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Zoning regulations and occupational licensing aren’t the only regulations with regressive impacts. A new study circulated by National Bureau of Economic Research (NBER) suggests building energy codes hurt the poor, too. The NBER report focuses on California, but most states adopted statewide building energy codes decades ago. As a result, regressive impacts may be widespread.

Building energy codes regulate a home’s energy footprint, and they are often justified by concerns about energy-related environmental externalities. But well-intentioned objectives don’t insulate the public from trade-offs.

The NBER study looks at impacts on home characteristics, energy use, and housing prices. In all three categories, the impact of residential energy codes is negative for those in the lowest income quintiles.

For example, stricter energy codes were associated with a decline in home values for low-income households of 8-12 percent. Stricter codes reduced the number of bedrooms and square footage of homes in the lowest income households by 4-6 percent. On the other hand, home values increased and changes to square footage and number of bedrooms were minimal for wealthier households.

For some environmental advocates, the distributional consequences may still be justified if energy codes reduced energy use. But the authors state there is “debate about the extent to which building energy codes reduce energy use at all.” The study finds no signficiant reduction in energy use per square foot, although it does find energy reduction on a per-dwelling basis but only in the second lowest-income quintile. 

This suggests energy codes do not meet even their own stated objectives. Energy codes provide another example of how various political objectives – including protecting the environment – unavoidably require trade-offs. Often the costs of regulation are borne by the poor.    

In his State of the Union address last night, President Trump said that one of his “greatest priorities” is to reduce the price of prescription drugs. “In many other countries,” he said, “these drugs cost far less than what we pay in the United States.” Alluding thus to the “drug reimportation” issue, he added that he had directed his administration “to make fixing the injustice of high drug prices one of our top priorities. Prices will come down.” That won’t be easy.

Back in 2004, when Congress took up the idea of lifting the ban in place on importing lower-priced drugs from abroad, I wrote a long, complex Cato Policy Analysis on the issues at stake, urging, as the subtitle said, “The Free Market Solution.” Unfortunately, three years later, when the Senate finally acted, the bill was anything but a free market solution. In fact, it amounted to importing foreign price controls, as I explained in a piece in the Wall Street Journal. Fortunately, the bill died, but in the face of state efforts along the same lines in 2013, I wrote this time at Cato@Liberty, explaining why the “simple” solution of lifting the ban would not work. Drawing from that post, here’s why, in a nutshell. (See the Policy Analysis for the complex details.)

Given the Food and Drug Administration’s safety and efficacy standards, it takes 12 to 15 years and upwards of a billion dollars to bring a new drug to market, but only pennies a pill to manufacture it thereafter. Obviously, drug companies need strong patent protection or they’d never undertake that research and development.

But when they go to market a new drug, they find a relatively free market only in America. Everywhere else they face socialized medical systems and strict price controls, so they segment markets and price their drugs differentially, garnering such profits as they can from each market. Naturally, therefore, they have to guard against “parallel markets”—vendors in low-price markets reselling the drugs (at a profit) in high-price markets, especially when supply limitations and no-resale contracts are legally suspect. That’s where the reimportation ban comes in. If low-price drugs sold abroad flood the American market, displacing higher-priced domestic drugs, there go the profits—and there goes the R&D needed to discover new drugs.

Naturally, Americans resent having to subsidize the rest of the world, in effect, which is why letting them import cheap drugs from abroad plays so well politically. But we’re faced here with a Hobson’s Choice—which I’ve only sketched in this post. As I said, it’s a complex issue, involving treaty arrangements, patent law, and much more, rooted ultimately in the socialized medical systems we find abroad, toward which, alas, we ourselves are moving. In fact, the ultimate aim of many of the reimportation proponents is to have the federal government subsidize, if not do, the R&D needed to bring new drugs on line. Talk about bad medicine.

The market approach to this problem that I originally proposed would have to allow drug companies to protect themselves through contractual arrangements that limited supplies and policed parallel markets. That may not be the only solution to this problem, however. In fact, Cato adjunct scholar Dr. David Hyman and attorney Charles Silver have a book coming this spring from Cato entitled Overcharged: Why Americans Pay Too Much for Health Care in which they propose, if anything, an even more complex “prize regime” to reduce drug costs. It’s a clever proposal that addresses even the orphan drug problem, but because it would involve both changes to our patent system and a measure of public funding, the authors grant that it faces a steep uphill battle.

As a political matter, therefore, the more likely approach will be the one we’ve seen from time to time that simply lifts the ban and includes a few other touches. If so, members will need to think it through carefully. The current arrangements did not come about by accident. But it’s hardly a stretch to say that the administration and Congress could make things worse.

 

Residents of Berkeley, California are a little bit scared about potential radio-frequency exposure from cellphones. Despite the FCC’s conclusion that there’s “no scientific evidence” linking “wireless device use and cancer or other illnesses,” the city mandated that any party buying or leasing cellphones communicate a specific message to every customer about radio-frequency exposure. Getting bad vibes from that requirement, CTIA (the wireless industry’s trade group) sued Berkeley for violating the First Amendment by compelling that speech.

It’s a cornerstone of First Amendment law that the right to speak necessarily entails the right to remain silent. This principle ensures the freedom of conscience and prevents citizens from being conscripted to serve as unwilling bullhorns for government communications. Likewise, it is a bedrock principle of First Amendment law—recently affirmed by the Supreme Court—that content-based restrictions of speech must survive the strictest scrutiny to pass constitutional muster.

Unfortunately, these rules don’t apply with the same force to regulations of “commercial speech,” which the Supreme Court has ruled need not meet the same rigorous standards of review as other types of speech. In a 1985 case called Zauderer v. Office of Disciplinary Counsel of Supreme Court of Ohio, the Court went further and created an additional narrow exception. Zauderer allowed courts to apply less rigorous scrutiny when analyzing the constitutionality of disclosures of “purely factual and uncontroversial information” when mandated in an effort to combat misleading commercial speech. The Zauderer standard also requires that any disclosures not be “unduly burdensome” and be “reasonably related to the State’s interest in preventing deception of consumers.”  

In ruling against CTIA, the U.S. Court of Appeals for the Ninth Circuit further eroded that already lax standard of judicial review. Instead of requiring Berkeley to show a need to combat consumer deception – and how the mandated disclosure provision alleviates that need – the Ninth Circuit skipped right over Zauderer to find that compelling speech content posed no constitutional issues because mandated disclosures need only be reasonably related to “non-trivial” government purposes. This dangerous dilution would allow government entities to compel a nearly unending amount of speech on any number of controversial topics, even if the compelled script was itself misleading.  

CTIA is now petitioning the Supreme Court to review that flawed decision. The Cato Institute, joined by the Competitive Enterprise Institute and Cause of Action Institute, has filed an amicus brief supporting that petition.

This important area of law desperately needs clarification, particularly at a time when compelled-disclosure regimes have proliferated and some courts have distorted the already insufficient Zauderer standard beyond recognition. To remain faithful to the First Amendment and the Court’s jurisprudence on compelled speech and content-based speech regulations, courts should apply strict scrutiny – meaning the government needs a really good reason and can’t achieve its goal any other way – to review laws that force market participants to disparage their own products and participate in policy debates they wish to avoid.

The Supreme Court will decide whether to take up CTIA v. City of Berkeley later this winter or spring.

A new study by Canadian scholars says that the users of infrastructure should pay for it generally, not taxpayers. Cato’s Peter Van Doren lauded the study by distinguished fiscal experts Richard Bird and Enid Slack, and dropped it on my chair.

Here are some highlights:

As Adam Smith (1776) said long ago, local public works such as roads and bridges should be financed and managed by the appropriate local government and paid for by those who use them. … [A]lthough there are some reasons for higher level governments to provide some local infrastructure projects, Smith was broadly right. No matter how infrastructure is financed, there is no free lunch. In the end, the bill must be paid either by user charges or by taxing someone and, whenever feasible, user charges are better.

… People should pay directly for many services provided by the public sector, particularly such congestible services as roads or water and sewerage provided to easily identifiable users.

One reason is simply because services that users pay for do not need to be paid from distorting taxes that reduce economic welfare.

Another reason is because when user charges for services fully cover the marginal social cost of providing them people buy such services only up to the point at which the value they receive from the last unit they consume is just equal to the price they pay, so that resources are more efficiently allocated.

Moreover, providers who are financed by full cost pricing have incentives to adopt the most efficient and effective ways of providing the service and to supply it only up to the level and quality that people are willing to pay for.

In addition, when services are financed fully by user charges, political decision makers can more readily assess the performance of service managers – and citizens can do the same with respect to the performance of politicians.

While user pays should be the general approach, the scholars go on to discuss some of the practical and political hurdles.

All in all, the paper is a nice introduction to the economics of public infrastructure, and is directly applicable to the current infrastructure debate in the United States.

For more on infrastructure, see www.downsizinggovernment.org/infrastructure-investment.

  

During his State of the Union speech, President Trump will tout his plan for draconian restrictions on legal immigrants. Supporters, like House Judiciary Committee Chairman Bob Goodlatte (R-VA), justify the plan by claiming that America is “by far the most generous nation in the world for legal immigration.” Not only is “by far” clearly false, but when you consider its wealth, America is already among the least generous to immigrants around the world.

The United States ranks in the bottom third of wealthy countries in terms of net new immigration as a share of total population from 2015 to 2017 as well as total foreign-born residents as a share of total population, according to figures  from the United Nations. Trump’s plan would make America even more closed than it already is.

The United Nations data contains information on the foreign-born populations in all countries (or semi-independent provinces) around the world.* U.S. immigration is decidedly unimpressive compared to all countries. Although America does have the highest total number of foreign-born residents in the world, a fair comparison requires controlling for the size of its current population. After all, a million new people entering India with a population of 1.3 billion would have very different effects than a million new people entering Estonia with a population of 1.3 million.

With this in mind, it is clear that America is nowhere near “the most generous country in the world” on immigration. Of the 232 jurisdictions that the UN includes, America ranks just 64th overall. Focusing on the rate of new immigrants as a share of total population, the United States had only the 49th highest net immigration rate from 2015 to 2017 (inflows minus outflows of foreign residents divided by total population). This places the United States rank in the 72nd and 79th percentiles in the world, respectively.

This assessment is still misleading, however, because it compares the United States to countries that very few immigrants would want to immigrate to. The United States’ ranking among more prosperous countries is even less inspiring. Of the 50 countries or provinces which had, according to the United Nations, a gross domestic product (GDP) of at least $20,000 per capita in 2015, the United States has the 34th highest share of foreign-born residents as well as the 34th highest net immigration rate (Table 1). This places the United States rank in the 32nd percentile on both measures.

The 50 most prosperous countries have double both the average foreign-born share and average immigration rate of the United States. Those countries at or above the 50th percentile have an average foreign-born share three times the U.S. share and an immigration rate four times as high as the U.S. rate. The United States is far from generous: it is downright stingy to immigrants. Figure 1 provides the net immigration rate from 2015 to 2017 for the United States and the 33 countries that rank higher than it. 

Figure 1: Countries With Highest Net Per Capita Immigration From 2015 to 2017 and a Per Capita GDP Above $20,000 in 2015

 

Sources: United Nations (Foreign Populations); United Nations (Total Populations); United Nations (GDP Per Capita) 

This still considerably overstates America’s generosity because such a large share of America’s foreign-born population is here illegally: almost a quarter. This appears to be one of the highest shares in the world. Many of America’s immigrants are already defying America’s attitude toward them. In other words, U.S. law is not only hostile toward new immigrants. It is hostile toward its existing foreign-born residents.

By almost any reasonable standard, America is already one of the least generous countries in the world toward legal immigrants. If the United States does implement the White House’s immigration framework, it would be moving its nation’s immigration system in the opposite direction of the rest of the world. Other developed economies are opening their borders to more immigrants than ever, while the United States would have sent its immigration rate back to its lowest level since World War II.

America, however, doesn’t need to be “generous” toward immigrants at all. It is in the country’s self-interest not to prohibit foreigners from living and working in America. Allowing people to freely move and work where they want is not charity. It is an expansion of the free market and allows people to contribute to the economic prosperity of the country and expand the pie for everyone. The president’s plan would make America both less generous and less prosperous.

 

Table 1: Immigration and Immigrant Population Ranking for Countries with Greater Than $20,000 Per Capita Gross Domestic Product

  Increase in Foreign-Born* From 2015-17 As a Share of Total Population Total Foreign-Born* Residents as a Share of Total Population   Country Rate Country Share

1

Kuwait

6.5%

United Arab Emirates

90.8%

2

Turks and Caicos

5.3%

Kuwait

79.4%

3

Saudi Arabia

4.5%

Sint Maarten

72.9%

4

United Arab Emirates

3.5%

Turks and Caicos

71.4%

5

British Virgin Islands

2.7%

Qatar

69.4%

6

Sint Maarten

2.5%

British Virgin Islands

66.3%

7

Germany

2.4%

Liechtenstein

66.0%

8

Liechtenstein

2.4%

China, Macao SAR

58.8%

9

Austria

1.9%

Monaco

55.5%

10

Macao SAR

1.8%

Bahrain

52.7%

11

Sweden

1.5%

Andorra

52.6%

12

Singapore

1.4%

Singapore

47.4%

13

Brunei Darussalam

1.4%

Luxembourg

46.6%

14

Australia

1.4%

Cayman Islands

40.6%

15

Qatar

1.4%

Hong Kong SAR

39.8%

16

Bahrain

1.3%

Saudi Arabia

38.6%

17

Ireland

1.2%

Anguilla

38.2%

18

Switzerland

1.1%

Aruba

34.8%

 

Average

1.1%

Average

30.9%

19

Denmark

1.1%

Bermuda

30.6%

20

Cayman Islands

1.0%

Switzerland

30.1%

21

Norway

1.0%

Australia

29.6%

22

Iceland

0.8%

Brunei Darussalam

26.0%

23

Canada

0.8%

New Caledonia

24.5%

24

Anguilla

0.7%

Israel

24.3%

25

Malta

0.7%

Curaçao

24.3%

26

United Kingdom

0.7%

New Zealand

23.1%

27

Bahamas

0.6%

Canada

21.9%

28

New Caledonia

0.6%

Austria

19.1%

29

Luxembourg

0.6%

Sweden

17.9%

30

Hong Kong SAR

0.6%

Ireland

17.2%

31

New Zealand

0.6%

Cyprus

16.3%

32

Monaco

0.6%

Bahamas

16.0%

33

Finland

0.5%

San Marino

15.9%

34

United States

0.5%

United States

15.6%

35

Curaçao

0.5%

Norway

15.4%

36

Netherlands

0.4%

Germany

14.9%

37

Slovenia

0.3%

United Kingdom

13.5%

38

Aruba

0.2%

Spain

12.8%

39

San Marino

0.2%

Iceland

12.7%

40

Italy

0.2%

France

12.3%

41

Belgium

0.1%

Netherlands

12.1%

42

Spain

0.1%

Slovenia

11.8%

43

Japan

0.1%

Denmark

11.5%

44

Republic of Korea

0.0%

Belgium

11.2%

45

Greenland

0.0%

Greenland

10.7%

46

France

0.0%

Malta

10.6%

47

Cyprus

-0.3%

Italy

9.9%

48

Bermuda

-0.3%

Finland

6.3%

49

Israel

-0.6%

Republic of Korea

2.3%

50

Andorra

-1.3%

Japan

1.8%

Sources: United Nations (Foreign Populations); United Nations (Total Populations); United Nations (GDP Per Capita)

*Note: The UN defines “foreign-born” to include people who receive citizenship through their parents despite being born overseas. Typically, the United States does not consider such people “immigrants” as they are citizens at birth. This results in a higher share of foreign-born for the United States than other estimates.

The federal government imposes a mandate to blend corn ethanol and other biofuels into the nation’s gasoline. This “renewable fuel standard” or RFS raises prices at the gas pump. The “10% Ethanol” sticker you see when filling your tank signals that you are being economically exploited by the government in cahoots with corn farmers.

At Downsizing Government, Nicolas Loris discusses how the RFS raises fuel and food prices. The mandate also damages some energy businesses, as the Wall Street Journal is reporting:

Philadelphia Energy Solutions LLC affiliates accounting for more than one-quarter of the fuel-refining capacity on the East Coast filed for bankruptcy protection, blaming the steep cost of complying with a federal environmental regulation.

… The company cited the Clean Air Act’s renewable-fuel-standard program as the primary reason for its financial distress, saying it is a victim of “regulatory compliance costs that specifically penalize independent merchant refiners.” It also blamed adverse economics in the energy sector.

Independent refiners have long complained about the program, which was introduced during President George W. Bush’s administration to boost the amount of ethanol in the country’s gasoline supply. The Renewable Fuel Standard requires companies to either blend ethanol with the gasoline they produce or buy credits. Refiners that don’t purchase the credits have to pay penalties to the government.

The credits are awarded where ethanol and gasoline are blended, which for the most part means facilities owned by integrated oil companies like Chevron Corp. CVX -2.07% and Exxon Mobil Corp. XOM -1.11% and by large retail gas-station chains. The system disadvantages smaller refiners like Philadelphia Energy with few blending facilities.

If it wants to avoid fines, Philadelphia Energy has to purchase blending credits, exposing the company to an “unpredictable, escalating, and unintended compliance burden” that has cost it $832 million since operations began in September 2012, the company said in court papers. Philadelphia Energy said it paid $13 million to comply in 2012, with the figure rising to $231 million by 2016.

The first sentence says a “federal environmental regulation” is to blame. That is ironic because the ethanol mandate, the RFS, is anti-environmental in numerous ways.

Loris concludes that the RFS creates no net green benefit, imposes costs on motorists, harms businesses, and is a “bureaucratic nightmare.” In his State of the Union message tonight, President Trump will discuss his deregulatory successes. He should put RFS repeal on his agenda for 2018.

Bloomberg has a good piece on the US economy under President Trump. Headline takeaway: on almost all metrics, the economy has improved or remained largely unchanged since he took office.

From Q4 2016 to Q4 2017:

-       GDP grew by 2.5 percent, the fastest annual increase since Q4 2015, and higher than the post-recession average of 2.2 percent.

-       Real nonresidential investment increased by 6.3 percent, higher than the post-recession average of 4.8 percent and after falling in three of four quarters in 2016.

-       The unemployment rate fell from 4.7 to 4.1 percent, and is now its lowest since 2000.

-       The unemployment rate for black and African-American workers fell to 6.8 percent, the lowest rate in the 45 years of recorded statistics.

-       The 25-54 civilian labor force participation rate crept up from 81.4 percent to 81.9 percent.

-       Labor productivity grew by 1.5 percent, historically below the 2.1 percent post-war annual average, but above the post-crisis 1 percent average.

The only really disappointing indicators for the President have been:

-       A fall in real median weekly earnings (official statistics show a 1.1 percent increase to Q3 2017 but a large fall in Q4, such that there has now been a 1.1 percent decline overall)

-       A widening budget deficit to 3.4 percent of GDP.

(Note: Bloomberg also chalks up an increase in manufacturing jobs as a “win”, but which sectors jobs come in should not concern us in a free economy. Nor should the trade deficit, the outlook for which it reports is moving in the “wrong direction.”)

Expect the President to herald the economic performance in his State of the Union speech tonight then. And with good reason – there’s lots of positive economic news.

Critics will claim most of the above represent cyclical improvements unrelated to policy. But we know from history bad policy can seriously derail growth prospects (especially temporarily). Why else would so many economists have warned of the consequences of a Trump victory?

The Trump administration have avoided major mistakes. There’s good reason to think the President’s direct deregulatory efforts coupled with slowing new regulations to a halt has enhanced business certainty and the productive capacity of the economy. Fears of severe trade shocks have not (yet) materialized. And perhaps most importantly, the administration has recognized the key challenge moving forward: with the labor market nearing full employment, robust growth and higher wages will only come primarily from an enhanced sustainable growth rate driven by productivity improvements.

The tax reform package’s central features - the cut in the corporate tax rate to 21 percent and immediate expensing on equipment - were designed explicitly to enhance investment to achieve this. The cutting of marginal income tax rates for most should likewise both enhance labor supply while also encouraging human capital accumulation at the margin. While I have concerns about other elements of the package, infrastructure reform which speeds up or lower the cost of economic projects could have beneficial supply-side consequences too.

Sure, there are always economic and policy risks and long-term challenges, some of which are more serious than others. A NAFTA unwinding in 2018 could cause a negative supply-side shock. An immigration package which slashes legal migrant numbers could reduce GDP and blow a hole in the public finances. In the longer-term, it would probably reduce GDP per capita too, through dampening specialization and job matching. Faulty expectations about long-term growth and wealth effects from high net worth could lead to a negative adjustment if there are downward asset price movements. And the US’s public finances are still on an unsustainable path.

But all in all the President’s first year has a positive economic story. And whether you agree with their exact prescriptions, the administration’s focus on raising productivity is the right one.

This year’s Federal Open Market Committee (FOMC), which meets for the first time this week, faces many unknowns, including new faces at the Fed. In fact, by year’s end, the Fed’s rate-setting body will have, at most, only two continuity voters — that is, members who voted during all of 2017 and will vote throughout 2018.

Only twice before in its history has the FOMC had so few continuity voters across two consecutive years: in 1987 and in 2007. On the first occasion, the Fed had to deal with a major stock market crash, while on the second it was confronted by the decline in the subprime market that heralded the 2008 Financial Crisis. These are only two data points to be sure, but the point is that a relatively inexperienced FOMC may find itself having to cope with situations that would pose a challenge even to the Fed’s most seasoned veterans.

Continuity FOMC Voters

This week’s FOMC meeting will be Janet Yellen’s last vote. Yellen will step down from the Federal Reserve Board on February 3, when her term as Chair expires, though she could have remained a Governor until 2024. Jerome “Jay” Powell, Yellen’s colleague on the Board, will succeed her, having been confirmed by the full Senate last Tuesday.

Powell is one of those two continuity votes on the FOMC this year, having voted at all of last year’s FOMC meetings. He’s expected to lead the Fed by hewing closely to Yellen’s example. As I previously noted, he will likely continue the normalization plan developed under Yellen — with its gradual path for rates increases and monthly reductions of the balance sheet. However, should deviations from the plan become necessary, Powell’s limited background in monetary economics and track record for relying on his staff and his FOMC colleagues suggest that he would work to maintain policy consensus.

Governor Lael Brainard, who has served on the Board since 2014, will join Powell as the only other continuity voter. She has previously been skeptical of removing monetary accommodation and raising interest rates, yet has never dissented in an FOMC vote. Despite her dovish reputation, she is very likely to support Powell’s leadership and policy decisions. Fed Governors have supported the Chair on FOMC decisions without exception for more than a decade. The last Governor’s dissent — when Mark W. Olson wanted an easier policy — was in 2005. Conversely, regional bank presidents have dissented 70 times since then.

New Faces at the Board of Governors

The most recently appointed Governor, Randal Quarles, voted only twice last year. Quarles came to the Fed with a background in private equity (he and Powell were both partners at the same private equity firm, The Carlyle Group). As Vice Chair of Supervision, it is widely believed that Quarles will focus more on his regulatory portfolio than staking out new ground in monetary policy. Recent comments indicate he’ll be determining how much of a burden current regulations impose, using a cost-benefit approach that Powell supports. But he has gone further than Powell in proposing regulatory relief for any large financial institution that does not impose systemic risk.

The Board of Governors is a 7-member body. So, with Yellen stepping down and Stanley Fischer having left the post of Vice Chair in October, four vacancies have yet to be filled. Yet so far the president has put forward but one nominee: Marvin Goodfriend.

Though he didn’t escape criticism at last week’s Senate Banking confirmation hearing, Goodfriend’s longstanding academic record of thinking about experimental monetary policy, as well has his considerable experience as a policy advisor at the Richmond Fed, would make him a valuable asset to the Board, and to the FOMC.

For example, Goodfriend was writing about how to overcome the zero lower bound in 2000, when the federal funds rate was 6.5%. And more than a decade ago he was writing on the utility of using interest on reserves as a tool for implementing monetary policy. My colleague George Selgin has questioned the Fed’s IOER-based “floor” system, suggesting that it harbors an inherent deflationary bias, among other shortcomings. Yet, it is desirable to have a permanent FOMC voter who has spent more than a decade thinking about the unconventional operating framework that the Fed is currently using.

And the other vacancies? While no names have circulated as potential Governors, several potential Vice Chair nominees have been mentioned. Those include Mohamed El-Erian, former CEO at PIMCO and economist at the IMF who currently serves at the chief economic adviser at Allianz; Larry Lindsey, a former Fed Governor and current CEO of the Lindsey Group, an economic consultancy; and Richard Clarida, the Global Strategic Advisor and a Managing Director at PIMCO and the C. Lowell Harriss Professor of Economics at Columbia University.

The most recent name reported is John Williams, President of the San Francisco Fed; incidentally, the same position Janet Yellen held before she moved to Washington to be Vice Chair under Ben Bernanke.

While Williams is eminently qualified for the role, his selection would be a curious one for the administration, if they intend to shake up the Fed, as it would dampen their overall impact on staffing officials in the Federal Reserve System. Williams is a 2018 FOMC voter. He is eligible to serve as SF Fed President through June 2027 — giving him a vote on the FOMC four years out of the next ten, since the SF Fed President sits on the FOMC every third year. Promoting him to Vice Chair would turn him into an annual FOMC voter (in addition to elevating him to the Board, of course), but the administration would have no direct say in who replaces him at the San Francisco Fed. Regional bank presidents are selected by that regional bank’s Class B and Class C Directors, not by executive nomination and are not subject to Senate confirmation.

Rotating Regional FOMC Voters

Each year, five Federal Reserve regional bank presidents vote on the FOMC: four rotate annually while the President of the New York Fed is a permanent voter. San Francisco has a seat on the FOMC in 2018, so Williams votes this year — with or without the Vice Chair promotion.

Unlike some of the regional bank presidents rolling off the FOMC, Williams is open to accelerating the path of rates hikes. He will be joined by Loretta Mester — who, as the President of the Federal Reserve Bank of Cleveland, votes every other year, rather than every third. Mester has been one of the most aggressive voices for a steeper path of rates hikes, having dissented twice in 2016, when she felt the Fed ought to be raising rates faster.

Mester and Williams are stark contrasts to two of last year’s voters. Recall that in December, Charles Evans, President of the Chicago Fed, joined Neel Kashkari in dissent, preferring to hold rates steady. Kashkari, President of the Minneapolis Fed, had already dissented during the other two rates hikes of 2017, preferring to maintain monetary accommodation in light of low inflation numbers.

But the major question marks are with the two most recently appointed regional bank presidents. They are both FOMC voters this year and between them there have been only five speeches.

Rafael Bostic took over leadership at the Atlanta Fed in June of last year. He’s been a public policy professor at the University of Southern California, an Assistant Secretary at the Department of Housing and Urban Affairs, and an economist at the Federal Reserve Board. In his only speech of the year thus far, he broadly underscored the normalization framework in place, though he sees different risks to the economy than his colleagues Williams and Mester. Where they see potential upside risk that may hasten rates hikes, Bostic believes that monetary policy is already “approaching a more neutral stance” and he is open to fewer than three hikes, as he believes the Fed will achieve its 2% inflation target by year’s end.

Thomas Barkin, starting just this month as President of the Richmond Fed, is even more of an unknown quantity. He is not totally new to the Federal Reserve System, having sat on the Atlanta Fed’s Board of Directors for six years, serving as Chairman for two. He was a senior partner and the chief risk officer at the consulting firm McKinsey & Company, which makes him a sensible choice for running the Richmond Fed as CEO. But these experiences shed no light on his views on monetary policy. His first speech will be read with great interest.

Vice Chair of the FOMC

A final source of FOMC uncertainty is the anticipated change in the leadership of the New York Fed. President William Dudley announced he will be stepping down this summer, rather than next January when his term ends. Dudley, who as NY Fed President is the Vice Chair of the FOMC, is currently the longest tenured FOMC voter. The search for Dudley’s replacement is already underway in earnest, and will be selected without direct input from the administration. But, whoever takes over for Dudley this summer will immediately and permanently vote on the FOMC throughout his or her tenure as NY Fed President.

Changes have already happened and more are coming to the Fed in 2018. As Powell takes the helm and Yellen’s normalization plan continues, uncertainties remain. With much still unknown about the 2018 Federal Open Market Committee, let us hope we learn more about the voters’ views long before we learn about how they respond to a crisis.

[Cross-posted from Alt-M.org]

Immigration and Customs Enforcement (ICE) has access to billions of license plate images that allow for the agency to engage in near real-time tracking of its targets. This surveillance capability should instill a sense of unease in us all, even if we aren’t in ICE’s crosshairs. 

Vigilant Solutions, the private company that reportedly collects the data ICE will query, owns a database with more than 2 billion license plate photos that produces 100 million hits a month. These photos come from toll roads, parking lots, vehicle possession agencies, as well as local law enforcement. According to ICE’s privacy impact assessment for the license plate tracking program, Vigilant Solutions’ data includes images from 24 of the US’ top 30 most populous metropolitan areas. ICE does not contribute license plate images to the database.

ICE policy does provide some privacy protections, but they fall far short of what the agency should impose on itself. ICE may only query the database for license plate numbers in order to find information about vehicles that are part of “investigatory or enforcement activities.” Given that ICE has been increasing the number of noncriminal undocumented immigrants it arrests, it’s safe to assume that ICE’s use of the license plate database will extend beyond investigations into undocumented immigrants who are wanted for violent crimes. 

ICE’s privacy impact assessment states that investigators with ICE’s Enforcement and Removal Operations, the agency responsible for deportations, will be able to access five years worth of license plate location data.

Those who believe that ICE should be dedicating significant resources to deporting non-violent undocumented immigrants may applaud the use of license plate location data. What they should consider is that they could be the targets of identical surveillance in the future. The federal government has conducted surveillance on a wide range of targets, and surveillance tools won’t change just because the target will.

The Constitution provides little protection when it comes to long-term warrantless tracking. In 2012, the Supreme Court unanimously held that the warrantless 28-day GPS tracking of a car violated the Fourth Amendment. However, the opinion of the Court, written by Justice Scalia and joined by his colleagues Chief Justice Roberts and Justices Kennedy, Thomas, and Sotomayor, is grounded in the physical intrusion of the GPS locator on the car rather than the GPS tracking violating the driver’s expectation of privacy.

Although Justice Sotomayor joined Justice Scalia’s majority opinion, she wrote her own solo concurrence highlighting the dangers of long-term monitoring that does not require tracking devices to be attached to property. She wrote, “physical intrusion is now unnecessary to many forms of surveillance.” Later in the concurrence, she described the information that location tracking can reveal: “I would ask whether people reasonably expect that their movements will be recorded and aggregated in a manner that enables the Government to ascertain, more or less at will, their political and religious beliefs, sexual habits, and so on.”

License plate readers are not the only tools that could be used to uncover intimate details of someone’s life. Police in Compton, Philadelphia, and Baltimore have used persistent aerial surveillance technology that enables analysts to use “Google Earth with TiVo” capabilities to track targets. Law enforcement agencies at the state, local, and federal level have been using so-called “Stingrays,” tracking devices that mimic cellphone towers. When merged with body cameras and CCTV cameras facial recognition technology will make it easier for officials to monitor people’s public movements. 

Until Congress or the Supreme Court imposes restrictions on ICE scouring through years of license plate location data without a warrant civil libertarians will have to wait for the Trump administration to adopt policies that restrict this kind of surveillance. The Trump administration’s rhetoric and policy announcements so far make hell freezing over seem more likely.

Those who agree with the Trump administration’s immigration policies are perhaps willing to overlook the significant civil liberties concerns associated with ICE being able to access five years worth of location information without a warrant. They shouldn’t. This technology won’t be put back in the box it came from after President Trump leaves the White House. It’s anyone’s guess who the next target of government surveillance will be. 

The other day, the Wall Street Journal looked at the Trump administration’s efforts to reduce the costs of building infrastructure:

The administration is hoping to roll back regulations in place for decades to reduce the period between project approval and construction, limiting environmental reviews and litigation in favor of getting big things built.

The effort is likely to face resistance from environmental groups and their Democratic allies in Congress. But the president’s advisers believe they can alter the permitting process in ways that change how the government builds roads, bridges, rails and pipelines for years to come. “ … I think one of the most important things this administration can do is take permit delivery times from what is now an average of 4.7 years down to two years,” said Alexander Herrgott, the lead infrastructure aide on the White House’s Council on Environmental Quality…”

… Previous presidents have tried to streamline the federal permitting process as a way to jumpstart rebuilding of the nation’s critical infrastructure. That includes President Barack Obama, who signed the FAST Act in 2015, a bipartisan transportation funding package that created a federal permitting improvement council aimed at speeding up the environmental review process.

Mr. Trump and his aides have cited studies suggesting that environmental review can often take a decade, and calling for that period to be reduced to two years. A Government Accountability Office study of the environmental review process in 2014 cited third-party estimates that reviews average 4.6 years.

We will hear more about Trump’s infrastructure approach in his State of the Union message tomorrow night. So far it appears the approach combines:

  1.  government spending increases, as I noted,
  2.  deregulation, as the WSJ noted,
  3.  privatization, as with Trump proposals for air traffic control and federal electricity assets, and
  4.  corporate tax cuts to boost private-sector infrastructure investment.

Approaches 2, 3, and 4 are very positive. Approach 1 is not.

More on permitting here. More on infrastructure policies here. More on privatization here.

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