be allowed to override common sense.

The usual narrative is that Democrats support consumer protections and Republicans oppose them. Today’s short-term plans final rule flips that narrative: Republicans are expanding consumer protections, and Democrats are opposing them.

Today’s rule reverses a 2016 Obama rule. The Obama rule reduced consumer protections in short-term plans by exposing sick patients to medical underwriting. Before that rule, consumers could purchase short-term plans that lasted 12 months. If they developed a serious illness, their plan could cover them until the next ObamaCare open enrollment period, when they could purchase coverage without medical underwriting. The Obama rule restricted short-term plans to 3 months. It prohibited “renewal guarantees” that protect enrollees who fall ill from medical underwriting when they purchased a new short-term plan. As a result, the Obama rule left short-term plan enrollees who got sick with no coverage for up to 9 months: those who purchased a plan in January, and developed a serious illness in February, would lose their coverage at the end of March, and have no coverage until the following January. (Source: NAIC) This was by design: the Obama administration wanted to expose sick people in short-term plans to medical underwriting and lost coverage as a way of forcing consumers to buy ObamaCare coverage instead. That’s at least a little messed up.

Today’s rule allows short-term plans to last 12 months and offer renewal guarantees. It therefore allows short-term plans to protect the sick from medical underwriting for an additional 9 months—indeed, “issuers may offer coverage under a short-term, limited-duration insurance policy for up to a total of 36 months, without any medical underwriting or experience rating beyond that completed upon the initial sale of the policy”—and allows renewal guarantees to protect them from medical underwriting indefinitely. Protecting the sick from medical underwriting has long been a goal of Congress.

So, to recap, Republicans are expanding consumer protections, and Democrats are opposing an expansion of consumer protections.

Weird, isn’t it?

President Trump tweeted this morning that, “One of the reasons we need Great Border Security is that Mexico’s murder rate in 2017 increased by 27% to 31,174 people killed, a record! The Democrats want Open Borders. I want Maximum Border Security and respect for ICE and our great Law Enforcement Professionals!”  He tweeted this because he’s spent the last few days stating that he would shut down the government if Congress did not adopt his immigration proposed reforms in the upcoming budget debate, especially the funding for the construction of a border wall.

Besides the political motivation for his tweet, President Trump seems to have assumed that crime in Mexico bleeds north into the United States, so more border security is required to prevent that from happening as murder rates begin to rise again in Mexico.  Although illegal immigrant incarceration rates are lower than they are for natives, illegal immigrant conviction rates in the border state of Texas are lower for almost every crime including homicide, and the vast majority of evidence indicates that illegal and legal immigrants are less crime-prone than natives, the President’s specific claim that murder rates spread from Mexico to the United States is different from most of the existing peer-reviewed literature. 

My colleague Andrew Forrester and I ran some simple regressions to test whether higher homicide rates in Mexican states that border the United States spread northward to U.S. states on the other side of the border.  It doesn’t make much sense to compare Mexican crime in the Yucatan Peninsula with that in Maine but, if President Trump’s theory is correct, then we should expect to see it cross from Baja California to California, for instance.  Homicide data for the Mexican border states come from the Mexican National Institute of Statistics and Geography.  American homicide data come from the Uniform Crime Reporting statistics at the FBI (files here).  Homicide rates in states in both countries are per 100,000 state residents which allows an apples-to-apples comparison.  We used data from 1997 through 2016 but were not able to include 2017 as U.S. crime data is unavailable for the American states although it is available for the Mexican states.  We decided to look exclusively at U.S. and Mexican border states because those are where we would expect crime to bleed over if such a thing happened. 

Figure 1 shows a negative relationship between homicide rates in U.S. border states and Mexican border states with a negative correlation coefficient of -0.46.  The coefficient is nearly identical when Mexican homicide rates in the previous year are compared to American homicide rates in the following year.  Although we did not include other controls, there is a negative relationship between homicides on the American side and the Mexican side.  In other words, when Mexican homicide rates go up then American rates tend to go down and vice versa.     

Figure 1

Homicide Rates in U.S. and Mexican Border States, 1997-2016

Homicide Rates in U.S. and Mexican Border States

Sources: UCR and NISG.

Note: Rates are per 100,000 residents in each state.

Figure 2 shows the same data but with years on the X-axis.  Mexican border state homicide rates vary considerably over time, especially when that government decided to try to crack down on drug cartels, but U.S. border state homicide rates trended slowly downward over the entire time.  There is a negative relationship between Mexican homicide rates and homicide rates in U.S. border states. 

Figure 2

Homicide Rates in U.S. and Mexican Border States, 1997-2016

Homicide Rates in U.S. and Mexican Border States

Sources: UCR and NISG.

Note: Rates are per 100,000 residents in each state.

Our figures and regressions above might not be capturing the whole picture.  Perhaps crime travels from Mexican border states and goes directly into the U.S. state that it is bordering.  That could be the source of President Trump’s worry.  We tested that in Figures 3-6 where we looked at how homicide rates in Mexican states contiguous to U.S. states are correlated with homicide rates there. 

Figure 3 shows homicide rates in the Mexican state of Baja California and in the American state of California.  There is a negative correlation coefficient of -0.66 between homicide rates in Baja California and in California, meaning that homicide rates move in the opposite directions in these two states.    

Figure 3

Homicide Rates in California and Baja California, 1997-2016

Homicide Rates in California and Baja California

Sources: UCR and NISG.

Note: Rates are per 100,000 residents in each state.

Figure 4 compares homicide rates in Arizona with those in Baja California and Sonora.  Homicide rates between Baja California and Arizona have a correlation coefficient of -0.69, meaning that homicide rates in Baja California and Arizona generally move in opposite directions.  Homicide rates in Arizona and Sonora have a correlation coefficient of +0.20, which means that they somewhat move in the same direction. 

It’s important to point out that the Sonoran homicide rate moves in roughly the same direction as Arizona’s homicide rate because Sonora’s rate mostly declines over the entire period and varies little by year just as Arizona’s rate does.  The Sonoran homicide rate will most closely track homicide rates in other American states for that reason but that does not show that Mexican murderers are crossing the border because Sonora is not as affected by the violent homicide swings that seem to dominate homicide rates in other Mexican states.  The Sonoran homicide rate comoves with Arizona’s homicide rate since they are both less volatile over time.    

Figure 4

Homicide Rates in Arizona, Baja California, and Sonora, 1997-2016

Homicide Rates in California and Baja California

Sources: UCR and NISG.

Note: Rates are per 100,000 residents in each state.

Figure 5 shows that homicide rates in New Mexico are positively correlated with those in Sonora at Chihuahua with coefficients of +0.40 and +0.05, respectively.  New Mexico’s homicide rate is more erratic and has a higher standard deviation than the other American states. 

 

Figure 5

Homicide Rates in New Mexico, Chihuahua, and Sonora, 1997-2016

Homicide Rates in New Mexico, Chihuahua, and Sonora

Sources: UCR and NISG.

Note: Rates are per 100,000 residents in each state.

Homicide rates in Texas are negatively correlated with homicide rates in the Mexican states of Coahuila, Nuevo Leon, and Tamaulipas with correlation coefficients of -0.79, -0.79, and -0.36, respectively.     

Figure 6

Homicide Rates in Texas, Coahuila, Nuevo Leon, and Tamaulipas, 1997-2016

Homicide Rates in Texas, Coahuila, Nuevo Leon, and Tamaulipas

Sources: UCR and NISG.

Note: Rates are per 100,000 residents in each state.

Correlation is not causation, especially in these simple regressions, but it would be very difficult to show that Mexican homicide rates are driving or at least influencing those in U.S. border states without at least finding a positive correlation.  The p-values in all of the above figures are all so high that the correlations are statistically insignificant in every case.  Researchers should dig into this data further to tease out more precise estimates or effects, but they are not significant or interesting enough for us to spend more time on them.  There are, of course, individual circumstances of Mexican criminals committing crimes in American states but that does not tell us how common those events are or whether President Trump’s proposed solutions would have any impact.  If the past events are any indication of the future, our work above allows us to confidently say that there is little reason to worry that homicide rates in Mexican border states will influence homicide rates in U.S. border states.  Whatever potential justifications there are for an expensive border wall, preventing the spread of homicide northward shouldn’t be one of them.      

Special thanks to Andrew Forrester for his help in writing this piece.      

Although many hailed last week’s “trade agreement” between President Trump and European Commission President Jean-Claude Juncker as an important achievement, it included no firm commitments to reduce tariffs, non-tariff barriers, or subsidies—or to do anything for that matter. The only agreement of substance was that new tariffs would not be imposed, while Washington and Brussels negotiated longer-term solutions to problems both real and imagined.

Those hungering for some good trade news might call that progress, but the only new tariffs that were under consideration (outside the exclusive domain of the president’s head) were those related to the Commerce Department’s investigation into the national security implications of automobile and auto parts imports. Of course, that investigation is still proceeding and there’s no reason to think Trump won’t leverage the threat of imposing auto tariffs to bend the outcome of those EU negotiations in his favor.

So what does Trump want? Trump seems committed to prosecuting a trade war with China and he expects the EU to have his back in that fight. Trump’s tariffs on $34 billion of Chinese products are scheduled to expand to $50 billion in early August and potentially to $250 billion in September. In a recent CNBC interview, Trump even threatened to subject all Chinese goods—more than $500 billion worth of imports in 2017—to additional tariffs.

For the first $34 billion, China has retaliated in kind, targeting mostly agricultural, aquaculture, and meat products. Beijing has pledged to go tit-for-tat throughout, even though its retaliation would have to take other forms—such as penalizing U.S. multinationals operating in China—because annual U.S. exports to China are in the neighborhood of only $130 billion.

The only real factor constraining Trump’s trade war is the potential that workers in red states will abandon the cause and turn on him. But so far, even as domestic production and employment are threatened as a consequence of the tariffs and the retaliation, Trump’s base still seems to be supporting his unorthodox, zero-sum approach to trade. Last month, a worker at Wisconsin’s Harley-Davidson facility, which will be downsizing as the company shifts production to Europe as a result of the EU’s retaliatory tariffs, said of Trump: “He wouldn’t do it unless it needed to be done, he’s a very smart businessman.” That worker and many others agree that the United States should be throwing its weight around to obtain a larger slice of the pie—even if that process ends up reducing the overall size of the pie.

In a effort to fortify that support, last week the administration authorized $12 billion of emergency relief for U.S. farmers caught in China’s retaliatory fire. Plans for financial relief for other industries similarly imperiled by retaliation are likely in the works and Trump expects the EU to do its part by picking up the slack and purchasing more U.S. soya, natural gas, and other commodities and manufactures previously destined for China. 

That may seem presumptuous, given that Trump has hit Europe with steel and aluminum tariffs, threatens her with auto tariffs, and called Europe a foe on the eve of his Helsinki meeting with Putin. Why would the EU oblige? That would seem to only encourage more of Trump’s passive-aggressive behavior.

Well, first, the EU wants to avoid the auto tariffs, which threaten the global auto market and, second, it shares many of the same concerns about China’s trade practices. But there’s only so much Europe can do to absorb excess U.S. supply. Will Trump insist that Germany cancel its gas contracts with Russia?  That would be an interesting twist. Will it be enough? Or will Trump deem the EU ungrateful and kill the auto trade?

The best we can hope for, I think, is that Trump comes to realize that if he wants to apply effective pressure on Beijing to abandon its most objectionable policies and to open its markets without onerous conditions, he will need the support—not the ire—of the governments of the EU, Japan, Korea, Canada, and Mexico to compel China to play by the rules. That means ditching the steel and aluminum tariffs and making nice. Then, maybe Trump will recommit the United States to abiding by those rules, too.

 

 

Concerned with how trade is commonly discussed, Greg Mankiw recently issued a plea to journalists to halt the use of subjective terms to describe trade flows. Rather than words such as “deteriorated” or “improved,” the Harvard economics professor (and noted textbook author) proposes that writers employ more objective language such as “the trade balance moved towards surplus.”

Mankiw’s plea is fine as far as it goes, but it probably doesn’t go far enough. The problem in the way trade is discussed lies not only in the descriptions applied, but the nouns themselves.

To speak of trade surpluses or deficits is utterly nonsensical, or at the very least a corruption of the term “trade” that incorrectly uses it as a synonym for “exports.” Trade, however, comprises both selling and buying, both exports and imports. The amount of trade between two countries (or any other group of entities) is the sum of their exports and imports. Given that both sides engage in the same amount of bilateral trade—that is to say, the same total of exporting and importing—a trade deficit is a mythical beast and logical impossibility. Perhaps we can speak of net exports or net imports, or export deficits and import surpluses as well as their reverse, but “trade deficit” should be regarded as a term devoid of real meaning.

Talk of a trade balance either being in surplus or deficit is problematic for similar reasons. Occasionally, one may encounter the descriptor “positive” applied to the trade balance if exports exceed imports and “negative” if the opposite occurs. But—as with trade deficits and surpluses—this is completely arbitrary. It makes no more sense to say this than to characterize a surplus of imports as positive or exports exceeding imports as negative.

This is no exercise in pedanticism. Precision of language is important. Terms matter, and the way in which trade is discussed influences how it is perceived. One can’t help but wonder how many people have an irrational fear of imports because they are said to contribute to a “trade deficit” or a “negative trade balance”—terms laden with unfavorable connotations. It’s not difficult to imagine that U.S. trade policy would be on a very different trajectory if President Trump spent his formative years in a world that did not speak of trade deficits and instead used more exact language and terms.

It may be too late for Trump, but a change in terminology could go a long way toward improving the conversation around trade and clearing the path for better policy.

Former White House national security official and Hillsdale College lecturer Michael Anton wrote an op-ed recently in the Washington Post where he used falsified quotes, poor legal reasoning, and displayed ignorance of the history and debates surrounding the 14th amendment to argue that President Trump should unilaterally end birthright citizenship (here’s Anton’s poor response to the devastating criticisms). 

Few commentators discussed what the actual effects of removing birthright citizenship would be and instead focused on the comparatively unimportant legal questions.  As an exception, my piece for the American Conservative argued that such a move would diminish immigrant assimilation in the United States.  However, I neglected to mention any of the social science that backed up my assertion in the American Conservative.  Below is a short summary of the relevant literature of the evidence that birthright citizenship helps immigrant assimilation.   

There are more assertions that birthright citizenship helps immigrant assimilation and integration than there are individual research papers testing the claim.  The major measures of assimilation or integration, both internationally and domestically, consider citizenship important.  The National Academies of Sciences (NAS) mammoth literature survey on the integration and assimilation of immigrants in the United States mentions birthright citizenship but never cites research backing up assimilations claims.  “Birthright citizenship is one of the most powerful mechanisms of formal political and civic inclusion in the United States,” the report says without any supporting evidence.  Later, the authors state, “Birthright citizenship is one of the most powerful mechanisms of formal political and civic inclusion in the United States; without it, the citizenship status of 37.1 million second-generation Americans living in the country (about 12% of the country’s population), and perhaps many millions more in the third and higher generations, would be up for debate.”  Again, the report does not provide any support for how powerful a mechanism for assimilation birthright citizenship is except to show that many people born here would not be citizens. 

Perhaps the NAS report doesn’t report on how citizenship affects assimilation and integration because the United States has had birthright citizenship for a long time.  Because of that continuity of policy, there is no experiment to run in the United States to test the importance of birthright citizenship for assimilation.  However, there are three suggestive pieces or strands of literature in the American context.  The first is Immigrants Raising Citizens where the author, Hirokazu Yoshikawa, writes that citizenship confers enormous benefits on the children of immigrants but the non-citizen status of their parents limits their ability to help them succeed. 

The second piece is the academic literature (see ft. 9) that shows that earning legal immigration status through an amnesty or DACA, even if it results in a status less than citizenship, confers enormous assimilative and economic benefits on the beneficiaries.  DACA and amnesties are better experiments to test the importance of citizenship or legal status by itself rather than normal naturalization because studies of the former policies remove the endogeneity concern while studies of the latter variety are plagued by it.  That’s a concern because people who choose to naturalize are probably different than those choosing not to, and those differences probably explain assimilative or economic outcomes better than the actual grant of citizenship.

The third piece, a book chapter by Irene Bloemraad, has a section based on interviews with many U.S.-born children of immigrants and what they think it means to be an American.  A common answer is that being born in the United States makes them an American.  One respondent said “we are all 100 percent Americans, we were born here. No matter what people say, we are Americans.”   Another telling exchange went like this:

One Vietnamese American teen’s response was typical.  Asked why he thinks of himself as America, he seemed a bit puzzled and said, “Because I was born here.”  This sort of response – repeated among a fair number of the teens – did not involve discussion of civic principles of cultural habits.  U.S. birth was enough or this teen to feel like he was American.

The third sentence of that quote may worry some folks concerned about the assimilation of the children of immigrants, but I doubt almost any other American-born teen would have answered differently.  Compared to Real Americans and not to the Imagined Americans of nationalist lore, birthright citizenship appeared to have helped here. 

However, the United States is not a great place to study the effects of birthright citizenship because we have not had a shift or reinterpretation in those rules in over a century.  Some countries like Ireland, the Dominican Republic, and Germany, have recently changed their citizenship laws to restrict birthright citizenship, also known as jus soli, and provide a quasi-natural experiment to study these effects

Germany provides the best opportunity to study the effects of birthright citizenship on assimilation.  The German Citizenship and Nationality Law of 1913 only granted citizenship to those who had at least one parent who was a German citizen at the time of the child’s birth.  In 1999, the German parliament amended that law to create a birthright citizenship component for children born on January 1, 2000, or after if at least one parent had been ordinarily resident in the country for at least eight years.  The law also created a transition period for many children born from 1990 through 2000 to naturalize if they met the requirements of the new law. 

This change in German citizenship law prompted a flood of research on how the new law affected immigrant assimilation in Germany.  Economists Ciro Avitabile, Irma Clots-Figuera, and Paolo Masella looked at how the new German law affected parental integration in a peer-reviewed paper published in the prestigious Journal of Law and Economics.  Their paper used responses from the German Social Economic Panel Survey to see how immigrants whose children were affected by the new citizenship law changed their behavior relative to those unaffected by the change in the law.  It focused on measurements of interactions with Germans (visiting or being visited by a German in a social situation), speaking German, and reading German newspapers.  On all three metrics, the immigrant parents of children who could naturalize became more integrated. 

The effects were small but noticeable.  The percentage of immigrant parents who had interactions with Germans rose from 71 percent prior to the reform to 77 percent afterwards, spoken German ability rose from 65 percent prior to the reform to 69 percent afterwards, and reading of German newspapers increased from 2.6 to 2.9 on a five-point scale (1 is home country papers only and 5 is German papers only).  Importantly, the measure of speaking German doesn’t control for fluency.  They also found that the outcomes are larger for immigrants who came from a country that speaks an Indo-European language.  Importantly, Turkish is not an Indo-European language.  For those from a non-Indo-European language group, the reform had no effect on language but it increased their interactions with Germans to the same degree as for the Indo-European language users.  

Taking a wider view of the impact of this law in Germany, Ciro Avitabile, Irma Clots-Figuera, and Paolo Masella, the same economists mentioned above, published a peer-reviewed paper in the American Economic Journal: Applied Economics that looked at how child citizenship laws affected fertility decisions amongst immigrants.  Fertility is influenced by culture, so many social scientists and economists think it is an important indicator of immigrant assimilation.  Consistent with Gary Becker’s “quality-quantity” model of fertility, they found birthright citizenship reduced immigrant fertility and improved their health by reducing obesity and the social-emotional outcomes of the children affected.  Again, the effects are small but citizenship reform moved immigrants closer toward German fertility and health norms.

Gathman, Keller, and Monscheuer also looked at fertility and family structure.  They found that within 7.2 years of eligibility for citizenship, the immigrant-native fertility gap fell by 20 percent by raising the age of first births to immigrant mothers and reducing the likelihood of them having children.  The citizenship reform also narrowed the marriage gap between German and immigrant women by 45 percent and German and immigrant men by 50 percent.  Immigrant women were also more likely to marry men who were not from their own country of origin after the reform but the effect was small.

Felfe, Rainer, and Saurer found that immigrant parents enroll their children in preschool at a higher rate after the citizenship reform, closing the gap with native Germans.  They also enrolled them earlier in primary school and pushed their children into the university track at higher relative rates.  Further, reported “attention deficits” and “emotional problems” for the children of immigrants also decreased in schools relative to natives while there was no effect on reported “social problems,” “German language proficiency,” or “school readiness.”  Another working paper by Felfe, Kocher, Rainer, and Siedler found that the educational achievement gap between young immigrant men and their native peers nearly closes due to the reform.

The granting of citizenship to immigrant children also reduces return migration, increases the rate of mothers stay at home with their children among the parents whose children were affected, and reduces or almost closes the trust gap between immigrant children and native children in behavioral experiments – virtually eliminating in-group favoritism for immigrant boys.  

The relatively few cases of citizenship laws changing in countries with large numbers of immigrants limit the opportunity to study how immigrants and their children are affected by birthright citizenship.  The United States has not changed its policy on birthright citizenship in over a century so any attempt to study the impact of jus soli here would be constrained to cross-country comparisons.  However, legal changes in Germany provided a quasi-natural experiment with the result that birthright citizenship slightly improves immigrant assimilation and integration but it is not, by any means, a panacea.  The evidence from research on how birthright citizenship affects assimilation shows a generally positive impact and policymakers should assume that ending the practice in the United States will negatively affect assimilation here.   

A prominent law firm—Kurzban, Kurzban, Weinger, Tetzeli and Pratt, P.A.—filed a lawsuit Wednesday that has the potential to reshape legal immigration in a significant way. I submitted an expert affidavit in support of the lawsuit, which the lawyers cite in their motion for a preliminary injunction. The suit challenges the government’s unlawful practice of counting spouses and minor children against the green card limit for EB-5 investors—an issue I have written extensively about in prior posts.  

The EB-5 program allows almost 10,000 foreign nationals to receive permanent residence (i.e. a green card) if they invest up to $1 million in a new business that creates 10 jobs. In fiscal year 2014, the government announced that investors reached the annual quota for the first time, and a large backlog has developed. However, the government has chosen to reduce the quota by the number of spouses and children of the investors.

As Table 1 shows, 64.4 percent of those who received permanent residence under the program from 2014 to 2017 were the spouses and children of the investors. Thus, this practice has effectively reduced the quota for investors by almost two thirds.

Table 1: EB-5 Investors, Spouses, and Children Receiving Legal Permanent Residence

 

2014

2015

2016

2017

Totals Spouses

2,521

2,424

2,229

2,296*

9,470

Share Spouses

23.5%

23.8%

22.6%

23.3%*

23.3%

Children

4,267

4,159

4,204

4,048*

16,678

Share Children

39.8%

40.8%

42.6%

41.1%*

41.1%

Derivatives

6,788

6,583

6,433

6,345*

26,149

Share Derivatives

63.3%

64.6%

65.2%

64.4%*

64.4%

Principals

3,935

3,605

3,430

3,510*

14,480

Share Principals

36.7%

35.4%

34.8%

35.6%*

35.6%

Total

10,723

10,188

9,863

9,855

40,629

Sources: I-526 Principals and derivatives from Department of Homeland Security, 2014, 2015, 2016, 2017; *2017 derivative-primary shares estimated based on the average during the prior three years

As outlined in the complaint and motion for a preliminary injunction, this practice has no basis in law. Subsection (b)(5) of section 203 of the Immigration and Nationality Act specifies:

Visas [i.e. green cards] shall be made available, in a number not to exceed 7.1 percent [i.e. 9,940] of such worldwide level [i.e. 140,000], to qualified immigrants seeking to enter the United States for the purpose of engaging in a new commercial enterprise….

Subsection (b)(5) provides no green cards whatsoever to spouses and children of investors. This means that all of those visas should be available to the investors themselves. Only later in a separate provision—subsection (d) of section 203—are green cards provided for spouses and minor children of those immigrants:

A spouse or child… shall, if not otherwise entitled to an immigrant status and the immediate issuance of a visa under subsection (a), (b), or (c), be entitled to the same status, and the same order of consideration provided in the respective subsection, if accompanying or following to join, the spouse or parent.

Nothing in this provision applies the EB-5 cap under subsection (b)(5) or any other cap to the spouses and minor children. The government cannot simply create a quota where Congress has not provided one. Indeed, as I’ve written before, members of Congress in 1990—when the EB-5 program was created—explicitly envisioned spouses and children not counting against the quota. They made exact predictions of how much investment would be made based on the belief that fully 10,000 investors would enter under the new law.

Not only that, but the requirement that spouses and children receive the “same order of consideration” requires that they not be subject to the cap. The law defines “order of consideration” as “immigrant visas made available under subsection (a) or (b) shall be issued to eligible immigrants in the order in which a petition on behalf each such immigrant is filed…” In other words, the line is entirely determined by the date when the principal applicants—the investors—file their petitions “under subsection (b)”. The derivatives—spouses and minor children—are not part of the “order” at all. They get the same spot in line as their spouse or parent.

Obviously, this lawsuit would be a big win for investors and their families if it succeeds. Based on my calculations in my affidavit, nearly half of those involved in this lawsuit alone will have children reach adulthood during this time and lose their eligibility. New applicants applying this year face nearly 16 years to wait if they applied this year, meaning that anyone with a child over the age of 5 will never be able to immigrate.

As importantly, this legal analysis applies with equal force to all the other major immigration categories—family-sponsored, employer-sponsored, and diversity lottery winners—so a good outcome in this case would set a precedent that immigrants in those categories could use to have their spouses and children excluded from the quotas as well. This outcome would immediately boost immigration levels by about 40 percent, and over time, as new immigrants enter and are able to sponsor their parents after becoming citizens, this share would grow even further.

As Simon Lester noted, President Trump and European Commission President Jean-Claude Juncker caught the world by surprise Wednesday when they announced a step back from the rapidly escalating trade war between the United States and European Union.

In his statement, Trump added this bit of news:

And the European Union is going to start, almost immediately, to buy a lot of soybeans—they’re a tremendous market—buy a lot of soybeans from our farmers in the Midwest, primarily. So I thank you for that, Jean-Claude.

… Secondly, we agreed today to a strengthen and [sic] strengthening of our strategic cooperation with respect to energy. The European Union wants to import more liquefied natural gas—LNG—from the United States, and they’re going to be a very, very big buyer. We’re going to make it much easier for them, but they’re going to be a massive buyer of LNG, so they’ll be able to diversify their energy supply, which they want very much to do. And we have plenty of it.

Simon qualified that news in his post: “This was probably going to happen anyway because of market shifts and other factors.”

To say the least.

Concerning soybeans, a month ago Bloomberg explained that EU imports of the crop are set to rise dramatically as a result of another U.S. trade war, in this case with China. China has slapped retaliatory tariffs on U.S. soybeans, and Brazil is set to supplant the United States in that market. American farmers now have a surplus of soybeans—which the EU is happy to buy so long as the price is right.

This is reminiscent of the Arab oil embargo of the 1970s. In that case, the Arab states simply sold their oil to someone else and the United States bought its oil from someone else. (Well, we would have, if we hadn’t messed things up by putting a price cap on oil.)

Commodities like oil and soybeans move in world markets, and so if one particular buyer and one particular seller aren’t getting along, there are plenty of other buyers and sellers to step in, so long as someone’s willing to pay for the extra handling costs. (Don’t be surprised if Chinese consumers and U.S. farmers are the ones stuck with those costs for the soybeans.)

So the EU soybean “concession” is really just the EU doing what it was going to do anyway.

The same goes for LNG. Ever since the innovation of hydraulic fracturing dramatically increased U.S. natural gas supplies, producers have looked to sell the hydrocarbons on the world market using giant (and technologically amazing) LNG carrier ships.

Europe is a blossoming market for LNG. Its traditional natural gas source around the North Sea is beginning to tire, public opposition to fracking in Europe is strong (despite the continent’s enormous potential supplies), and though Russia is ramping up its pipeline exports to the continent, Europeans are understandably uneasy about becoming dependent on Russia. Also, the continent is trying to move away from coal and, in Germany, nuclear power as sources of energy, in favor of renewable sources. As Peter Van Doren explained earlier this week, renewables require a backup energy supply that can be quickly dispatched: natural gas is an ideal backup.

As a result, Europe has begun importing LNG from the United States. Lithuania and Poland—two nations that know well the games Russia can play—received their first shipments of American LNG last year. Expect more European nations to follow suit…

…if, of course, the economics work. And Juncker made sure to stress that as part of yesterday’s announcement.

So the EU LNG “concession” is also just the EU doing what it was going to do anyway.

Did Juncker pull one over on Trump? That’s doubtful. Even if the president is not aware of the world market trends in soybeans and LNG, his advisers certainly are.

Instead, Juncker probably helped Trump out, and in turn helped out both Americans and Europeans. Trump has been taking enormous heat for his ill-conceived trade war. Much of that criticism is coming from the Midwest and farm country, which delivered him the presidency in 2016. He needed to find a way to back down from the trade war without looking like he was backing down. Some EU “concessions” that benefit the very regions Trump needs to soothe are exactly what he needed—and those concessions were costless for Juncker to deliver.

The question now is, will there soon be similar “concessions” from China?

The Department of Justice recently filed a notice to appeal a federal judge’s decision to permit an $85.4 billion merger between AT&T and Time Warner. Though the judge rejected the government’s argument that the merger will raise prices for consumers and limit competition, the decision to appeal sends a clear signal that the Justice Department plans to aggressively pursue antitrust cases.

The appeal also exemplifies a recent resurgence of antitrust activism. Along with the AT&T and Time Warner deal, over the past year there has been renewed interest in antitrust, particularly in regards to tech giants like Google and Facebook. This resurgence represents a shift away from the consensus that government should not intervene in firm concentration unless it is clear that consumers are being harmed, and towards the conception that “big is bad,” regardless of whether consumer harm can be demonstrated.

But, as University of Chicago law professor and later federal judge Frank Easterbrook outlined in a seminal 1984 paper, a key question at the core of antitrust cases is the impact of Type I (false positive) and Type II (false negative) errors. A Type I error is the incorrect finding that firm concentration is causing consumer harm while a Type II error is the opposite, the incorrect finding that firm concentration is not causing consumer harm. Easterbrook argued that Type II errors are less harmful—though a firm’s practices are causing harm, in a dynamic market competing firms will find ways to offset the harmful advantage. But the government intervention impelled by a Type I error is not as easily offset.  Thus antitrust policy should err on the side of allowing practices rather than declaring them illegal.

A conception of antitrust that expands the justifications for government action opens the door for more Type I errors and, thus, greater harms to consumers and the large firms that serve them. In the current issue, and going back to 2001, Regulation has published a series of articles discussing the underlying principles and impacts of antitrust law and policy:

  • Daniel Crane argues that the politics of antitrust does not fit into a traditional left/right conception. Instead, antitrust enforcement receives support from factions that exist on both the left and right; one that supports large government and large businesses to increase efficiency, on one hand, and a different faction that supports limiting the size of both government and businesses, on the other.
  • Alan Reynolds argues in favor of the consumer-welfare framework for antitrust and refutes recent arguments that government should intervene because “big is bad.”
  • David Evans and Richard Schmalensee discuss “network effects” and the idea that tech early movers, like Google and Facebook, are especially able to concentrate market power. The authors contend that the current fears of tech firms’ market power are the product of political slogans.
  • Ike Brannon recounts the Justice Department’s 2014 challenge of John Deere’s plan to purchase a small competitor and discusses how a market is defined and whether the antitrust enforcement stifles innovation.
  • Daniel Crane examines claims that a major cause of income inequality is lax antitrust enforcement. Looking at the history of U.S. antitrust, he contends that greater market power often results in higher wages for workers.  Thus, the use of antitrust to reduce income inequality has little intellectual foundation.
  • Timothy Sandefur argues against Parker immunity, the exemption by federal courts of cartels sanctioned by state law from federal antitrust laws, and contends that the courts should restrict immunity to cases where states have explicitly chosen to restrict competition for legitimate reasons.
  • Erwin Blackstone, Larry Darby, and Joseph Fuhr review theories of duopoly and oligopoly and examine the idea that concentrated industries are inherently monopolistic. The authors find that many duopolies are highly competitive and argue that industry structure alone is not enough to justify antitrust regulation.
  • In another article, Daniel Crane discusses the early antitrust agenda of the Obama administration and outlines the beginnings of the ideological shift away from the Chicago school’s antitrust perspective towards a more active antitrust regime.
  • Thomas Lambert examines the court’s rejection of an FTC challenge to a merger between Whole Foods and Wild Oats, and outlines four principles that regulators should use when investigating mergers: relying on econometric evidence instead of business documents, adhering to economic theories when deciding whether to define unique distribution channels as “markets,” accounting for business trends and economies of scale when determining whether a merger will harm consumers, and raising the standard of proof for injunctive relief to limit the advantages enjoyed by regulators.
  • Richard Epstein discusses the 2006 Wright Amendment Reform Act, which demolished several gates at Love Field Airport in Dallas and, in so doing, distributed market power to American Airlines and Southwest Airlines.  
  • Richard Epstein and Thomas Brown outline a continuous succession of antitrust lawsuits against credit card companies and contend that antitrust law works best when it concentrates on horizontal agreements like bid rigging and price fixing. They argue that, in this case, governments are attacking the business arrangements that make platform industries work.  
  • Johnathan Adler contends that antitrust enforcement against “conservation cartels,” which form to maximize the long-term productive use of natural resources, undermines the creation of ecologically valuable and socially beneficial arrangements among resource users.
  • Fred McChesney discusses the trend towards an economic view of antitrust’s role and away from political or social objectives, but highlights three developments that deleteriously separate antitrust from economics: antitrust suits that interfere with private attempts to manage the commons, increased involvement in antitrust enforcement by state and European regulators leading to harmful suits that make no economic sense, and the desire by foreign enforcers and state attorney generals to play a larger role on the global antitrust stage.
  • George Bittlingmayer makes the case that, though antitrust policy has improved since the 1960s and 70s, despite a consensus under the Clinton and Bush administrations there is still little compelling evidence that antitrust laws improve consumer welfare.
  • David Evans examines antitrust under the Clinton administration and discusses the challenges facing the then new Bush administration: to retain the Clinton administration’s antitrust regime in the name of policy continuity or to pursue a level of agency interventionism more in line with Bush’s business philosophy.
  • David Henderson reviews The Microsoft Case: Antitrust, High Technology, and Consumer Welfare and discusses the justification for the antitrust case against Microsoft and its legacy.

Furthermore, over the years I have also reviewed working papers on antitrust:

  • In my review of working papers by Daniel Crane and Joshua Wright on the FTC’s antitrust case against intel, I discuss Type I and Type II errors as defined by Frank Easterbrook and argue that the literature shows that the case against Intel cannot be justified under the error-correction framework.
  • I review Lawrence White’s paper on “Too Big to Fail” and outline his contention that Too Big to Fail financial firms have nothing to do with market power. Instead, the problems of the banks stem from subsidies and negative externalities and should be dealt with directly rather than through antitrust action.
  • And in the Spring 2018, issue of Regulation I review a paper by Ann Bradford, Robert Jackson, and Johnathon Zytnick that examines 5,000 proposed mergers in Europe between 1990 and 2014 and finds no effect on the incidence or intensity of merger challenges by the EU if the acquiring firm was non-EU.

The DOJ’s appeal and recent concerns about the market power of tech firms exemplify an ascendant conception of antitrust as a proactive tool to reduce market power. The past 17 years of articles and reviews in Regulation, however, support an antitrust policy that is invoked only because of unambiguous and demonstrated harms to consumer welfare. This notion, and the limits it imposes on costly and inflexible government action, offers the best outcomes for consumers and competition.

Written with research assistance from David Kemp.

 

Recall that President Trump said this yesterday in the context of his remarks with European Commission President Juncker:

This is why we agreed today, first of all, to work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods. 

Zero tariffs on these products through a trade agreement is a plausible and useful goal. On the other hand, zero non-tariff barriers could only be achieved through the U.S. joining an EU-style single market, which I don’t think anyone has in mind here. It is possible to remove a few of the more egregious regulatory barriers, but we should be realistic about what can be achieved.

But let’s focus on subsidies. On this issue, U.S. Trade Representative Robert Lighthizer said this today at a Senate Committee hearing (starts around 34:45):

The idea is [to have] a balanced package and move from where we are to an environment where you don’t have tariffs or subsidies. Because that’s an important part. You can’t compete with someone who is subsidized. And we don’t subsidize for the most part. 

In terms of whether we subsidize “for the most part,” I thought this recent op-ed from Cato Senior Fellow Doug Bandow would be helpful:

Subsidies Galore: Corporate Welfare For Politically-Connected Businesses Is Bipartisan

Congress created the usual special interest frenzy with its latest iteration of the Farm Bill. Agricultural subsidies are one of the most important examples of corporate welfare, money handed out to businesses based on political connections.

Business plays a vital role in a free market. In real capitalism there are no guaranteed profits. But corporate welfare eliminates this handicap for the well-connected.

Business subsidies that allow politicians to channel economic resources toward their preferred ends distort investment and trade. Moreover, turning government into an engine of illicit profit encourages what economists call rent-seeking. Well-organized special interests usually triumph over the broader public and national interest.

Aid comes in many forms.

Agriculture has spawned a gaggle of sometimes bizarre subsidies. Like a dairy program which created milk surpluses, in turn encouraging state price fixing, generating massive cheese stockpiles, in turn triggering giveaways to the poor. Payments, loans, crop insurance, import quotas, and more underwrite farmers.

Money also goes to agricultural enterprises through the Rural Business-Cooperative Service, which supports “business development.” The recently defeated Farm Bill even included $65 million in special health care subsidies for agricultural associations. Ironically, farm households enjoy higher median income and wealth than non-farm households.

The Market Access Program is one of several initiatives to subsidize agricultural exports. Other programs support general trade and investment.

For instance, the Export-Import Bank is known as Boeing’s Bank. It provides cheap credit for foreign buyers of American products. Which, ironically, gives foreign firms an advantage over U.S. producers who must pay full fare. Ex-Im’s biggest beneficiary in recent years has been China, especially its state-owned firms.

The Overseas Private Investment Corporation underwrites U.S. investment in potentially unstable nations. If the project pays off, investors win. If not, the rest of us lose. Why should the public guarantee investor profits?

At the other end of the commercial spectrum is the Small Business Administration. Smaller firms are a vital part of the American economy but they are not an underserved market. There is no dearth of, say, liquor stores. SBA is a response to a political opportunity, not an economic need.

Much corporate welfare is disguised in broader terms. The Commerce Department’s Economic Development Administration subsidizes “development” in “distressed communities,” meaning the agency underwrites business, with dubious results. There are some 180 federal pork barrel “economic development” programs.

The Rural Utilities Service (formerly the Rural Electrification Administration), continues, never mind that rural America got electricity decades ago. Today RUS has expanded into Broadband internet and even television service.

The Bureau of Land Management (mis)manages federal lands, subsidizing use of rangeland by ranchers, for instance. There are incentives for airline companies to serve small markets. Foreign Military Financing is presented as a national defense measure, but in most cases the chief beneficiaries are arms makers.

Housing subsidies are many, most notably mortgage support and tax preferences, though the latter was trimmed by last year’s tax bill. The Trump administration is pushing subsidies for what the president calls “beautiful” coal power plants.

Federal research and development offers bountiful benefits to business. The more basic the R&D, the better the argument that the public interest is being served. The closer to commercialization, the more the expenditures are essentially corporate welfare.

For example, the Obama administration funneled $535 million worth of loan guarantees to Solyndra, which President Barack Obama called an “engine of economic growth.” The company filed for bankruptcy in 2011.

Tesla Syndrome

The Advanced Technology Vehicles Manufacturing program provides $25 billion in loans for development of cars powered by alternative fuels. Tesla is a major beneficiary. Some firms enjoy multiple benefits.

Although most public attention falls on direct expenditures, trade “protection” is no less a form of corporate welfare. Both tariffs and quotas allow domestic manufacturers to charge more. Tariffs and other fees alone come to around $40 billion a year.

Tax preferences are another means of corporate welfare. Buried in the tax code, they often are difficult to identify, Measures which affect only one firm or industry, in contrast to those with general economic impact, should be treated as subsidies. The Tax Foundation once figured “special tax provisions” to cost more than $100 billion annually in lost revenue.

States and localities also offer subsidies, many through grants, free property, and tax preferences to attract businesses to a particular area. Estimates of these costs run between around $50 billion and $80 billion.

Few in Washington really want to cut spending. But ending corporate welfare would be a start to restoring fiscal sanity in Washington.

As this piece demonstrates, we subsidize a lot, and the reality is that bilateral trade agreements can’t and won’t do much to stop it. There are some WTO obligations that place limits on the amounts and kinds of subsidies, and those help. But I wouldn’t expect much progress on subsidies in any U.S.-EU trade talks.

In February 2018 Agustin Carstens, the General Manager of the Bank for International Settlements in Basel, gave a speech at Goethe University in Frankfurt entitled “Money in the digital age: what role for central banks?” The speech quickly became notorious in the cryptocurrency community for its brusque dismissal of Bitcoin and other cryptoassets. Among other things, Carstens there called Bitcoin “a combination of a bubble, a Ponzi scheme and an environmental disaster.” A combination? One may judge the price of Bitcoin a bubble, but there is no other sense in which Bitcoin is a “Ponzi scheme.” The BIS being the central bankers’ bank, crypto supporters in response mocked Carstens for merely representing the interests of national fiat currency monopolies in quashing potential competitors.

More recently Carstens gave an interview to a Swiss periodical, available in English translation on the BIS website, in which he reiterated his anti-cryptocurrency position. “It’s a fallacy to think money can be created from nothing” was one of the oddest claims he made there, given that fiat monies are closer than cryptocurrencies are to being gratuitously created. This interview too has provoked criticism from crypto defenders.

Overlooked in the debate over Carstens’ dubious statements about Bitcoin and cryptocurrency have been the dubious statements he makes about historical forms of private money. I want to shine some critical light on those statements.

Early in the speech, Carstens (p. 1) declares: “Experience has also shown that to be credible, money requires institutional backup, which is best provided by a central bank.” Best by what criteria? The dollar hasn’t been better under the Federal Reserve than it was under the classical gold standard with private banknotes. The experience of other countries under fiat monies has been even worse than that of the United States. Central banks have brought higher inflation rates, higher price level uncertainty, and higher resource costs of the monetary system. They have diminished fiscal discipline. Floating rates have diminished the gains from international trade and cross-border investment. (For the evidence behind these summary contrasts see Selgin, Lastrapes, and White (2012).)

Carstens (p. 2) states: “Money is an IOU, but a special one because everyone in the economy trusts that it will be accepted by others in exchange for goods and services. One might say money is a ‘we all owe you’.” But this is a nonsensical use of terms. A fiat dollar is not an IOU or a “weOU;” a gold coin is not an IOU or a weOU. An IOU specifies the number of units to be repaid. By contrast, a fiat dollar or a gold coin does not entitle the hold to any specific quantity of any good or service. The future purchasing power is not pre-determined. It will depend on spot prices prevailing at a future date.

Carstens correctly notes (p. 2) that “many things have served as money.” He gives some examples and provides pictures of them. But in the next paragraph (p. 3) he curiously declares: “Common to most of these examples is that the nominal value of the items that have served at one time as money is unrelated to their intrinsic value.” Most of his examples (4 of 6) are commodity monies. The claim that “the nominal value … is unrelated to their intrinsic value,” while true for fiat monies, is false for commodity monies. A full-bodied gold coin (one of his examples) normally has a nominal value in proportion to its gold content.

Surprisingly, Carstens even gets wrong the details of a non-profit community currency project in his native Mexico, called the túmin. He describes it as “a local currency circulating (illegally) for some time around 2010 exclusively in the Mexican municipality of Espinal.” A little Googling reveals, however, that the túmin is still circulating in 2018, and has spread beyond its town of origin to 16 states of Mexico’s 32 states.

In a section of his speech entitled “What constitutes good money?,” Carstens goes seriously off track. He says this (p. 5) about the history of private money: “Over the ages, many forms of private money have come and gone. … While some lasted longer than others, most have invariably given way to some form of central bank money. The main reason for their disappearance is that the ‘incentives to cheat’ are simply too high.” Even putting aside the incoherence of the expression “most have invariably,” this is far from an accurate account of why legislatures granted central banks monopolies in money issue. The view that fraud (“wildcat banking”) was endemic to open-entry private note-issuing systems, and that the United States experience demonstrated this as Carstens believes (p. 6), was once popular. Even such a free-market stalwart as Milton Friedman subscribed to it in his 1960 Program for Monetary Stability. After examining later-published evidence on free banking episodes, however, Friedman and Schwartz (1986) realized that prevalent wildcat banking was a myth, accurately summarizing the facts this way: “Historically, producers of money have established confidence by promising convertibility into some dominant money, generally, specie. Many examples can be cited of fairly long-continued and successful producers of private moneys convertible into specie.” Dr. Carstens should begin to catch up with the literature and read the historical studies cited by Friedman and Schwartz.

While it is true, as Carstens notes, that banknotes did not circulate a par nationwide in the United States during the antebellum period, the reason was not fraud but government interference in the form of legal restrictions against interstate branching. Nationwide par circulation was the norm where banks were free to branch, as in Canada and Scotland. When Carstens (p. 7) refers to “the unhappy experience with private forms of money” he ignores the facts. When he suggests that “the experience with currency debasement that has peppered history” should warn us against “the proliferation of such private monies,” he inverts the facts. Currency debasements have been symptomatic of government monopoly in currency, not of private competition. A central bank with a monopoly on currency issue can debase the currency. A single bank in a multi-issuer issuer cannot, neither legally nor practically. As Adam Smith noted, the greater the proliferation of private note-issuers, the lesser the consequence to the public of the failure of any one of them. The system is robust. A central bank monopoly, by contrast, is a fragile single point of failure.

Yesterday, European Commission President Jean-Claude Juncker met with President Trump at the White House to talk about trade. Afterwards, to the surprise of many (including me), they held a press conference at which they said positive things about the U.S.-EU trade relationship. Then later, President Trump had five positive tweets about the meeting. It was more amicable than anything we’ve seen in U.S. trade policy for many months.

But obviously, positive tweets only get you so far. What does all this mean in terms of substance? That’s hard to say at this point. The key items the parties agreed on were the following:

– They will work towards “zero tariffs, zero non-tariff barriers, and zero subsidies” on non-auto industrial products. That’s not a huge category of goods, as it excludes agriculture and raw materials, among other things, and zero non-tariff barriers and subsidies seems really unlikely. But still, it would be great if we made progress here.

– The EU will buy more U.S. soybeans and liquid natural gas. This was probably going to happen anyway because of market shifts and other factors.

– They will have a dialogue about conflicting regulatory standards in the U.S. and EU. This is a long-time goal of U.S. and EU trade policy-makers. It sounds easier than it really is.

– They will work together on reform of the WTO, and to address problems to the trading system caused by China.

As for the existing tariffs the Trump administration has imposed on steel and aluminum from the EU, and the retaliatory tariffs imposed by the EU, those will stay in place, but progress on the broader talks could help resolve the tariff issue. Also, it appears that the threatened tariffs on auto imports will not be imposed on the EU.

In some ways, this seems like a “light” version of the Transatlantic Trade and Investment Partnership that the Obama adminisration had been trying to negotiate with the EU. But it’s too early to come up with a label. We need to see how this develops. 

It would be nice if we knew why Trump changed his tone yesterday. Has he recognized the limits of his aggressive approach to trade policy? Does he fear the impact of a trade war on voters? Did he have a good personal rapport with Juncker? This would help us understand whether a permanent change in approach is possible. Unfortunately, it’s not clear at this point where this is all going and how long it will last. But one day of trade peace is nice after months of harsh rhetoric and escalating tariffs. 

Nearly a century has passed since Justice Oliver Wendell Holmes’s legendary proclamation that “while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.” But that statement did little to actually clarify when the Fifth Amendment’s protections against uncompensated takings of property applies to government action that regulates away the use of land rather than physically taking it through eminent domain.

Attempting to clear up that confusion, the Supreme Court 40 years ago handed down the now infamous Penn Central decision (involving the historic qualities of NYC’s Penn Central Station). Penn Central requires courts to go through a balancing test based on (1) the economic impact of the regulation, (2) the extent to which the regulation interferes with reasonable investment-backed expectations, and (3) the nature or character of the government action. Unfortunately, that’s a lot of words to give very little direction, so property owners, regulators, lawyers, and lower courts have been clamoring for meaningful guidance on those fact-bound, ad-hoc inquiries ever since.

As the story of Simone and Lyder Johnson illustrates, the Supreme Court needs to provide true guiding principles on regulatory takings. The Johnsons were drawn to Ponce Inlet, Florida, where they bought land and made plans to construct their dream home. Sensing that the town may be able to benefit, Ponce Inlet persuaded the Johnsons to expand their plans into “a delightful mixed-use waterfront development.”

Over several years, the Johnsons bought additional parcels while working hand-in-hand with the town. They were amenable to providing everything the town asked for, like a nature preserve and boat slip. After millions of dollars were spent, the town changed its mind, halted all work, denied permits, and went so far as to pass legislation prohibiting all development on the Johnsons’ property.

The Johnsons sued, claiming that Ponce Inlet’s actions amounted to a compensable taking. The state trial court agreed, but the appellate court reversed and sent the case back to determine if a taking had occurred based on the economic impact on the “parcel as a whole” (meaning all the Johnsons’ property, rather than the specific parcels the trial court had found to be left devoid of economic value).

The Johnsons—through companies collectively known as Pacetta—have now asked the U.S. Supreme Court to review their case. Cato, along with the NFIB Small Business Legal Center, filed a brief supporting that petition. The Supreme Court has consistently referred to the Penn Central factors as the North Star of regulatory-takings law but has done little to clarify the meaning of each factor or how they should be weighed relative to one another.

What we do know is that property owners almost always lose under Penn Central. Under that nebulous test, lower courts are free to use those malleable factors to find that what government is attempting to achieve through its regulations is so important that a taking has not occurred, regardless of the regulation’s economic impact on the owner or the extent of its interference with invest-backed expectations. Likewise, lower courts frequently find that the economic impact of a regulation is not quite drastic enough—despite destroying as much as 95% of a property’s value—to find that a taking occurred, despite the extent of interference with investment-backed expectations.

The Court should take up Pacetta v. Ponce Inlet and use it as an opportunity to clarify at least one aspect of property law: that when one of Penn Central’s three ad-hoc inquiries tips strongly in favor of the owner, a taking has occurred and compensation is due.

A compelling explanation for why the American immigration system is more restrictive than other developed countries is that voters here do not feel that they have control over the border.  Pictures, videos, and the widespread perception that there is chaos on the border caused by illegal immigrants, despite facts to the contrary, have the effect of convincing American voters to be less liberal on the issue than they otherwise would be.  A recent paper by political scientists Allison Harell, Stuart Soroka, and Shanto Iyengar in the journal Political Psychology tests this “locus of control” argument by comparing immigration policies in Canada, the United States, and the United Kingdom with perceptions of control over immigration and its impact on their society. 

Harell et alia examine three perceived loci of control: individual, social, and an outgroup’s control over one’s own economic condition.  Across the three countries, the more that a respondent perceives himself and his society as being in control, the more pro-immigration he is.  When a respondent thinks that immigrants are responsible for his own personal economic or life outcomes then he is more hostile toward them because of his perceived lack of control.   They sum up their findings as:

Those who feel in control (personally or as a society) are less hostile towards immigrants, while those who attribute negative outcomes to immigrants’ predispositions are also more hostile. Results also suggest that measures of control are related to, but distinct from, both partisanship and racial prejudice.

Respondents’ perceptions of control across countries are related to the openness of immigration policies in the three countries studied by Harel et alia.  Canada has the most open immigration policy and Canadians have the greatest sense of control over immigration. Americans and British feel like they have less control, due to the Southern border with Mexico and membership in the Schengen Area, respectively.  Some of these measures of control, such as individual, social, or an outgroup’s degree of power, vary between the countries but the pattern holds: a greater perception of control is correlated with a more open immigration system.

Harell et alia’s theory passes the smell test, is consistent with what I know about psychology, and their empirics help explain different immigration policies across this small sample of countries.  However, the recent separation of families, caging of child migrants and asylum seekers on the border, the inability of the government to reunite them efficiently, and the chaos that this has created add an important caveat.  Voter reactions to border chaos probably depend on whom they blame for the chaos.  If voters blame the pro-immigration political party for the chaos, then voters are more likely to react by adopting more anti-immigration views.  With the exception of the current situation, politicians with a pro-immigration reputation (even when undeserved) have presided over the recent border crises so it makes sense that respondents would blame them.  However, if voters blame the anti-immigration political party for the chaos then they could react by adopting more pro-immigration views. 

There are two cases that help illustrate this point.

There was a large surge of unaccompanied alien children (UAC) on the border in 2014 that caused a crisis for the Obama administration.  Republicans reacted by claiming that Obama created the chaos by being too lax in enforcing immigration laws and that his announcement of DACA created the mass influx – two assertions that do not stand up to a bare minimum of scrutiny.  First, President Obama was nicknamed the Deporter-in-Chief because he deported more people than any other administration and will likely never have that odious honor taken from him.  As for border security, the number of crossers precipitously fell during his administration due to the poor American economy, rising fortunes and falling birthrates south of the border, and more effective border enforcement.  Secondly, the surge in child migrants that led to the crisis for Obama in 2014 began before he announced DACA, continued after everybody knew that the new crossers were ineligible, and was more linked to homicides in Central American countries than any change in American policy (although Mexican policy mattered quite a bit).  Regardless, voters blamed the feckless-looking Obama administration for the border chaos and Republicans took control of the Senate that year and nominated the most anti-immigration candidate in the GOP primary for president who shortly thereafter went on to barely win the election.

President Trump is now dealing with his own border surge just like President Obama did.  The recent surge in asylum seekers along the southwest border who enter unlawfully and surrender to Border Patrol is entirely an unintended creation of the Trump administration’s anti-asylum policies.  First, Trump’s administration has turned away many asylum seekers along the border and told them to “come back later.”  Second, they were changing asylum rules to restrict who could ask in the first place.  Those two factors, individually and together, incentivized asylum seekers to enter the United States illegally and ask for asylum because, for all they knew, they would never be able to at a port of entry.  They did so and got struck by the Trump administration’s third policy: zero tolerance and prosecution of all unlawful border crossers.  Since Trump’s administration ordered that every border crosser had to be prosecuted to the fullest extent of the law, the government separated parents from their minor children so as to charge the former with the misdemeanor of illegal entry.  Children aren’t caged with their parents when their parents are charged with a crime.  That turned into the nightmare of children in cages without their parents and the government’s inability to reunite them with their parents in many cases. 

Obama looked helpless, incompetent, and brutal in the 2014 border chaos as his administration caged entire families in deplorable conditions.  Trump now looks incompetent, brutal, and responsible for everything that’s happened on the border under his watch.  Republicans politically capitalized on the border chaos in 2014 by painting the Democrats as either complicit with the migrants or helpless to stop it.  The Republicans introduced a bill to gut the asylum system in response.  The Democrats, for their part, didn’t have a coherent explanation except “nuh-uh.”

Now that the dynamic has flipped, and anti-immigration politicians are being blamed for the chaos, we can test the locus of control theory.  If enough voters also blame their recent perceptions of border chaos and lack of control on anti-immigration politicians then they could react by supporting more liberal immigration policy rather than reflexively opposing liberalization.  Polling already shows that Americans are more supportive of increasing immigration during the Trump administration, and perhaps this could be in response to the chaos created by his policies or the fact that they are too brutal for voters, but those numbers have also been trending up for decades.

It is difficult for President Trump and the Republican Party to capitalize on the border chaos that he created when everybody believes that they created it.  The recent surge in asylum seekers and migrants on the border could provide an excellent testing ground for this caveat to the locus of control theory and whether perceptions of chaos always lead to less support for liberalization.  

Campaigning is officially over—and Pakistan will hold its third consecutive general elections tomorrow, on July 25. These elections have raised concerns about the state of civil–military relations within Pakistan amongst Pakistan-watchers. The Financial Times has labeled tomorrow’s elections as the “dirtiest elections in years” while the Economist explains that “The true winner may be the army; the losers will be Pakistanis.”

Pakistan’s military establishment is known for being involved in the state’s political affairs. In its 70 years of independence, Pakistan has spent more than half of its life under military rule: it has experienced four military coups, and each has turned into a 7–10 year military dictatorship. Even when civilian governments have been in power, the military has been known to interfere, calling the shots in foreign policy and national security. Oftentimes, the civilian leadership has called on the military in times of domestic security crisis, and the public has usually favored the military.  

But what makes the military’s interference in this election worse than past interferences? Politicians, analysts, human rights groups, and media personnel in Pakistan have accused the military of doing three things that are considered troublesome.

The first is targeting the Pakistan Muslim League–Nawaz party, who was elected in 2013. Historically, the army and recently ousted prime minister Nawaz Sharif have had a tumultuous relationship. Two years ago, it was the army along with Pakistan Tehrik-i-Insaf’s Imran Khan that brought the lawsuit that led to Sharif’s court-ruled dismissal, disqualification from running for office, and corruption trial that has sentenced him and his daughter to 10 and 7 years in prison respectively. However, Imran Khan and the military deny any links to each other.

The second problematic activity is the army’s pressure on the media. Pakistan is considered to be one of the most dangerous countries for journalists regardless of the kind of government in power. Hameed Haroon, chief executive of the Dawn Media Group (the largest English media company in Pakistan) and the president of the All Pakistan Newspapers Society wrote an op-ed in the Washington Post about how this time the level and kind of media censorship is different. The recent media censorship is all about ensuring that the media does not provide independent coverage of Pakistan’s central political issue, which is the “deepening power struggle between the military and civilian authorities.” In April, a widely watched cable news channel, Geo News, was forced to go off air after appearing too sympathetic toward Sharif. Only direct negotiations with army officials allowed Geo News to go back online. Dawn newspaper has also experienced pressure, where newspapers have been confiscated in army-controlled areas and distributors have been harassed by army officials.

The third, and perhaps most concerning, is how the military has been using the judiciary as a cover. The military’s encroachment into judicial space began after the December 2014 Army Public School attack by the Pakistani Taliban that killed over 130 children and teachers. The Sharif government and then-Chief of Army Staff Raheel Sharif came together and developed the National Action Plan, a 20-point plan designed to counter domestic terrorism. The plan reinstated the death penalty and established military courts, where those charged with terrorism would now be tried, avoiding the overburdened civilian special courts called the Anti-Terrorism Courts. In the past, any time a civilian government or military dictatorship created military courts to try civilians, the Supreme Court of Pakistan struck the courts down as being unconstitutional. But in 2015, the parliament passed a constitutional amendment, called the 21st amendment, which discarded the separation of powers between the branches of government for those charged with terrorism, granting jurisdiction to the military and applying court martial rules to those charged with terrorism. The media eventually uncovered that the civilian government had been pressured by the military to pass the constitutional amendment. Later in 2015, the Supreme Court ruled to uphold the 21st amendment. Military courts remain active today.

The Pakistan Army, therefore, views itself as the manager of the government rather than a subordinate. But for a democratic system to work, the military needs to be beholden to the civilian leadership. If a military controls foreign policy then it will create a military-centric foreign policy where a solution to every national security problem will be seen as something that can, and should, be solved by the military. As they say, when you have a hammer, everything looks like a nail. But as a developing country with a host of other issues, such as a looming financial crisis and a youth bulge where 64% of the population is under the age of 29, Pakistan can’t afford to have a military-centric foreign policy.

Ultimately, the military’s current involvement and interference in the political system undermines its own credibility—and that of the system that it so desperately wants to lead.

The declining cost of solar panels and the widespread adoption of rooftop solar in California lead to many cocktail party discussions about the competitiveness of green energy. While at first glance it may seem that solar power and other renewable energy sources are able to compete with conventional resources, a closer examination of the characteristics and costs of electricity systems demonstrates that current renewable technologies are not economically competitive.

The fixed costs of electricity systems, the capital costs of transmission and distribution systems, are large. Actual electricity tariffs do not typically recover fixed costs explicitly and separately from electricity use. Instead they recover them through use charges per kWh. If electricity pricing were more efficient, customers would pay a large fee for the use of the transmission and distribution systems disconnected from the amount of electricity they use and would be charged a separate variable fee based on actual consumption. (See this article by Ahmad Faruqui and Mariko Geronimo Aydin in the Fall 2017 issue of Regulation for a more thorough discussion of electricity pricing.) Thus, current bills do not inform consumers about how high the fixed costs of the system really are.

Understanding the significance and recovery of fixed costs is important because of the manner through which customers with solar panels on their roof are reimbursed for the power they generate.  Solar production in many states, especially California, is reimbursed at full retail rates. But when a household produces solar power and reduces the use of system-generated electricity, the system saves only the marginal costs of the power that it did not have to produce, which is usually much less than the retail rate. None of the large fixed costs are saved.

In California, because of its tiered retail rate structure, the discrepancy between the retail rate and the amount the system saves because of rooftop solar production is large. The marginal cost of power generation is about 6-10 cents per kWh, but customers are reimbursed at full retail rates (many at over 30 cents per kWh) rather than the lower marginal costs of system generation. Reimbursement at full retail rates shifts the fixed costs of the electric system from solar panel households to other users. Without the excessive payments, decentralized solar would not be competitive.

Other renewable generation sources would appear to be competitive with natural gas generation. According to estimates of the total costs of various generation technologies over their operating lifetime, large-scale centralized solar generation in the deserts of the American southwest and large-scale onshore wind generation both have costs that are competitive with new natural gas generation. (Offshore wind is much more costly. See my blog on Cape Wind, a failed plan to build a wind farm off the coast of Massachusetts.)

However, even if the lifetime average costs of wind and solar are the same as coal or natural gas, the equivalence needs to be qualified. Different electricity generation technologies are very imperfect substitutes. The marginal value of electricity varies across time because demand varies by time of day and space because of transmission constraints. For example, wind power supply is greatest during winter nights, when demand is low, and lowest during summer when demand is highest. Wind is also most plentiful far from where people live and consume electricity, meaning it incurs additional costs to transport the electricity to people. At least solar output is large during the summer afternoon peak demand period. But both solar and wind are not dispatchable. That is, their output cannot be made to vary up or down.

Until cost-competitive green energy that is dispatchable is available, renewable sources of electricity require backup conventional generation. Because the sun eventually sets, and the wind stops blowing, natural gas generation whose output can be varied (sometimes quickly) must be available as backup. The fixed and variable costs of the backup must be paid by someone. These hidden costs need to be considered in any calculation of “cost competitiveness.”

Future technological breakthroughs, such as more efficient batteries to store electricity and more cost effective dispatchable solar power sources, may make green energy a better substitute for conventional generators. But for the time being, without governments putting their thumbs on the scale, green energy is not competitive. 

Written with research assistance from David Kemp.

When Katie Sherman was nineteen years old, she was incarcerated at Trumbull County jail in Ohio, for about five months. During that time, Charles E. Drennen worked as a corrections officer in the female pod of the jail where she was housed. Several female inmates had filed complaints that they’d been harassed and threatened by Drennen, who had a reputation for glaring at the inmates while they were sleeping, but Drennen began focusing on Ms. Sherman in particular. He often made highly sexual comments to her, and on at least four or five occasions, ordered her to expose herself to him, and to touch herself sexually in front of him and other inmates. Ms. Sherman – again, then a nineteen-year-old girl – complied because she was intimidated by Drennen. She eventually attempted to file a complaint against him (even though complaints were not anonymous), but she was never given the complaint form she requested. 

After she was released, Ms. Sherman - along with Michele Rafferty, her cellmate - filed a Section 1983 lawsuit, asserting (amongst many other claims) that Drennen’s sexual abuse violated her Eighth Amendment right to be free from cruel and unusual punishment. Drennen moved for summary judgment, arguing that this was “only” sexual harassment, and that because he did not physically touch Ms. Sherman himself, he hadn’t violated her constitutional rights. The district court correctly rejected this perverse “no touching” safe harbor for sexual abuse, and noted that “the facts, viewed in a light most favorable to Plaintiffs, demonstrate that Sherman only masturbated and revealed her breasts due to Drennen’s control over her.” The court likewise rejected Drennen’s claim for qualified immunity, holding that “[i]t is clearly established that sexual abuse is impermissible” and that “[a]ny reasonable prison official would understand that he has no authority to command an inmate to engage in sexual acts.”

Under normal principles of civil litigation, Ms. Sherman would then have been entitled to a jury trial on her civil rights claims. But the doctrine of qualified immunity gives defendants a one-side litigation advantage in the form of interlocutory appeals - that is, if a defendant is denied qualified immunity, they can immediately appeal that decision, before the case even goes to trial. Mr. Drennen has done exactly that, so the question of whether he should receive qualified immunity is now being briefed before the Sixth Circuit. The Cato Institute has therefore filed an amicus brief, urging the court to affirm the denial of immunity, but also to address the legal infirmities with the doctrine in general.

As I’ve  discussed  several  times now, qualified immunity was essentially invented out of whole cloth by the Supreme Court over the last half century. The text of our primary civil rights statute – usually called “Section 1983” after its place in the federal code – makes no mention of any immunity, and the common-law background against which it was adopted did not include any freestanding defense for public officials who acted unlawfully; on the contrary, the historical rule was that public officials were strictly liable for constitutional violations. In essence, qualified immunity has become nothing more than a “freewheeling policy choice” by the Court, at odds with Congress’s judgment in enacting Section 1983.

In this particular case, the district court’s denial of immunity was correct, even under existing precedent. The case law clearly establishes that sexually abusing prisoners violates their constitutional rights (including cases like this, where the defendants did not physically touch the prisoners), and any reasonable person would have known that Drennen’s actions were impermissible. As we argue in our brief:

In cases where a defendant’s alleged violation of a plaintiff’s constitutional rights arises from the defendant’s attempt to carry out otherwise lawful duties—for example, a police officer making a snap decision on how much force is necessary in making a lawful arrest—qualified immunity “gives ample room for mistaken judgments,” Malley, 475 U.S. at 343, and thus may require more factual specificity before concluding that the law is clearly established.

[But] [i]n this case, Defendant-Appellant Drennen repeatedly ordered Katie Sherman—then a teenage girl under his custody and control—to expose herself and touch herself sexually in front of him and other prisoners. It beggars belief to suggest that Mr. Drennen could possibly have thought that this behavior was lawful or appropriate, especially because—as explained in detail by the additional amicus—federal and state prison regulations already make abundantly clear that prison officials may never make sexual “requests” of inmates. See Br. of Roderick & Solange MacArthur Justice Center, at 25-27. For better or worse, qualified immunity protects “all but the plainly incompetent or those who knowingly violate the law.” Malley, 475 U.S. at 341—yet Mr. Drennen’s sexual abuse and harassment of Ms. Sherman easily meets both of these conditions.

In addition to affirming the denial of immunity, however, the Sixth Circuit should also discuss the maturing consensus that qualified immunity is itself unlawful, and vitiates the power of individuals to get redress for violations of their constitutional rights. Several  lower  court  judges have already made exactly this point, either in published opinions or in the press, and it’s reasonable to expect that the Supreme Court will be highly attuned to this judicial input as they decide whether to reconsider the doctrine at the start of the new term.

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